Neurocrine Biosciences, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Neurocrine develops and commercializes treatments for neurological and endocrine disorders. Its lead U.S. product is INGREZZA for tardive dyskinesia (TD); AbbVie markets ORILISSA for endometriosis pain under a collaboration.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $151.8 | $60.8 | $319.7 | $67.1 |
| INGREZZA product sales, net | $111.3 | $45.8 | $279.3 | $52.1 |
| Collaboration revenue | $40.5 | $15.0 | $40.5 | $15.0 |
| Operating expenses | $97.4 | $66.8 | $304.7 | $210.3 |
| Operating income (loss) | $54.3 | $(6.0) | $15.0 | $(143.2) |
| Net income (loss) | $50.8 | $(11.1) | $3.0 | $(149.4) |
| Diluted earnings (loss) per share | $0.52 | $(0.13) | $0.03 | $(1.70) |
- Revenue increased substantially as INGREZZA sales expanded. Q3 collaboration revenue included a $40.0 million milestone after FDA approval of AbbVie’s ORILISSA on July 24, 2018, and $0.5 million of ORILISSA royalties.
- Operating margin was approximately 35.8% in Q3 and 4.7% for the first nine months of 2018. These results include the collaboration milestone and should not be read as a steady-state margin.
- Cost of sales was $1.6 million in Q3 and $3.4 million for the nine months. Management cautioned that costs and product margins would be affected beginning in Q4 by INGREZZA API manufactured after FDA approval; much of the API in product sold to date had been expensed as R&D before approval.
- R&D expense was $35.5 million in Q3 and $121.4 million for the nine months; SG&A was $60.4 million and $180.0 million, respectively. Increased pipeline activity, personnel, and INGREZZA commercialization contributed to higher expenses. Nine-month 2018 share-based compensation included a non-recurring $7.7 million charge for modifying certain awards.
Cash, liquidity and debt
- Cash and cash equivalents were $195.7 million; restricted cash was $5.5 million. Available-for-sale investments totaled $624.9 million. Cash, restricted cash and investments together were approximately $826.1 million at September 30, 2018, versus $767.8 million at December 31, 2017.
- Operating cash flow was positive $50.9 million for the first nine months, compared with $134.9 million used in the prior-year period. Investing activities used $136.7 million; financing provided $27.7 million, mainly from stock issuance and option exercises. Cash, cash equivalents and restricted cash decreased $58.0 million during the period.
- Total assets were $933.7 million and stockholders’ equity was $447.5 million. Current assets were $714.4 million and current liabilities $456.4 million; current liabilities included $383.6 million of net carrying value for the convertible notes.
- The 2.25% convertible senior notes have $517.5 million principal and mature in 2024. Their conversion condition was triggered at quarter-end, making holders eligible to convert from October 1 through December 31, 2018; accordingly, the notes were classified as current. The company said it intended to use combination settlement, generally paying principal in cash and settling any excess conversion value in shares or cash at its option.
Changes, outlook and notable items
- Compared with the first nine months of 2017, Neurocrine moved from a $149.4 million net loss to $3.0 million net income and from negative to positive operating cash flow. Results reflect higher INGREZZA sales and the ORILISSA approval milestone, partly offset by increased commercialization and R&D costs.
- Management stated that existing capital resources, investment income and expected strategic-alliance payments should fund current and projected requirements for at least 12 months. It also cautioned that future funding needs depend on commercialization and development spending, and that additional financing may not be available on acceptable terms.
- Management expects operating results and profitability to fluctuate and did not provide specific revenue or earnings guidance in the supplied filing text. It noted higher INGREZZA cost of sales was expected from Q4 2018.
- Pipeline programs included opicapone for Parkinson’s disease, valbenazine for Tourette syndrome, elagolix for uterine fibroids with AbbVie, and NBI-74788 for congenital adrenal hyperplasia. The FDA indicated that an additional Phase III study was not requested for opicapone; Neurocrine paid BIAL a $10 million milestone in Q1 2018.
- The Mount Sinai license-agreement lawsuit was agreed to be dismissed in its entirety in Q3. The company reported no other proceedings it believed would have a material adverse effect and no off-balance-sheet arrangements.
- Risks highlighted include INGREZZA commercialization, reimbursement and market acceptance; reliance on single-source suppliers and contract manufacturing; clinical and regulatory uncertainty; dependence on collaborators; and the notes’ potential cash settlement and dilution. The company also cited pricing and healthcare-policy risks.
- Neurocrine adopted the revenue standard Topic 606 in January 2018 with no material change to revenue recognition. It expected the forthcoming lease standard to materially affect the balance sheet through recognition of lease assets and liabilities.
Important facts for investors to verify
- Whether INGREZZA sales growth and patient access continue, and how reimbursement, competition and product supply affect demand.
- The amount and timing of post-approval INGREZZA manufacturing costs and the resulting product gross margin.
- Whether ORILISSA generates additional royalties or milestones, and the status of AbbVie’s development and commercialization plans.
- Whether holders convert the notes and the resulting cash requirement, share dilution, and subsequent balance-sheet classification.
- Whether cash resources remain sufficient as commercial, pipeline, facility and lease-related spending increases.