Neurocrine Biosciences, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
Neurocrine develops and commercializes medicines for neurological, endocrine and psychiatric conditions. INGREZZA (valbenazine) generated the large majority of product sales; ONGENTYS (opicapone) is also marketed by the company. Partners commercialize DYSVAL in Japan and elagolix products in the United States. The company’s research portfolio includes programs in movement disorders, congenital adrenal hyperplasia, epilepsy, schizophrenia and other indications.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $387.9 | $296.0 | $1,076.7 | $821.5 |
| Net product sales | $379.3 | $288.8 | $1,036.3 | $786.6 |
| Operating income | $87.8 | $44.5 | $145.6 | $138.8 |
| Net income | $68.5 | $22.5 | $65.5 | $96.9 |
| Diluted EPS | $0.69 | $0.23 | $0.67 | $0.99 |
| Operating cash flow | Not separately presented | Not separately presented | $196.4 | $252.3 |
- Q3 revenue rose 31% year over year, primarily on higher INGREZZA demand, new patient starts and record prescriptions. Q3 INGREZZA sales were $376.4 million, up from $286.5 million; ONGENTYS sales were $2.9 million, versus $2.3 million.
- Q3 operating expenses increased to $300.1 million from $251.5 million. R&D was $107.7 million and SG&A was $186.3 million. Management cited greater clinical investment, milestone costs, expanded sales capacity and commercial initiatives.
- Q3 operating margin was approximately 22.6%, versus 15.0% a year earlier; net margin was approximately 17.7%, versus 7.6%. For the nine months, operating margin was approximately 13.5%, versus 16.9%, and net margin approximately 6.1%, versus 11.8%.
- Nine-month revenue increased 31%, but net income declined 32%. Results included a $70.0 million loss on extinguishment of convertible notes, higher R&D and SG&A, and increased collaboration milestone expenses. The 2022 period also included a $23.6 million unrealized gain on equity securities, compared with a $7.5 million loss in 2021.
- At September 30, cash and cash equivalents were $212.2 million and available-for-sale debt securities totaled $949.8 million, or $1.162 billion combined. Working capital was $720.4 million. Total assets were $2.143 billion and stockholders’ equity was $1.545 billion.
- Operating cash flow for the nine months was $196.4 million, down from $252.3 million. The company attributed pressure in part to higher accounts receivable, which increased $115.7 million, and higher investment in commercial and development activities. Investing cash flow was negative $61.5 million; financing cash flow was negative $258.9 million, primarily reflecting $279.0 million paid to repurchase notes.
Debt, liquidity and material changes
The company repurchased $210.8 million principal amount of its 2.25% convertible senior notes for $279.0 million in cash during Q2 2022, recognizing a $70.0 million extinguishment loss. At September 30, $170.4 million principal remained outstanding. Because the notes’ conditional conversion threshold was met, holders could convert during October 3–December 30, 2022; accordingly, the $169.2 million net carrying amount was classified as a current liability. The company elected to settle principal in cash upon conversion. Management said existing capital resources and anticipated revenues should cover projected funding needs for at least 12 months, while noting that future needs depend on commercial performance, development costs and other factors.
Adoption of ASU 2020-06 on January 1, 2022 changed convertible-note accounting and reduced reported interest expense; prior-year amounts were not restated. Debt securities had $18.9 million of gross unrealized losses at quarter-end, primarily attributed to interest-rate changes. Management said it did not intend, and was not more likely than not required, to sell the securities before recovery of amortized cost. A 1% unfavorable interest-rate change was not expected to have a material effect on portfolio fair value.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects current resources and anticipated revenues to fund requirements for at least the next 12 months, but gives no assurance they will cover all planned programs and commercialization activities.
- In October 2022, the company submitted an FDA supplemental application for valbenazine for chorea associated with Huntington disease. On November 1, 2022, after quarter-end, it acquired Diurnal Group plc for approximately $56 million; purchase accounting was still being finalized.
- Clinical programs in Russia and Ukraine were suspended because of the ongoing conflict, creating potential delays for valbenazine and luvadaxistat. The company also highlighted continuing uncertainty from COVID-19, including possible effects on trials, suppliers and commercialization.
- Five generic-drug companies had filed ANDAs challenging patents covering INGREZZA. Litigation was ongoing, with a consolidated Delaware trial scheduled for January 2, 2024. The company said it did not believe pending claims were likely to have a material adverse effect, but litigation outcomes are uncertain.
- Four customers accounted for approximately 89% of nine-month product revenue and 95% of accounts receivable at September 30, creating customer-concentration and collection exposure. The company also relies on third parties for manufacturing and supply.
- Potential future event-based milestone payments under existing collaboration and license agreements could total up to $10.8 billion. These are contingent on specified events and are not current recorded debt.
- Other material risks include pricing and reimbursement pressure, competition, clinical and regulatory uncertainty, product safety, intellectual-property challenges and the company’s ability to sustain profitability. The filing reports an accumulated deficit of $495.8 million.
Most important facts for investors to verify
- Whether INGREZZA demand and prescription growth continue, and how the Huntington disease filing progresses.
- Developments in the INGREZZA generic-patent litigation, including the scheduled January 2024 trial and potential effects on exclusivity.
- Whether holders convert the remaining notes, the associated cash settlement, and the notes’ future classification and repayment requirements.
- Cash generation, accounts-receivable collections and customer concentration, particularly given the company’s expanded commercial and clinical spending.
- Clinical-program timing and costs, including the impacts of the Russia-Ukraine suspension, collaboration milestones and the Diurnal acquisition.