Enanta Pharmaceuticals(ENTA) - 2022 Q3 - Quarterly Report

PART I. UNAUDITED FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Consolidated Financial Statements Presents unaudited consolidated financial statements: balance sheets, operations, comprehensive loss, equity, and cash flows Consolidated Balance Sheets Presents key financial position data, including assets, liabilities, and equity, as of June 30, 2022, and September 30, 2021 Consolidated Balance Sheet Highlights (in thousands) | Item | June 30, 2022 | September 30, 2021 | | :----------------------------------- | :------------ | :----------------- | | Cash and cash equivalents | $28,367 | $57,206 | | Short-term marketable securities | $224,921 | $186,796 | | Total current assets | $313,035 | $319,021 | | Total assets | $385,214 | $438,791 | | Total current liabilities | $23,035 | $36,172 | | Total liabilities | $47,191 | $39,362 | | Total stockholders' equity | $338,023 | $399,429 | Consolidated Statements of Operations Details the company's revenues, expenses, and net loss for the three and nine months ended June 30, 2022 and 2021 Consolidated Statements of Operations (in thousands, except per share amounts) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :----------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Royalty revenue | $19,479 | $21,624 | $65,843 | $73,499 | | Research and development | $39,090 | $46,994 | $129,726 | $125,165 | | General and administrative | $12,929 | $8,477 | $32,913 | $24,180 | | Total operating expenses | $52,019 | $55,471 | $162,639 | $149,345 | | Loss from operations | $(32,540) | $(33,847) | $(96,796) | $(75,846) | | Net loss | $(31,700) | $(24,024) | $(95,407) | $(54,397) | | Net loss per share (Basic & Diluted) | $(1.53) | $(1.19) | $(4.64) | $(2.70) | Consolidated Statements of Comprehensive Loss Outlines the net loss and other comprehensive income/loss components, such as unrealized gains/losses on securities Consolidated Statements of Comprehensive Loss (in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net loss | $(31,700) | $(24,024) | $(95,407) | $(54,397) | | Net unrealized losses on marketable securities | $(583) | $(319) | $(3,238) | $(1,108) | | Total other comprehensive loss | $(583) | $(319) | $(3,238) | $(1,108) | | Comprehensive loss | $(32,283) | $(24,343) | $(98,645) | $(55,505) | Consolidated Statements of Stockholders' Equity Summarizes changes in stockholders' equity, including common shares, additional paid-in capital, and accumulated deficit Consolidated Statements of Stockholders' Equity (in thousands) | Item | June 30, 2022 | September 30, 2021 | | :----------------------------------- | :------------ | :----------------- | | Common Shares Outstanding | 20,720 | 20,238 | | Common Stock Amount | $207 | $202 | | Additional Paid-In Capital | $388,267 | $351,033 | | Accumulated Other Comprehensive Loss | $(3,620) | $(382) | | (Accumulated Deficit) Retained Earnings | $(46,831) | $48,576 | | Total Stockholders' Equity | $338,023 | $399,429 | - Total stockholders' equity decreased from $399,429 thousand at September 30, 2021, to $338,023 thousand at June 30, 2022, primarily due to accumulated deficit increasing from $48,576 thousand to $(46,831) thousand[21] Consolidated Statements of Cash Flows Reports cash inflows and outflows from operating, investing, and financing activities for the nine months ended June 30 Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net cash used in operating activities | $(69,248) | $(48,975) | | Net cash provided by (used in) investing activities | $26,666 | $(35,692) | | Net cash provided by financing activities | $17,103 | $2,137 | | Net decrease in cash, cash equivalents and restricted cash | $(25,479) | $(82,530) | | Cash, cash equivalents and restricted cash at end of period | $32,335 | $5,209 | - Net cash used in operating activities increased by $20.3 million for the nine months ended June 30, 2022, compared to the same period in 2021, driven by higher R&D costs, partially offset by an $8.5 million federal tax refund[100] - Net cash provided by investing activities increased by $62.4 million, shifting from a net use of $35.7 million in 2021 to a net provision of $26.7 million in 2022, primarily due to the timing of marketable securities transactions[102] - Net cash provided by financing activities increased by $15.0 million, from $2.1 million in 2021 to $17.1 million in 2022, mainly due to an increase in stock option exercises[103] Notes to Consolidated Financial Statements (unaudited) Provides detailed explanations