Puma Biotechnology, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. Puma is a biopharmaceutical company focused on NERLYNX (neratinib), its marketed product, and development of neratinib for additional cancer indications.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $56.4 | $62.6 | $209.3 | $179.9 |
| Product revenue, net | $53.5 | $52.6 | $152.9 | $139.4 |
| License revenue | $2.8 | $10.0 | $56.3 | $40.5 |
| Royalty revenue | $0.1 | — | $0.2 | — |
| Cost of sales | $9.4 | $9.0 | $26.7 | $24.3 |
| SG&A expense | $31.4 | $28.5 | $110.4 | $105.2 |
| R&D expense | $30.0 | $36.4 | $102.6 | $126.5 |
| Operating loss | $(14.4) | $(11.3) | $(30.4) | $(76.1) |
| Net loss | $(16.9) | $(14.2) | $(64.4) | $(82.9) |
| Net loss per share | $(0.44) | $(0.37) | $(1.67) | $(2.19) |
- Cash flow: Operating activities provided $20.8 million in the first nine months of 2019, versus $31.2 million used in 2018. Investing activities provided $5.6 million; financing activities used $67.1 million. Cash, cash equivalents and restricted cash declined $40.7 million to $72.1 million.
- September 30 liquidity: Cash and cash equivalents were $58.9 million, marketable securities $51.5 million, and working capital $62.8 million. Restricted cash was $13.2 million. Management said cash, marketable securities and expected product-sale and license proceeds should fund operating needs for at least one year after filing.
- Debt and balance sheet: Long-term debt was $100.0 million principal, or $94.2 million net of financing costs and accretion. Total liabilities were $214.9 million and stockholders’ equity $17.2 million. The June refinancing replaced $155.0 million of prior debt with a $100.0 million facility; the company recorded an $8.1 million extinguishment loss. New debt bears interest at the greater of 9.0% or prime plus 3.5%; interest-only payments run through August 2021, with maturity in June 2024.
Material changes and management commentary
- Nine-month revenue rose 16%, led by license revenue and 5% higher NERLYNX sales volume, along with two 10% gross-price increases. Higher variable-consideration estimates partially offset product revenue growth.
- Nine-month license revenue included the $51.0 million Pierre Fabre upfront fee and milestone-related revenue. Q3 license revenue was lower year over year, while the 2018 quarter included a $10.0 million upfront payment. A $2.5 million Pint milestone receivable was recorded in Q3 and is expected to be collected in Q3 2020.
- Nine-month R&D declined 19%, mainly due to lower stock-based compensation, headcount and clinical-trial costs. SG&A increased 5%, largely because prior-period insurance reimbursements reduced reported legal expense in 2018.
- Management expects R&D spending to decline over the next 12 months and SG&A to remain consistent with 2018, while noting that commercialization and development may require additional funding. It expects continued losses and remains dependent on NERLYNX sales and access to financing.
- The company adopted lease accounting in 2019, adding right-of-use assets and lease liabilities; management reported no material effect on operations or cash flows. Disclosure controls were assessed as effective.
Risks, contingencies and unusual items
- Litigation: The company accrued $9.0 million for the Hsu securities class action and $22.4 million for the Eshelman defamation verdict. Hsu damages remain uncertain pending a claims process and appeals; the company estimates $9–$18 million, with higher damages reasonably possible. Eshelman’s jury award was $15.9 million compensatory and $6.5 million punitive; post-trial motions, possible fees and interest, and appeals could change the amount. The company reported a $16.4 million net legal verdict expense for Eshelman after $6.0 million of insurance reimbursements.
- Post-marketing obligation: A $9.0 million liability related to the Pierre Fabre agreement was recorded. Accrued expenses also included $31.4 million of legal verdict expense at quarter-end.
- Debt and liquidity risks: The new facility has revenue targets, restrictive covenants and default provisions that could permit a higher interest rate and enforcement against collateral, including cash. The company reported compliance at September 30, 2019. It cautioned that funding needs could exceed estimates and future financing may not be available.
- Business risks: NERLYNX is the principal expected source of product revenue; commercialization is relatively recent, and manufacturing relies on third parties. Regulatory decisions, clinical outcomes, competition and product demand could affect results.
Important facts for investors to verify
- NERLYNX prescription demand, net pricing, variable-consideration reserves and customer concentration; CVS/Caremark and Accredo/Acaria represented 36% and 21% of Q3 total revenue, respectively.
- Timing and collectability of license and milestone proceeds, including the Pint receivable, and whether license revenue is recurring or milestone-driven.
- Cash burn, restricted-cash availability, debt interest and amortization obligations, revenue-covenant compliance and the one-year liquidity assessment.
- Final outcomes and potential costs of Hsu and Eshelman, including claims, fees, interest, appeals and insurance coverage.
- Progress of clinical programs and international commercialization, including reliance on licensees and contract manufacturers.