NBIX

Business Context and Reporting Period

Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Neurocrine discovers, develops, and intends to commercialize drugs for neurological and endocrine-related diseases. The company has no marketed products and relies on collaborations and equity financing. Key programs include elagolix (endometriosis) and GPR119 agonists (Type II diabetes).

Key Financial Metrics

Liquidity: As of September 30, 2010, the company held $77.3 million in cash and cash equivalents and $57.8 million in investments, totaling $135.2 million in liquid assets. This represents a significant increase from $59.9 million at December 31, 2009.

Material Changes vs. Prior Period

• Revenue Surge: Total revenues for the nine months ended September 30, 2010, were $19.8 million, a massive increase from $2.2 million in the same period in 2009. This was driven by new collaboration agreements with Abbott ($75 million upfront) and Boehringer Ingelheim ($10 million upfront).
• Profitability Shift: The company reported a net income of $3.3 million for the third quarter of 2010, compared to a net loss of $8.2 million in Q3 2009. However, the nine-month period still resulted in a net loss of $10.5 million, improved from a $43.1 million loss in the prior year.
• Operating Expenses: Research and development expenses decreased to $23.1 million for the nine months ended September 30, 2010, from $29.1 million in 2009, due to restructuring efforts and expense management. General and administrative expenses also declined from $12.0 million to $10.0 million.
• Cash Flow: Net cash provided by operating activities turned positive at $67.2 million for the nine months ended September 30, 2010, compared to a use of $39.1 million in the prior year, primarily due to upfront licensing fees.

Guidance, Outlook, and Risks

Management Commentary: Management expects to incur operating losses for the foreseeable future as product candidates advance through clinical development. The company believes current capital resources, combined with future collaboration payments, will satisfy funding requirements for at least the next 12 months.

Key Risks and Contingencies:

• Clinical Trial Failure: Product candidates may fail to demonstrate safety or efficacy, delaying or preventing regulatory approval. Specific uncertainty exists regarding the indiplon program and the acceptance of endpoints for the elagolix Phase III trials.
• Collaboration Dependence: The company relies heavily on Abbott and Boehringer Ingelheim for funding and commercialization. Termination of these agreements could severely impact liquidity and development timelines.
• Financing Needs: Additional funding will be required for future development. The company has a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited for up to $75 million, but market conditions may make additional financing difficult or dilutive.
• Real Estate Obligations: The company has ongoing lease obligations and rent differential payments related to its corporate headquarters sale-leaseback transaction, with a remaining cease-use liability of approximately $8.5 million.

Investor Verification Checklist

• Collaboration Terms: Verify the specific amortization schedules and milestone triggers for the Abbott and Boehringer Ingelheim agreements to understand future revenue recognition.
• Cash Burn Rate: Monitor the rate of cash consumption against the $135.2 million liquidity position to assess the runway for independent R&D programs.
• Indiplon Status: Confirm the current status of the indiplon program and any potential costs associated with resubmitting the NDA to the FDA.
• Real Estate Liability: Review the remaining obligations under the lease amendments, specifically the rent differential payments and the $8.5 million cease-use liability.
• CEFF Utilization: Track any potential drawdowns under the Kingsbridge CEFF, which could result in significant dilution to existing shareholders.