Enanta Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2018; financial statements are unaudited. The filing also reports results for the six months ended March 31, 2018. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and results
Enanta is a biotechnology company developing small-molecule drug candidates for liver diseases and viral infections. Its current revenue is from its AbbVie collaboration: tiered royalties on HCV regimens containing Enanta’s protease inhibitors glecaprevir and paritaprevir, plus milestone payments. Enanta’s wholly owned programs target NASH, PBC, RSV and HBV.
| Metric | Three months ended Mar. 31, 2018 | Three months ended Mar. 31, 2017 | Six months ended Mar. 31, 2018 | Six months ended Mar. 31, 2017 |
|---|---|---|---|---|
| Revenue | $44.0 | $9.0 | $82.2 | $19.4 |
| Operating expenses | $27.2 | $18.5 | $50.9 | $35.9 |
| Operating income (loss) | $16.9 | $(9.5) | $31.2 | $(16.6) |
| Net income (loss) | $12.6 | $(5.4) | $24.2 | $(10.4) |
| Diluted earnings (loss) per share | $0.61 | $(0.28) | $1.20 | $(0.54) |
Quarterly operating margin was approximately 38.3% and net margin 28.5%; six-month operating margin was approximately 38.0% and net margin 29.5%. The filing does not present a gross-profit measure. Second-quarter revenue was entirely royalties; first-half revenue included $67.2 million of royalties and a $15.0 million milestone for AbbVie’s Japanese approval of MAVIRET.
Financial position, cash flow and liquidity
- At March 31, 2018, cash and cash equivalents were $66.9 million and marketable securities were $222.0 million, totaling $288.9 million. Current assets were $305.7 million against current liabilities of $17.1 million.
- Total liabilities were $21.3 million. Enanta reported no debt other than a capital lease obligation of $0.3 million; the balance sheet also included $1.5 million of Series 1 nonconvertible preferred stock classified as a liability.
- For the six months, operating cash flow was $(3.2) million, investing cash flow was $4.0 million, financing cash flow was $0.4 million, and cash increased $1.3 million.
- Operating cash flow was affected by a $33.4 million increase in accounts receivable and higher R&D spending. Management attributed cash-flow comparisons primarily to the timing of collaboration receipts and tax payments.
Material changes and management outlook
- Compared with the prior-year quarter, revenue increased substantially as MAVYRET/MAVIRET royalties began contributing alongside royalties from older paritaprevir regimens. Quarterly royalties rose to $44.0 million from $9.0 million.
- Six-month R&D expense increased to $39.4 million from $25.5 million, reflecting advancing clinical and preclinical work and increased headcount and external costs. G&A expense rose to $11.5 million from $10.4 million.
- Enanta initiated Phase 2 studies of EDP-305 in PBC and NASH during the quarter. EDP-938 was in Phase 1; management anticipated a Phase 2a RSV challenge study in the fourth quarter of calendar 2018, subject to successful Phase 1 completion. The company aimed to identify an HBV development candidate in 2018.
- Management expects R&D expenses to increase as programs advance, but stated that existing financial resources and cash flows should fund operations for the foreseeable future. No specific revenue, earnings or cash-burn guidance was provided.
- The company’s revenue outlook depends heavily on AbbVie’s HCV commercialization, market share, pricing, patient volumes and reimbursement. Management noted that the HCV market is dynamic and that AbbVie’s regimen faces competition and pricing pressure.
Risks, contingencies and unusual items
- Revenue concentration and reliance on AbbVie are material risks: AbbVie controls commercialization, and HCV demand, competition, pricing, reimbursement or a change in AbbVie’s strategy could reduce royalties.
- Enanta’s wholly owned candidates remain in early development and face clinical, safety, regulatory, manufacturing, intellectual-property and financing risks; successful development or approval is not assured.
- The Tax Act reduced the recorded deferred tax assets by $3.8 million through remeasurement. The company’s provisional tax estimates could change with further guidance. The six-month effective tax rate was 27.1%.
- The IRS was examining fiscal 2016 tax returns; no adjustments had been proposed. Unrecognized tax benefits were $1.4 million. The company reported no threatened or pending litigation and no material changes to commitments and contingencies.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- AbbVie’s subsequent HCV sales, market share, pricing and reimbursement, and the resulting royalty trend for Enanta.
- Collection timing for the elevated $44.0 million accounts receivable balance and the effect on operating cash flow.
- Progress, safety findings, timelines and spending for EDP-305, EDP-938 and the HBV program.
- Whether R&D spending and cash requirements remain consistent with management’s stated ability to fund operations for the foreseeable future.
- Any updates to provisional Tax Act accounting estimates or the ongoing IRS examination.