Scholar Rock Holding Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Scholar Rock is a clinical-stage biopharmaceutical company with no revenue from commercial product sales; collaboration revenue is its only reported revenue source.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.8 million | — | $12.9 million | — |
| Research and development expense | $15.7 million | $8.1 million | $40.2 million | $26.2 million |
| General and administrative expense | $6.2 million | $3.2 million | $15.0 million | $8.9 million |
| Net loss | $16.1 million | $10.8 million | $39.4 million | $34.4 million |
| Net loss per share | $0.55 | $0.44 | $1.46 | $2.72 |
- Q3 operating expenses rose 94.8% year over year; nine-month expenses rose 56.9%. Higher development spending, particularly for SRK-181, and increased headcount and public-company costs contributed. Nine-month net loss increased 14.7% year over year.
- Q3 revenue was recognized under the Gilead collaboration as research services were performed. No product-sales revenue was reported. No profit margin is meaningful given continuing operating losses.
- At September 30, cash and cash equivalents were $32.6 million and marketable securities were $143.4 million, totaling $176.1 million, versus $175.6 million at year-end 2018. Current assets were $179.2 million and current liabilities $32.5 million. Accumulated deficit was $146.3 million.
- Nine-month operating cash use was $47.0 million; investing cash use was $83.4 million, primarily reflecting purchases of marketable securities; financing provided $48.1 million, mainly from the stock offering. Cash, cash equivalents and restricted cash ended at $32.8 million.
- The company had no loan payable at quarter-end after making final payments in June 2019. Operating lease liabilities totaled $5.6 million.
Material changes and business developments
- The company sold 3.45 million shares in June and July at $15 per share, receiving approximately $48.3 million in net proceeds. Shares outstanding were 29,678,422 on November 1, 2019.
- R&D expense increased as SRK-181 advanced toward clinical testing, including manufacturing preparation and a one-time option fee; SRK-015 remained in a Phase 2 trial. G&A rose with increased compensation, separation-related costs and professional services.
- The Gilead agreement covers discovery and preclinical research for three TGFβ programs. The company received $50 million in cash upfront and a $30 million equity investment; $12.9 million of collaboration revenue was recognized in the first nine months of 2019, with approximately $50.0 million of allocated transaction price remaining in deferred revenue. Potential future milestones and royalties are contingent, not assured.
Outlook, risks and unusual items
- Management expected existing cash and marketable securities to fund operating expenses and capital requirements into the fourth quarter of 2021, while cautioning that estimates depend on assumptions. The notes separately state that resources were expected to cover current operations for at least one year after issuance of the financial statements.
- Management anticipated SRK-015 TOPAZ Phase 2 preliminary pharmacodynamic and pharmacokinetic data by year-end 2019, six-month interim efficacy and safety analysis in the first half of 2020, and 12-month top-line results between Q4 2020 and Q1 2021. Subject to regulatory feedback, it planned to begin an SRK-181 Phase 1 trial in Q1 2020 and intended to nominate an RGMc-targeting candidate in 2020.
- The company expected continuing losses and rising R&D and G&A expenses. Future capital needs depend on clinical progress, costs, collaboration outcomes and other factors; additional financing may be required and may dilute shareholders or require favorable rights to be surrendered.
- Key risks include clinical safety or efficacy failures, trial enrollment and timing, manufacturing and third-party dependence, regulatory approval, intellectual-property protection, collaboration execution and access to financing. The company disclosed no material legal proceedings and reported disclosure controls effective at the reasonable-assurance level.
- Subsequent event: In November 2019, the company entered a lease for new Cambridge headquarters. Base rent is $6.9 million annually, with 3.5% annual increases; the landlord’s tenant-improvement allowance is up to $14.1 million. A $2.3 million security deposit/letter of credit is required. No construction costs had been incurred by September 30.
- Equity-based compensation included $0.6 million related to acceleration and modification of certain awards in Q3 2019. The company adopted the new lease accounting standard effective January 1, 2019, recognizing lease right-of-use assets and liabilities.
Investor verification priorities
- Confirm TOPAZ trial enrollment, safety, timing and the planned data milestones, and assess the assumptions behind SRK-181’s intended Phase 1 start.
- Review cash burn and the Q4 2021 runway estimate against spending plans, lease commitments and financing needs.
- Track Gilead research progress, option exercise decisions and the timing of deferred-revenue recognition; distinguish recognized collaboration revenue from contingent milestone and royalty potential.
- Assess the full cost and obligations of the new headquarters lease and tenant improvements, and the dilution from current and potential future equity issuance.