Sarepta Therapeutics, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Sarepta is a development-stage biopharmaceutical company focused on RNA-targeted therapeutics, primarily Duchenne muscular dystrophy (DMD) candidates. The filing covers the quarter and nine months ended September 30, 2015. Lead candidate eteplirsen, designed to skip exon 51, was accepted by the FDA for priority review on August 25, 2015, with a PDUFA action date of February 26, 2016. The company had no approved products or product sales.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Research contracts and grants revenue | $0 | $1.1 million | $0 | $9.7 million |
| Research and development expense | $36.7 million | $21.9 million | $105.0 million | $63.4 million |
| General and administrative expense | $15.1 million | $12.9 million | $50.7 million | $35.4 million |
| Operating loss | $51.8 million | $33.7 million | $155.7 million | $89.1 million |
| Net loss | $51.9 million | $29.2 million | $155.3 million | $91.4 million |
| Net loss per share | $1.25 | $0.71 | $3.75 | $2.31 |
| Operating cash flow | Not separately provided | Not separately provided | $(118.2) million | $(103.1) million |
Because the company had no revenue, gross and operating margins are not meaningful. Q3 operating expenses increased 49%, while the operating loss increased 54%. Nine-month research and development expense increased 66%, principally from higher clinical and manufacturing costs, increased trial enrollment, manufacturing activities and supply commitments. Eteplirsen-related research and development expense was $18.9 million in Q3 and $52.4 million year to date.
At September 30, 2015, cash and cash equivalents were $55.8 million, short-term investments were $44.1 million, and restricted cash and investments were $11.5 million, for total cash, cash equivalents and investments of $111.4 million. Total assets were $184.8 million versus $295.0 million at December 31, 2014. Working capital was $84.4 million, down from $210.9 million.
Total borrowings were $23.3 million, including a $20.0 million senior secured term loan with a net carrying value of approximately $19.3 million and other debt and notes payable. The term loan bears interest at 7.75%, requires interest-only payments through June 2016, and requires principal payments beginning July 2016. The credit agreement includes a minimum cash-collateral requirement and restrictive covenants.
Stock-based compensation was $5.7 million in Q3 and $25.8 million year to date, including $8.6 million related to the former CEO’s resignation. The accumulated deficit was $834.4 million at September 30, 2015.
Material changes versus the prior comparable period
- Government contract and grant revenue fell to zero because substantially all related development activities had been completed by December 31, 2014.
- Q3 net loss increased 78% and nine-month net loss increased 70%, driven primarily by higher research and development and general and administrative spending.
- Cash used in operations increased to $118.2 million from $103.1 million for the comparable nine-month period.
- Investing activities generated $78.2 million, primarily because available-for-sale securities matured; the prior-year period used $205.7 million for investing activities.
- The company entered into a $20.0 million senior secured term loan in June 2015, increasing long-term debt materially.
- General and administrative expense included $9.2 million of former CEO severance and increased spending for potential eteplirsen commercialization.
- The company’s common shares outstanding increased to 41.96 million at September 30, 2015 from 41.31 million at December 31, 2014; approximately 7.3 million additional shares were issuable under outstanding awards.
Guidance, outlook, risks and unusual items
On October 9, 2015, after quarter-end, Sarepta sold 3.25 million shares at $39.00 per share and received approximately $120.0 million in net proceeds. The underwriters also received a 30-day option for an additional 487,500 shares. Management stated that the September 30 liquidity, together with the offering proceeds, was expected to fund the current operational plan for the next twelve months, although additional financing may be required.
Management expects spending and capital requirements to increase as clinical development, manufacturing scale-up and potential commercialization of eteplirsen advance. The company had $132.7 million of non-cancelable purchase commitments, primarily related to DMD development programs, and up to $36.0 million of contingent development, royalty and commercial milestone obligations that were not recorded because the underlying milestones had not occurred.
- The principal business risk is regulatory uncertainty surrounding the eteplirsen NDA, including FDA interpretation of clinical, dystrophin, safety and natural-history data and the possibility of additional requests, delayed approval or rejection.
- Competition includes BioMarin’s drisapersen, whose advisory committee and PDUFA dates preceded those for eteplirsen.
- Patent interference proceedings involving Sarepta and Prosensa/BioMarin remain material. The PTAB issued a judgment against Sarepta in September 2015 involving a patent covering certain methods of using eteplirsen; Sarepta sought rehearing and expected to appeal.
- The company relies on third-party manufacturers and had no internal mid-to-large-scale manufacturing capability. Delays, quality problems or insufficient capacity could affect clinical trials or commercialization.
- Litigation included the appealed dismissal of the Corban securities case, the pending Kader securities case, stayed derivative actions, and an agreement in principle in the McDonald derivative suit that management did not expect to have a material financial impact.
- The former CEO resigned on March 31, 2015, and the company continued operating with an interim CEO while searching for a permanent CEO.
- Management reported that disclosure controls and procedures were effective as of September 30, 2015 and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Verify the FDA’s February 26, 2016 PDUFA outcome for eteplirsen and any related advisory committee, labeling or confirmatory-trial requirements.
- Reconcile post-quarter-end financing proceeds, share dilution and updated cash runway against the company’s continuing operating cash burn.
- Review the $132.7 million purchase commitments, restricted $10.7 million certificate of deposit supporting a manufacturing letter of credit, and potential milestone obligations.
- Monitor the MidCap credit agreement’s cash-collateral requirement, 7.75% interest rate, covenants and principal amortization beginning July 2016.
- Track PTAB and international patent proceedings involving eteplirsen and SRP-4053, including possible infringement exposure.
- Assess clinical data consistency, manufacturing scale-up, third-party supply capacity and competitive developments involving drisapersen and other DMD programs.