Eton Pharmaceuticals(ETON) - 2019 Q4 - Annual Report

Part I Business Eton Pharmaceuticals, established in April 2017, develops and commercializes innovative hospital injectables and pediatric retail prescriptions - Eton Pharmaceuticals is a specialty pharmaceutical company established in April 2017, focusing on developing, acquiring, and commercializing innovative pharmaceutical products for unmet patient needs, with a primary focus on hospital injectable and pediatric retail prescription products[20] - The company's corporate strategy targets product opportunities with short commercialization timelines (under 18 months), strong competitive protection (patents, exclusivity), and reduced clinical, regulatory, and commercial risks by leveraging existing data via the 505(b)(2) pathway[21][22][23][24] Product Portfolio Summary (as of Dec 31, 2019) | Product (Molecule) | Dosage Form | Category | Submission Timing | Market Size | | :--- | :--- | :--- | :--- | :--- | | Biorphen (Phenylephrine) | Injectable | Hospital | Approved | $45 million+ | | EM-100 (Ketotifen) | Ophthalmic | OTC** | Submitted | $50 million+ | | ET-105 (Lamotrigine) | Oral Liquid | Pediatric | Submitted | $700 million+ | | DS-300 | Injectable | Hospital | Submitted | $60 million*+ | | ET-104 | Oral Liquid | Pediatric | 2020 | $65 million+ | | ET-103 (Levothyroxine) | Oral Liquid | Pediatric | 2020 | $2.5 billion+ | | ET-203 | Injectable | Hospital | 2020 | $70 million+ | | DS-100 | Injectable | Hospital | 2020 | $100 million*+ | | ET-101 | Oral Liquid | Pediatric | 2020 | $800 million+ | - Eton relies on third-party Contract Manufacturing Organizations (CMOs) in the United States and Europe for all product manufacturing, which reduces capital investment and provides flexibility[51] - The company utilizes a co-promotion agreement with Xellia Pharmaceuticals for its commercial product, Biorphen, and plans to build its own sales force for its retail prescription product pipeline[45][46][47] Product Portfolio Details Eton's portfolio includes one approved product, Biorphen, three under FDA review, and five late-stage candidates - Approved Product: Biorphen® (Phenylephrine HCl Injection) was approved in October 2019 and launched in December 2019 for treating hypotension during anesthesia. The market is estimated at over 20 million units annually[27][28] - Products Under FDA Review: - ET-105 (Lamotrigine Oral Suspension): PDUFA date was March 17, 2020, but the FDA requested a human factors validation study, expected to be submitted in 2020[32] - EM-100 (Ketotifen Ophthalmic Solution): Rights sold to Bausch Health. Has a target action date in August 2020. Eton is eligible for a $1.5 million milestone payment and royalties[34] - DS-300 (Injectable): Submitted as a first-to-file ANDA with a target action date in October 2020, though litigation will likely delay final approval[35] - Late-Stage Pipeline (2020 NDA Submission Expected): - ET-203: Ready-to-use injectable. NDA resubmission expected in 2020 after a refuse-to-file letter[37] - ET-104: Oral liquid for a neurological indication[38] - ET-103: Oral liquid levothyroxine[39] - DS-100: Injectable for a new indication[40] - ET-101: Oral liquid for a neurological condition with an over $800 million market[41] Licensing Arrangements Eton utilizes various licensing and acquisition agreements to build its portfolio, involving profit-sharing, milestones, and royalties - Biorphen & ET-203 (Sintetica): Eton pays for marketing, Sintetica for development/manufacturing. Profits are split 50/50 after Eton retains a 5% net sales marketing fee and Sintetica receives the first $500,000 of profit[52][62] - ET-105 (Aucta): Eton paid $2 million upon FDA acceptance and owes further milestones upon approval and patent issuance, plus low double-digit royalties and sales-based milestones up to $18 million[53] - EM-100 (Eyemax/Bausch): Rights acquired from Eyemax (affiliated with CEO) and sold to Bausch Health. Eton received $500,000 upfront from Bausch and is due a $1.5 million milestone upon launch, plus low-double digit royalties. Eton will split this revenue with Eyemax after recovering $2 million[55][56] - DS-300: Eton is responsible for commercialization and Paragraph IV litigation, and is entitled to 62.5% of product profit[58] Government Regulations Eton operates under extensive FDA regulations, utilizing the 505(b)(2) pathway, and is subject to healthcare laws and reimbursement policies - The company is subject to extensive regulation by the FDA, requiring data on safety and efficacy, and manufacturing in compliance with current Good Manufacturing Processes (cGMP)[66] - Eton primarily intends to use the Section 505(b)(2) regulatory pathway, which permits an NDA to rely on studies not conducted by the applicant. This can reduce development time and cost but requires patent certifications against the reference drug, potentially triggering patent litigation and a 30-month stay of approval[80][82][154] - The company is subject to federal and state healthcare laws, including the Anti-Kickback Statute, False Claims Act, and the Physician Payments Sunshine Act, which regulate marketing practices and financial relationships with healthcare providers[85] - Sales and pricing are significantly impacted by coverage and reimbursement from third-party payors and government programs. Legislative changes, such as the Health Care Reform Law and ongoing efforts to control drug costs, could further affect profitability[87][92][96] Risk Factors The company faces risks from limited operating history, financial needs, product