Protagonist Therapeutics, Inc annual report, FY2018

Protagonist Therapeutics, Inc. — FY2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018; filed March 12, 2019. The filing is an annual report rather than a standalone fourth-quarter filing. Protagonist is a clinical-stage biopharmaceutical company with no approved products or product sales, developing peptide-based therapies in hematology and gastroenterology.

Business Context and Pipeline

PTG-300: Injectable hepcidin mimetic for beta-thalassemia and other iron-dysregulation disorders. The company filed a U.S. IND and initiated enrollment in a global Phase 2 beta-thalassemia study during 2018; patient dosing began in Q1 2019. FDA Fast Track and FDA/EU orphan drug designations were in place.
PTG-200: Oral, GI-restricted IL-23 receptor antagonist being co-developed with Janssen for inflammatory bowel disease. Phase 1 in 80 healthy volunteers was completed in 2018, and Janssen was expected to file a U.S. IND in the first half of 2019.
PN-943: Oral, GI-restricted alpha-4-beta-7 integrin antagonist. A Phase 1 study began in late 2018, with results expected in the first half of 2019 and a potential UC Phase 2 study targeted for the first half of 2020.
PTG-100: Global Phase 2 UC trial was discontinued in March 2018 for futility after an interim analysis. A later blinded endoscopy re-read identified efficacy signals, which management attributed to human error and an unusually high placebo effect in the original reads. The company replaced PTG-100 with PN-943.

Financial Performance and Position

Metric	FY2018	FY2017	Change
License and collaboration revenue	$30.9 million	$20.1 million	Up 54%
Research and development expense	$59.5 million	$46.2 million	Up 29%
General and administrative expense	$13.7 million	$11.8 million	Up 16%
Loss from operations	$42.3 million	$37.9 million	Loss increased $4.4 million
Interest income	$2.5 million	$0.9 million	Up 171%
Income tax benefit	$0.8 million	None	New in 2018
Net loss	$38.9 million	$37.0 million	Loss increased $2.0 million
Basic and diluted net loss per share	$1.74 loss	$2.09 loss	Improved due primarily to higher share count

Revenue was entirely license, collaboration and related services revenue; the company had no product revenue.
Revenue represented approximately 42% of operating expenses. On a reported basis, net loss was approximately 126% of revenue, although the revenue consisted primarily of collaboration accounting and was not recurring product sales.
FY2018 research and development spending included $14.3 million for PTG-300, $16.1 million for PTG-200, $20.4 million for PTG-100, $0.5 million for PN-943 and $9.8 million of preclinical and discovery research, before grants and incentives.
Cash used in operating activities was $49.9 million, compared with $3.9 million of operating cash flow provided in 2017. The decline primarily reflected a $23.5 million reduction in deferred revenue related to Janssen.
Cash, cash equivalents and available-for-sale securities totaled $128.9 million at year-end, compared with $155.5 million at year-end 2017. Working capital was $111.3 million.
Total assets were $139.5 million and stockholders’ equity was $112.5 million. The company reported no outstanding debt or credit facility.
FY2018 financing cash flow was $24.1 million, including $21.7 million of net proceeds from a private placement and warrants, $1.5 million from an ATM offering and $0.9 million from employee equity activity.

Material Changes Versus FY2017

License and collaboration revenue increased by $10.9 million as the company recognized additional Janssen-related deferred revenue and cost-sharing revenue tied to PTG-200 Phase 1 and Phase 2a activities.
R&D spending increased $13.3 million, driven mainly by increased PTG-200 and PTG-300 clinical activity and the PN-943 Phase 1 program, partly offset by lower PTG-100 and preclinical spending.
Operating cash flow shifted from a $3.9 million inflow to a $49.9 million outflow as deferred revenue was recognized and clinical spending increased.
Cash and investments declined $26.6 million despite $24.1 million of financing proceeds, reflecting operating cash burn and changes in working capital.
The company raised $21.7 million net in an August 2018 private placement of 2.75 million shares and issued warrants for 2.75 million additional shares at exercise prices of $10.00 and $15.00. None had been exercised at year-end.
In December 2018, the company exchanged 1.0 million common shares for pre-funded warrants exercisable at $0.00001 per share, subject to a 9.99% beneficial ownership limitation.

Outlook, Agreements, Risks and Unusual Items

Management believed year-end cash, cash equivalents and available-for-sale securities would fund operations for at least the next 12 months, but stated that additional substantial capital would be required for pivotal trials and commercialization.
The Janssen agreement provided a $25.0 million potential payment upon IND filing, up to $325.0 million of potential opt-in payments, up to $590.0 million of additional development, regulatory and sales milestones, and tiered royalties ranging from 10% to the mid-teens on worldwide net sales. None of the milestone or royalty revenue had been recognized as of year-end.
Janssen may elect not to continue PTG-200 development after specified Phase 2 stages or may terminate the agreement. Termination would eliminate potential future payments and could require Protagonist to fund further PTG-200 development.
The company expects continued losses and increasing R&D expenses. Product approval, commercialization and profitability remain uncertain.
Clinical development risks include trial delays, enrollment challenges, safety or efficacy failures, regulatory rejection, manufacturing dependence and possible adverse interpretation of clinical data.
The company relies on third-party contract research organizations and manufacturers and owns no manufacturing facilities. Clinical and commercial supply interruptions could delay development.
Potential contractual obligations included $11.2 million of operating lease payments through 2024 and beyond. Additional development, milestone and royalty obligations were not determinable and were excluded from the contractual obligations table.
The company recognized a $0.8 million income tax benefit from releasing a valuation allowance related to its Australian subsidiary, while U.S. deferred tax assets remained subject to a valuation allowance. Federal net operating loss carryforwards were approximately $109.1 million but may be limited by ownership changes.
The PTG-200 patent litigation filed by Medical Diagnostic Laboratories was dismissed in the company’s favor in February 2018; judgment ending the case was issued in March 2018, and no appeal was filed.

Investor Verification Checklist

Verify the timing and terms of Janssen’s expected PTG-200 IND filing and whether the $25.0 million payment was subsequently earned.
Track Phase 2 PTG-300 enrollment, safety, hemoglobin and transfusion-reduction data, and the planned second-indication study.
Assess PN-943 Phase 1 results and whether the company filed an IND and initiated the anticipated UC Phase 2 program.
Reconcile collaboration revenue with cash receipts, deferred revenue, cost-sharing payments and the estimated $60.7 million Janssen transaction price.
Monitor cash burn, remaining ATM capacity of $48.3 million at year-end, additional financing needs and potential dilution from outstanding warrants and equity awards.
Evaluate the impact of discontinuing PTG-100, including continuing wind-down costs and the reliability of the corrected efficacy analyses.
Review the company’s dependence on third-party manufacturers, CROs and Janssen, as well as patent protection, regulatory milestones and competing IBD and beta-thalassemia therapies.