Sutro Biopharma(STRO) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The company's interim financials show increased assets and liabilities due to a royalty sale, alongside a wider net loss Condensed Balance Sheets Total assets grew to $464.9 million while liabilities rose to $310.2 million, driven by a new deferred royalty obligation Condensed Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $235,095 | $47,254 | | Marketable securities | $123,198 | $255,090 | | Total current assets | $411,985 | $353,153 | | Total assets | $464,899 | $406,944 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $67,125 | $66,547 | | Deferred royalty obligation | $136,653 | $0 | | Total liabilities | $310,184 | $189,896 | | Total stockholders' equity | $154,715 | $217,048 | Condensed Statements of Operations Revenues decreased while R&D expenses increased, resulting in a higher net loss of $88.6 million for the first half of 2023 Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $10,412 | $28,096 | $23,086 | $33,993 | | Research and development | $41,592 | $32,332 | $80,991 | $62,322 | | General and administrative | $14,999 | $15,143 | $30,511 | $30,182 | | Loss from operations | ($46,179) | ($19,379) | ($88,416) | ($58,511) | | Net loss | ($38,524) | ($26,012) | ($88,574) | ($65,122) | | Net loss per share | ($0.64) | ($0.55) | ($1.49) | ($1.39) | Condensed Statements of Comprehensive Loss The company reported a comprehensive loss of $87.9 million for the first six months of 2023, including the net loss and unrealized gains Comprehensive Loss Summary (in thousands) | Metric | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | | Net loss | $(88,574) | $(65,122) | | Net unrealized income (loss) on securities | $634 | $(1,042) | | Comprehensive loss | $(87,940) | $(66,164) | Condensed Statements of Stockholders' Equity Stockholders' equity decreased to $154.7 million by June 30, 2023, primarily due to the period's net loss - Stockholders' equity declined to $154.7 million at June 30, 2023, from $217.0 million at the end of 2022, mainly due to the net loss incurred during the first half of the year[16] - During the first six months of 2023, the company issued 1,857,410 shares through its At-The-Market (ATM) facility, raising net proceeds of approximately $12.0 million[16][22][23] Condensed Statements of Cash Flows Financing activities, led by a $139.7 million royalty sale, drove a net cash increase despite negative operating cash flow Cash Flow Summary (in thousands) | Activity | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(92,186) | $(38,441) | | Net cash provided by investing activities | $133,608 | $80,897 | | Net cash provided by financing activities | $146,419 | $6,245 | | Net increase in cash | $187,841 | $48,701 | - The primary source of financing cash flow was $139.7 million in net proceeds from the sale of future royalties to Blackstone[19] Notes to Unaudited Interim Condensed Financial Statements Key notes detail a $140.0 million royalty sale to Blackstone, revenue shifts between collaborators, and the termination of the BMS deal - In June 2023, the company sold its 4% royalty interest in future net sales of Vaxcyte products to Blackstone for an upfront payment of $140.0 million, recorded as a deferred royalty obligation[31][108][109] - The company believes its unrestricted cash, cash equivalents, and marketable securities of $358.3 million as of June 30, 2023, will fund operations for at least the next 12 months[25][26] - BMS provided a notice of termination for the development of CC-99712, effective October 7, 2023, after which Sutro will regain sole worldwide rights[67] Revenue by Collaborator (Six Months Ended June 30, in thousands) | Collaborator | 2023 | 2022 | | :--- | :--- | :--- | | Astellas Pharma Inc. | $13,605 | $0 | | Bristol Myers Squibb (BMS) | $5,402 | $4,431 | | Merck Sharp & Dohme (Merck) | $2,693 | $1,210 | | Tasly Biopharmaceuticals | $0 | $25,000 | | EMD Serono | $8 | $2,034 | | Vaxcyte | $1,378 | $1,318 | | Total Revenue | $23,086 | $33,993 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses its ADC pipeline focus, decreased revenue, increased R&D costs, and improved liquidity from a royalty sale Overview Sutro Biopharma is advancing its lead ADC candidate, luvelta, into a registration-directed trial for ovarian cancer - The company's most advanced product candidate, luvelta, has entered a registration-directed Phase 2/3 trial (REFRaME) for patients with platinum-resistant ovarian cancer, with the first patient enrolled in July 2023[135][138] - The company's second candidate, STRO-001, has completed dose escalation in its Phase 1 trial, with future