Enanta Pharmaceuticals, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019. Financial statement amounts below are in U.S. dollars; figures are in millions unless stated otherwise.
Business context
Enanta is a biotechnology company developing small-molecule treatments, principally for viral infections and liver diseases. Its reported revenue was royalty revenue from AbbVie’s HCV regimen MAVYRET/MAVIRET, which contains Enanta-discovered glecaprevir. Royalties and existing financial resources fund Enanta’s wholly owned research and development programs.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Royalty revenue | $52.6 | $69.9 |
| Research and development expense | $32.8 | $34.9 |
| General and administrative expense | $6.9 | $7.2 |
| Operating income | $12.9 | $27.9 |
| Net income | $13.4 | $26.0 |
| Diluted earnings per share | $0.65 | $1.25 |
| Cash from operating activities | $12.4 | $30.3 |
- Revenue fell 24.8% year over year; operating income declined 53.8% and net income 48.3%. Operating margin was approximately 24.5%, versus 39.9% a year earlier; net margin was approximately 25.6%, versus 37.2%.
- R&D expense decreased 6.0% overall: liver-disease program costs fell to $13.4 million from $18.7 million, while virology costs rose to $19.2 million from $16.1 million. G&A expense was broadly flat.
- Cash, cash equivalents and marketable securities totaled $414.7 million at quarter-end, compared with approximately $400.2 million at September 30, 2019. Cash, cash equivalents and restricted cash decreased $23.7 million during the quarter, while investing cash outflow was $37.2 million, primarily reflecting purchases and maturities of marketable securities.
- Total assets were $511.0 million and stockholders’ equity was $482.3 million. The filing reports no conventional borrowings; it reports $9.1 million of operating lease liabilities and $1.6 million of Series 1 nonconvertible preferred stock as a liability. Current assets were $440.5 million versus current liabilities of $19.1 million.
- No gross margin is presented; the filing reports royalty revenue and operating expenses rather than product sales and cost of goods sold.
Material changes, outlook and commentary
- Management said royalty revenue is expected to remain dependent on AbbVie’s MAVYRET/MAVIRET sales; Enanta has no further AbbVie milestones expected. AbbVie’s stated expectation for calendar 2020 HCV sales was approximately $2.5 billion.
- Management believes existing cash and marketable securities, together with continuing royalties, should fund operations for the foreseeable future. It expects FY2020 expenses to exceed FY2019 expenses as its wholly owned programs advance, and cautions that future net income is uncertain.
- Programs and anticipated milestones: EDP-938’s Phase 2b adult outpatient RSV study was expected to continue enrollment through 2020, with data targeted for the first half of 2021; pediatric and immunocompromised RSV studies were planned. EDP-305’s 72-week Phase 2b NASH study was planned to begin by early Q2 2020, with PBC study data expected in Q2 2020. EDP-297 Phase 1 development was planned for mid-2020. EDP-514’s healthy-volunteer study was completed with a favorable reported safety profile, and patient studies were underway or planned.
- RSV enrollment timing was affected by an apparently early North American RSV season; management planned to continue the study in the Southern Hemisphere. The company also disclosed that a China-based contract manufacturer outside Wuhan had been required to extend its Chinese New Year closure by three days amid the then-recent coronavirus outbreak. Enanta warned that disruption to Chinese research or supply could delay programs or increase costs.
- AbbVie controls commercialization of the HCV regimen. Key risks include declining HCV demand, pricing and reimbursement pressure, competition, and possible changes in AbbVie’s commercial priorities. Clinical development, regulatory approval, safety, manufacturing, collaboration, intellectual-property and funding risks also apply.
- The company adopted lease accounting standard ASC 842 on October 1, 2019, recording right-of-use assets and lease liabilities; management said adoption did not materially affect results or cash flows. No threatened or pending litigation was reported. IRS and Massachusetts tax audits were being finalized; proposed adjustments described in the filing were immaterial. Disclosure controls were reported effective.
Important facts for investors to verify
- AbbVie’s actual MAVYRET/MAVIRET sales, royalty calculations and the effect of annual royalty-tier resets, pricing and payer access.
- Enrollment, timing and results for the EDP-938, EDP-305, EDP-297 and EDP-514 studies, including whether the stated development milestones were achieved.
- Quarterly cash use and R&D spending against management’s expectation of higher FY2020 expenses and its stated liquidity runway.
- Any continuing effects of China-based supplier or research disruptions, and the adequacy of clinical-material supply.
- Changes in HCV market competition, reimbursement, royalty income, lease obligations and resolution of the tax audits.