Business context and reporting period
Enanta Pharmaceuticals, Inc. is a biotechnology company whose revenue primarily comprises royalties from AbbVie’s hepatitis C (HCV) medicines containing Enanta-discovered protease inhibitors. The unaudited report covers the first quarter of fiscal 2019, the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017. Amounts below are in millions of dollars unless noted.
Enanta funds its wholly owned research programs in RSV, NASH, PBC and HBV. It has no internally developed products generating sales revenue.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $69.9 | $38.1 |
| Operating expenses | $42.0 | $23.7 |
| Operating income | $27.9 | $14.4 |
| Net income | $26.0 | $11.7 |
| Diluted earnings per share | $1.25 | $0.59 |
| Net cash from operating activities | $30.3 | $4.4 |
- Revenue rose 83%; royalties were $69.9 million versus $23.1 million. Prior-year revenue also included a $15.0 million milestone, the final milestone under the AbbVie agreement.
- Research and development expense increased to $34.9 million from $18.0 million; general and administrative expense rose to $7.2 million from $5.8 million. Approximate operating margin was 39.9%, compared with 37.7%; approximate net margin was 37.2%, compared with 30.7%.
- Cash, cash equivalents and marketable securities totaled $357.3 million at December 31, 2018. Cash, cash equivalents and restricted cash increased $10.5 million during the quarter. Investing activities used $20.9 million, mainly reflecting purchases and maturities of marketable securities.
- Total assets were $454.2 million and total liabilities were $27.4 million. Enanta reported no debt outstanding other than its capital lease obligation ($0.3 million). Current assets were $423.3 million against current liabilities of $22.6 million.
Material changes and management commentary
- Royalty revenue growth reflected increased royalties from AbbVie’s MAVYRET/MAVIRET HCV regimen; the prior comparable quarter included the one-time Japan approval milestone. Enanta says substantially all current royalty revenue derives from this regimen.
- R&D expense rose about 94%, primarily from increased clinical and preclinical activity and headcount. Liver disease R&D was $18.7 million and virology R&D was $16.1 million.
- Operating cash flow improved by $25.8 million year over year, reflecting higher net income and less cash used by changes in operating assets and liabilities.
- Enanta adopted ASC 606 on October 1, 2018 using the modified retrospective method; adoption did not affect its financial statements. Adoption of the restricted-cash cash-flow presentation standard increased the comparative 2017 cash-flow amounts by $0.6 million at the beginning and end of that period.
Outlook, risks and contingencies
- Management expects existing financial resources and continuing AbbVie royalties to fund wholly owned R&D for the foreseeable future, while cautioning that this forecast is subject to uncertainty. Enanta expects substantially greater R&D expense in fiscal 2019 and says continued net income is uncertain.
- Enanta expected top-line results from the EDP-938 Phase 2a RSV challenge study in mid-calendar 2019. EDP-305 had two ongoing Phase 2 studies: ARGON-1 in NASH and INTREPID in PBC. EDP-514 was selected as Enanta’s first HBV clinical candidate.
- Key business risk is dependence on AbbVie’s commercialization of MAVYRET/MAVIRET: Enanta does not control AbbVie’s sales, pricing, market access or resource decisions. Competition, reimbursement restrictions, pricing pressure, or falling HCV treatment demand could reduce royalties. No further milestones remain under the agreement.
- Other material risks include clinical, regulatory and safety uncertainty for early-stage candidates; competition; reliance on third-party manufacturers, CROs and collaborators; and intellectual-property risks. Enanta noted that some research and key manufacturing intermediates rely on third parties in China.
- The filing reports no threatened or pending litigation. An IRS examination for fiscal 2016 was being finalized after an immaterial proposed adjustment was paid; a Massachusetts tax examination for fiscal 2015 and 2016 had no proposed adjustments as of the filing. Unrecognized tax benefits were $2.0 million at quarter-end.
Most important facts for investors to verify
- AbbVie’s latest MAVYRET/MAVIRET sales, market share, pricing, reimbursement and royalty calculations, including the effect of annual royalty-tier resets.
- Whether EDP-938 results and the EDP-305 and EDP-514 development programs meet expected timelines and demonstrate acceptable safety and efficacy.
- Actual fiscal 2019 R&D spending, royalty trends and cash use relative to management’s statement that resources should support operations for the foreseeable future.
- Potential changes in HCV market size, competition, payer access, generic entry and the impact of AbbVie’s royalty-free licensing initiative in specified low- and middle-income markets.
- Resolution of the Massachusetts tax examination and any changes in uncertain tax positions or other commitments and contingencies.