Scholar Rock Holding Corporation — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018. Filed March 18, 2019. This is an annual report, not a standalone fourth-quarter report; it also describes certain developments through March 2019.
Business context
Scholar Rock is a clinical-stage biopharmaceutical company developing monoclonal antibodies that selectively inhibit growth-factor activation. Its lead candidate, SRK-015, entered Phase 1 in May 2018 for spinal muscular atrophy (SMA); the company planned a Phase 2 trial in 2019. SRK-181 was nominated in March 2019 for cancer immunotherapy and remained preclinical at year-end. Other discovery programs address fibrosis and anemia. The company had no approved products or product-sale revenue.
Financial performance and liquidity
| Metric | FY2018 / Dec. 31, 2018 | FY2017 / Dec. 31, 2017 |
|---|---|---|
| Revenue from product sales | None | None |
| Research and development expense | $36.3 million | $19.9 million |
| General and administrative expense | $14.4 million | $5.1 million |
| Total operating expenses | $50.7 million | $25.0 million |
| Net loss | $49.3 million | |
| $25.0 million | ||
| Net loss per share | $3.15 | $15.30 |
| Cash and cash equivalents | $115.1 million | $56.5 million |
| Marketable securities | $60.6 million | $1.5 million |
| Operating cash flow | +$24.6 million | −$21.7 million |
| Investing cash flow | −$60.2 million | +$17.7 million |
| Financing cash flow | +$94.3 million | +$50.5 million |
Operating cash flow was positive in 2018 primarily because of $62.9 million of deferred revenue associated with Gilead-funded research, not because operations were profitable. The $80 million Gilead transaction comprised a $50 million upfront payment and a $30 million equity investment; the filing allocated $17.1 million to the shares and $62.9 million to research activities. No revenue was recognized under the Gilead agreement in 2018; recognition was expected to begin in 2019 as research was performed. No operating margin is meaningful given the company’s losses and development-stage status.
Total assets were $181.3 million and total liabilities were $74.7 million at year-end. Loan and capital-lease payables totaled approximately $0.5 million; the SVB loan balance was $0.4 million and was due to mature in July 2019. Management said existing cash, cash equivalents and marketable securities were expected to fund operations into 2021, while noting that additional capital would be needed to complete development of current programs.
Material changes versus prior year
- Net loss nearly doubled, increasing 97% to $49.3 million. R&D expense rose 82%, chiefly from SRK-015 Phase 1 and manufacturing work, other early programs, and increased staffing.
- G&A expense rose 183%, reflecting higher headcount, public-company and professional-service costs, and $1.2 million of equity-award modification expense associated with the former COO’s retirement.
- Cash and marketable securities increased to $175.6 million, supported by $77.8 million of net IPO proceeds and the Gilead transaction. The company completed its IPO in May 2018 at $14 per share.
- Common stockholders’ equity was $106.6 million at year-end, compared with a $53.5 million stockholders’ deficit in 2017, following the IPO and conversion of preferred shares.
Outlook, risks and unusual items
- Management expected R&D and G&A spending to increase in 2019. It planned SRK-015 Phase 2 dosing in the second quarter of 2019, interim safety and efficacy results in the first half of 2020, and full 12-month topline results from late 2020 into early 2021. Timelines depended on regulatory feedback and enrollment.
- SRK-015 Phase 1 interim results were described as showing no apparent safety signal and supporting Phase 2 advancement. The filing reported no dose-limiting toxicities through 30 mg/kg; one pancreatitis serious adverse event was assessed as unrelated to treatment. Full Phase 1 results were still pending.
- The company planned to begin SRK-181 Phase 1 development in mid-2020, subject to completion of preclinical and manufacturing work. These are forward-looking plans, not achieved milestones.
- The Gilead agreement covers up to three fibrosis-focused programs. Gilead has options to license each program; potential payments include a $25 million proof-of-concept milestone, up to $1.425 billion in aggregate option, development, regulatory and commercial milestones, and tiered royalties. These contingent amounts are not assured.
- Key risks include clinical failure or delays, inability to obtain additional financing, dependence on third-party manufacturers and research vendors, competition, regulatory and reimbursement uncertainty, and protection of intellectual property. The company warned that its cash-runway estimate depended on assumptions and could prove shorter.
- Deferred tax assets of $35.0 million were fully offset by a valuation allowance; no income-tax provision was recorded. Management concluded disclosure controls were effective, but the filing included no auditor attestation on internal control over financial reporting because of the company’s newly public status.
- The auditor issued an unqualified opinion on the financial statements. The company reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether SRK-015’s Phase 2 trial started on schedule, enrolled the intended patient groups, and produced clinically meaningful efficacy and safety results.
- Whether the cash-runway estimate remains adequate after actual spending, trial costs, and collaboration research obligations; distinguish cash generation from deferred-revenue accounting.
- Whether SRK-181 reaches IND-enabling studies and clinical development on the stated timeline.
- Whether Gilead exercises program options and whether any contingent milestones or royalties become payable; confirm the timing and terms of revenue recognition.
- Current financing needs, dilution risk, debt repayment status, and the effects of stock-based compensation and equity-plan share increases.