Arcus Biosciences(RCUS) - 2022 Q4 - Annual Report

Part I Business Arcus Biosciences is a clinical-stage biopharmaceutical company focused on immuno-oncology, with its lead anti-TIGIT antibody in four Phase 3 studies and strong reliance on strategic collaborations - The company is a clinical-stage biopharmaceutical firm focused on creating best-in-class therapies, with its most advanced molecule, an anti-TIGIT antibody, in four Phase 3 registrational studies for lung and gastrointestinal cancers[26] - Arcus has five clinical programs targeting TIGIT, PD-1, adenosine receptors (A2a/A2b), CD73, and HIF-2α, with three antibodies and three small molecules being evaluated across 13 clinical studies[29] - The company's strategy focuses on building a differentiated portfolio of intra-portfolio combinations, designing efficient clinical trials, pursuing indications with strong biological rationales, and maximizing value through strategic collaborations like those with Gilead and Taiho[64] - As of December 31, 2022, the company had just over 500 full-time employees, with approximately 80% engaged in research and development activities[161] Company Overview and Clinical Pipeline Arcus Biosciences is advancing a diverse immuno-oncology clinical pipeline, centered on the anti-TIGIT antibody domvanalimab in four Phase 3 trials Key Clinical Programs and Status | Molecule | Target | Key Trials | Status | | :--- | :--- | :--- | :--- | | Domvanalimab (dom) | anti-TIGIT | ARC-10, STAR-121, STAR-221, PACIFIC-8 | 4 Phase 3 studies ongoing | | Zimberelimab (zim) | anti-PD-1 | Cornerstone in multiple combination trials | Approved in China for Hodgkin's Lymphoma | | Etrumadenant (etruma) | Adenosine A2a/A2b Receptor | ARC-6, ARC-7, ARC-9 | Phase 2 studies ongoing | | Quemliclustat (quemli) | CD73 | ARC-8, EDGE-Lung | Phase 1/1b and Phase 2 studies ongoing | | AB521 | HIF-2α | ARC-20 | Phase 1 study ongoing | - The ARC-7 Phase 2 study of domvanalimab plus zimberelimab showed a 45% reduction in risk of disease progression or death and a median PFS of 12.0 months, compared to 5.4 months for zimberelimab monotherapy in 1L NSCLC (PD-L1≥50%)[35] - Early-stage programs include AB598 (anti-CD39 antibody) and AB801 (Axl inhibitor), with plans to advance a small molecule for inflammation into preclinical development in 2023[28][48] License and Collaborations Arcus's business model heavily relies on strategic partnerships, notably with Gilead for co-development and funding, and Taiho for Asian markets, alongside in-licensed core assets - Gilead has an exclusive license to zimberelimab and has exercised options for the anti-TIGIT, adenosine receptor antagonist, and CD73 programs; for optioned programs, Arcus and Gilead co-develop and share global costs, with Arcus retaining U.S. co-promotion rights[29][52][53] - Gilead has the right to purchase up to 35% of Arcus's outstanding common stock until July 2025; as of year-end 2022, Gilead owned approximately 18.9% and has two designees on Arcus's Board of Directors[55][56][467] - Taiho has licensed rights for Japan and other Asian territories for the etrumadenant, zimberelimab, and anti-TIGIT programs, with potential milestone payments up to $275 million per program plus royalties[57][58] - Arcus in-licensed zimberelimab from WuXi Biologics and domvanalimab from Abmuno Therapeutics, with future milestone and royalty obligations to both[59][61] Competition The company faces intense competition in immuno-oncology from large pharmaceutical and biotech firms across its key drug programs - The company faces substantial competition from large pharmaceutical and biotech companies like AstraZeneca, Beigene, Bristol-Myers Squibb, Merck, and Roche/Genentech[68][69] Key Competitors by Drug Program | Arcus Program | Competitors in Development | | :--- | :--- | | Anti-TIGIT | Beigene, Roche/Genentech, Merck | | Adenosine Receptor Antagonist | Incyte, Merck KGaA, AstraZeneca, iTeos, Novartis | | CD73 Inhibitor | AstraZeneca, Bristol-Myers Squibb, Corvus, Novartis | | Anti-PD-1 | Multiple companies with approved products (Merck, BMS, etc.) | | HIF-2α Inhibitor | Merck (approved product), Novartis, NiKang Therapeutics | Intellectual Property Arcus's commercial success relies on its patent portfolio, which as of February 2023, includes 7 issued U.S. patents and 426 foreign applications, expiring between 2035 and 2042 - As of February 1, 2023, the company's patent portfolio includes 7 issued U.S. patents, 38 pending or issued