srpt-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-14895

 

SAREPTA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

93-0797222

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

215 First Street, Suite 415

Cambridge, MA

 

02142

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617) 274-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging growth company

 

  

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock with $0.0001 par value

  

64,632,001

(Class)

  

(Outstanding as of October 26, 2017)

 

 

 

 


SAREPTA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — As of September 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss — For the Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2017
and 2016

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

56

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

56

 

 

 

 

 

Item 5.

 

Other Information

 

56

 

 

 

 

 

Item 6.

 

Exhibits

 

56

 

 

 

 

 

Signatures

 

57

 

 

 

 

 

Exhibits

 

58

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except shares and per share amounts)

 

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

617,630

 

 

$

122,420

 

Short-term investments

 

 

 

 

 

195,425

 

Accounts receivable

 

 

24,751

 

 

 

5,228

 

Inventory

 

 

64,693

 

 

 

12,813

 

Restricted investment

 

 

 

 

 

10,695

 

Asset held for sale

 

 

1,501

 

 

 

 

Other current assets

 

 

27,033

 

 

 

26,895

 

Total current assets

 

 

735,608

 

 

 

373,476

 

Restricted cash and investments

 

 

784

 

 

 

784

 

Property and equipment, net of accumulated depreciation of $34,677

   and $30,346 as of September 30, 2017 and December 31, 2016, respectively

 

 

38,872

 

 

 

37,801

 

Intangible assets, net of accumulated amortization of $3,762 and $3,134 as of

   September 30, 2017 and December 31, 2016, respectively

 

 

14,029

 

 

 

8,076

 

Other non-current assets

 

 

10,988

 

 

 

3,967

 

Total assets

 

$

800,281

 

 

$

424,104

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,317

 

 

$

29,690

 

Accrued expenses

 

 

55,752

 

 

 

31,016

 

Current portion of long-term debt

 

 

4,732

 

 

 

10,108

 

Deferred revenue

 

 

3,303

 

 

 

3,303

 

Other current liabilities

 

 

1,366

 

 

 

1,305

 

Total current liabilities

 

 

70,470

 

 

 

75,422

 

Long-term debt

 

 

26,550

 

 

 

6,042

 

Deferred rent and other

 

 

6,105

 

 

 

5,949

 

Total liabilities

 

 

103,125

 

 

 

87,413

 

Commitments and contingencies (Note 18)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 3,333,333 shares authorized; none issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value, 99,000,000 shares authorized; 64,567,418

   and 54,759,234 issued and outstanding at September 30, 2017 and

   December 31, 2016, respectively

 

 

6

 

 

 

5

 

Additional paid-in capital

 

 

1,890,172

 

 

 

1,503,126

 

Accumulated other comprehensive loss

 

 

(12

)

 

 

(120

)

Accumulated deficit

 

 

(1,193,010

)

 

 

(1,166,320

)

Total stockholders’ equity

 

 

697,156

 

 

 

336,691

 

Total liabilities and stockholders’ equity

 

$

800,281

 

 

$

424,104

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share amounts)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product, net

 

$

45,954

 

 

$

 

 

$

97,307

 

 

$

 

Total revenues

 

 

45,954

 

 

 

 

 

 

97,307

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of in-licensed

   rights)

 

 

3,078

 

 

 

 

 

 

3,807

 

 

 

 

Research and development

 

 

34,239

 

 

 

34,349

 

 

 

122,266

 

 

 

117,523

 

Selling, general and administrative

 

 

28,176

 

 

 

22,184

 

 

 

90,461

 

 

 

60,812

 

Settlement and license charges

 

 

25,588

 

 

 

 

 

 

28,427

 

 

 

 

Amortization of in-licensed rights

 

 

780

 

 

 

 

 

 

837

 

 

 

 

Total cost and expenses

 

 

91,861

 

 

 

56,533

 

 

 

245,798

 

 

 

178,335

 

Operating loss

 

 

(45,907

)

 

 

(56,533

)

 

 

(148,491

)

 

 

(178,335

)

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

 

 

 

 

 

 

125,000

 

 

 

 

Interest income (expense) and other, net

 

 

184

 

 

 

(209

)

 

 

703

 

 

 

