UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended December 31, 2019

OR

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

Commission File Number 001-35839

ENANTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	2834	04-3205099
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

500 Arsenal Street

Watertown, Massachusetts 02472

(617) 607-0800

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ENTA	NASDAQ

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, a 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.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	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  ☒

As of January 31, 2020, the registrant had 19,924,426 shares of common stock, $0.01 par value per share, outstanding.

ENANTA PHARMACEUTICALS, INC.

FORM 10-Q — Quarterly Report

For the Quarterly Period Ended December 31, 2019

TABLE OF CONTENTS

		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	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
PART II—OTHER INFORMATION
Item 1A.	Risk Factors	26
Item 6.	Exhibits	49
Signatures		50

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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.

2

PART I—FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share amounts)

	December 31,		September 30,
	2019		2019
Assets
Current assets:
Cash and cash equivalents	$	27,558	$	51,230
Short-term marketable securities		346,227		284,006
Accounts receivable		52,570		51,313
Prepaid expenses and other current assets		14,153		15,299
Total current assets		440,508		401,848
Long-term marketable securities		40,941		65,013
Property and equipment, net		10,407		10,927
Deferred tax assets		10,656		11,341
Operating lease, right-of-use assets		7,762		—
Restricted cash		608		608
Other long-term assets		92		92
Total assets	$	510,974	$	489,829
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,596	$	6,689
Accrued expenses and other current liabilities		9,411		15,920
Operating lease liabilities		3,132		—
Total current liabilities		19,139		22,609
Operating lease liabilities, net of current portion		5,987		—
Series 1 nonconvertible preferred stock		1,628		1,628
Other long-term liabilities		1,933		3,100
Total liabilities		28,687		27,337
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock; $0.01 par value per share, 100,000 shares authorized; 19,810 and    19,703 shares issued and outstanding at December 31, 2019 and    September 30, 2019, respectively		198		197
Additional paid-in capital		304,672		298,409
Accumulated other comprehensive income		234		146
Retained earnings		177,183		163,740
Total stockholders' equity		482,287		462,492
Total liabilities and stockholders' equity	$	510,974	$	489,829

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

3

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	December 31,
	2019			2018
Royalty revenue	$	52,570		$	69,886
Operating expenses:
Research and development		32,778			34,878
General and administrative		6,921			7,152
Total operating expenses		39,699			42,030
Income from operations		12,871			27,856
Other income (expense):
Interest income (expense), net		2,076			1,885
Total other income (expense), net		2,076			1,885
Income before income taxes		14,947			29,741
Income tax expense		(1,504	)		(3,730	)
Net income	$	13,443		$	26,011
Net income per share:
Basic	$	0.68		$	1.34
Diluted	$	0.65		$	1.25
Weighted average shares outstanding:
Basic		19,751			19,426
Diluted		20,773			20,810

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

4

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

	Three Months Ended
	December 31,
	2019		2018
Net income	$	13,443	$	26,011
Other comprehensive income:
Net unrealized gains on marketable securities, net of tax of ($28) and ($45)		88		141
Total other comprehensive income, net of tax		88		141
Comprehensive income	$	13,531	$	26,152

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

5

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

							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, net of tax		—		—		—		141			—		141
Net income		—		—		—		—			26,011		26,011
Balances at December 31, 2018		19,435	$	194	$	283,530	$	(257	)	$	143,368	$	426,835

								Accumulated
					Additional			Other				Total
	Common Stock				Paid-In			Comprehensive		Retained		Stockholders'
	Shares		Amount		Capital			Income (Loss)		Earnings		Equity
Balances at September 30, 2019		19,703	$	197	$	298,409		$	146	$	163,740	$	462,492
Exercise of stock options		76		1		2,305			—		—		2,306
Vesting of restricted stock units, net    of withholding		31		—		(1,140	)		—		—		(1,140	)
Stock-based compensation expense		—		—		5,098			—		—		5,098
Other comprehensive income, net of tax		—		—		—			88		—		88
Net income		—		—		—			—		13,443		13,443
Balances at December 31, 2019		19,810	$	198	$	304,672		$	234	$	177,183	$	482,287

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

6

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended
	December 31,
	2019			2018
Cash flows from operating activities
Net income	$	13,443		$	26,011
Adjustments to reconcile net income to net cash provided by    operating activities:
Stock-based compensation expense		5,098			5,843
Depreciation and amortization expense		904			680
Deferred income taxes		657			(918	)
Premium paid on marketable securities		(988	)		—
Accretion of discount on marketable securities		(330	)		(977	)
Other non-cash items		(2	)		39
Change in operating assets and liabilities:
Accounts receivable		(1,257	)		(2,681	)
Prepaid expenses and other current assets		1,146			(3,182	)
Operating lease, right-of-use assets		520			—
Accounts payable		(179	)		124
Accrued expenses		(5,989	)		598
Income taxes payable		—			4,470
Operating lease liabilities		(593	)		—
Other long-term liabilities		(67	)		247
Net cash provided by operating activities		12,363			30,254
Cash flows from investing activities
Purchase of marketable securities		(117,461	)		(119,546	)
Proceeds from maturities and sale of marketable securities		80,748			98,999
Purchase of property and equipment		(488	)		(384	)
Net cash used in investing activities		(37,201	)		(20,931	)
Cash flows from financing activities
Proceeds from exercise of stock options		2,306			1,161
Payments for settlement of share-based awards		(1,140	)		—
Payments of capital lease obligations		—			(21	)
Net cash provided by financing activities		1,166			1,140
Net increase (decrease) in cash, cash equivalents and restricted cash		(23,672	)		10,463
Cash, cash equivalents and restricted cash at beginning of period		51,838			64,510
Cash, cash equivalents and restricted cash at end of period	$	28,166		$	74,973
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—		$	5
Supplemental disclosure of non-cash investing information:
Purchases of fixed assets included in accounts payable and accrued expenses	$	216		$	1,304
Operating lease liabilities arising from obtaining right-of-use assets	$	1,131		$	—