U.S. patent applications, and approximately 426 pending or issued foreign patent applications[79] - Issued patents and any future patents from pending applications are projected to expire between 2035 and 2042, excluding any potential patent term adjustments or extensions[79] Government Regulation The company's operations are extensively regulated by the FDA, covering drug development, approval, and post-market requirements, alongside various U.S. healthcare laws and recent reforms like the IRA - The company is subject to extensive regulation by the FDA, requiring a rigorous process of preclinical testing and clinical trials (Phase 1, 2, 3) before a drug or biologic can be marketed[83][84][85] - The FDA offers expedited programs such as Fast Track, priority review, accelerated approval, and Breakthrough Therapy designation to simplify or speed up the review process for drugs treating serious conditions[100][101][102] - The company is subject to various U.S. healthcare laws, including the federal Anti-Kickback Statute, False Claims Act (FCA), and HIPAA, which regulate interactions with healthcare providers and protect patient data[126][127][129] - Recent healthcare reform, such as the Inflation Reduction Act of 2022 (IRA), is expected to impact the business by allowing Medicare to negotiate drug prices and imposing rebates for price increases that outpace inflation[147][150][307] Risk Factors The company faces significant risks including operating losses, high drug development failure rates, heavy reliance on Gilead, intense competition, intellectual property challenges, and complex regulatory environments - The company has a history of operating losses, with a net loss of $267 million in 2022 and an accumulated deficit of $542 million as of December 31, 2022; it anticipates continued significant losses[169] - A key risk is the heavy dependence on the collaboration with Gilead for research, development, and commercialization; conflicts, termination of the agreement, or Gilead choosing not to exercise options could adversely affect the business[207][210] - The company relies on single-source third-party manufacturers, including WuXi Biologics in China for zimberelimab, which increases supply chain risk and exposure to import/export restrictions[214] - The company faces potential patent litigation risks, noting specific patents from Bristol-Myers Squibb (anti-PD-1) and Genentech (anti-PD-1/anti-TIGIT combo) that could impact commercialization of zimberelimab and domvanalimab[248] - The business is highly dependent on its founders, CEO Terry Rosen, Ph.D., and President Juan Jaen, Ph.D., whose departure would be difficult to replace[267][268] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[331] Properties As of December 31, 2022, Arcus leases approximately 151,000 sq ft in Hayward and 109,000 sq ft in Brisbane for its operations, with leases expiring in 2031 - The company leases approximately 151,000 sq. ft. in Hayward, CA for its headquarters and 109,000 sq. ft. in Brisbane, CA; both leases expire in 2031[332] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[333] Mine Safety Disclosures This item is not applicable to the company - None[334] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Arcus Biosciences' common stock trades on the NYSE under "RCUS", with no history or plans for cash dividends, retaining earnings for business development - The company's common stock trades on the NYSE under the symbol "RCUS"[337] - Arcus has never paid cash dividends and does not intend to in the foreseeable future[338] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Arcus reported $112 million in revenue, a net loss of $267 million, and ended the year with $1.14 billion in cash, sufficient to fund operations into 2026 Results of Operations In 2022, total revenues decreased 71% to $112 million, while R&D and G&A expenses increased, resulting in a net loss of $267 million Results of Operations (in millions) | | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total revenues | $112 | $383 | (71)% | | Research and development | $288 | $257 | 12% | | General and administrative | $104 | $72 | 44% | | Total operating expenses | $392 | $329 | 19% | | Net income (loss) | $(267) | $53 | * | - The decrease in 2022 revenue was primarily due to higher revenues recognized in 2021 from Gilead's exercise of its options on several programs[368] - The 12% increase in R&D expenses in 2022 was driven by $167 million in higher costs