Arcus Biosciences, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 5, 2020. Arcus is a clinical-stage cancer therapeutics company with four investigational products in clinical development and no product-sales revenue.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Collaboration and license revenue | $1.75 million | $1.75 million; unchanged |
| Research and development expense | $23.14 million | $15.55 million; up 49% |
| General and administrative expense | $7.01 million | $4.97 million; up 41% |
| Operating loss | $28.40 million | $18.77 million |
| Net loss | $27.75 million | $17.67 million; loss increased 57% |
| Basic and diluted net loss per share | $0.63 | $0.41 |
| Net cash used in operating activities | $31.28 million | $16.84 million |
| Cash, cash equivalents and investments | $157.9 million | $188.3 million at December 31, 2019 |
Revenue reflects recognition of previously received Taiho payments; it is not product revenue. Operating margin is not meaningful for this pre-commercial company. Management expects research and development and general and administrative expenses to increase substantially as programs advance and the company grows.
At March 31, current assets were $166.2 million and current liabilities were $21.0 million, implying working capital of about $145.2 million. Total liabilities were $35.5 million, including deferred revenue; the filing reports no borrowings or interest-bearing debt. Accumulated deficit was $233.1 million.
Investing activities provided $40.1 million, principally reflecting investment maturities exceeding purchases; financing activities provided $0.6 million, primarily from stock-option exercises. Cash and cash equivalents increased by $9.4 million during the quarter, while total cash and investments declined from year-end.
Material changes and unusual items
- R&D expense rose $7.6 million, mainly from higher clinical-trial costs, increased employee compensation and consulting expense; lower manufacturing costs partly offset the increases.
- G&A expense rose $2.0 million, primarily from increased employee compensation, consulting, software and telecommunications costs.
- Interest and other income declined 58% to $0.65 million, attributed mainly to lower investment yields and lower average cash and investment balances.
- PACT Pharma’s Series C financing caused Arcus’s ownership percentage to be diluted. Arcus recorded a $0.48 million deemed-sale gain and a $0.48 million share of PACT’s losses for the quarter; the two items offset in reported non-operating income.
- Stock-based compensation increased to $3.46 million from $1.67 million. The company also established a 2020 inducement plan reserving 3.0 million shares.
Outlook, risks and contingencies
- Management said $157.9 million of cash and investments should fund planned operations for at least 12 months after filing. Separately, the risk-factor discussion says the funds are expected to support development of AB928 and zimberelimab, including cohort expansions, into 2021, but not through regulatory approval. Additional capital will be required; no external funding source is committed.
- COVID-19 had suspended laboratory-based operations under shelter-in-place orders. Arcus said one discovery program remained on schedule for possible clinic entry in early 2021, while the second could be delayed; the size of any delay was unknown. Clinical enrollment remained relatively robust, but new trial and site starts and ongoing trial activities could be disrupted. Drug supply and contract-manufacturer operations were reported adequate at the time of filing.
- Arcus expects clinical, preclinical and manufacturing costs to rise. Development timing, trial outcomes, financing availability and collaboration milestones remain uncertain; failure to raise funds could require delaying, reducing or ending programs or licensing rights to others.
- Potential obligations include WuXi clinical, regulatory and commercialization milestones and royalties; Abmuno milestone payments of up to $101 million; and Strata regulatory and commercial milestones of up to $125 million, plus potential royalties. These amounts are contingent, not current debt.
- The Taiho agreement provides option, milestone and royalty opportunities, but no clinical or regulatory milestones, sales milestones or royalties had been recognized by March 31, 2020. Arcus stated it had no material legal proceedings and no material changes to contractual obligations outside the ordinary course.
Most important facts for investors to verify
- Confirm the company’s cash runway assumptions and whether COVID-19 restrictions have delayed laboratory work, clinical trials, or the planned advancement of discovery programs.
- Track operating cash burn, expected spending growth, and plans and terms for obtaining additional capital.
- Monitor clinical progress and safety and efficacy data for AB928, AB680, AB154 and zimberelimab, alongside competitive trial activity and enrollment.
- Reconcile share counts: the balance sheet, stockholders’ equity statement and April 30 cover-page disclosure report different share figures. The filing states 45,982,788 shares issued and outstanding on the balance sheet, 44,349,522 at March 31 in the equity statement, and 46,046,026 at April 30.
- Assess potential milestone, royalty and collaboration-related costs and proceeds, including the impact of Taiho option decisions and third-party development progress.