Vaxcyte, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements based upon our current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and beliefs. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. You should carefully read the “Risk Factors” section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled “Special Note Regarding Forward-Looking Statements.” Overview We are a next-generation vaccine company seeking to improve global health by developing superior and novel vaccines designed to prevent or treat some of the most common and deadly infectious diseases worldwide. Our cell-free protein synthesis platform enables us to design and produce protein carriers and antigens, the critical building blocks of vaccines, in ways that we believe conventional vaccine technologies currently cannot. Our pipeline includes pneumococcal conjugate vaccine, or PCV, candidates that we believe are among the most broad-spectrum PCV candidates currently in development, targeting the $7 billion global pneumococcal vaccine market. Our lead vaccine candidate is VAX-24, a 24-valent investigational PCV. We anticipate submitting our initial investigational new drug, or IND, application to the U.S. Food and Drug Administration, or FDA, for VAX-24 between January and June 2022 and initiating our Phase 1/2 clinical proof-of-concept study in adults thereafter. We expect to announce topline data from this study between late 2022 and early 2023. Our second PCV, known as VAX-XP, leverages our scalable and modular platform and builds on the technical proof of concept established by VAX-24 and, if approved, would expand the breadth of coverage to at least 30 strains without compromising immunogenicity due to carrier suppression. In addition to our PCV franchise, we are developing a novel conjugate vaccine candidate for Group A Strep and a novel protein vaccine candidate targeting the keystone pathogen responsible for periodontitis. Since January 1, 2020, key developments affecting our business include the following: • Achieved VAX-24 manufacturing milestones. We achieved several key manufacturing milestones for VAX-24 in preparation for the anticipated IND application submission and Phase 1/2 clinical study initiation. These include completion of: the good manufacturing practice, or GMP, batches of the eCRM protein carrier; the GMP batches of the 24 pneumococcal polysaccharides; the first two stages of the GMP batches for the 24 conjugated drug substances; the drug product batches used in the good laboratory practice, or GLP, toxicology studies; and the drug product batches that will serve as the source of the lead lot stability data for the IND application. • Progressed and reported new data for VAX-XP program. As part of our strategy to maximize the optionality and value of our PCV franchise, we have continued to advance VAX-XP, our broader-spectrum PCV candidate designed to cover at least 30 strains. We announced new data for VAX-XP that further demonstrate the potential benefits of our scalable technology platform and the reproducibility of data with conjugates produced at larger scale. Results from a preclinical proof-of-concept study showed that in rabbit models for VAX-XP compared to more than 30 different pneumococcal serotypes, including all of those contained in Prevnar 13, the VAX-XP IgG immune responses were superior to polysaccharide-only serotypes and comparable to Prevnar 13 in the common 13 strains. • Advanced and published data for VAX-A1 program. We advanced VAX-A1, our novel conjugate vaccine candidate designed to prevent infections from Group A Strep, a human pathogen causing pharyngitis, or strep throat, and certain severe invasive infections such as sepsis, toxic shock syndrome and necrotizing fasciitis. Based on the progress of the program, and consistent with 99 target timelines, we nominated the final VAX-A1 vaccine candidate in the first quarter of 2021. In January 2021, we announced the publication of preclinical data in the journal Infectious Microbes & Diseases , which showed that VAX-A1 demonstrated meaningful protection against systemic and soft tissue infection after challenge with no evidence of cross-reactivity with human tissue. Additionally, at the end of 2020, we completed the initial funding period under our agreement with CARB-X and are now in the process of submitting our proposal to CARB-X for the next funding period of the agreement. • Completed Initial Public Offering (IPO) and Series D financing. In June 2020, we completed our IPO of 17,968,750 shares of common stock, which included the full exercise of the underwriters’ option to purchase 2,343,750 additional shares, at a public offering price of $16.00 per share, resulting in aggregate net proceeds of $264.0 million. In March 2020, we completed our Series D convertible preferred stock financing, raising aggregate net proceeds of $109.9 million. • Strengthened leadership team and advisory board with key appointments. During 2020, we added several key leaders, including Andrew Guggenhime, President and Chief Financial Officer, and appointed Halley Gilbert to our board of directors, each bringing over 20 years of biotechnology leadership experience. In 2021, we added William Hausdorff, PhD to our Scientific Advisory Board. Dr. Hausdorff has worked on the development, clinical evaluation, registration, implementation and post-marketing assessment of a variety of vaccines over the past 30 years. Since 2018, Dr. Hausdorff has served as the Lead, Public Health Value Propositions for Vaccines at PATH, a global organization that works to accelerate health equity by bringing together public institutions, businesses, social enterprises, and investors to solve the world’s most pressing health challenges. Prior to joining PATH, he worked for 12 years at GlaxoSmithKline (GSK) Vaccines, eight years at Wyeth Vaccines and was previously at the Centers for Disease Control and Prevention. In his roles at GSK Vaccines and Wyeth Vaccines, he was involved in the development of Synflorix ® and Prevnar 13 ® , respectively. Dr. Hausdorff received his PhD in Biology from The Johns