NBIX

Business Context and Reporting Period

Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Neurocrine is a biopharmaceutical company discovering and developing drugs for neurological and endocrine-related diseases. The company has no approved products and generates revenue primarily through collaboration agreements. Key programs include elagolix (endometriosis), VMAT2 inhibitors (movement disorders), and CRF antagonists (stress-related disorders).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Surge: Total revenues increased 1,036% from $3.0 million in 2009 to $33.5 million in 2010. This was driven by new collaboration agreements with Abbott ($27.0 million revenue) and Boehringer Ingelheim ($3.5 million revenue).
• Improved Profitability: Net loss narrowed significantly from $51.0 million in 2009 to $8.0 million in 2010, primarily due to increased collaboration revenue and cost containment efforts.
• Liquidity Expansion: Cash and investments more than doubled to $126.9 million, fueled by $75 million in upfront payments from Abbott, $10 million from Boehringer Ingelheim, and $21.4 million from a public equity offering.
• Expense Reduction: Research and development expenses decreased by $2.5 million, and General and Administrative expenses decreased by $1.1 million compared to 2009.

Guidance, Outlook, and Risks

Management Outlook:

• Management expects to be profitable in 2011 due to full-year revenue recognition from Abbott and Boehringer Ingelheim agreements.
• However, the company does not expect to be operating cash flow positive in 2011 and anticipates negative cash flows for the foreseeable future after 2011.
• Elagolix is expected to enter Phase III clinical trials in 2011, pending FDA agreement on trial design.

Key Risks and Contingencies:

• Indiplon Uncertainty: The insomnia drug candidate indiplon received an "approvable" letter from the FDA in 2007 but requires additional studies (elderly trial, safety study, pregnancy study) before approval. Development is currently paused.
• Collaboration Dependence: The company relies heavily on partners (Abbott, Boehringer Ingelheim, GSK) for funding and development. Termination of these agreements could severely impact liquidity.
• Real Estate Obligations: The company has significant lease obligations related to its San Diego headquarters, including a "cease-use" liability and rent differential payments totaling approximately $76.3 million over the remaining lease term.
• Capital Needs: While current resources are sufficient for 12 months, the company may need to raise additional capital through equity offerings or its Committed Equity Financing Facility (CEFF), which could be dilutive.

Investor Verification Checklist

• Collaboration Milestones: Verify the specific scientific milestones required to trigger the remaining $530 million (Abbott) and $225 million (Boehringer Ingelheim) in potential payments.
• Elagolix Phase III Design: Confirm the outcome of the scheduled end-of-Phase II meeting with the FDA in March 2011 regarding the trial design for elagolix.
• Indiplon Status: Monitor any updates regarding the resubmission of the New Drug Application (NDA) for indiplon and the timeline for required additional studies.
• Lease Obligations: Review the specific terms of the rent differential payments and the "cease-use" liability associated with the San Diego facility lease.
• Equity Dilution: Assess the potential impact of the $75 million CEFF with Kingsbridge Capital and the $125 million shelf registration statement on existing shareholders.