and disclosures supporting the consolidated financial statements, including accounting policies and significant events - Enanta Pharmaceuticals, Inc. is a biotechnology company focused on discovering and developing small molecule drugs for viral infections and liver diseases, funded by royalties from its collaboration with AbbVie for HCV treatment (MAVYRET®/MAVIRET®)[26] - The COVID-19 pandemic has led to a decline in AbbVie's HCV sales and may impact the company's business, clinical trials, and supply chains, with the full extent of impact remaining uncertain[27] Fair Value of Financial Assets (in thousands) | Item | June 30, 2022 | September 30, 2021 | | :----------------------------------- | :------------ | :----------------- | | Money market funds | $13,554 | $54,819 | | U.S. Treasury notes | $97,176 | $83,038 | | Corporate bonds | $83,947 | $124,703 | | Commercial paper | $83,225 | $87,471 | | Total marketable securities | $264,348 | $295,212 | - The company has a Collaborative Development and License Agreement with AbbVie, under which it has received approximately $1,188,000 in license payments, preferred stock proceeds, research funding, milestone payments, and tiered royalties through June 30, 2022[43] Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :----------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Research and development | $2,202 | $2,569 | $7,496 | $7,525 | | General and administrative | $5,401 | $2,906 | $12,640 | $8,113 | | Total stock-based compensation | $7,603 | $5,475 | $20,136 | $15,638 | - The company filed a patent infringement suit against Pfizer, Inc. in June 2022, seeking damages for infringement of U.S. Patent No. 11,358,953 related to coronavirus protease inhibitors used in Paxlovid™[55] - The company extended its 500 Arsenal Street lease through September 1, 2027, and entered into a new 10-year lease for approximately 73,000 square feet of lab and office space at Arsenal on the Charles, with an expected tenant improvement allowance of $15.2 million[57][59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results, highlighting key drivers, trends, and future outlook Overview Enanta Pharmaceuticals focuses on discovering and developing small molecule drugs for viral infections and liver diseases - Enanta Pharmaceuticals is a biotechnology company focused on discovering and developing small molecule drugs for viral infections and liver diseases, with primary R&D targets including Respiratory Syncytial Virus (RSV), SARS-CoV-2, Hepatitis B Virus (HBV), and Human Metapneumovirus (hMPV)[65] - The company had $292.7 million in cash, cash equivalents, and marketable securities at June 30, 2022, and expects existing financial resources and HCV royalties to fund R&D programs for the next two years[65] Our Wholly-Owned Programs Details the company's wholly-owned drug development programs for RSV, COVID-19, HBV, and hMPV - RSV program: EDP-938 (N-protein inhibitor) is in Phase 2 studies (RSVPEDs in pediatric patients, RSVTx in adult hematopoietic cell transplant recipients, and planned RSV-High Risk study) EDP-323 (L-protein inhibitor) is a new clinical candidate with a Phase 1 study planned for H2 2022[66][68] - COVID-19 program: EDP-235 (oral 3CL protease inhibitor) completed a Phase 1 study with positive topline results, showing good safety and strong exposure multiples without ritonavir boosting A Phase 2 study is targeted for Q4 2022[68] - HBV program: EDP-514 (core inhibitor) showed safety and potency in Phase 1b studies in viremic and NUC-suppressed patients, with potential as a best-in-class core inhibitor for combination therapy[70] - hMPV program: The company is optimizing nanomolar inhibitor leads and aims to select its first clinical candidate for this indication in H1 2023[70] Our Royalty Revenue Collaboration Describes royalty revenue primarily from AbbVie's net sales of MAVYRET/MAVIRET for HCV treatment - Royalty revenue is primarily from AbbVie's net sales of MAVYRET/MAVIRET, an HCV treatment containing Enanta's glecaprevir, with annually tiered, double-digit royalties on 50% of net sales[72] COVID-19 Update Discusses the ongoing impact of the COVID-19 pandemic on business operations, clinical trials, and royalty revenues - The COVID-19 pandemic continues to impact business operations, clinical trials (slower enrollment in RSV studies due to suppressed incidence of respiratory illnesses), and royalty revenues from AbbVie's HCV sales[74] - Despite ongoing impacts, the company remains capable of funding its R&D programs for the next two years