Avadel Pharmaceuticals plc(AVDL) - 2018 Q4 - Annual Report

Part I Business Avadel Pharmaceuticals is a specialty pharmaceutical company focused on developing FT218 for narcolepsy, while also marketing three sterile injectable hospital products, following a significant 2019 restructuring - The company's primary business strategy is to focus on the development and potential FDA approval for its lead candidate, FT218, for the treatment of narcolepsy[12][22][281] Marketed Products | Product Name | Indication | | :--- | :--- | | Akovaz® | Treatment of clinically important hypotension in the setting of anesthesia | | Bloxiverz® | Reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery | | Vazculep® | Treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia | - In February 2019, Avadel initiated a corporate restructuring to focus on FT218, which included reducing its workforce by over 50% and the voluntary Chapter 11 bankruptcy filing of its subsidiary, Specialty Pharma, to exit the Noctiva™ business[21][299][598] - The company is developing a fourth Unapproved Marketed Drug (UMD) product, a sterile injectable for the hospital setting, with an NDA submission anticipated in the first quarter of 2019[34][290] - The company's FT218 product candidate, which uses Micropump® technology, received Orphan Drug Designation from the FDA in January 2018, potentially providing up to seven years of market exclusivity if approved[26][286] Risk Factors Significant risks include a 2018 net loss of $95.3 million, recent restructuring, intense competition for hospital products, and uncertainties in the FT218 clinical trial - The company reported a net loss of $95.3 million and used $82.7 million in cash from operations in 2018, which may limit its ability to fully pursue its business strategy focused on FT218[117] - The recent restructuring plan, including a 50% workforce reduction and the bankruptcy of its Specialty Pharma subsidiary, may not be as effective as anticipated and carries risks of unintended negative consequences[118] - A substantial majority of revenues (96.2% in 2018) come from three hospital products (Bloxiverz®, Vazculep®, Akovaz®) that face significant competition, pricing pressure, and declining sales[124][125] - The clinical trial for the key product candidate, FT218, has no estimated completion date, and a management-directed evaluation could result in changes that increase costs and further delay its completion[122][123] - Servicing the $143.75 million in 2023 Exchangeable Senior Notes may require significant cash, and the company may not have sufficient funds to settle exchanges, repay at maturity, or repurchase the notes if required[224][225] Unresolved Staff Comments Not applicable, as the company has no unresolved staff comments - Not applicable[239] Properties The company leases its research center in France, commercial and administrative offices in Missouri, and IP/supply chain operations in Ireland Leased Facilities | Location | Function | Size (sq. ft.) | Lease Expiration | | :--- | :--- | :--- | :--- | | Venissieux, France | Research Center | ~38,400 | 2022 | | Chesterfield, MO | Commercial & Admin | 24,236 | 2025 | | Dublin, Ireland | IP, Clinical, Supply Chain | 5,059 | 2025 | Legal Proceedings Subsidiary Avadel Specialty Pharmaceuticals, LLC, filed for Chapter 11 bankruptcy in February 2019 to exit Noctiva™ business and is involved in patent litigation with Ferring Pharmaceuticals - On February 6, 2019, the subsidiary Avadel Specialty Pharmaceuticals, LLC, responsible for Noctiva™, filed for voluntary Chapter 11 bankruptcy protection[243] - Specialty Pharma is a party in patent litigation initiated by Ferring Pharmaceuticals, which seeks to invalidate patents related to Noctiva™ and alleges trademark infringement[246][249] - The parent company's subsidiary, Avadel US Holdings, Inc., is providing up to $2.7 million in debtor-in-possession financing to Specialty Pharma during the bankruptcy proceedings[244] Mine Safety Disclosures Not applicable to the company's operations - Not applicable[250] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Avadel's ADSs trade on NASDAQ, experienced high volatility in 2018, has never paid dividends, and completed a $50 million share repurchase program ADS Price Range (2017-2018) | Quarter | 2018 High ($) | 2018 Low ($) | 2017 High ($) | 2017 Low ($) | | :--- | :--- | :--- | :--- | :--- | | Q1 | 11.70 | 6.76 | 12.30 | 8.87 | | Q2 | 7.78 | 5.89 | 11.72 | 8.75 | | Q3 | 7.14 | 4.08 | 11.18 | 8.14 | | Q4 | 4.66 | 1.74 | 11.53 | 7.52 | - The company has never declared or paid a cash dividend and does not anticipate doing so in the foreseeable future[256] - The company fully completed its authorized share buyback program of $50 million, with no shares repurchased during the three months ended December 31, 2018[257][258] Selected Financial Data 2018 saw a significant financial downturn with total revenues falling to $103.3 million, resulting in an operating loss of $104.9 million and a net loss of $95.3 million Selected Annual Financial Data (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | $103,269 | $173,245 | $150,246 | | Gross profit | $85,753 | $156,944 | $136,998 | | Operating (loss) income | $(104,926) | $89,505 | $(4,965) | | Net (loss) income | $(95,304) | $68,271 | $(41,276) | | Diluted net (loss) income per share | $(2.55) | $1.63 | $(1.00) | | Total assets | $190,300 | $253,277 | $245,482 | | Long-term debt | $115,840 | $267 | $815 | - Quarterly results in 2018 show consistent operating losses, culminating in a significant operating loss of $75.4 million in Q4 2018, which included a $66.1 million