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<<Back to Part 2

In Part 3, we will examine the financial statements of Pharmacyclics (NASDAQ:PCYC) and evaluate its financial strength with regard to its ability to fund all clinical programs related to ibrutinib. 2012 is the first year PCYC reported positive earnings. The revenues were derived from several milestone payments from its corporate partner, Johnson and Johnson (NYSE:JNJ). As the clinical programs draw closer to an end, more revenues from the JNJ partnership will be materialized between 2013 and 2016. We estimate that PCYC could receive from JNJ milestone payments of $100M in 2013, $163M in 2014, and $463M in 2015. We also estimate that PCYC will start generating commercial revenues from an ibrutinib launch in 2016 going forward. Total revenues for PCYC are estimated to be $500M (2016), $1.22B (2017), $2.24B (2018), and $3.7B (2019). The revenue numbers will be used for stock valuation in Part 4.

Let's first review PCYC's financial statements. In 2012 (ending December 31), the company reported net earnings of $117.5M, as compared to losses in previous years. So, 2012 is the first time the company's earnings have been positive. The $161M of revenues were primarily from milestone payments from its partnership with JNJ and other companies (see below). PCYC's R&D costs ($64M) were about 40% of its revenue and its SG&A expense ($13M) was 10% of its revenues in 2012. As the company expands its clinical programs in 2013 and 2014, we anticipate that these expenses will increase significantly.

Now, let's look at its balance sheet. The company has no long term debt. However, it is important to note that the company has a history of funding its operation through issuance of common stock. For example, during the fiscal year ended 6/30/2010, PCYC issued 31 million shares of common stock, representing a 115% increase in total shares outstanding. The following year, it issued 8.7 million shares, or a 14.7% increase in total shares. During the fiscal year ended 6/30/2012, the company only issued 1.4 million shares, or a 2% increase. Apparently, the partnership with JNJ in December 2011 alleviated the need to raise funds through stock issuance. PCYC currently has 74.4 million shares outstanding.

As of December 2012, the company has approximately $355M total assets which include $327M cash and marketable securities. Shareholder equity is $262M and total liabilities are $93M. The company has no long-term debt and plenty of cash. In addition, it can access loans from the JNJ partnership. Therefore, the company stands in good financial strength to upcoming clinical trials without further issuance of common shares.

Next, we review the partnership agreement with JNJ, because this is the major source of revenues from 2012 to 2016 until the company launches its first drug product in 2016.

In December 2011, PCYC entered into a worldwide collaboration and license agreement with Janssen, a subsidiary of Johnson & Johnson to develop and commercialize ibrutinib, for oncology indications. The collaboration provided for payments by JNJ to PCYC of $150M upfront, as well as the potential to receive future milestone payments of up to $825M based upon continued development progress ($250M), regulatory progress ($225M), and approval of the product in both the U.S. and worldwide ($350M). So, the total deal is $975M that PCYC may receive if all milestones are achieved (see Table).

(click to enlarge)

In 2012, the deal had triggered $100M milestone payments to PCYC, as a result of reaching a development progress milestone (the enrollment of patients to the Phase III CLL and Phase II MCL trials). We estimate that PCYC could receive additional $100M of development payments in 2013 and $50M in 2014, corresponding to the progress in CLL and MCL clinical trials. In addition, we estimate that PCYC may receive regulatory filing payments (total $225M) as early as 2014. We assume it will receive half of the payment in 2014 and the other half in 2015. We anticipate that in 2015, ibrutinib is likely to receive FDA and or EU approval for CLL and MCL indications. The events will result in the final milestone payment of $350M in 2015.

The partnership agreement with JNJ also includes costs and profit-sharing arrangement, in which JNJ is responsible for 60% of development costs, whereas PCYC is responsible for 40% of costs. Once the products are launched, both companies will share 50:50 of revenues and commercialization expenses. We will incorporate the information into our financial projection in Part 4.


PCYC corporate presentation-Jan2013

PCYC financial results-Dec2012

PCYC 10K-2012-end-June30

>>Go to Part 4

Disclosure: I am long PCYC, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.