TESARO (TSRO) Q3 Earnings Beat, Revenues Miss, Shares Up

TESARO, Inc. (NASDAQ:TSRO) incurred a loss of $2.49 per share in the third quarter of 2018, which was narrower than the Zacks Consensus Estimate of a loss of $2.62. The company had recorded a significantly lower loss of 47 cents in the year-ago period due to recognition of an upfront payment. Please note that the loss included a gain of $17.6 million related to divestiture of Varubi rights.

TESARO’s key marketed drug, Zejula is approved as maintenance treatment of recurrent ovarian cancer patients.

Total revenues, primarily from Zejula, were approximately $64.4 million in the quarter, up 12.6% sequentially. Revenues, however, missed the Zacks Consensus Estimate of $69.51 million. The company had recorded total revenues of $142.8 million in the year-ago quarter. TESARO had recorded an upfront payment of $100 million from Takeda in the year-ago period, which was missing this quarter.

Shares of the company rose almost 7.4% in pre-market trading on Nov 2, presumably on the back of strong growth in Zejula sales and an improved guidance. However, TESARO has underperformed the industry so far this year. While the stock has lost 61.5%, the industry decreased 3.8%.

Quarter in Detail

Product revenues during the quarter rose 52.3% year over year to $63.6 million. The significant increase was mainly driven by impressive growth in sales of Zejula, which increased almost 61% from the year-ago period to $63.2 million. Zejula’s sales were up 17.3% sequentially.

Importantly, the company registered more than 10,000 new patients on Zejula therapy since its launch. On its last quarter earnings call, the company stated that more than 6000 patients had been prescribed Zejula since launch. The drug showed strong uptake in Europe.

The company’s other marketed drug, Varubi, generated sales of $0.4 million in the quarter. In late June, TESARO entered into an agreement with TerSera Therapeutics to divest the U.S. and Canadian rights of the drug. During the third quarter, the company closed the deal and received an upfront payment of $35 million.

License, collaboration and other revenues were $0.8 million compared with $101 million in the year-ago period.

During the third quarter, research & development expenses increased 28.3% year over year to $94.2 million, primarily due to increased expenses for clinical studies on Zejula, TSR-042 and TSR-022. Selling, general and administrative (SG&A) expenses increased 11.3% year over year to $93.5 million, reflecting increased activities to support commercialization of Zejula in the United States as well as Europe.

TESARO ended the quarter with $476.8 million of cash and cash equivalents, down from $575.1 million on Jun 30, 2018.

Pipeline Update

The company is actively working on expanding the label of Zejula in first-line ovarian cancer as well as in other cancer indications. Zejula is being evaluated in several clinical studies as monotherapy or in combination for additional indications. Janssen, a subsidiary of Johnson & Johnson (NYSE:JNJ) , is developing Zejula in prostate cancer with regulatory applications to be filed next year.

A regulatory application seeking label expansion of Zejula in late-line ovarian cancer beyond BRCA-mutation patients is expected before year end. A phase III study and a phase II study are evaluating Zejula monotherapy and Zejula in combination with Roche’s (OTC:RHHBY) Avastin (bevacizumab), respectively, in first line ovarian cancer. Data is expected in late 2019 from both the studies.

Apart from Zejula, TESARO’s pipeline also includes immunotherapies – anti-PD-1 antibody, TSR-042, and anti-LAG-3 antibody, TSR-022. The company is developing TSR-042 in the lucrative first-line non-small cell lung cancer among other indications. The company expects to file a Biologics License Application (“BLA”) for TSR-042 in the second half of 2019 for recurrent endometrial cancer.

2018 Outlook Raised

TESARO raised the lower end of its sales guidance for 2018, after lowering it significantly on the second-quarter earnings call. It now expects it to be in the range of $258 to $265 million compared with $250 to $265 million expected previously. Expectations for Zejula sales were also higher in the range of $233 to $238 million (previously $225 to $235). Sales of the drug in the fourth quarter are expected to be $67 to $72 million.

The company expects other revenues, including licensing and Varuby oral (in Europe), to be in the range of $25 to $27 million (previously $25 to $30 million).

The company maintained its cash and cash equivalents guidance at $400 million at year end.

Our Take

Although Zejula continues to show strong adoption, competition is increasing in the stagnating PARP inhibitor segment. Approval of Clovis Oncology’s (NASDAQ:CLVS) Rubraca in earlier-line setting and expansion in patient population without BRCA mutation has made the ovarian cancer space more competitive. AstraZeneca’s Lynpraza is the third PARP inhibitor approved for ovarian cancer.

However, successful development of Zejula, earlier than Rubraca and Lynparza, in first-line ovarian cancer may boost sales of the drug.

Zacks Rank

TESARO currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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