Travere Therapeutics, Inc. annual report, FY2015

Business context and reporting period

The supplied filing is Retrophin, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed February 26, 2016—not a filing under the name Travere Therapeutics, Inc. The filing reports full-year results and unaudited fourth-quarter figures. Retrophin was a rare-disease biopharmaceutical company selling Chenodal, Cholbam and Thiola, while developing sparsentan, RE-024 and RE-034.

Financial performance and liquidity

FY 2015 gross margin was approximately 97.8% and operating margin approximately (50.8%), calculated from reported sales and cost of goods sold. Reported net income was driven by substantial non-operating and non-recurring items, rather than operating profitability. Fourth-quarter 2015 sales were $30.4 million, operating loss $15.2 million and net loss $2.5 million.

Operating cash use narrowed substantially year over year, but operations still used cash. Investing activities used $80.6 million and financing activities provided $100.8 million in 2015. The company reported $43.9 million carrying value of convertible debt at year-end ($46.0 million principal); the separate $45.0 million credit facility was repaid in July 2015. The convertible notes bear 4.5% interest, mature in 2019 and have an initial conversion price of $17.41 per share.

Material changes versus prior comparable period

• Sales increased approximately 254%, reflecting a full year of Chenodal and Thiola sales, Thiola growth and Cholbam sales beginning in April 2015.
• Cholbam was acquired after FDA approval in March 2015. The transaction included a pediatric priority review voucher, which Retrophin sold to Sanofi for $245.0 million: $150.0 million at closing and two later installments of $47.5 million each.
• Operating expenses rose $42.6 million, including higher commercial and development spending, a $13.8 million contingent-consideration revaluation and a $4.7 million Carbetocin asset impairment.
• 2015 net income included a $140.0 million gain on the voucher sale, a $49.1 million bargain-purchase gain on Cholbam and a $15.5 million litigation settlement gain. These were partly offset by a $33.3 million non-cash loss from warrant-liability revaluation and debt-related charges.
• A March 2015 public offering raised $140.0 million net and increased the share count. The company also divested certain assets to Turing-related purchasers; the filing reports a $0.9 million gain from those divestitures.

Outlook, risks and unusual items

Management said available cash and short-term investments were expected to fund operations in the near term, while cautioning that further equity or debt financing, or strategic alliances, might be needed depending on operating results. Management expected research and development expense to increase in 2016, focused on clinical programs and earlier-stage research. No specific sales or earnings guidance was provided.

• Sparsentan’s Phase 2 DUET study was enrolling; management anticipated top-line results in the third quarter of 2016 and said accelerated approval might be possible depending on results and FDA acceptance of proteinuria as a surrogate endpoint.
• RE-024 completed a Phase 1 study during 2015; the company was engaging with FDA on a potential registration trial. RE-034 remained in preclinical development.
• Commercial results depend on payer coverage, product acceptance, pricing, rare-disease patient identification and continued supply from third-party manufacturers. Chenodal and Thiola faced potential generic competition, and the company disclosed single-source supply dependencies.
• Legal matters included a shareholder class action settlement awaiting final court approval, proceedings and investigations relating to the former CEO, and uncertain requests for advancement of legal expenses. The company recorded no accrual for certain litigation because outcomes were not considered probable or reasonably estimable; potential advancement amounts were not clear.
• The company disclosed that prior-period financial statements required correction following an investigation into former CEO-related transactions and stock-option accounting. It reported that prior material weaknesses in internal controls had been remediated and that controls were effective at year-end.

Important facts for investors to verify

• Confirm the issuer and period: this is Retrophin’s FY 2015 Form 10-K, despite the request metadata naming Travere Therapeutics.
• Assess recurring performance separately from the voucher-sale, acquisition and litigation gains; reconcile the reported $117.2 million net income with the $50.7 million operating loss.
• Track collection of Sanofi’s two remaining $47.5 million installments and the company’s liquidity and cash burn after year-end.
• Review the convertible notes’ repayment or conversion terms, dilution exposure, and contingent royalty and milestone obligations, including the reported $59.0 million contingent-consideration liability.
• Monitor the DUET readout, RE-024 registration strategy, reimbursement and commercialization progress, manufacturing continuity, and the status and potential cost of litigation and legal-expense advancement.

Data note: The MD&A narrative says the company generated positive operating cash flow in 2015, but the cash-flow statement reports net cash used in operating activities of $0.6 million. The filing text does not reconcile this apparent inconsistency.