Sarepta Therapeutics, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
Sarepta is a commercial-stage biopharmaceutical company developing RNA-targeted therapeutics for rare neuromuscular diseases, primarily Duchenne muscular dystrophy (DMD). The filing covers the fiscal year ended December 31, 2016, with unaudited quarterly information for the quarter ended December 31, 2016.
- EXONDYS 51 (eteplirsen) received FDA accelerated approval on September 19, 2016, for DMD patients with mutations amenable to exon 51 skipping.
- Commercial shipments began in the third quarter, and all reported 2016 product revenue was generated in the fourth quarter.
- The approval is contingent on post-marketing studies confirming clinical benefit; improved motor function has not been established in the approval basis.
- Sarepta submitted an EU marketing authorization application in November 2016, which the EMA validated in December 2016.
Financial performance and key metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $5.4 million | $1.3 million | Up 333% |
| Product revenue | $5.4 million | None | New commercial revenue |
| Research and development expense | $188.3 million | $146.4 million | Up 29% |
| SG&A expense | $83.7 million | $75.0 million | Up 12% |
| Operating loss | $266.7 million | $220.2 million | Loss increased 21% |
| Net loss | $267.3 million | $220.0 million | Loss increased 21% |
| Net loss per share | $5.49 | $5.20 | Loss per share increased 6% |
| Operating cash flow | $(245.8) million | $(149.5) million | Cash use increased 64% |
| Cash flow from financing | $378.1 million | $147.8 million | Up 156% |
Fourth-quarter 2016 revenue was $5.4 million, compared with no product revenue in the first three quarters. Fourth-quarter net loss was $88.5 million, or $1.62 per share.
- Gross margin information is not presented as a meaningful operating measure because most EXONDYS 51 manufacturing costs incurred before FDA approval were expensed in research and development. Reported cost of sales was $0.1 million; management estimated that production costs related to 2016 product sold would have been approximately $0.5 million if not previously expensed.
- Research and development included $48.0 million of up-front and milestone payments, primarily the $40.0 million Summit payment and amounts related to the UWA license amendment.
- Cash, cash equivalents and investments totaled $329.3 million at year-end, consisting of $122.4 million of cash and equivalents, $195.4 million of short-term investments and $11.5 million of restricted cash and investments.
- Working capital was $298.1 million, compared with $162.2 million at December 31, 2015.
- Total borrowings were $16.2 million, including a $15.0 million senior secured term loan principal balance and approximately $1.4 million of mortgage principal.
- Stockholders’ equity was $336.7 million, compared with $190.3 million at year-end 2015. The accumulated deficit was $1.2 billion.
Material changes versus the prior comparable period
- The company transitioned from a development-stage model to initial commercialization, generating $5.4 million of EXONDYS 51 revenue in the fourth quarter.
- Revenue composition shifted from government research-contract revenue in 2015 to product revenue in 2016. Government research revenue fell to zero as prior government-funded development activities were completed.
- Operating losses expanded primarily because of higher research and development spending, commercial infrastructure investment and significant license and milestone payments.
- Financing provided $378.1 million of cash in 2016. June and September equity offerings generated net proceeds of approximately $37.3 million and $327.4 million, respectively, increasing shares outstanding to approximately 54.8 million at year-end.
- Operating cash burn increased substantially, although the equity financings more than offset operating and investing cash uses.
- Sarepta recorded $4.6 million of restructuring expense related to consolidating operations in Massachusetts, closing or reducing Corvallis operations and workforce reductions.
- Under a new October 2016 Summit collaboration, Sarepta paid $40.0 million upfront and assumed potential future development, regulatory and sales milestones and royalties.
Guidance, outlook, commentary, risks and unusual items
Management stated that year-end cash, cash equivalents and investments were sufficient to fund the current operational plan for at least the next twelve months. The company nevertheless expects significant future cash needs and may seek additional equity, debt, government funding, licensing or collaboration proceeds.
- Key near-term priorities are commercial execution for EXONDYS 51, expanding reimbursement coverage, resolving patient access and genetic-testing barriers, scaling manufacturing and completing FDA post-marketing commitments.
- The company planned to begin IND-enabling toxicology studies for its PPMO platform in 2017 and targeted an IND filing for a DMD exon 51 PPMO candidate before year-end 2017.
- EXONDYS 51 remains subject to a randomized, controlled confirmatory study and other post-marketing requirements. Failure to verify clinical benefit could result in restrictions or withdrawal of approval.
- Payor coverage was inconsistent at filing; most covered lives were subject to case-by-case review or restrictions, and some payors had denied coverage.
- Sarepta relies on third-party manufacturers, specialty pharmacies, distributors and logistics providers. Manufacturing scale-up, quality, supply and distribution failures could constrain revenue and clinical development.
- Intellectual-property disputes and appeals involving BioMarin remain material risks for EXONDYS 51 and the exon 45 and exon 53 programs, particularly in the United States and Europe.
- The company reported up to $712.6 million of potential future development, regulatory, royalty and sales milestone obligations, contingent on specified achievements.
- Contractual obligations totaled $125.0 million, including $87.1 million of purchase commitments, $20.2 million of lease obligations and $17.7 million of debt payments including interest.
- The company had approximately $65.3 million of cancellable future CRO commitments.
- Subsequent to year-end, Sarepta agreed on February 21, 2017 to sell its Rare Pediatric Disease Priority Review Voucher for an upfront payment of $125.0 million, subject to closing conditions and antitrust clearance.
- Several securities and derivative lawsuits remained pending or under appeal. The filing states that potential losses could not be reasonably estimated.
Important facts for investors to verify
- Whether EXONDYS 51 sales and patient starts expand beyond the initial $5.4 million fourth-quarter revenue base and whether reimbursement restrictions ease.
- Progress, enrollment, results and regulatory interpretation of the required confirmatory and post-marketing studies, including the risk to accelerated approval.
- EMA review progress and the prospects, timing and commercial terms of any EU approval and reimbursement.
- Manufacturing capacity, product quality, inventory utilization and reliance on contract manufacturers and specialty distribution channels.
- Cash burn relative to the $329.3 million year-end liquidity balance and the timing or terms of any additional financing.
- Potential dilution from future equity issuance and approximately 5.7 million excluded stock awards and options.
- Outcomes of BioMarin patent interference appeals and European patent opposition proceedings.
- Settlement or other financial exposure from pending securities and derivative litigation.