(478

)

Total other income (loss)

 

 

184

 

 

 

(209

)

 

 

125,703

 

 

 

(478

)

Loss before income tax expense

 

 

(45,723

)

 

 

(56,742

)

 

 

(22,788

)

 

 

(178,813

)

Income tax expense

 

 

2,011

 

 

 

 

 

 

3,902

 

 

 

 

Net loss

 

 

(47,734

)

 

 

(56,742

)

 

 

(26,690

)

 

 

(178,813

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on cash equivalents and short-term

   investments

 

 

26

 

 

 

(1

)

 

 

108

 

 

 

111

 

Total other comprehensive income (loss)

 

 

26

 

 

 

(1

)

 

 

108

 

 

 

111

 

Comprehensive loss

 

$

(47,708

)

 

$

(56,743

)

 

$

(26,582

)

 

$

(178,702

)

Net loss per share - basic and diluted

 

$

(0.78

)

 

$

(1.18

)

 

$

(0.47

)

 

$

(3.83

)

Weighted average number of shares of common stock

   outstanding for computing basic and diluted net loss

   per share

 

 

61,528

 

 

 

48,254

 

 

 

57,166

 

 

 

46,709

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(26,690

)

 

$

(178,813

)

Adjustments to reconcile net loss to cash flows from operating

   activities:

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

(125,000

)

 

 

 

Depreciation and amortization

 

 

5,968

 

 

 

3,947

 

(Accretion of discount) amortization of premium on available-for-

   sale securities and non-cash interest

 

 

(144

)

 

 

473

 

Loss on disposal of assets

 

 

792

 

 

 

45

 

Stock-based compensation

 

 

23,099

 

 

 

23,093

 

Non-cash restructuring expenses

 

 

 

 

 

504

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

 

 

 

Net increase in accounts receivable

 

 

(19,523

)

 

 

(9

)

Net increase in inventory

 

 

(51,880

)

 

 

(2,921

)

Net increase in other assets

 

 

(7,319

)

 

 

(8,203

)

Net decrease in accounts payable, accrued expenses,

   deferred revenue and other liabilities

 

 

(241

)

 

 

(2,703

)

Net cash used in operating activities

 

 

(200,938

)

 

 

(164,587

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(8,101

)

 

 

(2,427

)

Purchase of intangible assets

 

 

(8,591

)

 

 

(1,093

)

Purchase of available-for-sale securities

 

 

(100,348

)

 

 

 

Proceeds from sale of Priority Review Voucher

 

 

125,000

 

 

 

 

Maturity of restricted investment

 

 

10,695

 

 

 

 

Maturity and sale of available-for-sale securities

 

 

296,225

 

 

 

112,101

 

Net cash provided by investing activities

 

 

314,880

 

 

 

108,581

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from July 2017 Term Loan (defined in Note 12), net of cash

   debt issuance costs

 

 

29,620

 

 

 

 

Proceeds from revolving line of credit

 

 

24,000

 

 

 

 

Payments on June 2015 Term Loan (defined in Note 12) and mortgage loans

 

 

(15,081

)

 

 

(5,076

)

Payments on revolving line of credit

 

 

(23,008

)

 

 

 

Proceeds from sales of common stock, net of offering costs

 

 

353,959

 

 

 

364,951

 

Proceeds from exercise of options and purchase of stock under the

   Employee Stock Purchase Program

 

 

11,779

 

 

 

10,967

 

Net cash provided by financing activities

 

 

381,269

 

 

 

370,842

 

Increase in cash and cash equivalents

 

 

495,211

 

 

 

314,836

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning of period

 

 

122,556

 

 

 

80,440

 

End of period

 

 

617,767

 

 

 

395,276

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

924

 

 

$

1,199

 

Supplemental schedule of non-cash investing activities and financing

   activities:

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

$

1,791

 

 

$

1,955

 

Intangible assets included in accrued expenses

 

$

258

 

 

$

1,230

 

Reclassification of software licenses

 

$

204

 

 

$

 

Property and equipment reclassified to asset held for sale

 

$

1,529

 

 

$

 

Accrual for debt issuance costs related to the term loans

 

$

600

 

 

$

400

 

Accrual for offering costs related to equity offerings

 

