Arcus Biosciences, Inc. — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; filed May 2, 2019. Arcus is a clinical-stage cancer immunotherapy company with no product sales. Its revenue came from collaboration and licensing arrangements.
Financial performance and position
- Revenue: Collaboration and license revenue was $1.75 million, versus $1.25 million in Q1 2018. No product-sales revenue was reported.
- Expenses and earnings: Research and development expense was $15.55 million and general and administrative expense was $4.97 million; total operating expenses were $20.52 million. Operating loss was $18.77 million and net loss was $17.67 million, or $0.41 per share, compared with a $12.95 million net loss, or $1.37 per share, in Q1 2018. The per-share comparison is affected by the substantially larger weighted-average share count after the 2018 IPO.
- Cash flow: Operating cash use was $16.84 million. Investing activities provided $14.28 million, primarily from net maturities of investments; financing activities used $5,000. Cash, cash equivalents and restricted cash declined $2.57 million during the quarter.
- Liquidity: Cash and investments totaled $243.1 million, including $68.5 million cash and cash equivalents, $173.4 million short-term investments and $1.2 million long-term investments. Total assets were $258.5 million, total liabilities $37.0 million, and stockholders’ equity $221.6 million. The filing reports no borrowings or funded debt.
- Margins: The filing does not present a meaningful gross margin; revenue is collaboration-based and the company is still in clinical development.
Changes versus Q1 2018
- Revenue rose 40%, but operating expenses rose 41%; R&D increased 33% and G&A increased 70%. Net loss widened 36%.
- R&D expense growth primarily reflected higher clinical-trial costs, employee compensation, stock-based compensation and clinical supplies, partly offset by lower manufacturing costs.
- G&A growth reflected higher headcount and stock-based compensation, legal and accounting fees, and facilities costs. Interest and other income rose to $1.53 million from $0.60 million, largely due to higher investment balances and yields.
- Comparability of collaboration revenue is affected by Arcus’s January 1, 2019 adoption of ASC 606. Adoption increased opening accumulated deficit by $2.21 million and Q1 2019 revenue by $0.19 million versus the former accounting method; Q1 2018 remains reported under ASC 605.
Outlook, developments and risks
- Management expects initial dose-escalation data in mid-2019 for AB928 combinations with chemotherapy and AB122. The company also reported clinical trials underway for AB122 and AB154, and a healthy-volunteer trial for AB680.
- The filing says existing cash and investments were expected to fund planned operations for at least 12 months after filing. It more specifically estimates funding clinical development of AB928 and AB122, including cohort-expansion studies, into 2021, but not through regulatory approval. Further capital will be required; financing may dilute shareholders or constrain operations.
- Under the Taiho agreement, up to $5 million of anniversary payments remained expected in 2019. Taiho may also exercise program options; no option was exercised in Q1 2019, and no clinical or regulatory milestones, sales milestones or royalties had been recognized by quarter-end.
- On April 30, 2019, after quarter-end, Arcus entered a co-development agreement with Strata Oncology for AB122. Development costs are to be shared; Strata may receive milestone payments and royalties, and was issued 1,257,651 restricted shares subject to regulatory-milestone vesting.
- Key risks include early-stage clinical uncertainty, clinical-trial enrollment and safety, competition in immuno-oncology, reliance on third-party research and manufacturing, and substantial future funding needs. Arcus highlighted WuXi Biologics as its exclusive manufacturer of AB122 and AB154 under the relevant arrangements, and disclosed potential patent issues affecting AB122, including Bristol-Myers Squibb patents.
- No material legal proceedings were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether clinical data and trial progress support the expected mid-2019 readouts and the stated development timelines.
- Whether cash burn, trial costs and other commitments remain consistent with the stated runway into 2021, and what financing may be required.
- Whether the remaining Taiho payment is received and whether Taiho exercises further options or milestones become probable.
- The economic and dilution effects of the Strata agreement and its milestone-linked share vesting.
- Exposure to AB122-related intellectual-property disputes and dependence on WuXi Biologics for manufacturing.