Replimune Group, Inc. quarterly report, Q1 FY2019

Business context and reporting period

Replimune Group, Inc. is a clinical-stage biotechnology company developing oncolytic immunotherapies for cancer. This Form 10-Q covers the quarter ended June 30, 2018 (the first quarter of fiscal 2019); income and cash-flow comparisons are with the three months ended June 30, 2017. The company had no approved products and generated no product revenue.

Financial performance and position

Unless otherwise stated, amounts below are in millions of U.S. dollars; the filing presents financial statements in thousands.

Gross and operating margins are not meaningful because the company had no revenue. At June 30, 2018, cash and cash equivalents were $12.91 million and short-term investments were $39.12 million, totaling $52.03 million; restricted cash was an additional $1.86 million. Total assets were $59.29 million, current liabilities $4.50 million, and total liabilities $11.63 million. The company reported no debt outstanding. Convertible preferred stock of $86.36 million was classified outside stockholders’ deficit; stockholders’ deficit was $38.70 million.

Material changes versus the prior comparable period

• Net loss widened by $6.49 million. R&D expense increased $1.65 million, including $0.62 million in direct RP1 costs and higher personnel and other unallocated costs. Management attributed higher RP1 costs primarily to the ongoing Phase 1/2 trial.
• G&A expense rose $1.06 million, mainly from additional personnel and professional fees related to financial reporting and preparation to become a public company.
• Other expense included a $5.45 million noncash charge from remeasuring the preferred-stock warrant liability, which increased from $1.64 million at March 31 to $7.09 million at June 30. A $1.49 million year-over-year improvement in other income/expense, excluding the warrant charge, reflected primarily foreign-exchange gains; interest income also increased.
• Operating cash use rose $1.37 million. Investing activities provided $4.89 million, largely from maturities of short-term investments, while cash, cash equivalents and restricted cash decreased $2.90 million during the quarter.
• Short-term investments fell from $43.97 million to $39.12 million; restricted cash increased mainly because $1.78 million was placed for a landlord letter of credit.

Outlook, risks and notable items

• Management expected losses and expenses to rise as clinical and preclinical programs advance, the company prepares for public-company costs, and it develops manufacturing capacity. It stated that cash, investments and IPO proceeds would fund operating and capital requirements for at least 12 months from the August 30, 2018 financial-statement issuance. Separately, the MD&A estimated funding into the second half of 2021; both statements rely on assumptions and are subject to execution and development risks.
• After quarter-end, the company completed its IPO on July 24, 2018, selling 6.7 million shares at $15 per share, and sold another 707,936 shares on July 30 after partial exercise of the underwriters’ option. The filing reports approximately $103.3 million in net proceeds in aggregate after underwriting discounts and commissions and offering expenses. Preferred stock converted to common stock at the IPO closing, and the warrant liability was to be remeasured and reclassified to equity.
• The company planned a randomized, controlled Phase 2 RP1-plus-cemiplimab trial versus cemiplimab alone in approximately 240 patients with cutaneous squamous cell carcinoma, and intended to initiate an RP2 trial, both in the first half of 2019. It was also conducting a Phase 1/2 RP1 trial, with U.S. sites subject to an FDA clinical hold. The company submitted the requested longer-follow-up toxicology and biodistribution study in August 2018; FDA review was ongoing as of the filing.
• A planned Framingham, Massachusetts facility was expected to begin its lease term in November 2018, subject to landlord improvements. Management estimated approximately $28 million in capital expenditures to commence manufacturing operations. The company had $3.30 million in minimum contract-manufacturing commitments through June 30, 2019.
• BMS agreed to provide nivolumab for the ongoing trial at no cost. Under the Regeneron collaboration, development and supply costs for the agreed study plan were to be shared equally. No related costs or reimbursements had been recorded by June 30.
• Material risks include early-stage clinical and regulatory uncertainty, the FDA hold on U.S. RP1 sites, reliance on a limited number of suppliers and collaborators, substantial future funding needs, foreign-exchange exposure, and the possibility that products never achieve approval or commercial success. The filing reports no material litigation and no off-balance-sheet arrangements.
• Disclosure controls were assessed as ineffective at the reasonable-assurance level because of material weaknesses in the control environment, accounting staffing and segregation of duties, and formal controls for complex transactions. Management said remediation was underway; no material change in internal control occurred during the quarter.

Important facts for investors to verify

1. Confirm the current status and timing of the FDA review of the RP1 study submission and whether U.S. trial sites have been cleared to open.
2. Track clinical-trial initiation, enrollment, safety and efficacy disclosures for RP1 and RP2 against the stated development plans.
3. Reconcile the IPO’s final net proceeds and post-IPO cash runway, including the filing’s differing runway descriptions and planned manufacturing-facility spending.
4. Monitor quarterly operating cash use, R&D spending, warrant/equity accounting and the company’s ability to fund its plans without further financing.
5. Assess progress in remediating material weaknesses in financial reporting controls and any subsequent auditor or management findings.