Hopkins University and his BA in Biology from Carleton College. Since our inception in November 2013, we have devoted substantially all of our resources to performing research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, acquiring and developing our technology and vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have financed our operations primarily with proceeds from the sales of our redeemable convertible preferred stock and our IPO. Through December 31, 2020, we have raised approximately $569.5 million in gross proceeds from the sale of our capital stock. We will continue to require additional capital to develop our vaccine candidates and fund operations for the foreseeable future. Accordingly, until such time as we can generate significant revenue from sales of our vaccine candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We have incurred net losses in each year since inception and expect to continue to incur net losses in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in large part on the timing of our preclinical studies, clinical trials and manufacturing activities, and our expenditures on other research and development activities. Our net losses were $89.2 million and $50.3 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $198.6 million. As of December 31, 2020, we had cash and cash equivalents of $386.2 million, which we believe will be sufficient to fund our operating expenses and capital expenditure requirements through at least the completion and announcement of the topline data from our Phase 1/2 clinical proof-of-concept study of VAX-24 in adults, which we expect between late 2022 and early 2023, and to continue to advance our pipeline of other vaccine candidates. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our vaccine candidates, which 100 we expect will take a number of years. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • advance vaccine candidates through preclinical studies and clinical trials; • require the manufacture of supplies for our preclinical studies and clinical trials, in particular our lead vaccine candidate, VAX-24; • pursue regulatory approval of vaccine candidates; • hire additional personnel; • operate as a public company; • acquire, discover, validate and develop additional vaccine candidates; and • obtain, maintain, expand and protect our intellectual property portfolio. We rely and will continue to rely on third parties to conduct our preclinical studies and clinical trials and for manufacturing and supply of our vaccine candidates. We have no internal manufacturing capabilities, and we will continue to rely on third parties, of which the main suppliers are single-source suppliers, for our preclinical and clinical trial materials. Given our stage of development, we do not yet have a marketing or sales organization or commercial infrastructure. Accordingly, if we obtain regulatory approval for any of our vaccine candidates, we also would expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Because of the numerous risks and uncertainties associated with vaccine development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from the sale of our vaccines, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and may be forced to reduce our operations. Certain Significant Relationships Sutro Biopharma Vaxcyte was formed through its relationship with Sutro Biopharma, in 2013 by our co-founders with the goal of utilizing Sutro Biopharma’s proprietary XpressCF platform for protein synthesis in the field of vaccines addressing infectious diseases. In addition to receiving funding, we entered into a license agreement with Sutro Biopharma, or the Sutro License, on August 1, 2014. The Sutro License was amended on October 12, 2015 and again on May 9, 2018 and May 29, 2018. Under this license, we received an exclusive, worldwide, royalty-bearing, sublicensable license under Sutro Biopharma’s patents and know-how relating to cell-free expression of proteins to (i) research, develop, use, sell, offer for sale, export, import and otherwise exploit specified vaccine compositions, such rights being sublicensable, for the treatment or prophylaxis of infectious diseases, excluding cancer vaccines, and (ii) manufacture, or have manufactured by an approved contract manufacturing organization, such vaccine compositions from extracts supplied by Sutro Biopharma pursuant to the Sutro Biopharma Supply Agreement (as described below). We are obligated to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize the vaccine compositions. In consideration of the rights granted under the Sutro License, we are obligated to pay Sutro Biopharma a 4% royalty on worldwide aggregate net sales of vaccine products for human health and a 2% royalty on such net sales of vaccine products for animal health. Such royalty rates are subject to specified reductions, including standard reductions for third-party payments and for expiration of relevant patent claims. Royalties are payable on a vaccine composition-by-vaccine composition and country-by-country basis until the later of expiration of the last valid claim in the licensed patents covering such vaccine composition in such 101 country and ten years after the first commercial sale of such vaccine composition. In addition, we are obligated to pay Sutro Biopharma a percentage in the low-double digits of any net sublicensing revenue received for sublicense agreements executed before July 2020. Our obligation to pay sublicense fees to Sutro Biopharma expired in July 2020. In May 2018, we entered into a supply agreement, which we refer to as the Sutro Biopharma Supply Agreement, with Sutro Biopharma pursuant to which we purchase from Sutro Biopharma extract and custom reagents for use in manufacturing non-clinical and certain clinical supply of vaccine compositions utilizing the technology licensed under the Sutro License at prices not to exceed a specified percentage above Sutro Biopharma’s fully burdened manufacturing cost. If any extracts or custom reagents do not meet the specifications and warranties provided, then we will not have an