Business context and reporting period
Scholar Rock Holding Corporation (Nasdaq: SRRK) is a clinical-stage biopharmaceutical company developing growth-factor inhibitors. This unaudited Form 10-Q covers the three months ended March 31, 2019. Its lead candidate, SRK-015, is in development for spinal muscular atrophy (SMA); SRK-181 is being developed for cancers resistant to checkpoint blockade therapies. The company had no commercial product sales.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.1 | $0 |
| Research and development expense | $10.7 | $6.7 |
| General and administrative expense | $4.1 | $2.3 |
| Total operating expenses | $14.8 | $9.0 |
| Operating loss | $(11.7) | $(9.0) |
| Net loss | $(10.8) | $(8.9) |
| Basic and diluted net loss per share | $(0.42) | $(3.18) |
| Net cash used in operating activities | $(15.5) | $(9.9) |
Q1 2019 revenue was collaboration revenue from Gilead, not product sales. Net interest income was $0.9 million, compared with $0.1 million a year earlier. Profitability and product gross margins are not meaningful for this development-stage business.
At March 31, 2019, cash and cash equivalents were $67.0 million and marketable securities were $92.7 million, totaling $159.7 million, versus $175.6 million at December 31, 2018. Current assets were $162.0 million and current liabilities $34.1 million. Total liabilities were $73.5 million, including $0.3 million of loan payable and $59.8 million of deferred revenue. Accumulated deficit was $117.6 million.
Cash, cash equivalents and restricted cash decreased $48.1 million during the quarter. Investing cash outflow was $32.4 million, primarily reflecting purchases and maturities of marketable securities; it should not be read as operating burn alone. The company reported a $5.3 million operating lease right-of-use asset and a $6.0 million operating lease liability at quarter-end.
Changes, outlook, risks and unusual items
- Revenue began in 2019 under the December 2018 Gilead collaboration. R&D expense rose 60% year over year, primarily due to SRK-181 and other early programs, plus increased staffing and overhead. G&A expense rose 76%, mainly due to compensation, stock-based compensation and public-company costs.
- The Gilead agreement covers research across three TGFβ programs. Gilead paid $50 million upfront and made a $30 million equity investment; the company recognized $3.1 million of collaboration revenue in Q1 and reported $59.8 million allocated to unsatisfied performance obligations. Potential future consideration includes up to $1.425 billion in aggregate option, development, regulatory and commercial milestones across the programs, a $25 million proof-of-concept milestone, and tiered royalties. These are contingent, not assured proceeds.
- Management expected expenses to rise as SRK-015 advances through Phase 2, SRK-181 development continues, and Gilead research and company infrastructure expand. It said available cash and marketable securities were expected to fund operations into 2021, while cautioning that estimates depend on assumptions and additional capital may be needed. The financial-statement note separately states that existing resources were expected to fund current operations for at least one year after issuance.
- SRK-015 had positive interim Phase 1 results reported in early 2019; Phase 2 patient dosing began in April 2019, after quarter-end. SRK-181 was declared a product candidate in March, with a Phase 1 trial planned for mid-2020. These are development plans, not assured outcomes.
- Principal risks include clinical safety, efficacy, enrollment and timing; manufacturing and reliance on third parties; regulatory approval; intellectual-property protection; and the need for further financing. Gilead may not exercise its options, meet milestones, or continue the collaboration. The company reported no material legal proceedings, and management concluded disclosure controls were effective as of March 31, 2019.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing lease assets and liabilities; it reported no material effect on operations or cash flows. Stock-based compensation was $1.6 million, versus $0.5 million in Q1 2018.
Important facts for investors to verify
- Whether SRK-015 Phase 2 progresses as planned and produces meaningful safety and efficacy results.
- Whether SRK-181 reaches its planned clinical start and whether Gilead exercises options or triggers contingent payments.
- Cash consumption, deferred-revenue recognition and whether the stated runway into 2021 remains supported by updated forecasts.
- Potential additional financing needs, dilution, and the costs of expanding clinical, manufacturing and public-company operations.
- Trial enrollment, manufacturing capacity and supply risks, especially reliance on third-party manufacturers.