$

25

 

 

$

222

 

Property and equipment included in accrued expenses

 

$

385

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


SAREPTA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BUSINESS

Sarepta Therapeutics, Inc. (together with its wholly-owned subsidiaries, “Sarepta” or the “Company”) is a commercial-stage biopharmaceutical company focused on the discovery and development of unique RNA-targeted therapeutics for the treatment of rare neuromuscular diseases. Applying its proprietary, highly-differentiated and innovative platform technologies, the Company is able to target a broad range of diseases and disorders through distinct RNA-targeted mechanisms of action. The Company is primarily focused on rapidly advancing the development of its potentially disease-modifying Duchenne muscular dystrophy (“DMD”) drug candidates. On September 19, 2016, the United States Food and Drug Administration (“FDA”) granted accelerated approval for EXONDYS 51, indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. EXONDYS 51 is studied in clinical trials under the name of eteplirsen and is marketed in the U.S. under the trademarked name of EXONDYS 51® (eteplirsen) Injection.

In November 2016, the Company submitted a marketing authorization application (“MAA”) for eteplirsen to the European Medicine Agency (“EMA”) and the application was validated in December 2016. The Company continues to work with the EMA during their review process and anticipate they will complete their review and make a final decision on the approvability of the Company’s MAA for eteplirsen in the first half of 2018.

The Company has also initiated a market access program (“MAP”) for eteplirsen in select countries in Europe, North America, South America and Asia where it currently has not been approved. The MAP provides a mechanism through which physicians can prescribe eteplirsen, within their professional responsibility, to patients who meet pre-specified medical and other criteria and can secure funding. The Company has commenced shipments through the MAP and continue to expand the MAP to include more countries. In addition, the Company contracted with third party distributors and service providers to distribute eteplirsen in certain areas outside the U.S., such as Israel and certain countries in the Middle East, on a named patient basis.

As of September 30, 2017, the Company had approximately $618.4 million of cash, cash equivalents and investments, consisting of $617.6 million of cash and cash equivalents and $0.8 million of restricted cash and investments. The Company believes that its balance of cash, cash equivalents and investments as of the date of the issuance of this report is sufficient to fund its current operational plan for at least the next twelve months, though it may pursue additional cash resources through public or private financings, seek additional government funding and establish collaborations with or license its technology to other companies.

 

2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), reflect the accounts of Sarepta Therapeutics, Inc. and its wholly-owned subsidiaries. All intercompany transactions between and among its consolidated subsidiaries have been eliminated. Management has determined that the Company operates in one segment: discovering, developing, manufacturing and delivering therapies to patients for the treatment of rare neuromuscular diseases.

Estimates and Uncertainties

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include revenue recognition, inventory, valuation of stock-based awards, research and development expenses and income tax.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash, cash equivalents and investments held at financial institutions.  

As of September 30, 2017, the majority of the Company’s accounts receivable have arisen from product sales in the U.S. and all customers have standard payment terms which generally require payment within 30 to 60 days. Three individual customers accounted for 50%, 32% and 18% of net U.S. product revenues and 66%, 21% and 13% of accounts receivable from product sales,

6


respectively. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profile. As of September 30, 2017, the Company believes that such customers are of high credit quality.

As of September 30, 2017, the Company’s money market funds, commercial paper and government and governmental agency bonds were concentrated at two financial institutions, which potentially exposes the Company to credit risks. However, the Company does not believe that there is significant risk of non-performance by the financial institutions.

Significant Accounting Policies

For details about the Company’s accounting policies, please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements of the Annual Report on Form 10-K for the year ended December 31, 2016.

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash”. The amendments in this update requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company elected to early adopt this guidance as of January 1, 2017. This guidance was applied using a retrospective transition method for each period and, accordingly, the Company included approximately $0.1 million of restricted cash in cash and cash equivalents as of the beginning and ending periods in the accompanying unaudited condensed consolidated statements of cash flows.

During the second quarter of 2017, the Company granted its new CEO 3,300,000 options with service and market conditions. A market condition relates to the achievement of a specified price of the Company’s common stock, a specified amount of intrinsic value indexed to the Company’s common stock or a specified price of the Company’s common stock in terms of other similar equity shares. The grant date fair value for the options with service and market conditions is determined by a lattice model with Monte Carlo simulations and, with consideration given to estimated forfeitures, is recognized as stock-based compensation expense on a straight-line basis over the service period.

