Sarepta Therapeutics, Inc. quarterly report, Q2 FY2020

Sarepta Therapeutics, Inc. — Q2 2020 Form 10-Q Summary

Business context and reporting period

Sarepta is a commercial-stage biopharmaceutical company developing RNA-targeted therapeutics, gene therapies and other genetic medicines for rare diseases. Its commercial products are EXONDYS 51 (eteplirsen) and VYONDYS 53 (golodirsen), both approved by the FDA under the accelerated approval pathway for genetically defined Duchenne muscular dystrophy. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited and presented in thousands unless otherwise stated.

Key financial metrics

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$137.4 million	$94.7 million	$251.0 million	$181.7 million
Product revenue	$111.3 million	$94.7 million	$211.8 million	$181.7 million
Collaboration revenue	$26.0 million	—	$39.2 million	—
Operating loss	$(138.4) million	$(275.4) million	$(256.4) million	$(351.8) million
Net loss	$(150.8) million	$(276.4) million	$(168.3) million	$(353.0) million
Net loss per share	$(1.93)	$(3.74)	$(2.18)	$(4.85)
Operating cash flow	Not separately reported for the quarter	Not separately reported for the quarter	$520.2 million	$(225.2) million

Q2 total revenue increased 45%, driven by an 18% increase in product revenue and the addition of Roche collaboration revenue. Six-month revenue increased 38%. Q2 cost of sales was $13.3 million, implying a product-related gross margin of approximately 88%; total-company operating margin was approximately negative 101%. Research and development expense increased 66% to $188.5 million in Q2, principally from manufacturing and development spending for the micro-dystrophin program. Selling, general and administrative expense increased 9% to $73.7 million. The filing does not provide a GAAP total-company gross margin because cost of sales excludes certain manufacturing costs previously expensed in research and development.

Cash and cash equivalents were $1.640 billion at June 30, 2020, versus $835.1 million at December 31, 2019.
Short-term investments were $421.3 million, and restricted cash and investments were $9.6 million; total cash, cash equivalents and investments were approximately $2.071 billion.
Current assets were $2.459 billion and current liabilities were $354.9 million, producing working capital of $2.105 billion.
Long-term debt was $694.2 million, consisting of $241.0 million of other long-term debt and $453.1 million of convertible debt.
Six-month investing cash flow was $(51.9) million, including $108.1 million of net proceeds from the sale of a Priority Review Voucher and net purchases of available-for-sale securities.
Six-month financing cash flow was $336.6 million, including $312.1 million of net proceeds from issuing 2.52 million shares to Roche.

Material changes versus the prior comparable period

Product revenue increased $16.7 million in Q2 and $30.1 million year to date, primarily reflecting increased U.S. demand for EXONDYS 51 and VYONDYS 53.
The Roche collaboration became effective in February 2020. Sarepta received approximately $1.2 billion in cash consideration, including an upfront payment and equity investment. Of the consideration, $348.7 million was allocated to a combined performance obligation and is being recognized on a straight-line basis through the fourth quarter of 2023. A further $485.0 million was allocated to Roche options and remained deferred at June 30, 2020.
Deferred revenue increased to $797.7 million under the Roche arrangement, of which $89.2 million was classified as current.
R&D increased $75.3 million in Q2 and $120.8 million year to date, led by manufacturing spending for the micro-dystrophin program. Roche reimbursements reduced R&D expense by $8.9 million in Q2 and $25.2 million year to date.
Q2 operating loss improved by $137.0 million because the prior-year period included $173.2 million of acquired in-process research and development expense related to the Myonexus acquisition.
Six-month net loss benefited from the $108.1 million Priority Review Voucher gain. The prior-year six-month period included the $173.2 million Myonexus in-process R&D charge.
Cash from operations improved to $520.2 million from $(225.2) million, primarily because of the $794.5 million increase in deferred revenue associated with Roche; this cash flow was substantially transaction-related and may not recur.
Common shares outstanding increased to 78.4 million at June 30, 2020 from 75.2 million at year-end 2019, largely because of the Roche equity issuance and employee equity activity.

Guidance, outlook, commentary and risks

Management stated that available cash, cash equivalents and investments were sufficient to fund the current operational plan for at least the next twelve months, while noting that additional debt or equity financing, collaborations, licensing transactions or government funding may be pursued.
Sarepta expected to obtain safety and dosing insights for SRP-5051 in the second half of 2020, commence the SRP-9001 commercial-supply trial in 2020 or the second half of 2020 pending regulatory feedback, and complete GMP manufacturing runs for SRP-9003 by year-end 2020.
COVID-19 had caused difficulty for some patients receiving or initiating infusions, and management expected effects on product revenue, payer reauthorizations, clinical-site initiation, enrollment, follow-up visits and post-marketing commitments. Supply-chain disruption had been minimal as of the filing, but future effects remained uncertain.
EXONDYS 51 and VYONDYS 53 remain subject to confirmatory studies and other post-marketing requirements. Failure to verify clinical benefit or comply with FDA requirements could result in labeling changes, additional studies, restrictions or withdrawal of approval.
Sarepta relies heavily on third-party manufacturers and had $1.156 billion of non-cancelable manufacturing commitments as of June 30, 2020. Additional minimum batch requirements may arise if product candidates receive approval.
The company disclosed up to $3.2 billion of potential future development, regulatory, commercial and upfront royalty milestone payments under license and collaboration agreements. These amounts were contingent and not recorded as liabilities.
Contractual obligations totaled $2.152 billion, including $932.3 million of debt obligations, $64.2 million of lease obligations and $1.156 billion of manufacturing obligations.
Roche holds rights and options relating to ex-U.S. commercialization and certain future DMD programs. No Roche options had been exercised or expired by June 30, 2020.
Sandesh Mahatme resigned as executive vice president, chief financial officer and chief business officer effective July 10, 2020. Joseph Bratica served as interim principal financial and accounting officer at filing.
Reported legal proceedings described in the filing were voluntarily dismissed and closed. The filing nevertheless identifies ongoing risks involving intellectual property, regulatory approval, reimbursement, manufacturing, competition, clinical development, cybersecurity and access to capital.

Important facts for investors to verify

Separate recurring product revenue growth from Roche-related collaboration revenue and the substantial deferred-revenue balance.
Assess the sustainability of the $520.2 million six-month operating cash inflow, particularly the $794.5 million deferred-revenue contribution.
Track confirmatory trial results and FDA post-marketing obligations for EXONDYS 51 and VYONDYS 53, including any effect on accelerated approvals.
Monitor COVID-19 effects on patient infusions, payer approvals, clinical enrollment and trial follow-up.
Evaluate progress, funding requirements and regulatory feedback for SRP-9001, SRP-9003, casimersen and SRP-5051.
Review third-party manufacturing capacity, quality performance and the $1.156 billion manufacturing commitment profile.
Assess debt maturities, covenants and collateral requirements, including the $100 million minimum consolidated liquidity covenant and potential 2023 and 2024 refinancing needs.
Consider dilution from outstanding equity awards, future financings and the Roche share issuance, as well as the potential economic impact of contingent milestones and royalties.