Enanta Pharmaceuticals, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports unaudited fourth-quarter results for the three months ended September 30, 2018; this is an annual filing, not a standalone quarterly filing.
Business context
Enanta is a biotechnology company developing small-molecule medicines for viral infections and liver diseases. Its principal revenue source is royalties and milestone payments under its AbbVie collaboration for HCV treatments containing glecaprevir or paritaprevir. The company’s wholly owned pipeline focuses on RSV, NASH, PBC, and HBV; it has no independently commercialized products.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $206.6 million | $102.8 million |
| Royalties | $191.6 million | $37.8 million |
| Milestone revenue | $15.0 million | $65.0 million |
| Research and development expense | $94.9 million | $57.5 million |
| General and administrative expense | $23.4 million | $20.7 million |
| Operating income | $88.3 million | $24.6 million |
| Net income | $72.0 million | $17.7 million |
| Diluted earnings per share | $3.48 | $0.91 |
| Cash, cash equivalents, and marketable securities at year-end | $325.1 million | $293.7 million |
| Working capital at year-end | $364.4 million | $216.8 million |
FY2018 operating margin was approximately 42.7% and net margin approximately 34.8%, versus approximately 23.9% and 17.2%, respectively, in FY2017. These calculations use reported revenue and income figures.
Cash flow from operations was $29.2 million, compared with $52.7 million in FY2017. Investing activities used $35.4 million and financing activities provided $4.4 million. The company reported no debt other than a $0.4 million capital lease obligation; it also carried $1.6 million of Series 1 nonconvertible preferred stock as a liability. Contractual lease and capital-lease commitments totaled $11.9 million.
For Q4 FY2018, revenue was $67.2 million and net income was $27.4 million. Q4 FY2017 revenue was $75.9 million and net income was $36.5 million; that prior-year quarter included $65.0 million of milestone revenue, so the quarter-on-quarter comparison is affected by milestone timing.
Material changes versus FY2017
- Revenue more than doubled, mainly because royalties rose by $153.8 million following the launch and increased sales of MAVYRET/MAVIRET. FY2018 royalties were substantially all attributable to glecaprevir-containing treatment.
- Milestone revenue fell by $50.0 million: FY2018 included the final $15.0 million Japan approval milestone, compared with $65.0 million for U.S. and EU approvals in FY2017.
- R&D expense increased 65% to $94.9 million as clinical and preclinical work advanced, including two Phase 2 EDP-305 studies and Phase 1 work on EDP-938.
- Operating income and net income increased substantially. Cash from operations declined, principally due to a $56.6 million increase in accounts receivable from AbbVie and higher tax payments.
- The company’s 2018 effective tax rate was 22.7%, down from 34.3%; the Tax Cuts and Jobs Act lowered the federal corporate rate and led to a $3.8 million reduction in deferred tax assets.
Outlook, risks, and unusual items
- Management expected existing resources and future AbbVie royalties to fund operations for the foreseeable future, including at least the next 12 months. It expected substantially higher R&D expense in FY2019 and stated that FY2019 revenue was expected to come from AbbVie. No specific revenue or earnings guidance was provided.
- Pipeline progress: EDP-938 completed Phase 1 and entered a Phase 2a RSV challenge study in October 2018; EDP-305 entered Phase 2 studies in NASH and PBC; EDP-514 was selected as an HBV clinical candidate in November 2018, with Phase 1a/b planned for 2019. EDP-305 received FDA Fast Track designation for NASH with fibrosis and for PBC.
- Results remain highly dependent on AbbVie’s commercialization of MAVYRET/MAVIRET. HCV market contraction, price and reimbursement pressure, competition, generic entry, and AbbVie’s business decisions could reduce royalty revenue. Royalty tiers reset annually; Enanta said its calendar-year 2018 cumulative sales allocation reached the 17% tier.
- Key development risks include clinical failure or delay, safety findings, regulatory uncertainty, competition, intellectual-property challenges, and dependence on third-party manufacturers and research providers, including suppliers in China. Enanta cautioned that future profitability is uncertain despite recent net income.
- No material legal proceedings were reported. The company reported effective disclosure controls and internal control over financial reporting, and received an unqualified audit opinion. A potential $2.0 million preferred-stock payment upon a qualifying merger or sale is contingent and excluded from contractual-obligation totals.
Most important facts for investors to verify
- AbbVie’s subsequent MAVYRET/MAVIRET sales, pricing, market share, reimbursement access, and the resulting royalty calculations and tier resets.
- Whether reported receivables from AbbVie convert to cash on expected timing; year-end accounts receivable was $67.2 million.
- FY2019 R&D spending and cash use as the EDP-305, EDP-938, and EDP-514 programs advance, and management’s liquidity assumptions.
- Clinical-trial enrollment, safety, efficacy, and timing updates for the Phase 2 programs, plus the planned HBV clinical start.
- The effect of the Tax Act and any later tax guidance, including the realizability of deferred tax assets and outstanding uncertain tax positions.