Sarepta Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 7, 2014. Sarepta is a clinical-stage biopharmaceutical company developing RNA-based therapeutics, primarily eteplirsen and other Duchenne muscular dystrophy candidates. The company had no material product-sale revenue.
Financial position and results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2.6 million | $3.0 million | $8.7 million | $7.4 million |
| Research and development expense | $20.6 million | $13.0 million | $41.5 million | $26.7 million |
| General and administrative expense | $12.2 million | $7.1 million | $22.5 million | $13.2 million |
| Operating loss | $(30.3) million | $(17.1) million | $(55.4) million | $(32.5) million |
| Net loss | $(33.9) million | $(19.1) million | $(62.1) million | $(61.1) million |
| Basic and diluted loss per share | $(0.85) | $(0.60) | $(1.60) | $(1.92) |
| Operating cash flow | Not separately reported for the quarter | $(67.8) million | $(27.0) million |
Revenue was generated primarily from government research contracts and grants. The company reported no meaningful product revenue and remained loss-making. Based on reported revenue and operating loss, approximate operating margins were negative 1,172% for the quarter and negative 639% for the six-month period; conventional product margins are not meaningful.
At June 30, 2014, cash and cash equivalents were $102.8 million, short-term investments were $176.8 million, and restricted investments were $4.6 million, for total cash, cash equivalents and investments of approximately $284.2 million. Sarepta stated that this balance was sufficient to fund its current operating plan for the next twelve months. Total debt was approximately $1.6 million, including $96 thousand current debt and $1.5 million long-term debt. Deferred revenue was $3.3 million, and the accumulated deficit was $605.4 million.
Material changes versus the prior comparable period
- Second-quarter revenue declined 12% to $2.6 million, principally because the August 2012 intramuscular contract had ended and revenue under the Marburg-related contract declined, partly offset by a $0.9 million reimbursement from Carolinas Medical Center.
- Six-month revenue increased 17% to $8.7 million, driven by DMD-related activities, Marburg activities, the Carolinas Medical Center agreement, and the Children’s National Medical Center agreement.
- Quarterly research and development expense increased 59%, primarily from higher headcount, external DMD program spending, regulatory and manufacturing fees, and facility costs. Six-month R&D expense increased 55%.
- Quarterly general and administrative expense increased 73%, including higher legal, personnel, professional-services, and depreciation costs. Six-month G&A expense increased 71%.
- Six-month operating cash use increased to $67.8 million from $27.0 million, reflecting higher operating losses and unfavorable working-capital changes.
- The six-month net loss increased modestly despite substantially higher operating expenses because the loss from warrant revaluation fell to $7.0 million from $28.9 million in the prior year.
- On April 29, 2014, Sarepta sold 2.65 million common shares for net proceeds of approximately $94.5 million, increasing shares outstanding and creating potential dilution.
Guidance, outlook, risks, and unusual items
- Management planned to submit an NDA for eteplirsen by the end of 2014 and expected to begin additional eteplirsen and follow-on exon-skipping studies, subject to FDA feedback and execution.
- The Department of Defense contract supporting the Marburg program expired in July 2014. Only contract-finalization revenue, if any, was expected thereafter; Sarepta was evaluating alternative funding and development options.
- Management expected continued increases in research, development, manufacturing, commercialization, and regulatory spending and stated that additional financing might be required. Future financing could dilute existing stockholders.
- On July 15, 2014, Sarepta completed the acquisition of property and equipment in Andover, Massachusetts for approximately $15.0 million. Approximately $10.0 million was paid at closing, with the remaining $5.0 million payable in installments through January 2016.
- The company had approximately $181.3 million of reported contractual obligations, including $150.8 million of purchase commitments, $28.3 million of operating leases, and $2.2 million of long-term debt obligations.
- A purported securities class action concerning disclosures related to eteplirsen was pending. The filing stated that the case was at an early stage and that the potential outcome and financial impact could not be assessed.
- Patent interferences involving Sarepta and Prosensa relating to eteplirsen and SRP-4053 created intellectual-property uncertainty and could affect future exclusivity or commercialization.
- The FDA had questioned the evidentiary support for eteplirsen, including the use of dystrophin as a biomarker and the six-minute walk test. Week-144 data showed an approximately 8.5% decline in six-minute walk performance from baseline.
- Liability-classified warrants produced a $3.8 million non-cash valuation loss in the quarter and remained sensitive to Sarepta’s stock price and valuation assumptions.
- Management reported that disclosure controls were effective as of June 30, 2014 and stated that controls addressing a previously identified material weakness related to significant research and development contracts had been implemented during the first half of 2014.
Important facts for investors to verify
- Progress, timing, and FDA acceptance of the planned eteplirsen NDA and confirmatory trials.
- Whether the expired Marburg government contract is replaced by new government funding or other financing.
- Cash-burn rates, remaining liquidity, and the timing and terms of any future capital raises.
- Resolution and potential financial exposure from the securities litigation and Prosensa-related patent proceedings.
- Manufacturing scale-up, supply commitments, and the financial impact of the Andover property acquisition.
- Whether the remediation of the prior internal-control material weakness remains effective in subsequent filings.