Sutro Biopharma, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Sutro is a clinical-stage biopharmaceutical company developing protein therapeutics using its XpressCF platform. It had no approved products or commercial product sales.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $8.6 million | $5.8 million; up 49% as reported |
| Research and development expense | $15.2 million | $13.1 million; up 16% |
| General and administrative expense | $7.7 million | $4.4 million; up 75% |
| Total operating expenses | $22.9 million | $17.5 million; up 31% |
| Operating loss | $14.3 million | $11.7 million |
| Net loss | $14.3 million | $12.0 million |
| Net loss per share | $0.62 | $25.75; per-share comparison is affected by the IPO and share-count change |
| Cash used in operating activities | $20.1 million | $15.0 million |
At quarter-end, unrestricted cash, cash equivalents and marketable securities totaled $184.3 million; cash and cash equivalents alone were $26.6 million. Current assets were $176.5 million and current liabilities $31.1 million. Debt was $14.3 million, including $5.8 million current and $8.5 million non-current. The loan bears floating interest, averaging 8.90% in Q1, and matures in August 2021. Accumulated deficit was $154.3 million.
Cash, cash equivalents and restricted cash declined $98.7 million during the quarter. Investing cash outflow was $78.1 million, primarily reflecting purchases of marketable securities, rather than operating expenditure; operating cash outflow was $20.1 million. The filing does not present a meaningful gross margin for this clinical-stage, collaboration-revenue business.
Changes, accounting and material developments
- Revenue increased, principally because the 2018 Merck collaboration contributed $4.6 million, partly offset by a $2.5 million decline in Celgene revenue. Revenue included $4.9 million from related parties in Q1 2019.
- Revenue comparisons are affected by adoption of ASC 606 on January 1, 2019, using the modified retrospective method. Sutro recorded a $10.3 million opening reduction to accumulated deficit. Under the former ASC 605 method, Q1 2019 revenue would have been $7.6 million, rather than $8.6 million; the as-reported increase over Q1 2018 would therefore not be directly comparable.
- Operating expenses rose faster than revenue. Management attributed R&D growth mainly to higher compensation and development costs, and G&A growth mainly to personnel, professional fees and public-company costs.
- Management expects continued substantial losses and negative operating cash flows, and expects operating expenses to increase as programs advance. It believes available resources will fund operations for at least 12 months after the filing, but says additional capital will be needed to support development and operations. Financing may be unavailable or require dilution or concessions.
- STRO-001 was enrolling patients in Phase 1; initial safety data were expected in mid-2019 and initial efficacy data by year-end 2019. STRO-002 began Phase 1 enrollment in March 2019, with initial safety data expected by year-end 2019.
- Subsequent to quarter-end, the FDA cleared the IND for Celgene’s BCMA ADC collaboration program. Sutro is to provide clinical supply manufacturing and certain development services and may receive contingent payments of up to $275 million, plus tiered royalties, if development and approval milestones are achieved. Celgene declined its option for U.S. rights to a second program, so Sutro will not receive the related $12.5 million option-maintenance fee; U.S. rights to the other three programs remain with Sutro, while Celgene retains ex-U.S. rights.
Risks and other considerations
- Clinical, regulatory and manufacturing outcomes are uncertain; the lead candidates are early-stage, and no product has been approved for sale. Sutro highlights risks associated with clinical results, patient enrollment, scale-up, cGMP compliance and its novel cell-free manufacturing platform.
- Revenue and future funding depend substantially on collaborations and their partners’ decisions, performance and milestone achievements. The filing also notes the expected third-quarter 2019 completion of Bristol-Myers Squibb’s proposed acquisition of Celgene, subject to customary conditions and approvals.
- The company has secured debt with asset liens and restrictive covenants, although the loan has no financial covenants. Sutro reported no material legal proceedings and concluded disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Progress, enrollment and timing of safety and efficacy data for STRO-001 and STRO-002, and any changes to the stated development timelines.
- Actual cash burn and runway relative to management’s 12-month estimate, including the effect of R&D expansion and future financing needs.
- ASC 606’s effect on reported revenue and deferred revenue; distinguish accounting-related changes from cash received and recurring collaboration activity.
- Celgene program status, the forfeited $12.5 million fee, the consequences of the relinquished U.S. option, and whether any contingent milestones or royalties become payable.
- Merck collaboration performance and concentration of collaboration revenue, as well as debt repayment, interest-rate exposure and covenant compliance.