SUTRO BIOPHARMA, INC. annual report, FY2019

Sutro Biopharma, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Filed March 13, 2020. Sutro is a clinical-stage biotechnology company developing protein therapeutics using its XpressCF cell-free platform. It had no products approved for sale and generated no commercial product revenue.

Financial performance and liquidity

Metric	FY2019	FY2018
Revenue	$42.7 million	$38.4 million
Research and development expense	$65.6 million	$54.3 million
General and administrative expense	$32.6 million	$21.4 million
Operating loss	$55.5 million	$37.2 million
Net loss	$55.7 million	$35.3 million
Net loss per share	$2.43	$6.13
Operating cash flow	$(65.0) million	$12.7 million

• FY2019 revenue was primarily collaboration, license, research, and supply revenue. Revenue included $21.5 million from Merck, $11.3 million from BMS, $8.9 million from EMD Serono, and $1.1 million from SutroVax.
• At December 31, 2019, cash and cash equivalents were $5.0 million and marketable securities were $128.5 million, for combined resources of $133.5 million. Working capital was $95.6 million; total assets were $156.4 million and stockholders’ equity was $97.8 million.
• Year-end debt was $9.9 million. The filing reports no gross margin, and a conventional product-sales margin is not meaningful given the absence of commercial product sales.
• Cash used in investing activities was $51.1 million, primarily reflecting purchases of marketable securities and equipment; financing activities used $4.2 million, mainly for debt repayment.
• Fourth-quarter 2019 revenue was $11.3 million, net loss was $14.8 million, and loss per share was $0.65. The comparable fourth-quarter 2018 figures were revenue of $19.1 million, net loss of $1.5 million, and loss per share of $0.07.

Material changes versus prior period

• Annual revenue rose 11%, but operating expenses increased 30%; R&D expense rose 21% and G&A expense rose 52%. Net loss increased 58% to $55.7 million.
• Revenue growth reflected the 2018 Merck collaboration and EMD Serono activity, partially offset by a $9.9 million decrease in BMS/Celgene revenue. FY2018 included a $10.0 million Celgene manufacturing milestone that did not recur.
• Operating cash flow moved from $12.7 million provided in 2018 to $65.0 million used in 2019. The filing attributes the change in part to a $20.2 million decrease in deferred revenue and higher operating costs; 2018 cash flow had benefited from Merck’s $60.0 million upfront payment.
• Sutro adopted ASC 606 on January 1, 2019 using the modified retrospective method. Adoption reduced opening accumulated deficit by $10.3 million; FY2019 reported revenue was $42.7 million versus $43.5 million under the prior revenue standard, and reported net loss was $55.7 million versus $51.9 million on that basis.

Pipeline, outlook, risks, and unusual items

• STRO-001: Phase 1 dose escalation for multiple myeloma and non-Hodgkin lymphoma continued; the maximum tolerated dose had not been reached. Interim data available in 2019 included one complete response and one partial response in DLBCL, as well as a serious grade 5 thromboembolic dose-limiting event. The protocol was amended to screen for thrombosis. Management then expected additional data in the second half of 2020 and dose expansion in the first half of 2021. The FDA had granted orphan drug designation for multiple myeloma.
• STRO-002: Phase 1 dose escalation for ovarian and endometrial cancers continued; the maximum tolerated dose had not been reached. Data available through October 15, 2019 included one confirmed partial response and several cases of stable disease; no dose-limiting toxicities or ocular toxicity signals had been reported at that cutoff. Management then expected additional data in the second quarter of 2020 and dose expansion in the second half of 2020.
• Collaborations: BMS was conducting a Phase 1 trial of the BCMA ADC CC-99712. Merck’s collaboration could yield up to $1.6 billion in aggregate milestones, subject to development and other conditions, plus royalties; these are contingent potential payments, not committed revenue. EMD Serono’s lead bispecific ADC was in preclinical development. In March 2020, Merck extended a research term by one year with a $5.0 million payment.
• Capital and debt: Management stated that available resources were expected to fund operations for at least 12 months after filing, while also noting that substantial additional financing would be needed over time. On February 28, 2020, after year-end, Sutro borrowed $25.0 million under a new facility, using approximately $9.6 million to repay its prior loan. The new loan bears interest at a floating rate subject to an 8.07% floor, is interest-only through March 2022, and matures in March 2024; it includes covenants, collateral over assets other than intellectual property, and warrants for 81,257 shares.
• Key risks: Clinical-stage programs may fail or be delayed; early results may not predict later outcomes. Sutro cited manufacturing scale-up and regulatory uncertainty for its cell-free platform, reliance on collaborators and contract manufacturers, competition, future funding needs, intellectual-property risks, and possible dilution. The filing also identified the emerging COVID-19 outbreak as a potential source of clinical-trial, supply-chain, operating, and financing disruption.
• Unusual accounting and governance items: FY2019 interest and other expense included $3.1 million of interest expense associated with the financing component of the Merck upfront payment. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. No material legal proceedings were reported.

Investor verification priorities

1. Check subsequent clinical-trial disclosures for updated safety, efficacy, enrollment, and dose-escalation results for STRO-001 and STRO-002, including follow-up on STRO-001’s thromboembolic events.
2. Reassess cash runway using current cash, spending, and financing needs; confirm the proceeds, repayment, interest burden, covenants, and warrant dilution from the February 2020 loan.
3. Verify the timing and conditions of collaboration milestones, royalties, research funding, and any changes in partner priorities or rights, including the BMS programs.
4. Account for ASC 606’s effect when comparing reported revenue, deferred revenue, and losses with prior periods.
5. Review whether COVID-19 or manufacturing, trial-enrollment, regulatory, or financing developments changed management’s stated timelines and runway expectations.