development, regulatory hurdles, intellectual property, and stock ownership Risks Relating to Our Business Business risks include limited operating history, net losses, financing needs, growth management, and potential conflicts of interest - As a company founded in April 2017 with a limited operating history and recent commencement of revenue, it is difficult for investors to evaluate the business[103][104] Net Loss History | Year | Net Loss | | :--- | :--- | | 2019 | $18.3 million | | 2018 | $12.7 million | - The company may need additional financing to execute its business plan, and there is no guarantee that funds will be available on reasonable terms[109][110] - Arrangements with related parties, where the CEO has a material ownership interest in companies from which Eton has licensed products, present potential conflicts of interest[127][216] Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization Product development and commercialization face risks from competition, regulatory challenges, manufacturing reliance, market acceptance, and healthcare laws - The business depends entirely on the successful development, regulatory approval, and commercialization of its product candidates, which is not guaranteed[128][129] - The company faces substantial competition from major pharmaceutical companies with greater resources, and its 505(b)(2) strategy may have low barriers to entry for competitors[134][135] - The 505(b)(2) regulatory pathway is subject to risks, including the FDA disagreeing with the approach, or patent infringement lawsuits from reference drug holders, which can trigger an automatic 30-month stay on approval[146][151][154] - Eton is completely dependent on third-party contract manufacturers for its API and finished products. Any failure by these partners to comply with cGMP or maintain supply could halt or delay commercialization[195][196] - Future revenue is constrained by third-party payor coverage and reimbursement, as well as cost-containment initiatives and healthcare reform legislation that could affect drug prices[178][228] Risks Relating to Our Intellectual Property Rights Intellectual property risks involve protecting patents, licensed rights, and potential infringement claims, which are costly and uncertain - The company depends on licensed rights for certain pharmaceutical compounds, and the loss of these rights could prevent the sale of its products[235][236] - Protecting intellectual property is difficult and costly. Patent applications may be challenged, invalidated, or circumvented, and may not provide a competitive advantage[238][240] - Changes in U.S. patent law, such as the America Invents Act (AIA), have introduced a "first-to-file" system and new ways for third parties to challenge patents, potentially weakening the company's ability to protect its products[250][251][252] - The company's products may infringe on the intellectual property rights of others, which could result in costly litigation, require licensing agreements, or prevent commercialization efforts[256][257] Risks Related to Owning Our Common Stock Common stock risks include market volatility, dilution, reduced disclosure, no dividends, concentrated ownership, and anti-takeover provisions - The trading market for the company's common stock may not be active or liquid, and the price is subject to volatility[264] - As an "emerging growth company," Eton is subject to reduced disclosure requirements, which may make its stock less attractive to investors[272][273] - The company has not paid and does not plan to pay dividends; returns will be limited to stock appreciation[281][282] - Significant stock ownership by executives, directors (approx. 11.4%), and former parent company Harrow Health, Inc. (approx. 19.6%) may limit other stockholders' ability to influence corporate matters[304][305] - The company's charter includes a forum selection clause designating the Court of Chancery of the State of Delaware as the exclusive forum for certain stockholder litigation, which could limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable[299][300] Unresolved Staff Comments None - The company reports no unresolved staff comments[308] Properties Eton leases administrative and R&D office spaces in Illinois, considered adequate for current operations - The company leases a 5,507 sq. ft. office space in Deer Park, IL for administrative activities, with the lease expiring March 31, 2021[309] - A 2,782 sq. ft. research and development facility is leased in Lake Zurich, IL, with the lease expiring February 28, 2021[310] Legal Proceedings None - The company reports no legal proceedings[312] Mine Safety Disclosures Not applicable - This item is not applicable to the company[313] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Eton's common stock trades on Nasdaq, with 16 record holders, and the company has no plans for cash dividends - The company's common stock is listed on the Nasdaq Global Market under the symbol "ETON"[316] - As of February 28, 2020, there were 16 holders of record of the common stock[317] - The company has never declared or paid a cash dividend and does not expect to in the foreseeable future[318] Selected Financial Data Not applicable - This item is not applicable to the company[323] Management's Discussion and Analysis of Financial Condition and Results of Operations Eton generated its first revenues in 2019 but incurred increased net losses due to higher R&D and G&A expenses Results of Operations Eton's 2019 operations saw first revenues but increased net losses driven by higher R&D and G&A