Sutro Biopharma, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Sutro is a clinical-stage oncology company developing antibody-drug conjugates and other therapies using its XpressCF and XpressCF+ platforms. Its lead wholly owned candidates are STRO-002 and STRO-001. The company had no approved products and generated no commercial product sales; revenue came from collaborations, licenses, and related services.
Financial results and liquidity
- Revenue: Q3 revenue was $25.1 million, up 195% from $8.5 million a year earlier. Nine-month revenue was $59.1 million, up 15% from $51.2 million.
- Net loss: Q3 net loss was $19.5 million, or $0.37 per share, versus $30.9 million, or $0.67 per share, in Q3 2021. Nine-month net loss was $84.6 million, or $1.74 per share, versus $67.4 million, or $1.46 per share, in 2021.
- Operating costs: Q3 R&D expense rose 19% to $31.7 million; G&A fell 12% to $14.6 million. For nine months, R&D rose 26% to $94.0 million and G&A rose 11% to $44.8 million. There is no meaningful product gross margin to report because Sutro had no commercial product sales.
- Cash flow: Nine-month operating cash flow was positive $27.4 million, compared with negative $60.1 million in 2021. The 2022 result was substantially supported by an $85.2 million increase in deferred revenue, primarily related to Astellas, and should not be read as evidence of positive operating profitability. Investing cash flow was positive $2.9 million and financing cash flow was positive $36.1 million.
- Liquidity and debt: At September 30, Sutro had $287.3 million of unrestricted cash, cash equivalents, and marketable securities, plus $36.9 million of Vaxcyte equity securities. Debt was $19.3 million, including $12.5 million current and $6.8 million non-current. The company said available unrestricted funds should support operations for at least 12 months after filing, while also stating it will need additional capital.
- Balance sheet: Total assets were $400.7 million, total liabilities $171.0 million, and accumulated deficit $418.0 million. Deferred revenue was $90.7 million, of which $15.9 million was current.
Material changes versus the prior comparable period
- Q3 revenue growth reflected the new Astellas and BioNova arrangements, a $10.0 million Merck milestone, and increased BMS materials-supply revenue. Astellas contributed $5.0 million of recognized Q3 revenue; BioNova contributed $4.0 million.
- Nine-month revenue included $25.0 million from the amended Tasly license agreement and $5.0 million from Astellas. These increases were partly offset by Merck revenue declining from $38.2 million to $11.4 million, largely because significant Merck performance obligations and milestones had been recognized in 2021.
- Nine-month operating expenses increased 21% to $138.9 million, primarily from higher R&D and personnel costs. The nine-month operating loss widened to $79.7 million from $63.5 million.
- Common shares outstanding increased to 54.6 million at September 30 from 46.3 million at December 31, 2021, partly reflecting ATM sales. Sutro sold 7.46 million shares through the ATM in the first nine months, netting $40.9 million.
Outlook, commentary, and risks
- Management expects substantial future losses and increased operating expenses as it advances clinical programs, develops manufacturing capabilities, and expands research and development. It did not provide specific revenue, earnings, or cash-burn guidance.
- The company reported STRO-002’s Phase 1 dose-expansion study was ongoing and said it had discussed a potential registration-directed trial with the FDA; accelerated approval is uncertain and depends on trial results and FDA review. STRO-001’s Phase 1 dose escalation was continuing, with the maximum tolerated dose not yet reached.
- Management cited risks including clinical failure or delay, manufacturing and supply constraints, reliance on collaborators, access to future financing, competition, intellectual-property challenges, and possible COVID-19-related disruption.
- The $90.0 million Astellas upfront payment was largely deferred: $88.1 million remained deferred at quarter-end, with revenue recognition expected over the collaboration’s service period. The agreement includes potential milestones and royalties, but future amounts are contingent.
- The Tasly agreement was amended after Tasly sought renegotiation: the upfront payment became $25.0 million, while a separate $15.0 million payment was tied to regulatory milestones. Sutro recognized $25.0 million in revenue and recorded $2.5 million of China withholding tax.
- After quarter-end through November 7, Sutro sold another 2.82 million ATM shares for $15.3 million net and sold 1.03 million Vaxcyte shares for $28.1 million net. The Vaxcyte holding’s market-value changes can materially affect reported earnings.
Key facts for investors to verify
- Whether clinical progress and upcoming STRO-002 and STRO-001 data support the company’s development plans and potential regulatory pathways.
- How quickly deferred collaboration revenue converts to recognized revenue and cash, and whether future milestone payments are achieved.
- Whether the stated 12-month liquidity runway remains adequate under actual spending and trial timelines, given management’s expectation of further financing needs.
- The pace and dilution impact of further ATM issuance, and the remaining value and volatility of Sutro’s Vaxcyte investment.
- Debt repayment and covenant requirements, including the $10.0 million minimum unrestricted cash covenant and the March 2024 debt maturity.