Protalix Biotherapeutics, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited financial figures below are in U.S. dollars; amounts are converted to millions unless otherwise stated. Protalix develops recombinant therapeutic proteins using its ProCellEx platform. Its marketed taliglucerase alfa is sold as Uplyso in Brazil and certain Latin American markets and as Elelyso elsewhere. Key candidates include PRX-102 for Fabry disease, PRX-110 for cystic fibrosis and OPRX-106, an oral anti-TNF candidate.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4.67m | $1.34m | $7.12m | $4.36m |
| Cost of revenue | $4.25m | $0.22m | $6.45m | $0.73m |
| Gross profit / margin | $0.42m / 9.0% | $1.11m / 83.3% | $0.67m / 9.4% | $3.63m / 83.3% |
| Net R&D expense, after grants | $5.06m | $3.95m | $18.90m | $13.62m |
| SG&A expense | $2.01m | $2.16m | $6.22m | $5.99m |
| Operating loss | $6.65m | $5.00m | $24.44m | $15.97m |
| Net loss | $7.29m | $3.82m | $26.74m | $14.86m |
| Basic and diluted loss per share | $0.07 | $0.04 | $0.27 | $0.16 |
Financial results include discontinued operations where applicable. Nine-month 2015 included $3.85m of income from discontinued operations, compared with a $0.19m loss in 2016; Q3 2015 included $2.20m of discontinued-operations income, while Q3 2016 had none.
Cash, liquidity and debt
- Cash and cash equivalents were $51.32m at September 30, 2016, down $25.05m from $76.37m at December 31, 2015. Net cash used in operating activities was $24.76m for the first nine months; investing used $0.73m, financing provided no cash, and exchange-rate effects added $0.43m.
- Current assets were $59.65m and current liabilities $10.33m. Total liabilities were $85.58m; shareholders’ equity was a $15.10m capital deficiency.
- Convertible notes had a $68.13m carrying amount and are 4.5% notes due 2018; the filing reports their fair value at approximately $47.3m. A $4.30m promissory note was also recorded. Interest paid was $3.11m during the nine-month period.
- Management stated that available cash was expected to fund planned activities for at least 12 months, while cautioning that assumptions could change and additional financing might be needed.
Changes and management commentary
- Nine-month revenue rose 63%, primarily because more drug substance was sold to Pfizer. The company says those sales were at cost, driving cost of revenue sharply higher and reducing gross margin from 83.3% to 9.4%.
- Net R&D expense increased 39% year over year for the nine months, mainly due to $5.0m more in clinical-trial costs. Management expects R&D to remain its primary expense.
- The Amended Pfizer Agreement gives Pfizer all Elelyso revenue and responsibility for expenses outside Brazil; Protalix retains Brazil rights and bears Brazil expenses. Protalix remains obligated to supply drug substance to Pfizer, and failure to meet supply commitments could result in substantial financial penalties.
- Fiocruz purchases of Uplyso have been substantially below agreed purchase milestones. Protalix says it may terminate the Brazil agreement but was continuing supply and discussing possible compliance steps with Fiocruz.
- Pipeline progress: PRX-102 Phase III trials began in June 2016 and enrollment was ongoing; the first patient entered the PRX-110 Phase II trial in July 2016; following a Phase I study showing safety, tolerability and biological activity, Protalix expected to begin a Phase II OPRX-106 ulcerative-colitis trial shortly.
- Management warned that additional capital may be required; financing could dilute shareholders or impose additional debt obligations, and funding may not be available on acceptable terms. The company reported no material changes to its previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Most important facts to verify
- Whether cash burn and clinical-trial spending remain consistent with management’s stated minimum 12-month funding outlook.
- Progress and costs of PRX-102 Phase III, PRX-110 Phase II and the planned OPRX-106 Phase II trial.
- Whether Fiocruz meets its purchase obligations and whether the Brazil agreement continues, changes or is terminated.
- Protalix’s ability to meet Pfizer supply commitments and the potential financial consequences of any shortfall.
- Refinancing, repayment or conversion plans for the 4.5% notes due 2018, and the effect of further financing on liquidity and shareholder dilution.
- The sustainability and economics of Pfizer drug-substance sales, which increased revenue but were reported at cost and materially compressed gross margins.