Sarepta Therapeutics, Inc. — Q1 2019 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. The filing covers the three months ended March 31, 2019, with comparative results for the three months ended March 31, 2018. EXONDYS 51 (eteplirsen) for Duchenne muscular dystrophy was the company’s first commercial product and primary revenue source.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Product revenue | $87.0 million | $64.6 million | 35% |
| Cost of sales | $12.1 million | $5.6 million | 116% |
| Research and development | $90.6 million | $46.2 million | 96% |
| Selling, general and administrative | $60.6 million | $43.3 million | 40% |
| Operating loss | $76.4 million | $30.7 million | 149% wider |
| Net loss | $76.6 million | $35.4 million | 117% wider |
| Net loss per share | $1.07 | $0.55 | 95% wider |
| Cash used in operating activities | $146.2 million | $35.7 million | 310% wider |
Approximate gross margin was 86% before amortization of in-licensed rights and approximately 85.9% including that amortization. Operating margin was approximately negative 87.8%, and net margin was approximately negative 88.1%.
At March 31, 2019, cash and cash equivalents were $732.2 million, short-term investments were $612.0 million, and restricted cash and investments were $6.2 million, for total cash, cash equivalents and investments of approximately $1.35 billion. Working capital was $1.53 billion. Total assets were $1.96 billion and stockholders’ equity was $1.35 billion.
Long-term debt was $425.8 million, primarily convertible debt. Contractual obligations included $618.1 million of convertible debt payments including interest, $74.1 million of lease obligations and $537.7 million of manufacturing obligations. The filing states 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
- EXONDYS 51 revenue increased $22.4 million, primarily reflecting increased U.S. demand.
- Cost of sales increased $6.5 million, driven by higher product volume, royalties, overhead and a $1.3 million write-off of batches that did not meet quality specifications.
- R&D expense increased $44.3 million, reflecting increased clinical and manufacturing activity, micro-dystrophin gene therapy development, post-marketing studies, headcount, facilities and PPMO toxicology work.
- SG&A expense increased $17.2 million, primarily due to higher personnel, stock-based compensation, facilities and technology costs.
- Operating cash use increased by $110.6 million, including a $79.6 million increase in other assets and a $15.0 million increase in inventory.
- The company raised approximately $365.3 million net in a March 2019 underwritten public offering of approximately 2.6 million common shares at $140.41 per share, increasing diluted-equity risk for existing holders.
- Cash increased substantially while short-term investments declined, principally because of the equity financing and investment maturities and purchases.
- Effective January 1, 2019, Sarepta adopted ASC 842 for leases, recognizing approximately $41.1 million of lease right-of-use assets and $58.9 million of operating lease liabilities at March 31, 2019.
Guidance, outlook, risks and unusual items
- The FDA granted priority review for golodirsen, with a targeted action date of August 19, 2019. Sarepta expected to complete the open-label golodirsen study in 2019 and submit an NDA for casimersen in 2019.
- Management expected to complete the initial SRP-5051 study by late 2019 to the first quarter of 2020, conduct a confirmatory micro-dystrophin trial using commercial supply by the end of 2019, and begin dosing an NT-3 gene-therapy trial for CMT type 1A in 2019, subject to regulatory feedback.
- Sarepta exercised its option to acquire Myonexus in February 2019. The acquisition closed April 4, 2019, after the reporting date. The negotiated exercise price was $165.0 million, with approximately $8.7 million of transaction fees; the company expected to record approximately $168.7 million of in-process R&D expense in Q2 2019. Additional milestone payments of up to $200.0 million may be payable.
- Future milestone, development, regulatory, commercial and royalty obligations under license and collaboration agreements could reach $555.8 million, excluding amounts not yet probable or contractually due.
- EXONDYS 51 has accelerated approval, and continued approval may depend on confirmatory evidence of clinical benefit. Failure to satisfy post-marketing requirements or unfavorable safety or efficacy results could lead to restrictions or withdrawal of approval.
- The company relies on a limited number of third-party manufacturers and incurred significant manufacturing commitments. Supply interruptions, quality failures, cGMP deficiencies or insufficient capacity could affect commercial sales and clinical programs.
- Sarepta continued to incur significant operating losses and stated that it expected losses at least through 2019. Future financing may be required; additional equity could dilute shareholders and debt could increase fixed obligations.
- Revenue is concentrated in EXONDYS 51 and among three customers, which represented 41%, 40% and 15% of Q1 2019 net product revenue. Reimbursement, payor coverage, competition and patient adoption remain significant commercial risks.
- No material legal claims were reported as of March 31, 2019. Management concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether EXONDYS 51 demand, net pricing, reimbursement and customer concentration support continued revenue growth.
- The FDA’s August 19, 2019 action on golodirsen and the timing and outcome of the casimersen NDA submission.
- Confirmatory-trial results and regulatory developments affecting EXONDYS 51’s accelerated approval.
- Clinical, regulatory and manufacturing progress for the micro-dystrophin, MYO-101, SRP-5051 and other gene-therapy programs.
- The Q2 2019 accounting impact and cash requirements from the completed Myonexus acquisition, including the expected $168.7 million in-process R&D expense and potential milestones.
- Operating cash burn, manufacturing commitments, convertible-debt obligations and the timing or terms of any future financing.
- Whether manufacturing partners can meet commercial and clinical demand while maintaining quality and cGMP compliance.