Cocrystal Pharma, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed April 1, 2019. This is an annual report, not a standalone fourth-quarter report. Cocrystal is a clinical-stage antiviral drug developer with no approved products or product-sales revenue.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $58.572 million | $5.822 million |
| General and administrative expense | $4.352 million | $2.440 million |
| Operating loss | $62.924 million | $8.262 million |
| Net loss | $49.048 million | $0.613 million |
| Net loss per share, basic and diluted | $1.75 | $0.03 |
| Cash used in operating activities | $8.290 million | $6.903 million |
| Cash and restricted cash at year-end | $2.752 million | $0.777 million |
| Net cash provided by financing activities | $8.893 million | $4.080 million |
The 2018 net loss included a $53.905 million noncash impairment charge that fully wrote off the remaining in-process research and development asset, partly offset by a $13.582 million income-tax benefit. The impairment followed the decision to focus the HCV program on CC-31244 and abandon the acquired RFS Pharma compounds. Excluding the impairment, 2018 R&D expense was $4.667 million, down $1.155 million from 2017. G&A increased by $1.912 million, including higher legal, listing, and accounting costs and the absence of certain 2017 offsets. Revenue-based margins are not meaningful because the company had no product revenue.
At December 31, 2018, current assets were $2.943 million and current liabilities were $1.557 million. Total liabilities were $1.674 million; the convertible notes had been converted into common stock in May 2018, while capital lease obligations totaled approximately $331,000. Total assets were $68.562 million, including $65.195 million of goodwill; no IPR&D asset remained. The company reported 29.938 million shares outstanding at year-end.
After year-end, cash on hand was reported at approximately $8.7 million as of March 29, 2019. The company also received a $4 million Merck upfront payment in January and net proceeds of approximately $3.674 million from a March private placement. Despite these funds, management said available capital might not cover operations for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible inability to continue as a going concern.
Business developments and changes
- HCV: CC-31244 entered a U.S. Phase 2a study in 2018; enrollment was completed in September. The open-label study tested two weeks of CC-31244 with Epclusa followed by four weeks of Epclusa alone. Preliminary data announced in January 2019 indicated the regimen was tolerated without discontinuations due to adverse events, and 8 of 12 subjects achieved SVR12. Final results were expected in the second quarter of 2019. A separate investigator-sponsored Hong Kong Phase 2a study was expected to begin in the first half of 2019.
- Influenza: CC-42344 was selected as a preclinical lead; the company planned additional IND-enabling work and expected to initiate a Phase 1 study in 2020. Other influenza A/B inhibitors remained preclinical.
- Merck collaboration: Effective January 2, 2019, Merck agreed to fund research and development, including clinical development, and take responsibility for worldwide commercialization of resulting products. Cocrystal received $4 million upfront and could receive up to $156 million in development, regulatory, and sales milestones, plus royalties. These potential payments are contingent, and Merck may terminate before the first commercial sale without cause.
- Portfolio and financing: Cocrystal terminated its Emory HCV license in December 2018 because the covered compounds were no longer considered essential. During 2018 it raised approximately $7.684 million net from a common-stock offering and converted all outstanding convertible notes into shares. It reported raising $13 million gross from common-stock financings and receiving the $4 million Merck payment over the 12 months discussed in its MD&A. At-the-market sales were suspended in March 2019.
Outlook, risks, and unusual matters
- Management expected R&D expense to decrease in 2019, citing completion of the U.S. Phase 2a study and limited remaining study work; the Hong Kong study was expected to be funded by its investigator. The company also expects continuing operating losses and negative operating cash flows for years, and does not anticipate product-sale revenue for at least five years.
- The principal financial risk is the stated going-concern uncertainty and need for further funding. Management cautioned that financing may be unavailable or dilutive; the company’s public-offering capacity was also limited by the Form S-3 “baby shelf” rule. A director’s January 2019 injunction may restrict reliance on certain securities-registration exemptions absent an SEC waiver.
- Clinical, regulatory, scientific, intellectual-property, competition, manufacturing, and third-party collaboration risks are substantial. Phase 2a preliminary results are early and do not establish later-stage success or approval. Merck controls key development and commercialization decisions for its program and can terminate the agreement.
- The company disclosed a securities class action and a related derivative action, as well as an appeal of a dismissed lawsuit. It could not estimate potential losses and recorded no litigation contingency; its insurer initially declined coverage of the class and derivative actions.
- Management found disclosure controls and internal control over financial reporting ineffective at year-end, identifying two material weaknesses involving financial-statement review and controls over technical accounting and reconciliations. The auditor gave an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements. Management planned remediation during 2019.
- The $53.905 million IPR&D impairment, $13.582 million tax benefit, and $306,000 noncash gain from a decrease in derivative-liability fair value materially affected reported results. The company also settled a mortgage note in 2018 for $1.4 million, recognizing a $106,000 gain.
Most important facts for investors to verify
- Current cash, burn rate, and whether subsequent financing and Merck reimbursements provide sufficient runway; reconcile year-end cash with the $8.7 million reported as of March 29, 2019.
- Final HCV Phase 2a results, including the full study population, safety findings, and durability of response beyond the preliminary 8-of-12 SVR12 result.
- Merck collaboration funding, program progress, termination rights, and the conditions attached to milestone and royalty potential.
- Progress in remediating the two material weaknesses and any subsequent auditor assessment.
- Status and potential financial exposure of the disclosed litigation, including insurance coverage, and the effects of the director-related securities-law injunction on future fundraising.