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

7

ENANTA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Amounts in thousands, except per share data)

1. Nature of the Business and Basis of Presentation

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 for the treatment of chronic hepatitis C virus, or HCV. Glecaprevir is co-formulated as part of AbbVie’s leading direct-acting antiviral (DAA) combination treatment for HCV, which is marketed under the tradenames MAVYRET^® (U.S.) and MAVIRET™ (ex-U.S.) (glecaprevir/pibrentasvir). Royalties from the Company’s AbbVie collaboration and its existing financial resources provide funding to support the Company’s wholly-owned research and development programs, which are primarily focused on the following disease targets: respiratory syncytial virus (“RSV”), non-alcoholic steatohepatitis (“NASH”), 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.

Unaudited Interim Financial Information

The consolidated balance sheet at September 30, 2019 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 December 31, 2019 and for the three months ended December 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, 2019.

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 December 31, 2019 and results of operations for the three months ended December 31, 2019 and 2018 and cash flows for the three months ended December 31, 2019 and 2018, have been made. The results of operations for the three months ended December 31, 2019 are not necessarily indicative of the results of operations that may be expected for subsequent quarters or the year ending September 30, 2020.

The accompanying consolidated financial statements have been prepared in conformity with GAAP. All 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.

2. Summary of Significant Accounting Policies

For the Company’s Significant Accounting Policies, please refer to its Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Other than the adoption of ASC 842 as of October 1, 2019, there were no other significant changes to the Company’s Significant Accounting Policies during the quarter.

Use of Estimates

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

8

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 Series 1 nonconvertible preferred stock and 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.

Recently Adopted Accounting Pronouncements

The Company adopted ASU No. 2016-02, Leases (Topic 842), as of October 1, 2019, using the modified retrospective method under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The transition method allows entities to apply the transition requirements at the effective date rather than at the beginning of the earliest comparative period presented. The Company’s reporting for comparative periods is presented in accordance with ASC 840, Leases. Adoption of the new standard resulted in the recording of right of use (“ROU”) assets and lease liabilities of $7,151 and $8,622, respectively. The adoption of the standard did not have a material impact on the Company’s results of operations or cash flows. The Company elected to use the transition package of three practical expedients, which among other things, allowed the Company to carry forward the historical lease classification. The Company has elected, under Topic 842, the further practical expedient not to separate non-lease components from the lease components to which they relate and instead to combine them and account for them as a single lease component. The Company also elected the accounting policy election to keep leases with a term of twelve months or less off the balance sheet and to recognize payments for those leases on a straight-line basis over the lease term.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. At the inception of the arrangement, the Company determines if an arrangement is a lease based on assessment of the terms and conditions of the contract. Operating lease ROU assets and lease liabilities are recognized at commencement date, and thereafter if modified, based on the present value of lease payments over the lease term. The lease term includes any renewal or early-termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its estimated secured incremental borrowing rate for that lease term. The underlying assets of the Company’s leases as of the adoption date consisted of office and laboratory space.

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 period through 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. The Company adopted the new standard on the effective date of October 1, 2019. The adoption of the standard did not have a material impact on the Company’s financial position and results of operations.

Recently Issued Accounting Pronouncements 

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.

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.

9

3. Fair Value of Financial Assets and Liabilities

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 December 31, 2019 and September 30, 2019, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:

	Fair Value Measurements at December 31, 2019 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	6,065	$	—	$	—	$	6,065
Commercial paper		—		17,423		—		17,423
Marketable securities:
U.S. Treasury notes		176,856		—		—		176,856
Commercial paper		—		77,269		—		77,269
Corporate bonds		—		133,043		—		133,043
	$	182,921	$	227,735	$	—	$	410,656
Liabilities:
Series 1 nonconvertible preferred stock	$	—	$	—	$	1,628	$	1,628
	$	—	$	—	$	1,628	$	1,628

	Fair Value Measurements at September 30, 2019 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	44,569	$	—	$	—	$	44,569
Marketable securities:
U.S. Treasury notes		170,515		—		—		170,515
Corporate bonds		—		111,837		—		111,837
Commercial paper		—		66,667		—		66,667
	$	215,084	$	178,504	$	—	$	393,588
Liabilities:
Series 1 nonconvertible preferred stock	$	—	$	—	$	1,628	$	1,628
	$	—	$	—	$	1,628	$	1,628

During the three months ended December 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 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:

	Range (Weighted Average)
	December 31,	September 30,
Unobservable Input	2019	2019
Probabilities of payout	0%-60%	0%-60%
Discount rate	5.75%	6.00%

10

The following table provides a rollforward of the aggregate fair values of the Company’s outstanding Series 1 nonconvertible preferred stock for which fair value is determined by Level 3 inputs:

	Series 1 Nonconvertible Preferred Stock
Balance, September 30, 2019	$	1,628
Change in fair value of nonconvertible preferred stock		—
Balance, December 31, 2019	$	1,628

4. Marketable Securities

As of December 31, 2019 and September 30, 2019, the fair value of available-for-sale marketable securities, by type of security, was as follows:

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
U.S. Treasury notes	$	176,712	$	144	$	—			176,856
Corporate bonds		132,928		127		(12	)		133,043
Commercial Paper		77,269		—		—			77,269
	$	386,909	$	271	$	(12	)	$	387,168

September 30, 2019
Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value