Arcus Biosciences, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Arcus is a clinical-stage oncology biopharmaceutical company and has not generated product-sales revenue.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Collaboration and license revenue | $4.3 million | $0.2 million | $6.8 million | $0.2 million |
| Research and development expense | $12.9 million | $21.4 million | $38.2 million | $35.1 million |
| General and administrative expense | $3.6 million | $1.9 million | $10.0 million | $5.2 million |
| Operating loss | $12.1 million | $23.1 million | $41.4 million | $40.1 million |
| Net loss | $10.8 million | $23.1 million | $37.3 million | $39.9 million |
| Net loss per share, basic and diluted | $0.25 | $11.86 | $1.16 | $23.47 |
Revenue came from the Taiho collaboration, not product sales. Q3 revenue included $3.0 million from Taiho’s option exercise for the adenosine receptor antagonist program and approximately $1.3 million of research revenue. No gross margin is reported; a product-based margin is not meaningful at this stage.
At September 30, 2018, cash and cash equivalents were $74.9 million, short-term investments $182.9 million and long-term investments $7.7 million, totaling $265.6 million in cash and investments. Current assets were $265.3 million and current liabilities $16.6 million. Total liabilities were $41.6 million; the filing reports no borrowings or debt balance. Accumulated deficit was $110.5 million.
For the first nine months of 2018, operating cash use was $35.9 million, investing cash use was $116.0 million and financing cash provided was $128.3 million. Financing included $125.1 million of net IPO proceeds. Cash and cash equivalents declined $23.5 million from year-end 2017; the large investing outflow primarily reflected purchases of marketable investments.
Changes versus prior comparable periods
- Q3 net loss narrowed by $12.3 million year over year, principally as R&D expense fell $8.6 million. The main driver was the absence of the $15.0 million WuXi license upfront payment incurred in Q3 2017; this was partly offset by higher clinical, manufacturing, personnel and other development costs.
- For the nine-month period, net loss narrowed $2.6 million, while operating loss increased $1.3 million. R&D rose $3.1 million and G&A rose $4.8 million, partly offset by higher collaboration revenue and interest income.
- Higher G&A reflected increased staffing, public-company legal and accounting costs, stock compensation and facilities expense. Interest and other income rose, including a $1.2 million gain associated with dilution of Arcus’s PACT Pharma investment.
- The March 2018 IPO raised approximately $124.7 million net, and all outstanding preferred shares converted into common stock. Common shares outstanding were 44,453,724 as of November 1, 2018; per-share comparisons are also affected by the reverse stock split and IPO-related change in share count.
Outlook, risks and unusual items
- Management said available cash, cash equivalents and short-term investments were expected to fund planned operations for at least 12 months after filing. The risk-factor discussion separately estimated resources could fund clinical development of AB928 and AB122, including cohort expansions, into 2021, but not through regulatory approval. These are estimates, not assurances; additional capital will be needed.
- Arcus expected R&D expense to increase substantially as it advances clinical programs, manufacturing and trials, and expected G&A to rise with growth and public-company costs. Management expected initial dose-escalation data for AB928 combinations with chemotherapy and AB122 in the first half of 2019.
- At the time of filing, AB928 was in a Phase 1/1b program; AB122 and AB154 had entered clinical trials, and AB680 was in a healthy-volunteer trial. Development remains early, with substantial efficacy, safety, regulatory, enrollment, manufacturing and commercialization uncertainty.
- Taiho’s agreement provides $35.0 million in non-refundable payments: $25.0 million had been received in 2017, a further $5.0 million was received in October 2018, and the final $5.0 million was expected in 2019. Arcus recognized the payments over the service period. Taiho exercised one program option for $3.0 million in July 2018; future options, milestones and royalties are contingent and not assured.
- Key risks include reliance on third-party clinical and manufacturing partners, including WuXi Biologics; competition in crowded immuno-oncology markets; uncertainty of combination-trial results; and intellectual-property exposure. The filing identifies Bristol-Myers Squibb patents broadly directed to cancer treatment with anti-PD-1 antibodies, expiring in 2023 and 2024, as a potential issue for AB122 if upheld and applicable.
- The company reported no material legal proceedings, no material changes in contractual obligations outside the ordinary course, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether clinical data and development timelines for AB928, AB122, AB154 and AB680 support the company’s stated plans.
- Cash burn and actual runway relative to the different disclosures: at least 12 months after filing and clinical funding into 2021, but not through regulatory approval.
- Timing and recognition of remaining Taiho payments, and whether future options, milestones or royalties are achieved.
- Progress and costs of clinical trials and manufacturing, including dependence on WuXi and other third parties.
- Scope, status and implications of the identified anti-PD-1 patent issues, as well as the company’s broader licensing and intellectual-property obligations.