Sarepta Therapeutics, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Sarepta is a commercial-stage biopharmaceutical company developing RNA-targeted therapeutics, gene therapies and other genetic medicines for rare diseases. The filing covers the three and six months ended June 30, 2019, with comparative periods ended June 30, 2018. EXONDYS 51 (eteplirsen) was the company’s principal commercial product in the United States, while the pipeline included golodirsen, casimersen, PPMO and multiple gene therapy programs.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Product revenue | $94.7 million | $73.5 million | $181.7 million | $138.1 million |
| Cost of sales | $15.9 million | $6.7 million | $28.0 million | $12.3 million |
| Approximate gross margin | 83.2% | 90.8% | 84.6% | 91.1% |
| Research and development | $113.3 million | $122.8 million | $203.8 million | $169.1 million |
| Selling, general and administrative | $67.4 million | $47.2 million | $128.0 million | $90.5 million |
| Operating loss | $275.4 million | $103.4 million | $351.8 million | $134.2 million |
| Net loss | $276.4 million | $109.3 million | $353.0 million | $144.6 million |
| Net loss per share | $3.74 | $1.67 | $4.85 | $2.22 |
Cash used in operating activities was $225.2 million in the first six months of 2019, compared with $152.9 million in the prior-year period. Investing activities provided $287.6 million, largely reflecting maturities and sales of marketable securities, while financing activities provided $383.9 million, including $365.4 million from a March 2019 equity financing. Cash, cash equivalents and restricted cash increased to $817.1 million from $410.4 million at June 30, 2018.
At June 30, 2019, Sarepta reported $808.6 million of cash and cash equivalents, $294.5 million of short-term investments and approximately $9.5 million of restricted cash and investments, totaling approximately $1.11 billion. Long-term debt was $431.0 million, primarily convertible debt. Working capital was $1.27 billion, comprising $1.43 billion of current assets and $162.1 million of current liabilities.
Material changes versus the prior comparable period
- Revenue increased 29% in Q2 and 32% for the first six months, primarily due to higher U.S. demand for EXONDYS 51.
- Cost of sales increased substantially as product volume, royalty payments and overhead rose; the company also recorded write-offs for batches that did not meet quality specifications. Gross margin declined year over year.
- Six-month R&D expense increased 21%, driven by higher clinical and manufacturing activity, headcount, facilities and technology spending, including investment in micro-dystrophin and ESSENCE programs.
- Q2 R&D expense declined 8% because the prior-year period included a $60.0 million Myonexus-related upfront payment; this reduction was more than offset by a new $173.2 million acquired in-process R&D charge.
- SG&A increased 43% in Q2 and 41% for the first six months, primarily due to headcount growth, global expansion, professional services and stock-based compensation.
- Net loss expanded materially, primarily because of the $173.2 million Myonexus in-process R&D charge and increased operating expenses.
- Common shares outstanding increased to 74.3 million at June 30, 2019 from 71.1 million at December 31, 2018, reflecting equity financing and employee-related issuances.
Guidance, outlook, risks and unusual items
- Management stated that available cash, cash equivalents and investments were sufficient to fund the current operating plan for at least the next twelve months, but expected future capital needs and may pursue additional debt, equity, government funding, collaborations or licensing transactions.
- The FDA’s targeted action date for golodirsen was August 19, 2019. Management expected to complete the open-label golodirsen study in 2019, submit an NDA for casimersen in 2019 and initiate a confirmatory SRP-9001 micro-dystrophin trial using commercial supply in the first half of 2020, subject to regulatory feedback.
- The April 2019 acquisition of Myonexus added five LGMD gene therapy programs. The transaction resulted in a $173.2 million immediate expense for acquired in-process R&D and a $4.5 million contingent consideration liability at acquisition; the liability was $5.2 million at June 30, 2019.
- Future development, regulatory, commercial and royalty milestone payments under license and collaboration agreements could reach $1.15 billion. These amounts were not accrued because the applicable milestones were not considered probable.
- Manufacturing commitments totaled approximately $669.0 million, and total contractual obligations and contingencies, including debt and leases, were approximately $1.36 billion.
- Key risks include dependence on EXONDYS 51 sales, reimbursement and payer coverage, required confirmation of clinical benefit under accelerated approval, clinical and regulatory uncertainty, competition, third-party manufacturing capacity and compliance, intellectual-property disputes, patient enrollment, and the possibility of continued operating losses and future equity dilution.
- The company relies on third-party manufacturers and reported a $0.9 million Q2 inventory cost primarily related to batches of EXONDYS 51 that did not meet quality specifications.
- No material legal claims, defaults upon senior securities or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective as of June 30, 2019.
Important facts for investors to verify
- Whether EXONDYS 51 revenue growth and payer coverage remain durable and whether net product revenue continues to offset rising commercialization and manufacturing costs.
- The FDA’s decision and any post-approval requirements for golodirsen, as well as the timing and results of the casimersen NDA and confirmatory studies.
- Clinical, regulatory and manufacturing progress for the micro-dystrophin and Myonexus gene therapy programs.
- The pace of cash consumption, the sufficiency of liquidity relative to the $669.0 million manufacturing commitments and $1.15 billion of potential milestone payments, and the need for additional financing.
- The implications of EXONDYS 51’s accelerated approval, including the risk that failure to verify clinical benefit could result in restrictions or withdrawal.
- Potential dilution from outstanding awards, future equity offerings and strategic transactions, and the company’s ability to service or refinance its convertible debt due in 2024.