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, 2019 , and management's discussion and analysis, included in our Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (SEC) onMarch 5, 2020 . 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, adaptive clinical trial designs. Our vision is to create, develop and commercialize highly differentiated combination cancer therapies that have the potential to cure. We currently have four investigational products in clinical development. We hold worldwide development and commercialization rights to each of these investigational products with the exception of zimberelimab, for which we hold rights outside ofChina andThailand .Taiho Pharmaceutical Co., Ltd. (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 ), which they have exercised with respect to our adenosine receptor antagonist program, including etrumadenant (formerly referred to as AB928), and our anti-PD-1 program, including zimberelimab. Gilead Sciences, Inc. (Gilead) has a time-limited option to obtain an exclusive license to all of our current and future clinical programs, subject to the rights of our existing partners to any territories. Upon closing of our Option, License and Collaboration Agreement with Gilead (the Gilead Collaboration Agreement), Gilead obtained an exclusive license to our zimberelimab program. Etrumadenant (formerly referred to as AB928), our small molecule dual A2a/A2b adenosine receptor antagonist, is in clinical development, and is being evaluated in four Phase 1b expansion studies in specific cancer indications: advanced colorectal cancer, triple negative breast cancer, EGFR-mutated lung cancer, and prostate cancer; two collaboration studies withGenentech utilizing their MORPHEUS Phase 1b/2 platform in third-line metastatic colorectal cancer and first-line metastatic pancreatic cancer; a Phase 1b/2 multi-cohort platform trial in participants with metastatic castrate resistant prostate cancer; and a Phase 1b trial in participants with colorectal cancer. AB680, our small-molecule CD73 inhibitor, is in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer. This study consists of a safety dose-escalation portion, followed by an enrollment expansion to evaluate the combination of AB680, zimberelimab (our anti-PD-1 antibody) and the standard-of-care chemotherapies gemcitabine and nab-paclitaxel.
Domvanalimab (formerly referred to as AB154), our in-licensed anti-TIGIT monoclonal antibody, is in Phase 2 development for the treatment of first-line metastatic non-small cell lung cancer in combination with zimberelimab and etrumadenant (formerly referred to as AB928).
Zimberelimab (formerly referred to as AB122), our in-licensed anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy. In addition to the combination studies with zimberelimab described above, we are also evaluating zimberelimab as monotherapy in a tumor-agnostic, biomarker-selected Phase 1b trial. Gilead Collaboration OnMay 27, 2020 , we entered into the Gilead Collaboration Agreement, a Common Stock Purchase Agreement (the Stock Purchase Agreement), and an Investor Rights Agreement, (collectively, the Gilead Agreements), each with Gilead. The transaction closed onJuly 13, 2020 following expiration of the antitrust waiting period. Upon closing, Gilead made an upfront payment of$175 million pursuant to the Gilead Collaboration Agreement, Gilead made an equity investment of approximately$200 million in us by purchasing 5,963,029 shares of our common stock at a per share price of$33.54 pursuant to the Stock Purchase Agreement, and we appointed Gilead's designee,Merdad Parsey , M.D., Ph.D., to our Board of Directors pursuant to the Investor Rights Agreement. Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab (formerly referred to as AB122) in certain markets and obtained exclusive options to acquire an exclusive license to 19
-------------------------------------------------------------------------------- develop and commercialize all of our current and future clinical programs during the 10-year collaboration term, contingent upon Gilead's payment of$400 million , with the first payment of$100.0 million in 2022 and an additional$100.0 million payment due at Gilead's option on each of the fourth, sixth, and eighth anniversaries of the agreement. For those programs that enter clinical development prior to the end of the collaboration term, Gilead's option rights will extend for up to an additional three years thereafter. Gilead may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from$200 million to$275 million per program for our current clinical programs, and$150 million per program for all other programs that enter clinical development. If Gilead exercises its option with respect to our TIGIT program, we are also eligible to receive up to$500 million in potentialU.S. regulatory approval milestones with respect to domvanalimab (formerly referred to as AB154). Upon Gilead's exercise of its option to a program, the two companies will co-develop and equally share global development costs, subject to certain of our opt-out rights, and expense caps on our spending and related subsequent adjustments. For each optioned program, provided we have not exercised our opt-out rights, we have an option to co-promote inthe United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize any optioned programs outside of theU.S. , subject to the rights of our existing partners to any territories, and Gilead will pay to us tiered royalties as a percentage of revenues ranging from the high teens to the low twenties. Gilead will further provide ongoing research and development support of up to$400 million over the collaboration term. Pursuant to the Stock Purchase Agreement and the Investor Rights Agreement, Gilead has the right, at its option, to purchase additional shares from us, up to a maximum of 35% of our then-outstanding voting common stock, from time to time over the next five years, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the$33.54 initial purchase price. The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to our Board of Directors.
