ARCUS BIOSCIENCES, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2020 , included in our Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (SEC) onFebruary 25, 2021 . This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Further, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Our actual results could differ materially from those discussed in these forward-looking and other statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled "Risk Factors."
Overview
We are a clinical-stage biopharmaceutical company focused on creating best-in-class cancer therapies. Our initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance. We have built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which we have the ability to develop in combinations with our monoclonal antibodies through rationally designed, indication-specific clinical trial designs. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies. In 2020, we entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead), whereby Gilead obtained rights to zimberelimab and a time-limited exclusive option to all of our current and future programs during the 10-year collaboration term. For each program to which Gilead exercises their option, the parties will co-develop globally and co-commercialize in theU.S. , subject to certain exceptions, and Gilead will have the right to commercialize the program outside ofthe United States , subject to the rights of our existing partners to certain territories. In connection with the Gilead Collaboration Agreement, we also entered into a Common Stock Purchase Agreement (as amended and restated inJanuary 2021 ), pursuant to which Gilead purchased an aggregate of 11,613,029 shares of our common stock for aggregate gross proceeds of$420.4 million and has the right, at its option from time to time over a five-year period, to purchase up to a maximum ownership of 35% of our then-outstanding voting common stock, and an Investor Rights Agreement that provides for a three-year standstill, two-year lockup and the right to designate two individuals to be appointed to our Board of Directors. In 2017, we entered into an Option and License Agreement (Taiho Agreement) withTaiho Pharmaceutical Co., Ltd. (Taiho) pursuant to which Taiho has a time-limited option to exclusively license the development and commercialization rights to each of our programs forJapan and certain other territories inAsia (excludingChina ). To date, Taiho has exercised their option rights to our adenosine receptor antagonist program (including etrumadenant) and our anti-PD-1 program (including zimberelimab).
We currently have six investigational products in clinical development:
Domvanalimab (formerly referred to as AB154), our anti-TIGIT monoclonal antibody, is being evaluated in combination with zimberelimab with or without etrumadenant vs. zimberelimab monotherapy in ARC-7, our randomized Phase 2 trial in first-line metastatic PD-L1?50% non-small cell lung cancer. InFebruary 2021 , we initiated ARC-10, our first registrational trial evaluating domvanalimab in combination with zimberelimab and zimberelimab monotherapy vs. chemotherapy in this same setting. Etrumadenant (formerly referred to as AB928), our small molecule dual A2a/A2b adenosine receptor antagonist, is being evaluated by us in several randomized or Phase 2 trials across major tumor types, including in our ARC-4, ARC-6, ARC-7, and ARC-9 studies, as well as in two randomized Phase 1b/2 trials being conducted byGenentech (the Morpheus trials).
Quemliclustat (formerly referred to as AB680), our small-molecule CD73 inhibitor, is being evaluated in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer (ARC-8) as well as late-line metastatic prostate cancer (ARC-6).
Zimberelimab (formerly referred to as AB122), our anti-PD-1 monoclonal antibody,
is the cornerstone of our combination strategy. We are currently evaluating
zimberelimab, either alone or in combination with other agents across several
tumor types, including non-small cell lung cancer in ARC-7, our Phase 2 trial,
and ARC-10, our recently initiated registrational trial which is designed to
support the approval of zimberelimab.
AB308, our Fc-enabled anti-TIGIT monoclonal antibody, is being evaluated in a
Phase 1/1b study. The dose escalation portion was designed to expeditiously
establish the safety, pharmacokinetics and pharmacodynamics of AB308 in
combination with zimberelimab. The dose expansion portion is evaluating AB308 in
combination with zimberelimab in multiple tumor types, including hematological
malignancies.
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-------------------------------------------------------------------------------- AB521, our HIF-2? inhibitor, is being evaluated in a healthy volunteer study to expeditiously characterize the pharmacokinetic and safety profile of AB521 and to identify the starting dose for a Phase 1/1b study in oncology indications.
