Arcus Biosciences, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Arcus is a clinical-stage oncology biopharmaceutical company with five investigational products in clinical development. It has no approved products and has not generated product sales revenue.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Collaboration and license revenue | $9.5m | $1.8m | $18.9m | $3.5m |
| Research and development expense | $68.8m | $35.7m | $135.2m | $58.8m |
| General and administrative expense | $16.8m | $11.4m | $32.6m | $18.4m |
| Operating loss | $76.1m | $45.4m | $148.9m | $73.8m |
| Net loss | $76.0m | $45.1m | $148.6m | $72.8m |
| Basic and diluted loss per share | $1.09 | $0.93 | $2.17 | $1.57 |
- For the six months, operating cash use was $140.3m, compared with $55.2m in 2020. Investing activities provided $65.8m, mainly reflecting net investment maturities and sales; financing provided $224.4m, primarily from Gilead’s February 2021 stock purchase.
- At June 30, cash, cash equivalents and marketable investments totaled $805.1m, versus $735.1m at December 31, 2020. Cash and cash equivalents alone were $320.5m. Management said this liquidity was expected to fund planned operations at least through 2023; the financial-statement note separately says at least twelve months after filing.
- Total assets were $898.8m and total liabilities $294.2m. The filing reports no borrowings or debt balance. Liabilities include $178.5m of deferred revenue and $52.2m of operating lease liabilities. The company reported $604.6m of stockholders’ equity and a $476.7m accumulated deficit.
- No product gross margin is reported; collaboration revenue is the company’s only reported revenue category. The filing does not provide a clear operating-margin measure.
Material changes versus the prior comparable period
- Q2 collaboration revenue rose $7.7m, reflecting $7.7m of Gilead pipeline-access revenue in addition to Taiho revenue. First-half revenue rose $15.4m for the same reason.
- Q2 R&D expense increased 93% and first-half R&D expense increased 130%, driven by higher personnel and stock-based compensation, clinical activity, manufacturing, and facility costs. First-half expenses also included development milestones for zimberelimab and domvanalimab.
- Net loss increased 69% in Q2 and 104% in the first half, as expense growth substantially exceeded collaboration-revenue growth. Stock-based compensation was $26.1m for the first half, up from $7.9m.
- Liquidity increased from year-end, supported by Gilead’s $220.4m February share purchase. The company also substantially expanded lease commitments and property and equipment investment.
Outlook, management commentary and risks
- Management expects R&D and G&A expenses to increase substantially over the next several years as clinical programs advance, later-stage trials expand, and discovery and operating capabilities grow. No quantitative earnings or revenue guidance was provided.
- In June, Arcus reported a first interim ARC-7 analysis in first-line metastatic, PD-L1-high NSCLC: domvanalimab-based combination arms showed encouraging response-rate activity, while zimberelimab monotherapy activity was described as similar to marketed anti-PD-1 agents studied by other companies. No unexpected safety signals were observed at the cutoff. These were interim results; all three ARC-7 arms and the ARC-10 registrational study were to continue enrolling as planned.
- Gilead has rights to zimberelimab and options over Arcus programs under a 10-year collaboration, with potential option payments, shared development costs and royalties. Gilead held approximately 19.4% of Arcus’s common stock at quarter-end and has rights to purchase up to 35% ownership under the agreements.
- COVID-19 could disrupt trial initiation, enrollment, conduct or completion and affect patient retention. Arcus said enrollment remained relatively robust in most studies and reported sufficient current drug supply, but could not predict the pandemic’s ultimate effect.
- Key risks include clinical-trial efficacy, safety and enrollment uncertainty; reliance on collaborators and third-party manufacturers; competitive pressure; intellectual-property disputes; and the possibility that additional funding may be needed if costs rise or anticipated collaboration payments do not materialize. The company reported no material legal proceedings and no material changes to internal control during the quarter.
- An April lease amendment extended Hayward lease terms and added space; Arcus disclosed approximately $43m of additional undiscounted minimum payments under the amendment. Future minimum payments exclude approximately $90.3m for the Brisbane lease and $5.3m for additional Hayward space that had not yet commenced.
Important facts for investors to verify
- Whether trial progress and subsequent, verified clinical data support the encouraging interim ARC-7 findings, and how ARC-10 enrollment and execution proceed.
- Cash burn and runway against the stated through-2023 outlook, especially as R&D spending and lease-related costs rise.
- Gilead’s decisions on program options, the timing and amounts of collaboration payments, and the resulting allocation of development costs and rights.
- Clinical-trial enrollment, drug supply and operating impacts from COVID-19 and other disruptions.
- Share dilution and governance implications of Gilead’s ownership, additional-purchase rights and board representation.