Sarepta Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; filed August 9, 2016. Sarepta is a pre-commercial biopharmaceutical company developing RNA-targeted therapeutics, primarily for Duchenne muscular dystrophy (DMD). Its lead candidate was eteplirsen, designed to skip exon 51.
Financial Results and Position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $44.3 million | $29.2 million | $83.2 million | $68.3 million |
| General and administrative expense | $17.8 million | $12.9 million | $38.6 million | $35.6 million |
| Operating loss | $62.1 million | $42.1 million | $121.8 million | $104.0 million |
| Net loss | $62.3 million | $41.9 million | $122.1 million | $103.4 million |
| Basic and diluted loss per share | $1.35 | $1.01 | $2.66 | $2.50 |
There was no product revenue, and operating and net profit margins were not meaningful because the company reported no revenue and substantial losses.
- Cash and liquidity: Cash and cash equivalents were $111.8 million at June 30, 2016, compared with $80.3 million at December 31, 2015. Total cash, cash equivalents and investments, including restricted amounts, were $134.7 million versus $204.0 million at year-end 2015.
- Cash flow: Cash used in operating activities was $104.0 million for the first six months, compared with $71.9 million in the prior-year period. Investing activities provided $98.4 million, primarily from sales and maturities of investments. Financing activities provided $37.1 million.
- Equity financing: In June 2016, Sarepta sold approximately 2.1 million shares at $17.84 per share, generating approximately $37.5 million of gross proceeds and approximately $0.2 million of offering costs.
- Debt: Total borrowings were $20.2 million at June 30, 2016, consisting of $20.2 million of long-term debt. This compared with $23.4 million at December 31, 2015. The senior secured term loan was $20.0 million originally and requires pledged cash subject to specified minimums.
- Working capital: Current assets were $153.2 million and current liabilities were $66.9 million, resulting in working capital of $86.3 million, down from $162.2 million at December 31, 2015.
Material Changes Versus the Prior Comparable Period
- Second-quarter research and development expense increased 52% to $44.3 million; first-half expense increased 22% to $83.2 million. The increases primarily reflected higher clinical and manufacturing activity and a $7.0 million up-front license payment to the University of Western Australia.
- Second-quarter general and administrative expense increased 37% to $17.8 million, primarily due to higher personnel and stock-based compensation costs. First-half expense increased 8% to $38.6 million, partly offset by the absence of $9.2 million of prior-year severance expense related to the former CEO’s resignation.
- Second-quarter net loss increased 49% to $62.3 million; first-half net loss increased 18% to $122.1 million. Loss per share increased to $1.35 for the quarter and $2.66 for the six months, partly reflecting the higher loss despite a larger share count.
- Eteplirsen-related research and development spending increased 122% in the second quarter and 38% for the first half. Exon 53 spending also increased, while exon 45 spending declined.
- The company recorded $1.2 million of restructuring expense for the first six months as it consolidated operations in Massachusetts and planned to close its Corvallis, Oregon facility. The company estimated total restructuring expenses of approximately $1.8 million and remained obligated for approximately $4.3 million of post-completion lease payments.
- The accumulated deficit reached approximately $1.0 billion at June 30, 2016. Shares outstanding increased to approximately 47.9 million from 45.6 million at December 31, 2015, primarily reflecting equity issuance and other share activity.
Outlook, Regulatory Matters, Risks and Contingencies
- The FDA’s advisory committee voted against key findings supporting eteplirsen’s efficacy and dystrophin evidence in April 2016. The FDA was not bound by the recommendation, but the PDUFA action date of May 26, 2016 passed without a decision because the FDA continued its review.
- In June 2016, the FDA requested additional western-blot dystrophin data from biopsies already obtained in the ongoing eteplirsen confirmatory study. Approval timing and the ultimate regulatory outcome remained uncertain.
- Management stated that cash, cash equivalents and investments at June 30, 2016 were sufficient to fund the current operating plan for at least the next twelve months. The company expects cash needs to increase and may seek additional equity or debt financing, government funding, collaborations or licensing transactions.
- The company has not generated product sales revenue and expects to continue incurring operating losses. No specific revenue, earnings or product-launch guidance was provided.
- The company had up to $92.7 million of potential future development, up-front royalty and commercial milestone payments under collaboration and license agreements. A $7.0 million UWA payment was recorded during the period, and additional $20.0 million payments may become due upon specified commercial milestones.
- Potential risks include delayed or denied FDA approval, insufficient clinical or dystrophin data, additional regulatory studies, manufacturing and supply-chain constraints, reliance on third parties, need for additional capital, dilution, debt covenant or default risk, intellectual-property disputes with BioMarin, and ongoing shareholder and derivative litigation.
- The company disclosed securities and derivative actions relating to eteplirsen disclosures. Several matters were dismissed or stayed, but certain proceedings remained pending and the company stated that possible losses could not be estimated.
- Patent interference proceedings and appeals involving Sarepta/UWA and BioMarin could affect patent protection and commercialization rights for eteplirsen and other exon-skipping candidates.
- Management reported that disclosure controls and procedures were effective as of June 30, 2016, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the FDA’s subsequent decision and any conditions, confirmatory-trial requirements or labeling restrictions for eteplirsen.
- Reconcile cash burn with the stated twelve-month liquidity assessment and assess the timing and terms of any subsequent financing.
- Review the senior secured term-loan covenants, pledged-cash requirements and potential default consequences if approval is delayed or denied.
- Monitor clinical-trial enrollment, dystrophin data, confirmatory-study design and results for eteplirsen and exon 45 and exon 53 candidates.
- Assess the financial impact of the Massachusetts consolidation, Corvallis lease obligations and any workforce reductions.
- Track UWA milestone and royalty obligations, BioMarin patent proceedings and the unresolved shareholder litigation.
- Confirm manufacturing capacity, third-party supply arrangements and potential termination costs tied to pre-commercialization commitments.