COVID-19 Pandemic
The degree to which COVID-19 impacts our business operations, research and development programs and financial condition remains highly uncertain and will depend on future developments, including the ultimate duration and/or severity of the pandemic, the impact of any resurgences and new variants that emerge, actions by government authorities to contain the spread of the virus, the availability, adoption and effectiveness of any vaccines, and when and to what extent normal economic and operating conditions can resume. Our management continues to actively monitor this health crisis and its effects on our operations, key vendors and workforce. We conduct our clinical trials in theU.S. and internationally in geographic regions that are impacted by COVID-19 to varying degrees. While we have seen relatively robust enrollment in most of our ongoing Arcus-sponsored studies, disruptions caused by the COVID-19 pandemic may impact our ability to initiate, enroll, conduct or complete our ongoing or planned clinical trials. TheAmerican Cancer Society has also reported that the pandemic has led to declines in screening, diagnosis and treatment for cancer patients, which will impact the enrollment of patients in clinical trials targeting early stage cancers and retention of patients overall in our trials. Patient safety remains our paramount concern and we continue to collaborate with our existing and with new investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance. We are unable to predict the ultimate impact of this pandemic on our ongoing and planned clinical programs. With respect to manufacturing and supply, our third-party contract manufacturers continue to operate at or near normal levels. At this time and subject to further COVID-19 implications, we believe we have manufactured sufficient drug supply for our ongoing clinical studies and we do not anticipate any disruptions to our ability to manufacture our investigational products. Global shipping has been severely challenged by the evolving pandemic, which has led to delays in our receipt of materials and supplies used in our clinical and laboratory operations. We actively manage our supply chain needs to minimize the impact of any disruptions to our clinical and laboratory operations. Our discovery programs were impacted by reduced operating capacity in our laboratories; however, our laboratory operations are operating at or near normal levels following the availability of vaccines and our mandatory vaccine policy. Our office-based employees continue to work remotely; however, we are beginning to resume periodic in-person meetings. The safety, health and well-being of our employees remains a primary concern, and we may restrict our business activities or modify our employee work arrangements in order to reduce the risk of exposure to COVID-19 among our employees. The COVID-19 pandemic continues to evolve and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.
Components of Operating Results
Collaboration and License Revenue
Our collaboration and license revenue consists of revenue recognized from the upfront and periodic payments received from Taiho and Gilead, for research and development services performed by us to develop our investigational products under the terms of our collaboration agreements, and from any option exercise payments. Operating Expenses
Research and Development Expenses
Our research and development expenses consist of expenses incurred in connection
with the research and development of our pipeline programs. These expenses
include pre-clinical and clinical expenses, payroll and personnel expenses,
including stock-based compensation for our employees, laboratory supplies,
product licenses, consulting costs, contract research, and depreciation. Shared
facility expenses are allocated to functional groups proportionally based on
usage. Under certain collaboration agreements we agree to share research and
development expenses with our partners or to reimburse our partners for
qualified expenses. We expense both internal and external research and
development costs as they are incurred. We record advance payments for services
that will be used or rendered for future research and development activities as
prepaid expenses and recognize them as an expense as the related services are
performed.
We do not allocate our costs by investigational product, as a significant amount
of research and development expenses include internal costs, such as payroll and
other personnel expenses, and certain external costs that are not recorded at
the investigational product level. In particular, with respect to internal
costs, several of our departments support multiple research and development
programs, and we do not allocate those costs by investigational product.
We expect our research and development expenses to increase substantially during
the next few years due to our Gilead collaboration and as we seek to complete
existing clinical trials and advance our programs into later-stage clinical
trials, pursue regulatory approval
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for our investigational products, and advance other programs into the clinic.
