Arbutus Biopharma Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Arbutus is a clinical-stage biopharmaceutical company focused on developing combination therapies for chronic hepatitis B (HBV). Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.1 million | $1.6 million | $4.4 million | $4.3 million |
| Research and development | $17.7 million | $16.6 million | $45.2 million | $46.9 million |
| Total operating expenses | $94.5 million | $34.0 million | $135.4 million | $77.1 million |
| Loss from operations | $91.4 million | $32.4 million | $131.0 million | $72.9 million |
| Net loss | $82.5 million | $24.5 million | $129.1 million | $38.8 million |
| Net loss per common share | $1.50 | $0.49 | $2.43 | $0.84 |
| Cash used in operating activities | $23.5 million | $13.2 million | $57.7 million | $50.8 million |
Operating margins were deeply negative given low collaboration and royalty revenue relative to research and development and other expenses; the quarter’s operating loss also included substantial non-cash impairment charges and an arbitration charge.
Revenue rose $1.5 million year over year in Q3 and was nearly flat for the nine-month period. 2019 revenue included a Gritstone development milestone, ONPATTRO royalties, Marqibo milestone and royalty revenue, and Gritstone services. Nine-month 2018 revenue included a Gritstone milestone and recognized upfront-fee revenue.
Liquidity, balance sheet and cash flow
- Cash and cash equivalents were $90.1 million at September 30, 2019, versus $36.9 million at December 31, 2018. Short-term investments declined from $87.7 million to zero, principally as investments matured; total assets fell from $227.9 million to $117.3 million.
- The company reported no outstanding debt. It had a $18.7 million liability related to its sale of future ONPATTRO royalties, as well as $3.5 million in operating lease liabilities and $3.0 million in contingent consideration.
- Nine-month operating cash use was $57.7 million. Investing activities provided $87.2 million, largely from maturities of short-term investments; financing activities provided $23.6 million, primarily from the ONPATTRO royalty transaction.
- Management said cash on hand at quarter-end was expected to fund operations into early 2021. Additional funding will be needed to continue development, and the filing notes that financing may not be available on acceptable terms.
Material changes and unusual items
- Arbutus recorded a $43.8 million non-cash impairment of its cccDNA in-process research and development asset, reducing its carrying value to zero after deciding to delay the program indefinitely. A related $12.7 million income tax benefit reduced the net impact.
- A $22.5 million non-cash goodwill impairment reduced goodwill to zero. The company cited a sustained share-price decline and market capitalization below the book value of net assets.
- The company recorded $6.5 million of arbitration expense after an arbitrator awarded the University of British Columbia $5.9 million, including interest. Arbutus paid the award in September; a further award for costs and attorneys’ fees remained undetermined, and the company accrued an estimate.
- In July, Arbutus received $20 million gross proceeds from selling OMERS a portion of its ONPATTRO royalty interest. OMERS is entitled to royalties until it receives $30 million, after which the sold royalty interest reverts to Arbutus. The related liability is accreted as interest expense; the company estimated an effective annual rate of approximately 25%.
- General and administrative costs increased for the nine-month period, partly due to the former CEO’s departure: $2.3 million cash severance and $2.2 million non-cash accelerated stock compensation were recognized.
Pipeline, outlook and risks
- AB-729, a subcutaneous RNAi candidate, entered a Phase 1a/1b trial in July 2019. Preliminary safety and efficacy data were expected in Q1 2020.
- After two cases of acute hepatitis were observed in a healthy-subject study, Arbutus stopped the AB-506 trial and decided to discontinue the program. The company expected to present further trial details at the November 2019 AASLD meeting and no longer expected an AB-506/AB-729 combination study in the second half of 2020.
- Arbutus expected to select a next-generation oral capsid-inhibitor lead for IND-enabling studies in December 2019. For AB-452, it planned a repeat 90-day preclinical safety study and expected a go/no-go decision in early 2020; backup compounds were also in development.
- The filing identifies clinical and preclinical safety findings, regulatory and development uncertainty, financing needs, dependence on collaborators and royalty flows, and intellectual-property disputes as risks. The company’s pipeline candidates were investigational, and successful development, approval, and commercialization were uncertain.
Important facts for investors to verify
- Whether AB-729’s expected Q1 2020 data and the subsequent clinical plan supported continued development.
- Details and implications of the AB-506 acute-hepatitis cases and whether any further costs or liabilities arose after discontinuation.
- Results of the AB-452 repeat safety study and selection and progress of a next-generation capsid inhibitor.
- Cash burn, financing needs, and whether the stated runway into early 2021 remained achievable.
- ONPATTRO royalty collections and the timing and conditions for the royalty interest sold to OMERS to revert.
- Any additional UBC arbitration costs and the potential dilution associated with the 8.75% compounding preferred-share coupon and its expected conversion into approximately 23 million common shares in 2021.