Enanta Pharmaceuticals(ENTA) - 2023 Q2 - Quarterly Report

PART I. UNAUDITED FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements and management's analysis of financial performance and condition Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for the periods ended March 31, 2023, and September 30, 2022 Consolidated Balance Sheets The balance sheets show a decrease in total assets and an increase in total liabilities as of March 31, 2023 Consolidated Balance Sheet Summary | Metric (in thousands) | March 31, 2023 | September 30, 2022 | Change (vs. Sep 30, 2022) | | :-------------------- | :------------- | :----------------- | :------------------------ | | Total Current Assets | $271,137 | $311,713 | -$40,576 | | Total Assets | $326,445 | $375,410 | -$48,965 | | Total Current Liabilities | $32,166 | $29,827 | +$2,339 | | Total Liabilities | $57,070 | $54,076 | +$2,994 | | Total Stockholders' Equity | $269,375 | $321,334 | -$51,959 | | Accumulated Deficit | $(139,823) | $(73,179) | -$(66,644) | Consolidated Statements of Operations The statements of operations detail increased net losses for both the three and six-month periods ended March 31, 2023 Statement of Operations Summary | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Total Revenue | $17,795 | $18,716 | $41,380 | $46,364 | | Total Operating Expenses | $57,246 | $52,563 | $110,844 | $110,620 | | Loss from Operations | $(39,451) | $(33,847) | $(69,464) | $(64,256) | | Net Loss | $(37,658) | $(33,592) | $(66,644) | $(63,707) | | Net Loss per Share, Basic and Diluted | $(1.79) | $(1.63) | $(3.19) | $(3.11) | Consolidated Statements of Comprehensive Loss These statements show a slightly reduced comprehensive loss for the six months ended March 31, 2023, despite a higher net loss Statement of Comprehensive Loss Summary | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Loss | $(37,658) | $(33,592) | $(66,644) | $(63,707) | | Net Unrealized Gains (Losses) on Marketable Securities | $860 | $(2,031) | $1,909 | $(2,655) | | Comprehensive Loss | $(36,798) | $(35,623) | $(64,735) | $(66,362) | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased significantly due to the net loss incurred during the period - Total stockholders' equity decreased from $321,334 thousand at September 30, 2022, to $269,375 thousand at March 31, 2023, primarily due to a net loss of $66,644 thousand for the six months ended March 31, 2023, partially offset by stock-based compensation expense and other comprehensive income[18] - Additional paid-in capital increased by $12,774 thousand, driven by stock-based compensation expense ($14,502 thousand) and exercise of stock options ($2,008 thousand), partially offset by vesting of restricted stock units, net of withholding ($3,734 thousand)[18] Consolidated Statements of Cash Flows Cash flows reflect increased cash from investing activities and a net increase in total cash and equivalents Cash Flow Activity Summary | Cash Flow Activity (in thousands) | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Cash Used in Operating Activities | $(49,424) | $(39,646) | | Net Cash Provided by Investing Activities | $80,334 | $10,446 | | Net Cash Provided by (Used in) Financing Activities | $(1,726) | $12,983 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $29,184 | $(16,217) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $77,146 | $41,597 | Notes to Consolidated Financial Statements (unaudited) These notes provide detailed context for the company's financial statements, covering business nature, accounting policies, and specific financial items 1. Nature of the Business and Basis of Presentation The company is a biotechnology firm focused on viral infections, funded primarily by its AbbVie collaboration - Enanta Pharmaceuticals, Inc is a biotechnology company focused on discovering and developing small molecule drugs for viral infections, including RSV, SARS-CoV-2, hMPV, and HBV[24] - The company has reported net losses since fiscal 2020 and expects to continue generating operating losses, with an accumulated deficit of $139,823 thousand as of March 31, 2023[31] - The COVID-19 pandemic has impacted the company's royalty revenues due to reduced patient volumes and sales of AbbVie's HCV regimens[26][27] 2. Summary of Significant Accounting Policies Financial statements rely on management estimates for revenue, stock-based awards, and R&D expenses - The preparation of financial statements requires management to make estimates and assumptions, particularly regarding revenue arrangements, valuation of stock-based awards, and accrual of R&D expenses[33] Potential Common Shares | Potential Common Shares (in thousands) | As of March 31, 2023 | As of March 31, 2022 | | :------------------------------------- | :------------------- | :------------------- | | Options to purchase common stock | 4,522 | 4,124 | | Unvested rTSRUs | 81 | 112 | | Unvested PSUs | 81 | 112 | | Unvested restricted stock units | 430 | 217 | 3. Fair Value of Financial Assets and Liabilities This note details the fair value measurement of the company's financial assets and liabilities - The Series 1 nonconvertible preferred stock is measured at fair value as a Level 3 liability, using a probability-weighted valuation model with unobservable inputs like payout probabilities (0%-65%) and a discount rate (7.25%)[38][39] Fair Value of Financial Instruments | Financial Assets (in thousands) | March 31, 2023 (Total Fair Value) | September 30, 2022 (Total Fair Value) | | :------------------------------ | :-------------------------------- | :------------------------------------ | | Money market funds | $70,562 | $13,905 | | U.S. Treasury notes | $22,003 | $91,328 | | Corporate bonds | $46,124 | $76,411 | | Commercial paper | $83,819 | $66,784 | | Total Assets | $222,508 | $248,428 | | Series 1 nonconvertible preferred stock (Liability) | $1,423 | $1,423 | 4. Marketable Securities The company's marketable securities portfolio consists primarily of corporate bonds, commercial paper, and U.S. Treasury notes - Most marketable securities mature within one year, with some corporate bonds and U.S. Treasury notes having maturities between one and two years, totaling $15,040 thousand at March 31, 2023[42] Marketable Securities by Type | Marketable Securities (in thousands) | Amortized Cost (Mar 31, 2023) | Fair Value (Mar 31, 2023) | Amortized Cost (Sep 30, 2022) | Fair Value (Sep 30, 2022) | | :----------------------------------- | :---------------------------- | :------------------------ | :---------------------------- | :------------------------ | | Corporate bonds | $47,329 | $46,124 | $78,663 | $76,411 | | Commercial paper | $83,819 | $83,819 | $66,784 | $66,784 | | U.S. Treasury notes | $22,229 | $22,003 | $92,416 | $91,328 | | Total | $153,377 | $151,946 | $237,863 | $234,523 | 5. Accrued Expenses This note provides a breakdown of the company's accrued expenses as of the reporting dates Accrued Expenses Summary | Accrued Expenses (in thousands) | March 31, 2023 | September 30, 2022 | | :------------------------------ | :------------- | :----------------- | | Accrued pharmaceutical drug manufacturing | $4,521 | $6,932 | | Accrued research and development expenses | $5,380 | $5,532 | | Accrued payroll and related expenses | $3,075 | $6,439 | | Accrued professional fees | $1,639 | $1,273 | | Accrued other | $867 | $760 | | Total | $15,482 | $20,936 | 6. AbbVie Collaboration The collaboration with AbbVie for HCV inhibitors is the company's primary source of revenue - The company has a Collaborative Development and License Agreement with AbbVie for HCV NS3 and NS3/4A protease inhibitors, including glecaprevir (MAVYRET®/MAVIRET®)[44] - Royalties are annually tiered, ranging from ten percent up to twenty percent, or a blended basis from ten percent up to the high teens, on the portion of AbbVie's net sales allocated to the protease inhibitor in the regimen[45] 7. Series 1 Nonconvertible Preferred Stock This note describes the outstanding Series 1 nonconvertible preferred stock, which is carried as a liability - As of March 31, 2023, 1,930 shares of Series 1 nonconvertible preferred stock were outstanding, carried at fair value as a liability due to liquidation features[46] 8. Stock-Based Awards This section details the company's stock-based compensation plans, including option activity and related expenses - As of March 31, 2023, the company had $70,253 thousand of unrecognized stock-based compensation cost, expected to be recognized over a weighted average period of 2.6 years[53] Stock Option Activity | Stock Option Activity (in thousands) | Shares Issuable (Mar 31, 2023) | Weighted Average Exercise Price (Mar 31, 2023) | | :----------------------------------- | :----------------------------- | :--------------------------------------------- | | Outstanding as of Sep 30, 2022 | 3,993 | $53.57 | | Granted | 728 | $45.44 | | Exercised | (117) | $17.14 | | Forfeited | (82) | $65.95 | | Outstanding as of Mar 31, 2023 | 4,522 | $52.98 | Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Research and development | $2,520 | $2,710 | $5,052 | $5,294 | | General and administrative | $4,843 | $3,761 | $9,450 | $7,239 | | Total | $7,363 | $6,471 | $14,502 | $12,533 | 9. Commitments and Contingencies The company is involved in patent infringement litigation and provides standard business indemnifications - The company filed a patent infringement suit against Pfizer, Inc on June 21, 2022, in the U.S. District Court for the District of Massachusetts, seeking damages for infringement of U.S. Patent No 11,358,953 related to Pfizer's COVID-19 antiviral, Paxlovid™[55] - The company provides indemnifications in the ordinary course of business, including to directors and executive officers, with maximum potential amounts often unlimited[57] 10. Subsequent Events A significant royalty sale agreement was executed after the reporting period - In April 2023, the company entered into a royalty sale agreement with an affiliate of OMERS, receiving a $200,000 thousand cash purchase price in exchange for 54.5% of future quarterly royalty payments on MAVYRET/MAVIRET net sales from September 30, 2023, through June 30, 2032, subject to a cap of 1.42 times the purchase price[59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, and future outlook Overview The company is a biotechnology firm specializing in viral infections, funded by AbbVie royalties and facing continued net losses - Enanta Pharmaceuticals is a biotechnology company specializing in small molecule drugs for viral infections, primarily funded by royalties from its collaboration