Sutro Biopharma, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sutro is a clinical-stage oncology company developing antibody-drug conjugates and related therapies using its cell-free protein synthesis platforms. It has no products approved for commercial sale; reported revenue comes from collaborations, licensing, manufacturing, and services.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $12.7 million | $5.9 million; up 115% |
| Research and development expense | $39.4 million | $30.0 million; up 31% |
| General and administrative expense | $15.5 million | $15.0 million; up 3% |
| Operating loss | $42.2 million | $39.1 million |
| Net loss | $50.1 million; $0.85 per share | $39.1 million; $0.84 per share |
| Operating margin | Approximately -333% | Approximately -664% |
| Cash used in operating activities | $61.0 million | $35.3 million |
| Cash, cash equivalents and marketable securities | $251.5 million | $302.3 million at December 31, 2022 |
| Vaxcyte equity investment | $25.0 million | $32.0 million at December 31, 2022 |
| Debt | $13.2 million, classified as current | $16.3 million at December 31, 2022 |
Operating margin is calculated as operating loss divided by revenue; the filing does not report a conventional product gross margin. Cash and marketable securities are separate from the Vaxcyte equity holding. Total current assets were $304.1 million and current liabilities were $59.5 million. Operating lease liabilities totaled $33.3 million.
Changes and notable items
- Revenue rose mainly because of $6.3 million from Astellas, including $2.5 million of revenue associated with the financing component of its upfront payment, and increased Merck and BMS manufacturing or supply activity. EMD Serono revenue fell to $8,000 from $1.9 million.
- R&D expense increased by $9.4 million, principally due to personnel costs, laboratory and clinical-development activity, and manufacturing.
- Net loss included a $7.0 million unrealized loss on Sutro’s Vaxcyte shares, compared with a $0.6 million unrealized gain in Q1 2022. This noncash mark-to-market item contributed to the larger net loss.
- Operating cash outflow increased to $61.0 million. Investing activities provided $67.5 million, primarily reflecting marketable-security maturities and sales; financing activities provided $8.8 million, including $10.9 million net ATM proceeds, partly offset by $3.1 million of debt repayment.
- During Q1, Sutro sold 1.64 million shares through its ATM facility for approximately $10.9 million net. It subsequently sold another 216,036 shares for $1.2 million net through May 12, 2023.
Outlook, developments and risks
- Management said available cash, cash equivalents, marketable securities, and equity securities were expected to fund operations for at least 12 months after the filing date. Sutro also said it would need additional capital to complete development activities and support operations; financing may be unavailable or dilutive.
- Management expected R&D expenses to increase as it advances clinical programs and manufacturing capabilities. No commercial revenue or profitability guidance was provided.
- Luvelta, Sutro’s lead candidate, was in dose expansion. The company expected to begin a registration-directed trial for platinum-resistant ovarian cancer in the first half of 2023 and planned updated data from its pegfilgrastim Cohort C in the second half of 2023. These were expectations stated in the filing, not reported completed milestones.
- Sutro reported that EMD Serono had decided to close the Phase 1a trial of M1231 and not proceed with a planned expansion, citing strategic portfolio considerations. This reduced associated collaboration activity and revenue.
- STRO-001 dose escalation was complete; the company also described STRO-003 as preclinical, with IND-enabling studies expected to finish in Q1 2024 and Phase 1 safety studies expected in 2024.
- The Oxford/SVB loan bears a floating rate; reported average rates were 10.95% in Q1 2023 and 8.07% in Q1 2022. The debt matures March 1, 2024. Sutro said it complied with its $10 million minimum unrestricted-cash covenant and amended the loan agreement in March and April 2023 to permit cash and investments at multiple financial institutions.
- Key risks include clinical and regulatory failure or delays, manufacturing and supply constraints, dependence on collaborators and their development decisions, the need for future financing, dilution, and volatility in the Vaxcyte investment. Sutro reported no legal proceedings it considered likely to have a material adverse effect. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether luvelta’s registration-directed trial and 2023 clinical-data milestones occurred on the expected timelines, and the maturity and quality of the supporting clinical evidence.
- Current cash runway assumptions and operating burn, including the extent to which collaboration receipts or additional financing are needed.
- The debt repayment plan before the March 2024 maturity, floating-rate exposure, and any continuing loan covenants.
- Potential dilution from ATM sales and equity compensation; common shares outstanding were 60.2 million at March 31, 2023 and 60.4 million as of May 11, 2023.
- Changes in the fair value of Vaxcyte shares and their effect on reported earnings, as well as progress and revenue implications across major collaborations, including Astellas, Merck, BMS, and EMD Serono.