What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-05 · 97 added, 133 removed, 96 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2019, and management’s discussion and analysis, included in our Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission (SEC) on March 5, 2020.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2020, included in our Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission (SEC) on February 25, 2021.

This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions.

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Our initial focus has been on well-characterized biological pathways with significant scientific data supporting their importance.

We have built a robust and highly efficient drug discovery capability to create highly differentiated small molecules, which we have the ability to develop in combinations with our monoclonal antibodies through rationally designed, indication-specific, adaptive clinical trial designs.

Our vision is to create, develop and commercialize highly differentiated combination cancer therapies that have the potential to cure.

We currently have four investigational products in clinical development.

We hold worldwide development and commercialization rights to each of these investigational products with the exception of zimberelimab, for which we hold rights outside of China and Thailand.

Taiho Pharmaceutical Co., Ltd.

(Taiho) has a time-limited option to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China), which they have exercised with respect to our adenosine receptor antagonist program, including etrumadenant (formerly referred to as AB928), and our anti-PD-1 program, including zimberelimab.

Gilead Sciences, Inc.

(Gilead) has a time-limited option to obtain an exclusive license to all of our current and future clinical programs, subject to the rights of our existing partners to any territories.

Upon closing of our Option, License and Collaboration Agreement with Gilead (the Gilead Collaboration Agreement), Gilead obtained an exclusive license to our zimberelimab program.

Etrumadenant (formerly referred to as AB928), our small molecule dual A 2a /A 2b adenosine receptor antagonist, is in clinical development, and is being evaluated in four Phase 1b expansion studies in specific cancer indications:

advanced colorectal cancer, triple negative breast cancer, EGFR-mutated lung cancer, and prostate cancer;

two collaboration studies with Genentech utilizing their MORPHEUS Phase 1b/2 platform in third-line metastatic colorectal cancer and first-line metastatic pancreatic cancer;

a Phase 1b/2 multi-cohort platform trial in participants with metastatic castrate resistant prostate cancer;

and a Phase 1b trial in participants with colorectal cancer.

AB680, our small-molecule CD73 inhibitor, is in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer.

This study consists of a safety dose-escalation portion, followed by an enrollment expansion to evaluate the combination of AB680, zimberelimab (our anti-PD-1 antibody) and the standard-of-care chemotherapies gemcitabine and nab-paclitaxel.

Domvanalimab (formerly referred to as AB154), our in-licensed anti-TIGIT monoclonal antibody, is in Phase 2 development for the treatment of first-line metastatic non-small cell lung cancer in combination with zimberelimab and etrumadenant (formerly referred to as AB928).

Zimberelimab (formerly referred to as AB122), our in-licensed anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy.

In addition to the combination studies with zimberelimab described above, we are also evaluating zimberelimab as monotherapy in a tumor-agnostic, biomarker-selected Phase 1b trial.

Our vision is to create, develop and commercialize highly differentiated combination cancer therapies.

We currently have five investigational products in clinical development.

In 2020, we entered into an Option, License and Collaboration Agreement (Gilead Collaboration Agreement) with Gilead Sciences, Inc.

(Gilead), whereby Gilead obtained rights to zimberelimab and a time-limited exclusive option to all of our current and future programs during the 10-year collaboration term.

For each program to which Gilead exercises their option, the parties will co-develop globally and co-commercialize in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners to certain territories.

In 2017, we entered into an Option and License Agreement (Taiho Agreement) with Taiho Pharmaceutical Co., Ltd.

(Taiho) pursuant to which Taiho has a time-limited option to exclusively license the development and commercialization rights to each of our programs for Japan and certain other territories in Asia (excluding China).

To date, Taiho has exercised their option rights to our adenosine receptor antagonist program (including etrumadenant) and our anti-PD-1 program (including zimberelimab).

Domvanalimab (formerly referred to as AB154), our anti-TIGIT monoclonal antibody, is being evaluated in combination with zimberelimab with or without etrumadenant vs.

zimberelimab monotherapy in ARC-7, our randomized Phase 2 trial in first-line metastatic PD-L1 ≥ 50% non-small cell lung cancer.

In February 2021, we initiated ARC-10, our first registrational trial evaluating domvanalimab in combination with zimberelimab and zimberelimab monotherapy vs.

chemotherapy in this same setting.

Etrumadenant (formerly referred to as AB928), our small molecule dual A 2a /A 2b adenosine receptor antagonist, is being evaluated by us in several randomized or Phase 2 trials across major tumor types, including in our ARC-4, ARC-6, ARC-7, and ARC-9 studies, as well as in two randomized Phase 1b/2 trials being conducted by Genentech (the Morpheus trials).

