Neurocrine Biosciences, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Neurocrine develops medicines for neurological and endocrine disorders. The period marked the start of U.S. commercialization of INGREZZA (valbenazine) for tardive dyskinesia, following FDA approval on April 11; commercial launch began May 1.
Financial results and liquidity
Amounts are in millions, except per-share data and where noted.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $6.3 | $0 | $6.3 | $15.0 |
| Operating expenses | $63.6 | $41.8 | $143.5 | $77.7 |
| Operating loss | $(57.3) | $(41.8) | $(137.2) | $(62.7) |
| Net loss | $(60.0) | $(40.3) | $(138.3) | $(59.5) |
| Net loss per share | $(0.68) | $(0.46) | $(1.58) | $(0.69) |
- Q2 product sales were $6.3 million; product cost was $0.06 million, implying a reported gross margin of about 99%. This is not representative of expected ongoing economics: much of the product sold had manufacturing costs expensed as R&D before FDA approval.
- First-half operating cash use was $125.6 million, versus $43.5 million in 2016. Investing activities used $156.2 million; financing provided $508.0 million, mainly from convertible-note proceeds.
- At June 30, cash and cash equivalents were $309.5 million and available-for-sale investments were $421.3 million, totaling $730.8 million. Total current assets were $536.8 million and current liabilities $27.7 million.
- In May, the company issued $517.5 million principal amount of 2.25% convertible senior notes due 2024, receiving net proceeds of approximately $502.8 million. The balance-sheet carrying value was $360.7 million after debt discount and issuance costs. The notes have an initial conversion price of approximately $75.92 per share.
Material changes versus comparable periods
- Q2 revenue began with the INGREZZA launch; there were no product sales in Q2 2016. First-half 2016 revenue included a $15 million AbbVie milestone; no license or milestone revenue was recorded in first-half 2017.
- Q2 SG&A rose $26.7 million to $41.7 million, primarily from INGREZZA launch personnel and commercial activities. First-half SG&A rose $42.8 million to $69.7 million for similar reasons.
- Q2 R&D declined $5.0 million to $21.9 million, mainly due to lower INGREZZA development and NDA-preparation costs, partly offset by personnel costs. First-half R&D rose $23.0 million to $73.8 million, principally due to the $30 million opicapone license fee paid to BIAL and expensed as in-process R&D.
- Net loss increased in both comparison periods, reflecting higher spending on the commercial launch and, for the first half, the opicapone license fee. Q2 also included $4.8 million of interest expense related to the new notes.
- Cash, cash equivalents and investments increased from $350.8 million at December 31, 2016 to $730.8 million at June 30, 2017, primarily following the debt financing.
Outlook, risks and unusual items
- Management stated that existing capital resources, investment income and expected strategic-alliance payments should fund current and projected requirements for at least the next 12 months, while cautioning that resources may not support all planned commercialization and R&D activities. The company expected operating cash-flow losses for the foreseeable future and did not expect profitability or positive operating cash flow in 2017.
- No specific sales or earnings guidance was provided. Management identified INGREZZA commercialization, reimbursement, spending levels and development progress as factors affecting future funding needs and results.
- Key commercial risks include limited commercialization experience, payer coverage and reimbursement uncertainty, and reliance on a single approved supplier for INGREZZA capsules and a single supplier for its active ingredient. The company has no manufacturing facilities and relies on third parties.
- The company cited clinical and regulatory uncertainty across its pipeline, dependence on AbbVie for elagolix development and commercialization, and reliance on BIAL for opicapone supply. BIAL terms include potential additional milestone payments of up to $115 million and minimum-sales provisions after commercialization.
- Mount Sinai litigation alleges breach of a license agreement related to the AbbVie collaboration and seeks unspecified damages, future sublicensing fees and legal fees. Neurocrine disputes the claims, intends to defend itself, and said it cannot predict the outcome or estimate a potential loss.
- The new notes create potential cash-settlement and dilution exposure if conversion conditions are met; conversion could also affect current-versus-long-term classification. The company reported no off-balance-sheet arrangements. Management said disclosure controls were effective and noted material changes to internal controls implemented for product sales, inventory and convertible debt processes.
Important facts for investors to verify
- INGREZZA prescription growth, net sales, gross-to-net deductions, reimbursement access and the eventual cost of product as pre-approval inventory is depleted.
- Whether the launch can scale while commercial and R&D spending remain high, and how operating cash burn affects the stated funding outlook.
- Convertible-note conversion conditions, potential cash repayment needs, dilution exposure and future balance-sheet classification.
- Supply continuity and quality at the two single-source INGREZZA suppliers, plus BIAL supply and license obligations.
- Developments in the Mount Sinai case, clinical programs and collaboration milestones; the filing does not provide a clear estimate of any potential litigation loss.