for expanded clinical activities, offset by $136 million in higher cost-sharing reimbursements from Gilead[370] - The 44% increase in G&A expenses in 2022 was primarily due to a $15 million increase in employee compensation costs and a $13 million increase in office facilities expense to support higher headcount[374] Liquidity and Capital Resources As of December 31, 2022, Arcus held $1.14 billion in cash, sufficient to fund operations into 2026, largely due to a $725 million payment from Gilead - As of December 31, 2022, the company had $1.14 billion in cash, cash equivalents, and marketable securities[380] - Management believes existing cash will be sufficient to fund planned operations into 2026[382] Cash Flow Summary (in millions) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $438 | $(256) | | Net cash used in investing activities | $(413) | $(4) | | Net cash from financing activities | $33 | $237 | - The positive operating cash flow in 2022 was primarily due to the receipt of $725 million from Gilead in January 2022 related to their option exercises[386] Critical Accounting Judgments and Estimates Critical accounting judgments primarily involve revenue recognition from collaboration agreements, requiring significant estimates for performance obligations and development timelines - Revenue recognition requires significant judgment, especially in allocating transaction prices to performance obligations and estimating standalone selling prices using forecasts, discount rates, and success probabilities[400][401] - For revenue recognized over time, estimates of the total effort required to satisfy performance obligations are critical; a hypothetical 10% change in this estimate for Gilead-related R&D activities would have impacted 2022 revenue by up to $7 million[402] - For the domvanalimab license transferred to Gilead in 2021, a 10% change in the estimated cash flows used in the discounted cash flow valuation would have changed the revenue recognized in 2021 by approximately $20 million[404] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its $1.14 billion portfolio and foreign currency exchange rates, neither of which is expected to have a material impact - The company has interest rate risk related to its $1.14 billion in cash, cash equivalents, and marketable securities; a 100 basis point change in interest rates is not expected to have a material effect[407] - The company is exposed to foreign currency exchange risk from contracts with non-U.S. entities, but a 20% adverse change in exchange rates is not expected to materially impact its financial position[408] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020-2022, with an unqualified auditor's opinion from Ernst & Young LLP, highlighting the Gilead collaboration as a critical audit matter Consolidated Balance Sheet Data (in millions) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Current Assets | $1,067 | $1,262 | | Cash and cash equivalents | $206 | $148 | | Marketable securities | $803 | $351 | | Total Assets | $1,345 | $1,592 | | Current Liabilities | $193 | $166 | | Deferred revenue, noncurrent | $355 | $462 | | Total Liabilities | $688 | $750 | | Total Stockholders' Equity | $657 | $842 | Consolidated Statement of Operations Data (in millions) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $112 | $383 | $78 | | Research and development | $288 | $257 | $159 | | General and administrative | $104 | $72 | $43 | | Net income (loss) | $(267) | $53 | $(123) | | Net income (loss) per share, diluted | $(3.71) | $0.71 | $(2.24) | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[575] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[578] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[582] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[583][588] Other Information The company reports no other information for this item - None[595] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the upcoming 2023 Proxy Statement Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's upcoming Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's upcoming Proxy Statement Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's upcoming Proxy Statement Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's upcoming Proxy Statement Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Annual Report on Form 10-K, including financial statements and an index of all exhibits Form 10-K Summary The company provides no summary for this item - None[605]