Sarepta Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Sarepta is a development-stage biopharmaceutical company focused on RNA-based therapeutics for rare and infectious diseases, led by eteplirsen and other exon-skipping candidates for Duchenne muscular dystrophy (DMD). The filing covers the three and nine months ended September 30, 2014. The financial statements are unaudited and prepared under U.S. GAAP.
The company had no product-sales revenue. Substantially all revenue came from government research contracts and grants. The Marburg portion of the Department of Defense contract expired in July 2014, with only potential contract-finalization revenue remaining.
Financial results and key metrics
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Revenue | $1.1 million | $4.2 million | $9.7 million | $11.6 million |
| Research and development expense | $21.9 million | $21.1 million | $63.4 million | $47.8 million |
| General and administrative expense | $12.9 million | $8.0 million | $35.4 million | $21.2 million |
| Operating loss | $33.7 million | $24.9 million | $89.1 million | $57.4 million |
| Net loss | $29.2 million | $42.0 million | $91.4 million | $103.2 million |
| Net loss per share | $0.71 | $1.24 | $2.31 | $3.17 |
Revenue declined 75% year over year in the quarter and 16% year to date. Net loss improved primarily because the company recorded a $4.3 million gain from warrant revaluation in the quarter, compared with a $17.2 million loss in the prior-year quarter. The nine-month comparison also benefited from a substantially smaller warrant-related loss.
Research and development expense increased 4% in the quarter and 33% year to date, reflecting higher headcount, DMD development, regulatory and manufacturing activity, sponsored research, facilities and preparation for potential eteplirsen commercialization. General and administrative expense increased 61% in the quarter and 67% year to date, driven by higher personnel and professional-fee costs.
Stock-based compensation was $4.6 million for the quarter and $14.6 million for the nine months, compared with $3.5 million and $7.5 million, respectively, in the prior-year periods. The company reported no outstanding liability-classified warrants at September 30, 2014.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $52.3 million at September 30, 2014, compared with $257.0 million at December 31, 2013.
- Short-term investments were $183.7 million and restricted investments were $4.6 million, resulting in approximately $240.7 million of cash, cash equivalents and investments.
- Cash used in operating activities was $103.1 million for the nine months, compared with $46.9 million in the prior-year period.
- Cash used in investing activities was $205.7 million, including $272.2 million of purchases of available-for-sale securities and $22.3 million of property and equipment purchases.
- Cash provided by financing activities was $104.1 million, including $94.5 million of net proceeds from an April 2014 offering of approximately 2.7 million common shares.
- Total liabilities were $32.9 million. Debt and notes payable were approximately $6.3 million in aggregate, excluding lease and purchase commitments.
- Management stated that available cash, cash equivalents and investments were sufficient to fund the current operational plan for the next twelve months, but expected to seek additional financing, government funding, collaborations or licensing arrangements.
Material changes versus the prior comparable period
- Government-contract revenue fell as the Marburg contract expired, the intramuscular Marburg agreement and CNMC agreement were completed, and DMD collaboration activity declined in the quarter.
- Operating expenses increased materially as the company expanded its infrastructure and advanced DMD clinical, regulatory, manufacturing and potential commercialization activities.
- The company acquired real and personal property in Andover, Massachusetts for approximately $15.1 million, recording $14.8 million of property and equipment and $4.7 million of notes payable.
- Common shares outstanding increased to approximately 41.3 million at September 30, 2014, from approximately 37.8 million at December 31, 2013, primarily reflecting equity issuance and warrant exercises.
- A material weakness identified at December 31, 2013 related to review of significant research and development contracts was addressed through newly implemented controls. Management concluded that disclosure controls and procedures were effective as of September 30, 2014.
Guidance, outlook, commentary and risks
On October 27, 2014, management announced plans to submit an NDA for eteplirsen by mid-2015, subject to further FDA discussions and requests. The filing states that the FDA requested additional information, including independent dystrophin-image assessment, 168-week Study 202 clinical data, additional safety duration, natural-history data and MRI data. FDA acceptance, review and approval remain uncertain.
Sarepta expects continued substantial spending on clinical development, regulatory activities, manufacturing scale-up, facilities and potential commercialization. The company has not generated product revenue and expects to incur operating losses in the near term. Without additional U.S. government funding, it would likely curtail certain infectious-disease research and development programs.
- Clinical trials may fail to demonstrate sufficient safety or efficacy, and the Study 202 week-144 six-minute-walk result showed an approximately 8.5% decline from baseline.
- Regulatory approval of eteplirsen and other candidates is uncertain and may require additional studies, data or analyses.
- The company relies on third-party manufacturers and faces risks involving capacity, quality, cGMP compliance, scale-up, supply and cost.
- Patent interferences involving Prosensa could affect intellectual-property protection for eteplirsen and other exon-skipping candidates.
- The company faces two shareholder-related legal proceedings concerning eteplirsen disclosures and executive and director compensation. The filing states that the outcomes and potential material impact cannot currently be assessed.
- Non-cancelable commitments totaled approximately $188.6 million, including $153.2 million of purchase obligations, $28.3 million of operating leases, $5.0 million of notes payable and $2.1 million of long-term debt.
- Future financing may be required and could dilute existing stockholders or be unavailable on acceptable terms.
Important facts for investors to verify
- Progress toward the planned mid-2015 eteplirsen NDA submission and the FDA’s additional data requirements.
- Results and timing of eteplirsen confirmatory studies, including Study 202 follow-up data.
- Cash burn, investment balances and the timing and terms of any future equity, debt or partnership financing.
- Replacement or extension of government-contract funding following expiration of the Marburg program.
- Manufacturing scale-up, third-party supply capacity and regulatory compliance.
- Outcomes of the Prosensa patent interferences and related European patent proceedings.
- Developments in the securities class action and derivative litigation.
- Whether the disclosed purchase commitments and lease obligations remain consistent with available liquidity and the company’s development plans.