Arcus Biosciences, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Clinical-stage biopharmaceutical company; quarter ended September 30, 2023, with year-to-date results for the nine months ended that date. Arcus has no approved products and has not generated product sales. Its lead anti-TIGIT antibody, domvanalimab, was in four Phase 3 registrational studies. Revenue was primarily from collaboration and license arrangements, particularly with Gilead.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $32 million | $33 million | $86 million | $78 million |
| Research and development expense | $82 million | $77 million | $247 million | $208 million |
| General and administrative expense | $30 million | $26 million | $88 million | $76 million |
| Net loss | $71 million | $65 million | $226 million | $200 million |
| Net loss per share, diluted | $0.94 | $0.90 | $3.07 | $2.78 |
| Operating cash flow | — | $(218) million | $508 million |
- Revenue was 88% attributable to Gilead in Q3 and 95% for the nine-month period. Q3 revenue declined 3% year over year; nine-month revenue increased 10%.
- Operating expenses rose 9% in Q3 and 18% year to date. R&D growth reflected expanding clinical and development activity; reimbursements from collaborators reduced reported R&D expense.
- Cash, cash equivalents and marketable securities totaled $950 million at September 30, 2023, down from $1.138 billion at year-end 2022. Total assets were $1.191 billion; stockholders’ equity was $520 million.
- The filing reports no conventional borrowings in the balance sheet. A $19 million liability for sale of future royalties to BVF was recorded in other noncurrent liabilities.
- Cash used in operations was $218 million year to date, versus $508 million provided in 2022, when Arcus received $725 million from Gilead. Investing activities provided $166 million, principally from net proceeds from marketable securities; financing provided $30 million.
- Deferred revenue was $429 million at quarter-end. Collaboration reimbursements recognized as reductions of R&D expense were $119 million for the nine months, versus $111 million in 2022.
Material changes, outlook and commentary
- Management said existing cash and investments should fund planned operations into 2026. The liquidity note separately states that resources are expected to cover at least 12 months following filing; investors should note the difference in specificity.
- Management expects R&D expense to increase substantially over the next few years as programs advance through later-stage trials and manufacturing activities expand. G&A is also expected to rise to support growth. No numerical earnings or revenue guidance was provided.
- In June, Gilead paid $35 million upfront for two inflammation research programs and purchased 1.0 million Arcus shares for $20 million. Arcus received another $5 million net from its at-the-market share sale in August. Gilead held approximately 19.8% of shares at quarter-end and can elect to purchase additional shares, up to 35% ownership, under specified terms.
- Taiho became obligated to pay $28 million after clinical milestones were met in the STAR-221 study; Arcus recorded the amount as a collaboration receivable and recognized $4 million revenue by quarter-end.
- BVF-program preclinical information in Q2 led Arcus to lower estimated success probabilities and delay projected milestones; the royalty liability’s imputed interest rate fell to 10.1% from 20.6%. The Q3-period impact was not material.
- After quarter-end, Arcus reported preliminary Phase 2 EDGE-Gastric results: overall objective response rate was 59% and six-month landmark progression-free survival was 77%; mature PFS was not yet reached. These preliminary findings are subject to change and are not Phase 3 results.
Risks and contingencies
- Substantial ongoing losses, no product-sales revenue and dependence on future collaboration payments or additional financing; clinical development may require greater spending than planned.
- Clinical, regulatory and competitive uncertainty, including the risk that interim results do not predict later trial outcomes, safety issues arise, or combination therapies fail to demonstrate benefit.
- Dependence on Gilead for collaboration economics and development support, and on third parties for trials and manufacturing. WuXi Biologics is identified as the sole manufacturer of zimberelimab drug substance; supply constraints and geopolitical or trade developments could disrupt development.
- Arcus reported suspending clinical trial activities, including enrollment, following the outbreak of war in Israel. It also cited carboplatin shortages in some trial countries.
- Other material risks include intellectual-property disputes, cybersecurity incidents, healthcare regulation, and potential dilution from future equity issuance. No material legal proceedings were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress, enrollment, safety and data maturity in the four domvanalimab Phase 3 studies, and whether preliminary EDGE-Gastric findings are confirmed in larger or randomized studies.
- Cash burn, clinical spending and the assumptions underlying management’s runway estimate into 2026.
- Gilead’s future option decisions, cost-sharing and milestone payments, and the effect of the collaboration’s revenue concentration.
- Manufacturing and trial-supply continuity, including WuXi Biologics dependence and reported chemotherapy shortages.
- Potential dilution from the at-the-market facility, equity awards and Gilead’s purchase rights.