enta-10q_20190331.htm

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

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 ☒

As of April 28, 2019, the registrant had 19,669,726 shares of common stock, $0.01 par value per share, outstanding.

This Quarterly Report on Form 10-Q, or Form 10-Q, contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about overall trends, royalty revenue trends, research and clinical development plans, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Form 10-Q.

	March 31,			September 30,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	106,030		$	63,902
Short-term marketable securities		264,127			244,828
Accounts receivable		39,631			67,205
Prepaid expenses and other current assets		14,052			4,454
Total current assets		423,840			380,389
Long-term marketable securities		16,510			16,389
Property and equipment, net		11,476			8,374
Deferred tax assets		9,052			8,375
Restricted cash		608			608
Other long-term assets		92			92
Total assets	$	461,578		$	414,227
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	8,884		$	4,745
Accrued expenses and other current liabilities		11,607			9,892
Income taxes payable		—			1,388
Total current liabilities		20,491			16,025
Series 1 nonconvertible preferred stock		1,628			1,628
Other long-term liabilities		3,249			2,895
Total liabilities		25,368			20,548
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock; $0.01 par value per share, 100,000 shares authorized; 19,669 and 19,395 shares issued and outstanding at March 31, 2019 and September 30, 2018, respectively		197			194
Additional paid-in capital		288,512			276,526
Accumulated other comprehensive loss		(12	)		(398	)
Retained earnings		147,513			117,357
Total stockholders' equity		436,210			393,679
Total liabilities and stockholders' equity	$	461,578		$	414,227

The accompanying notes are an integral part of these consolidated financial statements.

	Three Months Ended							Six Months Ended
	March 31,							March 31,
	2019			2018				2019			2018
Revenue
Royalties	$	39,631		$	44,049			$	109,517		$	67,158
Milestones		—			—		^`		—			15,000
Total revenue		39,631			44,049				109,517			82,158

Operating expenses:
Research and development		34,155			21,484				69,033			39,446
General and administrative		6,780			5,706				13,932			11,476
Total operating expenses		40,935			27,190				82,965			50,922
Income (loss) from operations		(1,304	)		16,859				26,552			31,236
Other income, net		2,245			1,066				4,130			2,026
Income before income taxes		941			17,925				30,682			33,262
Income tax (expense) benefit		3,204			(5,370	)			(526	)		(9,014	)
Net income	$	4,145		$	12,555			$	30,156		$	24,248

Net income per share:
Basic	$	0.21		$	0.65			$	1.55		$	1.27
Diluted	$	0.20		$	0.61			$	1.44		$	1.20

Weighted average shares outstanding:
Basic		19,549			19,206				19,487			19,167
Diluted		21,084			20,601				20,946			20,256

The accompanying notes are an integral part of these consolidated financial statements.

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2019		2018			2019		2018
Net income	$	4,145	$	12,555		$	30,156	$	24,248
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable securities, net of tax of $78, ($128), $123 and ($235)		245		(336	)	$	386	$	(682	)
Total other comprehensive income (loss)		245		(336	)		386		(682	)
Comprehensive income	$	4,390	$	12,219		$	30,542	$	23,566

The accompanying notes are an integral part of these consolidated financial statements.

								Accumulated
					Additional			Other					Total
	Common Stock				Paid-In			Comprehensive			Retained		Stockholders'
	Shares		Amount		Capital			Loss			Earnings		Equity
Balances at September 30, 2017		19,120	$	191	$	256,241		$	(112	)	$	45,356	$	301,676
Exercise of stock options and warrants		30		—		436			—			—		436
Stock-based compensation expense		—		—		4,120			—			—		4,120
Cumulative effect adjustment for adoption of new accounting guidance		—		—		(45	)		—			45		—
Other comprehensive loss		—		—		—			(346	)		—		(346	)
Net income		—		—		—			—			11,693		11,693
Balances at December 31, 2017		19,150	$	191	$	260,752		$	(458	)	$	57,094	$	317,579
Exercise of stock options		65		1		1,769			—			—		1,770
Vesting of restricted stock units, net of withholding		45		1		(1,757	)		—			—		(1,756	)
Stock-based compensation expense		—		—		3,590			—			—		3,590
Other comprehensive loss		—		—		—			(336	)		—		(336	)
Net income		—		—		—			—			12,555		12,555
Balances at March 31, 2018		19,260	$	193	$	264,354		$	(794	)	$	69,649	$	333,402

								Accumulated
					Additional			Other					Total
	Common Stock				Paid-In			Comprehensive			Retained		Stockholders'
	Shares		Amount		Capital			Income (Loss)			Earnings		Equity
Balances at September 30, 2018		19,395	$	194	$	276,526		$	(398	)	$	117,357	$	393,679
Exercise of stock options		40		—		1,161			—			—		1,161
Stock-based compensation expense		—		—		5,843			—			—		5,843
Other comprehensive income		—		—		—			141			—		141
Net income		—		—		—			—			26,011		26,011
Balances at December 31, 2018		19,435	$	194	$	283,530		$	(257	)	$	143,368	$	426,835
Exercise of stock options		157		2		4,464								4,466
Vesting of restricted stock units, net of withholding		77		1		(4,189	)		—			—		(4,188	)
Stock-based compensation expense		—		—		4,707			—			—		4,707
Other comprehensive income		—		—		—			245			—		245
Net income		—		—		—			—			4,145		4,145
Balances at March 31, 2019		19,669	$	197	$	288,512		$	(12	)	$	147,513	$	436,210

The accompanying notes are an integral part of these consolidated financial statements.