Later-stage clinical trials typically include a larger number of subjects, are
of a longer duration and include more geographic regions. As we advance our
clinical-stage programs and prepare to seek regulatory approval, we will also
need to conduct certain validation activities with respect to our manufacturing
processes for the investigational products in each program. Moreover, in order
to maximize the potential of our collaboration with Gilead, we believe it will
be important to grow our discovery capabilities and pipeline. As a result, we
expect our preclinical, clinical, and contract manufacturing expenses to
increase significantly relative to what we have incurred to date. The level of
our future research and development investment will depend on a number of
factors and uncertainties, including clinical outcomes from our ongoing clinical
trials, whether our collaborators opt into any of our programs, the amount of
opt-in and milestone payments we receive from our collaborators, and the breadth
of any joint development program agreed to with Gilead for programs they opt
into. In addition, under our license agreements with WuXi Biologics and Abmuno,
and our co-development and collaboration agreement with AstraZeneca, we may be
required to pay additional clinical and regulatory milestone payments based on
the development progress of our investigational products. Therefore, we are
unable to predict the timing or the final cost to complete our clinical programs
or validation of our manufacturing and supply processes and delays may occur due
to numerous factors. Factors that could cause or contribute to delays or
additional costs include, but are not limited to, those discussed in "Item 1A.
Risk Factors."
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses. We anticipate that our general and administrative expenses will increase substantially during the next few years as we support our growing research and development activities, including staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs.
Other Non-Operating Income, net
Other non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities as well as activity related to our equity method investment inPACT Pharma, Inc (PACT Pharma). To date, gains have consisted of gains on dilution of our investment in PACT Pharma, typically occurring upon PACT Pharma's new issuances of equity securities. Losses associated with the investment consist of our share of PACT Pharma's net losses.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our condensed consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles (U.S. GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies relating to revenue recognition, clinical trial accruals and stock-based compensation reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates in the nine months endedSeptember 30, 2021 , compared to those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 . For a description of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K. 20
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Results of Operations
Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30, Change
2021 2020 $ %
Revenues:
License revenue $ - $ 55,096 $ (55,096 ) -100 %
Collaboration revenue 9,461 9,434 27 0 %
Total revenues 9,461 64,530 (55,069 ) -85 %
Operating expenses:
Research and development 71,254 51,801 19,453 38 %
General and administrative 16,343 11,177 5,166 46 %
Total operating expenses 87,597 62,978 24,619 39 %
Income (loss) from operations (78,136 ) 1,552 (79,688 ) *
Non-operating income, net 161 270 (109 ) -40 %
Net income (loss) $ (77,975 ) $ 1,822 $ (79,797 ) *
* Not meaningful
Collaboration and License Revenue
Collaboration and license revenue decreased$55.0 million , from$64.5 million for the three months endedSeptember 30, 2020 to$9.5 million for the three months endedSeptember 30, 2021 . In the three months endedSeptember 30, 2021 , we recognized$7.7 million in collaboration revenues related to Gilead's ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement, as well as$1.8 million under the Taiho Agreement. In the three months endedSeptember 30, 2020 , we recognized$55.1 million in revenue for the license to zimberelimab and$7.7 million in collaboration revenues in accordance with the Gilead Collaboration Agreement, as well as$1.8 million under the Taiho Agreement.
Research and Development Expenses
Research and development expenses increased$19.5 million , or 38%, from$51.8 million for the three months endedSeptember 30, 2020 to$71.3 million for the three months endedSeptember 30, 2021 . The increase in research and development expenses was driven by costs incurred to support our expanded clinical and development activities. Our growing headcount and our 2021 stock awards drove a$12.9 million increase in employee compensation costs, including approximately$4.9 million of increased non-cash stock-based compensation. Clinical costs for our ongoing studies increased$12.7 million as a result of the increased number of programs and clinical trials compared to the same quarter in the prior year. We incurred an additional$2.9 million increase in office facilities and technology expense,$2.2 million increase in clinical consulting costs, and$1.0 million increase in lab supplies and equipment as we expanded our development efforts. There was also a net$1.7 million increase in research and development expense due to a decrease in reimbursement from collaboration partners for shared expenses. In the current quarter we recognized reimbursement of approximately$0.8 million from Gilead for certain applicable costs of developing zimberelimab in accordance with the Gilead Collaboration Agreement, compared to approximately$2.5 million from our collaboration partners in the same quarter in the prior year. The overall increase in research and development expense is partially offset by a decrease of$13.1 million in milestone expense incurred and a$1.3 million decrease in expense from manufacturing and development. We did not incur milestone expense in the three months endedSeptember 30, 2021 , compared to$13.1 million in the same quarter in the prior year.
