Sarepta Therapeutics, Inc. (then AVI BioPharma, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2011. The filing identifies the registrant as AVI BioPharma, Inc., a development-stage biopharmaceutical company focused on RNA-based therapeutics for rare and infectious diseases. The company’s lead programs included eteplirsen for Duchenne muscular dystrophy and government-funded candidates for Ebola, Marburg, and influenza.
Substantially all reported revenue came from U.S. government research contracts; the company had not generated material commercial product revenue.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Revenue | $11.6 million | $25.9 million |
| Research and development expense | $17.8 million | $32.6 million |
| General and administrative expense | $4.0 million | $9.0 million |
| Operating loss | $10.1 million | $15.7 million |
| Approximate operating margin | (87.4%) | (60.5%) |
| Net income | $1.3 million | $3.1 million |
| Net income margin | 11.0% | 12.0% |
| Diluted earnings per share | $0.01 | $0.02 |
| Net cash used in operating activities | Not separately provided for the quarter | $10.5 million |
Net income was primarily attributable to non-cash gains from reductions in the fair value of warrant liabilities: $11.3 million for the quarter and $18.5 million for the six-month period. The warrant liability was $19.9 million at June 30, 2011, compared with $39.1 million at December 31, 2010.
- Cash and cash equivalents were $54.2 million at June 30, 2011, compared with $33.6 million at December 31, 2010.
- Financing activities provided $32.3 million during the first six months, primarily from the April 2011 equity offering, which generated approximately $32.1 million of net proceeds.
- Total assets were $74.9 million and shareholders’ equity was $35.1 million at June 30, 2011, compared with a shareholders’ deficit of $2.8 million at year-end 2010.
- Long-term debt, including the current portion, totaled approximately $1.9 million.
- Contractual obligations totaled $23.2 million, including $17.0 million of operating leases, $3.0 million of purchases, $1.9 million of long-term debt, and $1.3 million of royalty payments.
Material changes versus the prior comparable period
- Second-quarter revenue increased 190% from $4.0 million to $11.6 million; six-month revenue increased 398% from $5.2 million to $25.9 million.
- The increase was driven principally by the July 2010 Ebola and Marburg agreement, which contributed $10.6 million in second-quarter revenue and $22.5 million in six-month incremental revenue versus the prior-year periods.
- Research and development expense increased 156% for the quarter and 150% for the six months, reflecting higher Ebola and Marburg spending, drug-substance manufacturing costs, DMD development, and severance and stock compensation charges.
- General and administrative expense decreased 16% for the quarter, primarily because of lower prior-year executive severance, but increased 18% for the six months because of higher staffing, professional services, and legal costs.
- The company reported net income in both 2011 periods versus net losses of $16.7 million for the quarter and $17.2 million for the six months in 2010. Management stated that the improvement was due principally to the warrant-liability valuation change rather than operating profitability.
- Accounts receivable increased to $10.9 million from $3.2 million at year-end 2010, including $4.6 million of unbilled receivables.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to initiate a Phase II trial of eteplirsen in August 2011 and targeted a pivotal Phase III trial in the second half of 2012.
- Management believed available cash, excluding future government-contract receipts, was sufficient to finance operations for at least the next 12 months, but expected operating losses and increasing cash requirements for several years.
- The company had government contracts with potential aggregate funding of $152.3 million; $102.0 million had been billed or recognized as revenue, while $50.3 million related to incomplete, unbilled development work.
- The Ebola and Marburg contract had potential funding of approximately $291 million over four segments and approximately six years, but continuation beyond the initial segment depended on government options.
- Government funding was subject to Congressional appropriations, contract performance, audits, and termination-for-convenience provisions. Delays, reductions, or termination could materially reduce revenue and liquidity.
- The company continued to have no approved commercial products and warned that product candidates might fail clinical trials, manufacturing requirements, or regulatory review. The filing specifically identified uncertainty regarding the effective dose of eteplirsen.
- The proposed Animal Rule pathway for Ebola and Marburg products was described as relatively new, infrequently used, and subject to FDA disagreement regarding the predictive value of animal models.
- Key risks included the need for additional capital, potential shareholder dilution, dependence on third-party manufacturers and service providers, clinical and regulatory uncertainty, intellectual-property challenges involving eteplirsen, competition, executive turnover, and stock-price volatility.
- During 2011, the company approved a new equity incentive plan and issued substantial options. At June 30, 2011, options outstanding totaled approximately 11.9 million shares and warrants outstanding totaled approximately 29.2 million shares.
- There were no material legal proceedings reported as of the filing date. Management stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm the company-name transition from AVI BioPharma, Inc. to Sarepta Therapeutics, Inc. and the corresponding historical share and security information.
- Distinguish operating performance from accounting gains caused by changes in the fair value of warrant liabilities.
- Assess the sustainability and timing of U.S. government contract revenue, including the $50.3 million of uncompleted and unbilled work and the government’s option and termination rights.
- Review cash burn, planned clinical-trial spending, and the likelihood and terms of future financing or potential dilution.
- Track the clinical and regulatory progress of eteplirsen, including dose selection and the planned Phase II and pivotal trials.
- Evaluate the enforceability and scope of intellectual-property rights, particularly the European patent opposition involving eteplirsen.
- Consider dilution from outstanding options, warrants, and the 14.9 million shares available under the 2011 equity incentive plan.