PALATIN TECHNOLOGIES INC annual report, FY2019

Palatin Technologies, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended June 30, 2019, filed September 12, 2019. The filing is an annual report, not a standalone “2018 Q4” report; it includes June 2019 quarter data. Palatin is a clinical-stage biopharmaceutical company focused on melanocortin and natriuretic peptide receptor therapies.

Financial results and liquidity

Metric	FY2019	FY2018
Revenue	$60.3 million	$67.1 million
Research and development expense	$14.9 million	$32.6 million
General and administrative expense	$9.7 million	$8.6 million
Operating income	$35.7 million	$25.9 million
Net income (loss)	$35.8 million	$24.7 million
Diluted earnings per share	$0.16	$0.12
Operating cash flow	$(21.8) million	$1.7 million

• FY2019 revenue was essentially driven by a $60 million AMAG milestone following FDA approval of Vyleesi; the balance was primarily contract-cost billings. Palatin had not yet earned commercial product sales or Vyleesi royalties.
• Reported operating and net margins were approximately 59% because of the regulatory milestone revenue; they should not be read as evidence of a recurring commercial margin.
• FY2019 R&D expense fell about 54%, principally because Vyleesi Phase 3 development concluded. G&A increased about 12%, mainly due to compensation expense.
• Cash and cash equivalents were $43.5 million at year-end; accounts receivable was $60.3 million, representing the AMAG approval milestone and collected in July 2019. Current liabilities were $4.2 million and total assets were $104.7 million.
• Notes payable were $0.33 million at June 30, 2019; the remaining final loan payments were made in July 2019. Interest expense declined to $0.42 million from $1.45 million.
• Cash declined by $21.8 million from operating activities, while financing activities provided $27.3 million, including $33.1 million net proceeds from common-stock sales. Management estimated existing resources would fund planned operations through at least September 30, 2020, but said additional funding would be needed for development and clinical trials.

Material changes and business developments

• The FDA approved Vyleesi (bremelanotide) for acquired, generalized HSDD in premenopausal women on June 21, 2019. AMAG began U.S. marketing efforts in August, with a national launch expected in the second half of September 2019.
• Vyleesi Phase 3 trials met their co-primary endpoints for desire and related distress; the key secondary endpoint of satisfying sexual events was not significantly different from placebo. Adverse-event discontinuation was approximately 18% for Vyleesi versus 2% for placebo.
• Palatin received a $60 million approval milestone from AMAG. The agreement also provides potential sales milestones of up to $300 million and tiered royalties, but future amounts depend on commercial sales.
• R&D priorities shifted toward MC1r programs and other pipeline candidates. PL8177 oral ulcerative-colitis and systemic uveitis Phase 2 studies were planned to start in the first half of calendar 2020; PL9643 dry-eye development was planned to proceed after a potential IND filing in late 2019. These were forward-looking plans, not completed milestones.
• Palatin adopted ASC Topic 606 on July 1, 2018, recording a one-time $0.5 million transition adjustment related to the Kwangdong license. The filing says adoption did not affect FY2019 statements of operations or cash flows.

Outlook, risks and contingencies

• Management expected Vyleesi royalties in FY2020 but stated that sales could not be forecast reliably. It also identified potential future milestone and royalty revenue from Fosun in China and Kwangdong in Korea, where regulatory approval or commercial-sale milestones remained outstanding.
• Profitability is not assured: FY2019 and FY2018 profits were substantially milestone-driven, and the company expected significant development spending and possible losses in future years. Management stated that additional financing may be required and may not be available on acceptable terms.
• Commercial risks include AMAG’s control over North American commercialization, uncertain market uptake and reimbursement, competition, Vyleesi’s injectable administration, and third-party manufacturing and device supply. The AMAG commercial supply agreement had not yet been finalized.
• Vyleesi’s reported common adverse events included nausea, flushing, injection-site reactions and headache; it caused small, transient blood-pressure increases and is contraindicated for women with uncontrolled high blood pressure or known cardiovascular disease.
• Pipeline candidates remain subject to clinical and regulatory risk. The company relies on outside contractors and manufacturers, has no commercial-scale manufacturing facilities, and may require substantial financing to advance candidates.
• The company reported no current material legal proceedings. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Important facts for investors to verify

• Actual Vyleesi launch performance, prescriptions, net sales, royalties, reimbursement coverage and any sales milestones; FY2019 revenue was not recurring product revenue.
• Collection and timing of the $60.3 million AMAG receivable, and whether the projected cash runway remains adequate as development costs and commercial receipts evolve.
• Execution of the AMAG supply agreement and reliable supply of Vyleesi, including the autoinjector and contract-manufacturer compliance.
• Whether planned PL8177 and PL9643 clinical milestones occurred, and the resulting safety, efficacy, timing and funding requirements.
• Potential dilution: common shares outstanding increased to 226.8 million at June 30, 2019; the filing also disclosed substantial outstanding options, warrants and restricted stock units.
• Patent-term protection for Vyleesi, including the pending patent-term-extension request, and future approvals and commercialization progress in China, Korea and other territories.