General and Administrative Expenses
General and administrative expenses increased$5.1 million , or 46%, from$11.2 million for the three months endedSeptember 30, 2020 to$16.3 million for the three months endedSeptember 30, 2021 . The increase in general and administrative expenses was driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations, as well as costs associated with being a public company. Our growing headcount as well as our 2021 stock awards drove a$5.7 million increase in employee compensation costs, including approximately$3.7 million in increased non-cash stock-based compensation. The overall increase in general and administrative expense is partially offset by a$1.0 million decrease in outside legal, accounting, and other consulting expenses due to costs related to our transaction with Gilead and other corporate development activities incurred in 2020. 21 --------------------------------------------------------------------------------
Non-Operating Income, Net
Non-operating income, net decreased$0.1 million or 40%, from$0.3 million for the three months endedSeptember 30, 2020 to$0.2 million for the three months endedSeptember 30, 2021 . The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the quarter endedSeptember 30, 2021 as compared to the same period in the prior year.
Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30, Change
2021 2020 $ %
Revenues:
License revenue $ - $ 55,096 $ (55,096 ) -100 %
Collaboration revenue 28,383 12,934 15,449 119 %
Total revenues 28,383 68,030 (39,647 ) -58 %
Operating expenses:
Research and development 206,412 110,636 95,776 87 %
General and administrative 48,990 29,617 19,373 65 %
Total operating expenses 255,402 140,253 115,149 82 %
Loss from operations (227,019 ) (72,223 ) (154,796 ) *
Non-operating income, net 481 1,218 (737 ) -61 %
Net loss $ (226,538 ) $ (71,005 ) $ (155,533 ) *
* Not meaningful
Collaboration and License Revenue
Collaboration and license revenue decreased$39.6 million , from$68.0 million for the nine months endedSeptember 30, 2020 to$28.4 million for the nine months endedSeptember 30, 2021 . In the nine months endedSeptember 30, 2021 , we recognized$23.1 million in collaboration revenues related to Gilead's ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement, as well as$5.3 million under the Taiho Agreement. In the nine months endedSeptember 30, 2020 , we recognized$55.1 million in revenue for the license to zimberelimab and$7.7 million in collaboration revenues in accordance with the Gilead Collaboration Agreement, as well as$5.3 million under the Taiho Agreement
Research and Development Expenses
Research and development expenses increased$95.8 million , or 87%, from$110.6 million for the nine months endedSeptember 30, 2020 to$206.4 million for the nine months endedSeptember 30, 2021 . The increase in research and development expenses was driven by costs incurred to support our expanded clinical and development activities. Our growing headcount and our 2021 stock awards drove a$36.4 million increase in employee compensation costs, including approximately$13.9 million of increased non-cash stock-based compensation. Clinical costs for our ongoing studies and manufacturing costs increased$34.6 million and$17.5 million , respectively, as a result of the increased number of programs and clinical trials compared to the same period in the prior year. We incurred an additional$5.4 million increase in office facilities and technology expense,$4.4 million increase in lab supplies and equipment, and$4.3 million increase in consulting services as we expanded our development efforts. The overall increase in research and development expense is partially offset by a$3.0 million decrease in development milestone expenses incurred. In the nine months endedSeptember 30, 2021 , the Company incurred a$10.0 million milestone payment due to WuXi Biologics pertaining to zimberelimab and$5.0 million incurred for a milestone payment due to Abmuno pertaining to domvanalimab. In the same period in the prior year, we incurred$10.1 million sublicense fee and a$5.0 million development milestone payment, both to WuXi, as well as a$3.0 million development milestone payment to Abmuno. There was also a net$4.0 million decrease in research and development expense due to an increase in reimbursement from collaboration partners for shared expenses. In the nine months endedSeptember 30, 2021 , we recognized reimbursement of approximately$6.9 million from Gilead for certain applicable costs of developing zimberelimab, including$4.0 million of cost sharing reimbursement related to milestone expense incurred, in accordance with the Gilead Collaboration Agreement. Reimbursement from our collaboration partners was approximately$2.9 million in the same period in the prior year.
