Sarepta Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2015, filed August 6, 2015. Sarepta is a pre-commercial biopharmaceutical company developing RNA-targeted therapeutics, primarily Duchenne muscular dystrophy candidates, including eteplirsen. The company has generated no product-sales revenue and completed substantially all development activities under its U.S. government contracts by December 31, 2014.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $29.2 million | $68.3 million |
| General and administrative expense | $12.9 million | $35.6 million |
| Operating loss | $42.1 million | $104.0 million |
| Net loss | $41.9 million | $103.4 million |
| Net loss per share | $1.01 | $2.50 |
| Cash used in operating activities | Not separately provided | $71.9 million |
Operating and net margins are not meaningful because revenue was zero. As of June 30, 2015, cash and cash equivalents were $69.5 million, short-term investments were $87.3 million, restricted cash and investments were $0.8 million, and total liquidity was $157.7 million. Working capital was $143.4 million.
Total borrowings were $25.7 million, including $20.8 million of long-term debt and $4.9 million of notes payable. In June 2015, Sarepta entered into a $20.0 million senior secured term loan bearing interest at 7.75%; an additional $20.0 million may become available upon FDA acceptance of the eteplirsen NDA. The agreement includes collateral, cash-balance, covenant and default provisions.
Material changes versus the prior comparable period
- Revenue declined to zero from $2.6 million in the second quarter and $8.7 million in the first six months of 2014 as government contract activities were completed.
- Research and development expense increased 41% to $29.2 million for the quarter and 65% to $68.3 million for the six months, primarily due to clinical enrollment, manufacturing activity, raw-material purchases, headcount and facility growth.
- General and administrative expense increased 6% for the quarter and 58% for the six months. The six-month increase included $9.2 million of former CEO severance expense, including stock-based compensation, as well as higher legal and personnel costs.
- Six-month net loss increased 66% to $103.4 million, while loss per share increased to $2.50 from $1.60.
- Cash used in operations increased to $71.9 million from $67.8 million. Investing activities provided $47.2 million, primarily from maturities of available-for-sale securities, compared with $185.2 million used in the prior-year period. Financing activities provided $20.7 million, primarily from the new term loan, versus $98.7 million in 2014 equity-related proceeds.
- Cash, cash equivalents and investments declined 25% from December 31, 2014, while total borrowings increased from $6.3 million to $25.7 million.
- Stock-based compensation increased to $20.1 million for the six months from $9.9 million, including $8.6 million associated with the former CEO’s resignation. The prior-year period included non-cash warrant-valuation losses of $7.0 million; no such losses were recorded in 2015 because the warrants had been exercised or expired.
Guidance, outlook, risks and unusual items
- Management stated that available cash, cash equivalents and investments were sufficient to fund the current operational plan for the next twelve months, but expected to seek additional financing, government funding, collaborations or licensing transactions.
- Sarepta filed the eteplirsen NDA at the end of June 2015. FDA acceptance, review, approval, clinical data interpretation and timing remained uncertain. FDA requests concerning eteplirsen data and exon 53 preclinical safety information could delay development or regulatory milestones.
- The company expected expenses and capital needs to increase as it advanced clinical trials, manufacturing scale-up and potential commercialization activities. It had no internal mid-to-large-scale manufacturing capacity and relied on third-party manufacturers.
- Non-cancelable contractual obligations totaled $169.6 million, including $112.5 million of purchase commitments, $27.0 million of lease obligations, $25.1 million of long-term debt obligations and $5.0 million of notes payable. Up to $36.0 million of additional development and commercial milestone payments could become payable upon specified achievements.
- Pending or stayed securities and derivative litigation related primarily to disclosures concerning eteplirsen. The company stated that an agreement in principle in one derivative action was not expected to have a material financial impact, but other matters remained unresolved.
- Key risks included failure or delay of regulatory approval, inconsistent clinical results, manufacturing and supply constraints, patent interferences and infringement claims, competition, need for additional capital, dilution, management transition following the former CEO’s resignation, and continued operating losses.
Most important facts for investors to verify
- FDA acceptance, review status and subsequent regulatory decisions regarding the eteplirsen NDA.
- Clinical efficacy and safety data, including confirmatory-study progress and FDA-requested analyses.
- Cash burn, remaining liquidity, financing requirements and compliance with the MidCap loan’s cash-balance and other covenants.
- Execution and cost of third-party manufacturing scale-up and associated purchase commitments.
- Status and potential exposure from securities, derivative and intellectual-property litigation.
- Timing and terms of any equity, debt, collaboration or licensing transactions and their potential dilution or strategic effects.