with AbbVie for HCV treatment (MAVYRET®/MAVIRET®)[62] - The company has reported net losses since fiscal 2020, with $66.6 million and $63.7 million net losses for the six months ended March 31, 2023 and 2022, respectively, and an accumulated deficit of $139.8 million as of March 31, 2023[63] - As of March 31, 2023, the company had $225.1 million in cash, cash equivalents, and marketable securities[66] Our Wholly-Owned Programs The company's R&D pipeline is focused on developing treatments for RSV, COVID-19, hMPV, and HBV - The company's primary wholly-owned R&D programs focus on virology, specifically Respiratory Syncytial Virus (RSV), SARS-CoV-2 (COVID-19), Human Metapneumovirus (hMPV), and Hepatitis B Virus (HBV)[67] - The RSV program includes two clinical candidates: EDP-938 (N-protein inhibitor) in three ongoing Phase 2 studies and EDP-323 (L-protein inhibitor) in a Phase 1 study[67][68] - The COVID-19 program features EDP-235 (3CL protease inhibitor) which completed a Phase 1 study with positive results and a Phase 2 SPRINT study showing dose-dependent symptom improvement[69] - The hMPV program includes a new research program for hMPV/RSV dual-inhibitors, with a clinical candidate expected in Q4 2023[70][72] Our Royalty Revenue Collaboration Royalty revenue from AbbVie's sales of MAVYRET/MAVIRET remains the company's primary income source - Substantially all royalty revenue is derived from AbbVie's net sales of MAVYRET/MAVIRET, an HCV treatment containing glecaprevir, a protease inhibitor discovered by Enanta[73] - Royalty revenues declined in fiscal 2022 and the first half of fiscal 2023 due to the COVID-19 pandemic's impact on patient volumes, HCV diagnoses, and MAVYRET/MAVIRET sales[74] Financial Operations Overview Operations are funded by AbbVie royalties, with R&D expenses expected to increase as clinical programs advance - The company funds operations primarily through AbbVie collaboration royalties and existing cash/marketable securities[76][77][78] Revenue Total revenue decreased due to lower royalty payments from AbbVie's HCV product sales - Royalty revenue decreased by $0.9 million for the three months and $6.0 million for the six months ended March 31, 2023, compared to the same periods in 2022, due to lower reported HCV sales by AbbVie[90][97] - The company recognized $1.0 million in license revenue during the six months ended March 31, 2023, from an upfront payment for an antibacterial compound license agreement[98] Revenue Summary | Revenue (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :--------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Royalty revenue | $17,795 | $18,716 | $40,380 | $46,364 | | License revenue | — | — | $1,000 | — | | Total revenue | $17,795 | $18,716 | $41,380 | $46,364 | Operating Expenses Operating expenses fluctuated due to shifts in R&D program spending and increased G&A costs Research and Development Expenses R&D expenses shifted, with increased spending on virology programs and decreased spending on the non-viral liver disease program - R&D expenses increased by $1.4 million for the three months ended March 31, 2023, primarily due to a $5.5 million increase in the virology program offset by a $5.0 million decrease in the non-viral liver disease program[92] - For the six months, R&D expenses decreased by $6.3 million, driven by a $9.7 million decrease in the non-viral liver disease program, partially offset by a $1.7 million increase in the virology program[99] R&D Program Expenses | R&D Programs (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Virology | $41,384 | $35,912 | $80,142 | $78,434 | | Liver disease (non-viral) | $515 | $5,547 | $1,366 | $11,101 | | Other | $1,569 | $628 | $2,862 | $1,101 | | Total R&D Expenses | $43,468 | $42,087 | $84,370 | $90,636 | General and Administrative Expenses G&A expenses rose due to higher stock-based compensation and legal fees from patent litigation - General and administrative expenses increased by $3.3 million for the three months and $6.5 million for the six months ended March 31, 2023, compared to the same periods in 2022, due to higher stock-based compensation expense and legal fees related to the Pfizer patent infringement suit[94][100] Other Income (Expense) Net interest and investment income increased significantly due to favorable changes in interest rates - Interest and investment income, net, increased by $1.6 million for the three months and $2.3 million for the six months ended March 31, 2023, compared to the same periods in 2022, primarily due to changes in interest rates[95][101] Income Tax Expense The company recorded a minimal income tax expense for the current periods - Income tax expense was $(44) thousand for the three months and $(10) thousand for the six months ended March 31, 2023, compared to zero in the prior year periods[12] Results of Operations This section provides a comparative analysis of operational results for the three and six-month periods Comparison of the Three Months Ended March 31, 2023 and 2022 The net loss widened in the three-month period due to lower revenue and higher operating expenses Three-Month Operational Comparison | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Royalty revenue | $17,795 | $18,716 | -$921 | | R&D expenses | $43,468 | $42,087 | +$1,381 | | G&A