Puma Biotechnology, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. Puma is a biopharmaceutical company focused on oncology and depends primarily on neratinib (NERLYNX). The FDA approved NERLYNX in July 2017 for extended adjuvant treatment of adults with early-stage HER2-positive breast cancer following trastuzumab-based therapy; U.S. sales began in July. The company is still developing neratinib for other indications and has no other marketed product.
Financial results and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $27.7 million | $0 |
| Product revenue, net | $26.2 million | $0 |
| License revenue | $1.5 million | $0 |
| Cost of sales | $5.6 million | $0 |
| Research and development expense | $207.8 million | $222.8 million |
| Selling, general and administrative expense | $106.7 million | $53.8 million |
| Operating loss | $292.4 million | $276.6 million |
| Net loss | $292.0 million | $276.0 million |
| Net loss per share, basic and diluted | $7.85 | $8.29 |
| Cash used in operating activities | $172.5 million | $141.7 million |
NERLYNX generated $21.6 million of revenue in Q4 2017, compared with $6.1 million in Q3; Q4 net loss was $64.1 million. The filing reports no revenue in 2016. Cost of sales was $5.6 million for 2017; the filing does not state a full-year gross margin.
- Liquidity: Cash and cash equivalents were $81.7 million at year-end, down from $194.5 million at December 31, 2016. Current assets were $106.4 million and current liabilities $58.3 million. The company reported total assets of $165.5 million and total liabilities of $112.2 million.
- Debt: $50 million principal was outstanding under a secured term loan at year-end; its balance-sheet carrying amount, net of financing costs, was $48.5 million. A further $50 million tranche was available subject to revenue and other conditions. The loan matures October 31, 2022.
- Other cash flows: Investing activities used $15.4 million, including a $50 million payment capitalized as an intangible asset following FDA approval. Financing activities provided $75.1 million, including $50 million of loan proceeds.
Material changes versus the prior year
- 2017 was Puma’s first year of product sales, following NERLYNX approval and launch; revenue was $27.7 million versus none in 2016.
- SG&A nearly doubled to $106.7 million, reflecting commercial-launch spending, sales-force hiring, patient programs, infrastructure and higher legal expense.
- R&D expense declined 6.7% to $207.8 million, primarily due to lower stock-based compensation and manufacturing costs, partly offset by higher internal costs.
- Operating cash use increased to $172.5 million from $141.7 million, while year-end cash declined by $112.8 million.
- The company took on $50 million of debt in October 2017; total liabilities rose to $112.2 million from $43.0 million.
Outlook, risks and unusual items
- Management estimated R&D spending of approximately $130–$140 million over the next 12 months, excluding stock-based compensation. It expected R&D expense to decline slightly in 2018 and SG&A to increase, in part because the sales force would incur a full year of costs.
- Puma expected 2018 top-line results from its Phase III trial of neratinib plus capecitabine versus lapatinib plus capecitabine in third-line HER2-positive metastatic breast cancer. Trial results and regulatory approval are uncertain.
- The EMA’s CHMP recommended refusing Puma’s application for NERLYNX in the extended adjuvant setting. Puma stated it intended to request re-examination. This contrasts with the FDA approval in the United States.
- The auditor’s report and management disclosures state that recurring losses and negative operating cash flows raise substantial doubt about Puma’s ability to continue as a going concern. The company said further financing may be needed; it had $81.7 million of cash at year-end.
- The credit facility imposes minimum revenue covenants and other restrictions. Failure to meet covenants could trigger default remedies, including foreclosure on collateral; the additional $50 million tranche was conditional and not assured.
- Neratinib’s principal identified safety concern is diarrhea. In the ExteNET trial, approximately 39.9% of treated patients had grade 3 or higher diarrhea without prophylaxis. Interim CONTROL trial results reported grade 3 diarrhea of 10.8% with loperamide plus colestipol, but these were study results, not proof of commercial outcomes.
- International licensing: agreements cover South East Asia, Israel and greater China. The CANbridge agreement was signed in January 2018, after year-end, and provides for a $30 million upfront payment plus potential milestones and royalties; it is not 2017 revenue.
- Material proceedings include a securities class action certified in December 2017 with trial set for November 2018, a defamation lawsuit, derivative actions and a stockholder fee claim. Outcomes and potential losses are uncertain. The filing states material adverse outcomes are possible.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the 2017 financial statements and internal controls. The filing also describes ratification of certain 2017 restricted-stock-unit awards that may not initially have been duly authorized.
Important facts for investors to verify
- NERLYNX’s post-launch sales, prescription and patient-access trends, and the assumptions behind net revenue reserves and channel inventory.
- Cash runway relative to operating cash use and management’s stated R&D and commercial spending plans; whether additional financing is required.
- Progress against the loan’s revenue covenants and eligibility for the second $50 million tranche, including the loan’s interest, final payment and collateral terms.
- The outcome and timing of the EMA re-examination, the 2018 Phase III data readout and post-marketing commitments for NERLYNX.
- Whether diarrhea management in practice matches clinical-trial findings, and whether adverse events affect prescribing, adherence or discontinuation.
- Potential cash, dilution or operational consequences of litigation, Pfizer royalties and milestones, and the international license agreements.