Arcus Biosciences, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Arcus is a clinical-stage biopharmaceutical company developing cancer immunotherapies. It had no product-sales revenue and was not profitable. This was its first quarter as a public company following its March 2018 IPO.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Collaboration and license revenue | $1.25 million | None |
| Research and development expense | $11.65 million | $5.80 million |
| General and administrative expense | $2.93 million | $1.50 million |
| Operating loss | $13.33 million | $7.30 million |
| Net loss | $12.95 million | $7.20 million |
| Basic and diluted net loss per share | $1.37 | $4.96 |
| Net cash used in operating activities | $13.25 million | $9.60 million |
Revenue was entirely from the Taiho collaboration and is recognized over the estimated performance period; it is not product-sales revenue. The filing does not provide a meaningful operating margin for this pre-commercial company.
At March 31, 2018, cash and cash equivalents were $198.1 million, short-term investments $82.1 million, and long-term investments $10.6 million, totaling $290.8 million in cash and investments. Current liabilities were $14.3 million; total liabilities were $38.8 million. No debt is reported. Deferred revenue totaled approximately $22.3 million, including $5.0 million current. The company reported $266.6 million of stockholders’ equity, versus a $72.3 million deficit at year-end 2017.
Financing cash flow was $129.4 million, primarily from the IPO and option exercises. The IPO issued 9.2 million shares at $15 per share. The filing reports approximately $124.7 million of IPO net proceeds in its narrative and $126.3 million of IPO proceeds, net of issuance costs, in the cash flow statement; it also notes accrued IPO costs still payable after quarter-end.
Changes versus the prior comparable period
- Revenue increased from zero, reflecting the Taiho agreement; $1.25 million was recognized in Q1 2018.
- Net loss increased 80% to $12.95 million. R&D expense rose 101%, mainly due to manufacturing costs, clinical operations for AB928 and AB122, higher staffing, and preclinical work.
- G&A expense rose 96%, reflecting higher legal and accounting fees, headcount, stock compensation, and facilities costs.
- Operating cash use increased from $9.60 million to $13.25 million.
- The IPO substantially strengthened liquidity and converted all outstanding convertible preferred stock into common stock. A 1-for-3.96 reverse stock split was effected in March 2018; share and per-share data are retrospectively adjusted.
Outlook, commentary, and risks
- Management said available cash, cash equivalents, and short-term investments should fund planned operations for at least 12 months. The risk-factor discussion estimates funding for clinical development of AB928 and AB122, including cohort expansion studies, into 2020, but not through regulatory approval. Additional capital will be needed, and timing and availability are uncertain.
- Management expects R&D spending to increase substantially as clinical trials expand and additional programs advance. G&A is also expected to rise with hiring, facilities, and public-company costs.
- The company planned to advance two additional candidates into clinical trials by year-end 2018 and expected initial data from its first intra-portfolio combination studies in the first half of 2019. These are forward-looking plans, not assured outcomes.
- Taiho’s agreement provides $35 million of non-refundable, non-creditable payments in total: $25 million received in 2017, with $5 million due in each of 2018 and 2019. Taiho had exercised no exclusive options by March 31, 2018. Potential milestones, sales-based payments, and royalties are contingent.
- Key risks include early-stage clinical uncertainty, trial enrollment and regulatory delays, reliance on third-party manufacturers and CROs, competition, intellectual-property disputes, and the need for substantial further financing. Arcus specifically noted potential exposure to BMS anti-PD-1 patents affecting AB122 and reliance on WuXi Biologics for AB122 manufacturing and biologics CMC development.
- The company reported no material legal proceedings involving Arcus, no material changes to contractual obligations outside the ordinary course, 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 IPO proceeds figures: $124.7 million described as net proceeds versus $126.3 million in financing cash flow, including the timing of accrued offering costs.
- Track quarterly operating cash burn, investment balances, and the assumptions underlying the stated runway, particularly the estimate that funding extends AB928 and AB122 development into 2020 but not regulatory approval.
- Monitor clinical progress and data timing for AB928 and AB122, planned trial starts for additional candidates, and whether combination data arrive as anticipated.
- Confirm receipt and revenue treatment of Taiho’s 2018 and 2019 payments, and monitor any option exercises or contingent milestones.
- Assess manufacturing dependence and any developments involving WuXi Biologics or the BMS patents relevant to AB122.