Sarepta Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 3, 2017. Sarepta is a commercial-stage biopharmaceutical company focused on RNA-targeted therapies for rare neuromuscular diseases. EXONDYS 51 (eteplirsen) received FDA accelerated approval in September 2016 and generated the Company’s first product revenue during the periods presented.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Product revenue | $35.0 million | $51.4 million |
| Cost of sales | $0.5 million | $0.8 million |
| Gross margin | Approximately 98.5% | Approximately 98.5% |
| Operating loss | $(63.3) million | $(102.6) million |
| Operating margin | Approximately (180.9)% | Approximately (199.8)% |
| Net income (loss) | $(63.0) million | $21.0 million |
| Basic diluted earnings (loss) per share | $(1.15) | $0.38 basic; $0.37 diluted |
| Cash used in operating activities | Not separately provided | $(143.0) million |
- Research and development expense was $58.9 million in the second quarter and $88.0 million year to date, compared with $44.3 million and $83.2 million, respectively, in the prior-year periods.
- Selling, general and administrative expense was $36.1 million in the second quarter and $62.3 million year to date, up 103% and 61%, respectively, primarily due to professional services, commercial infrastructure, executive transition costs, restructuring, and stock-based compensation.
- Six-month net income was driven by a $125.0 million gain from the March 2017 sale of the Rare Pediatric Disease Priority Review Voucher to Gilead. Excluding this unusual gain, the Company remained substantially loss-making.
- Cash, cash equivalents and investments totaled $301.7 million at June 30, 2017, consisting of $168.3 million of cash and cash equivalents, $132.6 million of short-term investments, and $0.8 million of restricted cash and investments.
- Working capital was $324.6 million. Reported debt was $11.2 million, all classified as current, versus $16.2 million at December 31, 2016.
- Inventory increased to $41.8 million from $12.8 million at year-end, while accounts receivable increased to $17.8 million from $5.2 million, reflecting the commercial launch of EXONDYS 51.
Material changes versus the prior comparable periods
- Revenue increased from zero in the 2016 comparable periods to $35.0 million in the second quarter and $51.4 million for the first six months of 2017 following the U.S. launch of EXONDYS 51.
- Despite new product revenue, second-quarter net loss was slightly higher than the prior-year loss because increased R&D and SG&A costs offset revenue. Year-to-date results improved substantially only because of the $125.0 million PRV gain.
- R&D expense increased year to date by $4.9 million, principally due to a $22.0 million Summit milestone payment and increased preclinical work, partly offset by lower clinical and manufacturing costs after EXONDYS 51 inventory capitalization.
- Operating cash use increased by $39.1 million year to date, driven largely by increases in accounts receivable and inventory associated with the product launch.
- The Company completed the transition from former CEO Edward Kaye to Douglas S. Ingram on June 26, 2017. The quarter included $3.4 million of estimated former-CEO severance and significant new equity awards to the incoming CEO.
- The Corvallis, Oregon consolidation continued; $2.8 million of restructuring expense was recognized during the first six months, and approximately $5.6 million of minimum lease payments and maintenance costs remained for the facility.
Outlook, unusual items, risks and contingencies
- Management stated that cash, cash equivalents and investments, together with recent financing activity, were sufficient to fund the current operational plan for at least the next twelve months. The Company expects future cash requirements to increase and may seek additional equity, debt, government funding, collaborations, or licensing transactions.
- The filing does not provide formal revenue or earnings guidance. Management expected the EMA to complete its review of the eteplirsen marketing authorization application and make a decision in 2018. The Company also planned to expand its managed access program outside the U.S.
- EXONDYS 51 remains subject to FDA post-marketing requirements, including confirmatory studies intended to verify clinical benefit. Failure to demonstrate benefit or safety could result in restrictions or withdrawal of accelerated approval.
- In July 2017, after the reporting date, Sarepta entered into BioMarin settlement and license agreements requiring $35.0 million of upfront payments, up to approximately $65.0 million of regulatory and sales milestones, and royalties of 4% to 8% on specified products. The Company had already recognized a $2.8 million charge for estimated royalties through June 30.
- Also after quarter-end, Sarepta entered into a $60.0 million term loan and a $40.0 million revolving credit facility, potentially expandable by another $20.0 million. The facilities mature in July 2021; term-loan borrowings bear interest at 6.25% plus one-month LIBOR.
- After quarter-end, the Company sold approximately 8.8 million shares at $42.50 per share and expected net proceeds of approximately $354.0 million. This financing increased liquidity but diluted existing stockholders.
- As of June 30, 2017, the Company had up to $743.5 million of future development, upfront, royalty, and sales milestone obligations under collaboration and license agreements, plus approximately $54.4 million of cancellable CRO commitments.
- Material risks include dependence on EXONDYS 51 commercial adoption and reimbursement, regulatory uncertainty, third-party manufacturing and supply constraints, clinical-trial outcomes, patent disputes, competition, litigation, leadership transition, and the need for additional financing.
- Several securities and derivative lawsuits remained pending or stayed; the filing states that potential losses could not be estimated for certain matters. A separate Delaware derivative matter was subject to a settlement framework that management did not expect to have a material financial impact.
Investor verification checklist
- Verify the sustainability and reimbursement quality of EXONDYS 51 revenue, including customer concentration and product-related reserves.
- Assess operating cash burn after excluding the one-time $125.0 million PRV gain and incorporating higher inventory, commercialization, clinical, and licensing costs.
- Review FDA confirmatory-study requirements and the status, design, enrollment, and results of studies supporting continued accelerated approval.
- Confirm the financial impact of the BioMarin agreements, including upfront payments, potential milestones, royalties, and intellectual-property rights.
- Review post-quarter-end debt and equity financings, including interest costs, collateral and covenants, maturity dates, and dilution.
- Evaluate the Company’s aggregate milestone obligations, litigation exposure, manufacturing dependence, and remaining Corvallis lease commitments.