Arcus Biosciences, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 5, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Arcus is a clinical-stage biopharmaceutical company developing cancer immunotherapies. It reported four clinical-stage candidates: AB928, AB122, AB154 and AB680. It had no product-sales revenue; reported collaboration and license revenue was principally from its Taiho agreement.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Collaboration and license revenue | $1.75 | $4.29 | $5.25 | $6.79 |
| Research and development expense | $17.24 | $12.86 | $57.80 | $38.21 |
| General and administrative expense | $7.76 | $3.58 | $18.64 | $9.96 |
| Operating loss | $(23.25) | $(12.15) | $(71.18) | $(41.38) |
| Net loss | $(22.35) | $(10.81) | $(68.11) | $(37.30) |
| Basic and diluted loss per share | $(0.51) | $(0.25) | $(1.56) | $(1.16) |
| Operating cash flow | Not separately provided | Not separately provided | $(63.99) | $(35.89) |
No gross margin is reported; the filing does not provide a clear basis for a meaningful margin comparison. Interest and other income was $1.25 million in Q3 and $4.27 million for nine months. Q3 share of equity-method investee losses was $0.36 million; nine-month share was $1.20 million.
At September 30, cash and cash equivalents were $78.99 million, short-term investments $112.00 million and long-term investments $5.99 million, totaling approximately $197.0 million in cash and investments. Current assets were $200.49 million and current liabilities $21.06 million. Total liabilities were $39.73 million; no borrowings or debt are reported in the presented balance sheet. Accumulated deficit was $188.73 million.
Nine-month investing cash flow was positive $71.32 million, primarily reflecting net investment maturities and purchases; financing cash flow was positive $0.60 million. Cash, cash equivalents and restricted cash increased $7.93 million to $79.20 million.
Material changes versus prior periods
- Q3 revenue fell 59% year over year, primarily because the prior-year quarter included $3.0 million recognized on Taiho’s option exercise. Nine-month revenue declined 23% for the same principal reason, partly offset by ASC 606 adoption.
- Q3 R&D expense rose 34%; nine-month R&D rose 51%, reflecting higher clinical-trial costs, additional personnel and a $7.5 million WuXi Biologics development milestone expensed in 2019.
- Q3 G&A expense rose 117%; nine-month G&A rose 87%, driven by staffing, stock compensation, facilities and public-company costs.
- Net loss increased 107% in Q3 and 83% for the nine-month period. Nine-month operating cash use increased to $63.99 million from $35.89 million.
- ASC 606 adoption increased reported 2019 revenue by $0.13 million for Q3 and $0.51 million for nine months versus the prior accounting method; it also reduced opening accumulated deficit by $2.21 million. Prior-year comparisons remain under ASC 605.
Outlook, risks and notable items
- Management said available cash and investments were expected to fund planned operations for at least 12 months after filing. The risk factors more specifically state that current resources were expected to support AB928 and AB122 clinical development, including cohort expansions, into 2021, but not through regulatory approval. Arcus expects to need substantial additional capital.
- Management expects R&D and G&A expenses to rise as trials expand, programs advance and public-company and staffing costs grow. No numerical revenue or earnings guidance was provided.
- Key risks include clinical efficacy and safety uncertainty, trial enrollment and timing, dependence on third-party manufacturers and CROs, competition, intellectual-property claims, and the possibility of financing on dilutive or unfavorable terms. The filing identifies BMS patents concerning anti-PD-1 antibodies, which expire in 2023 and 2024, as a potential issue for AB122 if upheld and relevant to commercialization.
- Taiho’s remaining $5.0 million anniversary payment was received in October 2019, after quarter-end. No Taiho options were exercised in the first nine months of 2019; no clinical/regulatory milestones, sales milestones or royalties had been recognized by September 30.
- Under the Strata collaboration, Arcus issued 1,257,651 restricted shares initially measured at $15.0 million. At quarter-end, the company considered none probable of vesting and recorded no related compensation expense.
- Arcus reported no material legal proceedings, no material changes to contractual obligations outside the ordinary course, and effective disclosure controls. It also disclosed a prior intrusion into its computer systems, which its investigation found had no material operational effect.
Important facts for investors to verify
- Reconcile the filing’s September 30 common-share counts: the balance sheet reports 45,842,966 shares issued and outstanding, while the stockholders’ equity statement reports 44,035,557; the filing also reports 45,858,976 shares outstanding as of October 30.
- Assess the assumptions behind the stated cash runway, planned clinical spending and timing and amount of future financing needs.
- Track clinical progress, safety, enrollment and data maturity for the four clinical-stage candidates, particularly AB928 and AB122 combination programs.
- Monitor future milestone payments and expenses under WuXi, Abmuno and Strata agreements, and any Taiho option exercises or milestone receipts.
- Evaluate the effect of ASC 606 on collaboration revenue and deferred revenue, and compare results with awareness that 2018 was reported under ASC 605.