with current royalty revenue and existing cash/investments of $292.7 million at June 30, 2022[74] Financial Operations Overview Outlines how the company funds operations and anticipates increasing R&D expenses and net losses - The company funds operations primarily through AbbVie collaboration royalties and existing cash, cash equivalents, and marketable securities[75] - Research and development expenses are expected to generally increase in the coming years as wholly-owned programs advance, leading to anticipated net losses in fiscal 2022[75] Comparison of the Three Months Ended June 30, 2022 and 2021 Compares financial performance for the three months ended June 30, 2022 and 2021, including revenue and expenses Financial Performance (Three Months Ended June 30, in thousands) | Item | 2022 | 2021 | Change ($) | Change (%) | | :----------------------------- | :----- | :----- | :--------- | :--------- | | Royalty revenue | $19,479 | $21,624 | $(2,145) | -9.9% | | Research and development | $39,090 | $46,994 | $(7,904) | -16.8% | | General and administrative | $12,929 | $8,477 | $4,452 | 52.5% | | Other income, net | $393 | $439 | $(46) | -10.5% | | Income tax benefit | $447 | $9,384 | $(8,937) | -95.2% | - The decrease in R&D expenses was primarily due to the timing of clinical trial costs in virology and liver disease programs, including the discontinuation of FXR agonists for NASH[88] - The increase in G&A expenses was mainly due to increased headcount and related compensation to support the expansion of R&D operations[90] Comparison of the Nine Months Ended June 30, 2022 and 2021 Compares financial performance for the nine months ended June 30, 2022 and 2021, including revenue and expenses Financial Performance (Nine Months Ended June 30, in thousands) | Item | 2022 | 2021 | Change ($) | Change (%) | | :----------------------------- | :----- | :----- | :--------- | :--------- | | Royalty Revenue | $65,843 | $73,499 | $(7,656) | -10.4% | | Research and development | $129,726 | $125,165 | $4,561 | 3.6% | | General and administrative | $32,913 | $24,180 | $8,733 | 36.1% | | Other income, net | $942 | $1,661 | $(719) | -43.3% | | Income tax benefit | $447 | $19,788 | $(19,341) | -97.7% | - The increase in R&D expenses was primarily driven by higher manufacturing costs for virology clinical studies, partially offset by decreased clinical trial expenses in virology and liver disease programs[96] - The significant decrease in income tax benefit was due to a state tax reserve release in 2022, compared to a federal net operating loss carryback available under the CARES Act in 2021 which is no longer available[98] Liquidity and Capital Resources Assesses the company's cash, cash equivalents, and marketable securities, and future funding requirements - At June 30, 2022, principal liquidity sources included $292.7 million in cash, cash equivalents, and marketable securities, down from $352.4 million at September 30, 2021[99] - Future funding requirements are dependent on factors such as AbbVie royalty sales, COVID-19 impact, R&D program scope and costs, clinical trial delays, manufacturing costs, new collaborations, and intellectual property litigation expenses[104] Off-Balance Sheet Arrangements Confirms the absence of off-balance sheet financing activities or interests in variable interest entities - The company does not engage in any off-balance sheet financing activities or have interests in variable interest entities[106] Contractual Obligations and Commitments Details the company's lease obligations and other contractual commitments for future periods - The company extended its 500 Arsenal Street lease, resulting in $20.3 million in updated minimum lease payments[108] - A new 10-year lease for 73,000 sq ft of lab/office space at Arsenal on the Charles was signed, with estimated minimum lease payments of $76.5 million and a $15.2 million tenant improvement allowance[109] Future Annual Minimum Lease Payments (in thousands) | Years Ended September 30, | Amount | | :------------------------ | :----- | | 2023 | $4,738 | | 2024 | $6,690 | | 2025 | $12,003 | | 2026 | $12,363 | | 2027 | $12,396 | | Thereafter | $65,726 | | Total future minimum lease payments | $113,916 | Critical Accounting Policies Refers to the company's critical accounting policies as detailed in its Annual Report on Form 10-K - The company's critical accounting policies are detailed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2021[112] Recently Issued Accounting Pronouncements Refers to a description of recently issued