Enanta Pharmaceuticals, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. Amounts below are in millions of dollars unless otherwise stated. Enanta is a biotechnology company whose revenue is primarily royalties from AbbVie’s HCV treatment MAVYRET/MAVIRET; it has no product sales from its own development programs.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Prior-year quarter | Six months ended March 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Royalty revenue | $27.6 | $39.6 | $80.2 | $109.5 |
| Research and development expense | $32.6 | $34.2 | $65.4 | $69.0 |
| General and administrative expense | $6.9 | $6.8 | $13.8 | $13.9 |
| Operating income (loss) | $(11.9) | $(1.3) | $1.0 | $26.6 |
| Net income (loss) | $(6.0) | $4.1 | $7.4 | $30.2 |
| Diluted earnings (loss) per share | $(0.30) | $0.20 | $0.36 | $1.44 |
| Operating cash flow | Not separately stated | Not separately stated | $27.0 | $60.3 |
Quarterly operating margin was approximately negative 43%, versus negative 3% a year earlier; six-month operating margin was approximately 1%, versus 24%. The filing does not report gross profit or gross margin as a separate measure. Six-month investing cash flow was $(9.5) million and financing cash flow was $5.5 million; cash, cash equivalents and restricted cash increased by $23.1 million.
At March 31, cash and cash equivalents were $74.3 million and marketable securities totaled $361.0 million, for combined cash and securities of $435.4 million. Current assets were $402.7 million and current liabilities were $19.5 million. Total liabilities were $27.5 million, including $9.1 million of operating lease liabilities and $1.6 million of preferred stock classified as a liability. The filing reports no conventional borrowings.
Material changes and operating developments
- Quarterly royalty revenue fell 30% year over year; six-month revenue declined 27%. Management attributed the six-month decline to lower HCV sales reflecting competition and fewer treated patients.
- The quarter shifted from net income to a net loss, primarily as royalty revenue fell below operating expenses. Six-month net income also declined substantially from the prior year.
- R&D expense declined year over year, mainly due to timing and completion of some liver-program study expenses; virology spending increased with EDP-514 clinical activity. Management expects R&D expense to rise as programs advance, though pandemic-related delays could reduce near-term spending.
- Operating cash flow decreased by $33.3 million year over year for the six-month period, reflecting lower net income and changes in operating assets and liabilities.
Outlook, risks and unusual items
- AbbVie lowered its calendar 2020 HCV sales estimate from $2.5 billion to approximately $2.3 billion, citing lower patient volumes in some international markets affected by COVID-19. Enanta’s royalties depend principally on these sales, and royalty rates reset to the lowest tier each calendar year.
- Management stated that existing cash and investments, together with continuing royalties, were expected to fund operations for the foreseeable future. It also cautioned that future revenue may not exceed expenses.
- COVID-19 had not materially affected the company’s consolidated financial position, results or cash flows through the filing date, but created substantial uncertainty. Recruitment and dosing were paused for the ARGON-2 NASH study and the EDP-514 study in nuc-suppressed HBV patients. Clinical-trial timing and planned study starts could be delayed; management also reported employees working remotely and no material supply-chain interruption anticipated at that time.
- Management expected to continue the RSV Phase 2b program, with data targeted for the third calendar quarter of 2021 if enrollment could be completed the following Northern Hemisphere winter. Planned additional RSV and HBV studies and an EDP-297 Phase 1 study were subject to pandemic conditions.
- EDP-305’s Phase 2a PBC study did not meet its primary endpoint; Enanta said it would focus further EDP-305 development on NASH. The filing identifies dependence on AbbVie, HCV pricing and competition, clinical and regulatory uncertainty, trial delays, third-party manufacturing, and intellectual-property risks as material concerns.
- The company adopted lease accounting standard ASC 842 on October 1, 2019, recording right-of-use assets and lease liabilities; adoption did not materially affect results or cash flows. A $539,000 uncertain tax benefit was released after finalization of a Massachusetts tax audit.
Important facts for investors to verify
- AbbVie’s subsequent HCV sales, patient volumes, pricing and competitive position, and the resulting royalty revenue to Enanta.
- Whether paused trials resume and whether COVID-19 affects enrollment, study timelines, costs or clinical-site availability.
- Progress and results for EDP-938, EDP-305, EDP-514 and EDP-297, including the implications of the missed PBC primary endpoint.
- Whether cash and investments remain sufficient if royalties decline or development spending increases.
- Clarification of future tax effects and the timing of remaining tax examinations, including the IRS audit noted as still being finalized.