Puma Biotechnology, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Puma is a biopharmaceutical company focused on developing and commercializing cancer therapies, principally NERLYNX (neratinib), approved in the U.S. for certain patients with early-stage HER2-positive breast cancer.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $99.1 million | $66.5 million |
| Product revenue, net | $45.6 million | $36.0 million |
| License revenue | $53.5 million | $30.5 million |
| Operating income (loss) | $9.8 million | ($23.4 million) |
| Net loss | ($10.1 million) | ($24.3 million) |
| Net loss per share, basic and diluted | ($0.26) | ($0.65) |
| Operating cash flow | ($16.1 million) | ($6.3 million) |
| Cash and cash equivalents | $48.8 million | $108.4 million at Dec. 31, 2018 |
| Marketable securities | $101.6 million | $57.0 million at Dec. 31, 2018 |
| Working capital | $154.8 million | $135.9 million at Dec. 31, 2018 |
| Long-term debt, net on balance sheet | $152.8 million | $151.9 million at Dec. 31, 2018 |
Total revenue rose about 49% year over year. Product revenue increased about 26%, which management attributed to 26% higher NERLYNX sales and a 10% increase in gross selling price, partly offset by higher variable consideration. License revenue included a $51.0 million upfront fee from Pierre Fabre and revenue from other license-related performance obligations and a milestone; the filing does not separately specify the recognized upfront fee from Knight.
Operating expenses totaled $89.2 million, down slightly from $89.9 million. SG&A increased 24% to $45.5 million, while R&D declined 24% to $35.7 million, including lower stock-based compensation. Cost of sales was $8.0 million; relative to product revenue, this implies an approximate product gross margin of 82.5% before other operating expenses. Interest expense rose to $4.4 million from $1.1 million. Q1 included $16.4 million of legal verdict expense, net of an anticipated insurance receivable.
Operating cash use increased year over year, principally reflecting a $60.2 million increase in accounts receivable, including $60.0 million due from Pierre Fabre for recognized license revenue. Investing cash use of $44.6 million largely reflected moving funds into short-term securities, rather than operating investment. Cash, cash equivalents and restricted cash ended the quarter at $53.1 million.
Material changes and notable items
- Two new regional sublicenses were signed: Knight for Canada and Pierre Fabre for specified European, North African and West African territories. The Pierre Fabre agreement included a $51.0 million upfront fee recognized in Q1, potential milestones of up to $345 million, and significant double-digit royalties. Knight’s agreement includes potential milestones of up to $7.2 million and significant double-digit royalties.
- The company recognized a $9.0 million post-marketing commitment liability related to the Pierre Fabre agreement.
- Effective January 1, 2019, lease accounting adoption added right-of-use assets and lease liabilities. At March 31, total lease liabilities were $26.9 million; adoption had no material effect on operations or cash flows.
- Debt principal outstanding was $155.0 million, with interest at the greater of 8.25% or prime plus 3.5%. Principal payments begin July 2020; the balance is due May 2023. The debt is secured by substantially all personal property other than intellectual property, and the company reported covenant compliance.
- Four specialty pharmacy/distributor customers each represented at least 10% of total revenue: CVS/Caremark 30%, Accredo/Acaria 25%, Diplomat 11%, and Biologics 11%, creating customer and channel concentration.
Outlook, risks and contingencies
- Management expects continued losses and negative operating cash flows during development and commercialization. It estimates R&D spending of $120–$130 million over the next 12 months, excluding stock-based compensation, expects SG&A to remain higher in 2019 than in 2018, and expects clinical R&D expenses overall to decline in 2019.
- The company said cash, cash equivalents and marketable securities, together with expected product sales and upfront license payments, were sufficient for operating needs for at least one year after the filing. It nevertheless remains dependent on adequate funding; financing availability may be affected by market conditions, regulatory decisions or clinical results.
- In Eshelman, a jury awarded $15.9 million in compensatory and $6.5 million in punitive damages. Puma recorded $16.4 million of expense after an anticipated $6.0 million insurance receivable, filed for a new trial or reduced damages, and said it intends to appeal if the verdict stands. Attorneys’ fees and prejudgment interest could increase the award.
- In the Hsu securities class action, a jury found liability on one statement and awarded up to $4.50 per share; estimated class-wide damages were accrued at $9–$18 million, but the final amount depends on claims and appeals and could be higher. No final judgment had been entered.
- Management identified reliance on NERLYNX, third-party manufacturers, uncertain product and license revenue, clinical and regulatory execution, financing needs, and litigation as important risks. It reported disclosure controls were effective at March 31, 2019.
Investor verification priorities
- Confirm collection timing of the $60.0 million Pierre Fabre receivable and the cash contribution from license revenue versus recurring NERLYNX sales.
- Track NERLYNX sales growth, net pricing, variable-consideration reserves, and customer concentration.
- Monitor the appeals, potential additional damages and insurance recoveries in the Eshelman and Hsu cases; reconcile legal accruals with subsequent court developments.
- Review cash burn against the stated R&D budget, liquidity runway, debt interest and revenue-covenant requirements.
- Assess the timing and achievability of sublicense milestones and the eventual regulatory and commercial contribution from partners.