Arcus Biosciences, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Arcus is a clinical-stage biopharmaceutical company with six investigational products in clinical development; it has no approved products and has not generated product-sale revenue.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $33.6 | $9.5 | $78.3 | $28.4 |
| Operating expenses | $103.0 | $87.6 | $283.9 | $255.4 |
| Operating loss | $(69.4) | $(78.1) | $(205.6) | $(227.0) |
| Net loss | $(64.9) | $(78.0) | $(199.5) | $(226.5) |
| Net loss per share, basic and diluted | $(0.90) | $(1.11) | $(2.78) | $(3.28) |
- Revenue is collaboration and license revenue, not product sales. Q3 2022 included $23.7 million of Gilead license and development-services revenue; other collaboration revenue was $9.8 million.
- For the nine months, research and development expense was $207.8 million and general and administrative expense was $76.1 million. These reported expenses reflect Gilead cost-sharing reimbursements, which reduced operating expenses by $93.4 million net for the period.
- At September 30, cash, cash equivalents and marketable securities totaled $1,191.9 million, up from $681.3 million at December 31, 2021. Current assets were $1,101.1 million versus current liabilities of $177.2 million.
- Nine-month cash from operating activities was $507.7 million, compared with $194.1 million used in the prior-year period. The 2022 inflow was materially affected by the $725.0 million Gilead option payment received in January and collaboration cost reimbursements; it should not be viewed as a recurring operating cash-flow run rate. Investing activities used $459.8 million, primarily reflecting net purchases of investments; financing activities provided $21.8 million.
- The filing lists no conventional borrowings. Other financing-related obligations include an $11.7 million liability for the sale of future royalties to BVF. Noncurrent operating lease liabilities were $119.2 million.
- Margins are not meaningful as a conventional operating measure for this development-stage company, which continues to report operating and net losses.
Changes versus comparable periods
- Q3 revenue rose $24.1 million year over year, primarily because Gilead-related license and development-services revenue began following its program option exercises. The nine-month increase was $50.0 million. Taiho access-rights revenue ended as its five-year option period concluded in September 2022.
- Q3 operating expenses increased 18%; R&D rose 8% and G&A rose 61%. Higher clinical, manufacturing, personnel and facilities costs were partly offset by increased Gilead reimbursements. For the nine months, total operating expenses increased 11%, with G&A up 55% and R&D up 1% after reimbursements.
- Net loss narrowed year over year in both periods, reflecting higher collaboration revenue and interest income, as well as lower reported R&D costs after cost sharing. The company nevertheless remained loss-making.
- Cash and investments increased largely due to Gilead’s January 2022 payment. The company also issued shares through equity award plans; 72.35 million shares were outstanding at September 30.
Outlook, significant items and risks
- Management said available cash, cash equivalents and investments were expected to fund planned operations into 2026. The financial statement note separately states resources are sufficient for at least 12 months following filing. The company expects R&D and G&A spending to rise substantially as it advances programs and expands development capabilities; no specific revenue or earnings guidance was provided.
- Domvanalimab was being evaluated in four registrational Phase 3 studies. In Q3, Gilead initiated STAR-121; Arcus also described STAR-221 as initiated. Development and commercialization are substantially linked to the Gilead collaboration, which includes shared development costs, potential future option payments and contingent milestones and royalties.
- Revenue included a $8.9 million Q3 and $13.1 million nine-month cumulative catch-up from revised estimates of future effort, primarily for zimberelimab. Management said a 10% change in estimated effort for relevant Gilead obligations could have changed current-quarter revenue by as much as $6.5 million.
- Management cited clinical-development uncertainty, competition, trial enrollment and execution, reliance on third parties and manufacturing supply, and potential COVID-19-related disruption. WuXi Biologics is a key single-source manufacturer; global shipping and raw-material lead times remained risks. The company reported no material legal proceedings.
- The BVF agreement funds inflammatory-disease research and may require future milestone payments and mid- to high-single-digit royalties if the program advances and generates sales. Its valuation depends on uncertain clinical, regulatory and commercial assumptions; the company reported a 20.6% imputed interest rate on the liability.
- Subsequent event: In October 2022, Arcus agreed to sublease approximately 31,000 square feet of unfinished Brisbane office space. The arrangement includes a $9.4 million tenant-improvement allowance and expected sublease income of about $3.0 million annually from 2023 through 2028.
Important facts for investors to verify
- Whether the stated runway into 2026 remains supportable as clinical-trial and infrastructure spending grows, and how much operating cash flow depends on nonrecurring collaboration receipts.
- Progress, safety and efficacy data, enrollment and timelines for the four domvanalimab registrational studies and other key programs.
- The assumptions behind Gilead-related revenue recognition and cost-sharing reimbursements, including the sensitivity of cumulative catch-up revenue to estimated development effort.
- Manufacturing continuity and supply-chain exposure, particularly reliance on WuXi Biologics, alongside clinical-trial execution and competitive risks.
- Potential future Gilead payments, shared development costs, BVF contingent obligations and the financial terms and commencement of the October 2022 office sublease.