Scholar Rock Holding Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
Scholar Rock is a clinical-stage biopharmaceutical company developing antibody therapies that target growth-factor signaling. Its lead candidate, SRK-015, is in a Phase 2 trial for Type 2 and Type 3 spinal muscular atrophy (SMA). SRK-181, for cancers resistant to checkpoint blockade therapies, was in preclinical development. The company had no commercial product sales; reported revenue came from its Gilead collaboration.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2019 | $5.0 | $8.1 |
| Revenue, 2018 | $0 | $0 |
| Research and development expense, 2019 | $13.7 | $24.5 |
| General and administrative expense, 2019 | $4.7 | $8.8 |
| Operating loss, 2019 | $(13.4) | $(25.1) |
| Net loss, 2019 | $(12.5) | $(23.3) |
| Net loss, 2018 | $(14.7) | $(23.6) |
| Net loss per share, basic and diluted, 2019 | $(0.48) | $(0.90) |
Q2 revenue was recognized under the Gilead agreement as research services were performed. Operating expenses exceeded revenue in both periods; the filing does not present a meaningful product gross margin, as the company had no product sales.
- Year-over-year changes: Q2 R&D increased 20.1% and G&A increased 36.1%; total operating expenses rose 23.8%. For the first half, R&D increased 34.9%, G&A increased 52.0%, and total operating expenses increased 39.1%. Six-month net loss narrowed by $0.3 million despite a higher operating loss, partly reflecting increased other income.
- Cash flow: First-half cash used in operations was $31.9 million, versus $21.5 million in 2018. Investing activities used $11.3 million, largely reflecting marketable securities purchases net of sales and maturities. Financing activities provided $41.9 million, primarily from the June stock offering.
- Liquidity: Cash and cash equivalents were $113.8 million and marketable securities were $71.3 million at June 30, totaling $185.1 million, compared with $175.6 million at December 31, 2018. Management estimated these resources would fund operations and capital needs into Q4 2021, while cautioning that actual spending could differ.
- Debt and obligations: The company made its final Silicon Valley Bank loan payments in June 2019; no loan payable remained at June 30. Deferred revenue was approximately $54.8 million, primarily related to uncompleted Gilead collaboration obligations. Operating lease liabilities totaled $5.7 million.
- Equity financing: In June, Scholar Rock sold 3.0 million shares at $15.00 per share for approximately $42.0 million in net proceeds. The underwriters exercised their option for another 450,000 shares in July, adding approximately $6.3 million in net proceeds.
Material changes and management outlook
- R&D expense increased as the company advanced SRK-181 and expanded personnel and infrastructure; SRK-015 external costs were lower than in the prior-year quarter, partly due to timing of manufacturing development in 2018. SRK-181 costs included a one-time option fee.
- Management expected R&D and G&A expenses to rise as clinical and research programs progress and public-company costs continue to grow. The company anticipated significant operating losses for the foreseeable future and no near-term product revenue.
- Management expected preliminary SRK-015 pharmacodynamic and pharmacokinetic data by the end of 2019, a six-month interim efficacy and safety analysis in the first half of 2020, and 12-month top-line results between Q4 2020 and Q1 2021.
- The company intended to begin a Phase 1 SRK-181 trial in solid tumors in mid-2020, with initial clinical data anticipated by the end of 2021. It also intended to nominate an RGMc-targeting candidate for iron-restricted anemia in the first half of 2020.
Risks, contingencies, and unusual items
- Development remains subject to clinical safety and efficacy uncertainty, trial enrollment and timing, regulatory approval, manufacturing supply, intellectual-property protection, and the need for additional financing. Management’s runway estimate depends on assumptions and could prove shorter than expected.
- The Gilead collaboration provided $50 million upfront cash and a $30 million equity investment. Potential future payments include a $25 million proof-of-concept milestone, up to $1.425 billion in aggregate program milestones, and tiered royalties; these amounts are contingent and not assured. Gilead holds options over three programs and may terminate the collaboration under the agreement.
- The filing reported no material legal proceedings. It disclosed no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30, 2019 and reported no material change in internal control over financial reporting during the quarter.
- Adoption of the new lease standard resulted in recognition of operating lease assets and liabilities; the company reported no material effect on operations or cash flows from adoption.
Important facts for investors to verify
- Progress, enrollment, safety, and timing of TOPAZ Phase 2 and the stated SRK-015 data milestones.
- Whether the SRK-181 Phase 1 start and RGMc candidate nomination occur on the expected timelines.
- Actual cash burn and whether available liquidity supports operations into Q4 2021.
- Gilead research progress, option decisions, revenue-recognition estimates, and the conditions for potential milestone and royalty payments.
- The effect of the July offering option exercise and future financing needs on cash runway and share dilution.