Puma Biotechnology, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. Puma is a biopharmaceutical company focused on developing and commercializing cancer therapies. Its principal commercial product is NERLYNX (neratinib).
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $53.4 | $70.6 | $151.6 | $121.8 |
| Product revenue, net | $48.9 | $48.8 | $94.7 | $97.4 |
| License revenue | $0.3 | $20.7 | $50.3 | $22.7 |
| Royalty revenue | $4.3 | $1.1 | $6.6 | $1.7 |
| Gross profit / approximate gross margin | $41.4 / 77.6% | $61.2 / 86.7% | $110.0 / 72.6% | $103.3 / 84.8% |
| Income (loss) from operations | ($16.6) | $7.1 | $3.4 | ($7.1) |
| Net income (loss) | ($5.1) | $3.4 | $11.3 | ($13.5) |
| Diluted EPS | ($0.13) | $0.08 | $0.28 | ($0.34) |
Gross margin is calculated as revenue less cost of sales, divided by revenue. First-half cost of sales included a $20.0 million one-time payment to terminate the CANbridge greater-China sublicense.
- Expenses: Q2 cost of sales was $12.0 million, SG&A $39.4 million, and R&D $18.6 million. For the first half, these were $41.5 million, $67.7 million, and $38.9 million, respectively.
- Cash flow: First-half operating cash flow was $15.6 million, versus $4.7 million in the prior-year period. Investing activities used $11.0 million; financing activities were approximately flat. Cash, cash equivalents, and restricted cash increased $4.6 million to $102.0 million.
- Liquidity: At June 30, cash and cash equivalents were $89.8 million and marketable securities were $19.1 million. Working capital was $29.9 million, versus $31.9 million at year-end 2020. Current assets were $167.8 million and current liabilities $137.9 million.
- Debt: Gross principal outstanding at June 30 was $100.0 million under the prior facility; its effective interest rate was 12.75%. Total liabilities were $230.5 million. In July, Puma refinanced the facility with $100.0 million of notes and used cash on hand to repay the old debt and approximately $9.2 million in related interest, fees, and costs. The new notes bear interest at 8% plus adjusted three-month LIBOR, are secured by substantially all assets including intellectual property, and have a $25 million conditional additional borrowing option.
Material changes versus comparable periods
- Q2 revenue fell 24% year over year, primarily because Q2 2020 included $20.7 million of one-time license revenue. Product revenue was nearly flat, while international royalties increased.
- First-half revenue rose 24%, driven by $50.3 million in license revenue, including a large upfront payment under a sublicense amendment, and higher royalties. Product revenue declined about 3%.
- Management attributed lower product revenue for the first half to a 15% decline in bottles sold and higher variable-consideration reserves (18.3% versus 15.3% of product revenue), partly offset by price increases. Q2 bottle volume fell approximately 10%; reserves rose to 17.7% from 14.4%.
- First-half cost of sales more than doubled, reflecting the $20.0 million CANbridge termination fee, higher Pfizer royalties, and increased intangible-asset amortization.
- Q2 SG&A increased 34%, mainly because of a $13.6 million noncash charge for extending the CEO’s warrant. First-half R&D declined 23%, reflecting lower stock compensation, trial close-outs and reduced enrollment, among other factors.
Outlook, risks, contingencies and unusual items
- Liquidity outlook: Management said cash, marketable securities and expected product sales and sublicense proceeds were sufficient for operating needs for at least one year after filing. The company also stated it expects continuing losses over the foreseeable future and remains dependent on commercialization and access to financing. No specific revenue or earnings guidance was provided.
- COVID-19: Restrictions and reduced in-person access to healthcare providers have adversely affected NERLYNX promotion and sales; trial enrollment disruptions were reported in the United States and the Phase II SUMMIT basket trial. Puma said it and key suppliers broadly maintained operations during the first half. Further effects on sales, trials and revenue-covenant compliance remain possible.
- Debt covenants: The new notes require minimum unrestricted cash and specified minimum revenue, and impose other operating restrictions. Failure to comply could trigger default remedies, including foreclosure on collateral. The filing does not state the numerical minimum-cash or revenue thresholds.
- Legal matters: In the Hsu securities class action, claimed damages were approximately $50.5 million. Puma estimated potential damages after claims challenges could range from $30.0 million to $51.4 million; the final amount remains uncertain. Puma accrued $30.0 million for Hsu. In Eshelman, an appeals court vacated the prior damages award and remanded for a new damages trial; Puma estimated potential damages at up to approximately $2.8 million, while noting the amount could be higher. The Q2 legal-verdict credit of $14.9 million primarily reflected a $20.0 million reduction in the Eshelman accrual, partly offset by a $5.1 million increase in the Hsu accrual.
- Other unusual items: The warrant extension generated $13.6 million of noncash stock-based compensation. The company also incurred the $20.0 million CANbridge termination fee. A $50.0 million first-half license-revenue contribution and the legal accrual credit materially influenced reported results.
- Commercial and supply risks: NERLYNX is the company’s sole marketed product, and Puma relies on third parties to manufacture it. The filing cites customer concentration, variable product-rebate estimates, competition, clinical and regulatory uncertainty, and dependence on sublicensees as risks.
Important facts for investors to verify
- How much of the first-half license revenue is recurring, and what sublicense milestones or royalties may follow?
- Whether NERLYNX bottle volumes and rebate/chargeback rates improve, and how COVID-19 and market access affect U.S. sales and international royalties.
- The final damages and payment timing in Hsu and Eshelman, including whether amounts exceed recorded accruals.
- Compliance with the new debt agreement’s minimum cash and revenue covenants, and the resulting interest and repayment burden.
- Clinical-trial progress, regulatory developments, and the company’s reliance on third-party manufacturers and sublicensees.
- The impact of equity compensation and potential dilution: the CEO warrant covers 2.1 million shares at $16 per share and was extended to October 2026.