There have not been any other material changes to the Company’s accounting policies as of September 30, 2017.

 

Recent Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”. The amendments in this update provide guidance about which changes to the terms or conditions of a stock-based payment award requires an entity to apply modification accounting in Topic 718. ASU No. 2017-09 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company elected to early adopt this guidance as of June 30, 2017 and determined that the adoption of this guidance does not have any impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The amendments in this update clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted. As of September 30, 2017, the Company has not elected to early adopt this guidance and does not expect the adoption of this guidance to have any impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes Topic 840, “Leases”. Under the new guidance, a lessee should recognize assets and liabilities that arise from its leases and disclose qualitative and quantitative information about its leasing arrangements. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU No. 2016-02 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this standard is expected to have an impact on the amount of the Company’s assets and liabilities. As of September 30, 2017, the Company has not elected to early adopt this guidance or determined the effect that the adoption of this guidance will have on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition. Under the new guidance, a company is required to recognize revenue when it transfers goods or renders services to customers at an amount that it expects to be entitled to in exchange for these goods or services. The new standard allows for either a full retrospective with or without practical expedients or a retrospective with a cumulative catch upon adoption transition method. This guidance was originally intended to be effective for the fiscal years beginning after December 15, 2016, with early adoption not permitted. In August 2015, the

7


FASB issued ASU No. 2015-14, “Deferral of the Effective Date”, which states that the mandatory effective date of this new revenue standard will be delayed by one year, with early adoption only permitted in fiscal year 2017. During the second quarter of 2016, the FASB issued three amendments to the new revenue standard to address some application questions: ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09”, and ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients”. In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which amends certain narrow aspects of the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples. These three amendments will be effective upon adoption of Topic 606. The Company is currently reviewing the new standards as compared to its current accounting policies with respect to its product revenues and a review of its customer contracts is also in process. During the last quarter of 2017, the Company plans to finalize its review of product revenues in the U.S. as well as revenue streams from its MAPs to determine the impact that this standard may have on its results of operations, financial position and disclosures. As of September 30, 2017, the Company has determined that it will utilize the full retrospective adoption method but has not finalized the effect that the adoption of this guidance will have on its consolidated financial statements.

Reclassification

The Company has revised the presentation as well as the captions of certain accrued expenses in Note 11, Accrued Expenses to the unaudited condensed consolidated financial statements to conform to the current period presentation. “Product revenue related reserves” of $0.3 million as of December 31, 2016 has been reclassified from “Other” of $3.6 million and presented separately in the accrued expenses table. The reclassification had no impact on total current liabilities or total liabilities.

Subsequent Events

The Company evaluated subsequent events from September 30, 2017 through the date of issuance of this report and concluded that no subsequent events have occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.

 

3. LITIGATION SETTLEMENT AND LICENSE AGREEMENTS

 

In July 2017, the Company and the University of Western Australia (“UWA”) entered into a settlement agreement with BioMarin Leiden Holding BV, its subsidiaries BioMarin Nederlands BV and BioMarin Technologies BV (collectively, “BioMarin”). On the same day, the Company entered into a license agreement with BioMarin and Academisch Ziekenhuis Leiden (“AZL”) (collectively with the Company, UWA and BioMarin, the “Settlement Parties”). Under these agreements, BioMarin agreed to provide the Company with an exclusive license to certain intellectual property with an option to convert the exclusive license into a co-exclusive license and the Settlement Parties agreed to stop most existing efforts to continue with ongoing litigation and opposition and other administrative proceedings concerning BioMarin’s intellectual property. Under terms of the agreements, the Company agreed to make total up-front payments of $35.0 million upon execution of the agreements, consisting of $20.0 million under the settlement agreement and $15.0 million under the license agreement. Additionally, the Company may be liable for up to approximately $65.0 million in regulatory and sales milestones for eteplirsen as well as exon 45 and exon 53 skipping product candidates. BioMarin will also be eligible to receive royalty payments, ranging from 4% - 8%, for exon 51 skipping products, exon 45 skipping products and exon 53 skipping products. The royalty terms under the license agreement will expire in December 2023 in the U.S. and September 2024 in the EU.

