Precision BioSciences, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are to the corresponding 2018 periods unless otherwise noted. Amounts below are in millions of dollars, except per-share data and percentages.
Business context and reporting period
Precision is an early-stage genome-editing company developing ARCUS-based therapies and food applications. Its Therapeutics programs include allogeneic CAR T and in vivo gene correction; its Food segment develops products through collaborations. The company has no product-sales revenue and has incurred losses since inception. Revenue primarily comes from collaboration research and license arrangements.
The company completed its IPO on April 1, 2019, issuing 9.085 million shares at $16 per share. Preferred stock and convertible notes converted into common stock at the IPO. It reported 50.66 million common shares outstanding at September 30 and 50.79 million as of November 6, 2019.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.9 | $2.5 | $15.7 | $5.9 |
| Research and development expense | $19.8 | $9.7 | $62.5 | $28.7 |
| General and administrative expense | $7.1 | $3.3 | $18.5 | $9.0 |
| Operating loss | $(22.0) | $(10.4) | $(65.3) | $(31.8) |
| Net loss | $(20.7) | $(9.8) | $(72.0) | $(30.6) |
| Basic and diluted loss per share | $(0.41) | $(0.62) | $(1.85) | $(1.94) |
| Net cash used in operating activities | Not separately provided for the quarter | $(50.5) | $(38.8) |
Q3 revenue grew about 91% year over year, while operating expenses more than doubled. Calculated operating margin was approximately negative 452% in Q3 2019 versus negative 411% in Q3 2018; for the nine-month periods it was approximately negative 416% versus negative 535%. Loss per share comparisons are affected by the larger weighted-average share count following the IPO.
- Revenue sources: Nine-month Therapeutics revenue was $14.4 million and Food revenue was $1.4 million. Gilead collaboration revenue was $10.0 million and Servier revenue was $4.4 million for the period; no milestone or royalty payments were received under those agreements.
- Cash and liquidity: Cash and cash equivalents were $206.3 million at September 30, up from $103.2 million at December 31, 2018. Current assets were $219.5 million and current liabilities $23.7 million. The reported figures imply a current ratio of about 9.3.
- Cash flows and investment: Nine-month operating cash use was $50.5 million; investing cash use was $19.1 million, mainly property, equipment and software purchases. Financing provided $172.7 million, principally IPO proceeds and convertible-note proceeds. Cash increased $103.1 million during the period.
- Debt: The $39.6 million 2019 convertible notes, plus accrued interest, settled in common shares at the IPO. The company recorded $9.8 million of fair-value expense and $0.2 million of interest expense before settlement. A $50 million revolving credit facility, maturing May 15, 2022, had no borrowings at quarter-end; the company reported covenant compliance. Deferred revenue is a significant liability but is not debt.
- Equity and deferred revenue: Stockholders’ equity was $155.8 million, compared with $40.0 million at year-end 2018. Deferred revenue totaled $88.7 million, current and noncurrent combined.
Material changes versus the prior comparable period
- Nine-month revenue increased $9.8 million, primarily due to increased Gilead research funding and a new collaboration agreement. The filing attributes Q3’s $2.3 million revenue increase mainly to increased Gilead research funding, partly offset by lower license fees from an agreement whose service period ended.
- Nine-month R&D expense rose $33.8 million. Increased platform and early-stage research spending and the CD20 program more than offset lower direct CD19 spending. The company cited higher staffing, laboratory, outsourced research, CMO and facility costs.
- Nine-month G&A expense increased $9.5 million, including higher employee-related, consulting, insurance, tax and facility costs, as well as public-company infrastructure.
- Net loss increased $41.4 million year over year, including the $9.8 million noncash fair-value charge on the 2019 notes. Increased interest income partly offset the loss.
- Property, equipment and software purchases rose to $19.1 million from $4.4 million, reflecting investment in facilities and manufacturing capabilities.
- ASC 606 adoption affected reported collaboration revenue: nine-month 2019 revenue was $1.3 million higher than it would have been under the prior guidance. Adoption also reduced opening accumulated deficit by approximately $1.0 million.
Outlook, management commentary and risks
- Runway and funding: Management expects existing cash to fund operations and capital expenditure requirements into 2021. It cautions that assumptions may prove imprecise, expenses are expected to rise, and additional capital will be needed absent significant recurring revenue. Future funding may require equity, debt, collaborations or licensing and could dilute shareholders or restrict operations.
- Clinical programs: PBCAR0191, a Servier-partnered CD19 allogeneic CAR T candidate, was in a Phase 1/2a trial. Initial data for three Dose Level 1 NHL patients, with cutoff August 1, 2019, were described in the filing as showing no serious adverse events or dose-limiting toxicities; two patients had objective responses. These are preliminary results from a very small group and require follow-up and verification. The company said dosing was progressing as planned.
- PBCAR20A: The FDA accepted the IND for the company-owned CD20 CAR T candidate in September 2019. Management expected a Phase 1/2a trial to begin in Q4 2019 and initial data in 2020. The filing also notes U.S. Orphan Drug Designation for mantle cell lymphoma.
- Manufacturing: The company opened its MCAT facility in July 2019 to support clinical material production. Management described possible longer-term annual capacity of up to 10,000 CAR T doses and 4,000 gene therapy doses, while noting operating efficiency, validation, staffing and regulatory risks.
- Collaboration dependence: Servier and Gilead agreements provide research funding and potential future milestones and royalties, but milestone and royalty revenue is uncertain. Servier’s agreement covers up to six targets and includes potential aggregate payments of about $1.6 billion, including the upfront payment; Gilead’s agreement includes up to $445 million in development and commercial milestones in addition to research funding. These amounts are contingent, not guaranteed revenue.
- Key risks and contingencies: The company highlighted continued losses and financing needs; clinical, regulatory and manufacturing uncertainty; potential off-target editing or other adverse events; dependence on ARCUS, collaborators and third-party suppliers; competition and public acceptance of genome editing; and intellectual-property risks. In August 2019, the PTAB initiated a patent interference involving a family of the company’s CAR T patents and a third-party application; an adverse outcome could affect patent claims and competitive position. The company reported no material legal proceedings.
- Other disclosures: Management forecast a 0% effective tax rate for 2019 and maintained a full valuation allowance against deferred tax assets due to its loss history. Disclosure controls were assessed as effective at the reasonable-assurance level; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether actual operating and capital spending supports management’s cash runway estimate into 2021, and when additional financing may be required.
- Updated PBCAR0191 safety, efficacy, follow-up and enrollment data beyond the preliminary three-patient snapshot.
- Whether PBCAR20A’s trial began on the expected timetable and whether initial data arrive as anticipated.
- MCAT validation, production performance, costs and actual contribution to clinical supply.
- The outcome and potential business impact of the CAR T patent interference, and ongoing compliance with the revolving-line covenants.
- Progress and funding under the Servier and Gilead collaborations, including any changes to revenue recognition, milestones or partner commitments.