Ultragenyx Pharmaceutical Inc. quarterly report, Q3 FY2018

Business context and reporting period

Ultragenyx Pharmaceutical Inc. is a rare-disease biopharmaceutical company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Crysvita and Mepsevii were approved therapies; the clinical pipeline included UX007, DTX301, DTX401 and DTX201.

Financial performance and liquidity

• Q3 revenue included $9.0 million of collaboration and license revenue ($5.4 million Crysvita-related and $3.6 million from Bayer) and $2.7 million of product sales, mainly Mepsevii ($2.1 million). Nine-month product sales were $6.3 million, including $5.3 million of Mepsevii sales.
• Nine-month net loss included a $170.3 million gain from the sale of priority review vouchers. Excluding this unusual item, the reported improvement in net loss versus 2017 does not reflect improved operating performance; operating loss increased.
• Q3 research and development expense was $70.0 million, up 16%; selling, general and administrative expense was $31.1 million, up 32%. For the nine months, these expenses were $222.4 million (up 31%) and $93.2 million (up 50%), respectively. Management attributed increases largely to pipeline activity, commercialization, personnel and stock-based compensation.
• Reported cost of sales was $0.3 million in Q3 and $0.6 million for nine months. The company cautioned that cost of sales was temporarily low because some manufacturing costs had been expensed before product approval; it expected cost of sales to rise as those inventories are depleted and new inventory reflects full manufacturing costs. Conventional product margins therefore may not be representative.
• At September 30, cash and cash equivalents were $83.0 million and short-term investments were $420.1 million, totaling $503.1 million in cash, cash equivalents and investments. Total assets were $765.1 million; total liabilities were $102.5 million. The balance sheet reports no borrowings or other debt line item.
• Cash used in investing activities was $106.9 million, including $500.0 million of investment purchases, partly offset by investment maturities and voucher-sale proceeds. Financing provided $324.6 million, including $271.0 million net from a public offering and $27.6 million from the ATM offering. Common shares outstanding rose to 50.5 million at quarter-end from 44.2 million at year-end 2017; 50.6 million were outstanding as of October 30.

Material changes, outlook and risks

• Revenue growth versus 2017 reflected Crysvita approvals and collaboration revenue, Mepsevii commercialization, and the acquired Bayer gene-therapy collaboration. The Dimension acquisition brought DTX301, DTX401 and DTX201 into the reported development-cost base.
• Management said available capital was expected to fund projected operating requirements for at least the next 12 months, while also stating that additional capital would likely be required over time. Future losses and expenses were expected to continue and increase as development and commercialization advance. Additional funding may require equity, debt, collaborations or licensing; unavailable or unfavorable financing could force program delays, reductions or termination.
• UX007: FDA accepted the company’s proposal to submit an NDA for LC-FAOD based on existing data; a pre-NDA meeting and further EMA discussions were expected by year-end 2018. Separately, a Phase 3 Glut1 DS study announced in October failed its primary and key secondary endpoints; the company planned to discontinue development for that indication.
• DTX301: the company reported mixed second-cohort results, including normalization of ureagenesis in one patient, and said the first patient remained clinically stable. The monitoring committee recommended proceeding to the third dose cohort; data were expected in mid-2019. Mild ALT elevations were reported and managed with steroids; no serious adverse events had been reported by the stated cutoff.
• DTX401: all three patients in the first dose cohort had been dosed; data were expected around year-end 2018. Crysvita TIO data were described as positive, with regulatory discussions ongoing. Mepsevii received EU approval in August and Brazilian approval in October 2018.
• Key risks include clinical and regulatory uncertainty, rare-disease patient identification and market size, pricing and reimbursement, continued funding needs, dependence on KHK and other partners, and reliance on single-source manufacturers. Gene-therapy safety, manufacturing scale-up, and possible additional regulatory requirements also pose risks. The company reported no material legal proceedings and said disclosure controls were effective.

Important facts for investors to verify

• Whether Crysvita and Mepsevii launches and collaboration economics translate into sustained revenue, particularly given partner roles and market access.
• The cash-burn trajectory: nine-month operating cash use was $234.7 million, and the $503.1 million liquidity figure includes investments as well as cash.
• How much of the nine-month net-loss improvement depended on the nonrecurring $170.3 million voucher gain, and how expenses evolve as programs advance.
• UX007’s regulatory path for LC-FAOD and the consequences of stopping Glut1 DS development; forthcoming DTX301 and DTX401 clinical data and safety findings.
• Potential dilution and future financing needs, as well as the effect of rising manufacturing costs on product margins.