Beone Medicines Ltd. quarterly report, Q3 FY2017

Business context and reporting period

BeiGene, Ltd. (now identified in the request as BeOne Medicines) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It is a commercial-stage oncology biopharmaceutical company developing targeted and immuno-oncology therapies and began distributing Celgene cancer drugs in China during September 2017. Financial amounts below are U.S. dollars in millions unless stated otherwise.

Key financial results and liquidity

• Revenue mix: Q3 and nine-month revenue included $211.4 million of Celgene collaboration license revenue and $8.8 million of net product revenue from ABRAXANE and REVLIMID sales in China. Product revenue was recorded net of $1.7 million of rebates and returns; cost of product sales was $1.9 million, implying product gross profit of approximately $6.9 million and gross margin of about 78%.
• Profit quality: Q3 profit principally reflected recognition of the upfront BGB-A317 license payment, rather than recurring product sales. The company allocated $250.0 million of non-contingent consideration between the license and R&D services; $211.4 million was recognized as license revenue and $38.6 million remained deferred. A further $13.0 million of the total upfront fees was allocated to acquired assets.
• Cash flow: Operating activities used $81.0 million in the first nine months, versus $63.4 million in 2016. Investing activities used $288.1 million, largely reflecting purchases of securities and time deposits, facility investment, and Guangzhou land rights. Financing activities provided $487.3 million, including the public offering, Celgene share issuance, GET shareholder loan and capital contribution.
• Balance sheet and liquidity: At September 30, cash and cash equivalents were $208.5 million and short-term investments were $548.9 million, totaling $757.4 million. Current assets were $962.3 million and current liabilities $103.2 million. Accounts receivable were $10.5 million and unbilled receivables $171.0 million, the remaining Celgene upfront amount due in December 2017.
• Debt and commitments: Total bank loan was $18.0 million, with $9.0 million due in each of 2018 and 2019. A GET shareholder loan of $140.3 million carried an 8% annual interest rate and matures in 2023 unless repaid or converted earlier. Capital commitments were $36.1 million; operating lease commitments were $23.1 million. Accumulated deficit was $231.2 million.

Material changes versus the prior comparable period

• Revenue increased sharply from none in Q3 2016, primarily because the Celgene BGB-A317 license became effective in August 2017; product sales also began in China. Nine-month 2016 collaboration revenue was $1.1 million, compared with $211.4 million in 2017.
• R&D expense rose 191% in Q3 and 157% for the nine-month period, reflecting expanded clinical programs, personnel and share-based compensation. SG&A expense rose 231% in Q3 and 199% year to date, including commercial buildout and the acquired China operations.
• Cash, cash equivalents and short-term investments increased from $368.2 million at December 31, 2016 to $757.4 million at September 30, 2017. Total assets rose to $1.05 billion from $405.8 million, alongside the Celgene transactions, fundraising and facility investment.
• BeiGene regained worldwide rights to BGB-283 after Merck KGaA declined to exercise its continuation option in March 2017. The company also acquired Celgene Shanghai’s China commercial operations and distribution rights for specified Celgene products.

Outlook, management commentary and risks

• Management stated that available resources were expected to fund projected operating requirements for at least 12 months after issuance of the financial statements. It also expected continued significant losses, negative operating cash flows and rising R&D, commercialization and manufacturing expenses; additional financing may be needed.
• The company reported no formal earnings guidance and said it did not give guidance on results of operations. Revenue is expected to fluctuate with product sales and the timing of collaboration fees, milestones and reimbursements. Potential future BGB-A317 development, regulatory and sales milestones were described as up to $980 million, plus royalties; these amounts are contingent and not assured.
• Key business risks include clinical-trial outcomes and delays, regulatory approval, drug safety, pricing and reimbursement, competition, manufacturing scale-up and compliance, dependence on collaborators and suppliers, intellectual property disputes, and the ability to finance development and commercialization. Risks also include currency conversion and foreign-exchange exposure in China.
• Unusual financial items include the large upfront license revenue, $4.9 million of nine-month shareholder-loan interest expense (partly capitalized), and a $3.1 million Q3 income-tax benefit primarily related to estimated R&D credits and the U.S. Orphan Drug Credit.
• The filing reported no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements. Management concluded disclosure controls and procedures were effective as of September 30, 2017.

Important facts for investors to verify

1. Confirm receipt of the remaining approximately $171.0 million Celgene upfront payment due in December 2017 and the timing of recognition of the $38.6 million deferred R&D-services allocation.
2. Assess recurring product sales, rebates and returns, and the commercial performance and reimbursement terms of the China distribution business; Q3 sales covered only a short launch period.
3. Track clinical and regulatory progress, costs and safety results for BGB-3111, BGB-A317, BGB-290 and BGB-283; the Q3 profit is not a reliable indicator of ongoing profitability.
4. Monitor Guangzhou facility construction, the $36.1 million capital commitment, the use restrictions on the GET loan and its 8% interest and possible equity conversion.
5. Review cash burn and financing needs against management’s 12-month liquidity assessment, including that $91.6 million of cash was held by BeiGene Biologics for specified facility and R&D purposes.
6. Consider share dilution and ownership effects from the August 2017 offerings and Celgene’s 32.7 million-share investment, as well as the potential terms of future financing.