NEUROCRINE BIOSCIENCES INC quarterly report, Q2 FY2021

Neurocrine Biosciences, Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. Unaudited results. Neurocrine is a neuroscience-focused biopharmaceutical company; INGREZZA is its principal product, with ONGENTYS launched in the U.S. in September 2020. The company also earns collaboration revenue and royalties.

Financial performance

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenue	$288.9 million	$302.4 million	$525.5 million	$539.5 million
Operating income	$62.8 million	$76.6 million	$94.3 million	$135.5 million
Net income	$42.3 million	$79.6 million	$74.4 million	$117.0 million
Diluted EPS	$0.43	$0.81	$0.76	$1.20

• Q2 net product sales were $266.8 million, including INGREZZA sales of $264.8 million and ONGENTYS sales of $2.0 million. INGREZZA sales were down from $267.6 million a year earlier; management attributed the slowdown in sales-volume growth largely to COVID-19’s impact on customers.
• Collaboration revenue was $22.1 million in Q2 versus $34.8 million a year earlier. The 2021 period included a $15.0 million milestone for MTPC’s Japanese marketing application for valbenazine; 2020 included a $30.0 million AbbVie milestone following ORIAHNN approval.
• Q2 operating margin was approximately 21.7%, versus 25.3% in Q2 2020; net margin was approximately 14.6%, versus 26.3%. For the first six months, operating margin was approximately 18.0% versus 25.1%, and net margin was approximately 14.2% versus 21.7%.
• Q2 R&D expense was $74.8 million, down from $80.9 million; six-month R&D rose to $148.0 million from $139.2 million, reflecting investment in the expanded clinical portfolio, personnel costs and a $6.4 million non-cash share-based compensation charge. Q2 SG&A increased to $143.2 million from $96.5 million, mainly on commercial investment, including the “TD Spotlight” INGREZZA advertising campaign launched in May 2021.
• Q2 acquired in-process R&D expense was $5.0 million, compared with $46.0 million a year earlier, when the Idorsia upfront fee was recorded. The Q2 2021 income-tax provision was $15.2 million versus $3.6 million; management said the 2021 effective rate began approximating statutory rates after release of substantially all valuation allowance at year-end 2020. No federal cash tax was expected in 2021 due to available net operating losses.

Cash, liquidity and debt

• At June 30, 2021, cash and cash equivalents were $368.0 million and available-for-sale debt securities totaled $854.7 million, or approximately $1.22 billion combined, compared with approximately $1.03 billion at December 31, 2020. Current assets were $1.11 billion and current liabilities $212.9 million.
• Six-month operating cash flow was $190.5 million, compared with $154.4 million in 2020. Investing activities used $27.7 million, versus providing $126.6 million; financing activities provided $18.1 million. Cash, cash equivalents and restricted cash ended the period at $371.2 million.
• The 2.25% convertible senior notes are due May 2024. $381.2 million principal remained outstanding; the balance-sheet carrying amount was $326.3 million. The notes are unsecured and have no financial or operating covenants. Conversion or redemption eligibility is conditional; the company said it was not aware of conditions allowing either as of the report date.
• Stockholders’ equity was $1.28 billion and accumulated deficit was $651.0 million at June 30, 2021. Shares outstanding were 94.6 million at quarter-end; 94,646,427 shares were reported outstanding July 28, 2021.

Changes, outlook and material matters

• Revenue decreased 4% year over year in both Q2 and the first half; product sales were nearly flat, while collaboration revenue fell as milestone timing differed between periods. Lower net income primarily reflected increased commercial and pipeline investment and higher income-tax expense.
• No numerical revenue or earnings guidance is provided in the filing. Management stated that existing capital resources, investment income and anticipated strategic-alliance payments were expected to cover current and projected funding needs for at least the next 12 months, while noting that future needs depend on commercial performance, development costs and other factors.
• Pipeline updates: luvadaxistat missed the primary endpoint in the Phase II INTERACT study in schizophrenia negative symptoms but met two cognitive-assessment secondary endpoints; the company planned to begin a Phase II study in cognitive impairment associated with schizophrenia by year-end 2021. Valbenazine’s Japanese application triggered the $15.0 million milestone. Rights to Voyager’s NBIb-1817 Parkinson’s disease program were terminated effective August 2, 2021; the rest of the Voyager collaboration continued.
• Four companies filed ANDAs seeking approval of generic INGREZZA and challenged certain patents. Neurocrine filed patent-infringement suits in July 2021. The outcome is uncertain; management could not predict litigation results.
• Management reported that it did not expect a current INGREZZA supply disruption, but warned that COVID-19 variants and future outbreaks could affect commercial activity, clinical trials and third-party operations. Other key risks include product acceptance and reimbursement, competition and generic entry, dependence on collaborators and contract manufacturers, customer concentration, clinical and regulatory uncertainty, and potential cash obligations or dilution from convertible-note conversion.
• Disclosure controls were assessed as effective at the reasonable-assurance level; no significant change in internal control over financial reporting was identified during the quarter.

Important facts for investors to verify

1. Whether INGREZZA sales growth recovers and how COVID-19, diagnosis rates, reimbursement and the specialty-pharmacy customer concentration affect demand and collections.
2. Patent coverage, litigation timing and potential generic-entry consequences for INGREZZA following the four ANDA challenges.
3. Clinical and regulatory progress in the pipeline, especially the planned luvadaxistat study, and the financial implications of program discontinuations or collaboration terms.
4. Whether increased SG&A and R&D investment produces sustained product growth and profitability, given the period’s lower earnings and higher tax provision.
5. Liquidity and the potential cash or share settlement consequences of the $381.2 million 2024 Notes, including any change in conversion eligibility.