obligation to pay for the non-conforming product, and Sutro Biopharma will be obligated to replace the non-conforming product within the shortest possible time with conforming product at our cost. For additional details regarding our relationship with Sutro Biopharma, see Note 13, “Related Party Transactions,” to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Lonza In October 2016, we entered into a development and manufacturing services agreement with Lonza Ltd., or Lonza, which we refer to, as amended, as the 2016 Lonza Agreement, pursuant to which Lonza is obligated to perform manufacturing process development and clinical manufacture and supply of components for VAX-24, including the manufacture of polysaccharide antigens, our proprietary eCRM protein carrier and conjugated drug substances. In October 2018, we entered into a second development and manufacturing services agreement with Lonza, which we refer to as the 2018 Lonza Agreement, and together with the 2016 Lonza Agreement, as the Lonza Agreements, pursuant to which Lonza is obligated to perform manufacturing process development and clinical manufacture and supply of VAX-24 finished drug product. In June 2018, we entered into a letter agreement, or the Lonza Letter Agreement, with Lonza, pursuant to which we agreed to certain terms for potential future equity payments as partial satisfaction of future obligations to Lonza under the Lonza Agreements. Specifically, we and Lonza agreed that the initial pre-IND cash payments made by us to Lonza are subject to a specified dollar cap, which we refer to as the Initial Cash Cap. After the Initial Cash Cap has been reached, then at our election, we can make any further pre-IND payments owed to Lonza under the Lonza Agreements in cash, equity at then market prevailing prices, or a combination of both. Lonza may elect to receive up to 25% of pre-IND payments in equity, up to a maximum of $2.5 million, and no more than $10 million of pre-IND payments may be satisfied by issuances of our common stock. Under the Lonza Agreements, we will pay Lonza agreed upon fees for Lonza’s performance of manufacturing services, and we will reimburse Lonza for its out-of-pocket costs associated with purchasing raw materials, plus a customary handling fee. Each Lonza Agreement is managed by a steering committee and any dispute at the steering committee will be resolved by senior executives of the parties. For additional details regarding our relationship with Lonza, see Note 5, “Commitments and Contingencies,” to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Impact of COVID-19 We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive efforts designed to protect the health and safety of our employees and to maintain business continuity. We believe that the measures we have implemented and continue to implement are appropriate, and we will continue to monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate. Based on guidance issued by federal, state and local authorities, we transitioned to a remote work model for our non-lab based employees in March 2020, while maintaining essential in-person laboratory functions 102 in order to advance key research and development initiatives, supported by the implementation of updated onsite safety procedures, including routine testing of employees. In particular, the COVID-19 pandemic slowed raw material supply chains and travel restrictions delayed the qualification of key analytical equipment used in manufacturing and curtailed in-person CMO oversight of manufacturing, affecting our manufacturing processes. As the pandemic continues, we could see an additional impact on our ability to advance our programs, obtain supplies from our contract manufacturers or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority, employee resources or otherwise. In any event, if the COVID-19 pandemic continues and persists for an extended period of time, we could experience significant disruptions to our development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects. In addition, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic could result in significant and prolonged disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the continued spread of COVID-19 could materially affect our business and the potential value of our common stock. The extent of the impact of the COVID-19 pandemic on our development and regulatory efforts, our ability to raise sufficient additional capital on acceptable terms, if at all, and the value of and market for our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States and in other countries, and the effectiveness of actions taken globally to contain and treat COVID-19. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, see the section titled “Risk Factors.” Components of Results of Operations Operating Expenses Research and Development Research and development expenses represent costs incurred in performing research, development and manufacturing activities in support of our own product development efforts and include personnel-related costs (such as salaries, employee benefits and stock-based compensation) for our personnel in research and development functions; costs related to acquiring, developing and manufacturing supplies for preclinical studies, clinical trials and other studies, including fees paid to contract manufacturing organizations; costs and expenses related to agreements with contract research organizations, investigative sites and consultants to conduct non-clinical and preclinical studies and clinical trials; professional and consulting services costs; research and development consumables costs; laboratory supplies and equipment costs; and facility and other allocated costs. Research and development expenses are expensed as incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed. We do not allocate our costs by vaccine candidates, as our vaccine candidates are at an early stage of development and our research and development expenses include internal costs, such as payroll and other personnel expenses, which are not tracked by vaccine candidate. In particular, with respect to internal costs, several of our departments support multiple vaccine candidate research and development programs. We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our vaccine candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our vaccine candidates and expand our pipeline of vaccine candidates. