Arbutus Biopharma Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results are presented in U.S. dollars; financial statement amounts below are in millions unless noted. Arbutus is a clinical-stage biopharmaceutical company focused on developing a potentially curative combination treatment for chronic hepatitis B (HBV).
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1.49 | $0.68 |
| Operating expenses | $14.64 | $19.88 |
| Operating loss | $(13.15) | $(19.20) |
| Net loss | $(13.86) | $(23.25) |
| Net loss attributable to common shares | $(16.84) | $(25.97) |
| Net cash used in operating activities | $(15.45) | $(16.58) |
- Revenue increased about 120%, primarily reflecting higher ONPATTRO-related royalties as Alnylam sales grew. Revenue included $0.66 million of non-cash royalty revenue, $0.75 million from Acuitas and $0.08 million of other milestone and royalty payments.
- Research and development expense was $10.42 million, down $4.30 million year over year, largely following the discontinuation of AB-506 and lower prior-period AB-729 preparation costs. General and administrative expense declined $0.86 million to $3.55 million. The filing does not report a gross margin; as a development-stage company, it reported operating and net losses.
- Cash and cash equivalents were $26.42 million; marketable securities totaled $61.69 million, for combined cash, cash equivalents and investments of $88.1 million. The company said these resources were expected to fund operations into the middle of 2021.
- Current assets were $88.33 million and current liabilities $4.03 million. Total liabilities were $29.36 million, including $19.38 million related to the sale of future royalties, $3.07 million of contingent consideration and $3.30 million of lease liabilities. The company reported no outstanding debt.
- Financing activities provided $12.48 million, principally from issuing 4.15 million common shares under its Jefferies sale agreement. Approximately $42.7 million remained available under that agreement at quarter-end. Common shares outstanding rose from 64.78 million at year-end 2019 to 68.96 million at March 31, 2020.
Material changes and notable items
- Net loss improved year over year, reflecting lower operating expenses and the absence of the prior-year $4.65 million equity-method loss on Genevant. Q1 2020 also included $1.04 million of interest expense, primarily non-cash amortization of the OMERS royalty-sale liability. Preferred-share dividend accretion of $2.98 million increased the loss attributable to common shares.
- Operating cash use decreased by $1.13 million year over year. Cash and cash equivalents fell $5.38 million during Q1 2020; investing activities used $2.40 million, mainly for purchases of marketable securities.
- Arbutus recorded $0.66 million of non-cash ONPATTRO royalty revenue while the related OMERS liability increased to $19.38 million after $1.04 million of non-cash interest expense. OMERS retains the sold royalty entitlement until it receives $30 million; the entitlement then reverts to Arbutus. The reported effective annual interest rate was approximately 22%.
- The company’s 40% Genevant investment had a carrying value of zero at March 31, 2020; Genevant’s convertible debt could significantly dilute Arbutus’s ownership if converted.
Pipeline, outlook and risks
- AB-729: Preliminary Phase 1a/1b results reported in March showed HBsAg declines in single-dose chronic HBV cohorts, with no serious adverse events reported. A Grade 3 ALT/AST flare occurred in one subject given 180 mg; two healthy volunteers in the 360 mg cohort had asymptomatic, reversible Grade 3 ALT elevations. Further 60 mg Week 12 results were expected in Q2 2020; 90 mg single-dose and 60 mg multi-dose results were expected in the second half of 2020.
- AB-836: The next-generation oral capsid inhibitor was in IND-enabling studies. Arbutus anticipated completing these studies by year-end 2020. These are management expectations, not guaranteed outcomes.
- Other programs: Arbutus discontinued AB-452 in February 2020 after preclinical evaluation, while continuing lead optimization of next-generation oral HBV RNA destabilizers and oral PD-L1 inhibitors. AB-506 had been discontinued in October 2019.
- COVID-19: Management said the pandemic had not yet required changes to 2020 objectives, but warned that trial enrollment and monitoring, clinical-site operations, supply chains and access to capital could be disrupted. The company also began small-molecule COVID-19 discovery work targeting viral polymerase and protease, and joined a COVID R&D consortium.
- Funding and development risks: Arbutus expects substantial additional funds will be needed to advance its pipeline and may seek equity or debt financing, collaborations, licensing, royalty monetization or grants. If funding is unavailable on acceptable terms, it may delay, reduce or eliminate programs or relinquish rights. Clinical and regulatory outcomes, financing access and the timing and amount of royalties are uncertain.
- Legal contingency: Arbutus paid a $5.9 million UBC arbitration award in 2019 and had accrued $0.4 million for a potential award of costs and attorneys’ fees as of March 31, 2020. A final amount was not specified in the filing text provided.
- Preferred shares: Roivant’s 1.164 million Series A preferred shares accrue an 8.75% annual coupon and are scheduled for mandatory conversion in October 2021 at $7.13 per share, subject to limited exceptions. The filing estimated conversion into approximately 23 million common shares.
Important facts for investors to verify
- Whether AB-729 follow-up and cohort results were delivered on the stated schedule, and how safety and efficacy developed.
- Whether COVID-19 affected trial enrollment, monitoring, supply chains, development timelines or the company’s projected mid-2021 cash runway.
- Cash burn, remaining Jefferies sale-agreement capacity, and any subsequent equity financing or changes in share count.
- ONPATTRO sales and royalty flows, the pace of OMERS collections and liability amortization, and the timing and terms of any royalty reversion.
- Progress, costs and regulatory timelines for AB-836 and next-generation HBV programs, including consequences of discontinued programs.
- The status and final cost of the UBC arbitration fees and costs, and potential dilution from Genevant convertible debt and the preferred-share conversion.