General and Administrative Expenses
General and administrative expenses increased$19.4 million , or 65%, from$29.6 million for the nine months endedSeptember 30, 2020 to$49.0 million for the nine months endedSeptember 30, 2021 . The increase in general and administrative expenses was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations, as well as 22 -------------------------------------------------------------------------------- costs associated with being a public company. Our growing headcount and our 2021 stock awards drove an$18.7 million increase in employee compensation costs, including approximately$12.9 million in increased non-cash stock-based compensation. We also incurred an approximately$1.5 million increase in office facilities expense due to our expanding headcount and office space. Recruiting expense and taxes increased in connection with our growth, as well as costs associated with ongoing compliance with public company requirements. The overall increase in general and administrative expense is partially offset by a decrease of$2.2 million in outside legal and other consulting expenses compared to the same quarter in the prior year, due to significant costs incurred in 2020 related to our transaction with Gilead and other corporate development activities.
Non-Operating Income, Net
Non-operating income, net decreased$0.7 million or 61%, from$1.2 million for the nine months endedSeptember 30, 2020 to$0.5 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the nine months endedSeptember 30, 2021 as compared to the same period in the prior year.
Liquidity and Capital Resources
To date, we have financed our operations primarily through net proceeds of approximately$677.1 million from equity offerings and proceeds of approximately$641.4 million from our collaboration and stock purchase agreements, including$220.4 million gross proceeds raised inFebruary 2021 from the sale to Gilead of 5,650,000 shares of our common stock. As ofSeptember 30, 2021 , we had$743.4 million of cash, cash equivalents, and investments in marketable securities, compared to$735.1 million as ofDecember 31, 2020 . Our cash and investments are held in a variety of interest-bearing instruments, including money market funds,U.S. government treasury obligations,U.S. government agency securities, and investments in corporate securities. Based on our existing business plan, we believe that our existing cash, cash equivalents, and investments will be sufficient to fund our planned level of operations at least through 2023.
We may require additional capital to complete the development and any commercialization of our investigational products. Our future capital requirements will depend on many factors, including:
• the scope, rate of progress and costs of clinical trials for our investigational products as well as drug discovery, preclinical development activities, and laboratory testing;
• the number and scope of clinical programs we decide to pursue;
• the scope and costs of manufacturing development and commercial manufacturing activities;
• the timing and amount of expense related to our current and future clinical programs, subject to the rights of our existing partners, and the costs associated with our share of the global development plan for such programs;
• the timing and amount of milestone payments we receive under the Taiho Agreement and Gilead Collaboration Agreement, and option fees under the Gilead Collaboration Agreement;
• the extent to which we acquire or in-license other investigational products and technologies;
• the cost, timing and outcome of regulatory review of our investigational products;
• the cost and timing of establishing sales and marketing capabilities, if any of our investigational products receive marketing approval;
• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
• our ability to establish and maintain collaborations on favorable terms, if at all;
• our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our investigational products;
• the costs associated with being a public company; and
• the cost associated with commercializing our investigational products, if they receive marketing approval.
If we raise additional funds by issuing equity securities, our stockholders may
experience dilution. Any future debt financing into which we enter may impose
upon us additional covenants that restrict our operations, including limitations
on our ability to incur liens or additional debt, pay dividends, repurchase our
common stock, make certain investments and engage in certain merger,
consolidation or asset sale transactions. Any debt financing or additional
equity that we raise may contain terms that are not favorable to us or our
stockholders. If we are unable to raise additional funds when needed, we may be
required to delay, reduce, or terminate
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--------------------------------------------------------------------------------some or all of our development programs and clinical trials. We may also be required to sell or license to others rights to our investigational products in certain territories or indications that we would prefer to develop and commercialize ourselves.
See "Risk Factors" for additional risks associated with our substantial capital requirements.
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