BIOCRYST PHARMACEUTICALS INC quarterly report, Q2 FY2015

BioCryst Pharmaceuticals, Inc. — Q2 2015 Form 10-Q

Reporting period: Three and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise. BioCryst is a clinical-stage biotechnology company focused on rare diseases and other unmet medical needs.

Financial performance and position

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Total revenue	$25.8m	$1.5m	$32.7m	$4.9m
Operating income (loss)	$5.3m	($11.6m)	($9.1m)	($19.0m)
Net income (loss)	$4.9m	($14.6m)	($10.3m)	($24.8m)
Research and development expense	$16.5m	$11.1m	$33.6m	$20.3m
General and administrative expense	$3.5m	$2.0m	$7.6m	$3.6m

• Q2 operating margin was approximately 21%, versus a loss from operations in the prior-year quarter; the current-quarter result reflects the CSL license revenue and should not be viewed as evidence of recurring profitability. Six-month operating margin was approximately negative 28%.
• Q2 diluted earnings per share were $0.06; six-month diluted loss per share was $0.14.
• Six-month operating cash flow was positive $14.4m, compared with negative $16.1m in 2014. The 2015 inflow included increases in accrued expenses and deferred revenue, among other working-capital movements; it does not represent operating profitability.
• At June 30, cash and cash equivalents were $76.8m and investments were $53.6m. Including $1.6m restricted cash, these balances total $132.0m. Working capital was $43.3m.
• Total assets were $150.2m and stockholders’ equity was $76.1m. Current liabilities were $63.8m. The balance sheet includes $30.0m of non-recourse notes payable, classified as current, plus $4.45m of interest payable.
• Inventory was $1.3m. Six-month RAPIVAB product sales were $0.5m; no product sales were recorded in Q2.

Material changes and business developments

• In June 2015, BioCryst licensed RAPIVAB rights to CSL subsidiary Seqirus UK Limited for worldwide territories excluding Israel, Japan, Korea and Taiwan. BioCryst received a $33.74m upfront payment and recognized approximately $21.7m as Q2 revenue. The remaining upfront consideration was deferred for inventory transfer, regulatory support and an EU-approval contingency.
• The CSL agreement provides for up to $12.0m in additional regulatory milestones, tiered royalties on qualifying sales, and a share of gross profit from certain non-U.S. government stockpiling purchases. BioCryst retains U.S. government pandemic-stockpiling rights and remains responsible for specified U.S. post-marketing obligations and regulatory work in Canada and the EU until approvals and related responsibilities transfer.
• Six-month collaborative and R&D revenue included $21.7m from CSL and $8.2m of government-contract reimbursements. Government reimbursements increased as BCX4430 development continued. Shionogi and Green Cross royalties were $1.7m for the half year, versus $1.9m in 2014.
• R&D spending rose, principally for avoralstat and second-generation HAE candidates, with additional spending on BCX4430. Six-month program spending included $12.1m for avoralstat, $10.1m for second-generation HAE compounds and $6.4m for BCX4430.
• Q2 foreign-currency hedge activity included a $0.8m mark-to-market loss and a $1.5m realized currency exchange gain. Six-month reported mark-to-market loss was $0.3m.

Outlook, risks and contingencies

• Management expects available cash and investments to fund planned operations into 2017. It forecasts 2015 operating cash usage of $18m–$28m and operating expenses of $75m–$95m; the expense range excludes equity-based compensation. The cash-use forecast includes the CSL upfront payment and excludes royalty-monetization and hedge-collateral effects.
• Management expects continued operating losses and negative cash flows until revenue is sufficient to support operations. Funding beyond 2017 may require government funding, licensing or collaboration payments, additional capital, regulatory approvals, spending reductions or restructuring. The company reported approximately $160m of remaining capacity across effective shelf registrations.
• The $30m PhaRMA Notes carry 14% interest and are secured primarily by Shionogi royalty and milestone payments and related hedge rights. Royalty Sub missed an interest payment in September 2014, triggering an event of default; noteholders may seek acceleration or foreclose on collateral. The notes are non-recourse to BioCryst, but default could reduce BioCryst’s potential future royalty benefit and cause legal or hedge-related costs.
• The yen hedge may require annual payments of approximately $2.0m in specified years through 2020 if the contractual exchange-rate condition is met. Maximum potential collateral at June 30, 2015 was $9.75m; no hedge collateral was posted at that date.
• Government contracts for BCX4430 are subject to option exercises, reimbursement, audit and termination at the government’s discretion. The filing reports $26.3m awarded under exercised NIAID options and $11.2m under exercised BARDA options as of June 30, 2015.
• Material development and commercial risks include clinical-trial outcomes and enrollment, regulatory approvals and RAPIVAB post-marketing commitments, dependence on partners and government funding, concentrated third-party manufacturing and distribution, and the possibility of future financing and dilution. The RAPIVAB manufacturer had received an FDA Warning Letter and Form 483, creating potential supply risk.
• Management reported disclosure controls and procedures were effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.

Investor verification priorities

• Confirm the timing and conditions for recognizing deferred CSL consideration, and track milestone achievement, royalties and commercial uptake.
• Assess the sustainability of government reimbursements and the remaining options, audit exposure and termination rights under BARDA and NIAID contracts.
• Monitor the PhaRMA Notes default, any creditor action, Shionogi royalty collections and potential hedge payments or collateral needs.
• Compare actual cash usage and operating expenses with management’s 2015 ranges, noting that the expense guidance excludes equity compensation.
• Track clinical and regulatory progress for avoralstat, BCX7353 and BCX4430, as well as RAPIVAB post-marketing commitments and manufacturing-supply remediation.