Ultragenyx Pharmaceutical Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Figures are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
Ultragenyx is a rare-disease biopharmaceutical company with two approved therapies, Crysvita and Mepsevii, and clinical programs including UX007, DTX301 and DTX401. Its Crysvita collaboration with Kyowa Kirin (KKC) generates the largest share of reported revenue. The company operates as one reportable segment.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $25.8 | $11.8 | $68.1 | $35.2 |
| Product sales | $4.2 | $2.7 | $13.1 | $6.3 |
| Operating expenses | $143.8 | $101.4 | $397.8 | $316.3 |
| Operating loss | $(118.0) | $(89.6) | $(329.7) | $(281.0) |
| Net loss | $(113.0) | $(87.3) | $(308.9) | $(109.8) |
| Basic and diluted loss per share | $(1.96) | $(1.74) | $(5.50) | $(2.22) |
Revenue detail: Q3 collaboration and license revenue was $21.6 million, including $21.5 million related to Crysvita; product sales were $4.2 million. For the nine-month period, collaboration and license revenue was $55.1 million and product sales were $13.1 million.
Margins and costs: Cost of sales was $2.7 million in Q3 and $3.9 million year to date. Management reported a $1.9 million inventory reserve for a batch that did not meet quality standards and cautioned that gross margin may decline as inventory previously expensed before approval is depleted and Mepsevii costs reflect full manufacturing costs. Reported cost of sales is therefore affected by inventory accounting and is not a straightforward indicator of mature product margins.
Cash flow: Nine-month operating cash use was $273.3 million, investing cash use was $80.3 million, and financing provided $363.9 million. Cash, cash equivalents and restricted cash increased $9.7 million to $125.2 million, including restricted cash.
Liquidity and obligations: Cash, cash equivalents and short-term investments totaled approximately $527.1 million at September 30, 2019. Current assets were $613.5 million and current liabilities were $90.3 million. The company reported $38.5 million of lease liabilities, including $7.3 million current and $31.2 million long-term; it reported no debt balance in the presented balance sheet. Total stockholders’ equity was $727.3 million.
Material changes versus the prior comparable period
- Q3 revenue rose 119% year over year; nine-month revenue rose 93%, primarily reflecting higher Crysvita collaboration revenue following U.S. and European approvals and higher product sales.
- Research and development expense increased 43% in Q3 and 23% year to date, to $100.1 million and $274.3 million, respectively. Drivers included increased DTX301 and DTX401 activity and $20.0 million for the GeneTx program and $15.6 million attributed to expanded Arcturus license rights.
- Selling, general and administrative expense increased 32% in Q3 and 28% year to date, reflecting personnel, commercialization, stock-based compensation and professional-services costs.
- Year-to-date 2018 net loss included a $170.3 million gain from sales of priority review vouchers; no such gain occurred in 2019. This makes the increase in year-to-date net loss less indicative of the change in underlying operating performance.
- Ultragenyx raised $330.4 million net in a February 2019 public offering and $24.8 million net through its at-the-market offering during the first nine months. Shares issued and outstanding increased to 57.75 million from 50.86 million at December 31, 2018.
Outlook, management commentary, risks and unusual items
- Management said existing capital resources were expected to fund projected operating requirements for at least the next 12 months, while also anticipating continued annual losses and likely additional capital needs. It warned that financing may not be available on acceptable terms and that funding shortfalls could require delaying, reducing or terminating programs.
- Expected milestones included a planned first-half 2020 Crysvita supplemental application for TIO; an FDA PDUFA date of July 31, 2020 for UX007; an update on the third DTX301 dose cohort around year-end 2019; and DTX401 expansion-cohort data in the first half of 2020, with a Phase 3 study expected to begin in 2020 if results support it. These are forward-looking expectations, not assured outcomes.
- In June, the company paid $30.0 million in connection with its expanded Arcturus collaboration and equity investment. It expensed $15.6 million for additional license rights and recorded $12.0 million of year-to-date fair-value gains on Arcturus shares and an option. Management noted that Arcturus share-price volatility could cause significant future earnings fluctuations.
- In August, Ultragenyx paid GeneTx $20.0 million for collaboration rights and an exclusive option to acquire the company; the payment was expensed as in-process R&D. Additional option-extension, acquisition, milestone and royalty payments could arise under the agreement.
- Key risks include ongoing losses and financing dependence; clinical, regulatory and patient-enrollment uncertainty; reliance on third parties and single-source suppliers for manufacturing; product quality and supply risks; commercialization, reimbursement and market-size uncertainty; and gene-therapy safety and manufacturing risks. The filing also identifies potential equity dilution from future fundraising.
- The company reported no material legal proceedings. Management concluded disclosure controls were effective and reported no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Crysvita revenue growth and product sales continue, and how much depends on KKC collaboration economics and partner execution.
- Progress and regulatory outcomes for the UX007, Crysvita-for-TIO, DTX301 and DTX401 programs, including the stated filing and data timelines.
- Manufacturing quality, inventory reserves and the evolution of product gross margins as previously expensed inventory is used up.
- Cash burn, the stated liquidity runway, future capital requirements and potential dilution; also monitor the concentration of receivables, as one collaboration partner represented 93% of accounts receivable at quarter-end.
- Arcturus investment valuation changes and any exercise of the additional-share option, as well as potential future GeneTx option, acquisition and milestone payments.