accounting pronouncements in the consolidated financial statements notes - A description of recently issued accounting pronouncements is provided in Note 2 to the consolidated financial statements[113] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses the company's exposure to market risks, primarily interest rate sensitivity and foreign exchange risk Interest Rate Sensitivity Assesses the potential impact of changes in market interest rates on the company's financial condition - At June 30, 2022, the company held $292.7 million in cash, cash equivalents, and marketable securities A 100 basis point change in market interest rates is not expected to materially impact financial condition or results of operations[114] Foreign Exchange Risk Identifies foreign currency exchange rate exposure, primarily British Pound and Euro, from international clinical trials - The company faces foreign currency exchange rate exposure, primarily British Pound and Euro, from international clinical trials, though the impact was immaterial for the nine months ended June 30, 2022[115][117] Item 4. Controls and Procedures Details management's conclusions on the effectiveness of disclosure controls and procedures and reports on any changes Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022 - Management concluded that disclosure controls and procedures were effective as of June 30, 2022, ensuring timely and accurate reporting of information[119] Changes in Internal Control Over Financial Reporting Reports on changes in internal control over financial reporting, including an accounting system migration - During the three months ended June 30, 2022, the company migrated its accounting system to an Oracle platform, updating internal controls to accommodate related business process changes No other material changes to internal control over financial reporting occurred[120] PART II. OTHER INFORMATION This part includes critical risk factors, a list of exhibits, and required signatures for the Form 10-Q filing Item 1A. Risk Factors Outlines significant risks and uncertainties that could materially affect the company's business and financial condition Summary of Principal Risk Factors Summarizes key risks including financial dependence on AbbVie, competition, and the impact of the COVID-19 pandemic - The company's financial prospects are substantially dependent on AbbVie's sales of MAVYRET/MAVIRET for HCV, which may continue to experience lower sales due to COVID-19 and competition[123] - Significant competition exists in RSV, SARS-CoV-2, HBV, and hMPV, with many competitors having more advanced product candidates, posing a risk to market entry and success[123] - The COVID-19 pandemic continues to impact business operations, clinical trials (delays in recruitment), and royalty revenue, potentially leading to continued operating losses due to increasing R&D expenses[123] Risks Related to Our Business Details risks concerning revenue dependence on AbbVie, intense competition, COVID-19 impacts, and development challenges - The company's revenue is primarily dependent on AbbVie's success in selling MAVYRET/MAVIRET, and any decline in sales due to competition, pricing pressure, or reduced patient volumes (e.g., from COVID-19) would adversely affect royalty revenues[126][130][131] - The pharmaceutical and biotechnology industries are highly competitive, with many companies developing therapies for HCV, RSV, SARS-CoV-2, HBV, and hMPV, often with more advanced candidates, posing a risk to the company's competitive position[133][135] - The ongoing COVID-19 pandemic has caused disruptions to business operations, clinical trial recruitment, and supply chains, and its uncertain future path could continue to materially affect the company's business and financial condition[141][143][144][147] - The company has limited independent clinical development experience, making it difficult to assess its ability to successfully develop and commercialize product candidates without AbbVie's involvement[148][149] - Failure to successfully develop wholly-owned programs like EDP-938, EDP-235, EDP-514, and EDP-323, or to discover new product candidates, would impair the company's ability to expand its business and achieve strategic objectives[152][153][154] - The company expects continued operating losses in fiscal 2022 and future periods due to diminishing royalty revenue and increasing research and development expenses as wholly-owned programs advance[155][159] Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates Addresses risks associated