expenses Financial Performance (2019 vs. 2018) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | $1.0 million | $0 | | R&D Expenses | $11.6 million | $5.6 million | | G&A Expenses | $7.6 million | $4.7 million | | Net Loss | $18.3 million | $12.7 million | Research and Development Expenses by Project (in thousands) | Product Candidate | 2019 | 2018 | | :--- | :--- | :--- | | DS-200 | $1,901 | $910 | | DS-300 | $1,237 | $1,251 | | EM-100 | - | $1,265 | | ET-105 | $2,127 | - | | ET-202 | $2,000 | - | | Other products | $1,374 | $1,026 | | Indirect expenses | $2,766 | $1,175 | | Total | $11,555 | $5,627 | Liquidity and Capital Resources Eton's liquidity is supported by IPO proceeds and a credit facility, despite increased cash usage from operations - As of December 31, 2019, the company had total assets of $17.1 million and working capital of $13.0 million[339] - Key funding sources include the 2018 IPO (net proceeds of $22.0 million) and a November 2019 Credit Agreement with SWK Holdings for up to $10 million, with $5.0 million received at closing[339] Summary of Cash Flows (in thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(18,026) | $(8,145) | $(4,718) | | Cash used in investing activities | $(1,846) | $(236) | $(130) | | Cash flows provided by financing activities | $5,203 | $21,960 | $18,004 | Critical Accounting Policies Critical accounting policies include revenue recognition, R&D expense treatment, and stock-based compensation valuation - Revenue Recognition (ASC 606): For Biorphen product sales, revenue is recognized upon delivery to wholesalers. The transaction price is estimated net of variable consideration such as chargebacks, returns, distribution fees, and discounts[343][433][435] - Research and Development Expenses: R&D costs are expensed as incurred. Upfront and milestone payments for the licensing of technology for products not yet approved by the FDA are expensed as R&D[360][361][443] - Stock-Based Compensation: The company uses the Black-Scholes model to estimate the fair value of stock option awards. Prior to the IPO, the board determined the fair value of common stock; post-IPO, the closing stock price on the grant date is used[357][359][450] Quantitative and Qualitative Disclosures About Market Risk The company's market risk is primarily interest rate risk on cash, with no material foreign currency exposure - The company's primary market risk is interest rate risk on its cash and cash equivalents, which are held in money market funds[366] - Management believes there is no material exposure to interest rate risk due to the low-rate environment and short duration of investments[366] - The company does not currently have exposure to foreign currency risk[366] Financial Statements and Supplementary Data This section presents the audited financial statements, including balance sheets, statements of operations, and cash flows Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity, with an increase in total liabilities Balance Sheet Summary (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $12,066 | $26,735 | | Total current assets | $15,009 | $27,502 | | Total assets | $17,072 | $28,327 | | Liabilities & Equity | | | | Total current liabilities | $1,963 | $2,024 | | Long-term debt, net | $4,540 | $— | | Total liabilities | $6,522 | $2,024 | | Total stockholders' equity | $10,550 | $26,303 | Statements of Operations The statement of operations reflects first revenues in 2019 but increased net losses due to higher operating expenses Statement of Operations Summary (in thousands, except per share data) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Total revenues | $959 | $— | | Gross profit | $506 | $— | | Total operating expenses | $19,107 | $10,321 | | Loss from operations | $(18,601) | $(10,321) | | Net loss | $(18,320) | $(12,740) | | Net loss per share | $(1.03) | $(5.80) | Statements of Cash Flows Cash flow statements show increased cash usage from operations, partially offset by financing activities, leading to a net cash decrease Statement of Cash Flows Summary (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,026) | $(8,145) | | Net cash used in investing activities | $(1,846) | $(236) | | Net cash provided by financing activities | $5,203 | $21,960 | | Net change in cash | $(14,669) | $13,579 | | Cash at end of period | $12,066 | $26,735 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None - The company reports no changes in or disagreements with accountants on accounting and financial disclosure[573] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[576] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[577] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[579] Other Information Not applicable - This item is not applicable to the company[581] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[584] Executive Compensation Executive compensation information is incorporated by reference from the company's Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[586] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the company's Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[587] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships and director independence is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[588] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[589] Part IV Exhibits, Financial Statement Schedules This section provides an index of financial statements, schedules, and exhibits filed with the Annual Report - This item lists the financial statements, schedules, and exhibits filed as part of the Form 10-K[591][594]