Scholar Rock(SRRK) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, and cash flows, reflecting increased net loss and cash usage driven by higher R&D expenses Consolidated Balance Sheets As of June 30, 2021, the company's total assets were $332.1 million, a decrease from $388.3 million at year-end 2020, primarily due to a reduction in marketable securities Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $206,919 | $160,358 | | Marketable securities | $75,298 | $180,673 | | Total current assets | $290,366 | $344,404 | | Total assets | $332,051 | $388,305 | | Liabilities & Equity | | | | Total current liabilities | $67,022 | $42,564 | | Total liabilities | $115,395 | $127,535 | | Total stockholders' equity | $216,656 | $260,770 | | Total liabilities and stockholders' equity | $332,051 | $388,305 | Consolidated Statements of Operations and Comprehensive Loss For the three and six months ended June 30, 2021, revenues were $4.6 million and $9.3 million, respectively, with net losses increasing to $30.7 million and $58.4 million due to higher R&D and G&A expenses Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | 6 Months 2021 | 6 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,595 | $3,900 | $9,303 | $8,930 | | Research and development | $25,603 | $16,997 | $48,152 | $33,899 | | General and administrative | $9,265 | $6,365 | $18,631 | $12,187 | | Loss from operations | $(30,273) | $(19,462) | $(57,480) | $(37,156) | | Net loss | $(30,707) | $(19,281) | $(58,378) | $(36,351) | | Net loss per share | $(0.84) | $(0.65) | $(1.60) | $(1.23) | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash used in operating activities significantly increased to $58.4 million, while investing activities provided $101.6 million, resulting in a $46.6 million increase in cash to $209.4 million Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(58,357) | $(17,191) | | Net cash provided by investing activities | $101,574 | $95,017 | | Net cash provided by financing activities | $3,344 | $994 | | Net increase in cash, cash equivalents and restricted cash | $46,561 | $78,820 | | Cash, cash equivalents and restricted cash, end of period | $209,417 | $117,626 | Notes to Consolidated Financial Statements The notes provide detailed information on the company's business, accounting policies, and financial statement line items, including product candidates, collaboration terms, and debt facility details - The company's lead product candidate, apitegromab, is being developed for Spinal Muscular Atrophy (SMA) and is anticipated to start a Phase 3 trial by year-end 2021, while SRK-181 is in a Phase 1 trial for cancers resistant to checkpoint inhibitors21 - Under the Gilead collaboration, the company recognized $4.6 million and $9.3 million in revenue for the three and six months ended June 30, 2021, respectively, with $42.7 million remaining in deferred revenue as of June 30, 202154 - In October 2020, the company entered into a $50.0 million loan agreement, with the first $25.0 million tranche funded and a second $25.0 million tranche available through December 31, 2021, contingent on clinical trial milestones48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses business overview, clinical developments, and COVID-19 impact, detailing increased operating expenses, particularly R&D, and the need for additional capital despite current liquidity into 2023 Overview and COVID-19 Impact The company, a biopharmaceutical firm, is advancing apitegromab (SMA) and SRK-181 (cancer) candidates, while navigating COVID-19 related disruptions to clinical trials and supply chains - Positive 12-month top-line data from the TOPAZ Phase 2 trial for apitegromab in SMA was announced in April 2021, with a pivotal Phase 3 trial expected to start by the end of 202166 71 - The DRAGON Phase 1 trial for SRK-181 is progressing, with plans to advance to the dose expansion portion (Part B) in mid-2021 and initial data from Part A expected by the end of 202173 - The COVID-19 pandemic has caused disruptions, including four patients in the TOPAZ trial missing three doses each due to site access restrictions and slower enrollment in the DRAGON trial80 174 Results of Operations Operating expenses significantly increased, driven by higher R&D costs for apitegromab manufacturing and SRK-181 clinical trials, alongside growth in general and administrative expenses Comparison of Results for the Six Months Ended June 30 (in thousands) | Item | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $9,303 | $8,930 | $373 | 4.2% | | Research and development | $48,152 | $33,899 | $14,253 | 42.0% | | General and administrative | $18,631 | $12,187 | $6,444 | 52.9% | | Net loss | $(58,378) | $(36,351) | $(22,027) | 60.6% | - The $14.3 million increase in R&D expense for the first six months of 2021 was driven by a $7.9 million increase in apitegromab costs (mainly manufacturing) and a $9.4 million increase in internal costs (personnel and new facility), partially offset by a $3.4 million decrease in SRK-181 costs108 109 113 Liquidity and Capital Resources As of June 30, 2021, the company had $282.2 million in cash, cash equivalents, and marketable securities, sufficient to fund operations into 2023, but additional capital will be required to complete clinical development - The company's cash, cash equivalents, and marketable securities totaled $282.2 million as of June 30, 2021117 - Existing cash is expected to fund operating expenses and capital expenditure requirements into 2023130 - Key funding sources include a November 2020 follow-on offering that raised approximately $215.9 million in net proceeds and a $50.0 million debt facility, of which $25.0 million has been drawn118 119 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is a smaller reporting company and is not required to provide the information for this item - As a smaller reporting company, Scholar Rock is not required to provide quantitative and qualitative disclosures about market risk141 