Arbutus Biopharma Corp quarterly report, Q3 FY2015

Arbutus Biopharma Corporation — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015. Financial amounts are in U.S. dollars; statement amounts are generally in millions below. Arbutus changed its name from Tekmira Pharmaceuticals on July 31, 2015. The March 2015 acquisition of Arbutus Inc. materially changed the company’s scale and pipeline; its results are consolidated from the acquisition date.

Financial performance and position

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Revenue	$4.1 million	$4.4 million	$12.2 million	$10.6 million
Operating expenses	$62.2 million	$11.2 million	$102.8 million	$32.8 million
Operating loss	$58.1 million	$6.8 million	$90.6 million	$22.2 million
Net loss	$29.0 million	$8.6 million	$55.9 million	$32.7 million
Basic and diluted loss per share	$0.57	$0.39	$1.28	$1.53
Operating cash used	$2.5 million	$6.7 million	$38.2 million	$5.6 million

Q3 revenue decreased about 7% year over year; nine-month revenue increased about 15%. Revenue came mainly from the Department of Defense (DoD), Monsanto, and Dicerna, plus licensing, milestone, and royalty income. The DoD accounted for 57% of nine-month revenue.
Q3 operating expenses included a $38.0 million noncash impairment of acquired cyclophilin research assets. R&D and general and administrative expenses also increased with expanded HBV development, clinical activity, staffing, and the acquired business. Nine-month expenses additionally included $9.7 million of acquisition costs and $11.0 million of noncash compensation expense related to merger awards.
Nine-month net loss was lower than in 2014 despite the higher operating loss, reflecting larger foreign-exchange gains and a gain from the decrease in the fair value of warrant liabilities, as well as a $15.2 million noncash income tax benefit associated with the impairment.
Gross profit and gross margin are not separately presented in the filing.

Liquidity, assets, and financing

At September 30, cash and cash equivalents were $181.1 million; short- and long-term investments were $25.0 million. Combined cash and investments totaled $206.1 million, compared with $112.2 million at December 31, 2014.
Current assets were $200.0 million and current liabilities were $13.8 million. The filing reports no conventional borrowings or debt balance; liabilities include deferred revenue, warrant liability, contingent consideration, and a deferred tax liability.
Cash used in operations for the first nine months was $38.2 million. Investing activities provided $9.5 million, and financing activities provided $143.9 million, principally from the March public offering. Cash and cash equivalents ended the period at $181.1 million.
The March offering issued 7.5 million shares at $20.25 per share, generating $151.9 million gross and $142.2 million net proceeds. Shares outstanding were 54.6 million at September 30.
Total assets were $722.6 million, including $353.6 million of acquired in-process R&D assets and $156.6 million of goodwill. These acquisition valuations were preliminary. The company reported no goodwill impairment for the period.

Changes, outlook, and notable items

The merger added HBV programs and increased the share count and reported assets. Management said the company had sufficient cash resources for at least the next 12 months, while noting that further substantial funding would be needed for continued pipeline development.
Management planned, subject to regulatory confirmation, to begin a multi-dose Phase II TKM-HBV study by year-end 2015, with results expected in 2016. It also anticipated filing for a cccDNA inhibitor in 2016, initiating clinical development of one core protein inhibitor in 2016, and starting CYT003 clinical development in 2016. These are forward-looking plans, not guarantees.
After evaluating OCB-030 and competing cyclophilin inhibitors, management concluded that cyclophilins did not play a meaningful role in HBV biology and discontinued the program. The decision was finalized after quarter-end but reflected management’s estimate at September 30; the filing recorded a $38.0 million impairment and $15.2 million tax benefit in Q3.
In October 2015, the DoD notified the company that Ebola-Guinea manufacturing and IND-submission work statements were terminated, subject to post-termination obligations. The TKM-Ebola contract was expected to conclude before year-end; management did not expect much DoD revenue in Q4 2015 or later.
Arbutus reported $11.8 million of Q3 foreign-exchange gains, primarily unrealized, and a $2.0 million gain from the reduced fair value of warrant liabilities. These amounts can fluctuate with currency and share-price assumptions.
Contingencies include an Alnylam arbitration over a disputed $5.0 million milestone, with the decision pending, and a UBC arbitration alleging at least $3.5 million in unpaid royalties plus an unspecified amount. Arbutus disputed the UBC claim and had not recorded an estimated loss because the outcome and amount could not be reasonably determined.
The company also disclosed conditional development, regulatory, and sales milestone and royalty obligations under acquired and licensed programs. Timing and amounts depend on future milestones or commercial success.

Most important facts for investors to verify

Progress, regulatory status, safety, and timing of TKM-HBV and the stated 2016 HBV development milestones.
Whether cash burn, collaboration receipts, and spending priorities support management’s stated minimum 12-month liquidity outlook, particularly after reduced DoD work.
Final purchase-price allocation and any subsequent impairment of acquired IPR&D or goodwill; the reported acquisition values remain preliminary.
Resolution and potential financial exposure from the Alnylam and UBC arbitrations, and the timing and probability of contingent milestone obligations.
Effects of the discontinued cyclophilin program, DoD termination, foreign-exchange movements, and warrant remeasurement on future reported results.