 

In July 2017, the Company made the cash payment of $35.0 million to BioMarin. Accordingly, as of September 30, 2017, the Company has recorded an intangible asset in the U.S. of $6.6 million on its unaudited condensed consolidated balance sheet. For the three and nine months ended September 30, 2017, the Company recorded $25.6 million and $28.4 million settlement and license charges, respectively, in its unaudited condensed consolidated statements of operations and comprehensive loss.

 

The intangible asset represents the fair value of the U.S. license to BioMarin’s intellectual property related to EXONDYS 51, which was determined by an income-based approach, and will be amortized on a straight-line basis over the remaining life of the patent. For both the three and nine months ended September 30, 2017, the Company recognized intangible asset amortization expense and royalties of approximately $0.8 million and $2.3 million, respectively. The royalties are included in cost of sales in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

 

 

8


4. GAIN FROM SALE OF PRIORITY REVIEW VOUCHER

In February 2017, the Company entered into an agreement with Gilead Sciences, Inc. (“Gilead”) to sell the Company’s Rare Pediatric Disease Priority Review Voucher (“PRV”). The Company received the PRV when EXONDYS 51 was approved by the FDA for the treatment of patients with DMD amenable to exon 51 skipping. Following the early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in March 2017, the Company completed its sale of the PRV to a subsidiary of Gilead. Pursuant to the Agreement, the subsidiary of Gilead paid the Company $125.0 million, which was recorded as a gain from sale of the PRV as it did not have a carrying value at the time of the sale.

 

5. FAIR VALUE MEASUREMENTS

The Company has certain financial assets that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

Level 1 — quoted prices for identical instruments in active markets;

 

Level 2 — quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3 — valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

The tables below present information about the Company’s financial assets that are measured and carried at fair value and indicate the level within the fair value hierarchy of valuation techniques it utilizes to determine such fair value: 

 

 

 

Fair Value Measurement as of September 30, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

360,612

 

 

$

360,612

 

 

$

 

 

$

 

Commercial paper

 

 

83,506

 

 

 

 

 

 

83,506

 

 

 

 

Government and government agency bonds

 

 

113,934

 

 

 

 

 

 

113,934

 

 

 

 

Certificates of deposit

 

 

648

 

 

 

648

 

 

 

 

 

 

 

Total assets

 

$

558,700

 

 

$

361,260

 

 

$

197,440

 

 

$

 

 

 

 

Fair Value Measurement as of December 31, 2016

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

1,147

 

 

$

1,147

 

 

$

 

 

$

 

Commercial paper

 

 

69,304

 

 

 

 

 

 

69,304

 

 

 

 

Government and government agency bonds

 

 

105,287

 

 

 

 

 

 

105,287

 

 

 

 

Corporate bonds

 

 

20,834

 

 

 

 

 

 

20,834

 

 

 

 

Certificates of deposit

 

 

11,343

 

 

 

11,343

 

 

 

 

 

 

 

Total assets

 

$

207,915

 

 

$

12,490

 

 

$

195,425

 

 

$

 

 

The Company’s assets with fair value categorized as Level 1 within the fair value hierarchy include money market funds and certificates of deposit. Money market funds are publicly traded mutual funds and are presented as cash equivalents in the unaudited condensed consolidated balance sheets as of September 30, 2017.

The Company’s assets with fair value categorized as Level 2 within the fair value hierarchy consist of commercial paper, government and government agency bonds and corporate bonds. These assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, through income-based approaches utilizing observable market data.

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts for long-term debt approximate fair value based on market activity for other debt instruments with similar characteristics and comparable risk.

 

9


6. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

It is the Company’s policy to mitigate credit risk in its financial assets by maintaining a well-diversified portfolio that limits the amount of exposure as to maturity and investment type. There were no available-for-sale securities as of September 30, 2017. The weighted average maturity of the Company’s available-for-sale securities as of December 31, 2016 was approximately four months.

