Sarepta Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2012; filed August 7, 2012. The company was formerly AVI BioPharma, Inc.; shareholders approved the name change effective July 11, 2012, together with a one-for-six reverse stock split. Sarepta remained a development-stage biopharmaceutical company focused on RNA-based therapeutics, including eteplirsen for Duchenne muscular dystrophy and antiviral candidates for Ebola and Marburg.
Financial Position and Performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $11.2 million, versus $11.6 million | $22.4 million, versus $25.9 million |
| Research and development expense | $13.8 million, versus $17.8 million | $28.7 million, versus $32.6 million |
| General and administrative expense | $2.9 million, versus $4.0 million | $6.2 million, versus $9.0 million |
| Operating loss | $5.6 million, versus $10.1 million | $12.4 million, versus $15.7 million |
| Net income (loss) | $8.0 million, versus $1.3 million | $(9.7) million, versus $3.1 million of income |
| Basic earnings (loss) per share | $0.36, versus $0.06 | $(0.43), versus $0.15 |
Margins: Revenue was primarily government-contract revenue recognized as related expenditures were incurred. Approximate operating margins were negative 49.6% for the quarter and negative 55.5% year to date. Net margins were approximately 71.7% for the quarter and negative 43.1% year to date, but were significantly affected by non-cash warrant valuation gains.
- Cash and cash equivalents were $24.5 million at June 30, 2012, down from $39.9 million at December 31, 2011.
- Operating cash use was $14.7 million for the first six months, compared with $10.5 million in the prior-year period.
- Investing cash use was $0.6 million, compared with $1.2 million; financing cash use was $0.04 million, compared with $32.3 million of financing cash provided in the prior-year period.
- Accumulated development-stage deficit was $319.6 million.
- Total debt was approximately $1.8 million, consisting primarily of long-term debt; current debt was $0.1 million and non-current debt was $1.7 million.
- Current liabilities were $17.1 million, including $3.3 million of deferred revenue and $2.9 million of warrant liability.
- Contractual obligations totaled $16.7 million, including $1.8 million of long-term debt, $13.7 million of operating leases and $1.2 million of purchase obligations.
Material Changes Versus Prior Comparable Period
- Six-month revenue declined 13%, primarily because the H1N1 government contract ended in June 2011, reducing comparable revenue by $3.2 million.
- Research and development expense declined 12% year to date, reflecting lower H1N1 spending, reduced personnel and proprietary research costs, and lower Ebola/Marburg spending, partially offset by higher DMD program costs.
- General and administrative expense declined 31% year to date, primarily due to lower salaries, severance, professional services, facilities and investor-relations costs.
- The quarterly net profit was driven largely by a $13.5 million non-cash gain from revaluation of warrant liabilities. The six-month warrant gain was only $2.6 million, versus $18.5 million in the prior-year period, contributing to the year-to-date net loss.
- The company completed a 28% workforce reduction initiated in December 2011; the remaining restructuring liability was $0.7 million at June 30, 2012.
- The company exercised an option to terminate its Bothell laboratory lease effective May 2013, reducing expected future commitments by approximately $0.4 million in 2013 and $0.6 million in 2014.
Guidance, Outlook, Commentary and Risks
- Management stated that existing cash, expected government funding and potential reductions in discretionary spending were sufficient to fund operations for at least the following 12 months, but additional capital would likely be needed.
- Management expected continued U.S. government funding for Marburg development and anticipated seeking equity or debt financing, collaborations or licensing transactions.
- The Department of Defense contract had approximately $126.5 million of available funding for current segments at June 30, 2012, with $75.0 million recognized. If all options were exercised, total potential funding was up to $288.0 million, of which $161.5 million remained unfunded.
- After quarter-end, on August 2, 2012, the DoD issued a stop-work order for the Ebola candidate AVI-7537 due to funding constraints. The order did not apply to the Marburg candidate AVI-7288. The filing stated that the order could be canceled, extended or followed by termination; termination could reduce total contract funding to approximately $183 million.
- Eteplirsen’s Phase IIb study met its primary dystrophin endpoint at the 30 mg/kg dose, although no significant clinical improvement versus placebo was observed in that study. Interim open-label extension data announced July 24, 2012 showed a 69.4-meter 6-minute-walk benefit for the 50 mg/kg cohort versus the placebo/delayed-treatment cohort at 36 weeks.
- Management anticipated additional eteplirsen open-label results in October 2012 and expected to begin enrollment in a pivotal Phase III trial in late 2013. These plans were subject to clinical, regulatory and funding risks.
- Key risks included the absence of approved commercial products, continued operating losses, dependence on U.S. government contracts, potential contract termination or funding reductions, clinical and regulatory failure, manufacturing and supply constraints, intellectual-property disputes, competition and possible future shareholder dilution.
Investor Verification Checklist
- Verify the outcome of the DoD stop-work order for AVI-7537 and its effect on future revenue, funding and research spending.
- Assess cash runway using the $14.7 million first-half operating cash burn and the company’s stated cost-reduction options.
- Separate recurring operating performance from non-cash warrant revaluation gains when evaluating profitability.
- Confirm subsequent clinical, regulatory and financing developments for eteplirsen and AVI-7288.
- Review potential dilution from 4.9 million outstanding warrants, 2.1 million outstanding options, restricted stock units and possible future financings.
- Evaluate the status of Prosensa-related patent matters and other intellectual-property risks affecting eteplirsen.