Arvinas, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Arvinas is a preclinical biopharmaceutical company developing PROTAC protein-degradation therapies. It had no product sales; collaboration and license arrangements generated revenue. The October 1, 2018 IPO and preferred-stock conversion occurred after quarter-end and are not reflected in the September 30 balance sheet.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.4 million | $1.7 million | $10.9 million | $5.0 million |
| Research and development | $13.1 million | $7.2 million | $30.6 million | $22.1 million |
| General and administrative | $4.3 million | $0.9 million | $7.1 million | $2.4 million |
| Operating loss | ($14.1 million) | ($6.4 million) | ($26.9 million) | ($19.5 million) |
| Net loss | ($13.4 million) | ($6.4 million) | ($25.4 million) | ($19.3 million) |
- Revenue increased year over year, primarily reflecting the Pfizer collaboration and the amended Genentech collaboration. The company reported no product revenue or royalties.
- Operating expenses rose as research programs, exploratory/platform work, personnel, and equity compensation expanded. No meaningful product gross margin is presented.
- Net loss attributable to common shares was $125.4 million for Q3 and $223.8 million for the nine months, principally because of $112.1 million and $198.4 million, respectively, in charges for changes in the redemption value of preferred shares/units. These amounts differ substantially from reported net loss and should not be treated as operating cash burn.
- At September 30, cash and cash equivalents were $6.2 million and marketable securities were $83.6 million, totaling $89.8 million. Working capital was approximately $75.7 million. Total liabilities were $62.6 million, including $54.2 million of deferred revenue; debt was approximately $2.2 million.
- For the nine months, the cash flow statement reports operating cash use of $3.9 million, investing cash use of $77.8 million, and financing cash provided of $56.9 million. Cash declined $24.7 million to $6.2 million. Investing activity mainly reflected purchases of marketable securities.
- In October, the IPO raised $123.2 million gross; the filing reports approximately $111.0 million net proceeds in one section. The preferred shares automatically converted into approximately 19.7 million common shares after the IPO.
Changes, outlook, and notable items
- Nine-month revenue more than doubled year over year, while R&D increased about 39% and G&A nearly tripled. The company attributed the cost increases to expanded platform and exploratory research, collaboration programs, employee expenses, and stock-based compensation.
- Management expected to submit an IND for ARV-110 in Q4 2018, begin its Phase 1 trial in Q1 2019, and report preliminary clinical data in the second half of 2019. For ARV-471, management expected an IND in the first half of 2019, a Phase 1 start in mid-2019, and preliminary data in 2020. These were plans, not assured outcomes.
- Management stated that September 30 cash, cash equivalents and securities, together with IPO proceeds, were expected to fund operating and capital requirements for at least 24 months. This estimate assumes no additional collaboration funding and may prove inaccurate; the company expects rising losses and says it will need substantial additional financing.
- Pfizer collaboration terms include potential option, development and sales-based milestone payments, plus royalties; Genentech terms include potential target, development, regulatory and commercial milestones, plus royalties. These are contingent and not assured revenue. The Merck collaboration expired in April 2018.
- State of Connecticut financing includes a $2.0 million loan with potential forgiveness of up to $1.0 million subject to employment conditions and a Connecticut-location covenant through 2028. Breaches of certain state-loan covenants could trigger repayment and liquidated damages. The company also remains subject to a location covenant related to previously forgiven funding.
- Key risks include unproven PROTAC technology, preclinical and clinical failure or delay, uncertain safety and efficacy, reliance on collaborators and contract manufacturers, intellectual-property challenges, competition, and future funding needs. No material legal proceedings were reported. Management said disclosure controls were effective as of quarter-end.
Most important facts for investors to verify
- Reconcile the cash-flow figures: the financial statements report operating cash use of $3.864 million, while MD&A reports $3.554 million; the MD&A cash-flow figures also differ from the statements for investing and financing activities.
- Confirm the final IPO net proceeds and offering costs: the filing gives approximately $111.0 million net proceeds in one section and $12.0 million total fees and expenses in another presentation.
- Track actual IND submissions, trial starts, enrollment, safety findings, and data timing for ARV-110 and ARV-471 against management’s stated plans.
- Assess cash runway using post-IPO cash and securities, actual spending, collaboration receipts, and the company’s stated assumption that no additional collaboration funding is received.
- Separate operating losses from preferred-stock redemption-value charges, and monitor the potential effects of equity compensation and share dilution following the IPO and preferred-stock conversion.