The following tables summarize the Company’s cash, cash equivalents and short-term investments for each of the periods indicated:

 

 

 

As of September 30, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

420,190

 

 

$

 

 

$

 

 

$

420,190

 

Commercial paper

 

 

83,516

 

 

 

 

 

 

(10

)

 

 

83,506

 

Government and government agency bonds

 

 

113,936

 

 

 

1

 

 

 

(3

)

 

 

113,934

 

Total assets

 

$

617,642

 

 

$

1

 

 

$

(13

)

 

$

617,630

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

617,642

 

 

$

1

 

 

$

(13

)

 

$

617,630

 

Total assets

 

$

617,642

 

 

$

1

 

 

$

(13

)

 

$

617,630

 

 

 

 

 

As of December 31, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

122,420

 

 

$

 

 

$

 

 

$

122,420

 

Commercial paper

 

 

69,355

 

 

 

 

 

 

(51

)

 

 

69,304

 

Government and government agency bonds

 

 

105,340

 

 

 

 

 

 

(53

)

 

 

105,287

 

Corporate bonds

 

 

20,850

 

 

 

 

 

 

(16

)

 

 

20,834

 

Total assets

 

$

317,965

 

 

$

 

 

$

(120

)

 

$

317,845

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

122,420

 

 

$

 

 

$

 

 

$

122,420

 

Short-term investments

 

 

195,545

 

 

 

 

 

 

(120

)

 

 

195,425

 

Total assets

 

$

317,965

 

 

$

 

 

$

(120

)

 

$

317,845

 

 

7. ACCOUNTS RECEIVABLE AND RESERVES FOR PRODUCT SALES

The Company’s accounts receivable arise from product sales, government research contracts and other grants. They are generally stated at the invoiced amount and do not bear interest.

The accounts receivable from product sales represents receivables due from the Company’s specialty distributor and specialty pharmacies. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profiles. The Company provides reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are written-off against the established reserve. As of September 30, 2017, the credit profiles for the Company’s customers are deemed to be in good standing and write-offs of accounts receivable are not considered necessary. Historically, no accounts receivable amounts related to government research contracts and other grants have been written off and, thus, an allowance for doubtful accounts receivable related to government research contracts and other grants is not considered necessary.

 

10


The following table summarizes the components of the Company’s accounts receivable for the periods indicated:

 

 

 

As of September 30, 2017

 

 

As of December 31, 2016

 

 

 

(in thousands)

 

Product sales, net of reserves

 

$

23,822

 

 

$

4,002

 

Government contract receivables

 

 

929

 

 

 

1,226

 

Total accounts receivable

 

$

24,751

 

 

$

5,228

 

 

The balance for government contract receivables for both periods presented is subject to government audit and will not be collected until the completion of the audit. The decrease in government contract receivables is related to contract finalization and subsequent collection of the European Union SKIP-NMD Agreement related to the Company’s exon 53 product candidate.

 

The following table summarizes an analysis of the change in reserves for discounts and allowances for the periods indicated:

 

 

 

Chargebacks

 

 

Rebates

 

 

Prompt Pay

 

 

Other Accruals

 

 

Total

 

 

 

(in thousands)

 

Balance, as of December 31, 2016

 

$

1

 

 

$

238

 

 

$

 

 

$

67

 

 

$

306

 

Provision

 

 

3,760

 

 

 

4,270

 

 

 

78

 

 

 

772

 

 

 

8,880

 

Payments/credits

 

 

(3,330

)

 

 

(660

)

 

 

(52

)

 

 

(592

)

 

 

(4,634

)

Balance, as of September 30, 2017

 

$

431

 

 

$

3,848

 

 

$

26

 

 

$

247

 

 

$

4,552

 

 

The following table summarizes the total reserves above included in the Company’s unaudited condensed consolidated balance sheets for the periods indicated:

 

 

 

As of September 30, 2017

 

 

As of December 31, 2016

 

 

 

(in thousands)

 

Reduction to accounts receivable

 

$

457

 

 

$

1

 

Component of accrued expenses

 

 

4,095

 

 

 

305

 

Total reserves

 

$

4,552

 

 

$

306

 

 

 

8. INVENTORY

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. The Company capitalizes inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. EXONDYS 51 which may be used in clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes. The following table summarizes the components of the Company’s inventory for the period indicated:

