Sutro Biopharma, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Sutro is a clinical-stage biopharmaceutical company developing protein therapeutics using its XpressCF platform. It had no products approved for commercial sale; revenue came from collaborations, research and development services, and supply agreements. Amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $12.3 | $7.8 | $31.4 | $19.3 |
| Research and development expense | $16.9 | $12.6 | $48.2 | $39.5 |
| General and administrative expense | $8.1 | $5.4 | $23.9 | $13.8 |
| Operating loss | $(12.7) | $(10.2) | $(40.7) | $(33.9) |
| Net loss | $(12.9) | $(10.2) | $(41.0) | $(33.8) |
| Basic and diluted net loss per share | $(0.56) | $(21.26) | $(1.79) | $(71.06) |
Liquidity and debt: At September 30, 2019, cash, cash equivalents and marketable securities totaled $150.4, versus $204.5 at December 31, 2018. Cash and cash equivalents alone were $12.0; marketable securities were $138.4, including $25.2 classified as long-term. Current assets were $135.6 and current liabilities $35.9. Debt was approximately $11.3 net of unamortized discount; the loan bears a floating rate and matures in August 2021. Accumulated deficit was $181.0 and stockholders’ equity $109.9.
Cash flow: Nine-month operating cash use was $51.9, compared with $18.6 provided in 2018. Investing cash use was $59.1, including substantial purchases of marketable securities, partly offset by maturities and sales. Financing cash use was $2.4, mainly debt repayments. The resulting $113.3 decrease in cash, cash equivalents and restricted cash should be viewed alongside the increase in marketable securities.
Changes and notable items
- Revenue rose 57% in Q3 and 63% for the nine-month period. Merck collaboration revenue was the principal driver of the nine-month increase; Merck contributed $15.6 of the $31.4 total.
- Operating expenses increased 39% in Q3 and 35% for the nine months. Management cited higher headcount and personnel costs, clinical-trial services for STRO-001 and STRO-002, manufacturing and production costs, and public-company expenses.
- Net loss increased 26% in Q3 and 21% for the nine months. Nine-month interest and other expense rose to $3.5, including $2.5 of interest expense associated with the financing component of the 2018 Merck upfront payment.
- Sutro adopted ASC 606 revenue accounting on January 1, 2019 using the modified retrospective method. The $10.3 cumulative transition adjustment reduced opening accumulated deficit. Prior-year periods were not restated; on the former accounting basis, 2019 revenue would have been $12.7 for Q3 and $31.8 for nine months, rather than reported revenue of $12.3 and $31.4.
- Celgene’s FDA-cleared BCMA ADC IND was the first IND from that collaboration. Celgene declined an option for U.S. rights to a second program, so it did not owe a $12.5 million option-maintenance fee; Sutro retained U.S. rights to the other three programs, while Celgene retained ex-U.S. rights.
Outlook, development and risks
- Management expects continuing substantial losses and higher operating expenses as it advances clinical programs and manufacturing capabilities. It said existing resources should fund operations for at least one year from the filing date, but that additional capital will be needed; financing may not be available on acceptable terms.
- STRO-001 was enrolling patients in a Phase 1 trial. The company reported preliminary responses in two patients with diffuse large B-cell lymphoma in November 2019; the trial had not reached the maximum tolerated dose. A grade 5 thromboembolic event had led to protocol changes requiring screening for pre-existing thrombotic events; no additional thromboemboli had been reported after the change, according to the filing.
- For STRO-002, October 2019 interim Phase 1 data in 13 patients showed no dose-limiting toxicities at that point, one confirmed partial response and some stable disease. These were preliminary findings from an ongoing dose-escalation trial, not evidence of established efficacy.
- The filing identifies clinical, regulatory, manufacturing scale-up, product-safety, collaboration, intellectual-property and future-funding risks. Results from early trials may not predict later outcomes. Sutro also noted no product made using a cell-free manufacturing platform had yet received FDA approval.
- On October 4, 2019, Sutro filed a shelf registration permitting up to $250 million of securities offerings and established an at-the-market program for up to $75 million of common stock, with sales-agent commissions of up to 3%. Use could dilute existing shareholders.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Current unrestricted cash, cash equivalents and marketable securities, quarterly cash burn, and the assumptions supporting management’s stated runway.
- Clinical-trial updates for STRO-001 and STRO-002, especially patient numbers, durability of responses, safety findings and any protocol changes.
- Revenue timing and concentration among Merck, Celgene and EMD Serono, including the effects of ASC 606 and collaboration milestones or partner decisions.
- Whether Sutro uses the shelf or ATM facility, the proceeds raised, and resulting share dilution.
- Debt repayment obligations, floating-rate exposure, and progress toward manufacturing and regulatory requirements.