Arcus Biosciences, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Arcus is a clinical-stage biopharmaceutical company with no product sales. Its most advanced anti-TIGIT antibody is in four Phase 3 studies. The company reports one operating segment.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $25 | $18 | +39% |
| Research and development expense, net of partner recoveries | $81 | $61 | +33% |
| General and administrative expense | $30 | $24 | +25% |
| Total operating expenses | $111 | $85 | +31% |
| Operating loss | $(86) | $(67) | Loss increased 28% |
| Net loss | $(80) | $(68) | Loss increased 18% |
| Net loss per share, basic and diluted | $(1.09) | $(0.96) | |
| Operating cash flow | $(98) | $654 |
Revenue came from collaboration and license arrangements, not product sales. Gilead accounted for all Q1 2023 revenue, compared with 89% in Q1 2022. The operating loss was approximately 3.4 times revenue in Q1 2023; gross margin is not presented as a meaningful standalone measure for this development-stage business.
Research and development costs rose primarily because clinical and development activity expanded, including higher net clinical, manufacturing and employee costs. The increase was partly offset by $42 million of collaboration reimbursements in Q1 2023, versus $31 million a year earlier. Interest and other income was $9 million, mainly reflecting a larger investment portfolio and higher yields; the company also recorded $1 million of effective interest expense on its future-royalty liability.
At March 31, 2023, cash and cash equivalents were $238 million and marketable securities were $806 million, totaling $1.044 billion, down from $1.138 billion at December 31, 2022. Total current assets were $1.015 billion and current liabilities were $179 million. The filing reports no conventional borrowings; it reports an $18 million fair-value liability related to the sale of future royalties. Deferred revenue was $427 million under the Gilead collaboration, including $97 million current and $330 million noncurrent. Stockholders’ equity was $600 million and accumulated deficit was $622 million. Common shares outstanding were 73.1 million at quarter-end; 73,105,580 were reported outstanding as of May 3, 2023.
Operating cash use was $98 million. Investing activities provided $129 million, mainly as marketable-security maturities exceeded purchases; financing activities provided $1 million. The prior-year operating cash inflow of $654 million included Gilead’s $725 million payment received in January 2022, so the year-over-year cash-flow comparison is heavily affected by that nonrecurring receipt.
Material changes and business developments
- License and development-services revenue increased to $17 million from $8 million, mainly due to etrumadenant and quemliclustat; other collaboration revenue declined to $8 million from $10 million.
- Management said planned operations are funded into 2026 based on the existing business plan. The financial-statement note separately says available funds are sufficient for at least twelve months following filing. Both statements are management assessments, not guarantees.
- Arcus reported 13 ongoing clinical studies, including four Phase 3 studies, across five clinical programs: TIGIT, PD-1, adenosine A2a/A2b receptors, CD73 and HIF-2α.
- In Q1, Arcus enrolled the third dose-escalation cohort (100 mg daily) in the Phase 1/1b ARC-20 AB521 study. Dose expansion in clear-cell renal cell carcinoma and a Phase 2 combination study were expected to begin in Q3 2023.
- Arcus and Gilead reviewed data from 90 patients in the randomized portion of ARC-8. Early overall-survival trends for quemliclustat plus chemotherapy were described as encouraging versus historical controls. Management said it did not believe zimberelimab contributed to the observed performance; mature overall-survival data were expected in late 2023 or early 2024 to inform whether to pursue Phase 3.
- Arcus expected to provide an updated ARC-7 analysis at the June 2023 ASCO Annual Meeting.
Outlook, risks and notable items
Management expects R&D expense to increase substantially over the next few years as it advances joint programs with Gilead, expands late-stage trials and manufacturing, and brings new programs into clinical development. G&A expense is also expected to rise to support expanded operations. Arcus cautions that development costs and timing are difficult to predict and that additional funding could be needed sooner than planned; future financing could dilute shareholders or impose restrictions.
- Clinical and regulatory uncertainty: All products remain investigational. Trial results, including preliminary or interim data, may change; trials can fail, be delayed, or require additional studies. Combination programs face added challenges in establishing the contribution and safety of each agent.
- Partner dependence: Gilead is Arcus’s key collaborator and Q1 2023 revenue source. Future funding, development responsibilities, option payments and commercial returns depend in part on the collaboration’s progress and terms. Gilead held approximately 18.9% of Arcus shares and had rights to purchase additional shares, subject to the agreement.
- Manufacturing and supply: Arcus relies on third parties, including WuXi Biologics, for manufacturing and has highlighted single-source, supply-chain, regulatory and geopolitical risks.
- Competition and intellectual property: The filing identifies competing oncology programs and potential patent disputes, including patents relating to anti-PD-1 and anti-TIGIT combinations that could affect commercialization timing or require a license if relevant claims are upheld.
- Future-royalty obligation: The BVF arrangement includes contingent clinical and regulatory milestone payments of up to $73 million if Arcus develops the program alone, or up to $160 million if Gilead opts in, as well as royalties on potential sales. The reported liability was $18 million at March 31, 2023.
- Other disclosures: Arcus reported no material legal proceedings, no material changes in contractual obligations outside the ordinary course, and effective disclosure controls; no material changes to internal control over financial reporting were reported for the quarter.
Most important facts for investors to verify
- Whether the clinical milestones and expected readouts occurred, particularly ARC-7, ARC-20, ARC-8, and the four Phase 3 domvanalimab studies.
- Whether the stated cash runway into 2026 remains supportable as trial, manufacturing and infrastructure spending increases, and how much is expected to be reimbursed by partners.
- Gilead collaboration economics and execution: cost-sharing, options, potential payments, program responsibilities, and the concentration of revenue and development funding.
- Whether manufacturing capacity and supply continuity, especially for single-source suppliers, can support the expanded clinical pipeline.
- Potential effects of competing therapies, regulatory requirements for combination products, patent challenges and contingent BVF payments on program economics and commercialization prospects.