development decisions to be informed by data from BioNova's trial in Greater China[140][141] - In June 2023, Sutro entered into an agreement with Blackstone, selling its 4% revenue interest in Vaxcyte's future products for a significant upfront payment[143] Results of Operations Revenue for the first half of 2023 fell 32% due to a non-recurring prior-year payment, while R&D expenses rose 30% Comparison of Six Months Ended June 30, 2023 and 2022 (in thousands) | Metric | 6 Months 2023 | 6 Months 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $23,086 | $33,993 | $(10,907) | (32)% | | Research and development | $80,991 | $62,322 | $18,669 | 30% | | General and administrative | $30,511 | $30,182 | $329 | 1% | | Loss from operations | $(88,416) | $(58,511) | $(29,905) | 51% | | Net loss | $(88,574) | $(65,122) | $(23,452) | 36% | - The decrease in revenue was primarily due to a $25.0 million upfront payment from Tasly recognized in 2022, partially offset by $13.6 million in new revenue from the Astellas collaboration[172] - The 30% increase in R&D expenses was mainly due to an $8.9 million increase in personnel-related costs and a $5.7 million increase in lab and clinical development expenses[173] Liquidity and Capital Resources The company's capital of $358.3 million, bolstered by a $140.0 million royalty sale, is sufficient for the next twelve months - In June 2023, the company received a $140.0 million upfront payment from Blackstone for the sale of its 4% royalty interest in potential future net sales of Vaxcyte products[181][182] - During the six months ended June 30, 2023, the company raised net proceeds of approximately $12.0 million from the sale of common stock through its At-the-Market (ATM) facility[183] - The company believes its existing capital resources are sufficient to fund operating expenses and capital expenditure requirements for at least the next twelve months from the filing date[194] Critical Accounting Policies and Estimates A new policy was adopted to account for the deferred royalty obligation from the Blackstone transaction as imputed debt - A new critical accounting policy was established for the deferred royalty obligation related to the sale of future Vaxcyte royalties to Blackstone[208] - The proceeds from the Blackstone transaction are recorded as a liability and will be amortized to interest expense using the effective interest rate method based on estimated future royalties[208] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to equity price risk from its Vaxcyte stock holdings and minor interest rate risk - The company is exposed to equity price risk from its holdings of Vaxcyte common stock, valued at $33.3 million as of June 30, 2023, where a 10% price decrease would result in a $3.3 million loss in fair value[212][213] - The company's debt of $10.2 million bears a floating interest rate, but management states that a 100 basis point change in rates would not have a material impact on interest expense[215] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[218] - No material changes to the company's internal control over financial reporting occurred during the quarter ended June 30, 2023[219] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings - Sutro Biopharma is not presently a party to any material legal proceedings[222] Risk Factors The company faces risks from its history of losses, dependence on early-stage candidates, and reliance on third parties - The company has a history of significant losses ($541.2 million accumulated deficit) and will need substantial additional funds to advance its product candidates[225][227] - The business is dependent on the success of its early-stage product candidates, particularly luvelta, which are based on novel and unproven XpressCF® and XpressCF+® platforms[225][239] - The company relies on third-party collaborations (like Astellas and Merck) and contract manufacturers, and the failure of these partners could materially harm the business[226][265][283] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[463] Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[463] Mine Safety Disclosures This item is not applicable to the company - Not applicable[464] Other Information There was no other information to report for the period - None[465] Exhibits Key exhibits include the Blackstone royalty purchase agreement and an amendment to the Oxford Finance loan agreement - Exhibit 10.1 is the Purchase Agreement with an affiliate of Blackstone Life Sciences, related to the sale of future royalties[467] - Exhibit 10.2 is the Fifth Amendment to the Loan and Security Agreement with Oxford Finance LLC[467] Signatures