Sutro Biopharma, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Sutro is a clinical-stage drug discovery, development and manufacturing company; it has no products approved for commercial sale and earns revenue primarily from collaborations, licensing and related services.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $17.8 million | $12.3 million | $34.4 million | $31.4 million |
| Research and development expense | $19.4 million | $16.9 million | $54.2 million | $48.2 million |
| General and administrative expense | $9.1 million | $8.1 million | $26.4 million | $23.9 million |
| Operating loss | $10.6 million | $12.7 million | $46.2 million | $40.7 million |
| Net income (loss) | $17.1 million | ($12.9 million) | $27.4 million | ($41.0 million) |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | ($48.9 million) | ($51.9 million) |
Q3 revenue grew 45%; nine-month revenue grew 10%. Nine-month operating expenses rose 12%, and operating loss widened 14%. Net income was not indicative of operating profitability: it included a $78.6 million non-cash unrealized gain on Sutro’s Vaxcyte shares. No commercial product revenue was reported. Gross margin is not presented as a separate metric.
At September 30, cash and cash equivalents were $64.4 million, marketable securities were $138.0 million, and unrestricted cash, cash equivalents and marketable securities totaled $202.4 million. Sutro separately held Vaxcyte equity valued at $78.8 million. Total assets were $307.2 million, total liabilities $63.1 million, and stockholders’ equity $244.1 million. Debt was $25.0 million principal, presented as $24.4 million net of discount and classified as non-current. Management said available unrestricted funds were expected to support operations for at least one year from the financial statements’ issuance; additional capital will be needed to advance development and fund operations.
Cash used in investing activities was $15.2 million for the nine months, including $5.5 million for equipment and leasehold improvements. Financing provided $124.4 million, primarily from the May public offering ($91.4 million net), Q3 ATM sales ($16.8 million net) and $25.0 million of refinancing proceeds, partly offset by $10.0 million of repayment of prior debt. Cash, cash equivalents and restricted cash increased $60.3 million to $65.2 million.
Material changes and notable items
- Q3 revenue increases were mainly associated with BMS/Celgene and Merck collaboration activity. Nine-month revenue also benefited from higher BMS and Merck activity, partly offset by lower EMD Serono and Vaxcyte revenue.
- R&D expense increased 12% for the nine months, mainly from higher personnel, consulting and outside-service costs. G&A increased 11%, primarily from personnel and legal and external services.
- The Vaxcyte shareholding became fair-value measured after Vaxcyte’s June 2020 IPO. Sutro held 1,634,005 shares, subject to a lock-up expiring in December 2020; price movements affect reported earnings.
- In February, Sutro refinanced its prior loan with a $25.0 million term loan, bearing floating interest at no less than 8.07%, interest-only through March 2022 and maturing March 2024. The loan is secured by company assets other than intellectual property and contains financial and operating restrictions.
- In May, Sutro issued 12.65 million shares at $7.75 per share for approximately $91.4 million net proceeds. In Q3, it sold 2.0 million shares through its ATM facility for approximately $16.8 million net. From October 1 to November 4, it sold another 500,000 ATM shares for approximately $5.0 million net.
- A September sublease covers approximately 115,466 square feet for a planned headquarters and expanded R&D space. Assuming an April 2021 start for the initial premises, estimated base rent totals $47.7 million through December 2027, before a potential $5.2 million rent-abatement benefit and excluding additional operating costs and taxes.
- A Merck collaboration estimate and transaction-price update affected 2020 revenue recognition. The filing reports a $0.8 million decrease in revenue and net income from the resource-allocation estimate change for the nine months; a separate $5.0 million extension payment and related cumulative catch-up were also recognized.
Outlook, programs and risks
- No specific financial forecast was provided. Management expects substantial future losses and higher operating expenses as it advances candidates, expands R&D and manufacturing capabilities, and operates as a public company. Available funding estimates rely on assumptions and could prove insufficient; raising capital may dilute shareholders or require unfavorable terms.
- STRO-002: In interim Phase 1 data reported September 9, 2020, 8 of 33 evaluable patients at doses of at least 2.9 mg/kg had an observed response (2 confirmed and 6 unconfirmed partial responses). Disease control at 12 weeks or more was reported in 20 of 33. The company planned further interim data and dose expansion in Q4 2020. These are early, uncontrolled data; the filing notes stable disease is not an FDA objective response.
- STRO-001: The Phase 1 dose-escalation study continued. In data disclosed November 4, 2020, 4 of 16 evaluable NHL patients had preliminary clinical benefit/disease control, including one complete response, two partial responses and one stable disease. The company expected to begin dose expansion in the first half of 2021, subject to completing escalation and selecting a dose.
- COVID-19 had caused some clinical-trial enrollment and site data-entry delays, although management said enrollment and treatment remained on track. Further disruption to trials, manufacturing, suppliers, sites or regulatory timelines remained possible.
- Key risks include early-stage clinical and regulatory uncertainty, safety and efficacy, manufacturing scale-up and supply, reliance on collaborators, competition, intellectual-property challenges, future financing needs, debt covenants, volatility in the Vaxcyte investment and the potential operational and cost effects of the new sublease.
- Merck may terminate its collaboration on 60 days’ notice; other partners also have termination rights. Certain BMS/Celgene program rights reverted to Sutro, which now holds worldwide rights to the BCMA-CD3, PD1-LAG3 and PD1-TIM3 programs.
Important facts for investors to verify
- Reconcile reported net income with the $78.6 million non-cash Vaxcyte gain, and assess the share value and lock-up expiration exposure.
- Review cash burn, collaboration receipts and deferred revenue, and test management’s at-least-12-month funding estimate against planned R&D, manufacturing and facility spending.
- Confirm the debt’s interest, repayment schedule, collateral, covenants and restrictions, including the company’s ability to obtain additional financing.
- Track full, updated STRO-001 and STRO-002 safety and efficacy data, enrollment, dose selection and expansion timing; distinguish preliminary disease-control observations from established clinical benefit.
- Assess the sublease’s full occupancy costs, timing, rent-abatement conditions and termination provisions, as well as dilution from public and ATM share sales and outstanding equity awards.