	Six Months Ended
	March 31,
	2019			2018
Cash flows from operating activities
Net income	$	30,156		$	24,248
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		10,550			7,710
Depreciation and amortization expense		1,482			1,200
Deferred income taxes		(800	)		2,791
Premium paid on marketable securities		(1	)		(243	)
Amortization of (accretion of) premium (discount) on marketable securities		(2,213	)		110
Change in fair value of warrant liability and Series 1 nonconvertible preferred stock		—			(41	)
Other non-cash items		37			(84	)
Change in operating assets and liabilities:
Accounts receivable		27,574			(33,435	)
Prepaid expenses and other current assets		(9,598	)		(1,369	)
Accounts payable		2,886			565
Accrued expenses		1,259			(939	)
Income taxes payable		(1,388	)		(3,918	)
Other long-term liabilities		396			236
Net cash provided by (used in) operating activities		60,340			(3,169	)
Cash flows from investing activities
Purchase of marketable securities		(271,712	)		(99,721	)
Proceeds from maturities and sale of marketable securities		254,994			104,986
Purchase of property and equipment		(2,891	)		(1,256	)
Net cash provided by (used in) investing activities		(19,609	)		4,009
Cash flows from financing activities
Proceeds from exercise of stock options and warrants		5,627			2,207
Payments for settlement of share-based awards		(4,188	)		(1,757	)
Payments of capital lease obligations		(42	)		(39	)
Net cash provided by financing activities		1,397			411
Net increase in cash, cash equivalents and restricted cash		42,128			1,251
Cash, cash equivalents and restricted cash at beginning of period		64,510			66,283
Cash, cash equivalents and restricted cash at end of period	$	106,638		$	67,534
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	9,955		$	9,883
Supplemental disclosure of non-cash investing information:
Purchases of fixed assets included in accounts payable and accrued expenses	$	1,598		$	111

The accompanying notes are an integral part of these consolidated financial statements.

Enanta Pharmaceuticals, Inc. (the “Company”), incorporated in Delaware in 1995, is a biotechnology company that uses its robust, chemistry-driven approach and drug discovery capabilities to create small molecule drugs primarily for the treatment of viral infections and liver diseases. The Company discovered glecaprevir, the second protease inhibitor discovered and developed through its collaboration with AbbVie, which is marketed as part of AbbVie’s direct-acting antiviral (DAA) regimen under the tradenames MAVYRET™ (U.S.) or MAVIRET™ (ex-U.S.) (glecaprevir/pibrentasvir) for the treatment of chronic hepatitis C virus, or HCV. The other protease inhibitor under its HCV collaboration, which is part of AbbVie’s initial DAA regimens for the treatment of chronic HCV, is currently marketed outside the U.S. under the tradename VIEKIRAX^®(paritaprevir/ritonavir/ombitasvir). Royalties from the Company’s AbbVie collaboration and its existing financial resources provide funding to support its wholly-owned research and development programs, which are currently focused on the following disease targets: respiratory syncytial virus (“RSV”); non-alcoholic steatohepatitis (“NASH”); primary biliary cholangitis (“PBC”); and hepatitis B virus (“HBV”).

The Company is subject to many of the risks common to companies in the biotechnology industry including, but not limited to, the uncertainties of research and development, competition from technological innovations of others, dependence on collaborative arrangements, protection of proprietary technology, dependence on key personnel and compliance with government regulation. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approvals, prior to commercialization. These efforts require significant amounts of capital, adequate personnel infrastructure, and extensive compliance reporting capabilities.

The consolidated balance sheet at September 30, 2018 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited consolidated financial statements as of March 31, 2019 and for the three and six months ended March 31, 2019 and 2018 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.

In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2019 and results of operations for the three and six months ended March 31, 2019 and 2018 and cash flows for the six months ended March 31, 2019 and 2018, have been made. The results of operations for the six months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for subsequent quarters or the year ending September 30, 2019.

The accompanying consolidated financial statements have been prepared in conformity with GAAP. All dollar amounts in the consolidated financial statements and in the notes to the consolidated financial statements, except per share amounts, are in thousands unless otherwise indicated.