impairment charge[268][269] Management's Discussion and Analysis of Financial Condition and Results of Operations 2018 financial decline was driven by a 40.4% revenue drop to $103.3 million, an operating loss of $104.9 million, a $66.1 million impairment charge, and a 70.5% increase in SG&A, despite a $143.75 million debt issuance Revenue by Product (2018 vs. 2017, in thousands) | Product | 2018 Revenue | 2017 Revenue | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Bloxiverz | $20,850 | $45,596 | $(24,746) | (54.3)% | | Vazculep | $42,916 | $38,187 | $4,729 | 12.4% | | Akovaz | $33,759 | $80,617 | $(46,858) | (58.1)% | | Noctiva | $1,204 | $0 | $1,204 | 100.0% | | Total Product Sales | $101,423 | $172,841 | $(71,418) | (41.3)% | - Operating loss was $104.9 million in 2018 compared to operating income of $89.5 million in 2017, driven by lower gross margin, a $66.1 million impairment of the Noctiva intangible asset, and a $41.5 million increase in SG&A expenses[301] - SG&A expenses increased 70.5% to $100.4 million in 2018, primarily due to approximately $48.5 million in sales and marketing costs for the launch of Noctiva[338] - R&D expenses increased 17.7% to $39.3 million in 2018, largely due to higher spending on the FT218 Phase 3 clinical study[336] - Net cash used in operating activities was $82.7 million in 2018, a significant shift from $16.7 million of cash provided by operations in 2017, primarily due to lower cash earnings[357][358] - Cash and marketable securities increased to $99.9 million at year-end 2018, primarily due to net proceeds of $137.6 million from a February 2018 debt issuance, offset by cash used in operations and share buybacks[303] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on marketable securities and foreign exchange risk from its Euro-functional subsidiary, with a 10% Euro change having an immaterial 2018 net loss impact - The company is subject to interest rate risk on its portfolio of marketable securities, which includes government and corporate bonds[379] - The company is exposed to foreign currency exchange risk from translating the results of its subsidiary with a Euro functional currency into U.S. dollars, where a 10% change in the exchange rate was deemed to have an immaterial impact on 2018 net loss[380] Financial Statements and Supplementary Data Audited 2018 financial statements confirm a significant decline with a $95.3 million net loss, total assets at $190.3 million, total liabilities at $187.5 million, and shareholders' equity at $2.8 million Consolidated Statement of (Loss) Income (in thousands) | Line Item | 2018 | 2017 | | :--- | :--- | :--- | | Total revenues | $103,269 | $173,245 | | Total operating expenses | $208,195 | $83,740 | | Operating (loss) income | $(104,926) | $89,505 | | Net (loss) income | $(95,304) | $68,271 | | Diluted net (loss) income per share | $(2.55) | $1.63 | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and marketable securities | $99,915 | $94,075 | | Total assets | $190,300 | $253,277 | | Long-term debt, less current portion | $115,734 | $156 | | Total liabilities | $187,520 | $167,697 | | Total shareholders' equity | $2,780 | $85,580 | Consolidated Statement of Cash Flows Highlights (in thousands) | Line Item | 2018 | 2017 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(82,716) | $16,662 | | Net cash used in investing activities | $(36,981) | $(15,698) | | Net cash provided by (used in) financing activities | $112,659 | $(23,318) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable, as the company reports no changes in or disagreements with its accountants - Not applicable[613] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes reported - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[613] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the criteria set forth by COSO[616] Other Information Not applicable, as there is no other information to report - Not applicable[617] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the Definitive 2019 Proxy Statement - Information is incorporated by reference to the Definitive 2019 Proxy Statement[620] Executive Compensation Information is incorporated by reference from the Definitive 2019 Proxy Statement - Information is incorporated by reference to the Definitive 2019 Proxy Statement[621] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the Definitive 2019 Proxy Statement - Information is incorporated by reference to the Definitive 2019 Proxy Statement[622] Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the Definitive 2019 Proxy Statement - Information is incorporated by reference to the Definitive 2019 Proxy Statement[623] Principal Accountant Fees and Services Information is incorporated by reference from the Definitive 2019 Proxy Statement - Information is incorporated by reference to the Definitive 2019 Proxy Statement[624] Part IV Exhibits and Financial Statement Schedules This section includes financial statements, schedules for Valuation and Qualifying Accounts, and an index of all exhibits, detailing deferred tax asset valuation allowance changes for 2016-2018 - This section includes the Financial Statements, Financial Statement Schedules, and an index of all required exhibits[626][627][630] Schedule II: Valuation and Qualifying Accounts (Deferred Tax Asset Valuation Allowance, in thousands) | Year | Beginning Balance | Additions | Deductions | Other Changes | Ending Balance | | :--- | :--- | :--- | :--- | :--- | :--- | | 2018 | $15,354 | $6,089 | $(75) | $(169) | $21,199 | | 2017 | $7,599 | $391 | $(664) | $8,028 | $15,354 | | 2016 | $45,516 | $6,873 | $(42,417) | $(2,373) | $7,599 |