Erasca, Inc. 10-Q Summary: Third Quarter 2021
Business Context and Reporting Period
Erasca is a clinical-stage precision oncology company focused on therapies for RAS/MAPK pathway-driven cancers. The company reported results for the three and nine months ended September 30, 2021. Its pipeline included 11 programs, with ERAS-007 and ERAS-601 in clinical development, additional preclinical programs, and discovery-stage programs. Erasca had no approved products and generated no product revenue.
During the quarter, Erasca advanced the HERKULES-1, HERKULES-2, and HERKULES-3 trials and announced a Pfizer collaboration under which Pfizer would supply encorafenib at no cost for HERKULES-3. The company completed its initial public offering in July 2021.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $20.0 million | $9.1 million | $49.8 million | $19.5 million |
| In-process research and development expense | $1.7 million | $0.1 million | $10.8 million | $17.7 million |
| General and administrative expense | $6.9 million | $2.0 million | $15.7 million | $5.1 million |
| Contribution to Erasca Foundation | $17.5 million | $0 | $17.5 million | $0 |
| Net loss | $46.1 million | $10.6 million | $92.3 million | $39.8 million |
| Net loss per share | $0.46 | $0.50 | $1.90 | $1.91 |
Profitability and operating margins were not meaningful because the company had no revenue and incurred substantial development expenses. Operating expenses were $46.0 million in the third quarter and $93.8 million for the first nine months.
Research and development expense increased primarily because of higher clinical and preclinical activity, personnel costs, outsourced services, consulting, and stock-based compensation. The company recorded $3.0 million of stock-based compensation in the third quarter and $5.4 million for the nine-month period.
As of September 30, 2021, cash and cash equivalents were $445.8 million, short-term investments were $40.8 million, and total cash, cash equivalents, and short-term investments were approximately $486.6 million. Total assets were $521.9 million, compared with $124.8 million at December 31, 2020. Accumulated deficit was $207.7 million.
Total liabilities were $39.0 million. The filing does not report conventional borrowings or debt. Operating lease liabilities totaled $20.2 million, including current and noncurrent amounts. Future minimum operating lease payments totaled $54.2 million before interest and tenant-improvement allowances.
Cash Flow and Liquidity
| Cash Flow | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 |
|---|---|---|
| Cash used in operating activities | $57.1 million | $19.6 million |
| Cash used in investing activities | $0.6 million | $87.8 million |
| Cash provided by financing activities | $438.3 million | $140.1 million |
| Net increase in cash, cash equivalents, and restricted cash | $380.5 million | $32.7 million |
The July 2021 IPO generated $317.0 million of net proceeds from the issuance of 21.6 million shares at $16.00 per share. The company also received $119.4 million of net proceeds from its Series B-2 preferred stock financing in January 2021. As of September 30, 2021, Erasca stated that it had not used any IPO proceeds and expected to use them for research and development, working capital, and general corporate purposes.
Management stated in the MD&A that existing cash, cash equivalents, and investments were expected to fund operations for at least the next 24 months. Elsewhere in the financial statement notes, management stated that these resources were expected to fund operations for at least one year from the issuance date. The filing does not provide a more precise cash runway estimate.
Material Changes Versus the Prior Comparable Period
- Quarterly net loss increased by $35.5 million to $46.1 million; nine-month net loss increased by $52.5 million to $92.3 million.
- Quarterly research and development expense increased by $10.9 million, or approximately 120%, and nine-month research and development expense increased by $30.3 million, or approximately 156%.
- General and administrative expense increased by $4.9 million for the quarter and $10.6 million for the nine-month period, reflecting personnel, stock-based compensation, insurance, legal, and audit costs.
- The company recorded a $17.5 million noncash contribution of common stock to the Erasca Foundation, representing 1,093,557 shares.
- In-process research and development expense decreased by $6.9 million for the first nine months, primarily because 2020 included significant NiKang and Katmai upfront and milestone payments.
- Cash and investments increased substantially following the IPO and Series B-2 financing. Total cash, cash equivalents, and short-term investments increased from approximately $118.7 million at December 31, 2020 to approximately $486.6 million at September 30, 2021.
- All outstanding convertible preferred stock converted into 71.3 million shares of common stock upon the IPO. Common shares outstanding were 118.6 million at September 30, 2021, compared with 21.9 million at December 31, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Erasca expects research and development and general and administrative expenses, and operating losses, to increase substantially as clinical trials, preclinical studies, manufacturing activities, hiring, intellectual property efforts, and public-company compliance requirements expand.
- The company expected to dose the first patient in HERKULES-4 in the first quarter of 2022, file an IND for ERAS-801 in the first quarter of 2022, and file an IND for ERAS-3490 in the second half of 2022.
- The company does not expect product revenue for several years, if ever, and will require additional capital unless it enters into sufficient collaborations, licenses, or other arrangements.
- Future funding may come from equity offerings, debt financings, collaborations, licenses, or other capital sources. Additional equity financing could dilute existing shareholders, while collaboration or licensing transactions could require the company to relinquish valuable rights.
- The company relies on third parties for manufacturing, clinical research, packaging, storage, and distribution. Supply-chain constraints, manufacturing delays, or failure to qualify additional manufacturers could delay development.
- Clinical development is subject to risks involving patient enrollment, safety, efficacy, regulatory review, trial design, manufacturing, costs, and timing. None of the company’s product candidates had regulatory approval.
- COVID-19 had not materially disrupted operations through the reporting date, but management warned that future effects could delay trials, recruitment, manufacturing, supply, and other activities.
- The company had future development, regulatory, commercial milestone, royalty, and sublicensing obligations under various license and acquisition agreements. No litigation was pending as of September 30, 2021.
- The company reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the stated liquidity runway: the MD&A cites at least 24 months, while the notes cite at least one year.
- Track quarterly cash burn, especially as the HERKULES trials and other clinical programs expand.
- Verify clinical enrollment, safety, efficacy, and regulatory milestones for ERAS-007, ERAS-601, ERAS-801, and ERAS-3490.
- Assess dilution from the IPO, stock options, the employee stock purchase plan, and future equity financings.
- Review contingent milestone, royalty, and sublicensing obligations under the Asana, ELS, NiKang, Katmai, LifeArc, and UCSF agreements.
- Evaluate the impact of the $17.5 million Erasca Foundation stock contribution and related-party governance arrangements.
- Monitor third-party manufacturing capacity, supply-chain redundancy, and potential effects of COVID-19 or other disruptions.