AB680, our small-molecule CD73 inhibitor, is being evaluated in a Phase 1/1b study for the treatment of first-line metastatic pancreatic cancer (ARC-8) as well as late-line metastatic prostate cancer (ARC-6).

Zimberelimab (formerly referred to as AB122), our anti-PD-1 monoclonal antibody, is the cornerstone of our combination strategy.

We are currently evaluating zimberelimab, either alone or in combination with other agents across several tumor types, including non-small cell lung cancer in ARC-7, our Phase 2 trial, and ARC-10, our recently initiated registrational trial which is designed to support the approval of zimberelimab.

AB308, our Fc-enabled anti-TIGIT monoclonal antibody, is being evaluated in a dose escalation study designed to expeditiously identify an every three week and an every four week dose for AB308 in combination with zimberelimab.

The dose escalation study will further evaluate the safety, pharmacokinetics and pharmacodynamics of AB308 in combination with zimberelimab.

Gilead Collaboration

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The transaction closed on July 13, 2020 following expiration of the antitrust waiting period.

Upon closing, Gilead made an upfront payment of $175 million pursuant to the Gilead Collaboration Agreement, Gilead made an equity investment of approximately $200 million in us by purchasing 5,963,029 shares of our common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement, and we appointed Gilead’s designee, Merdad Parsey, M.D., Ph.D., to our Board of Directors pursuant to the Investor Rights Agreement.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab (formerly referred to as AB122) in certain markets and obtained exclusive options to acquire an exclusive license to

develop and commercialize all of our current and future clinical programs during the 10-year collaboration term , contingent upon Gilead’s payment of $400 million, with the first payment of $100.0 million in 2022 and an additional $100.0 million payment due at Gilead’s option on each of the fourth, sixth, and eighth anniversar ies of the agreement .

Upon closing, Gilead made an upfront payment of $175 million pursuant to the Gilead Collaboration Agreement, and Gilead made an equity investment of approximately $200 million in us by purchasing 5,963,029 shares of our common stock at a per share price of $33.54 pursuant to the Stock Purchase Agreement.

Gilead made an additional equity investment in us of approximately $56.7 million, net of offering costs, by purchasing 2,200,000 shares of

our common stock at a per share price of $27.50 in our May 2020 Public Offering.

Pursuant to the Investor Rights Agreement, w e also appointed Gilead’s designee s , Merdad Parsey , M.D., Ph.D.

and Michael Quigley, Ph.D., to our Board of Directors.

Pursuant to the terms of the Gilead Collaboration Agreement, Gilead has an exclusive license to develop and commercialize zimberelimab in certain markets and obtained exclusive options to acquire an exclusive license to develop and commercialize all of our current and future clinical programs during the 10-year collaboration term, contingent upon Gilead’s payment of $400 million, with the first payment of $100 million in 2022 and an additional $100 million payment due at Gilead’s option on each of the fourth, sixth, and eighth anniversaries of the agreement.

For those programs that enter clinical development prior to the end of the collaboration term, Gilead’s option rights will extend for up to an additional three years thereafter.

Gilead may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from $200 million to $275 million per program for our current clinical programs, and $150 million per program for all other programs that enter clinical development.

Gilead may exercise its option, on a program-by-program basis, upon payment of an option fee that ranges from $200 million to $275 million per program for our clinical programs in existence at the date of the agreement, and $150 million per program for all other programs that enter clinical development thereafter.

If Gilead exercises its option with respect to our TIGIT program, we are also eligible to receive up to $500 million in potential U.S.

regulatory approval milestones with respect to domvanalimab (formerly referred to as AB154).

regulatory approval milestones with respect to domvanalimab.

Upon Gilead’s exercise of its option to a program, the two companies will co-develop and equally share global development costs, subject to certain of our opt-out rights, and expense caps on our spending and related subsequent adjustments.

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Gilead has the right to exclusively commercialize any optioned programs outside of the U.S., subject to the rights of our existing partners to any territories, and Gilead will pay to us tiered royalties as a percentage of revenues ranging from the high teens to the low twenties.

Gilead will further provide ongoing research and development support of up to $400 million over the collaboration term.

Pursuant to the Stock Purchase Agreement and the Investor Rights Agreement, Gilead has the right, at its option, to purchase additional shares from us, up to a maximum of 35% of our then-outstanding voting common stock, from time to time over the next five years, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price.

Pursuant to the Stock Purchase Agreement and the Investor Rights Agreement, Gilead has the right, at its option, to purchase additional shares from us, up to a maximum ownership of 35% of our then-outstanding voting common stock, from time to time over a five year period, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price) at the time Gilead exercises such option, and the $33.54 initial purchase price.

