DiaMedica Therapeutics Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter report. DiaMedica is a Canadian clinical-stage biopharmaceutical company focused primarily on DM199, a recombinant human tissue kallikrein-1 protein, for chronic kidney disease and acute ischemic stroke.
Business context and development status
- DM199 has not received regulatory approval, and the company has generated no product-sales revenue.
- In February 2018, DiaMedica began its Phase II REMEDY trial in acute ischemic stroke, designed to enroll up to 100 patients and administer treatment within 24 hours of symptom onset.
- The FDA accepted DiaMedica’s IND for a Phase Ib CKD study in December 2018; patient dosing began in February 2019.
- The company had five completed DM199 clinical studies involving more than 120 volunteers. Earlier studies generally showed tolerability and physiological activity, but a Type 2 diabetes study had confounded secondary endpoints because of protocol deviations and unresolved study-record issues.
- DiaMedica had nine full-time employees at December 31, 2018 and relies on third parties for clinical research and manufacturing.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| License revenue | $0.5 million | None | New revenue source |
| Research and development expense | $4.5 million | $3.2 million | Increased $1.3 million |
| General and administrative expense | $2.7 million | $1.3 million | Increased $1.4 million |
| Total operating expenses | $7.3 million | $4.5 million | Increased $2.7 million |
| Operating loss | $6.8 million | $4.5 million | Worsened $2.2 million |
| Net loss | $5.7 million | $4.3 million | Worsened $1.5 million |
| Basic and diluted loss per share | $0.74 loss | $0.72 loss | Higher loss per share |
| Operating cash flow | $(5.7) million | $(3.9) million | Greater cash use |
| Cash at year-end | $16.8 million | $1.4 million | Increased $15.5 million |
| Shareholders’ equity | $17.0 million | $0.8 million | Increased $16.2 million |
Reported profitability margins are not economically meaningful because 2018 revenue consisted primarily of a one-time $500,000 upfront license payment rather than recurring product sales. The company remained loss-making, with a $46.0 million accumulated deficit at year-end.
Other income totaled $1.1 million in 2018, primarily reflecting Australian research and development incentives of approximately $1.2 million. Income tax expense was $80,000. The filing does not disclose material conventional debt; liabilities were primarily accounts payable and accrued liabilities, with approximately $23,000 of capital lease obligations at year-end.
Liquidity, financing and capital resources
- December 31, 2018 cash was $16.8 million, total current liabilities were $1.3 million and total assets were $18.3 million.
- The company raised approximately $14.7 million of net proceeds in its December 2018 U.S. initial public offering, issuing 4.1 million shares at $4.00 per share.
- It also raised approximately $5.8 million net through March 2018 private-placement activity and received proceeds from warrant and option exercises.
- Management expects existing cash to fund the REMEDY stroke trial, the CKD Phase Ib study, a planned CKD Phase II study and planned operations through 2020. This is management’s estimate and is subject to clinical timing, results, spending and financing conditions.
- DiaMedica has no existing credit facilities and expects to require substantial additional capital to complete development, regulatory approval and commercialization.
- Outstanding R&D and other commitments were estimated at approximately $1.9 million over the next 12 months and $0.6 million in the following 12 months. These commitments are generally cancellable with 30 days’ notice, subject to costs incurred.
Material changes versus 2017
- Revenue began in 2018 through the Ahon Pharma license agreement; no product revenue was generated.
- R&D spending increased approximately 41%, driven by preclinical work supporting the U.S. IND, higher REMEDY trial costs and increased personnel and share-based compensation.
- G&A expense more than doubled, primarily due to public-offering, Nasdaq-listing, legal and accounting costs, as well as additional personnel and compensation costs.
- Operating cash burn increased from $3.9 million to $5.7 million.
- Cash and shareholders’ equity increased substantially as a result of the IPO and private financing activity.
- The company completed a 1-for-20 share consolidation in November 2018 and began trading on Nasdaq in December 2018.
Guidance, outlook, risks and unusual items
- Management expects operating losses and expenses to increase in the near term, including as a result of Nasdaq-listed U.S. public-company compliance costs.
- The Ahon Pharma agreement grants exclusive DM199 stroke-development and commercialization rights in mainland China, Taiwan, Hong Kong and Macau. DiaMedica received $500,000 upfront and may receive a $4.5 million regulatory milestone, up to $27.5 million of additional milestones and royalties of up to approximately 10%; future payments are uncertain and the agreement can be terminated by Ahon on 120 days’ notice.
- DiaMedica is dependent on Catalent Pharma Solutions for DM199 manufacturing and licensed manufacturing technology. Two future Catalent milestones total $370,000, with a royalty of less than 1% on future net sales after product launch.
- The company is litigating against Pharmaceutical Research Associates Group B.V. and its U.S. subsidiary regarding missing records and alleged execution errors in the Type 2 diabetes study. The outcome and any recovery are uncertain.
- Key risks include clinical-trial failure or delay, limited patient enrollment, regulatory rejection, manufacturing and CRO dependence, inability to obtain additional financing, dilution from future equity offerings, competition, reimbursement uncertainty and intellectual-property challenges.
- Observed DM199 tolerability issues were generally mild to moderate; orthostatic hypotension was the principal dose-limiting issue at a high dose in healthy volunteers.
- The company relies on an Australian R&D incentive program and recognized approximately AUD$777,000 in 2018 for qualifying expenditures made in 2017.
Important facts for investors to verify
- Progress, enrollment and results of the REMEDY Phase II stroke trial and the CKD Phase Ib study initiated in 2019.
- Whether the company’s cash runway remains sufficient through 2020 and when additional financing may be required.
- Receipt and timing of the $4.5 million Ahon Pharma milestone and the status of development in China and other licensed territories.
- Resolution and financial impact of the PRA litigation and whether complete diabetes-study records are obtained.
- Potential dilution from 807,563 shares issuable under warrants, 639,359 outstanding stock options and other equity awards.
- Manufacturing readiness, Catalent obligations and the ability to scale DM199 under applicable GMP requirements.
- Regulatory, safety and efficacy evidence supporting DM199, given that no product candidate has yet been approved.