Neurocrine Biosciences, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Neurocrine develops drug candidates and reported no revenue from product sales.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $9.4 | $41.6 | $31.2 | $66.3 |
| Research and development expense | $9.9 | $7.5 | $28.1 | $22.9 |
| General and administrative expense | $3.3 | $3.8 | $10.1 | $9.8 |
| Operating income (loss) | $(4.0) | $30.4 | $(7.1) | $33.5 |
| Net income (loss) | $(3.1) | $31.4 | $(4.5) | $36.2 |
| Diluted earnings (loss) per share | $(0.05) | $0.56 | $(0.07) | $0.64 |
Revenue was almost entirely collaboration-related. Cash and cash equivalents were $44.5 million; short- and long-term investments totaled $138.3 million. Cash, cash equivalents and investments together were $182.8 million at September 30, compared with $129.1 million at December 31, 2011. Current assets were $178.0 million and current liabilities $23.1 million. The balance sheet lists no debt; it does include lease-related liabilities and a $4.2 million restricted deposit supporting a letter of credit.
For the first nine months, operating cash use was $26.4 million, investing cash use was $62.6 million, and financing provided $83.4 million. The financing inflow primarily reflected net proceeds of approximately $83.0 million from a January public stock offering of 10.9 million shares at $8.10 per share. Cash and cash equivalents declined by $5.6 million to $44.5 million.
Operating and net margins were negative in 2012: operating loss was approximately 42% of Q3 revenue and 23% of nine-month revenue; net loss was approximately 33% and 14%, respectively. The company reported an accumulated deficit of $729.2 million.
Changes versus prior periods
- Revenue fell $32.3 million in Q3 and $35.1 million for the first nine months versus 2011. The principal driver was $30.0 million of Abbott milestones recognized in Q3 2011 that did not recur.
- Collaboration research revenue also declined as elagolix work transitioned substantially to Abbott and the Boehringer Ingelheim GPR119 research period ended in June 2012.
- R&D expense increased $2.4 million in Q3 and $5.2 million year to date, mainly from advancement of the VMAT2 program, higher personnel costs and increased share-based compensation. Nine-month VMAT2 external development expense was $5.3 million, versus $2.6 million in 2011.
- The company moved from net income in the comparable 2011 periods to net losses in 2012, reflecting lower collaboration revenue and higher R&D expense.
- Investment holdings increased, including $8.9 million classified as long-term at quarter-end, compared with none at December 31, 2011. The company also issued shares in the January offering, increasing shares outstanding.
Outlook, commentary and risks
- Management said existing capital resources, investment income and expected strategic-alliance payments should fund current and projected requirements for at least the next 12 months, but cautioned they may not support all planned R&D. The company expects operating cash flow losses for the foreseeable future and may need additional funding.
- Approximately $37 million remained available under the company’s $125 million shelf registration at September 30. Further equity financing could dilute shareholders; debt or collaboration financing may impose restrictions or require relinquishing product rights.
- Neurocrine reported 11 programs in development, including six in clinical development. Elagolix, its lead program for endometriosis and uterine fibroids, is partnered with Abbott; Abbott funds development, marketing and commercialization costs and has final decision authority under the joint development arrangement. Neurocrine may receive milestone payments and royalties, subject to program progress and agreement terms.
- The Abbott agreement included up to $480 million in development and regulatory event-based payments and up to $50 million in commercial event-based payments. As of September 30, the filing states no further payments then met the accounting definition of a milestone. Abbott may terminate on 180 days’ notice.
- Key risks include clinical-trial failure or delay, reliance on collaborators, inability to raise sufficient capital, regulatory approval uncertainty, competition, intellectual-property disputes, and eventual commercialization and reimbursement challenges. The filing specifically notes uncertainty about indiplon’s future development.
- Unusual and recurring accounting items include recognition of deferred gain on the 2007 real-estate sale: $2.3 million for the first nine months of 2012. The company recorded approximately $150,000 of gross cease-use expense following an August 2012 sublease extension.
- Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during the quarter. The filing did not provide specific earnings or revenue guidance.
Investor verification points
- Confirm the timing, conditions and remaining potential payments under the Abbott and Boehringer Ingelheim agreements, including collaborator rights to terminate and make development decisions.
- Track VMAT2 clinical progress, trial results and spending, as well as the status of the other clinical programs.
- Assess cash burn, investment liquidity and the assumptions supporting management’s at-least-12-month funding outlook, including future alliance receipts.
- Verify the effects of further share issuance, including use of the remaining shelf-registration capacity and resulting dilution.
- Review the underlying 10-Q and risk-factor disclosures for trial, regulatory, intellectual-property and commercialization developments; this summary does not replace the filing.