Sarepta Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 7, 2012. Sarepta, formerly AVI BioPharma, is a development-stage biopharmaceutical company focused on RNA-based therapeutics for rare and infectious diseases. Its lead programs were eteplirsen for Duchenne muscular dystrophy (DMD) and AVI-7288 for Marburg virus.
Financial performance and position
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Revenue | $7.6 million | $7.5 million | $30.0 million | $33.4 million |
| Operating loss | $(6.9) million | $(11.3) million | $(19.3) million | $(26.9) million |
| Net loss | $(49.6) million | $(4.0) million | $(59.2) million | $(0.9) million |
| Basic and diluted loss per share | $(2.17) | $(0.18) | $(2.61) | $(0.04) |
| Cash used in operating activities | Not presented for the quarter | $(22.5) million | $(18.0) million |
- Approximate operating margins were negative 91% for the quarter and negative 64% for the nine-month period. Approximate net margins were negative 654% and negative 197%, respectively; these margins were heavily affected by warrant revaluation losses.
- Cash and cash equivalents were $38.0 million at September 30, 2012, compared with $39.9 million at December 31, 2011.
- Total assets were $53.1 million. Total liabilities were approximately $61.6 million, including a $45.2 million warrant liability and $1.8 million of long-term debt, resulting in shareholders’ equity of $(4.6) million.
- Research and development expense declined 30% for the quarter and 18% for the nine-month period, primarily due to restructuring, lower proprietary and DMD spending, and reduced Ebola and H1N1 activity.
- General and administrative expense increased 12% for the quarter, mainly because of higher legal costs, but declined 20% for the nine-month period.
Material changes versus the prior comparable period
- Quarterly revenue increased 1%, while nine-month revenue declined 10%, mainly because the H1N1 government contract was substantially completed in 2011.
- Operating losses improved because of lower research and development and general and administrative costs.
- Net loss increased sharply because the fair value of liability-classified warrants increased by $42.7 million during the quarter and $40.2 million during the nine-month period. The resulting losses were noncash and were driven primarily by the increase in Sarepta’s share price.
- The warrant liability increased from $5.4 million at December 31, 2011 to $45.2 million at September 30, 2012. The warrants do not require cash settlement under their terms.
- In July 2012, the company completed a one-for-six reverse stock split and changed its name from AVI BioPharma to Sarepta Therapeutics.
- In September 2012, Sarepta sold approximately 1.4 million shares for net proceeds of $19.9 million under an equity financing arrangement. Through October 31, 2012, it sold an additional 0.6 million shares for $16.4 million.
Outlook, commentary, risks and unusual items
- Management expected available cash, continued government funding and discretionary spending reductions to fund operations for at least the following 12 months, but stated that additional capital would be required over time.
- On October 2, 2012, after the reporting date, the U.S. government terminated the Ebola portion of the July 2010 contract because of funding constraints. The Ebola program represented approximately half of the contract revenue. Sarepta expected substantially lower related research and development costs.
- The Marburg portion of the contract remained active. Remaining funding for the then-current segment was approximately $19.5 million, with estimated potential funding of approximately $84.4 million for later segments if the Department of Defense exercised its options. A separate August 2012 contract provided approximately $3.9 million for an intramuscular administration study of AVI-7288.
- Sarepta reported positive interim and 48-week open-label extension results for eteplirsen, including increased dystrophin expression and a statistically significant 6-minute walk test benefit in the 50 mg/kg cohort. The company anticipated initiating enrollment in a pivotal Phase III trial in late 2013. These results were from small, early-stage studies and did not establish regulatory approval or commercial viability.
- The company had no material product-sales revenue and substantially all reported revenue came from U.S. government research contracts. Contract revenue may fluctuate with the timing of reimbursable activities and government funding.
- Key risks include continued operating losses, need for additional financing and potential shareholder dilution, dependence on government contracts and appropriations, clinical and regulatory uncertainty, manufacturing and supply constraints, intellectual-property challenges, competition, and relocation-related costs and disruption.
- Noncancelable contractual obligations totaled approximately $15.7 million, including $1.8 million of debt, $13.2 million of operating leases and $0.6 million of purchase obligations.
- No material legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of September 30, 2012.
Important facts for investors to verify
- Reconcile the effect of the $40.2 million nine-month warrant revaluation loss to reported net loss and shareholders’ deficit, recognizing that it was noncash.
- Review post-quarter-end financing and warrant exercises, including the $16.4 million stock-sale proceeds and $5.6 million of warrant-exercise proceeds through October 31, 2012.
- Assess the revenue and liquidity impact of the October 2012 Ebola contract termination and the remaining Marburg contract options and funding.
- Evaluate whether the company’s cash runway assumptions remain valid given operating cash burn of $22.5 million in the first nine months and the stated need for future financing.
- Verify the clinical evidence, dose selection, regulatory pathway and timing for the planned eteplirsen pivotal trial.
- Monitor potential dilution from 4.8 million outstanding warrants, 2.4 million options, restricted stock units, stock appreciation rights and future equity offerings.