Enanta Pharmaceuticals, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports the quarter ended September 30, 2016 (FY2016 Q4). Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Business context
Enanta is a research-and-development-focused biotechnology company. Its principal current revenue source is royalties and milestone payments from AbbVie’s hepatitis C (HCV) regimens containing Enanta’s protease inhibitor paritaprevir. Enanta has no products it commercializes independently. Its wholly owned programs focus on NASH/PBC, RSV, HBV and HCV.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $88.3 | $160.9 |
| Research and development expense | $40.5 | $23.2 |
| General and administrative expense | $17.0 | $13.5 |
| Operating income | $30.8 | $124.1 |
| Net income | $21.7 | $79.0 |
| Diluted earnings per share | $1.13 | $4.09 |
| Cash provided by operating activities | $35.8 | $76.7 |
Revenue fell about 45% year over year, primarily because AbbVie milestone revenue declined to $30.0 million from $125.0 million. Paritaprevir royalties increased to $57.7 million from $34.1 million. Higher R&D spending, up about 74%, reflected advancing internal programs and increased clinical, preclinical and staffing costs. FY2016 operating margin was about 35%, versus 77% in FY2015; the comparison is affected by the prior year’s larger milestone revenue.
FY2016 Q4 revenue was $12.8 million, operating expenses $15.9 million and net loss $1.8 million, or $0.09 per diluted share. In FY2015 Q4, revenue was $14.4 million and net income was $5.8 million, or $0.29 per diluted share. FY2016 Q4 included an income tax benefit of $0.8 million; Q4 revenue did not include the $30 million Japan approval milestone, which was recognized in FY2016 Q1.
At September 30, 2016, cash, cash equivalents and marketable securities totaled $242.2 million; working capital was $224.3 million and stockholders’ equity was $269.9 million. The company reported no debt outstanding. Capital lease obligations were $0.5 million, and operating lease commitments totaled $12.7 million. Operating cash flow decreased from FY2015, reflecting lower AbbVie receipts and increased R&D spending. Enanta stated that existing resources and expected cash flows should fund operations for the foreseeable future.
Material changes and development update
- Paritaprevir royalties rose, but milestone revenue fell substantially; AbbVie cash receipts were $89.2 million in FY2016 versus $144.7 million in FY2015.
- Enanta initiated a Phase 1 study of lead FXR agonist EDP-305 in September 2016. It also continued its Phase 1 HCV study of EDP-494, including a proof-of-concept component.
- Glecaprevir (ABT-493), partnered with AbbVie’s pibrentasvir, completed several Phase 3 studies. AbbVie reported encouraging study results in November 2016 and planned regulatory submissions; these developments occurred after fiscal year-end. Enanta could receive up to $80 million in commercialization approval milestones and tiered royalties on the contractually allocated portion of sales.
- Enanta ended its commercial antibiotic development program in 2014; the NIAID-funded contract was completed in August 2015.
Outlook, risks and contingencies
Management expected FY2017 revenue to be primarily generated by the AbbVie collaboration and anticipated higher R&D expenses as EDP-305 advanced, the EDP-494 proof-of-concept study was completed, and other programs progressed. The filing gives no quantified revenue or earnings guidance. Further milestones and royalty amounts are uncertain, and management cautioned that future profitability is not assured.
- AbbVie dependence: AbbVie controls development and commercialization decisions for the partnered HCV products. HCV competition, pricing pressure, payer restrictions, lower sales, or termination or delay of development could reduce Enanta’s royalties and milestones.
- Development and regulatory risk: Enanta’s wholly owned candidates are early stage and may fail in trials, encounter safety issues or delays, or not obtain approval or market acceptance.
- Operational dependence: Enanta relies on third parties for manufacturing and clinical research, including certain research and manufacturing activities in China; supply or contractor disruptions could delay programs.
- Intellectual property and contingencies: Patent protection, third-party claims and potential licensing costs could affect development or commercialization. The company reported no material legal proceedings and no pending tax examinations. Its NIAID contract costs remained subject to government audit and adjustment.
Important facts for investors to verify
- AbbVie’s subsequent filings and disclosures on paritaprevir sales, royalty-bearing allocations, pricing, market share and any reductions to royalties.
- Regulatory submission, approval and commercialization progress for the glecaprevir/pibrentasvir combination, including milestone eligibility and royalty terms.
- Clinical progress, safety findings and spending for EDP-305, EDP-494, and the RSV and HBV programs.
- Cash, marketable securities, operating cash flow and R&D spending in subsequent periods relative to management’s liquidity outlook.
- Potential effects of lease commitments, the preferred-stock warrant liability, intellectual-property matters and any government audit adjustments.