with lengthy, expensive, and uncertain clinical development and regulatory approval processes - Clinical drug development is lengthy, expensive, and uncertain, with potential for delays due to factors like patient recruitment, regulatory approvals, third-party contractor compliance, and the ongoing impact of the COVID-19 pandemic[169][170][173] - Product candidates, including EDP-938, EDP-235, and EDP-514, may have undesirable side effects that could delay or prevent marketing approval, require safety warnings, or lead to market withdrawal[176][177][178][180][181] - Results from early clinical trials may not predict later-stage success, and changes in development programs (e.g., manufacturing, formulation) can introduce risks, potentially delaying or jeopardizing approval[185][186] - The regulatory approval process is lengthy, expensive, and unpredictable, with no guarantee of timely approval for any product candidates, and approval policies can change, potentially rendering clinical data insufficient[188][189][190] - The regulatory pathway for COVID-19 treatments like EDP-235 is continually evolving, leading to uncertainty in timelines and processes for authorization or approval[191][192][194] Risks Related to Commercialization of Our Product Candidates Covers risks related to pricing, reimbursement, market acceptance, and the company's lack of commercial infrastructure - Unfavorable pricing regulations, third-party reimbursement practices, and healthcare reform initiatives in the U.S. could negatively affect market acceptance and profitability of MAVYRET/MAVIRET and future products[201][202][203][204] - The uncertain future path of the COVID-19 pandemic, including a potential decrease in new infections, could reduce the market opportunity for EDP-235 as a treatment, leading to unrecoverable development costs[205][206][208] - Foreign governments often impose strict price controls, which can delay commercial launch and negatively impact revenues from product sales in those countries[209][210] - The company lacks internal sales, marketing, and distribution infrastructure and may not be successful in building these capabilities or entering into favorable licensing/collaboration agreements, hindering commercialization[211][212][213][214] - Commercial success depends on significant market acceptance among physicians, patients, and healthcare payors, influenced by efficacy, safety, pricing, reimbursement, and competitive advantages[215][217] Risks Related to Our Dependence on Third Parties Highlights risks from reliance on third parties for collaborations, manufacturing, research, and clinical trial oversight - Failure to establish new product collaborations or maintain existing ones on favorable terms could delay or terminate product development, increase cash expenditures, and require the company to develop internal expertise it currently lacks[219][220][221] - Reliance on third-party manufacturers for product candidate supplies carries risks, including regulatory compliance, quality control, supply chain disruptions (e.g., from COVID-19), and potential delays in clinical trials or commercialization[223][224][225][226] - Dependence on third-party researchers and manufacturers in China for key intermediates and early-stage research exposes the company to risks from production disruptions, trade wars, political unrest, or epidemics[227][229] - Reliance on third parties to monitor, support, and oversee clinical trials means less control over timing and costs, and their failure to perform as required could delay or terminate trials or compromise data integrity[230][231] Risks Related to Our Intellectual Property Rights Discusses challenges in obtaining and maintaining patent protection and risks of intellectual property infringement litigation - The company faces challenges in obtaining and maintaining adequate patent protection due to the highly competitive nature of small-molecule drug development and the uncertainty of patent issuance, validity, and enforceability[237][238] - Claims that product candidates infringe third-party intellectual property rights could lead to costly litigation, require substantial time and money to resolve, or necessitate obtaining licenses that may not be available on acceptable terms[240][241][244][245] - Unfavorable outcomes in intellectual property litigation could limit research and development activities, prevent commercialization of products, or result in substantial damage awards[246][247][248] - Issued patents covering product candidates could be found