Sutro Biopharma, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 13, 2023. Sutro is a clinical-stage oncology company developing antibody-drug conjugates and related therapeutics. It has no products approved for commercial sale, and revenue to date comes primarily from collaborations and licensing.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data. Interim results are unaudited.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $16.9 | $25.1 | $40.0 | $59.1 |
| Research and development expense | $45.7 | $31.7 | $126.7 | $94.0 |
| General and administrative expense | $15.3 | $14.6 | $45.8 | $44.8 |
| Operating loss | $(44.0) | $(21.2) | $(132.4) | $(79.7) |
| Net loss | $(49.3) | $(19.5) | $(137.9) | $(84.6) |
| Basic and diluted loss per share | $(0.81) | $(0.37) | $(2.30) | $(1.74) |
- Cash flow: For the first nine months, operating activities used $125.7 million, versus $27.4 million provided in 2022. Investing activities provided $19.6 million and financing activities provided $140.7 million, including $136.2 million net proceeds from the royalty sale and $12.0 million from ATM stock sales. Cash, cash equivalents and restricted cash increased $34.6 million to $82.7 million.
- Liquidity: At September 30, cash, cash equivalents and marketable securities totaled $321.1 million; Sutro also held $34.0 million in Vaxcyte equity securities. Management expects these resources to fund operations for at least 12 months after filing, but says additional capital will be needed to complete development and support operations.
- Debt and obligations: Outstanding term debt was $7.1 million, down from $16.3 million at December 31, 2022, and matures March 1, 2024. The separate deferred royalty obligation was $142.8 million at quarter-end. Total liabilities were $319.4 million and stockholders’ equity was $112.3 million.
- Margins: The filing does not present gross margin; as a clinical-stage company, it reports operating expenses rather than product cost of sales.
Material changes versus the prior comparable period
- Q3 revenue fell 33% and nine-month revenue fell 32%. Lower revenue reflected the absence of prior-year milestone or option payments from Merck, Tasly and BioNova, as well as reduced BMS and EMD Serono activity. Astellas revenue and a $5.0 million Tasly milestone partly offset the declines.
- R&D expense rose 44% in Q3 and 35% for the nine-month period, mainly from increased contract manufacturing and outside services, personnel, and clinical development costs. Operating losses consequently widened.
- Nine-month operating cash flow shifted from a $27.4 million inflow to a $125.7 million outflow. The prior-year inflow included a large increase in deferred revenue, principally from Astellas’ upfront payment; 2023 also reflected higher receivables and lower deferred revenue.
- In June 2023, Sutro sold Blackstone its 4% royalty interest in potential future Vaxcyte product sales for $140.0 million upfront, netting $136.2 million after transaction costs. Blackstone may pay up to an additional $250.0 million if specified return thresholds are achieved. Sutro recorded the proceeds as a deferred royalty obligation and recognized $6.4 million of non-cash interest expense during the first nine months.
- Common shares outstanding increased to 60.9 million from 57.5 million at year-end 2022. ATM sales generated $12.0 million net during the first nine months; there were no ATM sales in Q3.
Business developments, outlook and risks
- Luvelta: Sutro’s lead candidate is in the registration-directed Phase 2/3 REFRaME trial for platinum-resistant ovarian cancer; the first patient entered Part I in July 2023. The company reported preliminary endometrial cancer data in October 2023, after quarter-end, and described the results as encouraging. These are preliminary clinical findings, not evidence of regulatory approval or established efficacy.
- Other programs and collaborations: Sutro regained worldwide rights to BMS’ CC-99712 after BMS ended the collaboration, effective October 7, 2023. EMD Serono had previously stopped further development of M1231. Sutro expects to complete IND-enabling work for STRO-003 in 2024 and expects to begin its Phase 1 safety study that year.
- Management outlook: Sutro expects substantial ongoing losses and R&D spending. It was evaluating programs and spending while developing its 2024 goals and financial plan, citing challenging capital-market conditions. No quantified earnings or revenue guidance is provided.
- Funding and execution risks: Management’s runway estimate depends on assumptions and may prove shorter than expected. Sutro may need additional financing; it warns that funding may be unavailable or costly, and that equity financing could dilute shareholders. Clinical, regulatory, manufacturing, supply-chain, collaboration and competition risks could delay or prevent development.
- Other items: The term loan has a $10.0 million minimum unrestricted-cash covenant; Sutro reported compliance at quarter-end. Management concluded disclosure controls were effective at a reasonable assurance level, with no material quarterly change in internal control over financial reporting. The filing reports no material legal proceedings.
Important facts for investors to verify
- Whether cash burn, planned 2024 spending and subsequent financing needs remain consistent with management’s stated minimum 12-month runway.
- Progress, enrollment, safety and efficacy in REFRaME and other luvelta studies, including whether October 2023 preliminary endometrial findings are confirmed in fuller datasets.
- Whether collaboration revenue, milestones and reimbursements can replace declining contributions from terminated or reduced partner programs.
- How future Vaxcyte royalty estimates affect the $142.8 million deferred royalty obligation and the possibility of additional Blackstone payments.
- Upcoming debt maturity and potential dilution from equity compensation, ATM issuance or other financing.