Ultragenyx Pharmaceutical Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Ultragenyx develops and commercializes treatments for rare and ultra-rare genetic diseases. It reported four FDA-approved therapies at quarter-end: Crysvita, Mepsevii, Dojolvi (approved June 30), and Crysvita for tumor-induced osteomalacia (approved June 18). Its clinical-stage gene-therapy programs include DTX301 and DTX401; it also has an option to acquire GeneTx, developing GTX-102 for Angelman syndrome.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $61.7 million | $24.1 million | $98.0 million | $42.3 million |
| Operating loss | $63.1 million | $112.5 million | $183.7 million | $211.7 million |
| Net income (loss) | $25.3 million | ($99.2 million) | ($93.7 million) | ($195.9 million) |
| Operating cash flow | Not separately stated | Not separately stated | ($7.8 million) | ($184.8 million) |
Q2 revenue rose 156%; first-half revenue rose 132%. Q2 collaboration and license revenue was $50.2 million, product sales were $8.1 million, and non-cash collaboration royalty revenue was $3.5 million. Product sales increased 65% in both Q2 and the first half.
Q2 net income was driven by a $95.2 million non-cash gain from the fair-value increase in the Arcturus investment; first-half gain was $102.9 million. These gains substantially affect reported earnings and do not reflect operating profitability. R&D expense was $80.7 million in Q2 and $193.7 million in the first half; SG&A was $42.3 million and $89.8 million, respectively.
Cash, cash equivalents, and available-for-sale investments totaled $817.5 million at June 30, 2020. Six-month investing cash outflow was $181.3 million and financing cash inflow was $91.4 million. Operating cash use was limited to $7.8 million, in part because of $134.9 million of contract-liability additions associated with Daiichi Sankyo. Management said existing resources were expected to fund projected operating requirements for at least 12 months, while also stating additional capital would likely be needed to execute longer-term plans.
No conventional borrowings are identified in the supplied filing text. Material obligations include a $325.8 million liability from the sale of future Crysvita royalties, $43.6 million of lease liabilities, and $61.9 million of disclosed lease and manufacturing/service contractual commitments. The royalty-sale liability accretes non-cash interest; expense was $8.4 million in Q2 and $16.5 million in the first half.
Material changes and unusual items
- Daiichi Sankyo agreement: The company recognized $18.9 million of Q2 and first-half revenue from its manufacturing-technology license and transfer arrangement. The filing describes a $183.8 million transaction price, with substantial revenue recognition expected over the technology-transfer service period, currently estimated to be substantially complete by the end of 2021.
- Arcturus investment: Fair value increased to $140.2 million at June 30 from $27.8 million at year-end 2019. The holding creates significant earnings volatility.
- Royalty monetization: The 2019 sale of European Crysvita royalty rights to RPI generated $314.2 million net proceeds, recorded as a liability; the company recognizes related European royalties as non-cash revenue and records accretion as non-cash interest expense.
- Cost of sales included a $4.6 million manufacturer credit for future inventory batches after quality issues. This contributed to a reported first-half cost-of-sales credit of $1.7 million. Management expects gross margin percentage to decline as inventory produced at fully reflected manufacturing costs replaces previously expensed pre-approval inventory.
- Equity issuance: The company issued 1.24 million shares to Daiichi Sankyo in Q1 and raised $20.4 million through its ATM program in the first half; the ATM facility was fully used by June 30.
Outlook, commentary, and risks
- Management expects annual losses to continue, with R&D and SG&A expenses expected to increase as programs advance and commercial infrastructure expands. No specific financial revenue or earnings guidance is provided in the filing text.
- COVID-19 disrupted clinical enrollment and dosing, regulatory interactions, manufacturing activities, and commercial patient identification. DTX301 fourth-cohort dosing was on hold; data were expected by year-end 2020. The company warned that further delays, supply constraints, lower revenue, and higher expenses were possible.
- Management expected DTX301 Phase 3 initiation in the first half of 2021, subject to FDA discussions, and anticipated further DTX401 data in the second half of 2020 with potential Phase 3 initiation in early 2021. GTX-102 preliminary data were expected in the first half of 2021, contingent on pandemic-related timing.
- Key risks include continued operating losses and possible financing needs; clinical, regulatory, and rare-disease patient-enrollment uncertainty; reliance on third-party and single-source manufacturing; product supply and quality issues; commercialization, pricing, and reimbursement uncertainty; and volatility in the Arcturus investment. Management reported disclosure controls were effective and no material legal proceedings were pending.
Important facts for investors to verify
- How much of reported revenue growth is recurring product or collaboration activity versus the Daiichi Sankyo license and non-cash royalty recognition.
- The sustainability of operating cash use, particularly the effect of Daiichi Sankyo contract-liability changes and future milestone or transfer-service revenue recognition.
- The Arcturus share price and resulting fair-value impact on earnings and the carrying value of the investment.
- COVID-19 effects on clinical timelines, commercial patient access, and drug-product or raw-material supply, including progress on DTX301 and DTX401.
- Manufacturing quality credits, future cost of sales, and the expected effect of fully costed inventory on gross margins.
- Future financing needs, dilution, and obligations associated with the royalty-sale liability, leases, and development agreements.