Neurocrine Biosciences, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Amounts are in U.S. dollars. Neurocrine is a clinical-stage drug developer with no product-sales revenue. Its lead programs were partnered elagolix (AbbVie) and its VMAT2 inhibitor NBI-98854.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $19.8 million | $0 |
| Research and development expense | $24.4 million | $12.2 million | $59.7 million | $30.9 million |
| General and administrative expense | $11.5 million | $4.7 million | $23.5 million | $13.0 million |
| Operating loss | $35.8 million | $16.9 million | $63.5 million | $43.9 million |
| Net loss | $34.4 million | $15.9 million | $59.6 million | $41.1 million |
| Basic and diluted loss per share | $0.40 | $0.21 | $0.71 | $0.56 |
License revenue was recognized under the Mitsubishi Tanabe agreement; there was no revenue in Q3. Gross margin is not meaningful because the company had no product sales.
- Cash and investments: $478.8 million at September 30, 2015, comprising $66.4 million cash and cash equivalents and $412.5 million investments, versus $231.3 million at year-end 2014.
- Liquidity: Current assets were $382.8 million and current liabilities $19.8 million. Total liabilities were $45.5 million. The filing reports no debt balance and no off-balance-sheet arrangements.
- Cash flows, nine months: Operating cash used was $22.8 million (versus $31.8 million in 2014); investing cash used was $217.9 million; financing cash provided was $276.0 million. Financing primarily reflects the February 2015 stock offering.
- Equity: The February offering of 8.0 million shares generated approximately $270.7 million net proceeds. Outstanding shares were 85.9 million at September 30. Accumulated deficit was $885.9 million.
Material changes versus comparable periods
- Q3 operating expenses more than doubled year over year, largely reflecting the VMAT2 Phase III program, increased R&D and administrative staffing, and higher share-based compensation.
- Nine-month R&D expense increased $28.8 million, principally from VMAT2 clinical development; G&A increased $10.5 million. The nine-month net loss widened despite $19.8 million in license revenue.
- Q3 share-based compensation expense was $13.9 million versus $2.7 million a year earlier. The company recorded about $8.3 million of performance-based award expense as achievement became probable, mainly following Kinect 3 Phase III results.
- Cash and investments increased substantially, primarily due to the 2015 public offering. Operating cash use was lower year over year, partly reflecting the Mitsubishi Tanabe upfront payment.
Outlook, commentary, and risks
- Management expected existing capital resources, investment income, and anticipated alliance payments to fund current projected needs for at least the next 12 months, while cautioning that resources might not support all planned R&D. It expected operating cash-flow losses for the foreseeable future and did not expect 2015 profitability.
- The Mitsubishi Tanabe agreement provided a $30 million upfront payment, up to $85 million in event-based payments, and potential royalties. Neurocrine recognized $19.8 million of the upfront fee and deferred $10.2 million for continuing obligations. A Huntington’s chorea trial could cost approximately $12 million if requested by Mitsubishi Tanabe.
- AbbVie was responsible for third-party development and commercialization costs for elagolix. Up to $500 million in future event-based payments remained, but none then met the accounting definition of a milestone. Future royalties depend on product sales.
- The company said it had suspended two planned NBI-77860 CRF-antagonist studies after previously unobserved preclinical findings. Key risks include clinical failure or delay, regulatory and manufacturing challenges, reliance on collaborators, need for future funding, and potential dilution or program cuts if financing is inadequate.
- Management reported effective disclosure controls and no significant change in internal control over financial reporting during the quarter. Adoption of the new revenue standard was expected in 2018; the company was assessing the adoption method and impact.
Important facts for investors to verify
- Subsequent clinical, regulatory, and NDA developments for NBI-98854 and the status of its VMAT2 programs.
- Timing and conditions for Mitsubishi Tanabe payments, deferred revenue recognition, potential trial costs, and royalties.
- Progress and partner execution under the AbbVie collaboration; the remaining $500 million is contingent and not recognized as milestone revenue.
- Cash burn relative to the stated 12-month funding outlook, and any subsequent financing, dilution, or changes to planned R&D.
- Impact of the CRF study suspension and the significant performance-based compensation expense on future reported results.