Scholar Rock Holding Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2020. Scholar Rock is a clinical-stage biopharmaceutical company developing growth-factor-targeting antibodies. It has no product-sales revenue; reported revenue came from its Gilead collaboration. Its lead programs are SRK-015 for spinal muscular atrophy (SMA) and SRK-181 for checkpoint-inhibitor-resistant cancers.
Key financial metrics
Amounts below are in millions of dollars, except per-share data. The income and cash-flow comparisons are for the three months ended March 31.
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Revenue | $5.03 | $3.11 |
| Research and development expense | $16.90 | $10.74 |
| General and administrative expense | $5.82 | $4.07 |
| Operating loss | $(17.69) | $(11.70) |
| Net loss | $(17.07) | $(10.76) |
| Net loss per share, basic and diluted | $(0.58) | $(0.42) |
| Operating cash flow | $2.64 provided | $15.53 used |
| Cash, cash equivalents and marketable securities | $160.65 | $157.45 at Dec. 31, 2019 |
| Cash, cash equivalents and restricted cash | $97.93 | $38.81 at Dec. 31, 2019 |
| Total liabilities | $77.06 | $83.48 at Dec. 31, 2019 |
| Accumulated deficit | $174.92 | $157.85 at Dec. 31, 2019 |
Revenue increased 61.9%, while operating expenses rose 53.4% and net loss widened 58.7%. R&D expense grew 57.4%, primarily from TOPAZ and DRAGON development costs and increased staffing; G&A expense grew 43.0%, mainly from compensation and professional services. No product gross margin is reported because the company has no product sales. No outstanding loan payable was reported; the prior equipment loan was repaid in June 2019. Deferred revenue was $62.38 million at March 31, 2020.
Q1 operating cash flow was positive principally because Scholar Rock received a $25 million Gilead milestone payment in January for a milestone achieved in December 2019. The cash-flow statement also reflects working-capital movements, including a $25 million reduction in accounts receivable and a $5.03 million reduction in deferred revenue. The $59.13 million increase in cash and restricted cash included marketable-security maturities and purchases; it should not be read as operating cash generation. Cash, cash equivalents and marketable securities together increased by about $3.2 million from year-end.
Material changes and operating developments
- Gilead collaboration revenue rose to $5.03 million from $3.11 million, reflecting program progress and inclusion of the $25 million milestone in the collaboration transaction price.
- R&D spending on SRK-015 increased to $4.20 million from $1.74 million; SRK-181 spending rose to $3.99 million from $1.74 million.
- TOPAZ enrollment was completed in January 2020 with 58 patients. The planned interim efficacy, safety and PK/PD analysis was moved to Q4 2020, about one quarter later than previously expected. Top-line 12-month data were pushed to the first half of 2021 from prior expectations of Q4 2020 to Q1 2021.
- The DRAGON Phase 1 trial began in Q1 2020, with patient dosing starting in April. The company anticipated a dose-escalation update in Q4 2020 and clinical response and safety data in 2021.
Outlook, risks and unusual items
- Management expected existing cash, cash equivalents and marketable securities to fund operating expenses and capital expenditure requirements into Q4 2021, but stated that additional capital would be needed to complete clinical development of current programs. The estimate depends on assumptions and funds could be used sooner than expected.
- Management expects continued significant operating losses and increasing expenses as clinical programs and research advance. No revenue guidance or profitability timetable is provided.
- COVID-19 restrictions had affected TOPAZ patient access, dosing, assessments and data monitoring. The company also expected near-term Gilead research activity and related revenue recognition to decrease until laboratory operations returned to normal. Further trial and data-readout delays were possible.
- Gilead has exclusive options over three TGFβ programs. The company reported up to $1.425 billion in potential additional aggregate milestone payments and tiered royalties, contingent on future achievements; these amounts are not assured.
- The company signed a lease for a new Cambridge headquarters with base rent of $6.9 million per year, subject to 3.5% increases, and a tenant-improvement allowance of up to $14.1 million. It had secured a $2.3 million letter of credit. The lease had not commenced for accounting purposes at March 31; free rent ran through mid-August 2020.
- On May 1, 2020, Chief Scientific Officer Alan J. Buckler notified the company of his resignation, effective June 1. The filing also states the company did not have a Chief Financial Officer.
- Management reported effective disclosure controls as of March 31, 2020, with no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether COVID-19 disruptions further affect TOPAZ dosing, assessments, enrollment follow-up or the revised data timetable, and DRAGON enrollment and milestones.
- Whether the stated Q4 2021 liquidity runway remains supportable given planned R&D spending, the new headquarters lease and the need for additional capital to complete clinical development.
- The timing and amount of Gilead collaboration revenue recognition, the remaining performance obligations, and the assumptions underlying future milestone and royalty potential.
- Whether Gilead program activity and laboratory operations recover as expected, and how that affects deferred revenue recognition.
- The leadership transition following the CSO resignation and the disclosed absence of a CFO, including any subsequent appointments or changes in financial oversight.