Sutro Biopharma, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Sutro is a clinical-stage drug discovery, development and manufacturing company; it had no products approved for commercial sale. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $9.5 | $10.5 | $16.6 | $19.2 |
| Research and development expense | $17.2 | $16.1 | $34.9 | $31.3 |
| General and administrative expense | $8.6 | $8.1 | $17.4 | $15.8 |
| Operating loss | $(16.4) | $(13.7) | $(35.6) | $(28.0) |
| Net income (loss) | $29.9 | $(13.8) | $10.3 | $(28.0) |
| Operating cash used | $(31.2) | $(35.7) |
- Q2 and six-month 2020 net income included a $48.9 million unrealized gain on Sutro’s Vaxcyte shares. The gain was noncash; Sutro still reported an operating loss and used cash in operations.
- There is no commercial-product revenue or reported gross margin. Revenue principally came from collaboration and license agreements, with additional supply, manufacturing and service revenue.
- Revenue fell 10% in Q2 and 13% for the six-month period. Management attributed the declines mainly to lower EMD Serono revenue, including completion of recognition of the original agreement’s transaction price in May 2019. Six-month R&D expense rose 11%, and G&A rose 10%, primarily reflecting higher personnel and external-service costs.
- At June 30, cash and cash equivalents were $65.3 million and marketable securities were $141.7 million, or about $207.0 million combined. Vaxcyte equity securities were valued at $49.1 million, separately. Total assets were $277.5 million; total liabilities were $70.8 million; stockholders’ equity was $206.8 million.
- Debt was $25.0 million principal, reported at a net carrying value of $24.3 million, all classified as non-current. The Oxford Finance/Silicon Valley Bank loan bears floating interest at a minimum 8.07%, is interest-only through March 2022 and matures March 1, 2024.
- Six-month investing cash use was $15.5 million, mainly net purchases of marketable securities and $2.5 million of equipment and leasehold improvements. Financing provided $107.1 million, including $91.4 million net proceeds from a May stock offering and $25.0 million of loan proceeds, partly offset by $10.0 million of debt repayments.
Material changes and unusual items
- In May, Sutro sold 12.65 million common shares at $7.75 per share, receiving approximately $91.4 million net. Shares outstanding increased from 23.1 million at year-end 2019 to 35.9 million at June 30, 2020; the filing reported 35,879,012 shares outstanding as of July 30.
- Vaxcyte’s June IPO made Sutro’s 1,634,005-share holding measurable at fair value. The shares were subject to a lock-up expiring in December 2020, and the reported valuation incorporated a discount for lack of marketability.
- A Merck collaboration estimate change in Q1 reallocated resources between two programs and reduced six-month revenue, net income and basic/diluted EPS by $3.6 million, $3.6 million and $0.14/$0.13, respectively. Merck also exercised an extension option that added a $5.0 million payment; the resulting transaction-price update included a cumulative revenue catch-up.
- Merck and Vaxcyte ceased to be related parties following their respective public offerings. Sutro reported no material litigation and stated that disclosure controls and procedures were effective at a reasonable assurance level.
Outlook, commentary and risks
- Management expects substantial future R&D and operating losses and said expenses are expected to increase as programs advance. It stated that available cash, cash equivalents and marketable securities should fund operations for at least one year from the financial statements’ issuance date, but additional capital will be needed to support development and operations. No formal financial guidance was provided.
- Sutro planned to report additional STRO-002 safety and initial efficacy data and begin the dose-expansion phase in the second half of 2020. April interim data covered 30 heavily pretreated ovarian-cancer patients; at doses of at least 2.9 mg/kg, one partial response and stable disease in some patients were reported. Management cautioned that stable disease is not an FDA-defined objective response. Grade 4 treatment-emergent neutropenia occurred in six patients and was reported as reversible within one week.
- COVID-19 had caused very minor clinical-trial enrollment delays and occasional site data-entry delays; enrollment and treatment were described as on track. The filing warned that future effects on trials, staff, manufacturing, suppliers, collaborators and financial performance remained uncertain.
- Key risks include clinical and regulatory failure or delay, manufacturing scale-up and supply constraints, reliance on collaboration partners, the need for future financing and potential dilution, restrictive debt covenants, and volatility in the Vaxcyte share value. Sutro’s stated liquidity runway depends on assumptions that may prove incorrect.
Investor verification points
- Confirm subsequent STRO-001 and STRO-002 trial updates, including patient numbers, dose levels, duration of response, safety findings and any schedule changes.
- Track operating cash use against management’s at-least-one-year runway estimate, and assess the timing and terms of any additional financing.
- Check the Vaxcyte holding’s valuation, lock-up expiration and any subsequent sales or changes in marketability discount; distinguish unrealized gains from operating performance.
- Review collaboration revenue, deferred revenue recognition, Merck program allocation and extension terms, and progress toward contingent milestones, which are not assured.
- Monitor debt service, floating-rate exposure and compliance with Oxford/SVB covenants, as well as any COVID-related disruption to trials or manufacturing.