Sarepta Therapeutics, Inc. quarterly report, Q2 FY2013

Sarepta Therapeutics, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Sarepta Therapeutics is a development-stage biopharmaceutical company focused on RNA-based therapeutics for rare and infectious diseases. Its principal programs were eteplirsen for Duchenne muscular dystrophy (DMD) and AVI-7288 for Marburg virus. The filing covers the three and six months ended June 30, 2013; financial statements are unaudited and amounts are in thousands except per-share data.

The company had no material product-sales revenue. Substantially all reported revenue came from U.S. Department of Defense (DoD) and other government research contracts and grants.

Financial Performance and Key Metrics

Metric	Q2 2013	Q2 2012	Six Months 2013	Six Months 2012
Revenue	$2,951	$11,207	$7,425	$22,419
Research and development expense	$12,984	$13,849	$26,746	$28,654
General and administrative expense	$7,054	$2,915	$13,181	$6,196
Operating loss	$(17,087)	$(5,557)	$(32,502)	$(12,431)
Net income (loss)	$(19,051)	$8,038	$(61,135)	$(9,666)
Basic and diluted EPS	$(0.60)	$0.36/$0.35	$(1.92)	$(0.43)

Revenue declined 74% year over year in the quarter and 67% for the six-month period. The company remained loss-making, with an accumulated development-stage deficit of $492.4 million as of June 30, 2013. No meaningful operating margin or sustainable profitability was reported.

Net cash used in operating activities was $26,995 for the six months, compared with $14,731 in the prior-year period. Investing cash use was $9,173, primarily reflecting restricted investments, equipment and patent costs. Financing activities provided $4,692, including proceeds from equity, warrant and option exercises.

Cash and cash equivalents were $156,185 at June 30, 2013, compared with $187,661 at December 31, 2012. Restricted investments totaled $7,807, resulting in cash equivalents and invested cash of approximately $164.0 million. Total assets were $183,633 and total liabilities were $94,812.

Debt was limited: current debt was $90 and noncurrent debt was $1,622. The largest liability was the $79,116 fair value of warrant liabilities, a non-cash, Level 3 liability. The company recorded a $28,851 loss from the increase in warrant liability during the first six months.

Material Changes Versus Prior Comparable Period

Government-contract revenue fell primarily because the Ebola portion of the DoD contract was stopped in August 2012 and terminated in October 2012, and Marburg-related activity also declined.
General and administrative expense increased 142% in the quarter and 113% for the six-month period, driven principally by higher personnel, stock-based compensation and professional-service costs.
Research and development expense decreased 6% in the quarter and 7% for the six-month period as lower Ebola and Marburg spending more than offset increased DMD, proprietary research, personnel and licensing costs.
The company shifted from Q2 2012 net income of $8.0 million to Q2 2013 net loss of $19.1 million. The six-month net loss increased to $61.1 million from $9.7 million.
Cash declined by $31.5 million during the first six months, compared with a $15.4 million decline in the prior-year period.
The company purchased $7.3 million of certificates of deposit to secure letters of credit for manufacturing arrangements and $0.6 million for a Cambridge lease security deposit.
In July 2013, after the reporting period, the company established a new at-the-market offering for up to $125.0 million and had sold approximately $37.9 million of shares through August 7, 2013.

Guidance, Outlook, Risks and Unusual Items

Management believed available cash and invested cash, considering its stock price and outstanding warrants, would fund the current operating plan for the next twelve months. The filing does not provide a formal revenue or earnings forecast.
The company expected to initiate a pivotal eteplirsen trial by the end of 2013, with dosing expected to begin in early 2014. It also planned to evaluate an FDA New Drug Application submission for eteplirsen in the first half of 2014, subject to further regulatory and manufacturing discussions.
DoD funding remained critical. The August 2012 Marburg contract’s current performance period was expected to end in the second half of 2013, subject to extensions. Future Marburg contract segments were optional and dependent on DoD funding and decisions.
Government contracts may be delayed, reduced or terminated for convenience, and funding was exposed to congressional appropriations, sequestration and changing government priorities.
Key clinical and regulatory risks included the possibility that eteplirsen data would not support regulatory filing or approval, that the FDA would not accept dystrophin as a suitable surrogate endpoint, or that additional studies would be required.
Additional risks included clinical-trial failure, manufacturing scale-up and quality issues, dependence on limited third-party manufacturers, intellectual-property disputes, competition, and the absence of commercial product revenue.
The warrant liability created substantial earnings volatility because it was remeasured using a Black-Scholes-Merton model and was sensitive to the company’s share price and valuation assumptions.
The company recorded $0.7 million of restructuring charges during the first six months related to the relocation from Bothell to Cambridge and Corvallis; $0.2 million remained accrued at June 30, 2013.
Contractual obligations totaled $54.2 million, including $30.0 million of operating leases, $22.5 million of purchase obligations and $1.7 million of long-term debt.

Important Facts for Investors to Verify

Whether DoD funding and optional Marburg contract segments continued, were extended or were reduced after the filing date.
The status, design, enrollment and regulatory outcome of the planned pivotal eteplirsen trial and any FDA filing.
The adequacy of the eteplirsen clinical, dystrophin and manufacturing data for FDA review.
Cash-burn rates, subsequent equity issuance and the duration of liquidity under the company’s evolving development plan.
The valuation, expiration and potential dilution associated with the 2.6 million outstanding liability-classified warrants and other equity awards.
Potential intellectual-property exposure involving Prosensa and other competitors in DMD exon-skipping therapies.
Manufacturing capacity, supply agreements, quality controls and the company’s ability to scale eteplirsen production.
Whether the company can develop product-sales revenue, given its historical dependence on government contracts and continuing operating losses.