Arcus Biosciences, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. Arcus is a clinical-stage oncology company with four investigational products in clinical development. It had no product-sales revenue and reported operating losses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Collaboration and license revenue | $1.75 million | $1.75 million | $3.5 million | $3.5 million |
| Research and development expense | $35.7 million | $25.0 million | $58.8 million | $40.6 million |
| General and administrative expense | $11.4 million | $5.9 million | $18.4 million | $10.9 million |
| Net loss | $45.1 million | $28.1 million | $72.8 million | $45.8 million |
| Basic and diluted loss per share | $0.93 | $0.64 | $1.57 | $1.05 |
- Revenue was entirely collaboration and license revenue under the Taiho agreement; it was recognized from previously received payments. No Taiho milestones or royalties had been earned as of June 30.
- Q2 operating expenses rose 52% year over year, while net loss widened 60%. R&D growth reflected clinical, manufacturing, and personnel costs; G&A increases included legal and accounting work related to Gilead, corporate-development consulting, and increased headcount. Lower lab activity during COVID-19 partly offset R&D growth.
- For the first half, operating cash use was $55.2 million, versus $36.6 million a year earlier. Investing activities used $47.0 million, compared with $41.0 million provided in 2019. Financing provided $329.5 million, primarily from the public offering.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $285.2 million; short-term investments were $177.3 million. Total cash, cash equivalents, and marketable securities were $462.5 million, up from $188.3 million at year-end 2019.
- Current assets were $471.6 million and current liabilities $40.0 million. Total liabilities were $52.7 million; the filing reports no debt balance.
- In June, Arcus sold 12.65 million shares at $27.50 per share, generating approximately $326.2 million net. Common shares outstanding were 58.94 million at June 30; the cover reports 64.91 million outstanding as of July 31.
- Management said existing resources were expected to fund planned operations for at least 12 months following the filing date. This assessment predates the July Gilead transaction.
Material developments, outlook, and risks
- Gilead transaction, closed July 13, 2020: After quarter-end, Gilead paid $175 million upfront and invested approximately $200 million in Arcus equity, purchasing 5,963,029 shares at $33.54 each. The combined $375 million was not included in June 30 cash and investments. Gilead received an exclusive zimberelimab license in certain markets and options over current and future clinical programs. Option fees, potential milestones, cost-sharing terms, royalties, and research support depend on agreement terms and future events.
- Outlook: Arcus expects R&D and G&A expenses to increase substantially as it advances clinical programs, expands discovery capabilities, and supports collaboration activity. It provided no numerical earnings or revenue guidance. Future capital needs depend in part on clinical progress, Gilead option decisions, and collaboration payments.
- COVID-19: Laboratory operations resumed at reduced capacity in late June after suspension during shelter-in-place restrictions. The company said the delay to its second planned discovery-stage clinical program was not yet known and anticipated possible delays to clinical programs and new-site starts. Enrollment remained relatively robust in ongoing company-sponsored studies, and management reported sufficient drug supply for ongoing trials at that time.
- Other commitments and unusual items: A $5.0 million WuXi development milestone was recorded as R&D expense in Q2. A lease amendment adds 36,303 square feet, expected to commence in January 2021, with an eight-year term and $10.1 million of minimum payments. Arcus also recognized a $0.6 million first-half gain related to dilution of its PACT Pharma investment, alongside a $0.6 million share of PACT losses.
- Key risks: Clinical-stage programs carry substantial efficacy, safety, regulatory, enrollment, manufacturing, and commercialization risks. COVID-19 could further disrupt research and trials. Arcus relies on third parties for clinical work and manufacturing, including an exclusive WuXi relationship for certain biologics. Gilead’s options and collaboration may affect Arcus’s development costs, control, and ability to form other partnerships. The filing also cites competitive, intellectual-property, cybersecurity, and financing risks.
Important facts for investors to verify
- Whether clinical enrollment, program timelines, and laboratory capacity have recovered from COVID-related disruption, especially the delayed discovery-stage program.
- How Arcus deploys the post-quarter $375 million from Gilead, its updated cash runway, and the effect of higher expected operating expenses.
- Which programs, if any, Gilead options into, and the resulting option fees, development-cost sharing, milestones, royalties, and Arcus opt-out or co-promotion rights.
- Progress and safety/efficacy data for the four clinical-stage products, and any material changes to WuXi supply or development milestones.
- Share-count and dilution effects from the June offering and Gilead investment, including reconciliation of reported outstanding-share figures and potential equity awards.