Curis, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless otherwise stated.
Business context
Curis is a clinical-stage biotechnology company focused on cancer therapeutics. Its most advanced proprietary candidate, CUDC-907, was in Phase 1 and Phase 2 studies. In June, the FDA accepted the IND for CA-170 and the company began its Phase 1 trial. CA-4948 remained in preclinical development. Erivedge, commercialized by Genentech and Roche for advanced basal cell carcinoma, generated Curis’s royalty revenue; those royalties are being used to service Curis Royalty’s secured debt.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1.680 in 2016; $2.083 in 2015 | $3.406 in 2016; $3.741 in 2015 |
| Operating loss | $(10.680) in 2016; $(7.369) in 2015 | $(19.487) in 2016; $(38.391) in 2015 |
| Net loss | $(11.290) in 2016; $(8.128) in 2015 | $(20.731) in 2016; $(39.977) in 2015 |
| Net loss per share | $(0.09) in 2016; $(0.06) in 2015 | $(0.16) in 2016; $(0.34) in 2015 |
| Research and development expense | $8.822 in 2016; $5.938 in 2015 | $15.650 in 2016; $10.657 in 2015 |
| General and administrative expense | $3.443 in 2016; $3.411 in 2015 | $7.059 in 2016; $6.940 in 2015 |
Royalties were $1.842 million in Q2, down 9% year over year, and $3.586 million for the first half, down 3%. Research and development revenue, net, was negative in both 2016 periods because amounts reimbursable to Genentech exceeded related revenue. No meaningful product-sales margin is provided; Curis reported operating and net losses.
Q2 net loss increased year over year as research and development spending rose, including CUDC-907 clinical costs and a $3.0 million Aurigene milestone for CA-170 IND acceptance. First-half net loss improved substantially year over year, primarily because 2015 included $24.348 million of in-process R&D expense associated with the Aurigene collaboration. First-half 2016 R&D expense nevertheless increased 47%.
- Cash flow: First-half operating cash use was $18.841 million, investing cash use was $4.164 million, and financing cash use was $1.443 million. Cash and cash equivalents declined by $24.448 million to $8.643 million.
- Liquidity: Cash, cash equivalents and investments totaled $61.671 million at June 30, excluding $0.153 million of restricted investment. Management said existing resources should fund current and planned operations into 2017.
- Debt: Curis Royalty’s loan bears 12.25% interest and is non-recourse to Curis, secured by Erivedge royalty-related assets. Net debt carrying value was $21.968 million; principal and interest due were approximately $22.4 million. First-half principal payments were $2.141 million.
- Equity: Curis had not sold shares under its $30 million at-the-market program by June 30. There were 129.462 million shares outstanding at quarter-end and 129.472 million as of July 29.
Outlook, developments and principal risks
- Management expects continued operating losses and does not expect profitability in the foreseeable future. Future operations depend on controlling expenses and obtaining financing, collaboration proceeds or contingent Genentech payments; additional funding is not assured and could be dilutive or require reduced or delayed development.
- Potential near-term Aurigene obligations include an estimated $4.0 million CA-170 Phase 1 initiation milestone in Q4 2016 or Q1 2017, and a $7.5 million immuno-oncology exclusivity fee estimated for Q1 2017. Additional milestones may be triggered by CA-4948 development.
- Erivedge royalties declined, and the company disclosed that Genentech reduced the U.S. royalty rate after Novartis’s competing Hedgehog inhibitor, sonidegib, entered the market. Lower Erivedge sales or royalty rates could also extend loan repayment.
- Key risks include early-stage clinical uncertainty, patient enrollment and safety outcomes, reliance on Aurigene and Genentech/Roche, competition, manufacturing and regulatory hurdles, and the need for additional capital. Royalties are expected to go toward debt service for the foreseeable future, limiting their availability for operations.
- Management reported effective disclosure controls as of June 30, 2016 and no material change in internal control over financial reporting during the quarter. The filing states there were no off-balance-sheet arrangements.
Investor verification priorities
- Track cash burn, financing plans, and whether the stated runway into 2017 remains achievable.
- Verify clinical progress, enrollment and data for CUDC-907 and CA-170, and development timing for CA-4948.
- Check whether the CA-170 milestone and Aurigene exclusivity fee become payable on the estimated schedules, and assess other potential collaboration obligations.
- Monitor Erivedge sales, royalty rates after sonidegib competition, and the resulting pace of repayment of the royalty-secured debt.
- Reconcile future reported losses against the 2015 one-time Aurigene-related in-process R&D charge when comparing periods; monitor possible equity issuance and dilution.