Neurocrine Biosciences, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Neurocrine is a neuroscience and endocrine-focused biopharmaceutical company. INGREZZA was approved for tardive dyskinesia (TD) in April 2017 and launched in the U.S. in May.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $161.6 million | $15.0 million |
| INGREZZA net product sales | $116.6 million | None |
| Collaboration milestones and license fees | $45.0 million | $15.0 million |
| Operating expenses | $293.0 million | $162.4 million |
| Operating loss | $131.4 million | $147.4 million |
| Net loss | $142.5 million | $141.1 million |
| Net loss per diluted share | $1.62 | $1.63 |
| Cash used in operating activities | $94.3 million | $106.2 million |
- Fourth-quarter 2017 revenue was $94.5 million, operating expenses were $82.7 million, and net income was $6.9 million ($0.08 per basic share; $0.07 diluted). Q4 2016 revenue was zero and net loss was $44.7 million.
- FY 2017 R&D expense was $121.8 million, up from $94.3 million; the increase primarily reflected the $30 million opicapone license fee paid to BIAL and higher personnel costs. SG&A rose to $169.9 million from $68.1 million, principally reflecting the INGREZZA commercial launch.
- Reported product cost was $1.3 million, implying a high initial product gross margin; management cautioned that this was temporarily low because some product sold used active ingredient costs expensed before approval. Future product costs and margins were expected to be higher.
- At year-end, cash, cash equivalents and investments totaled $763.3 million; working capital was $500.5 million. Total assets were $817.6 million.
- The company issued $517.5 million of 2.25% convertible senior notes due 2024, receiving approximately $502.8 million net proceeds. Carrying value was $369.6 million after debt discount and issuance costs; fair value was approximately $662.1 million. Cash interest paid in 2017 was $6.2 million.
- Net cash used in investing activities was $250.9 million, driven mainly by investment purchases and maturities; financing activities provided $516.6 million, primarily from the notes issuance. These investment-portfolio movements are distinct from operating cash burn.
Material changes, outlook and key risks
- Revenue rose sharply with INGREZZA’s first commercial sales and $45.0 million in collaboration revenue: $30.0 million from AbbVie following FDA acceptance of the elagolix endometriosis NDA and $15.0 million from Mitsubishi Tanabe’s development milestone. Despite revenue growth, annual net loss remained broadly similar as launch and development costs increased.
- Management expected a net loss in 2018, with higher R&D expense and significantly higher SG&A from a full year of commercialization. It anticipated higher INGREZZA sales and an AbbVie event-based payment; the filing does not provide a specific 2018 revenue or loss forecast.
- Pipeline milestones: AbbVie’s endometriosis NDA had priority review and a PDUFA date in Q2 2018; AbbVie expected uterine-fibroid Phase III topline data in Q1 2018 and anticipated a possible 2019 NDA. Neurocrine expected pediatric Tourette study topline data in late 2018. After a January 2018 FDA meeting, the company was awaiting minutes on a potential opicapone NDA submission.
- Clinical uncertainty remains: an adult Tourette study improved a secondary global-change measure but missed its prespecified primary tic-severity endpoint. In a pediatric study, exposure was below the anticipated therapeutic range for many participants; the company initiated a further Phase IIb study.
- Key operating risks include dependence on single-source suppliers for INGREZZA drug substance and capsules, concentration of 99% of product revenue in three customers, reimbursement and pricing pressure, competition (including AUSTEDO for TD), clinical/regulatory setbacks, and continued losses and cash requirements.
- A Mount Sinai lawsuit alleges breach of a license agreement related to the AbbVie collaboration and seeks unspecified damages, sublicensing fees and attorneys’ fees. The company disputes the claims; a trial was anticipated in the first half of 2018, and potential loss could not be estimated.
- The company reported an accumulated deficit of $1.2 billion and stated it did not expect to be profitable in 2018. It believed available capital and anticipated alliance payments would fund current requirements for at least 12 months, but noted planned activities could require additional funding.
- Independent auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Subsequent INGREZZA sales, prescription trends, payer coverage, rebates and net pricing, as well as the durability of commercial growth.
- Actual product costs and gross margins as post-approval active ingredient inventory is used up.
- FDA decisions and clinical results for elagolix, opicapone and valbenazine in Tourette syndrome, including timing and any additional trial requirements.
- Cash burn versus the $763.3 million cash-and-investment balance, 2024 note conversion or settlement exposure, and future financing needs.
- Outcome and potential financial impact of the Mount Sinai litigation, and progress on supplier diversification and customer concentration.
- Effects of adopting the new revenue-recognition standard on collaboration milestones and revenue timing; management said the impact was still under evaluation.