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our vaccine candidates may be affected by a variety of factors, including the safety and efficacy of our vaccine candidates, early clinical data, investment in our clinical programs, 103 competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our vaccine candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or if, when and to what extent we will generate revenue from the commercialization and sale of our vaccine candidates. We accrue for costs related to research and development activities based on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors, including contract manufacturing organizations, or CMOs, that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors exceed the level of services provided and result in a prepayment of the research and development expense. Advance payments for goods and services to be used in future research and development activities are expensed when the activity has been performed or when the goods have been received. We make significant judgments and estimates in determining accrued research and development liabilities as of each reporting period based on the estimated time period over which services will be performed and the level of effort to be expended. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. Our clinical development costs may vary significantly based on factors such as: • the costs and timing of our chemistry, manufacturing and controls, or CMC, activities, including fulfilling GMP-related standards and compliance, and identifying and qualifying a second supplier; • the costs related to raw materials estimates from our third-party manufacturing and supply partners; • the cost of clinical trials of our vaccine candidates being greater than we anticipate; • changes in the standard of care on which a clinical development plan was based, which may require new or additional trials; • the number of sites included in the trials; • the countries in which the trials are conducted; • delays in adding a sufficient number of trial sites and recruiting suitable volunteers to participate in our clinical trials; • the number of subjects that participate in the trials; • the number of doses that subjects receive; • subjects dropping out of a study or lost in follow-up; • potential additional safety monitoring requested by regulatory agencies; • the duration of subject participation in the trials and follow-up; • the cost and timing of manufacturing our vaccine candidates; • the phase of development of our vaccine candidates; and 104 • the efficacy and safety profile of our vaccine candidates. General and Administrative General and administrative expenses consist primarily of costs and expenses related to personnel (including salaries, employee benefits and stock-based compensation) in our executive, legal, finance and accounting, human resources and other administrative functions; legal services, including relating to intellectual property and corporate matters; accounting, auditing, consulting and tax services; insurance; and facility and other allocated costs not otherwise included in research and development expenses. We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we increase our headcount to support our continued research and development activities and grow our business. We also anticipate that we will incur increased expenses as a result of operating as a public company, including expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with SEC rules and regulations and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. Other Income (Expense), Net Other income (expense), net includes interest expense incurred on our capital leases for lab equipment, interest income earned from our cash and cash equivalents, grant income, foreign currency transaction gains (losses) related to our Swiss Franc cash and liability balances and changes in the fair value of our redeemable convertible preferred stock tranche liability (see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” Note 3, “Fair Value Measurements and Fair Value of Financial Instruments,” and Note 6, “Redeemable Convertible Preferred Stock,” to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detail). Grant Income In July 2019, CARB-X awarded us up to $1.6 million in initial funding to advance the development of a universal vaccine to prevent infections caused by Group A Strep Bacteria. In July 2020, the CARB-X agreement was amended to increase the funding percentage for reimbursable expenses during the initial funding period from 50% to 90%. As a result, the initial funding amount increased from $1.6 million to $2.7 million. Income is recognized as we incur and pay qualifying expenses over a period that ends on December 31, 2020. Qualifying expenses under this funding arrangement are recorded as a receivable when we have both incurred and paid the expenses. We recognized $2.5 million and $0.2 million in grant income for funding research and development under this award during the years ended December 31, 2020 and 2019, respectively. No grant income was recognized for the year ended December 31, 2018 because the grant was not awarded until 2019. Grant income is included as a component of Other income (expense), net in the statements of operations and comprehensive loss. 105 Results of Operations Comparison of the Years Ended December 31, 2020 and 2019 The following table summarizes our results of operations for the periods presented: Year Ended December 31, Change 2020 2019 $ % Operating expenses: Research and development $ 73,564 $ 45,607 $ 27,957 61.3 % General and administrative 16,017 8,546 7,471 87.4 % Total operating expenses 89,581 54,153 35,428 65.4 % Loss from operations (89,581 ) (54,153 ) (35,428 ) 65.4 % Other income (expense), net: Interest expense (7 ) (40 ) 33 (82.5 )% Interest income 244 632 (388 ) (61.4 )% Grant income 2,478 237 2,241 * Foreign currency transaction losses (2,351 ) (135 ) (2,216 ) * Change in fair value of the redeemable convertible preferred stock tranche liability — 3,185 (3,185 ) (100.0 )% Total other income (expense), net 364 3,879 (3,515 ) (90.6 )% Net loss and comprehensive loss $ (89,217 ) $ (50,274 ) $ (38,943 ) 77.5 % * not meaningful Operating Expenses Research and Development Expenses The following table summarizes our research and development expenses for the periods presented: Year Ended December 31, Change 2020 2019 $ % Product and clinical development (1) $ 51,072 $ 27,985 $ 23,087 82.5 % Personnel-related 9,943 5,947 3,996 67.2 % Professional and consulting services 4,184 4,669 (485 ) (10.4 )% Research and development consumables 2,288 2,474 (186 ) (7.5 )% Facility related and other allocated 2,957 2,422 535 22.1 % Laboratory supplies and equipment 2,032 1,174 858 73.1 % Other (2) 1,088 936 152 16.2 % Total research and development expenses $ 73,564 $ 45,607 $ 27,957 61.3 % (1) Includes expenses for third-party manufacturing and outsourced contract services, including preclinical studies and outsourced assays. (2) Includes travel-related expenses, warrant expense and other miscellaneous office expenses. Research and development expenses increased by $28.0 million, or 61.3%, in 2020 compared to 2019. The increase was primarily attributable to an increase of $23.1 million in product and clinical development expenses mainly related to our lead vaccine candidate, VAX-24, driven by increases of $18.6 million in outsourced manufacturing activities and $4.5 million in outsourced research services due to the ramp-up of the eCRM and polysaccharide GMP campaigns and conjugation and drug product activities in preparation for our anticipated IND application submission between January and June 2022 and Phase 1/2 clinical study initiation thereafter. The increase in personnel-related expenses of $4.0 million was primarily related to the increase in the number of 106 employees to support our expan sion in research and development activities and higher stock-based compensation expense resulting from an increase in the number of options granted during the year and an increase in the fair value of our common stock affecting the valuation of new option grants . General and Administrative Expenses General and administrative expenses increased by $7.5 million, or 87.4%, in 2020 compared to 2019. The increase was mainly due to increases of $3.9 million in personnel-related costs related to higher stock-based compensation expense resulting from an increase in the number of options granted during the year and an increase in the fair value of our common stock affecting the valuation of new option grants, as well as growth in the number of employees in our general and administrative functions, $1.6 million in professional and consulting services resulting from increased legal expenses and consulting costs, and $1.7 million in other expenses primarily due to an increase in directors and officers insurance expense as a result of being a public company. Other Income (Expense), Net Other income (expense), net decreased by $3.5 million, or 90.6%, in 2020 compared to 2019. During 2019, we recognized a $3.2 million gain resulting from a change in the fair value of the redeemable convertible preferred stock tranche liability, which was settled in December 2019, and there was no such gain recognized during 2020. Other income (expense), net also decreased due to an increase in foreign currency losses of $2.2 million resulting from the depreciation of the U.S. Dollar against the Swiss Franc. These decreases were partially offset by an increase of $2.2 million in grant income from the CARB-X program, which commenced in July 2019. Comparison of the Years Ended December 31, 2019 and 2018 The following table summarizes our results of operations for the periods presented: Year Ended December 31, Change 2019 2018 $ % Operating expenses: Research and development $ 45,607 $ 30,145 $ 15,462 51.3 % General and administrative 8,546 5,388 3,158 58.6 % Total operating expenses 54,153 35,533 18,620 52.4 % Loss from operations (54,153 ) (35,533 ) (18,620 ) 52.4 % Other income (expense), net: Interest expense (40 ) (75 ) 35 (46.7 )% Interest income 632 903 (271 ) (30.0 )% Grant income 237 — 237 * Foreign currency transaction losses (135 ) 42 (177 ) * Change in fair value of the redeemable convertible preferred stock tranche liability 3,185 5,178 (1,993 ) (38.5 )% Total other income (expense), net 3,879 6,048 (2,169 ) (35.9 )% Net loss and comprehensive loss $ (50,274 ) $ (29,485 ) $ (20,789 ) 70.5 % * not meaningful 107 Research and Development Expenses The following table summarizes our research and development expenses for the periods presented: Year Ended December 31, Change 2019 2018 $ % Product and clinical development (1) $ 27,985 $ 14,824 $ 13,161 88.8 % Personnel-related 5,947 5,328 619 11.6 % Professional and consulting services 4,669 3,567 1,102 30.9 % Research and development consumables 2,474 2,435 39 1.6 % Facility related and other allocated 2,422 1,962 460 23.4 % Laboratory supplies and equipment 1,174 951 223 23.4 % Other (2) 936 1,078 (142 ) (13.2 )% Total research and development expenses $ 45,607 $ 30,145 $ 15,462 51.3 % (1) Includes expenses for third-party manufacturing and outsourced contract services, including preclinical studies and outsourced assays. (2) Includes travel-related expenses, warrant expense and other miscellaneous office expenses. Research and development expenses increased by $15.5 million, or 51.3%, in 2019 compared to 2018. The increase was primarily attributable to an increase of $13.2 million in product and clinical development expenses mainly related to our lead vaccine candidate, VAX-24, driven by an $11.5 million increase in costs related to outsourced manufacturing activities and an $1.8 million increase in contracted research services. General and Administrative Expenses General and administrative expenses