ADMA Biologics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; filed November 3, 2017. The financial statements are unaudited and prepared under U.S. GAAP.
Business context
ADMA is a vertically integrated plasma-derived biologics company operating plasma collection centers and developing, manufacturing and commercializing immune-globulin products. On June 6, 2017, ADMA acquired selected Biotest Therapy Business Unit assets, including the FDA-approved Nabi-HB and Bivigam products, the Boca Raton fractionation facility and related manufacturing assets. The acquisition materially expanded the company’s assets, liabilities, revenue sources and operating expenses.
ADMA’s lead pipeline candidate, RI-002, is being developed for primary immune deficiency disease. The FDA’s July 2016 Complete Response Letter cited manufacturing, quality and regulatory deficiencies at the Boca Facility and certain vendors, rather than concerns with RI-002 clinical safety or efficacy data.
Financial performance and key metrics
| Metric | Three months ended September 30, 2017 | Three months ended September 30, 2016 |
|---|---|---|
| Total revenue | $4.7 million | $2.9 million |
| Gross profit/(loss) | $(6.6) million | $1.2 million |
| Loss from operations | $(14.4) million | $(3.7) million |
| Net loss | $(15.2) million | $(4.3) million |
| Basic and diluted loss per share | $(0.59) | $(0.34) |
| Metric | Nine months ended September 30, 2017 | Nine months ended September 30, 2016 |
|---|---|---|
| Total revenue | $10.8 million | $7.3 million |
| Gross profit/(loss) | $(6.5) million | $3.0 million |
| Loss from operations | $(28.8) million | $(13.4) million |
| Net loss | $(30.8) million | $(15.0) million |
| Basic and diluted loss per share | $(1.67) | $(1.26) |
| Net cash used in operating activities | $(23.9) million | $(14.7) million |
- Third-quarter revenue increased 61%, primarily because Nabi-HB sales contributed $1.9 million following the acquisition. Plasma revenue was $2.8 million versus $2.9 million in the prior-year quarter.
- Nine-month revenue increased 47%, including $2.4 million of Nabi-HB revenue and $8.2 million of plasma revenue. License and other revenue was approximately $0.1 million in both comparable periods.
- Cost of product revenue increased to $11.3 million in the third quarter and $17.2 million for the nine-month period. The increase reflected unabsorbed Boca Facility manufacturing costs, Nabi-HB production and approximately $2.0 million and $2.5 million of Warning Letter remediation costs, respectively.
- Research and development expense declined 39% for the nine-month period to $4.4 million, primarily because of lower RI-002 validation, testing, BLA and production costs.
- SG&A expense increased 136% in the quarter and 148% for the nine-month period, driven primarily by Biotest transaction costs and expenses associated with the acquired business.
- At September 30, 2017, cash and cash equivalents were $13.6 million, accounts receivable were $1.5 million and inventories were $13.4 million. Working capital was approximately $18.1 million.
- Total assets were $72.8 million, compared with $23.7 million at December 31, 2016. Stockholders’ equity was $13.0 million, compared with a deficit of $4.5 million at year-end 2016, largely reflecting shares issued in the acquisition.
Debt and liquidity
- At September 30, 2017, the company reported $14.5 million of Oxford senior notes, $1.8 million of end-of-term liability and $14.8 million of net related-party debt owed to Biotest under a 6% subordinated note due June 2022.
- During the nine months, ADMA paid $4.4 million of principal on Oxford debt and received $15.0 million under the Biotest note.
- Operating cash burn increased to $23.9 million for the first nine months, partly offset by $17.2 million of investing cash inflows and $10.4 million of financing inflows. Ending cash increased $3.7 million from December 31, 2016.
- Management stated that existing cash, projected revenue and receivables, and Biotest’s equity commitment of up to $12.5 million were expected to fund operations only through the end of the first quarter of 2018. Additional financing was expected to be required thereafter.
- The filing states that recurring losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern.
Material changes, outlook and unusual items
- The Biotest transaction was accounted for as an acquisition with a preliminary purchase price of approximately $59.8 million, funded principally through ADMA equity and the future transfer of two plasma centers to Biotest.
- ADMA issued 4,295,580 voting shares and 8,591,160 non-voting shares to Biotest. As of November 1, 2017, 25,793,404 common shares were outstanding.
- The Boca Facility resumed production late in the third quarter, but Bivigam was not expected to be available for sale through the remainder of 2017. Management expected FDA clearance for a Bivigam relaunch around mid-2018.
- Management expected to be inspection-ready for FDA re-inspection of the Boca Facility by the end of 2017 and anticipated a possible RI-002 BLA refiling in mid-2018, contingent on remediation and FDA actions. These are forward-looking expectations, not guarantees.
- On October 10, 2017, after quarter-end, ADMA entered a Marathon senior secured credit facility of up to $40.0 million, including a $30.0 million initial term loan. Approximately $17.0 million was used to retire Oxford debt, $5.5 million was placed in a debt service reserve, approximately $1.5 million was paid for financing-related costs and approximately $6.0 million remained for remediation and general corporate purposes.
- The Marathon loan bears interest at LIBOR plus 9.50%, subject to a 1% floor, carries a deferred facility fee equal to 9.20% of funded amounts and had an estimated effective interest rate of approximately 16.5%. It is secured by substantially all company assets, including the Boca Facility, and includes a minimum liquidity requirement of $5.5 million.
- Availability of an additional $10.0 million Marathon tranche depends on specified FDA and revenue milestones for Bivigam or RI-002.
- ADMA agreed to transfer its two existing plasma collection centers to Biotest on January 1, 2019, increasing the importance of successfully completing and licensing its third center.
Principal risks and contingencies
- Failure or delay in remediating the FDA Warning Letter and related cGMP, CMC and vendor deficiencies could prevent Bivigam production and delay or prevent RI-002 approval.
- The company has limited revenue, substantial cumulative losses of $137.7 million and continuing negative operating cash flow, and may be unable to obtain financing on acceptable terms.
- Revenue is concentrated: BPC and SK represented approximately 76% of nine-month 2017 revenue, with BPC representing approximately 68%.
- Manufacturing depends on complex plasma-derived processes, FDA compliance, adequate plasma supplies and third-party filling and packaging capacity.
- The transfer of two plasma centers to Biotest in 2019 could reduce the company’s historical revenue base if the replacement center is not timely licensed and operational.
- Debt financing creates substantial fixed obligations, collateral liens, restrictive covenants, a minimum liquidity requirement and potential acceleration upon default.
- RI-002 remains subject to FDA review and may never be approved or commercialized despite positive Phase III results.
Facts investors should verify
- Current FDA status of the Boca Facility, completion of remediation activities and timing and outcome of any FDA re-inspection.
- Whether Bivigam manufacturing resumed and whether FDA clearance for relaunch was obtained.
- Status and timing of the RI-002 BLA resubmission and any additional FDA requirements.
- Actual cash burn, available unrestricted liquidity, debt-service reserve balances and compliance with Marathon loan covenants.
- Availability and terms of additional financing beyond the Biotest commitment.
- Progress, licensing and expected collection capacity of the third plasma center before the January 1, 2019 asset-transfer obligation.
- Revenue concentration, related-party sales and purchases with Biotest, and the effect of the 2019 plasma-center transfer on future revenue.