Sarepta Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017. Sarepta is a commercial-stage biopharmaceutical company focused on RNA-targeted therapies for rare neuromuscular diseases. EXONDYS 51 (eteplirsen), approved by the FDA in September 2016 under accelerated approval for certain Duchenne muscular dystrophy patients, generated the company’s product revenue. The company was expanding U.S. commercialization, managed access programs and international regulatory activities while advancing exon 45, exon 53 and PPMO programs.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Product revenue | $46.0 million | $97.3 million |
| Cost of sales, excluding in-licensed-right amortization | $3.1 million | $3.8 million |
| Research and development | $34.2 million | $122.3 million |
| Selling, general and administrative | $28.2 million | $90.5 million |
| Operating loss | $45.9 million | $148.5 million |
| Net loss | $47.7 million | $26.7 million |
| Net loss per share | $0.78 | $0.47 |
Reported gross margin was approximately 93.3% for the quarter excluding amortization of in-licensed rights, or approximately 91.6% including that amortization. For the nine-month period, the corresponding margins were approximately 96.1% and 95.2%. Operating margins were approximately negative 99.9% for the quarter and negative 152.6% for the nine months; net margins were approximately negative 103.9% and negative 27.4%, respectively.
- Nine-month net loss benefited from a $125.0 million gain on the sale of a Rare Pediatric Disease Priority Review Voucher to Gilead. Without that gain, the company would have reported a substantially larger pre-tax loss.
- Cash used in operating activities was $200.9 million for the nine months, compared with $164.6 million in the prior-year period.
- Investing activities provided $314.9 million, primarily from the PRV sale and maturities or sales of investments. Financing activities provided $381.3 million, including $354.0 million of net equity proceeds and debt financing.
- Cash and cash equivalents were $617.6 million at September 30, 2017. Cash, cash equivalents and restricted cash and investments totaled approximately $618.4 million.
- Working capital was $665.1 million, compared with $298.1 million at December 31, 2016.
- Total debt was $31.3 million, consisting of $26.6 million of long-term debt and $4.7 million of current debt. The company also had a $40.0 million revolving commitment, with approximately $1.0 million outstanding at quarter-end.
Material changes versus the prior comparable period
- Revenue increased from zero in the 2016 periods to $46.0 million in the third quarter and $97.3 million for the first nine months of 2017 following the commercial launch of EXONDYS 51.
- Third-quarter net loss improved by $9.0 million, while nine-month net loss improved by $152.1 million, primarily because of the $125.0 million PRV gain and product revenue.
- Nine-month operating loss improved by $29.8 million despite a 38% increase in total costs and expenses, because of product revenue and lower EXONDYS 51-related clinical and manufacturing costs after commercialization.
- Research and development expense increased 4% for the nine months to $122.3 million, including a $22.0 million Summit milestone payment and higher preclinical spending, partly offset by lower clinical and manufacturing costs.
- SG&A expense increased 49% for the nine months to $90.5 million, driven by higher professional services and legal costs, increased headcount, former CEO severance and Corvallis restructuring costs.
- The company issued approximately 8.8 million common shares in July 2017 at $42.50 per share, generating approximately $354.0 million of net proceeds. Shares outstanding increased to approximately 64.6 million at September 30, 2017.
- In July 2017, Sarepta paid BioMarin $35.0 million under settlement and license agreements, recorded $28.4 million of settlement and license charges for the nine months, and became subject to potential milestone payments of approximately $65.0 million plus royalties of 4% to 8% on specified products.
Guidance, outlook, commentary and risks
Management stated that available cash, cash equivalents and investments were sufficient to fund the current operating plan for at least the next twelve months. The filing did not provide a specific revenue or earnings forecast.
- The EMA was expected to complete its review of the eteplirsen marketing authorization application in the first half of 2018. EXONDYS 51 remained commercially approved only in the U.S.; international access was through managed access or named-patient programs.
- Management targeted dosing the first patient in a PPMO exon 51 study before the end of 2017, expected ESSENCE enrollment to conclude by year-end 2017 or early 2018, and planned a first-in-human SRP-5051 study by year-end 2017.
- Continued U.S. approval depends on post-marketing requirements, including confirmatory evidence of clinical benefit. Negative or inconclusive results could lead to labeling restrictions or withdrawal of approval.
- Commercial performance depends heavily on EXONDYS 51 adoption, reimbursement, patient identification, distribution execution, manufacturing scale-up and supply availability. Three customers represented 50%, 32% and 18% of net U.S. product revenue.
- The company relied on third-party manufacturers and distributors and had approximately $54.4 million of cancellable future CRO commitments.
- Future development, regulatory, royalty and sales milestones under collaboration and license agreements could total up to $808.5 million. Litigation, intellectual-property challenges, competition, adverse events, regulatory changes and the need for additional financing remain material risks.
- The company recorded $3.9 million of income tax expense for the nine months, largely associated with the PRV gain, despite reporting a net loss.
Important facts for investors to verify
- Quarterly and cumulative EXONDYS 51 sales trends, gross-to-net reserves and customer concentration.
- Progress and results of FDA-required confirmatory studies and the status of the EMA application.
- Manufacturing capacity, inventory levels, third-party supply arrangements and any product-quality or supply interruptions.
- Cash burn, projected runway, debt covenant compliance and the likelihood or terms of future equity or debt financing.
- Potential milestone, royalty and license obligations, including the BioMarin settlement and the aggregate $808.5 million of contingent commitments.
- Clinical, regulatory and intellectual-property developments for EXONDYS 51, SRP-4045, SRP-4053 and SRP-5051.
- Outstanding shareholder litigation and other proceedings for which the filing states that a possible loss cannot currently be estimated.