Arbutus Biopharma Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; fourth-quarter results are also summarized. Unless noted otherwise, amounts are U.S. dollars. Arbutus is a clinical-stage biotechnology company focused primarily on developing combination treatments intended to cure chronic hepatitis B (HBV), alongside licensing its lipid nanoparticle (LNP) delivery technology.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1.5 million | $24.9 million |
| Operating expenses | $493.1 million | $127.2 million |
| Loss from operations | $491.6 million | $102.3 million |
| Net loss | $384.2 million | $61.1 million |
| Basic and diluted loss per share | $7.24 | $1.34 |
| Cash used in operating activities | $57.9 million | $54.8 million |
- Revenue fell 94% as the DoD Ebola contract and Monsanto arrangement ended and Dicerna discontinued its program. 2016 revenue consisted mainly of Dicerna license and service revenue and small royalty and milestone payments; the company reported no product sales.
- Operating expenses included $253.2 million of intangible-asset impairment and $138.2 million of goodwill impairment. The intangible impairment was partly offset by a $105.0 million deferred tax benefit. The impairments were non-cash and management said they did not affect liquidity or cash flow from operations.
- Research, development, collaborations and contracts expense was $61.3 million, versus $51.5 million in 2015; general and administrative expense was $39.4 million, versus $26.4 million. Stock-based compensation was $39.2 million, including $32.0 million related to expiration of repurchase rights on merger consideration shares.
- Year-end cash and cash equivalents were $23.4 million; short-term investments were $107.1 million and restricted investment was $12.6 million, for $143.2 million in total cash and investments. The company’s stated net liquidity measure—cash, cash equivalents and short-term investments less accounts payable and accrued liabilities—was $120.6 million.
- Total assets were $275.9 million, total liabilities $72.9 million, and stockholders’ equity $203.0 million. The company had a $12.0 million Wells Fargo loan due December 2019, secured by $12.6 million of restricted cash. No operating margin is informative for this pre-revenue development-stage business.
Fourth quarter: The unaudited quarterly table reports revenue of negative $0.2 million and net loss of $218.7 million ($4.05 per share). Elsewhere, the MD&A states Q4 net loss was $242.8 million ($4.49 per share). The filing text does not provide a clear reconciliation of these conflicting Q4 figures; verify against the financial statements and subsequent disclosures.
Material changes versus the prior year
- Net loss widened substantially, primarily because of 2016 impairment charges and higher operating expenses, while revenue declined from $24.9 million to $1.5 million.
- Intangible assets fell to $99.4 million from $352.6 million, and goodwill to $24.4 million from $162.5 million, following impairments. Management cited program discontinuation or delay and a higher discount rate in the annual valuation.
- Operating cash use increased modestly, while cash and investments declined to $143.2 million from $191.4 million. Investing activities used $99.1 million, including purchases of investments and restricted collateral; financing provided $12.6 million, principally from the Wells Fargo loan.
- The functional currency changed from the Canadian dollar to the U.S. dollar effective January 1, 2016; prior periods were not restated. The change also caused certain Canadian-dollar options to be classified as liabilities.
Business outlook, risks and unusual items
- Pipeline: ARB-1467 Phase II interim results showed stepwise reductions in HBV surface antigen; three of five patients receiving three monthly 0.4 mg/kg doses had reductions of at least one log. Management expected Cohorts 1–3 final data in the first half of 2017 and Cohort 4 biweekly-dosing results in the second half of 2017. ARB-1740 Phase II data were expected in the second half of 2017; a healthy-volunteer study for AB-423 was planned for 2017. These are forward-looking expectations, not assured outcomes.
- Partner programs: In March 2017, Alexion agreed to pay $7.5 million upfront, up to $75 million in development, regulatory and commercial milestones, and single-digit royalties for an exclusive LNP license in one rare-disease program. Alnylam expected patisiran Phase III top-line data in mid-2017 and, assuming positive results, regulatory filings by year-end 2017; Arbutus is entitled to low- to mid-single-digit royalties on certain LNP-enabled sales.
- Funding: Management believed available cash resources were sufficient for at least the next 12 months from year-end 2016, but said substantial additional funding would be needed over the following years. Funding needs depend on clinical progress, partnerships, licensing revenue, and other factors; inadequate financing could delay, reduce or terminate programs.
- Portfolio focus: The company suspended or terminated several non-HBV programs and collaborations, including Dicerna’s DCR-PH1, Cytos’s TLR9 program, NeuroVive’s OCB-030, and further development of Ebola/Marburg and other non-HBV assets. It discontinued ARB-1598 and delayed cccDNA Sterilizer research, contributing to impairment charges.
- Controls and audit: The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness involved management review of the impairment discount rate and a mathematical error in the goodwill calculation; the resulting adjustment was recorded in the 2016 statements. Management described a remediation plan, but timely remediation is not assured.
- Legal matters: UBC alleges at least $3.5 million in unpaid royalties plus an unspecified amount, interest and costs; Arbutus disputes the claim and had recorded no estimate of possible loss. A liability hearing was scheduled for June 2017. In a separate Acuitas dispute, a court injunction barred new sublicensing of Arbutus LNP technology through October 2017 or further court order. Litigation outcomes and related costs remain uncertain.
- Other risks include dependence on partners and future financing, clinical and regulatory uncertainty, competition, intellectual-property disputes, foreign-exchange exposure, and potential dilution. The company had no sustained profitability and did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Reconcile the conflicting Q4 net-loss and loss-per-share amounts in the filing.
- Review the assumptions and sensitivity underlying the $391.3 million combined 2016 intangible-asset and goodwill impairment charges, and track remediation of the material weakness.
- Confirm actual cash runway, cash burn, restricted-cash terms and financing requirements against later filings and clinical spending plans.
- Check clinical trial updates against the stated 2017 timelines, including ARB-1467, ARB-1740 and AB-423, and distinguish interim findings from evidence of durable patient benefit.
- Monitor Alexion and Alnylam program progress and the timing and conditions of any milestone or royalty income.
- Follow the UBC arbitration and Acuitas litigation, including potential financial exposure and effects on access to or sublicensing of LNP intellectual property.