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the period - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021143 - No changes in internal control over financial reporting occurred during the six months ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, internal controls146 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company states that it is not party to any material legal proceedings that would be reasonably expected to have a material adverse effect on its business - As of the date of the report, the company is not party to any claim or litigation expected to have a material adverse effect on the business147 Item 1A. Risk Factors This section details numerous risks and uncertainties across product development, manufacturing, operations, intellectual property, financial condition, and common stock - The company identifies several material risks, including the lengthy and expensive process of product development with an uncertain outcome, potential adverse effects from the COVID-19 pandemic, reliance on third parties for clinical trials and manufacturing, and the need for additional capital150 152 155 Risks Related to Product Development and Regulatory Approval This subsection outlines the significant uncertainties in drug development, including high costs, long timelines, unpredictable regulatory processes, and potential for adverse events or enrollment difficulties - Product development is a lengthy, expensive process with an uncertain outcome, and the company may experience delays or be unable to complete the development and commercialization of its product candidates160 - The COVID-19 pandemic has impacted and may continue to impact clinical trials through enrollment delays, site access restrictions, and supply chain disruptions170 - The results of preclinical studies and early-stage clinical trials may not predict future results, and interim data may change as more patient data becomes available179 180 Risks Related to Manufacturing and Supply The company's dependence on third-party contract manufacturers for all preclinical and clinical product supplies creates risks of supply interruption, quality control issues, and scaling challenges - The company relies on third-party manufacturers for all clinical trial supplies and does not own its own manufacturing facilities, creating risks of supply interruption or quality issues243 - The company relies on a single source supplier for the drug substance for both apitegromab and SRK-181, which could create significant disruption if this relationship is impacted243 Risks Related to Our Business and Operations This section covers operational risks, including managing organizational growth, retaining key personnel, protecting against cybersecurity threats, ensuring compliance with complex healthcare regulations, and dependence on the Gilead collaboration - The company needs to grow its organization and may experience difficulties managing this growth, including attracting and retaining qualified personnel255 - Failure to maintain the Gilead Collaboration Agreement or failure by Gilead to perform its obligations could negatively impact the business332 - The business is subject to complex healthcare laws and regulations, including anti-kickback statutes and data privacy laws, non-compliance with which could result in significant penalties279 289 Risks Related to Intellectual Property The company's success is highly dependent on its ability to obtain and maintain patent, trademark, and trade secret protection, facing risks from application failures, validity challenges, third-party infringement claims, and global protection difficulties - The company's success depends on its ability to obtain and maintain patent and trade secret protection, which is a difficult and costly process348 - The company depends on intellectual property licensed from third parties, and failure to comply with license obligations could result in the loss of significant rights358 - Third-party claims of intellectual property infringement could prevent or delay product development and lead to costly litigation374 Risks Related to Our Financial Condition and Capital Requirements This subsection details the company's history of net losses and the expectation that losses will continue, highlighting the primary risk of needing to raise additional capital to fund operations and complete product development - The company has incurred net losses every year since inception and anticipates this will continue as it advances its R&D programs405 - The company will require additional capital to complete the development and commercialization of its product candidates, and failure to obtain it could force delays or discontinuation of programs410 - The ability to use net operating loss carryforwards of $168.4 million (federal) and $170.1 million (state) may be limited by ownership changes under Section 382 of the tax code415 Risks Related to Our Common Stock Risks related to the company's common stock include price volatility, no dividend intention, significant insider ownership concentration, and reduced reporting requirements as an "emerging growth company" and "smaller reporting company" - The trading price of the company's common stock is subject to high volatility419 - As of June 30, 2021, executive officers, directors, and their affiliates beneficially hold approximately 17.7% of the outstanding voting stock, allowing them to exert significant control422 - The company is an "emerging growth company" and a "smaller reporting company," which allows for reduced public company reporting requirements426 429 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities during the reporting period - The company reports no unregistered sales of equity securities for the period446 Item 5. Other Information The company reports that there is no other information to disclose for this item - No information was reported under this item449 Item 6. Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and officer certifications