Arbutus Biopharma Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited financial statements are prepared under U.S. GAAP and reported in U.S. dollars. Arbutus is a clinical-stage biopharmaceutical company focused on developing treatments for chronic hepatitis B (HBV); it also licenses delivery technologies and holds an equity interest in Genevant.
Financial results and liquidity
Amounts below are in millions of U.S. dollars unless otherwise noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.24 | $1.04 | $2.68 | $1.27 |
| Operating expenses | $23.29 | $20.52 | $43.13 | $39.06 |
| Operating loss | $(22.05) | $(19.49) | $(40.45) | $(37.78) |
| Net income (loss) | $3.09 | $(18.26) | $(14.34) | $(36.88) |
| Net income (loss) attributable to common shares | $0.55 | $(18.26) | $(19.22) | $(36.88) |
| Basic and diluted earnings (loss) per common share | $0.01 | $(0.33) | $(0.35) | $(0.68) |
| Cash used in operating activities | Not stated separately here | Not stated separately here | $37.59 | $22.62 |
- Q2 net income included a $24.9 million non-cash gain recorded when Arbutus contributed delivery-platform assets to Genevant. Excluding this gain, the company continued to report a substantial operating loss.
- R&D expense was $16.36 million in Q2 and $30.31 million for the first half, up from $15.45 million and $29.32 million, respectively. G&A declined to $3.78 million in Q2 and $7.44 million for the first half.
- Site-consolidation charges were $2.58 million in Q2 and $4.20 million for the first half. Management estimated total costs of approximately $5.0 million.
- Revenue remained small and collaboration-based. Q2 2018 revenue included $0.94 million from Gritstone, $0.26 million from the Department of Defense contract closeout, and $0.04 million in other milestone and royalty payments. Gritstone represented 78% of first-half revenue.
- At June 30, cash and cash equivalents were $10.19 million and short-term investments were $144.68 million, totaling $154.87 million. Total assets were $277.01 million; total liabilities were $38.94 million.
- The $12.0 million Wells Fargo loan was repaid in March 2018; no loan payable remained at quarter-end. The $12.6 million restricted cash securing it was released.
- Management said available cash was expected to fund operations for at least the next 12 months, while noting that substantial additional funding would be needed to continue pipeline development. No revenue or earnings guidance was provided.
Material changes versus comparable periods
- Revenue rose 20% in Q2 and more than doubled for the first half, primarily reflecting Gritstone collaboration revenue and the DoD closeout reimbursement; 2017 included revenue from the since-terminated Alexion agreement.
- Operating losses widened in both comparisons as expenses rose, including new site-consolidation costs and increased program R&D spending. The first-half net loss narrowed substantially, mainly because of the Genevant transaction gain and lower stock-based compensation, not a reduction in operating losses.
- Operating cash use increased to $37.59 million in the first half from $22.62 million a year earlier. The company also completed the $66.4 million second tranche of Roivant’s preferred-share investment and repaid its loan.
- Arbutus launched Genevant with Roivant in April, licensing it LNP and ligand-conjugate delivery rights for RNA-based applications outside HBV. Arbutus held 41% of Genevant at June 30, retained HBV platform rights and its full patisiran royalty entitlement, and recorded the $24.9 million gain.
- The company reduced its global workforce by approximately 35% and closed its Burnaby facility, consolidating its HBV business in Warminster. Management said the changes were completed without negatively affecting R&D timelines.
Outlook, risks, contingencies and unusual items
- Management expected interim results from the 30-week ARB-1467 combination study in the second half of 2018 and final results in 2019. It planned to advance AB-506 into patient testing, with dosing expected in 2018 and topline results targeted for mid-2019; an AB-452 IND/CTA filing was targeted for Q3 2018, with dosing targeted for Q4. AB-729 filing was targeted for the first half of 2019. These are forward-looking expectations, not assured outcomes.
- Arbutus anticipated possible first patisiran royalties in the second half of 2018, subject to regulatory approval and commercialization by Alnylam. Genevant and Gritstone may also generate future milestones or royalties, but timing and amounts are uncertain.
- Management identified funding needs, clinical and regulatory outcomes, competing technologies, partner performance, manufacturing issues, foreign-exchange movements, and intellectual-property costs as factors that could affect cash needs and results. It warned that unavailable or unfavorable financing could force program delays, reductions, or relinquishment of rights.
- UBC arbitration remains unresolved. UBC alleges at least $3.5 million of unpaid royalties plus an unspecified amount, interest, and costs; Arbutus disputes the claims and has recorded no estimate of possible loss because the outcome and amount cannot be reasonably determined. The next phase had no schedule at filing.
- Facility lease obligations totaled $7.2 million, including $1.6 million due in less than one year. Arbutus remained the primary obligor on the Burnaby head lease and did not expect sublease income to cover all related costs. The filing also describes contingent payments under prior licensing and acquisition arrangements.
- Roivant’s 1,164,000 preferred shares accrue an 8.75% annual compounded coupon and are mandatorily convertible into 22,589,601 common shares in October 2021, subject to specified exceptions. As of July 31, 2018, the filing reported 55.4 million common shares outstanding; common shares plus outstanding options and preferred-share conversion would total approximately 84.8 million.
Important facts for investors to verify
- Whether the $24.9 million Genevant gain is clearly separated from recurring operating performance when assessing the Q2 profit.
- Actual cash burn and updated liquidity runway, considering the $37.6 million first-half operating cash use and continuing R&D investment.
- Progress and results for ARB-1467, AB-506, AB-452 and AB-729 against the stated clinical and regulatory timelines.
- Any patisiran approvals, commercial sales, and resulting royalty receipts, as well as Genevant and Gritstone milestone or royalty activity.
- Developments in the UBC arbitration, possible exposure under other contingent obligations, and costs of the Burnaby lease after consolidation.
- The potential dilution and coupon accrual associated with preferred shares and options; verify the conversion terms and resulting share count.