Sarepta Therapeutics, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Sarepta is a pre-commercial biopharmaceutical company developing RNA-targeted therapeutics, primarily exon-skipping treatments for Duchenne muscular dystrophy (DMD). The filing covers the fiscal year ended December 31, 2015; fourth-quarter figures are unaudited. The lead candidate, eteplirsen, targets exon 51 skipping and was under FDA priority review following NDA acceptance in August 2015.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $1.3 million | $9.8 million | Down 87% |
| Research and development expense | $146.4 million | $94.2 million | Up 55% |
| General and administrative expense | $75.0 million | $49.3 million | Up 52% |
| Operating loss | $220.2 million | $133.8 million | Loss increased 65% |
| Net loss | $220.0 million | $135.8 million | Loss increased 62% |
| Net loss per share | $5.20 | $3.39 | Loss increased $1.81 |
Revenue consisted primarily of government research contracts and grants, not product sales. The company has generated no product revenue. The filing does not present a meaningful positive operating or net margin because the company remains pre-commercial and loss-making.
- Fourth-quarter 2015 revenue was $1.3 million versus $27,000 in fourth-quarter 2014. Fourth-quarter net loss was $64.7 million, or $1.44 per share, versus $44.4 million, or $1.08 per share.
- FY 2015 operating cash flow was negative $149.5 million, compared with negative $128.5 million in 2014.
- Investing activities provided $8.4 million, primarily reflecting net maturities and purchases of short-term securities, versus $159.0 million of investing cash use in 2014.
- Financing activities provided $147.8 million, including approximately $119.9 million net proceeds from an October 2015 equity offering and $19.6 million net proceeds from a senior secured term loan.
- Cash, cash equivalents and investments totaled $204.0 million at December 31, 2015, including $80.3 million of cash and cash equivalents, $112.2 million of short-term investments and $11.5 million of restricted cash and investments.
- Working capital was $162.2 million, down from $210.9 million. Total borrowings were $23.4 million, including a $20.0 million MidCap senior secured term loan, mortgage debt and notes payable.
- Management stated that available cash, cash equivalents and investments were sufficient to fund the current operating plan for at least the next twelve months, but additional financing may be required as development and commercialization activities expand.
Material changes versus the prior comparable period
- R&D spending increased $52.2 million, driven mainly by higher clinical and manufacturing costs, increased trial enrollment, raw-material purchases and supply-agreement activities.
- Eteplirsen R&D expense increased 145% to $72.1 million; exon 45 expense increased 53% to $6.6 million, while exon 53 expense declined 30% to $5.6 million.
- G&A expense increased $25.7 million, including $9.5 million of higher professional fees, $9.2 million of former CEO severance expense and increased personnel costs.
- Government-contract revenue declined sharply as Department of Defense development programs largely ended; only $1.3 million of contract-finalization revenue was recognized in 2015.
- Common shares outstanding increased to approximately 45.6 million at year-end from 41.3 million, reflecting the equity offering and option exercises. Approximately 6.8 million potentially dilutive awards were outstanding but excluded from diluted loss per share because they were antidilutive.
- The company entered into the MidCap credit agreement in June 2015. The facility bears interest at 7.75%, requires minimum cash collateral and includes restrictive covenants and events of default.
Guidance, outlook, management commentary, risks and unusual items
- The FDA postponed the eteplirsen advisory committee meeting because of severe weather. After Sarepta submitted four-year clinical-effectiveness data, the PDUFA action date was extended to May 26, 2016.
- Management planned continued investment in eteplirsen manufacturing scale-up, commercial infrastructure, clinical trials and potential confirmatory studies for exon 45 and exon 53 candidates.
- The company had no approved products and no product-sales revenue. Future profitability depends on regulatory approval, successful clinical development, commercialization, reimbursement and additional financing.
- Manufacturing capacity is outsourced to third parties, with limited qualified suppliers and approximately $130.0 million of purchase obligations, primarily related to the DMD program.
- Contractual obligations and contingencies totaled approximately $181.7 million, including debt, leases and purchase commitments. Separately, potential development, regulatory and commercial milestone payments totaled up to $95.2 million, contingent on achievement of specified milestones and not recorded as liabilities.
- Patent risk was material. The PTAB ordered cancellation of a Sarepta/UWA patent covering certain methods of using eteplirsen; Sarepta’s rehearing request was denied and an appeal was planned. Additional U.S. and European interference and patent proceedings involving BioMarin remained unresolved.
- Several securities and derivative lawsuits related to eteplirsen disclosures were pending or stayed. The filing states that possible losses could not be reasonably estimated, except that management did not expect the McDonald derivative matter to have a material financial impact.
- The former CEO resigned in 2015, and Edward Kaye served as interim CEO at the filing date. The company incurred $9.2 million of related severance expense, including $8.6 million of stock-based compensation.
- Government-contract revenue, litigation outcomes, FDA decisions, clinical results, manufacturing scale-up and access to capital were identified as major sources of uncertainty.
Most important facts for investors to verify
- FDA action and advisory committee outcomes for eteplirsen, including the effect of the additional clinical data on approval requirements.
- Results, design and regulatory acceptance of eteplirsen confirmatory studies and follow-on exon 45 and exon 53 programs.
- Actual cash burn, financing needs and compliance with the MidCap minimum-cash and other debt covenants.
- Progress and cost of commercial-scale manufacturing, supplier commitments and the $10.7 million restricted investment securing a manufacturing-related letter of credit.
- Resolution of Sarepta’s patent interferences and appeals, including potential BioMarin infringement claims.
- Status and potential exposure of pending securities and derivative litigation.
- Whether the $204.0 million liquidity balance remains sufficient after increased clinical, manufacturing and pre-launch spending.