COVID-19 Pandemic
The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including the ultimate duration and/or severity of the outbreak and any resurgences, actions by government authorities to contain the spread of the virus, the timing, availability 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 across our ongoing Arcus-sponsored studies, we expect to see volatility as local governments respond to resurgences and during the upcoming flu season, each of which may result in the prolonged reinstitution, extension or enhancement of shelter-in-place measures. 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 full impact of this pandemic on our clinical programs.
With respect to manufacturing and supply, we believe we currently have sufficient drug supply for our ongoing clinical studies. Our third-party contract manufacturers continue to operate at or near normal levels and, at this time and subject to further COVID-19 implications, we do not anticipate any disruptions to our drug supply chain.
Our discovery programs were impacted by the suspension in our laboratory-based
operations from mid-March to late June. Despite the return of our
laboratory-based personnel back into our facilities, our laboratories are
operating at reduced capacity due to employee safety measures, such as social
distancing requirements and shift work. Entering 2020, we expected to advance
two preclinical programs into the clinic in the first quarter of 2021. The
suspension and reduced operating capacity have delayed the advancement of the
second program until the second half of 2021.
The full impact of the COVID-19 outbreak remains highly uncertain and subject to
change. In connection with our resumption of laboratory operations, we
instituted regular COVID-19 testing services in order to minimize the risk to
our employees. These additional operating costs, along with the absence of any
furlough or measures to reduce personnel costs despite reduced laboratory
capacity, will have a negative impact on our operations and financial condition.
We do not expect the forward impact will be material due to adjustments in
operations that we have made. However, there are many uncertainties around the
COVID pandemic and future developments, which are unpredictable, may result in a
material, negative impact to our operations and financial condition.
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--------------------------------------------------------------------------------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 payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, pre-clinical and clinical expenses, and depreciation. 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 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 (Cayman) Inc. (WuXi Biologics) andAbmuno Therapeutics LLC (Abmuno), and our co-development and collaboration agreement withStrata Oncology, Inc. (Strata), we may be required to pay additional clinical and regulatory milestone payments based on the development progress of zimberelimab and domvanalimab (formerly known as AB154). 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 "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. 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 due to staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest earned on our investments in fixed-income marketable securities.
Gain on Deemed Sale from Equity Method Investee
Gain on deemed sale from equity method investee consists of a gain related to the dilution of our investment inPACT Pharma, Inc. (PACT Pharma) occurring upon PACT Pharma's new issuances of equity securities in which we do not participate on a pro rata basis or at all. 21 --------------------------------------------------------------------------------
Share of Loss from Equity Method Investee
Share of loss from equity method investee consists of our share of loss recorded
in connection with our equity method investment in
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 (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. Except for those updates resulting from our entering into the Gilead Agreements, there have been no significant changes in our critical accounting policies and estimates during the nine months endedSeptember 30, 2020 , as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.
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
2020 2019 $ %
Collaboration and license revenue $ 64,530 $ 1,750 $ 62,780 *
Operating expenses:
Research and development 51,801 17,241 34,560 200 %
General and administrative 11,177 7,758 3,419 44 %
Income (loss) from operations 1,552 (23,249 ) 24,801 -107 %
Non-operating income (expense):
Interest and other income, net 270 1,254 (984 ) -78 %
Share of loss from equity method investee - (357 ) 357 -100 %
Total non-operating income, net 270 897 (627 ) -70 %
Net income (loss) $ 1,822 $ (22,352 ) $ 24,174 -108 %
*Not meaningful
Collaboration and License Revenue
Collaboration and license revenue increased$62.7 million , from$1.8 million for the three months endedSeptember 30, 2019 to$64.5 for the three months endedSeptember 30, 2020 . The increase in collaboration and license revenue was primarily due to the recognition of$55.1 million in revenue for the license to zimberelimab and$7.7 million related to Gilead's ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement. 22 --------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses increased$34.6 million , or 200%, from$17.2 million for the three months endedSeptember 30, 2019 to$51.8 million for the three months endedSeptember 30, 2020 . The increase in research and development expenses was primarily due to an$11.1 million increase in manufacturing costs required to supply our clinical studies, an increase of$4.5 million in clinical costs for our ongoing clinical studies, and an increase of$5.2 million in employee compensation costs primarily due to additional headcount, approximately$2.1 million of which consists of non-cash stock-based compensation. We also incurred$13.1 million in expense in the three months endedSeptember 30, 2020 , consisting of a$10.1 million sub-license fee due to WuXi for zimberelimab and a$3.0 million payment due to the achievement of a development milestone under Abmuno Agreement, with no corresponding payments in the same period of the prior year.
General and Administrative Expenses
General and administrative expenses increased$3.4 million , or 44%, from$7.8 million for the three months endedSeptember 30, 2019 to$11.2 million for the three months endedSeptember 30, 2020 . The increase in general and administrative expenses was primarily due to$1.3 million in employee compensation costs primarily due to additional headcount, approximately$1.2 million of which consists of non-cash stock-based compensation. Additional increases in finance and legal expenses were largely driven by expenses incurred as a result of our transaction with Gilead as well as costs incurred to support our growth and ongoing compliance with public company requirements.
