Arcus Biosciences, Inc. annual report, FY2019

Arcus Biosciences, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 5, 2020. Fourth-quarter figures below are unaudited. Arcus is a clinical-stage oncology biopharmaceutical company with no approved products or product-sale revenue.

Financial results and liquidity

Metric	FY 2019	FY 2018
Collaboration and license revenue	$15.0 million	$8.4 million
Research and development expense	$78.5 million	$49.6 million
General and administrative expense	$25.2 million	$13.6 million
Total operating expenses	$103.7 million	$63.2 million
Operating loss	$88.7 million	$54.9 million
Net loss	$84.7 million	$49.6 million
Net loss per share, basic and diluted	$1.93	$1.43
Operating cash used	$73.5 million	$43.0 million

• Revenue came from the Taiho option and license agreement; Arcus had no product sales. FY 2019 revenue rose 80%, principally reflecting an $8.0 million Taiho option exercise for the anti-PD-1 program and revenue from the upfront agreement. The company adopted ASC 606 in 2019; adoption increased reported 2019 revenue by $0.3 million versus the former method and reduced opening accumulated deficit by $2.2 million.
• Losses widened as development activity and costs grew. R&D expense increased 58%, largely due to clinical-study costs and $8.7 million of WuXi milestone expense and $2.5 million of Strata milestone expense. G&A increased 86%, including personnel, stock compensation, facilities, and public-company costs.
• FY 2019 fourth quarter: revenue $9.75 million, operating expenses $27.28 million, net loss $16.60 million, and basic and diluted loss per share $0.38. FY 2018 fourth quarter figures were $1.56 million, $15.05 million, $12.30 million, and $0.28, respectively.
• At December 31, 2019, cash, cash equivalents, and investments totaled $188.3 million (cash and equivalents $57.9 million; short-term investments $130.3 million); working capital was $170.0 million, total assets $203.1 million, and total liabilities $39.3 million. The filing reports no borrowings or debt balance.
• Cash used in operations was $73.5 million; investing activities provided $59.2 million, mainly reflecting investment maturities, and financing activities provided $1.1 million. Cash, cash equivalents, and restricted cash declined $13.1 million.
• No operating margin is meaningful for this pre-commercial company; the filing reports operating losses and no product sales. Management said available cash and investments were expected to fund planned operations for at least 12 months from the filing date; elsewhere it estimated funding for AB928 and zimberelimab clinical development into 2021, but not through regulatory approval.

Business developments and outlook

• Four clinical-stage candidates: AB928, a dual A_2a/A_2b adenosine receptor antagonist; AB680, a small-molecule CD73 inhibitor; zimberelimab, an anti-PD-1 antibody; and AB154, an anti-TIGIT antibody. Programs were in Phase 1/1b or Phase 2 development; none was approved.
• In 2019, Taiho exercised its option on the anti-PD-1 program for $8.0 million, following its 2018 exercise for the adenosine antagonist program. Taiho had paid the full $35.0 million upfront obligation by year-end. Potential future milestone, sales-based, and royalty payments are contingent.
• Arcus and Genentech agreed to conduct combination studies using AB928 and atezolizumab in metastatic colorectal and first-line pancreatic cancer. The companies share certain development costs and supply their own investigational products.
• Management planned additional AB928 studies in prostate and colorectal cancer in 2020 and expected early randomized data from the AB154 Phase 2 lung cancer study by year-end 2020. AB680 was being studied with zimberelimab and chemotherapy in first-line metastatic pancreatic cancer.
• Management expects substantial increases in clinical, manufacturing-development, research, and administrative spending, and says substantial additional capital will be needed. No external funding source was committed; future equity, debt, collaborations, or licensing could dilute shareholders, constrain operations, or require relinquishing rights.
• Key risks include clinical-trial failure or delay, safety findings, intense competition, regulatory and reimbursement uncertainty, dependence on third-party CROs and manufacturers, and reliance on limited or single-source supply. The filing noted that COVID-19 could disrupt trial-site enrollment and treatment and supply chains, although no supply disruption had been experienced at the time described.
• Potential obligations include up to $375.0 million in WuXi commercialization milestones plus royalties, up to $101.8 million in Abmuno milestones, and contingent Taiho milestones and royalties; these are not fixed obligations and are excluded from the contractual-obligations table. Non-cancelable lease payments totaled $13.4 million through 2025. Arcus reported no material legal proceedings.
• Auditors issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the auditor did not provide an internal-control opinion.

Investor facts to verify

• Cash runway assumptions, quarterly cash burn, and the timing and terms of any financing or collaboration.
• Trial enrollment, efficacy, safety, and the timing and completeness of upcoming data, particularly for AB154, AB928, AB680, and zimberelimab combinations.
• How much of reported collaboration revenue is recurring service revenue versus option-exercise payments, and the future timing and likelihood of contingent milestones or royalties.
• Manufacturing continuity and alternative supply arrangements, especially for biologics manufactured through WuXi in China, and any effects from COVID-19 or trade restrictions.
• Potential dilution and share-based compensation: options outstanding totaled 4.74 million at year-end, and 1.26 million restricted shares issued to Strata were subject to milestone vesting.