Puma Biotechnology, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results are for Puma and its wholly owned subsidiary. Puma received FDA approval for NERLYNX (neratinib) on July 17, 2017, and began U.S. commercialization in September. NERLYNX is its first and only commercial product.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net product revenue | $6.1 | $0 | $6.1 | $0 |
| Cost of sales | $1.5 | $0 | $1.5 | $0 |
| SG&A | $32.5 | $14.0 | $75.8 | $37.3 |
| Research and development | $49.5 | $52.0 | $157.6 | $166.4 |
| Operating loss | $(77.4) | $(66.0) | $(228.8) | $(203.7) |
| Net loss | $(77.2) | $(65.8) | $(227.9) | $(203.4) |
| Basic and diluted loss per share | $(2.07) | $(2.02) | $(6.15) | $(6.26) |
| Cash used in operating activities | Not separately shown in cash-flow statement | Not separately shown in cash-flow statement | $(136.9) | $(100.7) |
Q3 gross profit was approximately $4.6 million, or about 75% of revenue, based on reported revenue and cost of sales. Management cautioned that cost of sales would appear artificially low until additional product is manufactured: pre-approval manufacturing costs had been expensed. The filing does not provide a normalized or forward-looking gross margin.
- At September 30, cash and cash equivalents were $79.7 million and marketable securities were $26.6 million, totaling approximately $106.3 million. Working capital was $22.3 million; stockholders’ equity was $79.2 million.
- Total assets were $181.9 million and total liabilities were $102.7 million. Accrued expenses rose to $79.6 million from $17.4 million, including a $50.0 million accrued regulatory milestone payable to Pfizer. The balance sheet shows no borrowing line at September 30; the subsequent loan is described below.
- Cash and cash equivalents fell by $114.8 million during the first nine months. Operating cash outflow was $136.9 million; investing activities provided $8.1 million, primarily from net sales and maturities of marketable securities; financing activities provided $14.0 million, mainly from option exercises.
- Stock-based compensation was $83.2 million for the nine months and was a significant noncash expense. The company reported non-GAAP adjusted net loss of $144.7 million for the period, excluding stock-based compensation; this measure is not a substitute for GAAP results.
Material changes versus prior periods
- Revenue began following the NERLYNX approval and launch; there was no product revenue in the comparable 2016 periods.
- Q3 SG&A increased 132% year over year, primarily due to commercialization preparations, professional fees, and growth in sales and administrative headcount. Nine-month SG&A more than doubled, to $75.8 million.
- R&D decreased 4.8% in Q3 and 5.3% for the nine-month period, reflecting lower clinical-trial and stock-based compensation costs, partly offset by increased internal development and contractor costs.
- Net loss increased year over year in Q3 and for the nine-month period. Nine-month operating cash use also increased from 2016.
Outlook, risks, and unusual items
- Funding and going concern: Management expects significant losses and negative operating cash flows to continue and states that substantial doubt exists about the company’s ability to continue as a going concern. It says commercialization and operations may require additional funding beyond the $106.3 million of cash, cash equivalents, and marketable securities at quarter-end; no committed financing was in place as of September 30.
- Spending outlook: The company estimated R&D spending of approximately $130 million to $145 million over the next 12 months, excluding stock-based compensation, and expected higher SG&A as U.S. commercialization continued.
- Subsequent debt financing: On October 31, 2017, Puma closed a $100 million term-loan facility and drew the first $50 million. The additional $50 million may be drawn between March 31 and June 30, 2018, subject to a revenue milestone and other conditions. The loan is secured by substantially all personal property other than intellectual property, bears interest at the greater of 7.75% or prime plus 3.5%, and matures October 31, 2022. It includes revenue covenants, other operating restrictions, and a final payment equal to 7.5% of principal funded; default remedies include potential foreclosure on collateral, including cash.
- Regulatory outlook: The EMA review of the European marketing application was subject to a clock stop for additional data analyses, with a company response due December 22, 2017; Puma expected an EMA opinion in Q1 2018. FDA approval is limited to the specified extended-adjuvant breast-cancer indication and includes post-marketing commitments. Safety, including diarrhea, adoption, pricing, reimbursement, supply, and competition could affect commercial results.
- Legal matters: The company disclosed securities class-action, derivative, defamation, and stockholder fee proceedings. It had accrued no legal contingency because none was considered probable and estimable, but stated that material adverse outcomes are possible and that defending the matters will require resources.
- Other items: Puma capitalized the $50 million Pfizer regulatory milestone as an intangible asset and began amortizing it over the estimated useful life through 2030. Q3 amortization was approximately $0.6 million. A subsequent ratification addressed certain unvested 2017 restricted-stock-unit awards that may not have been properly authorized initially.
Important facts for investors to verify
- NERLYNX prescriptions, net revenue after rebates and discounts, channel inventory, returns, payer coverage, and the sustainability of launch demand.
- Cash burn, forecast spending, financing needs, and whether the first loan tranche and any additional funding are sufficient to support commercialization and development.
- Performance against the loan’s quarterly revenue covenants and eligibility for the second $50 million tranche.
- EMA review progress and the outcome of post-marketing studies and clinical programs, including potential safety or label changes.
- Manufacturing capacity and costs, the effect of previously expensed pre-approval inventory, and resulting future cost of sales and margins.
- Developments in disclosed litigation and the potential financial and operational impact.