invalid or unenforceable if challenged in court, potentially leading to a loss of patent protection and adverse impacts on the business[249][251] - Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and proprietary information, potentially compromising the company's competitive position[258][259][260] - Changes in patent law, influenced by legislative and judicial developments, could diminish the value of patents, making it harder to obtain, maintain, and enforce intellectual property rights[261] Risks Related to Our Industry Examines industry-specific risks such as product liability, cybersecurity, and compliance with healthcare laws - The company faces an inherent risk of product liability lawsuits from clinical testing and commercialization, which could result in substantial liabilities, limit commercialization, and damage reputation[263][264][265] - Internal computer systems, or those of collaborators/contractors, are vulnerable to failures or security breaches (e.g., viruses, cyber-attacks), which could disrupt development programs, lead to data loss, and incur substantial liability[266][267][268][270] - Relationships with customers and third-party payors are subject to anti-kickback, fraud and abuse, and other healthcare laws, non-compliance with which could lead to criminal sanctions, civil penalties, and reputational harm[271][272][273] Risks Related to Our Common Stock Addresses risks concerning stock price volatility, anti-takeover provisions, dividend policy, and potential stock dilution - The company's stock price has been and is likely to remain volatile, influenced by clinical trial results, AbbVie's actions, competition, regulatory developments, and general market conditions, potentially leading to substantial stockholder losses[274][275] - Provisions in corporate charter documents and Delaware law could make an acquisition of the company more difficult and prevent attempts by stockholders to replace current management, potentially limiting the stock price[276][277][278][280][281] - Employment agreements with executive officers include severance benefits upon termination in connection with a change of control, potentially harming financial condition and discouraging business combinations[282][283] - The company does not anticipate paying cash dividends on common stock for the foreseeable future, meaning investors must rely on stock price appreciation for returns[284][285] - Sales of a substantial number of common stock shares in the public market, including those from outstanding options and restricted stock units, could significantly depress the market price[286][287] - If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about the company, its stock price and trading volume could decline[288][289] General Risk Factors Covers general risks including environmental compliance, insurance coverage, internal control effectiveness, and social media use - Failure to comply with environmental, health, and safety laws and regulations could lead to fines, penalties, or substantial costs, potentially harming business success[290][291][292] - Insurance policies are expensive and may not cover all business risks, leaving the company exposed to significant uninsured liabilities that could adversely affect financial position[294][295] - Failure to maintain an effective system of internal control over financial reporting could lead to inaccurate financial reports, fraud, and loss of investor confidence, harming the stock price[296][297][299] - Cybersecurity incidents, including system failures, breaches, or data corruption, could adversely affect business by leading to loss of confidential information, regulatory actions, litigation, and reputational harm[299][300][301][302] - Use of social media by the company or its employees could give rise to liability, loss of trade secrets, or reputational harm from negative posts or comments[304] Item 6. Exhibits Lists the exhibits filed as part of the Form 10-Q, including corporate documents, lease agreements, and certifications - Key exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Second Amendment to Lease (500 Arsenal Street), First Amendment to Lease Agreement (400 Talcott Avenue), new Lease Agreement (Arsenal on the Charles), and certifications from the CEO and CFO[307][308][309] Signatures Contains the required signatures for the Form 10-Q filing, confirming its submission by authorized personnel - The report was signed by Paul J. Mellett, Chief Financial Officer (Principal Financial and Accounting Officer), on August 8, 2022[314][318]