Neurocrine Biosciences, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; balance-sheet figures are as of June 30, 2014. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Neurocrine is a clinical-stage drug developer and reported no product sales. Its two lead late-stage programs were elagolix, partnered with AbbVie for women’s health, and its wholly owned VMAT2 inhibitor for movement disorders. The company said it planned to begin Phase III development of the VMAT2 program later in 2014.
Financial highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0.73 million | $0 | $1.46 million |
| Research and development expense | $10.16 million | $10.53 million | $18.73 million | $20.84 million |
| General and administrative expense | $4.20 million | $3.37 million | $8.35 million | $6.76 million |
| Net loss | $13.38 million | $12.24 million | $25.22 million | $24.32 million |
| Net loss per share | $0.18 | $0.18 | $0.35 | $0.36 |
With no revenue in 2014, operating margins are not meaningful. Six-month operating cash use was $19.73 million, versus $7.95 million in 2013; management attributed much of the increase to collection of approximately $14.1 million of receivables in the prior-year period. Investing activities used $124.13 million, largely reflecting investment purchases and maturities. Financing provided $136.52 million, primarily from the February stock offering.
At June 30, cash and cash equivalents were $37.45 million, short-term investments $157.21 million, and long-term investments $65.28 million, totaling approximately $259.9 million. Current assets were $197.58 million and current liabilities $12.05 million. Total liabilities were $32.69 million; the balance sheet reports no borrowings. Restricted cash was $4.44 million. The company raised approximately $133.2 million net by selling 8.0 million shares at $17.75 per share in February; outstanding shares rose from 67.35 million at year-end 2013 to 75.92 million at June 30, 2014.
Changes versus comparable periods
- Revenue fell to zero because the prior-year periods included deferred license-fee revenue from the AbbVie collaboration; the company recognized no milestone payments in the periods presented.
- Q2 net loss increased by about $1.14 million year over year; six-month net loss increased by about $0.91 million. Management cited higher share-based compensation, associated in part with the increase in the share price.
- Six-month R&D expense declined by $2.11 million, mainly because VMAT2 Phase IIb development had substantially concluded in 2013. Management expected VMAT2 Phase III to increase external development expense significantly.
- G&A expense increased in both comparison periods, primarily from higher personnel and share-based compensation costs.
- Cash, cash equivalents and investments increased from $145.7 million at December 31, 2013 to $259.9 million at June 30, 2014, principally reflecting the equity financing.
Outlook, risks and unusual items
- Management believed existing capital resources, investment income and expected strategic-alliance payments would fund current and projected requirements for at least 12 months, but cautioned that resources might not support all planned R&D. Additional funding could be needed; equity financing would dilute shareholders, while debt or collaboration arrangements could restrict operations or require relinquishing rights.
- The company expected operating and cash-flow losses for the foreseeable future and said it did not expect profitability or positive operating cash flow in 2014. It had not generated product-sale revenue.
- Elagolix development and potential future payments depend substantially on AbbVie’s performance, regulatory success and commercialization; AbbVie may terminate the agreement on 180 days’ notice, subject to specified terms.
- Clinical, regulatory, manufacturing, intellectual-property, competition and product-liability risks could delay or prevent development or commercialization. The filing also notes dependence on third-party manufacturers and clinical research organizations.
- Other income included $1.61 million of recognition of a deferred gain from the 2007 real-estate sale during the first half of 2014. The remaining deferred gain was to be recognized over the lease term, which expires at the end of 2019.
- The company was evaluating a new revenue-recognition standard required to be adopted beginning in 2017; its impact had not yet been determined.
Investor verification priorities
- Confirm timing, trial design, costs and progress of the planned VMAT2 Phase III program and subsequent clinical disclosures.
- Track AbbVie’s elagolix development and regulatory progress, collaboration status, and any milestone or royalty outlook.
- Reassess cash runway against operating cash use and the expected increase in Phase III spending; distinguish liquid investments from restricted cash.
- Monitor further equity issuance, potential dilution, and the conditions governing the company’s shelf registrations.