Arcus Biosciences, Inc. — Q2 2019 Form 10-Q
Business context and period. Clinical-stage biopharmaceutical company developing cancer immunotherapies. This filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. The company had no approved products or product-sales revenue.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Collaboration and license revenue | $1.75 million | $1.25 million | $3.50 million | $2.50 million |
| Research and development expense | $25.0 million | $13.7 million | $40.6 million | $25.4 million |
| General and administrative expense | $5.9 million | $3.5 million | $10.9 million | $6.4 million |
| Operating loss | $29.2 million | $15.9 million | $47.9 million | $29.2 million |
| Net loss | $28.1 million | $13.5 million | $45.8 million | $26.5 million |
| Basic and diluted net loss per share | $0.64 | $0.32 | $1.05 | $1.01 |
| Net cash used in operations | Not stated for quarter | Not stated for quarter | $36.6 million | $24.1 million |
Liquidity and capital. At June 30, cash, cash equivalents, and short-term investments totaled $224.4 million, down from $256.5 million at December 31, 2018; total investments including long-term investments were $259.7 million at year-end. The company reported total assets of $239.0 million, liabilities of $42.3 million, and stockholders’ equity of $196.6 million. No borrowings or financial debt are shown in the presented balance sheet. Management said available cash and investments should fund planned operations for at least 12 months after filing; elsewhere, it said funding could support AB928 and AB122 clinical development, including cohort expansions, into 2021, but not through regulatory approval. Additional capital will be needed.
Operating cash outflow was partly offset by $41.0 million of cash provided by investing activities, mainly net maturities and sales of investments. Financing provided $0.6 million; there was no IPO financing in 2019. No product gross margin is reported; collaboration revenue is the only reported revenue source.
Material changes and notable items
- Q2 net loss more than doubled year over year, while six-month net loss increased 73%. R&D expense rose 82% in Q2 and 60% for the first half; G&A expense rose 71% in both comparisons.
- R&D growth included a $7.5 million WuXi Biologics development milestone expense, higher clinical-trial costs, and increased staffing and lab-supply costs. The prior-year comparison included a $2.0 million Abmuno milestone expense; lower manufacturing costs partly offset increases.
- Effective January 1, 2019, Arcus adopted ASC 606 using the modified retrospective method. The adoption reduced opening accumulated deficit by $2.2 million and increased reported collaboration revenue by $0.2 million for Q2 and $0.4 million for the first half versus prior guidance. The revenue relates to the Taiho collaboration, not product sales.
- On April 30, Arcus entered a co-development collaboration with Strata Oncology for AB122 and issued 1,257,651 restricted shares with an initial measured fair value of $15.0 million. Shares vest subject to regulatory milestones; Arcus recorded no related compensation expense because vesting was not considered probable at June 30.
- A $7.5 million WuXi development milestone was reached and expensed in June, and paid in July. Deferred revenue at June 30 was $17.5 million in total, current and noncurrent.
Outlook, risks, and other disclosures
- Management expects R&D and G&A expenses to increase substantially as clinical programs, staffing, and public-company costs expand. The filing gives no quantified revenue or earnings guidance.
- Key risks include early-stage clinical and regulatory uncertainty; trial enrollment, safety, and efficacy; reliance on third-party manufacturers and CROs; and competition, particularly for anti-PD-1 candidate AB122. The company also disclosed dependence on WuXi Biologics for AB122/AB154 manufacturing and biologics CMC services.
- Future funding needs depend on trial scope, costs, milestones, and other factors. Equity financing could dilute holders; debt or collaboration arrangements could impose restrictions or require rights to be relinquished. Failure to raise funds could force program delays, reductions, or termination.
- Arcus reported no material legal proceedings, no material changes outside the ordinary course to contractual obligations, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Reconcile the filing’s reported common shares: the balance sheet lists 45,854,213 shares at June 30, while the stockholders’ equity roll-forward lists 43,934,108; the July 30 cover page reports 45,849,189.
- Assess cash runway against the filing’s different descriptions: at least 12 months after filing and development of AB928/AB122 into 2021, but not through regulatory approval.
- Track clinical progress, trial enrollment and safety, and the timing and cost of AB928, AB122, AB154, and AB680 programs.
- Monitor future milestone expenses and payments under WuXi, Abmuno, and Strata agreements, and potential Taiho option exercises and receipts.
- Review the effects of ASC 606 on recurring collaboration revenue and deferred revenue; reported revenue remains collaboration-based, with no product sales.