expenses | $13,778 | $10,476 | +$3,302 | | Interest & investment income, net | $1,837 | $255 | +$1,582 | | Net loss | $(37,658) | $(33,592) | -$4,066 | Comparison of the Six Months Ended March 31, 2023 and 2022 The six-month net loss also increased, driven by lower royalty revenue and higher G&A expenses, despite a decrease in R&D costs Six-Month Operational Comparison | Metric (in thousands) | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | Change | | :-------------------- | :------------------------------ | :------------------------------ | :----- | | Royalty revenue | $40,380 | $46,364 | -$5,984 | | License revenue | $1,000 | — | +$1,000 | | R&D expenses | $84,370 | $90,636 | -$6,266 | | G&A expenses | $26,474 | $19,984 | +$6,490 | | Interest & investment income, net | $2,830 | $549 | +$2,281 | | Net loss | $(66,644) | $(63,707) | -$2,937 | Liquidity and Capital Resources The company's liquidity position is supported by existing cash, marketable securities, and a recent royalty sale - Net cash used in operating activities increased by $9.8 million to $49.4 million for the six months ended March 31, 2023, due to timing of R&D payments and a federal tax refund received in 2022[104] - Net cash provided by investing activities increased by $69.9 million to $80.3 million, driven by timing of marketable securities transactions, partially offset by increased capital expenditures for facility expansion[106] - Net cash used in financing activities was $1.7 million, a $14.7 million decrease from the prior year, due to lower proceeds from stock option exercises and higher payments for share-based awards[107] - The company expects its $225.1 million in cash, cash equivalents, and marketable securities as of March 31, 2023, plus the $200.0 million from the April 2023 royalty sale, to fund operations into calendar 2026[108] - Less than 5% of the company's cash and marketable securities were held at Silicon Valley Bank (SVB) when it was closed, and transfers to a larger financial institution have been initiated[109] Cash Flow Activity Summary | Cash Flow Activity (in thousands) | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Operating activities | $(49,424) | $(39,646) | | Investing activities | $80,334 | $10,446 | | Financing activities | $(1,726) | $12,983 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $29,184 | $(16,217) | Off-Balance Sheet Arrangements The company has no 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[111] Contractual Obligations and Commitments A significant royalty sale agreement represents a key future financial commitment - In April 2023, the company sold 54.5% of its future MAVYRET/MAVIRET royalty payments for $200.0 million cash, with payments capped at 1.42 times the purchase price through June 30, 2032[112][113] Critical Accounting Policies The company's critical accounting policies are referenced from its most recent 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, 2022[114] Recently Issued Accounting Pronouncements Information on new accounting pronouncements is available in the notes to the financial statements - A description of recently issued accounting pronouncements is provided in Note 2 to the consolidated financial statements[115] Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the company's market risk disclosures during the reporting period - No material changes to market risk disclosures occurred during the three and six months ended March 31, 2023[117] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed effective as of the end of the reporting period - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2023[118] Changes in Internal Control Over Financial Reporting No material changes affecting internal control over financial reporting occurred during the quarter - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that materially affected or are reasonably likely to materially affect internal control over financial reporting[119] PART II. OTHER INFORMATION This part covers risk factors, other corporate information, and a list of filed exhibits Item 1A. Risk Factors No material changes to the company's previously disclosed risk factors occurred during the quarter - No material changes to the risk factors discussed in the 2022 Form 10-K occurred during the quarter ended March 31, 2023[120] Item 5. Other Information This section reports on an amendment to the company's equity incentive plan Item 5.02 Departure of Directors of Certain Officers; Election of Directors; Appointment of Certain Directors; Compensatory Arrangements of Certain Officers The company's 2019 Equity Incentive Plan was amended to increase the number of shares available for issuance - The 2019 Equity Incentive Plan was amended on March 2, 2023, to increase the number of shares of common stock reserved for issuance by 975,000 shares[121] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including key agreements and certifications - Key exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Royalty Purchase Agreement with OMERS, the amended 2019 Equity Incentive Plan, and certifications from the CEO and CFO[123] Signatures The report is duly signed on behalf of the company by its Chief Financial Officer - The report was signed by Paul J Mellett, Chief Financial Officer, on May 9, 2023[127]