Enanta Pharmaceuticals, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2015. Dollar amounts below are in millions unless otherwise noted. Enanta is a research-focused biotechnology company; revenue is primarily from collaborations and government-funded research, not sales of products it commercializes itself.
Financial results
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Revenue | $57.4 | $2.2 | $134.9 | $3.1 |
| Operating expenses | $8.8 | $7.3 | $16.1 | $13.6 |
| Operating income (loss) | $48.6 | $(5.1) | $118.8 | $(10.6) |
| Net income (loss) | $28.8 | $(5.2) | $70.8 | $(10.6) |
| Diluted EPS | $1.49 | $(0.28) | $3.67 | $(0.58) |
- Revenue drivers: The quarter included a $50.0 AbbVie milestone for European regulatory approval of a paritaprevir-containing regimen, $7.0 in AbbVie royalties, and $0.4 under the NIAID contract. Six-month revenue included $125.0 in AbbVie milestones, $8.4 in royalties, and $1.5 from NIAID.
- Margins: Calculated operating margin was 84.7% for the quarter and 88.1% for the six-month period; calculated net margin was 50.1% and 52.5%, respectively. These unusually high margins reflect milestone revenue and should not be read as representative recurring margins.
- Expenses: Quarterly R&D was $5.4 and G&A $3.4; both increased year over year. For six months, R&D was $9.9 and G&A $6.2. Enanta attributed higher R&D principally to increased early-stage discovery spending and higher G&A partly to stock-based compensation and expanding operations.
- Cash flow: Six-month operating cash flow was $93.3, versus use of $10.0 in 2014. Investing used $100.5, largely reflecting purchases of marketable securities; financing provided $2.3. Cash and cash equivalents declined to $25.8 from $30.7 at September 30, 2014.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $226.8 at March 31, 2015, including $201.1 of marketable securities. The company reported no debt and said available resources should fund anticipated needs for the foreseeable future.
- Balance sheet: Total assets were $245.9 and stockholders’ equity $224.2. Current liabilities were $19.8, including $14.5 of income taxes payable; the filing reports no debt outstanding.
Material changes and business developments
- Results shifted from losses in the 2014 comparison periods to substantial income in 2015, principally because AbbVie achieved U.S. and European regulatory milestones and began commercializing paritaprevir-containing therapy. Prior-period revenue was mainly NIAID contract revenue.
- Enanta recognized a $75.0 U.S. approval milestone in December 2014 and a $50.0 European approval milestone in January 2015. It remained eligible for up to $30.0 in Japan commercialization approval milestones for paritaprevir and up to $80.0 for specified approvals of additional protease inhibitors.
- AbbVie royalties were $8.4 for the six months. Royalties depend on AbbVie sales and contractual allocation of combination-regimen sales to Enanta’s compounds.
- Enanta regained full rights to its NS5A program, including EDP-239, from Novartis in September 2014 and assumed the proof-of-concept study. It is funding its NS5A, cyclophilin inhibitor, and nucleotide polymerase programs; it also announced NASH as a new focus area.
- The NIAID antibiotic contract was amended in February 2015: committed funding was reduced to $21.0 million and the contract was scheduled to conclude in August 2015 upon delivery of the Phase 1 study report. Enanta does not expect significant additional revenue under it.
Outlook, risks, and unusual items
- Management expects near-term revenue to remain substantially dependent on AbbVie’s commercialization of paritaprevir and advancement of related programs. The timing and amount of future royalties and milestones are uncertain, and continuing net income is not assured.
- Management expects R&D spending to increase as programs advance, particularly if internally funded programs enter clinical development. No quantified earnings or revenue guidance is provided.
- Income tax expense was $20.0 for the quarter and $48.5 for six months, reflecting taxable domestic earnings and use of deferred tax assets/net operating losses. The corresponding prior-year periods had no tax provision because a valuation allowance was then maintained.
- The company amended its Watertown office and laboratory lease, expanding space and extending the term through September 2022. Future minimum operating lease payments were $15.3 in total; $0.6 of restricted cash collateralized a letter of credit.
- Key risks include dependence on AbbVie’s decisions and commercial execution, intense competition in HCV, clinical and regulatory uncertainty, reliance on third parties for manufacturing and trials, intellectual-property disputes, and uncertainty in future collaboration funding. The filing reports no pending or threatened litigation and no pending income tax examinations.
Important facts for investors to verify
- How AbbVie’s HCV regimen sales, market share, pricing, and contractual sales allocations translate into Enanta royalties.
- Progress and timing of the remaining AbbVie milestones, including the disclosed Japan opportunity and milestones for additional protease inhibitors.
- EDP-239 study progress and the funding, development timelines, and costs for Enanta’s independent HCV and NASH programs.
- Completion of the NIAID contract, final funding and audit adjustments, and whether any additional revenue is earned before its scheduled August 2015 conclusion.
- Use of the $226.8 million liquidity balance, expected R&D growth, and the impact of the lease expansion and tax payments on future cash needs.