The Investor Rights Agreement also includes a three-year standstill and a two-year lockup and provides Gilead with registration rights commencing at the end of the lockup period, pro rata participation rights in certain future financings and the right to designate two individuals to be appointed to our Board of Directors.

On January 31, 2021, we and Gilead entered into an Amended and Restated Common Stock Purchase Agreement, which amended and restated in its entirety the Common Stock Purchase Agreement, pursuant to which Gilead purchased from us 5,650,000 shares of our common stock at a purchase price of $39.00 per share, for gross proceeds of $220.4 million.

All other terms of the original Common Stock Purchase Agreement, including Gilead’s option to purchase additional shares from us, up to a maximum ownership of 35% of our then-outstanding common stock, remain unchanged.

COVID-19 Pandemic

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including the ultimate duration and/or severity of the outbreak and any resurgences, actions by government authorities to contain the spread of the virus, the timing, availability and effectiveness of any vaccines, and when and to what extent normal economic and operating conditions can resume.

The degree to which COVID-19 impacts our business operations, research and development programs and financial condition will depend on future developments, including the ultimate duration and/or severity of the outbreak, the impact of any resurgences and new strains that emerge, actions by government authorities to contain the spread of the virus, the timing, availability and effectiveness of any vaccines, and when and to what extent normal economic and operating conditions can resume.

Our management continues to actively monitor this health crisis and its effects on our operations, key vendors and workforce.

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and internationally in geographic regions that are impacted by COVID-19 to varying degrees.

While we have seen relatively robust enrollment across our ongoing Arcus-sponsored studies, we expect to see volatility as local governments respond to resurgences and during the upcoming flu season, each of which may result in the prolonged reinstitution, extension or enhancement of shelter-in-place measures.

While we have seen relatively robust enrollment across our ongoing Arcus-sponsored studies, we expect to see volatility as local governments respond to resurgences and the emergence of new strains, each of which may result in the prolonged reinstitution, extension or enhancement of shelter-in-place measures.

The American Cancer Society has also reported that the pandemic has led to declines in screening, diagnosis and treatment for cancer patients, which will impact the enrollment of patients in clinical trials targeting early stage cancers and retention of patients overall in our trials.

Patient safety remains our paramount concern and we continue to collaborate with our existing and with new investigational sites to implement measures to minimize disruptions to patients and ensure continued access to treatment, in accordance with health authority guidance.

We are unable to predict the full impact of this pandemic on our clinical programs.

We are unable to predict the ultimate impact of this pandemic on our ongoing and planned clinical programs.

With respect to manufacturing and supply, we believe we currently have sufficient drug supply for our ongoing clinical studies.

Our third-party contract manufacturers continue to operate at or near normal levels and, at this time and subject to further COVID-19 implications, we do not anticipate any disruptions to our drug supply chain.

Our discovery programs were impacted by the suspension in our laboratory-based operations from mid-March to late June.

Despite the return of our laboratory-based personnel back into our facilities, our laboratories are operating at reduced capacity due to employee safety measures, such as social distancing requirements and shift work.

Entering 2020, we expected to advance two preclinical programs into the clinic in the first quarter of 2021.

The suspension and reduced operating capacity have delayed the advancement of the second program until the second half of 2021.

Our discovery programs are impacted by reduced operating capacity in our laboratories due to employee safety measures, such as social distancing requirements and shift work.

This has slowed the pace of our discovery efforts, and our HIF-2α program is now expected to enter clinical development in the second half of 2021.

The full impact of the COVID-19 outbreak remains highly uncertain and subject to change.

In connection with our resumption of laboratory operations, we instituted regular COVID-19 testing services in order to minimize the risk to our employees.

These additional operating costs, along with the absence of any furlough or measures to reduce personnel costs despite reduced laboratory capacity, will have a negative impact on our operations and financial condition.

The safety, health and well-being of our employees remains a primary concern, and we instituted remote work arrangements for our office-based employees and regular

COVID-19 testing services for our laboratory-based employees in order to reduce the risk of exposure to COVID-19 among our employees.

These actions have increased our operating costs, whjch together with the absence of any furlough or measures to reduce personnel costs despite reduced laboratory capacity, will have a negative impact on our operations and financial condition.

We do not expect the forward impact will be material due to adjustments in operations that we have made.

However, there are many uncertainties around the COVID pandemic and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.

C omponents of Operating Results

Components of Operating Results

Collaboration and License Revenue

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Our research and development expenses consist of expenses incurred in connection with the research and development of our pipeline programs.

These expenses include payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, pre-clinical and clinical expenses, and depreciation.

