Scholar Rock Holding Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Scholar Rock is a clinical-stage biopharmaceutical company developing apitegromab for spinal muscular atrophy (SMA), SRK-181 for checkpoint-inhibitor-resistant cancers, and earlier-stage programs. It has no approved products and has generated no product-sales revenue. Financial amounts below are in U.S. dollars; dollar figures are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $0 | $5.5 | $33.2 | $14.8 |
| Research and development expense | $33.4 | $31.3 | $94.8 | $79.4 |
| General and administrative expense | $10.5 | $11.3 | $32.3 | $29.9 |
| Total operating expenses | $43.9 | $42.5 | $127.1 | $109.3 |
| Operating loss | $(43.9) | $(37.1) | $(93.9) | $(94.6) |
| Net loss | $(43.3) | $(37.5) | $(95.2) | $(95.9) |
| Net loss per share, basic and diluted | $(0.55) | $(1.02) | $(1.80) | $(2.62) |
Margins are not meaningful given the absence of product sales and the collaboration-related nature of reported revenue. Q3 2022 net loss widened 15.4% year over year as revenue fell to zero and operating expenses rose 3.1%. Nine-month net loss was slightly lower year over year despite 16.3% higher operating expenses, primarily because of $33.2 million of Gilead-related revenue recognized in January 2022.
Cash, liquidity and debt
- At September 30, 2022, cash and cash equivalents were $133.1 million and marketable securities were $210.6 million, totaling $343.7 million, versus $253.0 million at December 31, 2021.
- Cash, cash equivalents and restricted cash were $135.6 million at quarter-end. Operating cash use for the first nine months was $103.8 million, compared with $94.3 million in 2021. Investing cash use was $171.8 million, largely reflecting purchases of marketable securities; financing provided $195.8 million, primarily from the June equity offering.
- Debt on the September 30 balance sheet totaled approximately $50.6 million: $0.8 million short-term and $49.8 million long-term. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- In June, the company received $195.3 million net proceeds from an offering with $205.0 million gross proceeds, issuing common shares, pre-funded warrants and common warrants. Common shares issued and outstanding were 51.7 million at September 30; 27.7 million pre-funded warrants remained outstanding.
Material changes and operating developments
- All Gilead collaboration revenue had been recognized by January 31, 2022, following Gilead’s termination of its option exercise period. The collaboration is no longer an ongoing source of revenue.
- Nine-month R&D expense rose 19.4%. Apitegromab program costs increased $9.1 million, mainly due to the Phase 3 SAPPHIRE trial; SRK-181 costs decreased $3.0 million, partly because of a prior-year pembrolizumab purchase. Internal R&D costs increased, including compensation and equity-based compensation.
- In May 2022, Scholar Rock reduced its workforce by 39 positions, approximately 25%, to prioritize clinical-stage programs. It recorded $1.9 million in severance costs and $0.1 million of non-cash equity-modification expense; most remaining severance accrual was expected to be paid by year-end 2022.
- Marketable securities were U.S. Treasury obligations. The company reported $0.9 million of accumulated unrealized losses at September 30, 2022, which it considered temporary and stated it had the ability and intent to hold the securities to recovery or maturity.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and marketable securities were expected to fund operating expenses and capital requirements into 2025. The filing also states the company will require additional capital to complete clinical development and commercialization; management’s estimates depend on assumptions that may change.
- Expected spending includes the Phase 3 SAPPHIRE trial and apitegromab extensions, the Phase 1 DRAGON trial of SRK-181, manufacturing, and ongoing research. Management expected clinical-stage development costs to rise, partly offset by lower early-research costs following portfolio changes and workforce reductions.
- On November 10, 2022, after quarter-end, the company amended its loan agreement to permit total borrowing of up to $100 million, including two additional $25 million tranches subject to milestone and lender conditions. The amendment extended the loan maturity to November 2027 and interest-only payments through November 2024, potentially November 2025 if milestones are met. The rate is the greater of prime plus 4.60% or 9.35%. These additional tranches are not equivalent to committed cash available without conditions.
- Key risks include clinical trial failure or delay, uncertain regulatory approval, patient enrollment and COVID-related or other site and supply-chain disruption. The company relies on third parties, including a single-source drug-substance supplier for apitegromab and SRK-181. Other risks include the need for further financing, potential dilution, and whether restructuring produces expected savings.
- TOPAZ 24-month extension data, reported in June 2022, were described as showing sustained improvement for non-ambulatory patients; the company noted the analysis was based on available data and excluded post-surgery assessments for three patients from the relevant analysis. The filing cautions that interim and clinical data may change and that early-stage results may not predict pivotal-trial outcomes.
- The filing notes a CEO transition in October 2022. Management stated disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2022.
Important facts for investors to verify
- Current SAPPHIRE and DRAGON trial progress, enrollment, timelines, and eventual efficacy and safety results; distinguish reported extension-trial analyses from pivotal-trial evidence.
- Whether the company’s stated runway into 2025 remains supportable as clinical, manufacturing and other costs evolve, and what additional financing may be needed.
- Availability and terms of the two conditional loan tranches, the floating-rate floor, repayment schedule and any related covenants.
- Potential dilution from the June 2022 financing: 25.5 million pre-funded warrants and 10.5 million common warrants, in addition to equity awards and other securities.
- Progress in diversifying or securing clinical supply, given reliance on third-party manufacturers and a single-source supplier.
- Whether the workforce reduction achieves anticipated savings without impairing execution, and the effects of the October 2022 CEO transition.