Business Context and Reporting Period
Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 five in clinical trials. The lead clinical program is elagolix for the treatment of endometriosis.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $747 | $1,751 |
| Net Loss | $(19,665) | $(21,077) |
| Loss Per Share (Basic & Diluted) | $(0.51) | $(0.55) |
| Operating Cash Flow | $(14,390) | $(28,181) |
| Cash and Cash Equivalents (End of Period) | $51,665 | $107,639 |
| Total Assets | $101,028 | $118,182 |
| Accumulated Deficit | $(722,928) | $(703,263) |
Liquidity and Debt: The company reported total cash, cash equivalents, and investments of $86.0 million as of March 31, 2009. There is no long-term debt listed on the balance sheet, though the company has significant lease obligations and a "cease-use liability" of $18.2 million related to a facility lease termination.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately 57% to $0.7 million from $1.8 million in Q1 2008. This was primarily due to the absence of a $1.0 million milestone payment from GlaxoSmithKline (GSK) recognized in the prior year.
- Expense Reductions:
- R&D Expenses: Decreased to $10.8 million from $14.2 million, driven by reduced external development costs for the elagolix program and lower depreciation.
- G&A Expenses: Decreased to $4.2 million from $8.3 million, largely due to the absence of $2.4 million in severance and accelerated stock option expenses incurred in Q1 2008.
- New Expenses: The company recognized $4.8 million in "cease-use expense" related to the termination of its corporate headquarters lease (Front Building), reflecting increased construction costs and revised assumptions on subleasing.
- Investment Impairment: A $1.5 million loss was recognized on auction rate securities due to other-than-temporary impairment, contrasting with no such loss in the prior year.
Outlook, Risks, and Unusual Items
- Restructuring: In May 2009 (subsequent to the period end), the company announced a reduction of approximately 60 employees. A severance charge of approximately $3.0 million is expected in Q2 2009. The company also suspended 401(k) matching and terminated its deferred compensation plan.
- Liquidity Risk (Auction Rate Securities): Approximately $22.6 million (par value) of long-term investments are held in auction rate securities which have experienced failed auctions and are currently illiquid. While secured by student loans, the fair value was written down to $17.5 million. The company expects to sell these securities to UBS starting June 30, 2010.
- Real Estate Contingency: The company vacated the Front Building of its headquarters in late 2008. The liability for lease termination costs is sensitive to sublease income assumptions; a 10% change in estimated sublease income could alter the liability by approximately $1.7 million.
- Indiplon Uncertainty: The company received an "Approvable Letter" from the FDA for indiplon in 2007 but has ceased clinical development pending further requirements. There is significant uncertainty regarding the resources and timeline required to resubmit the NDA.
- Capital Needs: Management believes current resources are sufficient for at least 12 months but anticipates needing additional funding for future R&D and clinical trials. The company may seek equity or debt financing, which could be dilutive or restrictive.
Investor Verification Checklist
- Auction Rate Securities Liquidity: Verify the current status of the $22.6 million in illiquid auction rate securities and the timeline for the UBS ARS Rights exercise period (June 2010).
- Real Estate Liability: Monitor the progress of subleasing the vacated Front Building, as failure to lease could significantly increase the cease-use liability.
- Upcoming Restructuring Costs: Confirm the timing and magnitude of the expected $3.0 million severance charge in Q2 2009.
- Indiplon Regulatory Path: Assess the likelihood and cost of resubmitting the NDA for indiplon given the FDA's 2007 requirements.
- Cash Burn Rate: Evaluate the sustainability of the current cash position ($51.7 million) against the projected operating losses and upcoming restructuring expenses.