Sutro Biopharma, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited interim financial statements; amounts below are in U.S. dollars. Sutro is a clinical-stage drug discovery, development and manufacturing company using its XpressCF platform. It has no approved products and no commercial product sales.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $28.0M | $9.5M | $42.7M | $16.6M |
| Research and development expense | $25.3M | $17.2M | $47.9M | $34.9M |
| General and administrative expense | $12.5M | $8.6M | $23.7M | $17.4M |
| Operating loss | $(9.8)M | $(16.4)M | $(28.8)M | $(35.6)M |
| Net income (loss) | $(6.2)M | $29.9M | $(36.5)M | $10.3M |
| Operating cash flow | Not separately reported by quarter | Not separately reported by quarter | $(35.7)M | $(31.2)M |
Q2 revenue rose 196% year over year, while operating expenses rose 46%; the operating loss narrowed. For the first half, revenue increased 157%, but operating expenses increased 37%. The company reported no positive operating margin; commercial product revenue remains nil. Net results were heavily affected by unrealized changes in the value of Sutro’s Vaxcyte shares: a $4.3M gain in Q2 2021 and a $6.4M loss for the first half, versus a $48.9M gain in both 2020 comparison periods.
At June 30, cash and cash equivalents were $56.4M and marketable securities were $227.0M, totaling $283.4M in unrestricted cash, cash equivalents and marketable securities. Vaxcyte equity securities were valued at $35.3M, separately from that liquidity total. Total assets were $359.8M; stockholders’ equity was $307.5M. Debt was $24.8M net of discount on the balance sheet; contractual principal was $25.0M. Cash, cash equivalents and restricted cash decreased $149.8M during the first half. Investing outflow of $115.9M largely reflected purchases of marketable securities and $7.8M of property and equipment, rather than solely operating consumption.
Management stated that existing unrestricted cash, cash equivalents and marketable securities were expected to fund operations for at least 12 months following the filing. It also expects to need additional capital to complete development and support operations. The loan bears a floating rate with an 8.07% floor, is interest-only through March 1, 2022, and matures March 1, 2024.
Material changes and notable items
- Merck revenue was $19.9M in Q2 and $31.8M for the first half, including a $14.0M cumulative revenue catch-up after a $15.0M contingent payment was earned for initiation of an IND-enabling toxicology study. Sutro said it received the payment in Q2.
- EMD Serono revenue included a $2.0M Q2 contingent payment tied to a patient-enrollment achievement. BMS revenue growth primarily reflected clinical-supply manufacturing activity.
- Research and development spending increased with headcount, laboratory and production materials, clinical-trial activity and facilities. General and administrative costs also rose, including personnel and facilities expenses.
- Operating cash use increased to $35.7M from $31.2M in the prior-year half. The filing attributes significant working-capital use to lower deferred revenue, higher receivables and prepayments, and compensation payments.
- Sutro extended two San Carlos manufacturing leases by five years, with estimated base rent of $4.2M and $4.3M over the respective extension periods. Its South San Francisco sublease has estimated base rent of $45.5M through 2027, excluding a potential $5.2M rent-abatement benefit. The filing lists $55.2M of future minimum lease and sublease payments.
Pipeline, outlook and risks
- STRO-002: Phase 1 dose escalation was fully enrolled; dose expansion was ongoing. In data through April 23, 2021, 10 of 31 evaluable patients at clinically active dose levels had a response (one complete and nine partial responses, including four confirmed partial responses). The filing reported median progression-free survival of 7.2 months and median duration of response of 5.8 months among five confirmed responders. Grade 3 or 4 neutropenia occurred in 64% of the 39 patients evaluable for safety; these early, limited clinical data do not establish efficacy or safety in larger studies. Sutro expected initial dose-expansion data and planned combination and endometrial-cancer expansion cohorts in the second half of 2021.
- STRO-001: Phase 1 dose escalation continued; the maximum tolerated dose had not been reached in the filing’s discussion. The company reported no ocular toxicity signals in its cited trial update. STRO-001 has FDA Orphan Drug Designation for multiple myeloma.
- Management expects research and development and other operating costs to rise as programs advance, manufacturing capabilities develop and the company supports public-company obligations. No revenue guidance or numerical expense forecast was provided.
- COVID-19-related supply constraints, including limited availability of filters and other manufacturing consumables, could delay research, production or clinical programs. The company reported minor enrollment and site-data delays but said overall enrollment and treatment remained on track at the filing date.
- Key risks include clinical-trial failure or delays, manufacturing scale-up and regulatory uncertainty for the cell-free platform, reliance on collaborators and third-party suppliers, need for future financing and potential dilution, and volatility in Vaxcyte’s share price. Sutro reported no material legal proceedings and said disclosure controls were effective.
- Sutro expected to lose emerging-growth-company and smaller-reporting-company status on December 31, 2021 after its non-affiliate public float exceeded $700M at June 30. It expected to adopt lease accounting standard ASC 842 in Q3 2021, increasing reported assets and liabilities.
Investor verification priorities
- Track STRO-002 expansion, combination and endometrial-cohort progress, including response durability and adverse events, and distinguish preliminary Phase 1 findings from later-stage evidence.
- Verify the timing and amount of future collaboration milestones, especially the portion of Merck-related revenue attributable to one-time catch-up recognition rather than recurring services.
- Monitor operating cash burn, working-capital movements, investment maturities and management’s stated cash runway; assess when additional financing may be required.
- Review Vaxcyte holdings and mark-to-market effects separately from operating performance, and assess the potential effect of share-price volatility on reported earnings.
- Assess manufacturing-material availability, facility expansion and lease obligations, debt covenants and the effect of ASC 842 adoption on reported liabilities.