Business context and reporting period
Arcus Biosciences, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Arcus is a clinical-stage oncology company with six investigational products in clinical development; it has no approved products and reported no product-sales revenue. Its most advanced program, the anti-TIGIT antibody domvanalimab, was in two Phase 3 registrational studies. Gilead is a major development and commercialization partner and held approximately 19.2% of Arcus’s common stock at quarter-end.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $26.8 million in 2022; $9.5 million in 2021 | $44.8 million in 2022; $18.9 million in 2021 |
| Operating expenses | $95.7 million; $85.6 million in 2021 | $180.9 million; $167.8 million in 2021 |
| Net loss | $66.6 million; $76.0 million in 2021 | $134.6 million; $148.6 million in 2021 |
| Basic and diluted loss per share | $0.93; $1.09 in 2021 | $1.88; $2.17 in 2021 |
Revenue consisted of collaboration and license revenue, including Gilead research and development services and pipeline-access revenue and Taiho revenue. Revenue increased substantially year over year as Arcus began recognizing revenue for Gilead-optioned programs. Operating margins are not a useful measure for this pre-commercial business.
Second-quarter R&D expense was $69.9 million, up 2% year over year; the reported expense is net of Gilead cost-sharing reimbursements. G&A expense rose 54% to $25.8 million, reflecting higher personnel, stock-based compensation, facilities and other support costs. For the first half, R&D expense declined 3% to $131.1 million, mainly reflecting greater Gilead reimbursements and lower license-related costs, while G&A increased 53% to $49.8 million.
At June 30, cash, cash equivalents and marketable investments totaled $1.271 billion, versus $681.3 million at December 31, 2021. Cash and cash equivalents were $272.6 million; short- and long-term investments were $900.1 million and $98.3 million. Management stated in MD&A that existing funds were expected to support planned operations into 2026; the financial-statement note separately states the funds were sufficient for at least 12 months following filing.
Operating activities provided $588.7 million in the first half, compared with $140.3 million used in the prior-year period. This was principally driven by receipt of Gilead’s $725 million option-exercise payment in January 2022 and $66.3 million of Gilead cost-sharing reimbursements; it should not be read as recurring operating cash generation. Investing activities used $483.3 million, largely as Arcus invested funds in marketable securities. Financing activities provided $19.3 million, including $5.0 million from BVF and equity-plan proceeds. The filing reports no conventional borrowings; it reports operating lease liabilities and an $11.2 million long-term liability related to the sale of future royalties to BVF.
Material changes versus the prior comparable period
- Second-quarter revenue rose $17.3 million year over year, primarily because $16.7 million of license and development-service revenue was recognized for Gilead programs; this category had no revenue in the 2021 quarter.
- Net loss narrowed by $9.3 million in the quarter and $13.9 million for the first half, despite higher total operating expenses, as collaboration revenue and interest income increased.
- Gilead cost-sharing reductions of operating expenses rose to $35.9 million for the quarter and $66.3 million for the first half, compared with $1.2 million and $6.1 million, respectively, a year earlier.
- Cash and investments increased following the $725 million Gilead payment, while the collaboration receivable fell sharply from year-end as the amount due was collected.
- Accumulated other comprehensive loss increased to $7.2 million from $1.3 million at year-end, primarily reflecting unrealized losses on available-for-sale investments.
Outlook, risks and unusual items
Management expected R&D and G&A spending to increase substantially as Arcus and Gilead advance optioned programs into larger, later-stage trials and Arcus expands development infrastructure. Arcus planned two additional Phase 3 domvanalimab studies in the second half of 2022, subject to interim ARC-7 analyses, and expected additional etrumadenant and quemliclustat studies in that period. These are plans, not assurances of initiation or success.
Key risks include clinical-trial failure or delay, enrollment and retention challenges, adverse safety findings, competition, reliance on Gilead and third-party research and manufacturing partners, and uncertainty around regulatory approval and commercialization. COVID-19 could disrupt trials, site operations and supply chains. Arcus highlighted dependence on WuXi Biologics for manufacturing certain biologics and noted potential trade and supply-chain uncertainty; it reported no anticipated impact to its manufacturing plans at the time. The company also cited inflation, geopolitical conditions, intellectual-property risks and potentially significant future capital needs.
Under the BVF agreement, Arcus may owe development and regulatory milestone payments and mid- to high-single-digit royalties on resulting product sales. The related liability uses significant unobservable estimates; its imputed interest rate was approximately 20.6% at quarter-end. The filing reports no material legal proceedings, no material changes to contractual obligations outside the ordinary course, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether planned Phase 3 studies and other clinical milestones occurred, and what subsequent trial data show, particularly for domvanalimab.
- Whether the stated cash runway into 2026 remains supportable as trial scope, spending and Gilead reimbursements evolve.
- How much of reported cash flow and revenue reflects nonrecurring Gilead option payments, deferred revenue recognition or partner cost sharing.
- Progress, manufacturing continuity and supply-chain exposure for programs relying on WuXi Biologics and other third parties.
- The future timing and amount of BVF milestone and royalty obligations, and potential dilution from equity compensation or financing.