Arbutus Biopharma Corp. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial figures are in U.S. dollars; amounts below are in millions unless noted. Statements are unaudited. The company changed its name from Tekmira Pharmaceuticals Corporation to Arbutus Biopharma Corporation on July 31, 2015.
Business context
Arbutus is a clinical-stage biopharmaceutical company focused primarily on developing treatments intended to cure chronic hepatitis B (HBV), alongside RNA-interference therapeutics and lipid nanoparticle (LNP) delivery technology. On March 4, 2015, it completed its acquisition of Arbutus Inc. (formerly OnCore), adding HBV programs and substantially changing the company’s scale and pipeline. Acquired results are included from the acquisition date, so comparisons with 2014 are not fully like-for-like.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3.44 | $1.81 | $8.12 | $6.24 |
| Operating expenses | $17.86 | $11.23 | $40.55 | $21.62 |
| Operating loss | $(14.42) | $(9.42) | $(32.43) | $(15.38) |
| Net loss | $(14.89) | $(6.08) | $(26.88) | $(24.07) |
| Basic and diluted loss per share | $(0.27) | $(0.28) | $(0.64) | $(1.15) |
| Operating cash flow | $(16.67) | $(8.01) | $(35.64) | $1.15 |
- Revenue increased year over year, primarily reflecting collaboration and contract revenue, licensing payments, and new Dicerna revenue. The DoD accounted for 54% of Q2 revenue and 60% of first-half revenue.
- Operating expenses rose sharply, especially general and administrative costs and first-half acquisition costs of $9.66 million. Q2 general and administrative expense was $7.66 million versus $1.79 million a year earlier, partly due to increased staffing, merger-related compensation expense, and legal costs.
- Net loss includes volatile non-operating items. Q2 included a $2.57 million foreign-exchange loss and a $2.02 million gain from a decrease in warrant-liability fair value. First-half results included a $4.47 million foreign-exchange gain and a $0.80 million warrant fair-value gain.
- No conventional borrowings are reported in the presented balance sheet. At June 30, cash and cash equivalents were $207.21 million and long-term investments were $10.01 million; combined cash and investments were $217.22 million. Current assets were $215.70 million and current liabilities $16.13 million, implying working capital of about $199.57 million.
- Total assets were $773.82 million, including acquired in-process research and development of $390.02 million and goodwill of $156.05 million. Total liabilities were $185.32 million, including a $156.01 million deferred tax liability. These acquisition-related balances are based on preliminary purchase-price allocations.
- Management said available cash and investments were expected to fund operations for at least the next 12 months, while noting substantial additional funding will be needed for continued pipeline development. The March public offering raised $151.88 million gross and $142.18 million net. Shares outstanding increased to 54.30 million at June 30 from 22.44 million at year-end.
Material changes versus the prior comparable period
- Revenue grew 90% in Q2 and 30% in the first half, while operating losses widened. First-half operating cash flow shifted from $1.15 million provided in 2014 to $35.64 million used in 2015.
- The March acquisition added major HBV assets and expanded operations; acquired Arbutus Inc. reported a $4.07 million loss and no revenue from acquisition through June 30.
- Q2 2015 loss per share was slightly lower than Q2 2014, while first-half loss per share improved substantially, in part because of the increased weighted-average share count following financing and the acquisition.
- First-half cash increased by $135.02 million, principally reflecting the $142.18 million net public-offering proceeds and investment movements; cash used in operations was $35.64 million.
Outlook, commentary, risks and unusual items
- Management’s HBV strategy is to develop combination regimens targeting viral replication, immune response and cccDNA. It planned to use TKM-HBV Phase I results to select a formulation for multi-dose testing in chronically infected patients in the second half of 2015; the filing also described expected IND filings or equivalent submissions for several HBV programs in 2015–2016.
- Management expected to report final TKM-PLK1 study data in the second half of 2015. OCB-030 preclinical work was expected to support an IND filing by year-end 2015.
- After quarter-end, on July 20, 2015, the company said TKM-Ebola development activities would be suspended because the development path was unclear and that it was jointly re-evaluating the DoD contract. The FDA’s partial clinical hold remained in place for healthy-volunteer doses above 0.24 mg/kg/day.
- TKM-Ebola-Guinea’s Phase II RAPIDE trial stopped enrollment after reaching a predefined futility boundary; data analysis was ongoing and full results were pending. DoD-funded Ebola-related development activity was also suspended for joint contract re-evaluation.
- Key contingencies include disputed Alnylam arbitration over a claimed $5 million milestone, with a decision expected in Q3 2015, and UBC arbitration alleging at least $3.5 million in unpaid royalties plus unspecified amounts, interest and costs. The company had not recorded an estimated loss for the UBC matter because the likelihood and amount were uncertain.
- In July 2015, amendments to founding executives’ repurchase rights shortened the expiry period to August 2017 and were expected to increase compensation expense by about $1.89 million per quarter beginning in Q3 2015. Acquisition accounting and contingent consideration valuations remained preliminary.
- Other risks include clinical and regulatory uncertainty, dependence on partner and government funding, future financing needs, foreign-exchange exposure, and Level 3 warrant and contingent-consideration valuations. The company stated that its disclosure controls were effective; acquired Arbutus Inc. was excluded from the controls assessment under SEC guidance for recently acquired businesses.
Important facts for investors to verify
- Progress and safety results for TKM-HBV and the timing of any transition to testing in HBV patients.
- Updated TKM-Ebola/DoD contract terms and the implications of the suspension, FDA partial hold, and TKM-Ebola-Guinea futility finding.
- Final clinical data for TKM-PLK1 and progress against stated HBV pipeline milestones.
- Cash burn and runway relative to the company’s stated 12-month funding estimate, including the effect of planned clinical programs and increased compensation expense.
- Final acquisition purchase-price allocation, impairment assessments for acquired IPR&D and goodwill, and contingent consideration estimates.
- Outcomes and potential financial exposure from the Alnylam and UBC arbitrations, plus the revenue contribution and concentration risk associated with the DoD and other partners.