Arbutus Biopharma Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report; fourth-quarter figures are unaudited. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Arbutus is a clinical-stage biopharmaceutical company focused on developing combination treatments intended to cure chronic hepatitis B (HBV). Its principal programs target HBV replication and viral antigens. The company had no product sales; revenue came from collaborations, licensing, milestones and royalties. Other assets include an approximately 40% interest in Genevant Sciences and royalties on Alnylam’s Onpattro.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $5.9 million | $10.7 million |
| Operating expenses | $95.7 million | $121.6 million |
| Loss from operations | $89.8 million | $110.9 million |
| Net loss | $57.1 million | $84.4 million |
| Net loss attributable to common shares | $67.2 million | $85.3 million |
| Basic and diluted loss per common share | $1.21 | $1.56 |
| Cash used in operating activities | $67.9 million | $48.6 million |
Revenue declined about 44%. Operating expenses fell about 21%, and net loss narrowed about 32%; the improvement in net loss included material non-operating items, including the Genevant gain. Revenue was too small relative to operating expenses for a conventional operating margin to be informative; the company remained substantially loss-making.
FY2018 revenue included $4.3 million from Gritstone and $1.6 million of other milestone and royalty payments; FY2017 included $8.0 million from Alexion, whose license was terminated in 2017. Onpattro generated a $0.75 million approval/first-sale milestone and Arbutus received its first sales royalty in Q4 2018. The filing does not state the amount of that royalty payment.
At December 31, 2018, cash and cash equivalents were $36.9 million and short-term investments were $87.7 million, totaling $124.6 million. Net liquidity after accounts payable and accrued liabilities was $115.2 million. The $12.0 million promissory note was repaid in March 2018; no debt remained at year-end. Financing cash flow was $55.6 million, principally reflecting $66.4 million of preferred-share proceeds, partly offset by the loan repayment. The company reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Operating cash use increased by $19.3 million, principally due to higher development spending, restructuring costs and lower collaboration cash receipts, including the absence of Alexion’s 2017 payment.
- Operating expenses included $14.8 million of impairment charges for AB-423 intangible assets, versus $40.8 million of impairment charges in 2017 related to discontinued STING agonists. The 2018 charge followed the decision to indefinitely defer AB-423 as AB-506 advanced.
- FY2018 included a $24.9 million gain associated with establishing Genevant and a $5.6 million equity-method loss reflecting Arbutus’s share of Genevant’s results. Arbutus also recorded a $7.3 million reduction in contingent consideration, primarily reflecting lower expected AB-423 milestone probability and revised sales timing.
- Revenue fell from $10.7 million to $5.9 million, in part because Alexion revenue did not recur. Gritstone revenue rose to $4.3 million, but from April 2018 Genevant became entitled to half of specified Gritstone revenue, with Arbutus recording those amounts net.
- The company reduced its global workforce by approximately 35% and consolidated HBV operations in Warminster, Pennsylvania, closing its Burnaby research facility. Restructuring expense was $4.8 million in 2018; total expected cost was approximately $5.6 million.
- Series A preferred shares outstanding increased to 1.164 million after the January 2018 tranche. The shares accrue at 8.75% annually, compounded, and are mandatorily convertible in October 2021 under the stated terms.
Outlook, management commentary, risks and contingencies
- Management stated that year-end cash, cash equivalents and investments were expected to fund operations into 2020 and, elsewhere, for at least the next 12 months. It also said substantial additional funding would be needed to continue active pipeline development. A $50 million at-the-market common-share sale facility was authorized in December 2018; no shares had been sold under it by year-end.
- AB-506 was in the HBV-patient portion of a Phase 1a/1b trial. Top-line results were expected in late Q2 2019; management anticipated a Phase 2 study with a nucleos(t)ide analogue in the second half of 2019.
- For AB-729, management anticipated clinical entry in Q2 2019 and HBV-patient dosing in the second half of 2019, subject to successful enabling studies and regulatory filings. A possible AB-506/AB-729/standard-of-care combination study was anticipated in the first half of 2020, contingent on earlier results.
- Nonclinical safety findings in the AB-452 RNA-destabilizer program delayed a potential clinical study while the company investigated their nature and implications. Backup compounds remained in lead optimization; a program update was expected in the second half of 2019.
- Key risks include early-stage development and clinical failure, regulatory delays, continuing cash needs and possible dilution, reliance on collaborators and third-party manufacturers, competition, and the uncertain commercialization and royalty potential of Onpattro. The company had accumulated a deficit of $805.2 million and did not expect sustained profitability in the foreseeable future.
- UBC arbitration remained unresolved. UBC sought $10.9 million in alleged unpaid royalties, plus interest and costs; the company disputed the claim. The next phase was anticipated in Q2 2019. Arbutus recorded no estimate of possible loss because likelihood and amount could not be reasonably determined.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Most important facts for investors to verify
- Whether the company met the stated clinical milestones for AB-506 and AB-729, and whether results support the planned combination strategy.
- How AB-452 safety findings were resolved and whether the backup RNA-destabilizer program progressed.
- Actual cash burn, collaboration receipts and remaining runway relative to management’s funding outlook; whether the $50 million share-sale facility was used.
- Onpattro royalty receipts and sales trajectory, plus Genevant’s operating performance and the value and liquidity of Arbutus’s approximately 40% stake.
- The outcome and financial exposure of the UBC arbitration and any resulting royalty, licensing or legal costs.
- The potential dilution from preferred-share conversion and other equity awards. The filing reported 56.1 million common shares outstanding on March 5, 2019 and 22.6 million common shares issuable on preferred conversion under its stated assumption.