Arbutus Biopharma Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; selected fourth-quarter results are also summarized. Dollar amounts are in U.S. dollars unless otherwise noted. The filing is an annual report, not a standalone quarterly filing.
Business context
Arbutus, formerly Tekmira Pharmaceuticals, is a clinical-stage biopharmaceutical company focused primarily on developing combination therapies intended to cure chronic hepatitis B (HBV), supported by its lipid nanoparticle (LNP) delivery technology. The March 2015 acquisition of Arbutus Inc. expanded its HBV pipeline. The company has no commercial HBV or RNAi product revenues; reported revenue comes from collaborations, licensing, milestones and royalties.
Financial performance and liquidity
| Metric (US$ millions, except per-share data) | FY2015 | FY2014 |
|---|---|---|
| Revenue | 24.9 | 15.0 |
| Operating expenses | 127.2 | 48.4 |
| Operating loss | (102.3) | (33.4) |
| Net loss | (61.1) | (38.8) |
| Basic and diluted loss per share | (1.34) | (1.80) |
| Net cash used in operating activities | (54.8) | (12.4) |
- Revenue rose about 66%, but remained collaboration- and licensing-dependent. Monsanto accounted for approximately $15.0 million of FY2015 revenue, including a $11.8 million release of deferred revenue after Arbutus revised the option period end date to December 31, 2015.
- FY2015 operating expenses included a $39.0 million impairment of the OCB-030 cyclophilin program, $9.7 million of acquisition costs and $22.1 million of stock-based compensation. The latter included $16.7 million tied to expiration of repurchase rights on shares issued in the Arbutus Inc. merger.
- Other income was $25.0 million, including $21.8 million of foreign-exchange gains and a $3.3 million gain from the change in warrant fair value. A $16.2 million deferred tax benefit partly offset the pretax loss. These items materially affected reported net loss.
- At year-end, cash and cash equivalents were $166.8 million; short- and long-term investments totaled $24.6 million, for combined cash and investments of $191.4 million. Current assets were $183.9 million and current liabilities $10.6 million. Total liabilities were $164.6 million, including a $146.3 million deferred tax liability and $7.5 million contingent consideration. The supplied filing text does not identify outstanding borrowings as a material liability.
- Net cash provided by financing was $143.9 million, principally reflecting $142.2 million of net proceeds from the March 2015 public offering. Management said available resources were sufficient for at least the next 12 months, while warning that further substantial funding would be required to advance the pipeline.
- Q4 2015 revenue was $12.7 million and net loss was $5.3 million, compared with $4.4 million of revenue and a $6.2 million net loss in Q4 2014. Q4 revenue included the deferred-revenue release from Monsanto; Q4 results also included foreign-exchange gains.
- No gross margin is presented in the filing. Arbutus reported a $3.7 million facility lease commitment and no material capital-expenditure commitments. The filing does not present a conventional product-sales margin or debt leverage metric.
Material changes versus prior periods
- Revenue increased from $15.0 million to $24.9 million, principally due to Monsanto revenue recognition; the mix and timing of collaboration receipts are irregular.
- Operating loss widened to $102.3 million from $33.4 million, as R&D and corporate spending expanded following the merger, alongside acquisition costs and the OCB-030 impairment. Net loss increased, although FX gains and the tax benefit reduced the reported loss relative to operating loss.
- Operating cash use increased to $54.8 million from $12.4 million, reflecting expanded research and development and the acquired business. The March 2015 public offering materially strengthened liquidity.
- Shares outstanding increased to 54.6 million at February 29, 2016, from 22.4 million at December 31, 2014, reflecting the merger and equity issuance. The March offering raised net proceeds of $142.2 million.
- The company changed its name from Tekmira to Arbutus effective July 31, 2015, and changed its functional currency from the Canadian dollar to the U.S. dollar prospectively on January 1, 2016.
Outlook, management commentary and risks
- Arbutus reported that the ARB-1467 Phase II multidose study had begun; HBsAg-reduction data were expected in the second half of 2016. The Phase I study reported no dose-limiting toxicities through 0.4 mg/kg, the highest dose tested at the time, and dose escalation was continuing.
- Management planned to file INDs or equivalent applications in the second half of 2016 for ARB-1740, a lead cccDNA formation inhibitor and a lead capsid assembly inhibitor. Clinical development of ARB-1598 in HBV patients was conditional on supportive preclinical evaluation. These are plans, not reported outcomes.
- Non-HBV programs were largely suspended while the company focused on HBV. TKM-PLK1 HCC expansion-cohort enrollment was complete, with an efficacy assessment in approximately 20 subjects and results expected in 2016. Ebola development was suspended; the DoD contract was terminated, and the company did not expect significant DoD revenue after 2015. Monsanto did not proceed to Phase B; in March 2016 it exercised its option to acquire PADCo for a $1.0 million fee.
- Key risks include early-stage drug development and clinical/regulatory uncertainty; continuing losses and future financing needs; reliance on collaborators and irregular milestone/licensing receipts; competition; dependence on licensed intellectual property; foreign-exchange exposure; and potential dilution from equity compensation or future financings.
- UBC is pursuing arbitration over allegedly unpaid royalties of at least $3.5 million, plus an unspecified amount based on non-public information, interest and costs. Arbutus disputes the claim and had not recorded an estimated loss because the likelihood and amount were uncertain. Separately, the Alnylam arbitration over a disputed $5 million milestone concluded with no payment to Arbutus.
- Potential milestone and royalty obligations under licenses could be substantial if development, regulatory or sales milestones are achieved. The company reported no dividends and did not expect to pay them in the near future. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting at year-end.
Important facts for investors to verify
- Whether ARB-1467 produces meaningful and durable HBsAg reductions in the Phase II study, and whether the planned 2016 IND filings and development timelines were achieved.
- How much of future operating costs can be funded by the reported $191.4 million year-end cash and investment balance, given FY2015 operating cash use of $54.8 million and management’s stated need for additional capital over time.
- The sustainability and timing of collaboration revenue after the DoD contract ended and Monsanto research activity ceased, including the commercial progress of partner programs and royalty sources.
- The status and potential exposure of the UBC arbitration, and the effect of milestone, royalty and contingent-consideration obligations on future cash requirements.
- How much reported performance depended on non-cash or potentially volatile items, particularly the impairment, stock-based compensation, foreign-exchange gains, warrant remeasurement and deferred tax benefit.
- Any dilution from outstanding options, warrants, replacement awards or future financings, and the effect of the January 2016 functional-currency change on reported comparisons.