BIOCRYST PHARMACEUTICALS INC quarterly report, Q3 FY2016

Business context and reporting period

BioCryst Pharmaceuticals, Inc. is a biotechnology company focused on developing small-molecule drugs, particularly for rare diseases. This Form 10-Q covers the quarter and nine months ended September 30, 2016; financial amounts below are in millions except per-share data. The company reported ongoing operating losses and stated that it expects to fund planned operations into 2018 using available liquidity.

Key financial results and liquidity

Q3 operating expenses were $17.0 million, including $14.1 million of research and development and $2.8 million of general and administrative expense. Nine-month operating expenses were $57.8 million. No product sales were recorded in 2016, compared with $5.7 million in Q3 2015 and $6.2 million in the first nine months of 2015. Royalty revenue was $3.5 million in Q3 and $6.0 million year to date in 2016.

Cash, restricted cash and investments totaled $68.7 million at September 30, 2016. Debt included $28.1 million of current non-recourse notes payable and $22.7 million carrying value of the senior credit facility; the facility had $23.0 million principal outstanding. Management forecast 2016 operating cash usage of $55–$75 million and operating expenses of $68–$80 million, excluding equity-based compensation from the expense forecast. The cash forecast excludes hedge collateral and other non-routine cash flows.

Material changes versus the prior comparable period

• Nine-month revenue fell $26.3 million, primarily because 2015 included revenue recognized from the SUL RAPIVAB license upfront payment and product sales, while 2016 did not; lower galidesivir-related collaboration revenue also contributed.
• Q3 revenue declined $3.2 million year over year as product and collaboration revenue decreased, partly offset by higher peramivir royalties. Shionogi’s Japanese government stockpiling sale contributed $3.5 million of Q3 royalties; those proceeds were available for general corporate use.
• Q3 R&D expense fell $6.0 million year over year, primarily following the discontinuation of avoralstat development. Nine-month R&D expense decreased $4.9 million; lower avoralstat and galidesivir spending was partly offset by higher BCX7353 and other program costs.
• Nine-month net loss increased $25.8 million, despite lower operating expenses, reflecting the large revenue decline and a $6.6 million foreign-currency-derivative loss, compared with a $0.9 million gain in the 2015 period. The derivative also increased quarterly earnings volatility.
• Operating cash flow shifted from $1.7 million provided to $47.6 million used. The cash-flow statement includes a $12.1 million outflow from accounts payable and accrued expenses. Cash and cash equivalents rose $6.5 million, supported by $22.7 million of net proceeds from the new credit facility and investment maturities.

Outlook, commentary, risks and unusual items

• Management said current liquidity was expected to support planned operations into 2018, but operations substantially beyond 2017 would require some combination of additional government funding or procurement contracts, licensing or milestone proceeds, new capital, regulatory approvals, spending reductions or restructuring. The company has incurred losses and negative operating cash flows since inception.
• On September 23, 2016, BioCryst closed a fully funded $23.0 million senior credit facility bearing interest at LIBOR, subject to a 0.5% floor, plus 8%. The rate was 8.5% at quarter end. Payments are interest-only through fiscal 2017, followed by scheduled principal and interest payments; the agreement includes a 5% final payment fee, prepayment fees and restrictive covenants.
• The PhaRMA Notes, with $30.0 million principal and a 14% rate, remained in default at September 30, 2016 after an interest shortfall in 2014. They are obligations of Royalty Sub and are non-recourse to BioCryst apart from the pledged equity interest. Noteholders may pursue acceleration or foreclosure, which could eliminate BioCryst’s potential future benefit from related royalties.
• The yen-dollar hedge generated a reported $6.6 million net loss for the first nine months of 2016. BioCryst had posted $2.2 million of collateral and could be required to post up to $7.8 million; conditional annual premiums of about $2.0 million may be due from 2017 through 2020.
• Development updates included initiation of the Phase 2 APeX-1 trial of oral BCX7353 for hereditary angioedema in August 2016. Galidesivir remained supported by BARDA and NIAID cost-plus-fixed-fee contracts, which the government may terminate. Management also cited encouraging nonclinical Zika findings presented on October 29, 2016; these were preclinical results, not evidence of clinical efficacy.
• Key risks include clinical and regulatory failure, dependence on government contract reimbursement and partners, single-source manufacturing, need for further financing and potential dilution, competition, and uncertainty in product demand and royalties. The company also retains RAPIVAB post-marketing and regulatory responsibilities despite the SUL commercialization arrangement.
• Management reported that disclosure controls and procedures were effective as of September 30, 2016, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

• Whether the stated liquidity runway into 2018 remains achievable against actual cash use, government reimbursements and development spending.
• Progress, enrollment and interim results from BCX7353’s Phase 2 APeX-1 trial, and the status of galidesivir government funding and development.
• Performance of SUL and other peramivir partners, future royalty receipts, and any regulatory milestones or government stockpiling orders.
• Status and potential remedies relating to the defaulted PhaRMA Notes, together with senior credit facility covenants, repayment costs and hedge collateral or premium requirements.
• Potential impact of additional financing or equity issuance, and any material changes to the company’s operating-expense and operating-cash guidance.