Puma Biotechnology, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts are in millions except per-share data. The company develops and commercializes cancer therapies; NERLYNX (neratinib) is its only FDA-approved product and principal commercial focus.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $62.6 | $6.1 | $179.9 | $6.1 |
| Product revenue, net | $52.6 | $6.1 | $139.4 | $6.1 |
| License revenue | $10.0 | — | $40.5 | — |
| Cost of sales | $9.0 | $1.5 | $24.3 | $1.5 |
| SG&A | $28.5 | $32.5 | $105.2 | $75.8 |
| Research and development | $36.4 | $49.5 | $126.5 | $157.6 |
| Operating loss | $(11.3) | $(77.4) | $(76.1) | $(228.8) |
| Net loss | $(14.2) | $(77.2) | $(82.9) | $(227.9) |
| GAAP loss per share, basic and diluted | $(0.37) | $(2.07) | $(2.19) | $(6.15) |
| Cash used in operating activities | $(7.3) | $(54.9) | $(31.2) | $(136.9) |
Q3 2018 revenue growth primarily reflects U.S. NERLYNX sales following its July 2017 launch, plus $10.0 million of license revenue. Nine-month license revenue came from three 2018 sublicense agreements. Q3 SG&A fell year over year, partly due to lower external legal and commercialization-support costs; nine-month SG&A increased with commercial staffing and launch costs. R&D decreased as clinical activity and stock-based compensation declined.
For Q3, the company reported non-GAAP adjusted net income of $6.6 million, or $0.17 per basic share, after excluding stock-based compensation. This measure is not a substitute for GAAP results; GAAP net loss was $14.2 million.
At September 30, 2018, cash and cash equivalents were $68.3 million and marketable securities were $59.7 million; working capital was $116.5 million. Total assets were $230.7 million, total liabilities $184.8 million, and stockholders’ equity $45.9 million. Cash, cash equivalents and restricted cash declined $13.4 million over the first nine months. Investing cash outflow largely reflects purchases of marketable securities.
Long-term debt was $125.0 million principal, reported net of financing costs and accretion at $121.1 million. The amended facility bears interest at the greater of 8.25% or prime plus 3.5%, requires interest-only payments through July 2020, and matures May 1, 2023. An additional $30.0 million may be drawn through December 31, 2018, subject to a revenue milestone and no default. The facility is secured by substantially all personal property other than intellectual property.
Material changes and business developments
- NERLYNX product revenue rose substantially from the comparable 2017 periods as U.S. commercialization progressed. Three customers accounted for 35%, 27% and 14% of Q3 total revenue, respectively.
- The European Commission authorized NERLYNX in September 2018 for a specified extended-adjuvant treatment of adult patients with early-stage hormone-receptor-positive, HER2-positive breast cancer within one year of prior trastuzumab-based therapy.
- In Q1, the company entered sublicenses covering China, Israel, Mexico and 21 Central and South American countries and territories. The $10.0 million Pint upfront payment was recognized in Q3 after required performance obligations were satisfied. The Pint agreement also provides for up to approximately $24.5 million of future milestones, plus potential royalties; timing is not estimable.
- Debt principal increased following the May 2018 amendment and refinancing. Interest expense was $3.5 million in Q3 and $7.2 million for the first nine months, versus none in the 2017 comparison periods.
Outlook, risks and contingencies
- Management expects continued net losses and negative operating cash flows during development and global commercialization. The filing states that significant historical losses raise substantial doubt about the company’s ability to continue as a going concern; continued operations depend on commercialization and obtaining additional capital.
- Management estimates R&D spending of approximately $120–$130 million over the next 12 months, excluding stock-based compensation. It expects SG&A to remain higher than 2017 as commercialization continues, while R&D was expected to decline slightly in 2018 as existing trials wind down.
- The company says available cash and marketable securities may not be sufficient for U.S. commercialization and an EU launch. Access to the additional $30 million debt tranche is conditional; future financing is uncertain and equity financing could dilute shareholders.
- Debt covenants include minimum revenue tests. A default could increase the applicable interest rate by 5 percentage points and permit remedies against collateral, including cash. The facility also has prepayment fees and a final payment equal to 7.5% of funded original principal.
- The company relies on third parties to manufacture and supply its product and candidates. NERLYNX is its only approved product, leaving it exposed to commercialization, customer concentration, manufacturing, regulatory and clinical-development risks.
- In the securities class action, the court dismissed claims against one executive and certain alleged statements; remaining claims were scheduled for trial on January 15, 2019. A separate defamation case was expected to go to trial in Q1 2019. The company cannot estimate potential losses, but says it does not expect the proceedings to materially affect results, cash flows or financial condition. It recorded an $11.2 million insurance receivable for expected reimbursement of certain class-action legal expenses. Derivative-action settlements in principle were awaiting court approval, with expected amounts covered by insurance.
- Management reported disclosure controls were effective as of September 30, 2018 and no material change in internal control over financial reporting during the quarter. The filing reported no material change to the previously disclosed risk factors.
Investor facts to verify
- NERLYNX prescription demand, net pricing, returns and rebates, and the concentration of revenue among a small number of customers.
- Cash consumption relative to the $127.9 million in cash, cash equivalents and marketable securities, and the timing and conditions for drawing the additional $30 million.
- Compliance with debt revenue covenants, interest-rate exposure, and the long-term repayment and final-payment obligations.
- EU launch progress and sublicense partner progress toward regulatory approval and commercialization, including achievement of potential milestones.
- Updates on the securities and defamation litigation, insurance recoveries and settlement approvals, as well as the company’s stated going-concern funding needs.