Enanta Pharmaceuticals Inc (ENTA)

[mouton29]

Stepping back, I understand this is old, but I never understood this entire discussion and now that I’ve looked at the financial statements, it seems clearer than ever that it’s all semantics.

The bottom line is that ENTA received $200 million and agreed to pay back 1.42x that amount over time. Assuming the cap will be reached, you can view it as

(I) a sale of $200 million of future royalties for $284 million (providing the buyer with an estimated IRR of 5.6%), in which case the $284 million of royalties would be income to the buyer and not to ENTA but there would be no explicit financing charge on an the ENTA financial statements. Presumably ENTA would report the $200 million of proceeds as income or

(II) a borrowing, in which case ENTA is paid the $282 million of royalties, treats that as income but pays it all over to the “lender”, $200 million as principal and $82 million as interest. The net effect of this is that ENTA has $200 million of income (since the principal repayment is not a deduction) over the life of the deal, exactly equal to the cash “borrowing” proceeds, and the same net result as in (I).

The second of these is what ENTA bean counters decided was appropriate. And the financial statements, including the cash flow, which adjusts from income statement, makes appropriate adjustments.