Puma Biotechnology, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. Amounts below are in U.S. dollars; financial-statement amounts are generally shown in millions unless noted.
Business context
Puma is a biopharmaceutical company focused on developing and commercializing cancer treatments. Its only FDA-approved product is NERLYNX (neratinib), launched in the U.S. in July 2017 for extended adjuvant treatment of certain patients with early-stage HER2-positive breast cancer. The company also has neratinib candidates for other indications and PB357 in its pipeline.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Product revenue, net | $50.8m | $0 | $86.8m | $0 |
| License revenue | $0 | $0 | $30.5m | $0 |
| Total revenue | $50.8m | $0 | $117.3m | $0 |
| Cost of sales | $8.8m | $0 | $15.2m | $0 |
| Operating expenses | $92.2m | $78.2m | $182.1m | $151.4m |
| Operating loss | $(41.4)m | $(78.2)m | $(64.8)m | $(151.4)m |
| Net loss | $(44.3)m | $(77.8)m | $(68.7)m | $(150.7)m |
| Basic and diluted loss per share | $(1.17) | $(2.10) | $(1.82) | $(4.08) |
NERLYNX product gross margin was approximately 82.6% in Q2 and 82.5% for the first half, calculated from reported product revenue and cost of sales. Puma remained loss-making. Q2 SG&A rose 61% year over year to $40.1m, principally reflecting commercial launch staffing and marketing; R&D fell 18.8% to $43.2m, mainly due to lower clinical-trial costs and stock-based compensation. For the first half, SG&A increased 77.1% to $76.7m, while R&D declined 16.6% to $90.2m.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $95.9m and marketable securities were $38.6m; working capital was $106.5m. Current assets were $170.1m and current liabilities $63.5m.
- Six-month operating cash use was $23.9m, compared with $82.0m in the first half of 2017. Investing cash use was $38.8m and financing provided $76.9m, including $75.0m of incremental debt proceeds. Cash, cash equivalents and restricted cash ended at $100.2m.
- Debt principal outstanding was $125.0m; balance-sheet long-term debt, net of financing costs, was $120.3m. The amended facility carries interest at the greater of 8.25% or prime plus 3.5%, with principal payments beginning July 2020 and maturity in May 2023. An additional $30m may be drawn in Q4 2018 subject to revenue and other conditions.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses, operating cash outflows and dependence on future financing and successful commercialization.
Material developments, outlook and risks
- First-half license revenue of $30.5m came from upfront payments under two sublicenses. Puma signed agreements for China and Israel; a Latin America sublicense had not generated revenue by June 30 because required documentation remained outstanding. The Latin America agreement includes potential payments of up to approximately $34.5m if specified obligations and milestones are achieved.
- On June 28, 2018, the European Medicines Agency’s CHMP issued a positive recommendation for NERLYNX in a defined patient group. The European Commission still had to decide whether to grant marketing authorization.
- Management expected 2018 SG&A and expenses into 2019 to remain above 2017 levels as commercialization continued; it expected 2018 R&D to decline slightly from 2017 as trials wound down. It estimated R&D spending of $120m–$130m over the next 12 months, excluding stock-based compensation.
- Commercialization depends heavily on NERLYNX, a single product with limited sales history. Three customers represented 41%, 25% and 14% of Q2 revenue, respectively. The company relies on third parties to manufacture its products and may need additional capital; financing may be unavailable or dilutive.
- The debt facility includes minimum-revenue covenants, restrictions on specified corporate actions and default provisions that could permit remedies against collateral, including cash. Interest-rate increases may raise borrowing costs.
- Stock-based compensation was $47.5m for the first half. Puma reported legal proceedings, including a securities class action and a defamation action; it said outcomes could not be predicted. A July 30 settlement in principle of three derivative lawsuits was expected to be covered by insurance, subject to court approval.
Most important facts for investors to verify
- NERLYNX sales trajectory, channel inventory, customer concentration and net-revenue reserves as commercialization matures.
- Cash runway against operating cash use, planned R&D and commercialization costs, and the company’s stated going-concern uncertainty.
- Compliance with the loan’s revenue covenants and eligibility for the optional $30m tranche; borrowing costs and repayment obligations.
- European Commission action following the CHMP recommendation and progress on other regulatory and sublicense milestones.
- Potential financial and operational effects of litigation, manufacturing dependence, and substantial stock-based compensation.