Sutro Biopharma, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The unaudited results are for a clinical-stage biopharmaceutical company developing therapeutics using its XpressCF+ platform. Sutro had no products approved for commercial sale and generated no product-sale revenue.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $7.8 | $17.5 | $19.3 | $47.7 |
| Research and development expense | $12.6 | $13.7 | $39.5 | $39.5 |
| General and administrative expense | $5.4 | $4.9 | $13.8 | $12.3 |
| Operating loss | $(10.2) | $(1.1) | $(33.9) | $(4.1) |
| Net loss | $(10.2) | $(1.4) | $(33.8) | $(4.3) |
| Operating cash flow | — | $18.6 | $(32.2) |
- At September 30, cash and cash equivalents were $41.4 million and marketable securities were $81.6 million, totaling $123.0 million in unrestricted liquid resources. Current assets were $127.4 million; current liabilities were $36.9 million.
- Debt was $14.7 million, net of unamortized discount: $3.2 million current and $11.5 million non-current. The Oxford/Silicon Valley Bank loan carries a floating rate of at least 7.39%; scheduled principal repayments were expected to begin in March 2019.
- Accumulated deficit was $148.8 million. The filing does not provide a clear gross margin measure; it reports operating expenses by function.
Material changes and financing
- Revenue fell 55% in Q3 and 59% for the nine-month period year over year. The principal comparison was Celgene milestone and contingent revenue recorded in 2017, including a $10.0 million manufacturing milestone; no comparable milestone was earned in 2018. New Merck collaboration revenue and service/supply revenue partly offset the decline.
- R&D expense was nearly unchanged year to date, while G&A rose 12%, reflecting headcount, legal/audit/consulting costs, and costs reclassified from R&D.
- Nine-month operating cash flow was positive despite the net loss, principally because deferred revenue increased by $49.2 million. The increase included the $60.0 million Merck upfront payment, which is being recognized over an estimated four-year service period; operating cash flow should not be read as an indication of recurring profitability.
- In May–July, Sutro raised $85.4 million gross from Series E preferred stock. After quarter-end, its October 1 IPO raised approximately $74.4 million net, and a concurrent Merck private placement raised approximately $10.0 million. Preferred stock converted into common stock upon the IPO; the September 30 balance sheet does not reflect these subsequent events.
Business, outlook, and risks
- Lead wholly owned programs are STRO-001, an ADC in early clinical testing, and STRO-002, then in late preclinical development. The filing reports that FDA clearance of the STRO-002 IND followed in November 2018, with a Phase 1 trial expected to begin in early 2019. STRO-001 received FDA orphan drug designation for multiple myeloma in October 2018.
- Management expected available resources to fund operations for at least 12 months, while also stating that additional financing will be needed to advance programs. Management expects substantial future losses and higher R&D spending; the filing gives no specific revenue or earnings guidance.
- Material uncertainties include clinical and regulatory failure or delay, manufacturing scale-up and cGMP compliance, reliance on collaborators and third parties, intellectual-property disputes, and the need for additional capital. Merck, Celgene, and EMD Serono can terminate their respective agreements under stated notice provisions. The Merck agreement also offers potential milestone payments of up to $1.6 billion, contingent on program development and sales; these are not assured proceeds.
- Management reported effective disclosure controls as of September 30, 2018 and no material quarter changes to internal control over financial reporting. No material legal proceedings were reported.
Important facts for investors to verify
- Cash runway and expected spending after the IPO, especially as clinical trials and manufacturing activities expand.
- Clinical progress, safety, and enrollment for STRO-001, and timing and results of the planned STRO-002 trial.
- Revenue dependence on collaboration partners, the terms and termination rights in those agreements, and the timing and conditions of future milestone payments.
- Post-IPO share count, options and warrants, and the effect of the preferred-stock conversion and lock-up expirations on potential dilution and trading supply.