 

 

As of September 30, 2017

 

 

As of

December 31,

2016

 

 

(in thousands)

 

Raw materials

$

44,257

 

 

$

9,531

 

Work in progress

 

20,144

 

 

 

3,175

 

Finished goods

 

292

 

 

 

107

 

Total inventory

$

64,693

 

 

$

12,813

 

 

 

9. ASSET HELD FOR SALE

The Company owns a facility located at 1749 SW Airport Avenue, Corvallis, OR (“Airport Facility”). The Airport Facility was previously leased to an unrelated third party. In July 2016, the third party lessee terminated the lease and vacated the facility. It has been unoccupied since then. The Company set up a program and was actively marketing the Airport Facility. The Airport Facility with net book value of approximately $1.5 million was reclassified as an asset held for sale which is presented as a component of

11


current assets as of March 31, 2017. In August 2017, the Company entered into a purchase and sale agreement with an unrelated third-party buyer. The sale price of as well as fees related to the Airport Facility are approximately $1.5 million and $0.2 million, respectively. The transaction is scheduled to close by the end of 2017. For both the three and nine months ended September 30, 2017, the Company recognized an approximate loss of $0.2 million from the anticipated sale of the asset.

 

 

10. OTHER CURRENT ASSETS AND OTHER NON-CURRENT ASSETS

The following table summarizes the Company’s other current assets for each of the periods indicated:

 

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

 

 

(in thousands)

 

Manufacturing-related deposits and prepaids

 

$

18,399

 

 

$

23,604

 

Prepaid clinical and preclinical expenses

 

 

3,612

 

 

 

1,225

 

Other prepaids

 

 

4,000

 

 

 

1,152

 

Other

 

 

1,022

 

 

 

914

 

Total other current assets

 

$

27,033

 

 

$

26,895

 

 

The following table summarizes the Company’s other non-current assets for each of the periods indicated:

 

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

 

 

(in thousands)

 

Prepaid clinical expenses

 

$

7,056

 

 

$

3,725

 

Manufacturing-related deposits

 

 

3,570

 

 

 

 

Other

 

 

362

 

 

 

242

 

Total other non-current assets

 

$

10,988

 

 

$

3,967

 

 

 

11. ACCRUED EXPENSES

The following table summarizes the Company’s accrued expenses for each of the periods indicated: 

 

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

 

 

(in thousands)

 

Accrued contract manufacturing costs

 

$

13,438

 

 

$

4,673

 

Accrued clinical and preclinical costs

 

 

13,123

 

 

 

10,033

 

Accrued employee compensation costs

 

 

10,560

 

 

 

8,748

 

Accrued professional fees

 

 

5,520

 

 

 

2,799

 

Product revenue related reserves

 

 

4,095

 

 

 

305

 

Accrued income taxes

 

 

3,493

 

 

 

 

Accrued BioMarin royalties

 

 

2,289

 

 

 

 

Accrued research costs

 

 

317

 

 

 

1,186

 

Other

 

 

2,917

 

 

 

3,272

 

Total accrued expenses

 

$

55,752

 

 

$

31,016

 

 

12. INDEBTEDNESS

Term Loan

In July 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit and Security Agreement”) which provides a term loan (“July 2017 Term Loan”) of $60.0 million with MidCap Financial Trust (“MidCap”). Borrowings under the Amended and Restated Credit and Security Agreement bear interest at a rate per annum equal to 6.25%, plus the one-month London Interbank Offered Rate (“LIBOR”). In addition to paying interest on the outstanding principal under the Amended and Restated Credit and Security Agreement, the Company paid an origination fee equal to 0.50% of the amount of the term loan when advanced under the Amended and Restated Credit and Security Agreement and will be liable for a final payment fee equal to 2.00% of the amount borrowed under the Amended and Restated Credit and Security Agreement when the July

12


2017 Term Loan is fully repaid. Commencing on July 1, 2018, and continuing for the remaining thirty six months of the facility, the Company will be required to make monthly principal payments of approximately $0.8 million, set forth in the Amended and Restated Credit and Security Agreement, subject to certain adjustments as described therein. The facility matures in July 2021.

