Business Context and Reporting Period
Aastrom Biosciences, Inc. (the filing issuer identified in the source text) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. On May 30, 2014, Aastrom acquired Sanofi’s cell therapy and regenerative medicine business, including Carticel, MACI, Epicel, Genzyme Denmark, related patents and manufacturing operations. The acquisition moved the company from development-stage to commercial-stage operations.
The acquired portfolio included commercial products for cartilage repair and severe burns, while Aastrom continued developing ixmyelocel-T for ischemic dilated cardiomyopathy. The results include approximately three months of acquired-business operations for the quarter and four months for the nine-month period.
Financial and Operating Highlights
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|---|---|
| Revenue | $9.7 million | $0 | $14.1 million | $11 thousand |
| Gross profit | $4.1 million | $0 | $3.5 million | $8 thousand |
| Gross margin | 43% | 0% | 25% | 73% |
| Operating loss | $8.0 million | $3.6 million | $21.2 million | $16.0 million |
| Net loss | $6.9 million | $2.3 million | $17.6 million | $12.7 million |
| Net loss per share | $0.82 | $1.20 | $2.90 | $6.60 |
| Cash flow from operations | Not separately provided | Not separately provided | $(19.2) million | $(15.6) million |
- Quarterly revenue consisted primarily of Carticel revenue of $7.5 million and Epicel revenue of $1.8 million. Nine-month revenue included $10.9 million from Carticel, $2.7 million from Epicel, $0.3 million from bone marrow and $0.2 million from MACI.
- Research and development expense increased to $7.8 million for the quarter and $15.5 million for the nine months, driven by higher ixCELL-DCM clinical-trial spending, acquired-business expenses and a $3.2 million Verigen-related payment.
- Selling, general and administrative expense increased to $4.3 million for the quarter and $9.3 million for the nine months, reflecting sales and marketing costs, integration expenses and Denmark operations.
- The nine-month results included a $3.6 million non-cash bargain purchase gain from the acquisition and a $0.2 million quarterly and $0.2 million year-to-date restructuring-related reduction to gross profit; restructuring charges totaled $3.1 million year to date.
- Cash was $37.6 million at September 30, 2014, compared with $8.1 million at December 31, 2013. Total current assets were $44.7 million and total liabilities were $12.6 million.
- Debt was limited to approximately $153 thousand, consisting of current and long-term debt. Warrant liabilities were $1.2 million.
- Financing activities provided $50.2 million during the first nine months, including $37.5 million of net proceeds from a September equity offering, $7.1 million of net ATM proceeds and proceeds from Lincoln Park equity sales and warrant exercises.
Material Changes Versus the Prior Comparable Period
- The acquisition added substantial commercial revenue but also increased operating costs, manufacturing obligations, sales infrastructure and integration requirements. Period-over-period comparisons are not fully comparable because the acquired business was not owned in 2013.
- Common shares outstanding increased to 23.8 million at October 31, 2014 from 4.7 million at December 31, 2013, primarily due to equity issuances and warrant exercises.
- The company discontinued MACI manufacturing in Denmark, temporarily stopped European MACI sales and reduced MACI research and development spending. Approximately 80 full-time positions, or about 30% of the workforce, were eliminated.
- MACI sales were temporarily discontinued in Europe because of low utilization and unfavorable pricing. The company intended to evaluate a possible U.S. regulatory pathway and selective European reintroduction, but timing was undetermined.
- The company recorded a $3.2 million liability for a settlement resolving potential future MACI development milestones owed to former Verigen shareholders. The amount was paid on October 17, 2014.
- The nine-month net loss increased by $4.8 million versus 2013, while the loss per share improved because the weighted-average share count increased from 2.5 million to 7.6 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the $37.6 million cash balance was expected to sustain operations for at least one year, but also stated that positive operating cash flow was not expected for at least a year and would depend on product growth, improved margins and lower expenses.
- The company expected to complete its restructuring plan by the end of the fourth quarter of 2014 and warned that additional lease termination costs and stay-on bonuses could occur.
- The company expected to complete enrollment in the 108-patient Phase 2b ixCELL-DCM trial during 2014, with top-line efficacy results expected approximately 12 months later.
- The company reported substantial doubt about its ability to continue as a going concern in the prior-year audit report, although management believed the September equity financing extended liquidity for at least one year. Additional capital could still be required.
- Disclosure controls and procedures were ineffective at September 30, 2014 because of a material weakness involving significant-transaction evaluation and the financial close process. Management cited insufficient accounting personnel and technical expertise and was using consultants and additional hiring to remediate the weakness.
- One U.S. distributor represented approximately 75% of revenue for both the quarter and nine-month period, creating significant customer concentration risk.
- The Cambridge, Massachusetts manufacturing facility received an FDA Form 483 in March 2014. The company was implementing corrective measures, but further FDA action could affect manufacturing or sales.
- Key risks include continued operating losses, dependence on equity financing, dilution, integration of the acquired business, regulatory approval for MACI and ixmyelocel-T, clinical-trial failure or delay, manufacturing concentration, supplier dependence, reimbursement pressure, competition and intellectual-property limitations.
Most Important Facts for an Investor to Verify
- Whether Carticel and Epicel sales, pricing and gross margins improved sufficiently after the acquisition to offset ongoing R&D, commercialization and restructuring costs.
- The status and final cost of the Denmark shutdown and any additional restructuring or lease-related obligations.
- Cash burn, remaining availability under the Lincoln Park equity line and ATM arrangements, and the timing and terms of any further financing.
- Progress, enrollment completion and subsequent results of the ixCELL-DCM Phase 2b trial.
- FDA responses to the Cambridge facility’s Form 483 and the company’s remediation of manufacturing and internal-control deficiencies.
- The sustainability of revenue given the approximately 75% concentration in one distributor and the company’s dependence on a limited number of products and facilities.
- Potential dilution from outstanding warrants, preferred-stock conversion rights, stock options and additional equity issuance.