Sarepta Therapeutics, Inc. quarterly report, Q1 FY2020

Sarepta Therapeutics, Inc. — Q1 2020 Form 10-Q Summary

Business context and reporting period

Sarepta is a commercial-stage biopharmaceutical company developing RNA-targeted therapeutics, gene therapies and other genetic medicines for rare diseases. Its commercial products are EXONDYS 51 for exon 51-amenable Duchenne muscular dystrophy (DMD) and VYONDYS 53 for exon 53-amenable DMD. The filing covers the three months ended March 31, 2020, compared with the same period in 2019. The financial statements are unaudited and prepared under U.S. GAAP.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019	Change
Total revenue	$113.7 million	$87.0 million	+31%
Product revenue	$100.4 million	$87.0 million	+15%
Collaboration revenue	$13.2 million	—	New
Operating loss	$(118.0) million	$(76.4) million	Loss increased $41.6 million
Net loss	$(17.5) million	$(76.6) million	Loss decreased $59.2 million
Net loss per share	$(0.23)	$(1.07)	Improved $0.84
Cash from operating activities	$627.8 million	$(146.2) million	Improved $774.0 million

Product cost of sales was $12.6 million, implying an approximate product gross margin of 87.4%. Total operating expenses were $231.7 million, including research and development expense of $136.1 million, up 50%, and selling, general and administrative expense of $82.8 million, up 37%. The operating loss margin was approximately 103.8% of revenue. The net loss was substantially reduced by a $108.1 million gain from the sale of a Priority Review Voucher.

At March 31, 2020, Sarepta had $1.764 billion of cash and cash equivalents, $406.9 million of short-term investments and $9.6 million of restricted cash and investments, or approximately $2.181 billion in total cash, cash equivalents and investments. Working capital was $2.241 billion. Total borrowings were $688.0 million, consisting of $240.5 million of long-term debt and $447.5 million of convertible debt. Management stated that available liquidity was sufficient to fund the current operating plan for at least the next twelve months.

Material changes versus the prior comparable period

Product revenue increased $13.4 million, primarily due to growing U.S. demand for EXONDYS 51 and VYONDYS 53.
Research and development expense increased $45.6 million, driven primarily by higher clinical and manufacturing spending for gene therapy and ESSENCE programs, increased personnel costs, stock-based compensation and milestone expenses. Roche reimbursements reduced research and development expense by $16.4 million.
SG&A increased $22.2 million, including a $14.3 million increase in professional services associated primarily with the Roche transaction.
Sarepta entered into a Roche collaboration that became effective in February 2020. Roche provided approximately $1.2 billion in cash consideration, including an equity investment. Sarepta issued 2,522,227 shares to Roche for approximately $400.0 million, or $158.59 per share.
Under the Roche arrangement, $342.7 million was allocated to a combined performance obligation and is being recognized over an estimated period through the fourth quarter of 2023. Sarepta recognized $13.2 million of collaboration revenue in Q1 2020 and reported $820.4 million of related deferred revenue at March 31, 2020.
Operating cash flow was positive primarily because of the $820.4 million increase in deferred revenue related to the Roche transaction; this cash flow is not representative of recurring operating performance.
Cash and investments increased 92% from December 31, 2019, while total borrowings increased approximately 1%.

Guidance, outlook, commentary and risks

Management expected to continue incurring significant operating losses at least through 2020 and did not provide quantitative revenue or earnings guidance in the filing.
Key 2020 development objectives included obtaining safety and dosing insights for SRP-5051 in the second half of 2020, commencing the SRP-9001 commercial-supply trial in 2020 subject to regulatory feedback, reporting the second SRP-9003 cohort and selecting a dose in the third quarter, and completing LYS-SAF 302 dosing by mid-2020.
COVID-19 had caused difficulty for some patients receiving infusions, delays in insurer reauthorizations, potential delays in clinical-site initiation and enrollment, and possible interruptions to manufacturing and supply activities. Management expected COVID-19 to reduce commercial product revenue but stated that supply-chain disruption had been minimal as of the filing.
Both EXONDYS 51 and VYONDYS 53 were approved under the FDA accelerated approval pathway. Continued approval depends on post-marketing requirements and confirmatory evidence of clinical benefit; failure to meet these requirements or unfavorable safety or efficacy results could lead to restrictions or withdrawal.
Sarepta relies extensively on third-party manufacturers and reported $854.8 million of manufacturing commitments, including Catalent and Thermo agreements. Additional minimum batch requirements may arise following regulatory approval of products manufactured under these arrangements.
The company may be obligated to make up to $3.2 billion in future development, regulatory, commercial, royalty and upfront milestone payments. These amounts were contingent and were not recorded as liabilities because achievement was not considered probable.
The credit agreement requires consolidated liquidity of at least $100.0 million at each month-end and is secured by specified collateral, including certain U.S. intellectual property and other assets. A change of control would trigger mandatory prepayment of the term loans.
Material risks include clinical-trial delays, regulatory uncertainty, manufacturing capacity and quality, reimbursement and payer access, competition, intellectual-property disputes, dependence on Roche and other collaborators, COVID-19 effects, and the company’s continuing operating losses.
Two shareholder-related cases concerning disclosures related to golodirsen were voluntarily dismissed and closed in April 2020, after the quarter ended.

Important facts for investors to verify

Separate recurring product revenue growth from the nonrecurring or contract-driven effects of the Roche collaboration, deferred revenue recognition and the Priority Review Voucher gain.
Monitor EXONDYS 51 and VYONDYS 53 confirmatory trials and FDA post-marketing obligations because accelerated approval status depends on verification of clinical benefit.
Assess the effect of COVID-19 on infusions, payer reauthorizations, clinical enrollment, trial follow-up and manufacturing timelines.
Review Roche’s options, deferred-revenue recognition period, cost-sharing terms, milestones and potential ex-U.S. commercialization rights.
Evaluate the sustainability of cash usage excluding the Roche transaction, including rising research, manufacturing, commercialization and contractual commitments.
Track debt maturities, credit-agreement liquidity requirements, collateral provisions and potential dilution from convertible debt, stock awards and future financings.
Verify the company’s ability to meet approximately $854.8 million of manufacturing commitments and potential contingent milestone obligations of up to $3.2 billion.