Business context and reporting period
Arcus Biosciences, Inc. is a clinical-stage oncology biopharmaceutical company with four investigational products in clinical development. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. The company had no approved products or product sales; reported revenue came from collaboration and license arrangements.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Collaboration and license revenue | $64.5 million | $1.8 million | $68.0 million | $5.3 million |
| Research and development expense | $51.8 million | $17.2 million | $110.6 million | $57.8 million |
| General and administrative expense | $11.2 million | $7.8 million | $29.6 million | $18.6 million |
| Operating income (loss) | $1.6 million | $(23.2) million | $(72.2) million | $(71.2) million |
| Net income (loss) | $1.8 million | $(22.4) million | $(71.0) million | $(68.1) million |
Q3 diluted earnings per share were $0.03; nine-month diluted loss per share was $1.37. The quarter’s small profit reflects collaboration revenue, including $55.1 million recognized for the zimberelimab license and $7.7 million for Gilead pipeline access rights; it should not be read as product-driven or necessarily recurring profitability. Nine-month operating expenses rose substantially, while net loss widened modestly year over year.
At September 30, 2020, cash, cash equivalents and marketable investments totaled $785.1 million, up from $188.3 million at December 31, 2019. Current assets were $797.2 million and current liabilities $162.9 million. Total liabilities were $266.7 million, including $206.9 million of current and noncurrent deferred revenue; no borrowings are reported on the presented balance sheet. Management said available cash and investments were expected to fund planned operations for at least 12 months following the filing date.
For the first nine months, operating activities provided $161.1 million, investing activities used $434.1 million, and financing activities provided $437.0 million; cash, cash equivalents and restricted cash increased $163.9 million. Operating cash flow was materially affected by Gilead-related receipts and a $187.9 million increase in deferred revenue. Financing proceeds included the May public offering and Gilead’s stock purchase.
Material changes and significant agreements
- Revenue increased primarily because the Gilead agreements closed in July 2020. Gilead paid $175 million under the collaboration agreement and invested approximately $200 million in Arcus stock; the filing allocated part of the stock purchase premium to collaboration performance obligations.
- Arcus raised approximately $326.2 million net in its May 2020 public offering. Together with Gilead’s investment and upfront payment, these transactions significantly strengthened liquidity but also increased shares outstanding.
- Gilead obtained an exclusive zimberelimab license and options covering current and future clinical programs during a 10-year collaboration term. Option exercises, development-cost sharing, potential U.S. co-promotion, and ex-U.S. royalties are subject to the agreement’s terms; future payments and program participation are not assured.
- R&D expense increased 200% in Q3 year over year, driven by clinical supply and trial costs, increased headcount, a $10.1 million WuXi sublicense fee related to zimberelimab, and a $3.0 million Abmuno development milestone. G&A also rose, including higher personnel, legal and public-company costs.
- On October 29, 2020, Arcus announced an AstraZeneca collaboration to evaluate domvanalimab with durvalumab in a registrational Phase 3 trial for unresectable Stage III non-small cell lung cancer. AstraZeneca will conduct the trial, the parties will supply their respective agents and share trial costs, and each retains rights to its molecule and future commercial economics. Gilead retains an option relating to domvanalimab.
Outlook, risks and unusual items
- Management expects R&D expense to increase substantially as clinical programs advance, manufacturing needs grow and the company expands discovery capabilities. G&A is also expected to rise to support growth.
- COVID-19 had affected laboratory operations and added operating costs. The company reported relatively robust enrollment but anticipated potential volatility in trials; it delayed the expected advancement of its second of two preclinical programs into the clinic from Q1 2021 to the second half of 2021. It reported sufficient drug supply for ongoing trials at the time of filing.
- Key risks include clinical and regulatory failure or delay, competition for patients and sites, dependence on third-party clinical and manufacturing providers (including WuXi), collaboration and option uncertainty, intellectual-property disputes, and the possibility that additional capital may be needed beyond current plans.
- Arcus reported no material legal proceedings. It also disclosed an additional Hayward facility lease expected to commence in January 2021, with an eight-year term and minimum payments of $10.1 million.
Important facts for investors to verify
- How much of reported collaboration revenue and operating cash flow is attributable to upfront or other nonrecurring Gilead payments, and how deferred revenue will be recognized over time.
- The expected pace and cost of clinical development, the effect of COVID-19 on trial enrollment, and the timing of the delayed preclinical program.
- Whether Gilead exercises program options and how resulting development costs, payments, royalties and any opt-out rights affect Arcus’s cash needs and economics.
- Cash utilization relative to management’s stated runway, including the impact of rising R&D expenses and future lease obligations.
- Clinical progress, manufacturing continuity and supply dependence, particularly for zimberelimab and domvanalimab, and the terms and execution of the AstraZeneca trial.