Enanta Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited report covers the quarter and nine months ended June 30, 2020 (Enanta’s fiscal third quarter and year to date). Enanta is a biotechnology company developing treatments for viral infections and liver diseases. Its revenue was royalties under its AbbVie collaboration, substantially all from glecaprevir in AbbVie’s MAVYRET/MAVIRET HCV regimen; it reported no revenue from its own product sales.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages. The filing reports no product cost of sales or gross margin.
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Royalty revenue | $18.7 | $44.4 | $98.8 | $153.9 |
| Research and development expense | $34.7 | $34.5 | $100.1 | $103.5 |
| General and administrative expense | $6.8 | $6.2 | $20.6 | $20.1 |
| Operating income (loss) | $(22.9) | $3.8 | $(21.9) | $30.3 |
| Net income (loss) | $(14.3) | $7.0 | $(6.8) | $37.2 |
| Basic and diluted EPS | $(0.71) | $0.36 basic; $0.33 diluted | $(0.34) | $1.90 basic; $1.77 diluted |
- Operating margin was approximately negative 122% in the quarter, versus positive 8% a year earlier; year to date it was approximately negative 22%, versus positive 20%. These are calculated from reported operating results and revenue.
- For the nine months, operating cash flow was $22.5 million, compared with $62.9 million in 2019. Investing activities provided $17.3 million, versus $34.5 million used; financing provided $8.8 million, versus $1.9 million. Cash, cash equivalents and restricted cash increased $48.6 million to $100.5 million.
- At June 30, cash and cash equivalents were $99.9 million and marketable securities totaled $335.5 million, or $435.4 million combined. Current assets were $413.4 million and current liabilities $23.9 million.
- Total liabilities were $31.1 million. The filing reports $8.8 million of operating lease liabilities and $1.6 million of Series 1 nonconvertible preferred stock classified as a liability; it reports no conventional borrowing debt. Stockholders’ equity was $480.6 million.
Material changes versus prior comparable periods
- Quarterly royalty revenue fell 58% year over year; nine-month revenue fell 36%. Enanta attributed the decline to HCV market competition and fewer patients diagnosed and treated during the COVID-19 pandemic. AbbVie reported quarterly MAVYRET/MAVIRET sales of $376 million, compared with $780 million a year earlier.
- Quarterly operating expenses increased 2% year over year; nine-month expenses decreased 2%. Year-to-date R&D expense declined as NASH trial spending shifted, partly offset by increased virology investment, including HBV, RSV, hMPV and SARS-CoV-2 work.
- Enanta moved from profit to loss in both the quarter and nine-month period. Other income declined, reflecting lower investment income. A $7.1 million quarterly income-tax benefit and $9.6 million year-to-date benefit partly offset pre-tax losses; the year-to-date benefit also included release of an uncertain tax benefit.
- Adoption of lease accounting standard ASC 842 in October 2019 added right-of-use assets and lease liabilities; the company said adoption did not materially affect results or cash flows.
Outlook, management commentary and risks
- Management said $435.4 million of cash, cash equivalents and marketable securities, together with continuing royalties, should fund operations for the foreseeable future. This outlook is subject to uncertainty; the company cautioned that future revenue may not exceed expenses.
- Enanta expected fiscal 2020 R&D spending to exceed 2019 levels as wholly owned programs advanced, although pandemic-related delays could reduce near-term spending. No specific revenue, earnings or cash-flow guidance was provided.
- COVID-19 reduced HCV treatment activity and royalty revenue and disrupted clinical-trial enrollment. Enrollment in the ARGON-2 NASH study and nuc-suppressed HBV study was paused in March and resumed in July 2020. Management reported no material supply-chain interruption at the time but noted that could change.
- Development outlook included anticipated RSVP RSV study data in the third calendar quarter of 2021, subject to enrollment and pandemic effects; planned initiation of two additional Phase 2 RSV studies in the fourth quarter of 2020; and planned Phase 1 EDP-297 study initiation in the third quarter of 2020, subject to trial-site safety conditions. Enanta also reported initiating ARGON-2 and a viremic HBV study in July 2020.
- EDP-514 healthy-volunteer testing showed a favorable short-term safety profile, according to the filing; topline results in nuc-suppressed HBV patients were expected in the second quarter of 2021, with preliminary viremic-patient data expected in the first half of 2021. EDP-305’s PBC study did not meet its primary endpoint; Enanta said it would focus further EDP-305 development on NASH.
- Key risks include dependence on AbbVie and a mature, competitive HCV market; further pandemic effects on treatment volumes and trials; clinical, regulatory, safety and manufacturing uncertainty for early-stage candidates; reliance on third parties; and the possibility that declining royalties and rising R&D costs could impair profitability or deferred-tax-asset realization.
- The company reported no current litigation and no material changes to contractual commitments during the nine months. It stated disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Subsequent AbbVie HCV sales, treatment volumes, pricing and Enanta’s royalty rate and adjustments, given the concentration of revenue in MAVYRET/MAVIRET.
- Whether pandemic-related interruptions recur, and whether the disclosed clinical-trial enrollment, timing and data milestones are achieved.
- Cash burn and R&D spending as programs advance, compared with management’s “foreseeable future” liquidity assessment.
- Future realization of $15.3 million in net deferred tax assets, which management said could require a valuation allowance if taxable income proves insufficient.
- Clinical efficacy and safety outcomes for EDP-938, EDP-514 and EDP-305, including the implications of the missed PBC primary endpoint and the development focus on NASH.