Sarepta Therapeutics, Inc. — Q1 2017 Form 10-Q 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). This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
EXONDYS 51 (eteplirsen) received accelerated FDA approval in September 2016 and generated the company’s first product revenue during the quarter. An application for European approval was validated by the EMA in December 2016 and remained under review at March 31, 2017.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Product revenue | $16.3 million | $0 | First commercial quarter |
| Cost of sales | $0.3 million | $0 | New commercial activity |
| Research and development | $29.1 million | $38.8 million | Down 25% |
| Selling, general and administrative | $26.2 million | $20.9 million | Up 26% |
| Operating loss | $39.2 million | $59.7 million | Improved by $20.5 million |
| Gain on sale of Priority Review Voucher | $125.0 million | $0 | Nonrecurring item |
| Net income (loss) | $84.1 million | $(59.8) million | Improved by $143.9 million |
| Basic earnings (loss) per share | $1.53 | $(1.31) | Improved by $2.84 |
| Operating cash flow | $(57.9) million | $(60.7) million | Use decreased by $2.8 million |
| Capital expenditures and intangible purchases | $5.7 million | $1.6 million | Higher investment |
Reported net income was substantially driven by the $125.0 million gain from selling the Rare Pediatric Disease Priority Review Voucher to Gilead Sciences. Excluding that gain, the company remained loss-making at the operating level.
Cash, cash equivalents and investments totaled $391.1 million at March 31, 2017, consisting of $274.7 million of cash and cash equivalents, $115.6 million of short-term investments and $0.8 million of restricted cash and investments. Working capital was $382.7 million.
Total borrowings were $13.7 million, including $11.3 million classified as current and $2.3 million classified as long-term. The company reported total assets of $511.5 million, total liabilities of $82.4 million and stockholders’ equity of $429.1 million.
Cash increased by $152.3 million during the quarter. Investing activities provided $210.0 million, primarily from the PRV sale, maturities of investments and release of a restricted investment. Operating activities continued to consume cash.
Material Changes Versus the Prior Comparable Period
- EXONDYS 51 produced $16.3 million of net product revenue, compared with no product revenue in Q1 2016.
- Research and development expense declined $9.7 million, primarily because manufacturing costs were capitalized after EXONDYS 51 approval, partly offset by increased clinical-trial activity.
- SG&A expense increased $5.3 million, primarily due to higher professional services, legal fees and commercial-launch activities.
- The company recorded a $125.0 million gain from selling its PRV and paid $2.0 million of income tax expense, primarily related to alternative minimum tax.
- Inventory increased to $30.4 million from $12.8 million at year-end 2016, reflecting preparation for commercial and clinical supply requirements.
- Accounts receivable increased to $12.3 million from $5.2 million, while product-related reserves increased to $1.0 million from $0.3 million.
- Total borrowings declined by $2.5 million from December 31, 2016.
- The Corvallis, Oregon restructuring was substantially completed; the company recorded $0.2 million of restructuring expense in Q1 2017 and remained obligated for approximately $6.0 million of minimum lease and maintenance payments.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash, cash equivalents and investments at March 31, 2017 were sufficient to fund the current operational plan for at least the next twelve months, but expected cash requirements to increase as commercialization and development programs advance.
- The company may seek additional financing through equity or debt offerings, government funding, collaborations, licensing or other strategic transactions. Additional equity financing could dilute existing shareholders.
- Management expected continued operating losses for the foreseeable future and could not predict when, or if, profitability or positive operating cash flow would be achieved.
- EXONDYS 51’s accelerated approval is subject to post-marketing requirements, including a randomized controlled confirmatory trial intended to verify clinical benefit. Failure to satisfy FDA requirements could result in restrictions or withdrawal of approval.
- Management was targeting an IND filing before year-end 2017 for SRP-5051, a DMD exon 51 PPMO candidate, subject to successful IND-enabling studies.
- The company planned to continue development of EXONDYS 51 and exon 45 and exon 53 candidates, including the ESSENCE study and other clinical, post-marketing and regulatory studies.
- Sarepta relied on third parties for manufacturing, warehousing, specialty-pharmacy distribution and clinical research services. Manufacturing capacity, quality, supply, reimbursement and distribution execution were identified as material risks.
- As of March 31, 2017, the company had up to $712.6 million of potential future development, royalty and sales milestone obligations under collaboration and license agreements, generally contingent on specified milestones. It also had approximately $51.0 million of cancellable future CRO commitments.
- Material legal and intellectual-property matters remained unresolved, including shareholder litigation, derivative actions, patent interference appeals and disputes involving BioMarin. The company stated that potential losses from certain litigation could not be estimated.
- On April 24, 2017, after the quarter ended, CEO Edward Kaye informed the board of his intention to resign at the end of his employment term on September 20, 2017, or another future date. The company began a CEO search.
Most Important Facts for Investors to Verify
- Whether EXONDYS 51 sales continue to grow and whether reimbursement, patient access and specialty-pharmacy execution support sustainable revenue.
- Progress, enrollment, safety and efficacy results from the FDA-required confirmatory and post-marketing studies for EXONDYS 51.
- The outcome and timing of the EMA review of eteplirsen and any resulting European commercialization requirements.
- Manufacturing scale-up, supply reliability, product quality and the company’s dependence on third-party manufacturers.
- Cash burn, operating losses, future financing needs and potential shareholder dilution.
- The extent and timing of contingent milestone, royalty and other contractual obligations.
- Developments in BioMarin-related patent proceedings and other intellectual-property disputes that could affect commercialization.
- The impact of the planned CEO transition and the company’s ability to retain key personnel.
- The sustainability of reported earnings after excluding the one-time $125.0 million PRV-sale gain.