Business Context and Reporting Period
Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Neurocrine discovers, develops, and intends to commercialize drugs for neurological and endocrine-related diseases. The company has eight programs in various stages of research and development, with five in clinical development. The lead clinical program is elagolix for the treatment of endometriosis. The company relies on collaborations with pharmaceutical companies (e.g., Dainippon Sumitomo Pharma, GlaxoSmithKline) for funding and development of certain programs.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $2,485 | $152 |
| Net Loss | $(42,048) | $(52,084) |
| Net Loss Per Share (Basic & Diluted) | $(1.10) | $(1.37) |
| Research & Development Expenses | $30,413 | $37,850 |
| General & Administrative Expenses | $12,951 | $17,124 |
| Cash and Cash Equivalents (End of Period) | $91,917 | $51,485 |
| Total Investments (Short & Long Term) | $41,577 | $79,721 (Short-term only) |
| Net Cash Used in Operating Activities | $(43,178) | $(33,607) |
| Accumulated Deficit | $(656,698) | $(614,650) |
Note: The company reported no product sales revenue; all revenue was derived from sponsored research, license fees, milestones, and grants.
Material Changes vs. Prior Period
- Revenue Increase: Total revenue for the six months ended June 30, 2008, increased significantly to $2.5 million from $0.2 million in the prior year. This was driven by a $1.0 million milestone from GlaxoSmithKline (GSK) related to the CRF program and $1.5 million in amortized upfront licensing fees from Dainippon Sumitomo Pharma (DSP).
- Expense Reduction: Operating expenses decreased due to a restructuring program initiated in December 2007, which reduced staff by approximately 125 employees. R&D expenses dropped $7.4 million and G&A expenses dropped $4.2 million compared to the prior year period.
- Net Loss Improvement: Net loss decreased by $10 million year-over-year, primarily due to the aforementioned cost containment measures.
- Investment Portfolio Shift: Short-term investments decreased from $79.7 million to $20.0 million, while long-term investments increased to $21.6 million, largely due to the classification of auction rate securities.
Outlook, Risks, and Contingencies
- Liquidity and Capital Resources: Management believes existing capital resources ($133.5 million in cash and investments) are sufficient to fund operations for at least the next 12 months. However, the company expects to incur operating losses for the foreseeable future and may require additional funding through strategic alliances or equity/debt offerings.
- Auction Rate Securities Risk: Approximately $22.6 million of the investment portfolio consists of auction rate securities that have experienced failed auctions due to global credit market liquidity issues. These securities are currently illiquid. The company recorded an unrealized loss of approximately $1.0 million in accumulated other comprehensive income. While the securities are AAA-rated and backed by student loans, the company may not be able to access these funds without a potential loss of principal until a future auction succeeds or the securities mature.
- Restructuring: The company is relocating operations to consolidate leased space. A "cease-use" date is anticipated, which will trigger a liability charge for remaining lease rentals offset by potential sublease income. An additional $2.0 million net charge for severance was recorded in the first half of 2008.
- Legal Proceedings: The company is defending against a consolidated securities class action lawsuit and a shareholder derivative suit alleging false statements regarding the progress of the drug candidate indiplon. A hearing on the motion to dismiss the amended complaint is scheduled for September 2008. The financial impact is currently not estimable.
- Indiplon Uncertainty: Following an FDA "Approvable Letter" in December 2007, the company ceased clinical development of indiplon in the U.S. pending new requirements (clinical trials in the elderly, safety studies, and pregnancy studies). There is significant uncertainty regarding the future development and commercialization of this product.
Key Facts for Investor Verification
- Illiquid Assets: Verify the status of the $21.6 million in auction rate securities and the potential impact of continued market illiquidity on the company's cash flow flexibility.
- Revenue Sustainability: Assess the reliance on milestone payments and collaboration amortization, as the company has no product sales revenue.
- Indiplon Status: Monitor the outcome of the FDA meeting regarding indiplon and the company's decision on whether to pursue the required additional studies.
- Legal Exposure: Track the progress of the securities class action litigation and the potential for settlement or dismissal.
- Runway: Confirm the sufficiency of the $133.5 million cash position to fund the pipeline through the next 12 months without dilutive financing.