Sutro Biopharma, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited quarterly results, including Q4 2018. Sutro is a clinical-stage biopharmaceutical company with no products approved for sale; revenue is primarily collaboration, research, development, manufacturing and supply revenue.
Financial results and liquidity
| Metric (US$ millions, except per-share data) | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | 38.4 | 51.7 |
| Research and development expense | 54.3 | 54.6 |
| General and administrative expense | 21.4 | 16.4 |
| Operating loss | (37.2) | (19.3) |
| Net loss | (35.3) | (19.7) |
| Net loss per share | (6.13) | (43.95) |
Q4 2018: Revenue was $19.1 million, net loss was $1.5 million and basic and diluted net loss per share was $0.07. Q4 2017 revenue was $4.0 million, net loss was $15.3 million and loss per share was $33.51. Per-share comparisons are heavily affected by the IPO and conversion of preferred stock into common shares; the filing does not provide a comparable quarterly breakdown of revenue drivers.
- FY revenue declined 26%, mainly because Celgene-related collaboration revenue was lower following the 2017 agreement restructuring; this was partly offset by the new Merck collaboration and $6.0 million of other revenue, including Celgene services and SutroVax supplies.
- Operating expenses rose 7% year over year. R&D was broadly flat; G&A increased 31%, including higher personnel and public-company-related costs.
- Cash and cash equivalents were $125.3 million and marketable securities were $79.2 million at year-end, totaling $204.5 million. Working capital was $173.5 million; total assets were $223.1 million and stockholders’ equity was $131.5 million.
- Operating cash flow was positive $12.7 million, versus negative $37.1 million in 2017. The 2018 result was substantially supported by a $60.0 million Merck upfront payment recorded as deferred revenue, not by product sales. Investing cash flow was negative $80.2 million, primarily due to purchases of marketable securities; financing cash flow was positive $170.8 million, chiefly from preferred-stock financing and the IPO/private placement.
- Debt was $14.7 million net of discount ($4.7 million current; $10.0 million non-current). The $15.0 million loan bears a floating rate with a 7.39% floor and matures August 2021; scheduled principal payments began in March 2019. Total contractual obligations disclosed were $27.8 million, including debt principal and interest and operating leases.
Business, developments and outlook
- The company’s XpressCF platform is used to discover, develop and manufacture protein therapeutics. Its two wholly owned lead candidates are STRO-001, a CD74-targeting ADC for multiple myeloma and non-Hodgkin lymphoma, and STRO-002, a FolRα-targeting ADC for ovarian and endometrial cancers.
- STRO-001 was in a Phase 1 trial and enrolling patients at year-end 2018. Management expected initial safety data in mid-2019 and initial efficacy data by year-end 2019. The FDA granted it Orphan Drug Designation for multiple myeloma in October 2018; this is not regulatory approval.
- STRO-002 began enrolling patients in Phase 1 in March 2019; initial safety data were expected by year-end 2019. The filing reports promising preclinical findings for both candidates but emphasizes that clinical safety and efficacy remain unproven.
- Collaborations include Merck, Celgene and EMD Serono. The 2018 Merck agreement included a $60.0 million upfront payment and potential aggregate milestones of up to $1.6 billion, plus royalties; such contingent amounts depend on future development and sales and are not assured. A Celgene BCMA ADC IND was expected in the first half of 2019. Celgene earned a $10.0 million manufacturing milestone in December 2018.
- The company raised approximately $85.4 million through Series E preferred stock financing and received approximately $74.4 million net from its October 2018 IPO, plus approximately $10.0 million in a concurrent Merck private placement. Management stated that available resources were expected to fund operations for at least 12 months from the filing date, while warning that additional funding would be needed for continued development.
- Management expects significant ongoing losses and increased spending as clinical development, manufacturing capabilities and public-company operations expand. Results and revenue may vary materially with trial spending, milestone events and collaboration revenue recognition. No commercial-product revenue is expected in the foreseeable future.
Material risks, contingencies and unusual items
- Clinical and regulatory risk is high: both lead candidates are early-stage, preclinical results may not predict human outcomes, and neither has established safety or efficacy. The filing notes hematological toxicity in non-human-primate studies for both ADCs.
- Manufacturing scale-up and regulatory acceptance of the company’s cell-free platform remain uncertain; no product made using a cell-free manufacturing platform had received FDA approval at the time of filing. The company also relies on third-party manufacturers, CROs and suppliers.
- Revenue and cash flow depend significantly on collaborations, which partners may terminate or deprioritize. Bristol-Myers Squibb had announced a proposed acquisition of Celgene, expected to close in Q3 2019 subject to approvals; the impact on the collaboration was uncertain.
- The Oxford/SVB loan is secured by company assets other than intellectual property and certain other assets, and includes restrictive covenants and events of default. The filing describes no material pending legal proceedings.
- In August 2018, Sutro entered into an agreement with the Leukemia & Lymphoma Society for up to $6.0 million of STRO-001 development funding. In certain future circumstances, Sutro may owe payments to LLS of up to $19.5 million; no payment-triggering event had occurred by year-end.
- The company reported an accumulated deficit of $150.3 million and a full valuation allowance against deferred tax assets. Use of tax attributes may be limited by future ownership changes.
- The audited financial statements received an unqualified opinion. Management said disclosure controls were effective at a reasonable-assurance level; no auditor attestation on internal control over financial reporting was included under applicable emerging-growth-company/new-public-company exemptions.
Important facts for investors to verify
- Subsequent STRO-001 and STRO-002 trial enrollment, safety, efficacy and timing versus the expectations stated in the filing.
- Cash, marketable securities, operating cash use and updated runway, separating upfront collaboration receipts from recurring operating cash generation.
- Merck, Celgene and EMD Serono program progress, milestone conditions, partner priorities and any effects of the announced Celgene acquisition.
- Debt repayment, interest costs, covenants and any need for additional financing or equity issuance.
- Revenue-recognition effects from adopting ASC 606 in 2019, including the impact on collaboration milestones and period-to-period comparability.
- Outstanding and potentially dilutive shares: 22,925,441 common shares were reported outstanding as of March 27, 2019; the IPO lock-up agreements expired March 25, 2019.