increased by $3.2 million, or 58.6%, in 2019 compared to 2018. The increase was primarily attributable to increases in personnel-related costs of $1.7 million due to increase in the number of employees in our general and administrative functions, employee development and stock-based compensation expenses, and audit, tax and legal fees of $1.3 million. Other Income (Expense), Net Other income (expense), net decreased by $2.2 million, or 35.9%, in 2019 compared to 2018. The decrease was primarily attributable to a decrease in income resulting from a change in the fair value of the redeemable convertible preferred stock tranche liabilities. In 2019, we recognized a $3.2 million gain as a result of a decrease in the fair value of the Series C preferred stock tranche liability, compared to $5.2 million in income as a result of decreases in the fair value of the Series B and Series C preferred stock tranche liabilities in 2018 of $3.8 million and $1.4 million, respectively. The decreases in fair value of the Series B and Series C preferred stock tranche liabilities were due to a reduction in their time to maturity following their respective settlements in May 2018 and December 2019. Liquidity and Capital Resources We have incurred losses and negative cash flows from operations from inception through December 31, 2020. We have funded our operations to date primarily through equity financings, including our IPO that was completed in June 2020, totaling approximately $569.5 million in aggregate gross proceeds and $545.2 million net of underwriting discounts, commissions and offering expenses. As of December 31, 2020, we had $386.2 million of cash and cash equivalents and an accumulated deficit of $198.6 million. Future Funding Requirements Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and, to a lesser extent, general and administrative expenditures. 108 We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to advance our vaccine candidates, expand our corporate infrastructure, including the costs associated with being a public company, further our research and development initiatives for our vaccine candidates and scale our laboratory and manufacturing operations. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. We believe that our existing cash and cash equivalents as of the date of this Annual Report on Form 10-K will be sufficient to fund our operating expenses and capital expenditure requirements through at least the completion and announcement of the topline data from our Phase 1/2 clinical proof-of-concept study of VAX-24 in adults, which we expect between late 2022 and early 2023, and to continue to advance our pipeline of other vaccine candidates. However, we will need to raise additional capital prior to commencing pivotal trials for any of our vaccine candidates. Until we can generate a sufficient amount of revenue from the commercialization of our vaccine candidates or from collaboration agreements with third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financings may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of or eliminate one or more of our research and development programs. Our future capital requirements will depend on many factors, including: • the timing, scope, progress, results and costs of research and development, testing, screening, manufacturing, preclinical and non-clinical studies and clinical trials, including any impacts related to the COVID-19 pandemic; • the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform field efficacy studies for our PCV candidates, require more studies than those that we currently expect or change their requirements regarding the data required to support a marketing application; • the cost of building a sales force in anticipation of any product commercialization; • the costs of future commercialization activities, including product manufacturing, marketing, sales, royalties and distribution, for any of our vaccine candidates for which we receive marketing approval; • our ability to maintain existing, and establish new, strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any such agreement; • any product liability or other lawsuits related to our products; • the revenue, if any, received from commercial sales, or sales to foreign governments, of our vaccine candidates for which we may receive marketing approval; 109 • the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing our patents or other intellectual property rights; • expenses needed to attract, hire and retain skilled personnel; • the costs of operating as a public company; and • the impact of the COVID-19 pandemic, which may exacerbate the magnitude of the factors discussed above. A change in the outcome of any of these or other variables could significantly change the costs and timing associated with the development of our vaccine candidates. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such change. Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2020 2019 2018 (in thousands) Net cash used in operating activities $ (46,628 ) $ (47,145 ) $ (30,466 ) Net cash used in investing activities (1,105 ) (1,195 ) (1,773 ) Net cash provided by financing activities 374,870 41,567 62,190 Effect of exchange rate changes on cash and cash equivalents 87 (341 ) — Net increase (decrease) in cash and cash equivalents $ 327,224 $ (7,114 ) $ 29,951 Cash Flows from Operating Activities Net cash used in operating activities for the year ended December 31, 2020 was $46.6 million, which primarily resulted from a net loss of $89.2 million, partially offset by a net change in operating assets and liabilities of $35.3 million and non-cash charges of $7.3 million. The net change in operating assets and liabilities of $35.3 million was primarily due to increases in accounts payable of $26.1 million resulting from the deferral of completion payments until April 2021 in accordance with our contract with Lonza, accrued manufacturing expenses of $7.2 million related to outsourced manufacturing activities and accrued expenses of $2.2 million related primarily to increases in contract research services related