Business Context and Reporting Period
Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Neurocrine discovers, develops, and intends to commercialize drugs for neurological and endocrine-related diseases. The company has no approved products and generates revenue primarily through collaborative research agreements, license fees, and milestones. As of the reporting date, the company had eight programs in various stages of development, with six in clinical trials. The lead program, elagolix, targets endometriosis.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Total Revenues | $733 | $2,213 | N/A |
| Net Loss | $(8,177) | $(43,122) | N/A |
| Net Loss Per Share (Basic/Diluted) | $(0.21) | $(1.11) | N/A |
| Operating Expenses | $10,456 | $46,903 | N/A |
| Cash and Cash Equivalents | N/A | N/A | $35,316 |
| Total Investments (Short & Long Term) | N/A | N/A | $28,404 |
| Total Assets | N/A | N/A | $75,908 |
| Total Liabilities | N/A | N/A | $74,833 |
| Stockholders' Equity | N/A | N/A | $1,075 |
Note: All financial figures are in thousands unless otherwise noted. The company reported a significant "Cease use expense" of $5.858 million for the nine-month period related to real estate lease termination.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues for the nine months ended September 30, 2009, decreased to $2.2 million from $3.2 million in the prior year period. This was primarily due to the absence of a $1.0 million milestone payment from GSK recognized in the prior year.
- Expense Reduction: Research and development (R&D) expenses decreased significantly to $29.1 million (nine months 2009) from $43.4 million (nine months 2008). This reduction is attributed to a restructuring program initiated in May 2009, which reduced staff by approximately 65 employees and saved approximately $12.0 million annually.
- Net Loss Improvement: Net loss for the nine months ended September 30, 2009, was $43.1 million, a decrease from $59.8 million in the same period in 2008. The improvement is driven by cost containment measures and expense management.
- Real Estate Liability: The company recognized an additional $5.9 million in cease-use expense due to revised assumptions regarding the timing of tenant occupancy and rental rates for its vacated Front Building. A $4.0 million release fee was paid in October 2009 to settle obligations for this building.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Elagolix Development: Following an FDA Type C meeting in August 2009, the company launched the "Daisy Petal Study" (0901) using a modified pain scale to better assess elagolix efficacy. Top-line data is expected in the second quarter of 2010.
- Liquidity: Management believes existing capital resources, interest income, and future collaboration payments will satisfy funding requirements for at least the next 12 months. However, additional funding will be required for future clinical trials and operations.
- Financing Facility: In September 2009, the company entered a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited, allowing for the potential sale of up to $75.0 million of common stock over three years. No shares had been issued under this facility as of September 30, 2009.
Risks and Contingencies
- Auction Rate Securities (ARS): Approximately $22.4 million (par value) of the company's investment portfolio is held in illiquid auction rate securities. While secured by student loans, these assets are not liquid due to failed auctions. The fair value was estimated at $19.5 million as of September 30, 2009. The company intends to sell UBS-held ARS in June 2010 via an ARS Rights program.
- Indiplon Uncertainty: The future development of the product candidate indiplon remains uncertain following a 2007 FDA "Approvable Letter" that required additional studies. The company has ceased U.S. clinical development activities pending further FDA guidance.
- Profitability: The company has an accumulated deficit of $746.4 million and expects to incur operating losses for the foreseeable future.
Investor Verification Checklist
- Liquidity Runway: Verify if the $35.3 million in cash and $28.4 million in investments are sufficient to fund operations through the expected Q2 2010 data readout for elagolix, considering the illiquidity of the $22.4 million ARS portfolio.
- Restructuring Savings: Confirm the realization of the projected $12.0 million annual savings from the May 2009 workforce reduction.
- Real Estate Obligations: Monitor the ongoing rent differential payments and operating expense obligations for the vacated Front Building through July 2011 and beyond.
- CEFF Utilization: Track whether the company exercises the Kingsbridge CEFF, which could result in significant shareholder dilution (up to 10% discount) and downward pressure on stock price.
- ARS Valuation: Review future filings for changes in the fair value of auction rate securities, as valuation models rely on significant unobservable inputs (Level 3) and assumptions regarding liquidity timing.