Arvinas, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing was signed August 5, 2019. Arvinas is a clinical-stage biopharmaceutical company developing PROTAC protein degraders; it had no product sales or approved products.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.0 million | $3.4 million | $8.0 million | $7.5 million |
| Research and development expense | $16.0 million | $10.3 million | $30.2 million | $17.5 million |
| General and administrative expense | $6.4 million | $1.6 million | $12.1 million | $2.8 million |
| Operating loss | $18.4 million | $8.5 million | $34.2 million | $12.8 million |
| Net loss | $17.2 million | $7.9 million | $31.6 million | $12.0 million |
| Net loss per share | $0.55 | $0.55* | $1.01 | $0.63* |
*2018 reported loss per share attributable to common shares was $11.96 for Q2 and $51.81 for the first half, including preferred-unit redemption-value adjustments of $14.8 million and $86.3 million, respectively. The table’s 2018 net loss per share figures are net loss divided by weighted-average shares and are not the reported attributable amount. Share counts also changed substantially after the October 2018 IPO.
Cash and liquidity: At June 30, cash and cash equivalents were $11.3 million and marketable securities were $147.8 million, totaling $159.2 million, versus $187.8 million at December 31, 2018. Current assets were $163.3 million and current liabilities $20.9 million. The company reported an accumulated deficit of $333.8 million.
Cash flows: First-half operating cash use was $26.3 million, compared with $7.1 million provided in the prior-year period. Investing activities provided $34.1 million, primarily from net maturities of marketable securities; financing activities provided $0.3 million. Cash and cash equivalents increased $8.2 million during the half-year.
Debt and other balance-sheet items: Debt was approximately $2.1 million at June 30, mainly the $2.0 million Connecticut loan, which bears 3.25% interest and may be partially forgiven subject to employment conditions. The separate CII loan was paid in July 2019. Operating lease right-of-use assets and liabilities of approximately $2.4 million were recognized upon adopting the lease standard in 2019. Deferred revenue was $45.5 million, expected to be recognized through 2023.
Gross margin is not meaningful to the company’s current development-stage operations; revenue is primarily collaboration and license revenue. No income tax benefit was recorded, with a full valuation allowance against deferred tax assets.
Changes versus prior comparable period
- First-half revenue rose 7% year over year, while net loss widened to $31.6 million from $12.0 million; the 2018 comparison excludes the large preferred-unit redemption-value adjustment from net loss.
- First-half R&D expense increased $12.7 million, reflecting employee costs, platform and exploratory research, and ARV-110 clinical-trial activity. G&A increased $9.3 million, including higher compensation, legal, insurance, and public-company costs.
- Stock-based compensation was $10.5 million for the first half of 2019, versus $1.1 million in the prior-year period, contributing materially to expense growth.
- Operating cash flow shifted from positive to negative, partly because 2018 included collection of a $25.0 million collaboration-related receivable. Cash plus marketable securities fell $28.6 million from year-end 2018.
Outlook, commentary and risks
- Management expected preliminary Phase 1 data for ARV-110 in Q4 2019; ARV-110 received FDA Fast Track designation in May 2019 for certain men with metastatic castration-resistant prostate cancer. Arvinas expected to start an ARV-471 Phase 1 trial in Q3 2019 and preliminary data in 2020.
- Management estimated existing cash, cash equivalents and marketable securities would fund planned expenses and capital needs into the second half of 2021. This estimate depends on assumptions and could prove wrong; the company anticipates substantial further losses and says additional financing will be needed.
- In July 2019, after quarter-end, the Bayer collaboration and agricultural joint venture became effective. Terms included a $17.5 million collaboration upfront payment, $1.5 million in additional research funding after invoicing, potential further research funding and milestone/royalty payments. Bayer also committed $56.0 million to the JV, including $16.0 million contributed at closing; each party initially held 50%, with 15% reserved for service-provider incentives. Bayer separately purchased 1,346,313 Arvinas shares for approximately $32.5 million.
- Key risks include the early and unproven nature of PROTAC drug development, clinical safety and efficacy uncertainty, trial enrollment and timing, dependence on third-party manufacturers and collaborators, intellectual-property protection, and the need for additional capital. Collaboration revenue and future milestone or royalty payments are contingent; no product-sale revenue or royalties had been received.
- The company reported no material legal proceedings and concluded disclosure controls were effective as of June 30, 2019. It identified no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ARV-110 trial progress and preliminary-data timing matched the stated Q4 2019 expectation, and whether the ARV-471 Phase 1 trial began as planned.
- The assumptions behind the stated runway into the second half of 2021, subsequent cash burn, and any financing or dilution required.
- Recognition and timing of collaboration revenue and deferred revenue, and the conditions for Bayer, Pfizer and Genentech research funding, milestones and royalties.
- The final accounting and cash effects of the post-quarter Bayer collaboration, joint venture and share issuance; these were not reflected in June 30 balances.
- Remaining Connecticut loan forgiveness and location/employment covenants, and any resulting repayment obligations.