Business context and reporting period
Spero Therapeutics, Inc. is a clinical-stage biopharmaceutical company developing treatments for multidrug-resistant bacterial infections. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; financial amounts below are in millions unless stated otherwise. Spero had no approved products and generated no product-sale revenue. Reported revenue came from government awards.
Key programs were SPR994, an oral antibiotic candidate; SPR741 and SPR206, intravenous candidates for Gram-negative infections; and SPR720, an oral candidate for pulmonary nontuberculous mycobacterial infections.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Revenue | $0.597 | — | $0.986 | — |
| Research and development expense | $6.910 | $6.005 | $20.366 | $19.406 |
| General and administrative expense | $3.653 | $1.909 | $8.350 | $5.005 |
| Total operating expenses | $10.563 | $7.914 | $28.716 | $24.411 |
| Net loss | $(9.844) | $(7.918) | $(26.018) | $(24.444) |
| Net loss attributable to common stockholders | $(12.076) | $(7.410) | $(31.327) | $(21.595) |
| Basic and diluted net loss per share | $(36.02) | $(23.23) | $(93.96) | $(70.15) |
Margins are not meaningful for this pre-commercial company. Common-stockholder losses exceed net losses because of cumulative preferred dividends and accretion to redemption value. Per-share figures reflect a subsequent one-for-6.0774 reverse stock split.
- At September 30, 2017, cash and cash equivalents were $25.373; current assets were $26.959 and current liabilities were $6.874. Total assets were $31.550, total liabilities were $7.273, and accumulated deficit was $82.194.
- The filing reports no debt balance. Preferred stock had a $108.371 million aggregate liquidation preference at quarter-end; it converted into common stock when the IPO closed.
- For the first nine months, operating cash use was $26.371, investing cash use was nil, and financing provided $41.429. Cash increased $15.058 from year-end 2016.
- There was no operating cash flow or earnings profitability; government-award revenue partially reimbursed qualifying research costs.
Material changes versus the prior comparable period
- Quarterly revenue rose from zero to $0.597 million, and nine-month revenue was $0.986 million, principally from DoD, NIAID and CARB-X awards.
- Quarterly operating expenses increased $2.649 million year over year, driven by higher G&A ($1.744 million increase) and R&D ($0.905 million increase). Nine-month operating expenses increased $4.305 million, including a $3.345 million rise in G&A.
- Quarterly net loss widened by $1.926 million; nine-month net loss widened by $1.574 million. The nine-month common-stockholder loss increased more substantially, partly reflecting higher preferred dividends and accretion.
- For the nine months, cash used in operations increased to $26.371 million from $19.755 million. Financing inflows included $43.111 million net proceeds from Series C preferred shares, offset in part by payments to repurchase minority interests and offering costs.
- Other income for the 2017 nine-month period included a $1.547 million gain from changes in fair value of derivative liabilities, mainly following decisions to discontinue certain underlying development programs. This is a non-operating, non-cash item.
Outlook, management commentary, risks and unusual items
- In November 2017, after quarter-end, the company completed its IPO and partial over-allotment, raising aggregate net proceeds of $77.7 million after underwriting discounts and commissions but before offering costs. Management said cash at September 30 plus IPO proceeds was expected to fund operating and capital needs into the second quarter of 2019.
- Management expected continued significant operating losses and said available funds would not cover development through regulatory approval and commercialization, including completion of a pivotal Phase 3 SPR994 trial. Funds allocated to SPR206 and SPR720 were expected to support those programs only to potential IND filing.
- SPR994’s Phase 1 trial began in Australia in October 2017. SPR741’s Phase 1b drug-interaction trial began in the fourth quarter; top-line data were anticipated in the first half of 2018. Management planned to reassess timing for a Phase 2 SPR741 combination trial after the Phase 1b results and regulatory feedback.
- Subsequent to quarter-end, Spero paid a $1.0 million Meiji milestone after the first SPR994 Phase 1 patient enrolled, and $2.6 million to Northern upon the IPO closing. Both were to be recorded as R&D expense in the fourth quarter.
- Risks include clinical failure or delay, regulatory requirements, safety and resistance, competition, dependence on contract manufacturers and research organizations, intellectual-property and license risks, and reliance on government awards that may be terminated or not renewed. Additional financing may be required after the stated runway and could dilute shareholders or require rights concessions.
- Other notable items: preferred shares carried cumulative dividends, and license agreements include potential milestone and royalty obligations. The filing reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of September 30, 2017.
Important facts for investors to verify
- Clinical progress and results for SPR994 and SPR741, including the FDA’s requirements for later-stage trials and the selection of an SPR741 partner antibiotic.
- Whether the cash runway estimate through the second quarter of 2019 remains valid as R&D spending, clinical plans and public-company costs evolve.
- Funding availability and conditions for government awards, including CARB-X and NIAID option periods, and the unresolved novation of the NIAID contract associated with the Cantab arrangements.
- Potential milestone payments, royalties and other obligations under the Meiji, Northern, Vertex, Aviragen and Cantab agreements.
- Post-IPO share count, dilution from options and equity plans, and the timing of resale eligibility for previously restricted shares.