Sutro Biopharma(STRO) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed interim financial statements for Sutro Biopharma, Inc. as of September 30, 2022, and for the three and nine months then ended, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes Condensed Balance Sheets As of September 30, 2022, total assets increased to $400.7 million from $341.4 million, driven by cash and marketable securities, while total liabilities rose to $171.0 million from $88.8 million due to deferred revenue, and total stockholders' equity decreased to $229.7 million from $252.6 million Condensed Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $96,779 | $30,414 | | Marketable securities | $190,560 | $199,118 | | Total current assets | $346,553 | $218,515 | | Total assets | $400,700 | $341,408 | | Liabilities & Equity | | | | Deferred revenue - current & non-current | $90,652 | $5,496 | | Total current liabilities | $58,288 | $41,736 | | Total liabilities | $170,974 | $88,844 | | Total stockholders' equity | $229,726 | $252,564 | Condensed Statements of Operations For the nine months ended September 30, 2022, revenues increased to $59.1 million from $51.2 million, operating expenses rose to $138.9 million from $114.7 million due to higher R&D, and the net loss widened to $84.6 million, or ($1.74) per share, from $67.4 million, or ($1.46) per share Statement of Operations Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Revenues | $59,140 | $51,226 | | Research and development | $94,036 | $74,473 | | General and administrative | $44,825 | $40,241 | | Loss from operations | ($79,721) | ($63,488) | | Net loss | ($84,610) | ($67,413) | | Net loss per share, basic and diluted | ($1.74) | ($1.46) | Condensed Statements of Cash Flows For the nine months ended September 30, 2022, net cash provided by operating activities significantly improved to $27.4 million from $60.1 million used in 2021, primarily due to an $85.2 million increase in deferred revenue, with cash, cash equivalents, and restricted cash increasing to $97.7 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $27,413 | ($60,099) | | Net cash provided by (used in) investing activities | $2,860 | ($118,096) | | Net cash provided by financing activities | $36,092 | $2,750 | | Net increase (decrease) in cash | $66,365 | ($175,445) | | Cash at end of period | $97,651 | $31,579 | Notes to Unaudited Interim Condensed Financial Statements This section details the company's accounting policies and financial activities, covering liquidity, revenue recognition from collaboration agreements, fair value measurements, debt, lease commitments, and stock-based compensation - The company believes its unrestricted cash, cash equivalents, and marketable securities of $287.3 million as of September 30, 2022, are sufficient to fund operations for at least 12 months from the filing date[25][26] - During the nine months ended September 30, 2022, the company sold 7,463,845 shares through its At-the-Market (ATM) facility, generating net proceeds of approximately $40.9 million[22][23] - Subsequent to the quarter end, from October 1 to November 7, 2022, the company sold an additional 2,821,315 shares under its ATM Facility for net proceeds of $15.3 million and sold 1,033,434 shares of Vaxcyte common stock for net proceeds of $28.1 million[145] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, providing an overview of its business, clinical programs, and collaborations, analyzing key financial performance drivers, liquidity sources, capital resources, funding requirements, and cash flow activities Overview Sutro Biopharma is a clinical-stage oncology company developing ADCs using its XpressCF® platforms, with lead candidates STRO-002 and STRO-001 in Phase 1 trials, multiple collaborations, and an accumulated deficit of $418.0 million as of September 30, 2022 - The company's lead product candidates are STRO-002 (anti-FolRα ADC) and STRO-001 (anti-CD74 ADC), both in Phase 1 clinical trials[149] - Sutro has multi-target collaborations with Astellas, Merck, BMS, EMD Serono, BioNova, and Tasly, which are key to its strategy and revenue generation[154] - The company had a net loss of $84.6 million for the nine months ended September 30, 2022, and an accumulated deficit of $418.0 million[156] Results of Operations For Q3 2022, revenue increased 195% to $25.1 million, driven by new collaborations and a Merck milestone, while nine-month revenue grew 15% to $59.1 million, boosted by a Tasly upfront payment, and R&D and G&A expenses rose 26% and 11% respectively Revenue by Collaborator - Nine Months Ended Sep 30 (in thousands) | Collaborator | 2022 | 2021 | | :--- | :--- | :--- | | Bristol Myers Squibb (BMS) | $8,774 | $7,784 | | Merck Sharp & Dohme (Merck) | $11,367 | $38,175 | | EMD Serono | $2,200 | $2,844 | | Astellas Pharma Inc. | $4,985 | $0 | | Vaxcyte | $2,814 | $2,423 | | BioNova Pharmaceuticals, Ltd. | $4,000 | $0 | | Tasly Biopharmaceuticals Co., Ltd. | $25,000 | $0 | | Total revenue | $59,140 | $51,226 | - The increase in nine-month revenue was primarily due to a $25.0 million upfront payment from Tasly, $5.0 million from the new Astellas collaboration, and $4.0 million from the BioNova agreement[183] - The decrease in Merck revenue for the nine-month period was due to the recognition of a $15.0 million milestone and other items in 2021 that did not recur in 2022, partially offset by a new $10.0 million milestone in Q3 2022[183] - R&D expenses for the nine months increased by $19.6 million (26%) to $94.0 million, driven by higher personnel costs, lab supplies, and clinical development expenses[184] Liquidity and Capital Resources As of September 30, 2022, Sutro had $287.3 million in cash, cash equivalents, and marketable securities, plus $36.9 million in Vaxcyte equity, sufficient to fund operations for at least twelve months, with major liquidity sources including upfront payments from Astellas and Tasly, a Merck milestone, and ATM stock sales - The company received a $90.0 million upfront payment from Astellas in Q3 2022[191] - The company received a net payment of $22.5 million from Tasly in Q2 2022 after a $2.5 million withholding tax on the $25.0 million upfront payment[192] - Net proceeds from the At-The-Market (ATM) facility were $40.9 million for the nine months ended September 30, 2022[190] Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $27,413 | ($60,099) | | Net cash provided by (used in) investing activities | $2,860 | ($118,096) | | Net cash provided by financing activities | $36,092 | $2,750 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on investments and debt, and equity price risk from its $36.9 million Vaxcyte common stock holdings, where a 10% price decrease would result in a $3.7 million fair value loss, though debt interest rate changes are not expected to have a material impact - The company's primary market risks are interest rate sensitivity