For the Company’s Significant Accounting Policies, please refer to its Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Other than the adoption of ASC 606 as of October 1, 2018, there were no other significant changes to the Company’s Significant Accounting Policies during the quarter.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant

estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, management’s judgments with respect to its revenue arrangements; valuation of stock-based awards; the accrual of research and development expenses, and the accounting for income taxes, including uncertain tax positions and the valuation of net deferred tax assets. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

On October 1, 2018, the Company adopted the new revenue standard, discussed below, which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries (“ASC 606”). ASC 606 provides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applied the guidance in ASC 606 to its one ongoing collaboration agreement under which it is eligible to earn sales-based royalties and will apply to qualifying arrangements entered into after October 1, 2018. The Company recognizes revenue related to the sales-based royalties in the period in which the underlying sales occur based on actual sales as communicated by the licensee. The license is deemed to be the predominant item to which the royalties relate.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) and has since issued several additional amendments thereto, collectively referred to herein as ASC 606, which supersedes the revenue recognition requirements in ASC 605-25, Multiple-Element Arrangements and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. This guidance was effective for the Company in the fiscal year beginning October 1, 2018. The Company adopted ASC 606 as of October 1, 2018 using the modified retrospective transition method. The adoption did not have an impact on its financial statements as the Company had satisfied its performance obligations under its one open revenue contract in fiscal 2011, prior to the adoption of ASC 606. The adoption of this guidance did not have an impact on the Company’s accounting for royalty payments as the Company receives sales-based royalties for which the license is deemed to be the predominant item to which the royalties relate.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) that changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will 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. This amendment was effective for the Company in the fiscal year beginning October 1, 2018. The Company adopted ASU 2016-18 retrospectively as of October 1, 2018. Upon the adoption of ASU 2016-18, the amount of cash and cash equivalents previously presented in the consolidated statements of cash flows for the three months ended December 31, 2017 increased by $608 as of beginning and end of the period to reflect the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) (“ASU 2017-09”) which provides updated guidance about changes to the terms or conditions of a share-based payment award that requires companies to apply modification accounting under Topic 718. This amendment was effective for the Company in the fiscal year beginning October 1, 2018. The Company adopted ASU 2017-09 as of October 1, 2018. The adoption of ASU 2017-09 did not have an impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which will replace the existing guidance in ASC 840, “Leases.” The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize leased assets and leased liabilities on the consolidated balance sheets and requiring disclosure of key information about leasing arrangements. This amendment is effective for the Company in the fiscal year beginning October 1, 2019, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU 2016-02 may have on its financial position and results of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This amendment is effective for the Company in the fiscal year beginning October 1, 2020. The Company is currently evaluating the potential impact that ASU 2016-13 may have on its financial position and results of operations.

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which requires companies to amend the amortization period for premiums on debt securities with explicit call features to be the earliest call date rather than through the contractual life of the debt instrument. This amendment aims to more closely align the recognition of interest income with the manner in which market participants price such instruments. This amendment is effective for the Company in the fiscal year beginning October 1, 2019, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU 2017-08 may have on its financial position and results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

The following tables present information about the Company’s financial assets and liabilities that were subject to fair value measurement on a recurring basis as of March 31, 2019 and September 30, 2018 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:

	Fair Value Measurements at March 31, 2019 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	89,172	$	—	$	—	$	89,172
Commercial paper		—		10,954		—		10,954
Marketable securities:
U.S. Treasury notes		106,670		—		—		106,670
Commercial paper		—		100,829		—		100,829
Corporate bonds		—		73,138		—		73,138
	$	195,842	$	184,921	$	—	$	380,763
Liabilities:
Series 1 nonconvertible preferred stock		—		—		1,628		1,628
	$	—	$	—	$	1,628	$	1,628

	Fair Value Measurements at September 30, 2018 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	51,025	$	—	$	—	$	51,025
Commercial paper		—		6,987		—		6,987
Corporate bonds		—		3,998		—		3,998
Marketable securities:
U.S. Treasury notes		42,703		—		—		42,703
Commercial paper		—		113,885		—		113,885
Corporate bonds		—		104,629		—		104,629
	$	93,728	$	229,499	$	—	$	323,227
Liabilities:
Series 1 nonconvertible preferred stock		—		—		1,628		1,628
	$	—	$	—	$	1,628	$	1,628

During the six months ended March 31, 2019 and 2018, there were no transfers between Level 1, Level 2 and Level 3.

The outstanding shares of Series 1 nonconvertible preferred stock are measured at fair value. The fair value of these instruments was based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The Company utilized a probability-weighted valuation model which takes into consideration various outcomes that may require the Company to transfer assets upon exercise. Changes in the fair value of the warrant liability (for the period the warrants were outstanding) and Series 1 nonconvertible preferred stock are recognized in other income (expense), net in the consolidated statements of operations.

The recurring Level 3 fair value measurements of the Company’s outstanding Series 1 nonconvertible preferred stock using probability-weighted discounted cash flow include the following significant unobservable inputs:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	ENTA	NASDAQ

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Operations	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Stockholders’ Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Unaudited Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
PART II—OTHER INFORMATION
Item 1A.	Risk Factors	28
Item 6.	Exhibits	52
Signatures		53

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

	Range (Weighted Average)
	March 31,	September 30,
Unobservable Input	2019	2018