Sutro Biopharma, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Sutro is a clinical-stage drug discovery, development and manufacturing company focused on its XpressCF platform and protein therapeutics. It has no products approved for commercial sale; revenue is primarily from collaborations and related services. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $10.5 | $5.7 | $19.2 | $11.5 |
| Research and development expense | $16.1 | $13.8 | $31.3 | $26.8 |
| General and administrative expense | $8.1 | $4.0 | $15.8 | $8.5 |
| Total operating expenses | $24.2 | $17.8 | $47.1 | $35.3 |
| Loss from operations | $(13.7) | $(12.1) | $(28.0) | $(23.8) |
| Net loss | $(13.8) | $(11.5) | $(28.0) | $(23.6) |
| Basic and diluted net loss per share | $(0.60) | $(24.17) | $(1.22) | $(49.90) |
- Revenue increased 85% year over year in Q2 and 67% in the first half. Merck Sharp & Dohme collaboration revenue was $5.5 million in Q2 and $10.1 million in the first half; the filing identifies Merck as a related party.
- Operating expenses grew faster than revenue, particularly G&A, which rose 100% in Q2 and 87% in the first half. Management attributes increases largely to higher personnel costs, clinical and preclinical development, and public-company expenses.
- Q2 operating margin and commercial-product gross margin are not separately reported; the company has no product sales. Reported net loss per share comparisons with 2018 are not directly comparable because of the major change in share count following the IPO.
- First-half cash used in operating activities was $35.7 million, versus $29.0 million in 2018. Investing activities used $68.9 million, principally reflecting purchases of marketable securities; financing activities used $1.3 million, including $2.0 million of debt repayments.
- At June 30, cash and cash equivalents were $19.4 million and marketable securities were $148.8 million, for unrestricted cash, equivalents and marketable securities of $168.2 million. Current assets were $162.2 million and current liabilities $36.1 million. Outstanding debt was $12.8 million, net of discount; the loan is secured by substantially all assets other than intellectual property and certain other assets.
- Accumulated deficit was $168.0 million. Management said available unrestricted cash, cash equivalents and marketable securities should fund operations for at least one year from issuance of the financial statements, but additional capital will be required to complete development and fund operations.
Material changes and accounting matters
- Revenue-recognition standard ASC 606 was adopted January 1, 2019 using the modified retrospective method. The $10.3 million transition adjustment reduced opening accumulated deficit by reducing deferred revenue for obligations considered satisfied in prior periods; 2018 periods were not restated.
- ASC 606 affects period-to-period comparisons: Q2 2019 revenue would have been $11.4 million under prior ASC 605, rather than the $10.5 million reported. First-half revenue would have been $19.1 million under ASC 605 versus $19.2 million reported.
- Deferred revenue was $47.0 million at June 30, including $21.4 million expected to be recognized over the next 12 months. The Merck 2018 agreement also has a financing component, contributing interest expense and revenue recognition effects.
- Cash and equivalents fell substantially from year-end, but much of the change reflects moving funds into marketable securities: first-half purchases totaled $147.4 million, partly offset by maturities and sales of $79.3 million.
Outlook, developments and risks
- Management expects substantial future losses and higher operating expenses as it advances clinical programs, expands research and development and manufacturing capabilities, and operates as a public company. The filing provides no specific financial forecast or revenue guidance.
- STRO-001, an ADC for B-cell malignancies, was enrolling patients in a Phase 1 dose-escalation trial. Interim data through May 14, 2019 covered 21 patients; Sutro reported generally good tolerability and preliminary anti-tumor activity, including one complete and one partial response in heavily pretreated diffuse large B-cell lymphoma patients. The filing also disclosed two thromboembolic events possibly related to treatment; the protocol was amended to screen for and treat pre-existing thrombotic conditions. Initial efficacy data were expected by year-end 2019.
- STRO-002, an ADC for ovarian and endometrial cancers, began Phase 1 enrollment in March 2019; initial safety data were expected by year-end 2019.
- The FDA cleared the IND for Celgene’s BCMA ADC in May 2019, the first collaboration program IND. Celgene holds worldwide development and commercialization rights; Sutro remains eligible for up to $275 million in development and regulatory contingent payments and tiered royalties if products are developed and commercialized.
- Celgene declined to exercise its option on a second program, so it did not owe the $12.5 million option-maintenance fee. U.S. clinical development and commercialization rights to the other three programs remain with Sutro; Celgene retains ex-U.S. rights and potential contingent payments and royalties.
- Key risks include clinical-trial safety, efficacy and enrollment uncertainty; manufacturing scale-up and regulatory requirements for the novel cell-free platform; dependence on collaborators and milestone timing; need for additional financing; and intellectual-property and competition risks. Merck may terminate its agreement on 60 days’ notice, and Celgene may terminate on 120 days’ notice. The Celgene/Bristol-Myers Squibb transaction was expected to close in late 2019 or early 2020, subject to conditions and approvals.
- The company reported no material legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether STRO-001 and STRO-002 meet the disclosed clinical milestones, and how complete safety and efficacy results compare with the interim data.
- Whether Sutro can maintain its stated cash runway as operating cash use continues, and when and on what terms additional financing may be needed.
- How collaborator decisions—including Celgene’s program choices and the impact of its planned combination with Bristol-Myers Squibb—affect future services revenue, milestones, rights and royalties.
- How ASC 606 judgments, deferred-revenue recognition and the Merck financing component affect reported revenue and expenses in subsequent periods.
- Debt repayment requirements, collateral and restrictive covenants, alongside potential dilution from future equity financing and outstanding equity awards.