Neurocrine Biosciences, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Neurocrine discovers and develops medicines for neurological and endocrine disorders; it had no product-sale revenue. Results were principally driven by collaboration revenue, including milestone payments.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $41.6m | $14.4m | $66.3m | $19.8m |
| Operating expenses | $11.2m | $12.0m | $32.8m | $33.4m |
| Operating income (loss) | $30.4m | $2.5m | $33.5m | $(13.6)m |
| Net income (loss) | $31.4m | $3.3m | $36.2m | $(10.5)m |
| Diluted earnings (loss) per share | $0.56 | $0.06 | $0.64 | $(0.20) |
- Revenue growth reflected collaboration milestones and deferred upfront-fee amortization. Abbott contributed $39.4m in Q3 and $59.3m for the nine months; Boehringer Ingelheim contributed $1.5m and $4.8m, respectively. DSP contributed $0.7m and $2.2m.
- Abbott milestone revenue included $10m for elagolix advancing into Phase II for uterine fibroids and $20m related to an FDA pre-Phase III meeting for endometriosis. No Boehringer Ingelheim milestones were recognized.
- Research and development expense was $7.5m in Q3 and $22.9m for the nine months. Lower elagolix development costs as work transitioned to Abbott partly offset higher VMAT2 and other research costs.
- Operating margin, calculated from reported operating income and revenue, was approximately 73% in Q3 and 51% for the nine months. These results include collaboration and milestone revenue and are not product-sales margins.
- Operating cash flow was $(11.7)m for the nine months, versus $54.5m provided in 2010. The comparison was affected by $85m of collaboration upfront payments received in 2010 and by working-capital movements, including increased receivables.
- Cash and cash equivalents were $39.5m; investments were $77.2m, for $116.7m combined. Restricted cash was an additional $6.1m. Current assets were $136.1m versus current liabilities of $48.4m. The filing reports no outstanding debt; the former property mortgage had been retired in 2007.
- Total assets were $149.0m, total liabilities $91.3m, and stockholders’ equity $57.7m at September 30. Accumulated deficit was $726.0m.
Changes, outlook and risks
- Nine-month revenue rose $46.5m year over year, and results shifted from a $10.5m net loss to $36.2m net income, primarily due to Abbott and Boehringer Ingelheim collaboration revenue, including Abbott milestones. Management cautioned that the company still expected negative operating cash flows and did not expect sustained profitability after 2011.
- Management expected existing capital resources, investment income and anticipated alliance payments to fund current projected needs for at least 12 months, while warning that resources might not support all planned programs. Additional funding could be needed; equity financing may dilute shareholders, and debt could impose covenants.
- Abbott is responsible for development, marketing and commercialization costs for the partnered GnRH compounds and has final decision authority under the joint development committee. Abbott may terminate on 180 days’ notice; specified rights would revert to Neurocrine. Neurocrine is eligible for sales-based payments and up to $24m in personnel funding through 2012.
- The pipeline included 11 programs, six in clinical development. Principal risks include clinical-trial failure or delay, regulatory uncertainty, reliance on collaborators, future financing needs, competition and intellectual-property challenges. The filing specifically notes that Phase II results for CRF1 candidate 561679 in major depression showed no benefit versus placebo.
- Unusual items included a one-time $1.0m executive separation and transition charge in Q3, including $0.3m of stock-based compensation, and a $0.4m reduction in estimated renovation liability that reduced cease-use expense. Q3 cease-use expense was a net credit of $0.1m.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management stated it expected to be profitable for full-year 2011, but also expected negative operating cash flow that year.
Investor facts to verify
- Whether elagolix advances on expected clinical and regulatory timelines, and the implications of the FDA meeting and uterine-fibroid milestone.
- How much future collaboration funding and milestone revenue is achievable, and the effect of partner decisions or termination rights.
- Cash burn, receivables collection and the availability of the shelf registration and committed equity facility if additional capital is required.
- Whether the company’s lease and sublease obligations, including the continuing rent differential, change materially.
- The outcome of the ongoing tax ownership-change analysis: potential ownership changes could limit use of net operating losses and research credits.