Sarepta Therapeutics, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Sarepta is a commercial-stage biopharmaceutical company developing RNA-targeted therapeutics, gene therapies and other genetic medicines for rare diseases. The filing covers the fiscal year ended December 31, 2018. EXONDYS 51 (eteplirsen), approved under the FDA accelerated-approval pathway in 2016, was the company’s only commercial product and generated substantially all revenue.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $301.0 million | $154.6 million | +95% |
| Cost of sales | $34.2 million | $7.4 million | +365% |
| Gross profit | $266.8 million | $147.2 million | +81% |
| Approximate gross margin | 88.6% | 95.2% | Down 6.6 percentage points |
| Research and development | $401.8 million | $166.7 million | +141% |
| Selling, general and administrative | $207.8 million | $122.7 million | +69% |
| Operating loss | $(343.6) million | $(171.6) million | Loss increased 100% |
| Net loss | $(361.9) million | $(50.7) million | Loss increased $311.2 million |
| Basic and diluted loss per share | $(5.46) | $(0.86) | $(4.60) |
| Cash used in operating activities | $(388.7) million | $(232.0) million | Use increased 68% |
Approximate 2018 operating margin was negative 114.2% and approximate net margin was negative 120.2%. Fourth-quarter 2018 revenue was $84.4 million, compared with $57.3 million in the fourth quarter of 2017; fourth-quarter net loss was $140.9 million, compared with $24.0 million in the prior-year quarter.
- At December 31, 2018, cash and cash equivalents were $370.8 million, short-term investments were $803.1 million and restricted investments were $1.0 million, for total cash, cash equivalents and investments of approximately $1.175 billion.
- Working capital was $1.252 billion, compared with $1.140 billion at year-end 2017. Management stated that available liquidity was sufficient to fund the current operating plan for at least the next twelve months.
- Total debt was $420.6 million, consisting primarily of the 1.50% convertible senior notes due 2024 with $570.0 million principal outstanding and a $420.6 million carrying value.
- Cash used in investing activities was $370.5 million, primarily reflecting purchases of marketable securities and $61.2 million of property and equipment. Financing activities provided $530.2 million, including $513.4 million of net proceeds from a November 2018 equity offering.
Material changes versus the prior comparable period
- EXONDYS 51 net product revenue increased $146.5 million, or 95%, to $301.0 million, primarily due to increased U.S. demand.
- Cost of sales increased substantially as commercial product volume grew, BioMarin royalties increased to $15.1 million, and $4.9 million of inventory costs were recognized for batches that did not meet quality specifications.
- Research and development expense increased $235.1 million. Major drivers included $85.0 million of Myonexus payments, $44.8 million of Lysogene-related payments and $8.0 million related to the Lacerta Pompe program, as well as higher clinical, manufacturing, personnel and preclinical costs.
- Selling, general and administrative expense increased $85.1 million due primarily to global expansion, increased headcount, professional services and stock-based compensation.
- 2017 included a nonrecurring $125.0 million gain from selling a Priority Review Voucher; no comparable gain occurred in 2018.
- In November 2018, Sarepta raised approximately $513.4 million net through an underwritten equity offering, increasing shares outstanding to approximately 71.1 million at year-end.
- Sarepta terminated its MidCap term loan and revolving credit facilities in September 2018 and repaid the associated balances. The company also repaid its mortgage loans following the sale of its Corvallis property.
- The company expanded its pipeline and manufacturing commitments through agreements with Myonexus, Lysogene, Lacerta, Nationwide, Brammer, Paragon and Aldevron. Total research and development expense included $142.4 million of upfront and milestone payments.
Guidance, outlook, commentary and risks
- Management expected continued business growth from EXONDYS 51 but also expected substantial operating losses and negative operating cash flow as commercialization, research and development, manufacturing and global expansion continued.
- Golodirsen’s rolling NDA was completed in December 2018, accepted for priority review, and assigned an FDA action date of August 19, 2019. The company expected to complete the open-label golodirsen study in 2019.
- Sarepta expected to submit an NDA for casimersen in 2019 if interim dystrophin results from the ESSENCE trial were positive, complete the first-in-human SRP-5051 trial, and advance confirmatory testing of the SRP-9001 micro-dystrophin program.
- The company planned to seek additional EMA scientific advice after the European Commission adopted a negative opinion on eteplirsen in December 2018. EXONDYS 51 was approved for sale in the U.S. and Israel, but not broadly outside those markets.
- The company relies on a limited number of third-party manufacturers and does not have internal large-scale GMP manufacturing capacity. Manufacturing scale-up, quality failures, supply interruptions and regulatory inspections could affect product availability and development timelines.
- EXONDYS 51’s continued accelerated approval depends on post-marketing requirements, including confirmatory studies verifying clinical benefit. Failure to provide satisfactory evidence could result in labeling changes, restrictions or withdrawal of approval.
- Coverage and reimbursement varied widely among payors, creating uncertainty around demand, pricing and collections. Three customers accounted for 42%, 38% and 18% of 2018 net product revenue, indicating significant customer concentration.
- Contractual obligations totaled approximately $1.156 billion, including $620.2 million of convertible debt payments, $77.7 million of lease obligations and $458.4 million of manufacturing commitments. Additional contingent milestone obligations could reach $378.8 million.
- In February 2019, after year-end, Sarepta exercised its option to acquire Myonexus for $165.0 million and could owe up to $200.0 million in additional milestone payments.
- The micro-dystrophin trial experienced an FDA clinical hold in 2018 due to trace DNA fragments in research-grade plasmid; the hold was lifted in September 2018 after corrective action.
Most important facts for investors to verify
- Whether EXONDYS 51 revenue growth continues and whether gross margin stabilizes as manufacturing costs, royalties and inventory charges increase.
- The timing and outcome of FDA action on golodirsen and the potential casimersen NDA, including the clinical evidence supporting accelerated approval.
- Results of EXONDYS 51 confirmatory trials and the risk to continued accelerated approval if clinical benefit is not verified.
- The cash-burn rate, funding runway and potential need for additional equity or debt financing despite approximately $1.175 billion of cash, cash equivalents and investments at year-end.
- Execution of manufacturing capacity arrangements and the company’s exposure to third-party supply, quality and GMP risks.
- The financial impact and integration risk associated with the Myonexus acquisition and other strategic collaborations.
- Customer concentration, payor coverage, rebates and reserves for product sales, including the increase in product-related reserves from $8.6 million to $28.5 million.
- Potential dilution and repayment obligations associated with the $570.0 million principal amount of 2024 convertible notes and outstanding equity awards.