Eton Pharmaceuticals, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited financial amounts are in $ thousands, except per-share data. The company develops, acquires, and commercializes specialty pharmaceutical products, including rare-disease treatments and hospital injectables.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $775 | $(161) | $15,739 | $(42) |
| Gross profit (loss) | $158 | $(17) | $13,396 | $(28) |
| Operating expenses | $6,005 | $6,255 | $16,205 | $19,663 |
| Operating loss | $(5,847) | $(6,272) | $(2,809) | $(19,691) |
| Net loss | $(6,094) | $(6,504) | $(2,994) | $(20,283) |
| Net loss per share | $(0.24) | $(0.31) | $(0.12) | $(1.01) |
Q3 2021 gross margin was approximately 20%; nine-month gross margin was approximately 85%, elevated by licensing revenue and therefore not representative of recurring product economics. Nine-month revenue included $14,000 in licensing milestone revenue, $1,481 in product sales, and $258 in royalties. Q3 revenue comprised $734 in product sales and $41 in royalties. The filing attributes the nine-month licensing revenue mainly to Azurity, Bausch, and other milestone revenue.
- At September 30, cash and cash equivalents were $22,709, versus $21,295 at December 31, 2020. Current assets were $25,863 and current liabilities $5,360; total assets were $26,606.
- Cash from operating activities was $396 for the first nine months, compared with cash used of $15,164 in 2020. Investing activities provided $695, primarily from the $700 lab-equipment sale; financing activities provided $323. Cash increased by $1,414 over the period.
- Debt carrying value was $6,642, comprising $1,092 current and $5,550 long-term. The SWK loan has $7,000 gross principal, is secured by company assets, and bears interest at three-month LIBOR plus 10%, subject to a 2% LIBOR floor. Principal payments begin in February 2022, with remaining principal due in November 2024. The company must maintain at least $3,000 cash.
- The $361 PPP loan and accrued interest were forgiven in May, producing a $365 gain; the $150 EIDL loan was repaid in July.
Material changes versus prior periods
- Nine-month revenue improved substantially from negative revenue in 2020, primarily due to 2021 licensing milestones and product and royalty revenue. The 2020 comparative included a Biorphen wholesale price reduction, resulting in negative net sales.
- Nine-month net loss narrowed to $2,994 from $20,283. Lower R&D spending and increased revenue drove the improvement, partly offset by higher G&A expenses to support Alkindi Sprinkle commercialization.
- Nine-month R&D fell to $5,554 from $10,703; 2020 included $4,764 of Alkindi Sprinkle licensing expense. G&A rose to $10,651 from $8,960, while Q3 G&A declined modestly year over year.
- Q3 cost of sales included a $432 provision for excess Biorphen inventory nearing expiration. Inventory was $334 at quarter-end, net of a $1,414 slow-moving reserve, versus a $623 reserve at year-end 2020.
- The company closed its laboratory operation and sold its equipment in May, recognizing a $181 gain. It also recorded $2,518 of stock-based compensation in the first nine months.
Outlook, risks, and subsequent events
- Management expected existing September 30 cash to fund operating and capital requirements for at least 12 months from the filing date, based on sales and spending assumptions. It cautioned that cash could be used sooner and additional financing might be needed; financing may be unavailable or dilutive. If product growth, development, or regulatory approvals are delayed and financing cannot be obtained, operations may need to be scaled back or discontinued.
- No numerical revenue or earnings guidance was provided. Management expected growth from market penetration of approved products and additional product launches and licensing milestones.
- COVID-19 restrictions on in-person hospital and surgical-center promotion had hindered Biorphen demand and continued to adversely affect Biorphen and Alkindi Sprinkle sales. Management noted Biorphen promotional efforts would likely remain affected.
- In October 2021, Eton licensed generic carglumic acid rights, paid $3,250, and expected a late-2021 launch. Eton also paid a $600 Rezipres milestone in October and expected a further $750 payment at launch. In November, Eprontia (topiramate oral solution) received FDA approval, and Eton entered a Tolmar co-promotion agreement for Alkindi Sprinkle; Tolmar receives a royalty on sales growth above the existing baseline.
- Two other pediatric neurology products sold to Azurity remained under FDA review. The Crossject hydrocortisone autoinjector and other development programs involve further potential milestone, royalty, and development costs.
- The company reported no pending or threatened litigation known to have a material operational impact and no legal proceedings in Part II. Management concluded disclosure controls were effective; it reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the $14,000 licensing revenue was nonrecurring, and what milestones or royalties remain achievable under the Azurity and other agreements?
- Whether Biorphen inventory can be sold before expiration and whether the recorded reserve adequately reflects future write-downs, returns, and chargebacks.
- Actual sales momentum and launch timing for Alkindi Sprinkle, Rezipres, carglumic acid, and Azurity products, including the effect of COVID-19 and the Tolmar arrangement.
- Cash burn and liquidity against management’s 12-month runway estimate, the $3,000 minimum-cash covenant, and scheduled SWK debt payments.
- Potential cash obligations from development and licensing agreements, including Crossject and the newly licensed carglumic acid product.