Arcus Biosciences, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Arcus is a clinical-stage cancer biotechnology company with six investigational products in clinical development and no approved products or product-sales revenue. Its anti-TIGIT program was in two registrational Phase 3 studies. Results are unaudited.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Collaboration and license revenue | $18.0 million | $9.5 million |
| Research and development expense | $61.2 million | $66.4 million |
| General and administrative expense | $24.0 million | $15.8 million |
| Operating loss | $67.2 million | $72.7 million |
| Net loss | $68.0 million | $72.6 million |
| Net loss per share, basic and diluted | $0.96 | $1.08 |
| Net cash provided by (used in) operating activities | $654.0 million | $(66.3) million |
Revenue increased 90%, principally because Arcus began recognizing license and development-service revenue for Gilead-optioned programs; Q1 2022 also included $8.3 million of Gilead pipeline-access revenue and $1.8 million under the Taiho agreement. The company remains loss-making, and conventional operating margins are not a useful indicator given its development-stage, collaboration-funded business.
Reported R&D expense fell 8% despite increased clinical activity, mainly reflecting Gilead cost-sharing reimbursements of $30.3 million versus $4.9 million a year earlier and lower scientific-license and milestone costs. Clinical costs rose $12.1 million. G&A increased 52%, reflecting headcount, facilities and related support for the expanding pipeline. Stock-based compensation totaled $16.5 million, up from $12.8 million.
Balance sheet and liquidity
- Cash, cash equivalents and marketable investments totaled $1.342 billion at March 31, 2022, compared with $681.3 million at December 31, 2021. Cash and cash equivalents were $548.8 million; short-term investments were $664.8 million and long-term investments were $128.8 million.
- Current assets were $1.264 billion and current liabilities were $161.3 million. Total liabilities were $746.8 million, including $546.2 million of deferred revenue and $114.8 million of noncurrent operating lease liabilities. The filing excerpt reports no conventional borrowings; it does disclose a liability associated with the sale of future royalties.
- Stockholders’ equity was $796.6 million; accumulated deficit was $343.3 million. Available-for-sale investments had $4.7 million of unrealized losses at quarter-end, and accumulated other comprehensive loss was $4.7 million.
- Management attributed the $400.9 million increase in cash, cash equivalents and restricted cash during the quarter primarily to Gilead’s $725 million option-exercise payment received in January. Operating cash flow therefore does not represent a recurring cash-generation level: it also reflected the large collaboration-related receipt. Arcus invested $268.1 million net in marketable securities.
The filing’s liquidity disclosures differ in horizon: the financial-statement note says existing cash and investments are expected to fund planned operations for at least 12 months after filing, while MD&A says the existing balance is expected to fund the planned level of operations into 2026. Both statements are subject to changes in operating plans and development costs.
Material changes, outlook and risks
- Gilead paid $725 million after exercising options covering three programs in December 2021; the payment was received in January 2022. Arcus reported $542.9 million of remaining Gilead-related deferred revenue at quarter-end. Gilead held approximately 19.3% of Arcus’s common stock and had rights to purchase additional shares, subject to contractual limits.
- Management expects R&D and G&A expenses to increase substantially as Arcus and Gilead advance programs, including into later-stage trials, and Arcus expands development and operational capabilities. Arcus and Gilead planned additional Phase 3 studies for domvanalimab in 2022, subject to clinical findings. Arcus also expected additional clinical studies for etrumadenant and quemliclustat in 2022.
- Under a 2021 agreement, BVF committed $15 million in three nonrefundable payments to fund inflammatory-disease research. Arcus received $5 million in Q1 2022 and expected the final $5 million in 2022. In return, Arcus may owe development and regulatory milestone payments and mid- to high-single-digit royalties if the program advances and products sell. The liability was $10.7 million at quarter-end and carried an estimated effective interest rate of approximately 20.6%.
- Research and development tax-cost treatment changed in 2022: mandatory capitalization and amortization of R&D expenses contributed to a $1.0 million income-tax expense. The filing warns this tax-law provision could reduce cash flow beginning in 2023 if not changed.
- Key risks include clinical-trial failure or delay, competition, reliance on Gilead and third-party manufacturers, and uncertainty around regulatory approval and future funding needs. COVID-19 may disrupt enrollment, site operations and supply chains. Arcus also suspended site activations in Russia, Ukraine and Belarus amid the Russia-Ukraine war; it warned sanctions could affect trial operations and intellectual-property filings. The company reported no material legal proceedings and no material change in contractual obligations outside the ordinary course.
Most important facts for investors to verify
- Reconcile the stated cash runway into 2026 with the note’s shorter “at least twelve months” liquidity statement, and review the assumptions behind each.
- Assess how much of future collaboration revenue and operating cash flow depends on Gilead payments, cost-sharing reimbursements and deferred-revenue recognition.
- Track clinical data, enrollment, trial timing and planned Phase 3 starts, particularly for domvanalimab, and compare outcomes with management’s stated plans.
- Monitor rising gross development needs, Gilead cost-sharing terms, potential partner milestones and royalties, and the BVF royalty liability and assumptions.
- Confirm the effect of the R&D tax-amortization requirement on cash taxes and verify whether supply-chain, COVID-19 or geopolitical disruptions affect trials or manufacturing.