and equity price risk related to its investment in Vaxcyte common stock[217] - As of September 30, 2022, the company held $36.9 million in Vaxcyte common stock. A hypothetical 10% price decrease would result in a $3.7 million loss in fair value[218][219] - The company's outstanding debt of $19.3 million has a floating interest rate, but management does not expect interest rate changes to have a material impact[221] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[223] - No material changes to the company's internal control over financial reporting occurred during the quarter ended September 30, 2022[224] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its business - Sutro is not presently a party to any legal proceedings that would have a material adverse effect on its business[226] Risk Factors This section details significant investment risks, including a history of losses, uncertainty of future profitability, reliance on early-stage product candidates and unproven novel technologies, the need for substantial additional funding, and potential impacts from the COVID-19 pandemic, alongside competition, manufacturing, collaboration, intellectual property, regulatory, and market volatility challenges Summary of Risk Factors The company highlights key risks including its limited operating history, significant losses, ongoing COVID-19 impact, need for substantial additional funding amid unfavorable capital markets, dependence on early-stage product candidates STRO-001 and STRO-002, unproven novel technology platforms, potential development delays, cybersecurity threats, reliance on collaborations, manufacturing complexities, and intense competition - The company has a history of significant losses ($418.0 million accumulated deficit as of Sep 30, 2022) and may never achieve profitability[229][230][232] - Business success is highly dependent on its two proprietary clinical-stage product candidates, STRO-001 and STRO-002, which are based on novel and unproven technology platforms (XpressCF® and XpressCF+®)[229] - Substantial additional funding is required, and unfavorable market conditions, inflation, and interest rate fluctuations may make it difficult to access capital[229] - The company relies on third-party collaborations (e.g., Astellas, Merck, BMS) and third-party manufacturing, which introduces risks related to performance and compliance[229] Risks Related to Our Business This subsection details business-related risks, including a history of significant losses, uncertain future profitability, ongoing COVID-19 operational risks, capital-intensive nature requiring substantial additional funding, success hinging on early-stage candidates and unproven platforms, development delays, competition, reliance on collaborators and third-party manufacturers, and the need for organizational growth - The company's product candidates are in early development stages and may fail, face delays, or be impacted by competitive products, materially harming their commercial viability[246] - The company's XpressCF® and XpressCF+® platforms are novel technologies, and no product manufactured on a cell-free platform has been approved by the FDA, creating regulatory uncertainty[255][271] - The company relies on a hybrid manufacturing model, using both internal facilities and third-party CMOs. Any inability to manufacture sufficient quantities, loss of suppliers, or failure to comply with cGMP would materially harm the business[288] - The company faces intense competition from well-funded biopharmaceutical companies with greater resources and experience in developing ADCs, cytokine derivatives, and other cancer therapies[305][306] Risks Related to Intellectual Property This subsection outlines intellectual property risks, emphasizing the company's dependence on obtaining, maintaining, and enforcing patents and protecting trade secrets, with potential challenges including failing to secure broad patent protection, challenges to existing patents, infringement of third-party patents, evolving legal landscapes, and difficulties in global IP protection - The company's ability to develop and commercialize products may be adversely affected if it cannot obtain and enforce sufficient patent protection for its technologies[336] - The company may face litigation or need to obtain licenses from third parties if its products are found to infringe on others' patents, which could be costly or unavailable on reasonable terms[352] - Failure to protect the confidentiality of trade secrets through non-disclosure agreements and other measures could harm the company's competitive position[343] - Changes in U.S. and international patent laws could diminish the value of patents and impair the ability to protect products[364] Risks Related to Government Regulation This subsection covers risks associated with government regulation, including the lengthy, expensive, and uncertain clinical development and approval process, ongoing regulatory obligations, potential pricing controls, healthcare reform measures, and complex compliance with anti-kickback, fraud, and data privacy laws - Clinical development is a long, expensive process with an uncertain outcome, and failure can occur at any stage. Early positive results are not predictive of later-stage success[367][368] - Even if approved, products will be subject to ongoing regulatory review, which may result in significant expenses, marketing restrictions, or market withdrawal[383] - Healthcare legislative reforms, such as the ACA and the Inflation Reduction Act (IRA), could lead to unfavorable pricing regulations, reimbursement policies, and increased downward pressure on prices[391][400][402] - The company is subject to complex federal, state, and foreign laws regarding data privacy and security (e.g., HIPAA, GDPR, CCPA), and failure to comply could result in significant penalties and reputational harm[406][408][413] Risks Related to Our Common Stock This subsection discusses risks for common stock investors, including high stock price volatility due to clinical, regulatory, and market factors, fluctuating operating results, anti-takeover provisions, no anticipated dividends, future equity sales causing dilution, and potential negative impacts from a lack of analyst coverage - The company's stock price is subject to high volatility due to clinical, regulatory, and market factors, and operating results may fluctuate significantly[442][452] - Anti-takeover provisions in the company's charter and under Delaware law could make a potentially beneficial acquisition more difficult[445] - The company does not plan to pay cash dividends in the foreseeable future, so capital appreciation is the sole potential source of gain for investors[451] - Future sales of common stock, including through the "at the market" offering program, will dilute existing stockholders and could adversely affect the stock price[455][458]