Interest and Other Income, Net
Interest and other income, net decreased$1.0 million or 78%, from$1.3 million for the three months endedSeptember 30, 2019 to$0.3 million for the three months endedSeptember 30, 2020 . The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities in the three months endedSeptember 30, 2020 as compared to the same period in the prior year.
Share of Loss from Equity Method Investee
We recognized no loss on our investment in PACT for the three months ended
Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended
September 30, Change
2020 2019 $ %
Collaboration and license revenue $ 68,030 $ 5,250 $ 62,780 *
Operating expenses:
Research and development 110,636 57,795 52,841 91 %
General and administrative 29,617 18,637 10,980 59 %
Loss from operations (72,223 ) (71,182 ) (1,041 ) 1 %
Non-operating income (expense):
Interest and other income, net 1,218 4,272 (3,054 ) -71 %
Gain on deemed sale from equity method
investee 613 - 613 *
Share of loss from equity method
investee (613 ) (1,202 ) 589 -49 %
Total non-operating income, net 1,218 3,070 (1,852 ) -60 %
Net loss $ (71,005 ) $ (68,112 ) $ (2,893 ) 4 %
*Not meaningful
Collaboration and License Revenue
Collaboration and license revenue increased$62.7 million , from$5.3 million for the nine months endedSeptember 30, 2019 to$68.0 million for the nine months endedSeptember 30, 2020 . The increase in collaboration and license revenue was primarily due to the recognition of$55.1 million in revenue for the license to zimberelimab and$7.7 million related to Gilead's ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement. 23 --------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses increased$52.8 million , or 91%, from$57.8 million for the nine months endedSeptember 30, 2019 to$110.6 million for the nine months endedSeptember 30, 2020 . The increase in research and development expenses was primarily due to an increase of$17.7 million in manufacturing costs required to supply our clinical studies, an increase of$13.4 million in clinical costs for our ongoing clinical studies, and an increase of$12.2 million in employee compensation costs primarily due to additional headcount, approximately$4.5 million of which consists of non-cash stock-based compensation. Expenses related to sublicense fees and milestone payments also increased$10.6 million , from$7.5 million for the nine months endedSeptember 30, 2019 to$18.1 million for the nine months endedSeptember 30, 2020 as a result of the sublicense fee paid to WuXi and milestone payments paid to WuXi and Abmuno. Those increases were partially offset by a decrease of$1.4 million in lab supplies and equipment due to decreased lab activities caused by shelter-in-place orders amid the COVID pandemic.
General and Administrative Expenses
General and administrative expenses increased$11.0 million , or 59%, from$18.6 million for the nine months endedSeptember 30, 2019 to$29.6 million for the nine months endedSeptember 30, 2020 . The increase in general and administrative expenses was due primarily to$2.2 million in consulting expenses incurred in corporate development activities. We also incurred increased expense of$3.7 million in employee compensation costs primarily due to additional headcount, approximately$2.9 million of which consists of non-cash stock-based compensation, and$3.5 million in legal and accounting expenses incurred to support our expanding operations and ongoing compliance with public company requirements.
Interest and Other Income, Net
Interest and other income, net decreased$3.1 million or 71%, from$4.3 million for the nine months endedSeptember 30, 2019 to$1.2 million for the nine months endedSeptember 30, 2020 . 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, 2020 as compared to the same period in the prior year.
Gain on Deemed Sale from Equity Method Investee
Gain on deemed sale from equity method investee was$0.6 million for the nine months endedSeptember 30, 2020 due to gains recorded in connection with PACT Pharma's Series C and Series C-1 preferred financings inJanuary 2020 andJune 2020 , respectively, in which we did not participate.
Share of Loss from Equity Method Investee
Share of loss from equity method investee was$0.6 million and$1.2 million for the nine months endedSeptember 30, 2020 and 2019, respectively, due to equity method losses resulting from PACT's expanding operations. 24 --------------------------------------------------------------------------------
Liquidity and Capital Resources
To date, we have financed our operations primarily through net proceeds of$226.2 million from private placements of convertible preferred stock,$46.0 million in proceeds from the Taiho Agreement, net proceeds of$124.7 million from our initial public offering of our common stock inMarch 2018 , and$326.2 million of net proceeds in ourMay 2020 Public Offering. In addition, inJuly 2020 we received$375.0 million from Gilead upon the closing of the transactions under the Collaboration Agreement and Stock Purchase Agreement with Gilead. As ofSeptember 30, 2020 , we had$785.1 million of cash, cash equivalents, and investments in marketable securities, compared to$188.3 million as ofDecember 31, 2019 . 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 through at least the next 12 months following the filing date of this report.
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 our drug discovery, preclinical
development activities, laboratory testing and clinical trials for our
investigational products;
• 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 programs Gilead exercises its option to obtain an
exclusive license 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 optioned 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 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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