Arcus Biosciences, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Arcus is a clinical-stage biopharmaceutical company with six investigational products in clinical development and no product sales. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $9.5m | $64.5m | $28.4m | $68.0m |
| Research and development expense | $71.3m | $51.8m | $206.4m | $110.6m |
| General and administrative expense | $16.3m | $11.2m | $49.0m | $29.6m |
| Net income (loss) | $(78.0)m | $1.8m | $(226.5)m | $(71.0)m |
| Net income (loss) per share, diluted | $(1.11) | $0.03 | $(3.28) | $(1.37) |
- Revenue mix: Q3 2021 revenue was collaboration revenue; there was no license revenue. Q3 2020 included $55.1m of license revenue for zimberelimab. Nine-month 2021 collaboration revenue was $28.4m, versus $12.9m in the prior-year period, but the comparison was more than offset by the prior-year $55.1m license recognition.
- Margins: The filing does not present a meaningful product gross margin; Arcus has no product sales and its revenue is collaboration and license revenue. Operating loss was $78.1m in Q3 2021 and $227.0m for the nine months.
- Cash and investments: $743.4m at September 30, 2021, comprising $179.4m cash and cash equivalents, $345.2m short-term investments and $218.7m long-term investments. Total was $735.1m at December 31, 2020.
- Cash flow: Operating activities used $194.1m in the first nine months of 2021, versus $161.1m provided in 2020. Investing activities used $22.8m; financing provided $225.7m, including $220.4m gross proceeds from Gilead’s February 2021 stock purchase. Cash, cash equivalents and restricted cash increased $8.8m to $182.4m.
- Debt and other obligations: The filing does not report borrowings or financial debt. Total liabilities were $296.7m, including $169.0m of current and noncurrent deferred revenue and $48.9m of noncurrent operating lease liabilities. The company reported $3.0m of restricted cash securing lease letters of credit.
- Equity: Stockholders’ equity was $542.6m, with an accumulated deficit of $554.7m. Common shares outstanding were approximately 70.2m at September 30, 2021.
Material changes versus comparable periods
- Q3 revenue fell 85% year over year, primarily because the prior-year quarter included the $55.1m zimberelimab license revenue. Nine-month revenue declined 58% for the same reason.
- Q3 R&D expense rose 38% and nine-month R&D expense rose 87%, reflecting expanded clinical activity, higher staffing and stock-based compensation, manufacturing, and facility costs. Q3 G&A expense increased 46%; nine-month G&A rose 65%, primarily due to staffing, stock compensation and public-company support costs.
- Net loss widened substantially, particularly against Q3 2020, when the license revenue resulted in reported net income. Nine-month operating cash flow shifted from positive to negative, largely reflecting increased development spending and the absence of the prior-year license payment.
- Arcus raised $220.4m gross from Gilead in February 2021 through the sale of 5.65m shares at $39.00 per share. Gilead held approximately 19.7% of Arcus at September 30, 2021 and retained rights to purchase additional shares, subject to the agreement’s terms.
Outlook, management commentary and risks
- Management expects R&D and G&A spending to increase as clinical programs advance, later-stage trials expand, and the company grows its discovery, manufacturing and operating capabilities. The filing provides no specific revenue or earnings guidance.
- The MD&A states existing cash, cash equivalents and investments are expected to fund planned operations at least through 2023. However, the liquidity discussion in the notes says funds are sufficient for at least 12 months following the filing date. These statements differ and merit clarification.
- Clinical progress depends in part on Gilead’s program options, future option and milestone payments, and collaboration terms. Gilead’s options cover current and future programs during the 10-year collaboration term; no clinical or regulatory milestones had been achieved under the Gilead agreement as of September 30, 2021.
- COVID-19 could affect trial enrollment, retention, site operations and data quality; global shipping delays had affected receipt of materials. Arcus reported that contract manufacturers were operating near normal levels and that it believed supply was sufficient for ongoing studies, while noting future impacts remained uncertain.
- Manufacturing and development rely on third parties, including WuXi Biologics for key biologics. The filing highlights risks from supply interruption, manufacturing compliance and the ability to scale production. Arcus also faces clinical, regulatory, competitive, intellectual-property and financing risks; it cited anti-PD-1 patent litigation risk involving BMS patents expiring in 2023 and 2024.
- In April 2021, Arcus amended its Hayward leases, extending existing terms through at least 2031 and adding space. The filing reports $67.7m of undiscounted future minimum payments for commenced leases, while noting that approximately $90.3m for the Brisbane lease and $5.3m for additional Hayward space had not yet commenced and were excluded from that schedule.
- Unusual item: In September 2021, Arcus and Strata agreed to cancel all 1.26m restricted shares issued under their collaboration after concluding the biomarker indications were unlikely to succeed given the competitive landscape.
- Subsequent event: In Q4 2021, BVF Partners agreed to provide up to $15m for an inflammatory-disease discovery and development program; Arcus received $5m. The arrangement includes potential milestone payments and royalties, and Gilead has an option to the program.
- Arcus reported no material legal proceedings, no material changes in internal control during the quarter, and effective disclosure controls at the reasonable-assurance level.
Most important facts for investors to verify
- Reconcile the stated cash runway through 2023 with the note’s statement that liquidity covers at least 12 months after filing.
- Track quarterly operating cash use and R&D spending against clinical-trial progress and the company’s expected spending increases.
- Monitor Gilead option decisions, collaboration cost-sharing, potential future equity purchases and the resulting ownership or dilution effects.
- Assess trial enrollment, efficacy and safety data, especially given COVID-related disruption, competition and reliance on third-party manufacturing and trial partners.
- Confirm the financial and operating implications of the uncommenced Brisbane and Hayward leases, and the terms and obligations of the BVF program announced after quarter-end.