to the VAX-24 program. Non-cash charges primarily consisted of $5.4 million in stock-based compensation expense, $1.4 million in depreciation and amortization and $0.3 million in asset impairment charges. Net cash used in operating activities for the year ended December 31, 2019 was $47.1 million, which primarily resulted from a net loss of $50.3 million and net non-cash charges of $0.8 million, partially offset by a net change in operating assets and liabilities of $3.9 million. Non-cash charges primarily consisted of a $3.2 million decrease in the fair value of our redeemable convertible preferred stock tranche liabilities primarily related to a reduction in the time to maturity during the year and the settlement of the Series C tranche liability in December 2019, partially offset by $1.2 million of depreciation and amortization expense and $1.2 million of stock-based compensation expense. The net change in operating assets and liabilities of $3.9 million was primarily due increases of $4.7 million in accrued liabilities resulting primarily from our increased contract manufacturing activities in 2019 and $0.9 million in accounts payable resulting from timing of billings and payments, partially offset by a $1.1 million increase in prepaid expenses and other current assets, a $0.8 million decrease in accrued compensation due primarily to the timing of the payment of our annual performance bonuses and a $0.7 million in prepaid 110 expenditures mainly related to contract manufacturing activities, contract research services and maintenance contracts . Net cash used in operating activities for the year ended December 31, 2018 was $30.5 million, which primarily resulted from a net loss of $29.5 million and net non-cash charges of $2.9 million, partially offset by a net change in operating assets and liabilities of $1.9 million. Non-cash charges primarily consisted of a $5.2 million decrease in the fair value of our redeemable convertible preferred stock tranche liabilities primarily related to the settlement of the Series B tranche liability, partially offset by $1.0 million of depreciation and amortization expense, $0.7 million of stock-based compensation expense and $0.5 million of warrant expense related to the preferred stock warrant issued to Sutro Biopharma in 2018. The net change in operating assets and liabilities of $1.9 million was primarily due to a $1.7 million increase in accrued liabilities resulting primarily from our commencement of contract manufacturing activities in 2018, a $1.3 million increase in accounts payable resulting primarily from increased contract manufacturing activities and a $0.5 million increase in accrued compensation, partially offset by the payment of a legal settlement of $0.9 million and a $0.4 million increase in prepaid expenses and other current assets. Cash Flows from Investing Activities Cash used in investing activities for the years ended December 31, 2020, 2019 and 2018 was $1.1 million, $1.2 million and $1.8 million, respectively, which related primarily to purchases of lab equipment and leasehold improvements. Cash Flows from Financing Activities Cash provided by financing activities for the year ended December 31, 2020 was $374.9 million, which primarily consisted of net proceeds of $264.0 million from our IPO and $109.9 million from the issuance of our Series D redeemable convertible preferred stock. Cash provided by financing activities for the year ended December 31, 2019 was $41.6 million, which primarily consisted of net proceeds from the issuance of the second tranche of our Series C redeemable convertible preferred stock of $42.5 million, partially offset by deferred offering costs of $1.1 million. Cash provided by financing activities for the year ended December 31, 2018 was $62.2 million, which primarily consisted of net proceeds from the issuance of the first tranche of our Series C redeemable convertible preferred stock and the second tranche of our Series B redeemable convertible preferred stock of $42.3 million and $20.0 million, respectively. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments at December 31, 2020: Payments Due by Period Less More than 1 - 3 3 - 5 than 1 Year Years Years 5 Years Total (in thousands) Operating lease obligations (1) $ 742 $ 190 $ — $ — $ 932 Total $ 742 $ 190 $ — $ — $ 932 (1) Consists of our corporate headquarters lease in Foster City, California that expires in March 2022, our second lease in Foster City, California that expires in April 2022 and a small office lease in San Diego, California that expires in April 2021. We have certain payment obligations under various license agreements. Under these agreements, we are required to make milestone payments upon successful completion and achievement of certain intellectual property, 111 clinical, regulatory and sales milestones. The payment obligations under the license agreements are contingent upon future events such as our achievement of specified development, clinical, regulatory and commercial milestones, and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our balance sheets as of December 31, 2020 or December 31, 2019 , or in the contractual obligations table above. See Note 1 3 , “Related Party Transactions,” to our financial statements included in Part I I , Item 8 of this Annual Report on Form 10- K . We enter into agreements in the normal course of business with vendors for preclinical and non-clinical studies, manufacturing and supply of our preclinical materials and for other services and products used for operating purposes. These contracts are generally cancelable following a certain period after written notice, and therefore, we believe that our non-cancelable obligations under these agreements are not material and have not been included in the table above. Legal Contingencies From time to time, we may become involved in legal proceedings arising from the ordinary course of business. We record a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated. Significant judgment by us is required to determine both probability and the estimated amount. We do not believe that