Neurocrine Biosciences, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2018. Neurocrine develops and commercializes medicines for neurological and endocrine disorders. Its principal commercial product was INGREZZA (valbenazine), approved for tardive dyskinesia in April 2017. AbbVie markets elagolix as ORILISSA following FDA approval on July 24, 2018, after quarter-end.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Revenue | $96.9 million | $168.0 million | $6.3 million for both periods |
| Operating expenses | $98.8 million | $207.3 million | $63.6 million; $143.5 million |
| Operating loss | $1.9 million | $39.3 million | $57.3 million; $137.2 million |
| Net loss | $5.9 million | $47.7 million | $60.0 million; $138.3 million |
| Net loss per share | $0.07 | $0.53 | $0.68; $1.58 |
Amounts are in millions except per-share data. INGREZZA product sales were the revenue source reported for these periods. Reported product costs were $0.9 million in Q2 and $1.8 million year to date; margins are not representative because a significant portion of product manufacturing costs had been expensed as R&D before FDA approval. The company expected higher product costs beginning in the second half of 2018.
At June 30, cash and cash equivalents were $166.4 million, available-for-sale investments totaled $591.7 million, and restricted cash was $5.5 million. Cash, cash equivalents, restricted cash and investments together totaled $763.6 million, versus $767.8 million at December 31, 2017. Current assets were $567.7 million and current liabilities $61.8 million.
Six-month operating cash use was $18.0 million, investing cash use $91.6 million, and financing cash inflow $22.3 million. Convertible notes had $517.5 million principal outstanding and a $378.9 million net carrying amount. Interest expense was $15.1 million year to date. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- INGREZZA sales expanded substantially from the launch-period comparison, driving lower operating and net losses despite increased spending.
- Year-to-date R&D rose to $85.9 million from $73.8 million, including higher pipeline and personnel costs. The 2017 comparison included a $30 million BIAL license payment; 2018 included a $10 million BIAL milestone payment, making the net year-over-year BIAL expense difference a $20 million decrease.
- Year-to-date SG&A increased to $119.6 million from $69.7 million, largely reflecting the INGREZZA commercial launch and related personnel costs.
- Operating cash use declined from $125.6 million to $18.0 million, mainly due to improved results from product sales. Financing inflows fell from $508.0 million in 2017, which included the convertible-note issuance, to $22.3 million in 2018.
Outlook, commentary, risks and unusual items
- Management expected existing resources, investment income and anticipated collaboration payments to fund projected requirements for at least 12 months, while warning that funding may be insufficient to execute all plans and that additional financing may be needed.
- Management expected continued operating losses as it supports INGREZZA commercialization and advances its pipeline. No specific revenue or earnings guidance was provided.
- On July 24, 2018, AbbVie’s ORILISSA approval triggered a $40 million milestone payable within 30 days and expected to be recognized as revenue in Q3 2018. AbbVie planned to begin marketing in August 2018.
- Six-month share-based compensation included a non-recurring $7.7 million charge related to modification of certain awards.
- Key disclosed risks include commercial uptake and reimbursement for INGREZZA, competition (including Teva’s AUSTEDO), reliance on single-source suppliers and contract manufacturers, clinical and regulatory uncertainty, collaborator dependence, and possible liquidity effects if convertible notes become convertible or are converted.
- The Mount Sinai litigation was agreed to be dismissed in its entirety in Q3 2018. Management reported no other known proceedings expected to have a material adverse effect.
Important facts for investors to verify
- INGREZZA prescription demand, net sales, payer coverage and rebate/chargeback estimates.
- Whether product costs rise as expected and how that affects gross margins after previously expensed pre-approval inventory is depleted.
- Timing and receipt of the $40 million ORILISSA milestone and any later collaboration milestones or royalties.
- Cash consumption relative to management’s stated 12-month funding outlook, and the terms and conversion triggers of the $517.5 million notes.
- Clinical, regulatory and supply progress for the pipeline, including opicapone, and continued dependence on third-party suppliers and collaborators.