Enanta Pharmaceuticals, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013 unless otherwise noted. Amounts below are in millions of dollars except per-share data. Enanta is a research-focused biotechnology company developing treatments for HCV, liver diseases including NASH, and other conditions.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $77.498 | $0.893 |
| Research and development expense | $4.519 | $4.263 |
| General and administrative expense | $2.769 | $2.087 |
| Operating income (loss) | $70.210 | $(5.457) |
| Net income (loss) | $42.009 | $(5.370) |
| Diluted EPS | $2.18 | $(0.30) |
| Operating cash flow | $(5.610) | $(5.871) |
Operating and net margins were approximately 90.6% and 54.2%, respectively, reflecting unusually high collaboration revenue rather than a recurring product-sales base. Revenue included a $75.0 million AbbVie milestone for FDA approval of a paritaprevir-containing HCV regimen, $1.392 million in initial royalties, and $1.106 million under the NIAID contract. The prior-year quarter’s revenue was from NIAID services.
Financial position and liquidity
- At December 31, 2014, cash and cash equivalents were $34.130 million and marketable securities were $93.460 million, totaling $127.590 million in cash and investments.
- Total assets were $215.427 million; current assets were $185.096 million and current liabilities were $19.866 million. Accounts receivable was $76.626 million, largely reflecting the unpaid AbbVie milestone at quarter-end.
- Total liabilities were $21.714 million. The company reported no debt outstanding.
- Operating cash use was $5.610 million despite reported net income, primarily because the $75 million milestone remained receivable. Cash and cash equivalents rose $3.431 million to $34.130 million during the quarter.
- Management said existing cash, cash equivalents, and marketable securities were expected to fund anticipated requirements for at least 24 months.
Material changes and business developments
- Revenue rose sharply from $0.893 million to $77.498 million, principally due to the AbbVie FDA-approval milestone and first royalties. R&D expense increased 6% and G&A expense increased 33% year over year.
- AbbVie’s paritaprevir-containing regimen received U.S. FDA approval on December 19, 2014. Enanta recognized its first royalty revenue in the quarter.
- On January 16, 2015, the European Commission authorized AbbVie’s VIEKIRAX/EXVIERA regimens for specified HCV genotypes. Enanta expected a $50 million milestone upon European commercialization regulatory approval in the quarter ending March 31, 2015.
- Enanta regained full rights to its NS5A program, including EDP-239, from Novartis in September 2014 and assumed responsibility for transitioning the proof-of-concept study. It reported no future payments to Novartis related to the transfer except for any drug product or ingredients it elects to purchase.
Outlook, risks, and unusual items
- Management expected R&D spending to increase as Enanta advances its independently funded NS5A, cyclophilin, and nucleotide-polymerase programs, and pursues NASH and other research. The filing provides no quantified revenue or earnings guidance; management cautioned that the quarter’s results are not indicative of the full fiscal year.
- Near-term revenue depends substantially on AbbVie’s development and commercialization of paritaprevir and related products. Further milestone and royalty amounts and timing are uncertain, and Enanta has limited control over AbbVie’s decisions.
- Enanta discontinued commercial development of its antibiotic candidate for non-biodefense uses. NIAID indicated it was prepared to amend the contract to conclude upon delivery of the Phase 1 study report, expected in August 2015; the filing notes potential termination and audit risks.
- The $28.502 million income-tax provision (40.4% effective rate) was a major expense in the profitable quarter. Deferred tax assets were used, following reversal of the valuation allowance in the prior fiscal year.
- Other key risks include intense competition and changing standards of care in HCV, clinical and regulatory uncertainty, dependence on collaborators and third-party manufacturers, and intellectual-property risks. The filing reported no pending litigation and no material change in commitments and contingencies for the quarter.
Important facts for investors to verify
- Whether and when AbbVie paid the $75 million milestone receivable, and how the European authorization translated into the expected $50 million payment.
- AbbVie’s product sales, the contractual allocation of combination-regimen sales to Enanta compounds, royalty calculations, and any applicable milestone conditions.
- Cash conversion and the timing of receivables and tax payments; operating cash flow was negative despite substantial reported earnings.
- Progress, costs, and funding needs for Enanta’s independent HCV and NASH programs, and the status of the NIAID contract amendment and expected study report.
- Whether the stated 24-month liquidity outlook remains adequate as R&D spending and clinical-development commitments evolve.