The Company may voluntarily prepay outstanding loans under the Amended and Restated Credit and Security Agreement at any time, provided that the Company may not prepay an amount that is less than the total of all of the credit extensions and other related obligations under the Amended and Restated Credit and Security Agreement then outstanding. In the event of a permitted prepayment, the Company is obligated to pay a prepayment fee equal to the following:

 

3.00% of the outstanding principal of such advance, if the prepayment is made within twelve months of the closing date;

 

2.00% of the outstanding principal of such advance, if the prepayment is made on or after the date which is twelve months after the closing date of such advance through the date which is twenty-four months after the closing date of such advance; and

 

1.00% of the outstanding principal of such advance, if the prepayment is made on or after the date which is twenty-four months after the closing date of such advance through the date immediately preceding the maturity date.

The Amended and Restated Credit and Security Agreement contains both affirmative and negative covenants. Affirmative covenants include government compliance, reporting requirements, maintaining property, making tax payments, maintaining insurance, cooperating during litigation, etc. Additionally, the Company is required to maintain an amount of cash and/or cash equivalents equal to not less than 75% of the sum of the outstanding principal amounts under both the Amended and Restated Credit and Security Agreement and the Revolving Credit Agreement (defined below). Negative covenants include restrictions on asset dispositions, mergers or acquisitions, indebtedness, liens, distributions, transactions with affiliates and other restrictions. The Amended and Restated Credit and Security Agreement includes customary events of default, including cross defaults and material adverse change. Additionally, the Company's failure to be compliant with the affirmative or negative covenants or make payments when they become due will result in an event of default.

After paying off certain debt issuance costs, the Company received net proceeds of $29.1 million related to the July 2017 Term Loan, $9.2 million of which was used to pay off the outstanding balance of the term loan that was taken out in June 2015 (“June 2015 Term Loan”). In connection with the July 2017 Term Loan, the Company recorded $30.0 million as long-term debt in the unaudited condensed consolidated balance sheet as of September 30, 2017. In addition, debt issuance costs of $1.1 million related to the July 2017 Term Loan were recorded as a direct deduction to the carrying value of the July 2017 Term Loan in the unaudited condensed consolidated balance sheet as of September 30, 2017. These costs are being amortized to interest expense using the effective interest method over the term of the loan.

Revolving Line of Credit

In July 2017, the Company entered into a revolving credit and security agreement (the “Revolving Credit Agreement”) which provides an aggregate revolving loan commitment of $40.0 million (which may be increased by an additional tranche of $20.0 million) with MidCap. Borrowings under the Revolving Credit Agreement bear interest at a rate of 3.95%, plus the one-month LIBOR. In addition to paying interest on the outstanding principal under the Revolving Credit Agreement, the Company paid $0.2 million of origination fee, which was 0.50% of the amount of the revolving loan. The Company recognized this origination fee as other asset and it is being amortized to interest expense over the term of the line-of-credit. Additionally, the Company is liable for unused line fees, minimum balance fees, collateral fees, deferred revolving loan original fees, etc. This facility matures in July 2021. The Company may voluntarily prepay the outstanding revolving loans under the Revolving Credit Agreement in whole or in part provided that the prepayment shall be in certain amounts as specified therein. As of September 30, 2017, the outstanding balance of the revolving line of credit is approximately $1.0 million.

Mortgage Loans

The Company has two loans outstanding which bear interest at 4.75%, mature in February 2027 and are collateralized by the Airport Facility in Corvallis, Oregon. At September 30, 2017, these loans had unpaid principal balances of $0.8 million and $0.5 million, for a total indebtedness of $1.3 million, and were presented as current portion of long-term debt on the unaudited condensed consolidated balance sheet.

13


For the three and nine months ended September 30, 2017, the Company recognized $0.8 million and $1.2 million of interest expense related to all outstanding loans, respectively. The following table summarizes the components of the long-term debt recorded for the period indicated:

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

 

(in Thousand)

 

Principal amount of the 2017 Term Loan

$

30,000

 

 

$

 

Principal amount of the 2015 Term Loan

 

 

 

 

15,000

 

Unamortized debt issuance expense

 

(1,037

)

 

 

(223

)

Net carrying value of term loan

 

28,963