NBIX

Business Context and Reporting Period

Company: Neurocrine Biosciences, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Neurocrine discovers, develops, and intends to commercialize drugs for neurological and endocrine-related diseases. The company's lead clinical program is indiplon, a candidate for the treatment of insomnia. Following the termination of a collaboration with Pfizer in 2006, Neurocrine reacquired worldwide rights to indiplon and is responsible for its development and commercialization.

Key Financial Metrics

Note: All financial figures are in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues for the nine months ended September 30, 2007, were $0.7 million, a significant decrease from $29.8 million in the same period in 2006. This drop is primarily attributed to the termination of the collaboration agreement with Pfizer in 2006, which previously generated substantial revenue through sponsored development, license fee amortization, and sales force allowances.
• Expense Reduction: Operating expenses decreased significantly due to staff reductions implemented in the third quarter of 2006.
  • R&D Expenses: Decreased to $57.6 million (nine months 2007) from $79.1 million (nine months 2006), driven by lower personnel costs ($12.4 million reduction) and reduced external development costs for cancelled programs.
  • SG&A Expenses: Decreased to $26.7 million (nine months 2007) from $47.8 million (nine months 2006), primarily due to cost savings from the 2006 staff reductions.
• Net Loss Improvement: Despite the revenue decline, the net loss for the nine months ended September 30, 2007, was $79.3 million, an improvement from $92.5 million in the prior year period, largely due to the aforementioned cost-cutting measures.
• Liquidity: Cash and cash equivalents decreased from $80.98 million at December 31, 2006, to $50.35 million at September 30, 2007, reflecting the net loss for the period.

Outlook, Risks, and Unusual Items

Regulatory Status and Outlook

• Indiplon NDA: On June 12, 2007, Neurocrine resubmitted its New Drug Application (NDA) for indiplon 5 mg and 10 mg capsules. The FDA accepted the resubmission and set a Prescription Drug User Fee Act (PDUFA) action date of December 12, 2007.
• Tablet Formulation: The 15 mg tablet formulation remains "Not Approvable" pending additional long-term safety and efficacy data. The company is formulating a strategy to pursue a sleep maintenance claim.
• Commercialization: The company expects to incur operating losses for the foreseeable future. Future profitability depends on FDA approval of indiplon and its subsequent market acceptance.

Recent Strategic Transactions (Subsequent Events)

• Japan License: On October 31, 2007, Neurocrine entered an exclusive license agreement with Dainippon Sumitomo Pharma Co. Ltd. (DSP) for indiplon in Japan. The deal includes a $20 million upfront fee, a $10 million milestone upon FDA approval, and potential total payments up to $135 million.
• Sale-Leaseback: On October 30, 2007, the company agreed to sell its facility and real property for $108 million, with a plan to lease it back for 10 years. This transaction is expected to provide approximately $60 million in net cash upon closing.

Risks and Contingencies

• Litigation: Two consolidated class-action lawsuits and a shareholder derivative suit were filed in June 2007 alleging false statements regarding the progress of indiplon's FDA approval. The financial impact is currently not estimable.
• Asset Impairment: The company holds a $94 million prepaid royalty asset related to indiplon. While management believes this asset is recoverable based on current cash flow projections, there is a risk of impairment if FDA approval is delayed or commercialization fails.
• Liquidity: The company anticipates sufficient capital for the next 12 months based on existing resources, interest income, and the anticipated sale-leaseback and DSP license fees. However, additional funding may be required for future R&D and commercialization.

Investor Verification Checklist

• FDA Decision Date: Verify the outcome of the FDA review by the PDUFA action date of December 12, 2007, for the indiplon capsule NDA.
• Transaction Closings: Confirm the closing of the $108 million facility sale-leaseback and the receipt of the $20 million upfront payment from the DSP Japan license agreement.
• Litigation Status: Monitor the consolidated securities litigation and shareholder derivative suit for any settlements or adverse rulings.
• Asset Valuation: Review future quarterly reports for any impairment charges related to the $94 million prepaid royalty asset if regulatory or commercial milestones are not met.
• Cash Burn Rate: Assess whether the company's cash reserves and anticipated inflows are sufficient to fund operations beyond the 12-month horizon without further dilutive equity financing.