Business context and reporting period
Palatin Technologies, Inc. is a development-stage biopharmaceutical company focused on receptor-targeted therapies. Its lead candidate is bremelanotide for hypoactive sexual desire disorder (HSDD); other programs target inflammatory and cardiovascular diseases. This Form 10-Q covers the quarter and six months ended December 31, 2017, the company’s fiscal second quarter. The interim financial statements are unaudited.
Palatin licensed North American bremelanotide rights to AMAG, rights in China and certain neighboring markets to Fosun, and Korean rights to Kwangdong. Revenue is primarily license-related, not product sales.
Financial performance and position
- Revenue: $10.6 million for the quarter and $37.6 million for the six months, versus none in the comparable 2016 periods. Six-month revenue comprised $32.6 million recognized under the AMAG arrangement and a $5.0 million Fosun license fee.
- Profit: Net income reported in the statements was $3.0 million for the quarter and $13.6 million for six months, compared with net losses of $10.0 million and $23.1 million, respectively, in 2016. Basic EPS was $0.02 and $0.07 for the 2017 periods. The results reflect license revenue and should not be read as evidence of recurring product profitability.
- Operating expenses: R&D was $6.0 million for the quarter and $20.2 million for six months; G&A was $1.6 million and $3.2 million, respectively. Six-month R&D rose from $19.4 million in 2016, while quarterly R&D declined from $8.1 million.
- Cash flow: Operating activities used $1.6 million in the first half, versus $17.7 million used in the prior-year period. Despite reported net income, operating cash flow was negative, principally reflecting movements in receivables, accrued expenses, and deferred revenue. Investing activities provided $0.2 million; financing activities used $3.9 million, including $4.0 million of debt repayment. Cash and cash equivalents fell $5.2 million to $35.0 million.
- Liquidity and debt: Current assets were $36.2 million and current liabilities $23.7 million, including $9.5 million of current deferred revenue. Management cited current liabilities of $14.1 million net of that deferred revenue. Notes payable, net of discounts and issuance costs, totaled $10.2 million, of which $7.9 million was current. The loans bear floating interest at one-month LIBOR plus 8.5%; Palatin reported covenant compliance.
- Equity: Common shares outstanding increased to 195.4 million at December 31 from 160.5 million at June 30, principally in connection with warrant exercises. The increase is relevant to per-share dilution.
Material changes versus the prior comparable period
- License revenue turned the company from operating and net losses to reported operating income and net income. The comparison is substantially affected by the AMAG license and related development reimbursements, plus the Fosun upfront fee.
- Cash burn from operations narrowed substantially, but cash still declined during the half-year after debt repayments and other financing outflows.
- Research and development expense increased 4% for the six-month period but decreased in the December quarter; G&A increased in both comparisons, which management attributed mainly to tax-related professional services and employee costs.
- Debt principal payments reduced the venture-loan balance, while the current portion remained material. Outstanding common shares rose approximately 22% from June 30.
Outlook, commentary, risks and unusual items
- Management said existing capital resources were expected to fund planned operations for at least one year after issuance of the financial statements. It also expects additional funding will be needed for other candidates’ clinical trials and later regulatory submissions; financing may not be available on acceptable terms.
- Palatin planned to use resources for preparation and filing of a U.S. NDA for bremelanotide and development of other programs. The filing gives no definite NDA filing date. It anticipated PL-3994 Phase 2A trials later in calendar 2018, PL-8331 IND-enabling work later in 2018, and potentially filing an IND for PL-5028 in the first half of 2019. The filing also reports that PL-8177 dosing in a Phase 1 safety study was announced in February 2018.
- Potential future AMAG payments include up to $80 million in regulatory milestones and $300 million in sales milestones, plus tiered royalties. Fosun and Kwangdong agreements include contingent milestones and royalties. These amounts depend on development, regulatory and commercial outcomes and are not assured.
- The $5.0 million Fosun upfront license fee was recognized as revenue in the period. Kwangdong’s $0.5 million upfront payment was recorded as non-current deferred revenue because of refund provisions. Foreign withholding taxes and a $0.5 million tax benefit associated with an AMT credit were unusual tax items; the company retained a valuation allowance against most deferred tax assets.
- Key risks include clinical and regulatory failure or delay, manufacturing and compliance requirements, commercialization and market acceptance, dependence on collaborators, and the need for further financing. Palatin said there were no material changes to risk factors in its prior annual report. It reported no current legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the reported net-income figures: the consolidated statements show $3.0 million for the quarter and $13.6 million for six months, but the organization note contains different figures. The accumulated-deficit balance also differs between the balance sheet and that note.
- Assess how much of reported revenue is tied to completion of AMAG development obligations and other upfront license payments, versus any recurring royalties or product sales; the filing reports no product sales.
- Review cash runway assumptions, the timing and amount of future clinical and NDA spending, and the material current debt maturities and floating interest cost.
- Track dilution from shares and equity awards, and the conditions required to earn contingent license milestones and royalties.