Business context and reporting period
Neurocrine Biosciences, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The company commercializes INGREZZA (valbenazine) in the U.S. for tardive dyskinesia, and is advancing programs including INGREZZA for Tourette syndrome, partner-developed elagolix, and opicapone for Parkinson’s disease.
Financial results and liquidity
Amounts below are in millions, except per-share data. Comparisons are with the three months ended March 31, 2017, or with December 31, 2017 for balance-sheet items.
| Metric | Q1 2018 | Prior comparable period |
|---|---|---|
| Revenue | $71.1 | $0 |
| Cost of product sales | $1.0 | $0 |
| Research and development | $48.9 | $51.9 |
| Sales, general and administrative | $58.6 | $28.1 |
| Operating loss | $(37.4) | $(79.9) |
| Net loss | $(41.8) | $(78.3) |
| Net loss per share, basic and diluted | $(0.47) | $(0.90) |
| Cash used in operating activities | $(38.5) | $(77.4) |
- Product cost was unusually low: some active pharmaceutical ingredient sold in the quarter had been manufactured before INGREZZA approval, and its cost had previously been expensed as R&D. The resulting approximate 98.7% product gross margin is therefore not necessarily representative of future periods.
- Cash, cash equivalents and investments totaled $736.8 at March 31, 2018, versus $763.3 at year-end 2017. Cash and cash equivalents were $175.3; short- and long-term investments were $285.2 and $276.3, respectively. Cash, cash equivalents and restricted cash at quarter-end were $179.8.
- Working capital was approximately $467.3, based on current assets of $513.7 and current liabilities of $46.5.
- Convertible notes had $517.5 principal outstanding and a $374.2 net carrying amount; interest expense was $7.5. The notes bear 2.25% interest and mature in 2024.
- Share-based compensation was $19.9, including a non-recurring $7.7 charge related to modifications of certain awards.
Material changes versus the prior period
- INGREZZA sales began in 2017; Q1 2018 generated $71.1 of product revenue versus none in Q1 2017. Operating cash use fell by $38.9, primarily reflecting product revenue and the lower operating loss.
- SG&A increased $30.5, primarily due to commercialization and launch costs, including higher personnel expenses.
- R&D expense declined $3.0, mainly because Q1 2017 included a $30.0 opicapone in-license payment to BIAL, compared with a $10.0 BIAL milestone payment in Q1 2018. Excluding the change in BIAL payments, R&D increased, including from pipeline activity and personnel costs.
- Net loss narrowed by $36.5, reflecting INGREZZA revenue, partly offset by launch spending, the BIAL milestone and higher share-based compensation.
Outlook, commentary and risks
- Management expected continued operating losses in 2018 and said existing resources, investment income and anticipated collaboration payments were expected to cover current projected funding needs for at least 12 months. It cautioned that funding may not support all planned commercialization and R&D activities and additional capital may be needed.
- In April 2018, AbbVie reported that additional liver-function data submitted late in FDA review of the elagolix NDA constituted a major amendment, extending the review period by three months and moving the PDUFA date into Q3 2018.
- The FDA indicated that an additional Phase III study was not required to support an opicapone NDA submission, triggering a $10.0 milestone payment to BIAL. Neurocrine is responsible for U.S. and Canadian development and commercialization costs and relies on BIAL for drug supply.
- Key risks include establishing sustained demand and reimbursement for INGREZZA; reliance on single-source suppliers and contract manufacturers; clinical and regulatory uncertainty; dependence on collaborators; competition, including AUSTEDO for tardive dyskinesia; and potential financing needs. The company reported no off-balance-sheet arrangements.
- Mount Sinai litigation alleges breach of a license agreement related to the AbbVie collaboration. The company said it would defend the claims, could not estimate potential loss, and anticipated trial in Q3 2018.
- The company adopted Topic 606 in January 2018 with no material change to revenue recognition or retained earnings. Disclosure controls were concluded effective as of March 31, 2018.
Important facts for investors to verify
- Subsequent INGREZZA sales, prescription trends, net pricing, payer coverage and rebate or chargeback estimates.
- Whether product costs rise as pre-approval API is depleted and newly manufactured API is sold.
- Elagolix’s revised FDA review timeline and outcome, and progress toward an opicapone NDA.
- Cash burn, funding requirements and the terms or potential dilution of any future financing or note conversion.
- Developments in the Mount Sinai case, manufacturing supply continuity, and clinical or regulatory milestones across the pipeline.