Arvinas, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Arvinas is a clinical-stage biopharmaceutical company developing PROTAC protein degraders. It had no product sales; revenue came from research collaborations and licenses.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $30.1 million | $3.4 million | $38.1 million | $10.9 million |
| Research and development | $16.6 million | $13.1 million | $46.8 million | $30.6 million |
| General and administrative | $8.0 million | $4.3 million | $20.0 million | $7.1 million |
| Operating income (loss) | $5.5 million | $(14.1) million | $(28.7) million | $(26.9) million |
| Net income (loss) | $(17.7) million | $(13.4) million | $(49.2) million | $(25.4) million |
| Net loss per common share | $(0.54) | $(62.38) | $(1.54) | $(115.62) |
| Cash used in operating activities | — | $(24.4) million | $(3.9) million |
Q3 operating income reflected a $24.7 million license contribution to the Bayer agricultural joint venture, Oerth Bio, recognized as revenue. The company also recorded a corresponding $24.7 million equity-method investment loss, so the transaction did not produce net income. Excluding that license revenue, Q3 revenue was approximately $5.4 million. The reported Q3 operating margin was about 18%, but was substantially affected by this non-cash, unusual license revenue.
At September 30, 2019, cash and cash equivalents were $12.1 million and marketable securities were $178.4 million, totaling $190.5 million. Current assets were $199.7 million and current liabilities $29.4 million. Total liabilities were $74.9 million, including $2.0 million of long-term debt; the prior CII equipment loan was repaid in July. Accumulated deficit was $351.5 million. Deferred revenue was $62.1 million.
Material changes and business developments
- Revenue increased year over year, principally due to the $24.7 million Oerth license contribution and collaboration activity, including the Bayer agreement and Pfizer payments. Excluding the Oerth contribution, nine-month revenue was $13.4 million, up about $2.5 million from the comparable period.
- Nine-month R&D expense rose $16.2 million, reflecting higher employee costs, platform and exploratory research spending, and clinical-trial costs. G&A rose $12.9 million, including public-company, legal, insurance, recruiting, and stock-compensation costs.
- In July, Arvinas launched its Bayer collaboration, receiving a $17.5 million upfront payment and $1.5 million in research funding; Bayer committed an additional $10.5 million of research funding through 2022. The agreement also provides potential development and sales milestones and tiered royalties.
- Arvinas sold Bayer 1,346,313 common shares for approximately $32.5 million. The shares were subject to a six-month lock-up; a resale registration statement was filed October 1.
- Arvinas and Bayer formed Oerth Bio, each initially holding 50%; 15% was reserved for future incentive grants. Bayer committed $56.0 million in cash to Oerth and contributed $16.0 million during the quarter. Arvinas stated it had no obligation to fund Oerth further and would not be diluted by Bayer’s future contributions. Arvinas’s investment carrying value was reduced to zero after its share of Oerth’s loss.
- Shares outstanding at September 30 were 33.1 million; 33.75 million were outstanding as of October 31. In October, the company entered an at-the-market distribution agreement allowing up to $100 million of common stock sales.
Outlook, commentary, and risks
Management expects substantial operating losses and negative operating cash flows for the foreseeable future, with expenses rising as clinical and research programs advance. It estimated that September 30 cash, cash equivalents, and marketable securities would fund planned operations and capital expenditures into the second half of 2021; this estimate depends on assumptions and may prove wrong. The company expects to need substantial additional financing and reported no committed external funding source.
ARV-110, for metastatic castration-resistant prostate cancer, began Phase 1 in Q1 2019; ARV-471, for ER-positive/HER2-negative breast cancer, began Phase 1 in Q3 2019. On October 23, after quarter-end, Arvinas reported preliminary safety, tolerability, and pharmacokinetic observations: exposures reached levels associated with tumor-growth inhibition in preclinical studies, and no dose-limiting toxicities or related Grade 2–4 adverse events had been observed at doses tested to date. These early findings are preliminary and do not establish efficacy or predict later trial results.
Key risks include clinical and regulatory uncertainty, potential safety issues, reliance on third-party manufacturers and research organizations, collaborator control over partnered programs and target selection, intellectual-property challenges, and the need for additional capital. State of Connecticut assistance agreements include location and employment conditions that could trigger repayment obligations and liquidated damages if breached. No material legal proceedings were reported. Management concluded disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- How much reported revenue and operating income is recurring collaboration activity versus the one-time Oerth license contribution, and how the related investment loss and deferred profit are accounted for.
- Updated enrollment, safety, pharmacokinetic, and efficacy data for the ARV-110 and ARV-471 trials; the October 23 observations were preliminary and limited to doses tested.
- Actual cash burn and development spending against management’s runway estimate into the second half of 2021, including assumptions that could shorten it.
- Terms and potential dilution from the $100 million at-the-market program, and the timing and impact of Bayer’s resale registration and lock-up expiration.
- Progress and funding under the Bayer, Pfizer, and Genentech collaborations, including milestone conditions, research funding, target rights, and any termination or exclusivity provisions.
- Compliance with Connecticut loan covenants, including employment and in-state location requirements, and the potential for forgiveness of up to $1.0 million of the 2018 loan.