Sutro Biopharma, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate. Sutro is a clinical-stage oncology company with no products approved for commercial sale; revenue is generated primarily from collaborations and supply agreements.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $10.4m | $28.1m | $23.1m | $34.0m |
| Research and development expense | $41.6m | $32.3m | $81.0m | $62.3m |
| General and administrative expense | $15.0m | $15.1m | $30.5m | $30.2m |
| Operating loss | $46.2m | $19.4m | $88.4m | $58.5m |
| Net loss | $38.5m | $26.0m | $88.6m | $65.1m |
| Basic and diluted loss per share | $0.64 | $0.55 | $1.49 | $1.39 |
| Net cash used in operating activities | Not separately stated for quarter | Not separately stated for quarter | $92.2m | $38.4m |
At June 30, 2023, cash and cash equivalents were $235.1m and marketable securities were $123.2m, totaling $358.3m in cash, cash equivalents and marketable securities. Sutro also held $33.3m of Vaxcyte equity securities, whose value can fluctuate. Total current assets were $412.0m and current liabilities were $67.1m. Debt was $10.2m, classified as current; the loan matures March 1, 2024. Management said available resources would fund operations for at least 12 months after filing, while noting that additional capital will be required.
In June, Sutro received $140.0m upfront from Blackstone for the sale of its 4% royalty interest in potential future Vaxcyte product sales. Net proceeds were $139.7m after issuance costs. The transaction is recorded as a deferred royalty obligation, not revenue; the liability was $136.7m at June 30 and carries a stated effective interest rate of 16.3%. Blackstone may pay up to a further $250.0m upon specified return thresholds.
Material changes versus the prior comparable period
- Q2 revenue fell 63% year over year; six-month revenue fell 32%. The main driver was the $25.0m Tasly upfront payment recognized in Q2 2022, which did not recur. Lower EMD Serono revenue also reflected its decision to stop development of M1231. Astellas revenue partly offset the declines, reaching $7.3m in Q2 2023, including $2.5m related to the financing component of its upfront payment.
- R&D expense increased 29% in Q2 and 30% for the first half, mainly from higher personnel costs, clinical and preclinical activity, laboratory supplies, manufacturing and facilities costs. Operating losses widened as revenue declined while spending increased.
- Q2 net loss included an $8.3m unrealized gain on Vaxcyte shares, compared with a $3.7m unrealized loss in Q2 2022. The six-month unrealized gain was $1.3m, versus a $3.2m loss in 2022; these are non-cash valuation changes.
- Operating cash use increased to $92.2m in the first half from $38.4m. Cash at period-end rose substantially, principally due to Blackstone proceeds and portfolio investment maturities, not operating cash generation.
- Cash, cash equivalents and marketable securities increased from $302.3m at December 31, 2022 to $358.3m at June 30, 2023. Debt declined from $16.3m to $10.2m. Sutro raised $12.0m net through its ATM facility in the first half, issuing about 1.86m shares.
Pipeline, outlook and key risks
- Luvelta (STRO-002): The company reported updated preliminary Phase 1 dose-expansion results in June 2023 and described the observed safety profile as manageable with preliminary efficacy signals. The registration-directed Phase 2/3 REFRaME trial for platinum-resistant ovarian cancer opened enrollment in June; the first patient was enrolled in July 2023. Sutro expected updated data from exploratory cohort C in the second half of 2023 and endometrial cancer data at the October 2023 ESMO Congress. These are forward-looking plans, not reported outcomes.
- STRO-001: Phase 1 dose escalation was complete. BioNova dosed its first patient in a Phase 1 study in Greater China in February 2023; Sutro said it would use resulting clinical data to inform future development prioritization.
- STRO-003: Sutro expected IND-enabling studies to be completed in Q1 2024 and planned to begin Phase 1 safety studies in 2024.
- Collaboration changes: BMS notified Sutro in June that it would discontinue CC-99712 development for portfolio-prioritization reasons. The agreement was to terminate October 7, 2023, after which worldwide rights would revert to Sutro. EMD Serono decided in March 2023 to close the M1231 Phase 1a trial and not begin a planned expansion study. These decisions underline the dependence of collaboration programs and revenue on partners’ priorities.
- Funding and execution: Sutro expects continued substantial losses and says it will need additional financing to complete development and fund operations. Financing may not be available on acceptable terms; equity issuance could dilute shareholders, while debt or collaborations could impose restrictions or require surrendering rights.
- Clinical and operating risks: Product candidates remain investigational; clinical results, safety, regulatory approval, manufacturing scale-up and commercialization are uncertain. Luvelta’s reported preliminary results may change as data mature. The company also cites competition, reliance on third-party suppliers and trial operators, intellectual-property risks, and potential disruption from cybersecurity incidents or banking instability.
- Other obligations and contingencies: Operating lease liabilities totaled $32.5m. The filing reports no legal proceedings management believes would have a material adverse effect and no material indemnification claims known to the company. A $10.0m minimum unrestricted-cash covenant applied to the loan; Sutro reported compliance at June 30. The loan’s floating-rate terms changed to a SOFR-based formula effective July 1, 2023.
Important facts for investors to verify
- Progress, enrollment, safety and efficacy updates from REFRaME, luvelta cohort C and the planned endometrial cancer presentation; distinguish preliminary data from final results.
- Whether Sutro’s cash runway remains at least 12 months as spending, trial costs and financing needs evolve, and whether additional financing or ATM sales cause further dilution.
- Terms and performance of the Blackstone royalty transaction, including the basis for future royalty-obligation estimates and whether any contingent payments become payable.
- Execution of the October 2023 BMS termination and the resources and plans required for Sutro to take over CC-99712 rights.
- Changes in collaboration revenue and partner program priorities, particularly Astellas, Merck, Vaxcyte and BioNova.
- Changes in Vaxcyte share value, which affected reported earnings by an $8.3m unrealized gain in Q2 and represents a market-risk exposure.
- Debt repayment by its March 1, 2024 maturity date, compliance with loan covenants, and continued access to cash across financial institutions.