Arbutus Biopharma Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparison is with the same 2015 periods. Amounts are in U.S. dollars. Arbutus is a clinical-stage biopharmaceutical company focused on developing therapies for chronic hepatitis B (HBV).
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.309 million | $3.440 million | $0.912 million | $8.122 million |
| Operating expenses | $195.557 million | $17.860 million | $216.137 million | $40.548 million |
| Loss from operations | $195.248 million | $14.420 million | $215.225 million | $32.426 million |
| Net loss | $130.000 million | $14.886 million | $145.874 million | $26.875 million |
| Basic and diluted loss per share | $2.47 | $0.27 | $2.80 | $0.64 |
| Cash used in operating activities | — | — | $28.351 million | $35.641 million |
- Revenue declined sharply after the DoD’s Ebola contract ended and Monsanto’s prior licensing and services revenue ceased. Q2 2016 revenue primarily comprised Dicerna fees and Marqibo royalties.
- Q2 included a $156.324 million non-cash impairment charge: $109.9 million related to immune modulators and $46.4 million to cccDNA sterilizers. A $64.864 million non-cash income tax benefit reduced the reported net loss; it does not represent operating cash inflow.
- Research and development expense rose to $15.215 million in Q2 and $28.359 million for the first half, reflecting expanded HBV research and ARB-1467 Phase II activity. General and administrative expense rose to $23.766 million and $30.985 million, respectively. Much of the increase included non-cash share-based compensation associated with the merger; Q2 G&A included $14.0 million of incremental expense from accelerated expiration of repurchase rights.
- Margins are not meaningful in this development-stage business given minimal revenue and substantial research and impairment costs.
- At June 30, cash and cash equivalents were $42.970 million and short-term investments were $122.340 million, totaling about $165.3 million. The comparable cash and investment balance at December 31, 2015 was about $191.4 million. Total assets were $530.9 million, total liabilities $99.5 million, and stockholders’ equity $431.3 million.
- The balance sheet reports no borrowings or debt. Investing activities used $98.975 million in the first half, principally reflecting purchases of short-term investments; financing activities provided $0.561 million.
Material changes versus prior periods
- First-half revenue fell 89% year over year, largely because DoD and Monsanto revenues recorded in 2015 did not recur.
- First-half operating cash use improved to $28.4 million from $35.6 million, while reported net loss increased substantially, chiefly due to the impairment charge and higher share-based compensation.
- Effective January 1, 2016, the company changed its functional currency from the Canadian dollar to the U.S. dollar. It reported $3.0 million in foreign-exchange gains for the first half and estimated that a 1% adverse Canadian-dollar exchange-rate move would cause a $0.6 million loss.
- Shareholders approved a 2016 incentive plan reserving 5 million shares for awards. The company had 54,796,741 common shares outstanding at July 31, 2016.
Outlook, commentary and risks
- Management stated that available cash and investments were sufficient for at least the next 12 months, while noting that substantial additional funding would be needed to advance the pipeline. Future financing may not be available on acceptable terms; insufficient funding could force program delays, reductions, or relinquishment of rights.
- Management expected ARB-1467 single-dose HBsAg-reduction data in Q3 2016 and multidose data in Q4 2016, and planned H2 2016 IND or equivalent filings for ARB-1740 and AB-423. The company said it would not file an IND for its cccDNA formation inhibitor in H2 2016 while it further explored the program’s biology.
- Arbutus discontinued ARB-1598 after research and analysis and, in July 2016, gave notice terminating its NeuroVive license for OCB-030. These program decisions and the cccDNA delay were associated with the impairment testing. Goodwill was not impaired, but management said a roughly 20% reduction in estimated reporting-unit fair value could trigger impairment.
- July 2016 topline results for the completed TKM-PLK1 study included stable disease in 51% of subjects by RECIST and partial responses in 22% by Choi criteria. Arbutus planned to explore partnership opportunities for further HCC study.
- The Blumberg research agreement was amended to increase annual funding from $1.0 million to $1.1 million and extend its initial term through October 29, 2018, with two one-year extension options.
- Key risks include clinical and regulatory uncertainty, dependence on future financing and collaborators, foreign-exchange exposure, intellectual-property disputes, and the sensitivity of impairment valuations to development assumptions.
- UBC arbitration remains unresolved. UBC claims $3.5 million in alleged unpaid royalties based on public information plus an unspecified amount, interest, and costs. Arbutus disputes the claims and recorded no loss estimate because the likelihood and amount were uncertain.
- The company reported no material changes to its previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2016.
Important facts for investors to verify
- Whether ARB-1467 data and the planned ARB-1740 and AB-423 filings were delivered on the stated timelines, and what the results imply for clinical development.
- Cash burn and investment balances in subsequent filings, including whether the stated at-least-12-month runway remains achievable without new financing.
- The basis and sensitivity of the $156.3 million impairment and the remaining intangible-asset and goodwill carrying values.
- Progress and potential exposure in the UBC arbitration, and any material change in the contingent consideration or other milestone obligations.
- Whether partner-generated milestones, royalties, and collaborations replace revenue lost from the DoD and Monsanto arrangements.