Arbutus Biopharma Corporation — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2017. Arbutus is a development-stage biopharmaceutical company focused on hepatitis B (HBV) therapies and lipid nanoparticle (LNP) delivery technology. Revenue is primarily from collaborations, licensing, milestones and royalties rather than marketed products. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.039 million | $0.309 million | $1.274 million | $0.912 million |
| Operating expenses | $20.524 million | $195.557 million | $39.058 million | $216.137 million |
| Operating loss | $19.485 million | $195.248 million | $37.784 million | $215.225 million |
| Net loss | $18.255 million | $130.000 million | $36.882 million | $145.874 million |
| Loss per share, basic and diluted | $0.33 | $2.47 | $0.68 | $2.80 |
| Cash used in operating activities | $5.078 million | $16.804 million | $22.617 million | $28.351 million |
At June 30, cash and cash equivalents were $24.212 million, short-term investments $78.797 million, and restricted investments $12.601 million, totaling $115.610 million. The total was $143.160 million at December 31, 2016. Total assets were $255.075 million, liabilities $79.289 million, and stockholders’ equity $175.786 million. The company had a $12.001 million loan payable and $20.8 million in disclosed contractual obligations, including facility leases and the loan. No meaningful product gross margin is reported.
Management said resources were sufficient to fund operations for at least the next 12 months, while noting that substantial additional funding will be needed for continued pipeline development. Investing activities provided $21.810 million in the first half, mainly from maturities and monetization of investments, partly offset by $6.539 million of property and equipment purchases.
Material changes and unusual items
- Q2 revenue rose to $1.039 million, primarily reflecting Alexion licensing revenue and services; the $7.5 million upfront payment was being recognized over the expected performance period. The agreement was terminated after quarter-end, as described below.
- Operating expenses and net loss were substantially lower than the prior-year quarter, largely because Q2 2016 included a $156.324 million intangible-asset impairment charge. The 2016 comparison also included a $64.864 million income tax benefit related to impairment.
- First-half R&D expense increased to $29.317 million from $28.359 million, reflecting clinical and development work, including AB-423 and ongoing HBV trials. G&A fell to $8.927 million from $30.985 million, mainly because prior-year expense included large non-cash compensation associated with the expiry of share repurchase rights.
- First-half foreign-exchange gains were $1.225 million. The company recorded a $0.949 million increase in the fair value of contingent consideration; the liability was $10.014 million at June 30.
Outlook, operations and risks
- Alexion termination: On July 27, 2017, Arbutus announced that Alexion had terminated its LNP license agreement after a strategic review and decision to discontinue mRNA therapeutics. The $7.5 million upfront payment is non-refundable. Arbutus expected to recognize the remaining deferred revenue and closeout-related revenue and costs in Q3 2017.
- Pipeline plans: Initial results from ARB-1467 Cohort 4 were expected in Q3 2017; results from longer bi-weekly combination studies were expected in 2019. Management expected to begin an AB-423 multiple-dosing study in HBV patients in the second half of 2017. Potential IND filings for AB-506 and AB-452 were targeted for 2018, subject to successful enabling studies; a GalNAc candidate nomination was expected in early 2018.
- Program changes and partner opportunity: Arbutus discontinued further ARB-1740 development after finding no significant potency advantage over ARB-1467. It continued ARB-1467 development. Alnylam’s patisiran results were expected in Q3 2017; Arbutus may receive royalties if LNP-enabled products are commercialized.
- Clinical and financing risks: Product development depends on clinical results, regulatory approvals, partners and access to additional capital. Management cautioned that inadequate funding could force delays, reductions or termination of programs or less favorable partnering arrangements.
- Legal matters: UBC alleges unpaid royalties of C$3.5 million based on public information, plus an unspecified amount, interest and costs; Arbutus disputes the claims and has a counterclaim. The first phase hearing took place in June 2017, and no loss estimate was recorded because the outcome and amount were uncertain. Acuitas litigation also continues; a pre-trial injunction restricting further sublicensing of Arbutus LNP technology was upheld on appeal.
- Controls: Management identified a material weakness in its review of the 2016 annual impairment evaluation, relating to discount-rate judgments and calculation accuracy. It said the issue did not affect the June 2017 period because no quantitative impairment calculation was performed at that date, and remediation efforts were ongoing. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Q3 2017 accounting for the Alexion termination, including the remaining deferred revenue, closeout costs and any resulting revenue recognition.
- Cash and investment balances, operating cash burn, and whether management’s stated 12-month funding horizon remains supportable after the termination.
- Clinical progress and timing for ARB-1467, AB-423, AB-506 and AB-452, including whether stated milestones are achieved.
- Developments in the UBC arbitration and Acuitas litigation, including potential financial or intellectual-property consequences.
- Progress in remediating the impairment-review material weakness and any future impairment indicators affecting intangible assets or goodwill.