Arbutus Biopharma Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. Arbutus is a clinical-stage biopharmaceutical company focused on developing therapies for chronic hepatitis B (HBV), using its LNP delivery technology.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 or comparator |
|---|---|---|
| Revenue | $0.235 million | $0.603 million |
| Operating expenses | $18.534 million | $20.580 million |
| Loss from operations | $18.299 million | $19.977 million |
| Net loss | $18.627 million | $15.874 million |
| Basic and diluted loss per share | $0.34 | $0.31 |
| Cash used in operating activities | $17.535 million | $11.546 million |
Revenue was minimal relative to operating expenses; a conventional operating margin is not meaningful for this development-stage business. R&D expense was $13.872 million, up from $13.144 million, reflecting clinical costs for AB-423 and ongoing ARB-1467 and ARB-1740 trials. General and administrative expense fell to $4.328 million from $7.219 million, largely due to lower non-cash compensation.
At March 31, cash and cash equivalents were $29.851 million, short-term investments $80.528 million, and restricted investments $12.601 million, or $122.980 million combined. Management said it expects these resources to fund operations for at least 12 months, while noting that substantial additional funds will be required for continued pipeline development. Accounts receivable rose to $7.878 million from $0.273 million, principally reflecting partner-related amounts. The company reported a $12.001 million loan payable, due December 27, 2019, bearing interest at one-month LIBOR plus 1.25%; it is secured by $12.601 million of restricted cash. Facility lease obligations totaled $9.1 million.
Cash increased by $6.438 million during the quarter, primarily because $26.618 million of short- and long-term investments were monetized, partly offset by operating cash use and $3.423 million of property and equipment purchases. Capital spending included the new U.S. facility; $1.427 million of property and equipment was acquired through trade payables.
Material changes and notable items
- Revenue declined year over year as Q1 2016 included Dicerna licensing and collaboration revenue; Dicerna had discontinued its program in 2016. Q1 2017 revenue included Alexion licensing and service revenue and other milestone and royalty payments.
- Arbutus signed an LNP technology license with Alexion in March 2017. The agreement provides a $7.5 million non-refundable upfront payment, up to $75 million in development, regulatory and commercial milestones, single-digit royalties, and reimbursement for specified services. The upfront cash was received in April 2017, after quarter-end; the company began recognizing the payment over its performance period.
- Net loss increased despite lower operating expenses, mainly because Q1 2016 included a $2.942 million foreign-exchange gain and a $1.0 million Monsanto-related gain, while Q1 2017 included a $1.059 million increase in fair value of contingent consideration. Q1 2017 also recorded a $0.427 million foreign-exchange gain.
- Investing activities provided $23.195 million, versus $13.582 million used in Q1 2016. Financing activities provided $0.354 million, including cash proceeds from warrant exercises; all remaining warrants were exercised or expired by quarter-end.
Outlook, development programs, and risks
Management described a strategy of advancing complementary HBV candidates toward combination therapies and ultimately finite-duration treatment regimens. ARB-1467 Cohort 4 was fully enrolled, with initial results expected in Q3 2017. ARB-1740 Phase II multiple-ascending-dose data were expected in the second half of 2017. The company initiated a healthy-volunteer AB-423 study in March and expected to begin a multiple-dose HBV patient study in the second half of 2017; combination evaluations were planned for 2018. These are forward-looking expectations, not assurances.
Key risks include clinical and regulatory uncertainty, the need for additional financing, dependence on collaborators and milestone or royalty income, manufacturing and trial execution risks, and foreign-currency exposure. Management stated that funding beyond the next 12 months may be needed and that unavailable or unacceptable financing could force delays, reductions, or discontinuation of programs.
- UBC arbitration: The University of British Columbia alleges at least $3.5 million in unpaid royalties, plus an unspecified amount, interest, and costs. Arbutus disputes the claims and filed a counterclaim. No loss estimate was recorded because the likelihood and amount could not be reasonably determined. A liability-phase hearing was scheduled for June 2017.
- Acuitas dispute: Arbutus is seeking termination of a cross-license agreement; Acuitas sought enforcement and other relief. A court injunction restricts Acuitas from entering new agreements sublicensing Arbutus LNP technology, and Acuitas’s appeal was denied on April 3, 2017. The underlying case remained pending.
- Contingent consideration: The fair-value liability increased to $10.124 million from $9.065 million. The company said the first milestone under the Enantigen acquisition was believed likely within the following 12 months.
- Controls: Management reported effective disclosure controls, but identified a material weakness in review of the 2016 annual impairment evaluation of intangible assets and goodwill. Management said it would continue evaluating and, as necessary, remediating the weakness during 2017.
- The filing reported no new material risk-factor changes and no material off-balance-sheet arrangements. No impairment charge was recorded in Q1 2017.
Important facts for investors to verify
- Whether the Alexion collaboration produces reimbursed service revenue, milestone payments, and royalties as expected; the $7.5 million upfront cash arrived after quarter-end.
- Clinical progress and data timing for ARB-1467, ARB-1740, and AB-423, including whether stated timelines are met.
- Cash burn, investment balances, and financing needs relative to management’s stated minimum 12-month runway.
- Developments and potential financial exposure in the UBC arbitration and Acuitas litigation.
- Progress in remediating the impairment-review material weakness and any subsequent impairment assessments.