there is any litigation or asserted or unasserted claim pending that could, individually or in the aggregate, have a material adverse effect on our results of operations or financial condition. Off-Balance Sheet Arrangements During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results: Accrued Research and Development Expenses We have entered into various agreements with contract manufacturing organizations, or CMOs, and may enter into contracts with clinical research organizations, or CROs, in the future. As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel and third parties to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued research and development expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates 112 in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. We accrue for costs related to research and development activities based on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors, including CMOs, that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received. We make significant judgments and estimates in determining accrued research and development liabilities as of each reporting period based on the estimated time period over which services will be performed and the level of effort to be expended. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred. Stock-Based Compensation Expense Stock-based compensation expense related to awards to employees is measured at the grant date based on the fair value of the award. The fair value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period, net of the impact of actual forfeitures recorded in the period in which they occur. Stock-based compensation expense related to awards to non-employees is recognized based on the then-current fair value at each measurement date over the associated service period of the award, which is generally the vesting term, using the straight-line method. The fair value of non-employee stock options is estimated using the Black-Scholes valuation model with assumptions generally consistent with those used for employee stock options, with the exception of the expected term, which is the remaining contractual life at each measurement date. Refer to Notes 2 and 11 for more information on assumptions used in estimating stock-based compensation expense. We use the Black-Scholes option-pricing model (“Black-Scholes”) as the method for determining the estimated fair value of certain financial instruments, which requires the input of the following assumptions: Fair Value of Common Stock The fair value of our common stock is determined by the Board of Directors with assistance from management and external appraisers. Management’s approach to estimate the fair value of our common stock is consistent with the methods outlined in the American Institute of Certified Public Accountants’ Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”), considering a number of objective and subjective factors including: valuations of our common stock performed with the assistance of independent third-party valuation specialists; our stage of development and business strategy, including the status of research and development efforts of our vaccine candidates, and the material risks related to our business and industry; our results of operations and financial position, including our levels of available capital resources; the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; the lack of marketability of our common stock; the prices of our redeemable convertible preferred stock sold to investors in arm’s length transactions and the rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock; the likelihood of achieving a liquidity event for the holders of our common and 113 redeemable convertible preferred stock, such as an initial public offering or a sale, given prevailing market conditions; trends and developments in our industry; and external market conditions affecting the life sciences and biotechnology industry sectors. The fair value s of the common stock were approved by the Board of Directors until our common stock started listing on the Nasdaq Global Select Market upon our IPO . The valuation assumptions were determined as follows: Expected Term Expected term represents the period that our stock-based awards are expected to be outstanding. The expected term for employee stock options is calculated using the simplified method where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the time from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term. The expected term for non-employee stock options is the remaining contractual term. Expected Volatility Expected volatility is estimated from the average historical volatilities of publicly traded companies within the life sciences industry that are considered to be comparable to our business over a period approximately equal to the expected term for employees’ options and the remaining contractual life for non-employees’ options. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. Expected Dividend We have not paid and do not anticipate paying any dividends in the near future. Accordingly, we have estimated the dividend yield to be zero. Risk-Free Interest Rate The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero-coupon notes with remaining terms corresponding with the expected term of the option. Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. However, as described in Note 3 to our financial statements included elsewhere in this Annual Report on Form 10-K, we early adopted certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies to the extent early adoption is permitted. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. 114 We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the consummation of the IPO, (iii) the date on which we are deemed to be a “large accelerated filer,” under the rules of the SEC, which means the market value of equity securities that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. Recently Adopted Accounting Pronouncements See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our financial statements for additional information.