Travere Therapeutics, Inc. quarterly report, Q1 FY2015

Business context and reporting period

This is Retrophin, Inc.’s Form 10-Q for the quarter ended March 31, 2015, filed May 11, 2015. The filing identifies the registrant as Retrophin, not Travere Therapeutics; investors should verify the company and filing match the intended issuer. Retrophin was a rare-disease biopharmaceutical company selling Chenodal, Thiola and newly acquired Cholbam, while developing sparsentan, RE-024 and RE-034.

Financial performance and position

Gross profit was approximately $17.1 million, or a derived gross margin of about 98.4%, based on reported sales and cost of goods sold. Q1 net income was not representative of recurring operating performance: it included a $48.6 million after-tax bargain-purchase gain on the Cholbam acquisition and a $40.0 million deferred tax benefit. These were substantially offset by a $36.8 million noncash loss from revaluing warrant liabilities.

At March 31, cash and cash equivalents were $120.2 million and marketable securities were $6.2 million, versus $18.2 million and $9.6 million, respectively, at year-end. Working capital was approximately $131.4 million. Total assets were $416.0 million and stockholders’ equity was $168.6 million, compared with a year-end stockholders’ deficit of $37.3 million. Total debt carrying value was approximately $84.2 million: $40.8 million under the credit facility and $43.4 million in convertible notes. The credit facility carried an 11% weighted-average rate; the notes bear 4.5% interest and mature in 2019. The company reported covenant compliance.

Material changes versus the prior period

• Sales rose from a nominal base following the addition of marketed products; the comparison is affected by acquisitions and product launches.
• On March 31, Retrophin completed its Cholbam acquisition. It paid $28.4 million in cash and issued approximately 661,279 shares; contingent milestones and royalties had a reported present value of about $42.2 million. Cholbam’s approval also transferred a Pediatric Priority Review Voucher, recorded at $96.3 million and classified as held for sale.
• A March public offering of 7.866 million shares generated $140.0 million net proceeds. The funds supported the Cholbam acquisition, and the company did not draw on the additional $30 million loan commitment arranged for that purchase.
• Operating cash use decreased by about $2.5 million year over year, while investing activities used $29.9 million, principally reflecting acquisition spending. Financing provided $139.2 million.
• The 2014 comparative quarter was restated for equity-award and consulting-agreement accounting errors, increasing operating expenses and net loss by $5.1 million.

Outlook, risks, contingencies and unusual items

Management said existing capital resources and projected revenue were expected to fund requirements for at least 12 months, but cautioned that funding may not sustain all development and commercialization plans. It expected continued operating losses and increased spending on the sparsentan Phase 2 study, RE-024 development and commercialization of Cholbam. The company had no stated earnings guidance.

Cholbam received FDA approval in March 2015. The company was enrolling approximately 100 patients in the sparsentan DUET Phase 2 study and said results might support an accelerated-approval application, subject to the data. The U.S. RE-024 IND became effective April 28, 2015, and orphan designation was granted May 5, 2015; both events occurred after quarter-end. Retrophin planned to seek a sale of the voucher during 2015 and reported negotiations were underway.

Key risks include early-stage clinical uncertainty and patient enrollment, dependence on third-party manufacturers and a specialty distributor, reimbursement and commercialization challenges, generic competition for Chenodal and Thiola, and substantial debt. The filing lists litigation, including a securities class action and a suit alleging damages exceeding $2.5 million, and a U.S. Attorney subpoena concerning the company’s relationship with its former CEO. Retrophin said it was not a target of that investigation; no loss-contingency accrual was recorded because losses were not considered probable or reasonably estimable.

Disclosure controls were found not effective as of March 31, 2015. Management cited prior material weaknesses involving the control environment, contract review and equity-award accounting and described remediation efforts. The quarter also included asset sales to Turing Pharmaceuticals, which was controlled by the former CEO; the filing reported proceeds of $1.0 million for ketamine assets, $1.0 million for Vecamyl rights and inventory, and $1.1 million for Syntocinon assets.

Important facts for investors to verify

• Confirm that Retrophin’s 2015 Q1 filing, rather than a Travere Therapeutics filing, is the intended subject.
• Assess the assumptions and preliminary purchase accounting behind the $96.3 million voucher valuation, $48.6 million after-tax bargain gain and $40.0 million tax benefit; these materially affect reported earnings.
• Check whether the voucher was sold, for what proceeds, and how Cholbam sales and contingent acquisition payments developed after quarter-end.
• Review subsequent cash burn, product revenue, debt service and covenant compliance against management’s 12-month liquidity statement.
• Monitor remediation of ineffective disclosure controls, the restatement history, and developments in the listed litigation and government investigation.