Scholar Rock Holding Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. The company is a pre-revenue biopharmaceutical developer; its lead candidate, SRK-015, is being developed for spinal muscular atrophy (SMA).
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $11.424 million | $4.711 million | $18.125 million | $8.279 million |
| General and administrative expense | $3.460 million | $1.177 million | $5.775 million | $2.350 million |
| Total operating expenses | $14.884 million | $5.888 million | $23.900 million | $10.629 million |
| Net loss | $14.707 million | $5.879 million | $23.599 million | $10.609 million |
| Operating cash used | $21.510 million | $9.934 million |
At June 30, 2018, cash and cash equivalents were $115.061 million, with no marketable securities; total assets were $118.978 million. Current assets were $116.917 million and current liabilities $6.685 million. Total liabilities were $7.366 million, including $0.731 million of current loan payable; the loan matures July 1, 2019. The filing reports no revenue, so profit margins are not applicable. Accumulated deficit was $81.124 million.
Financing cash flow for the first half was $78.804 million, primarily from the IPO, while investing cash flow provided $1.306 million. The company says available cash and investments are expected to fund operating and capital requirements into the second half of 2020, based on assumptions that could prove incorrect.
Material changes and notable events
- R&D expense rose 142.5% in Q2 and 118.9% in the first half year over year, principally from higher SRK-015 research, preclinical, clinical-development and manufacturing costs, other early-program spending, and increased headcount.
- G&A expense rose 194.0% in Q2 and 145.7% in the first half, reflecting increased compensation, professional services, and public-company costs.
- Net loss increased 150.2% in Q2 and 122.4% in the first half. Higher interest income partly offset operating expense growth.
- The May 2018 IPO sold 6,164,000 shares at $14 per share. The company reported approximately $77.8 million of net proceeds. Preferred stock converted into 15,109,950 common shares; the preferred-stock warrant converted into a warrant for 7,614 common shares.
- IPO proceeds resolved the substantial doubt about the company’s ability to continue as a going concern, according to management. The company nevertheless expects significant continuing losses and says additional capital will be needed to complete development.
Outlook, risks and contingencies
- The FDA allowed the SRK-015 Phase 1 first-in-human trial to proceed in April; the company initiated the trial in May 2018. SRK-015 has FDA orphan drug designation for SMA. The filing provides no Phase 1 results or specific trial-completion guidance.
- Management expects expenses, particularly R&D and public-company costs, to increase. The company cannot reliably estimate the timing or cost of completing development, and expects no product revenue unless a candidate is successfully developed and approved.
- Key risks include clinical safety and efficacy, trial enrollment in a rare-disease population, regulatory approval, continued access to financing, and dependence on third parties. SRK-015 manufacturing currently relies on a single-source supplier.
- The company is eligible for up to $25 million in development, $97 million in regulatory and $130 million in commercial milestones under its Janssen agreement, plus royalties; none was recognized as revenue in the periods presented. The next potential milestone is $2 million, subject to achievement of a specified development milestone.
- The Cambridge facility lease was amended to add 9,132 square feet; the expansion space was delivered in July 2018, after quarter-end. Annual rent increases from $1.4 million to $1.7 million over the lease term.
- No material legal proceedings were reported. The company disclosed no off-balance-sheet arrangements and no material changes to previously reported contractual obligations. It identified interest-rate exposure as not material under a one-percentage-point rate change.
Important facts for investors to verify
- Progress, safety findings, enrollment and timing for the SRK-015 Phase 1 trial, and any subsequent regulatory updates.
- Cash burn and whether the stated runway into the second half of 2020 remains supportable as development spending rises.
- IPO proceeds reconciliation: the filing reports approximately $77.8 million net proceeds in its narrative, while the cash-flow statement lists $79.137 million of IPO proceeds net of issuance costs.
- Loan repayment schedule and final payment fee, as well as the effect of the July 2018 lease expansion on cash requirements.
- Milestone conditions and timing under the Janssen agreement; milestone and royalty amounts are contingent and not assured revenue.