These expenses include pre-clinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, and depreciation.

Shared facility expenses are allocated to functional groups proportionally based on usage.

Under certain collaboration agreements we agree to share research and development expenses with our partners or to reimburse our partners for qualified expenses.

We expense both internal and external research and development costs as they are incurred.

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The level of our future research and development investment will depend on a number of factors and uncertainties, including clinical outcomes from our ongoing clinical trials, whether our collaborators opt into any of our programs, the amount of opt-in and milestone payments we receive from our collaborators, and the breadth of any joint development program agreed to with Gilead for programs they opt into.

In addition, under our license agreements with WuXi Biologics (Cayman) Inc.

(WuXi Biologics) and Abmuno Therapeutics LLC (Abmuno), and our co-development and collaboration agreement with Strata Oncology, Inc.

(Strata), we may be required to pay additional clinical and regulatory milestone payments based on the development progress of zimberelimab and domvanalimab (formerly known as AB154).

In addition, under our license agreements with WuXi Biologics and Abmuno, and our co-development and collaboration agreements with Strata, and AstraZeneca, we may be required to pay additional clinical and regulatory milestone payments based on the development progress of our investigational products.

Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors.

Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Risk Factors.”

Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A.

Risk Factors.”

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions.

Shared facility expenses are allocated to functional groups proportionally based on usage.

Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses.

We anticipate that our general and administrative expenses will increase substantially during the next few years as we support our growing research and development activities, including due to staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs.

Interest and Other Income, Net

Interest and other income, net consists primarily of interest earned on our investments in fixed-income marketable securities.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee consists of a gain related to the dilution of our investment in PACT Pharma, Inc.

(PACT Pharma) occurring upon PACT Pharma’s new issuances of equity securities in which we do not participate on a pro rata basis or at all.

Share of Loss from Equity Method Investee

Share of loss from equity method investee consists of our share of loss recorded in connection with our equity method investment in PACT Pharma, Inc.

(PACT Pharma).

We anticipate that our general and administrative expenses will increase substantially during the next few years as we support our growing research and development activities, including staff expansion, additional occupancy costs, and other costs associated with increased infrastructure needs.

Other Non-Operating Income, net

Other non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities as well as activity related to our equity method investment in PACT Pharma, Inc (PACT Pharma).

To date, gains have consisted of gains on dilution of our investment in PACT Pharma, typically occurring upon PACT Pharma’s new issuances of equity securities.

Losses associated with the investment consist of our share of PACT Pharma’s net losses.

Critical Accounting Policies, Significant Judgments and Use of Estimates

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We believe that the accounting policies relating to revenue recognition, clinical trial accruals and stock-based compensation reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

Except for those updates resulting from our entering into the Gilead Agreements, there have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2021, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020 and more fully described in Note 2 of the accompanying condensed consolidated financial statements.

Results of Operations

Three Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Collaboration and license revenue

Operating expenses:

Research and development

General and administrative

Income (loss) from operations

Non-operating income (expense):

Interest and other income, net

Share of loss from equity method investee

Total non-operating income, net

Net income (loss)

* Not meaningful

Collaboration and License Revenue

Collaboration and license revenue increased $62.7 million, from $1.8 million for the three months ended September 30, 2019 to $64.5 for the three months ended September 30, 2020.

The increase in collaboration and license revenue was primarily due to the recognition of $55.1 million in revenue for the license to zimberelimab and $7.7 million related to Gilead’s ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement.

Research and Development Expenses

Research and development expenses increased $34.6 million, or 200%, from $17.2 million for the three months ended September 30, 2019 to $51.8 million for the three months ended September 30, 2020.

The increase in research and development expenses was primarily due to an $11.1 million increase in manufacturing costs required to supply our clinical studies, an increase of $4.5 million in clinical costs for our ongoing clinical studies, and an increase of $5.2 million in employee compensation costs primarily due to additional headcount, approximately $2.1 million of which consists of non-cash stock-based compensation.

We also incurred $13.1 million in expense in the three months ended September 30, 2020, consisting of a $10.1 million sub-license fee due to WuXi for zimberelimab and a $3.0 million payment due to the achievement of a development milestone under Abmuno Agreement, with no corresponding payments in the same period of the prior year.

General and Administrative Expenses

General and administrative expenses increased $3.4 million, or 44%, from $7.8 million for the three months ended September 30, 2019 to $11.2 million for the three months ended September 30, 2020.

The increase in general and administrative expenses was primarily due to $1.3 million in employee compensation costs primarily due to additional headcount, approximately $1.2 million of which consists of non-cash stock-based compensation.

Additional increases in finance and legal expenses were largely driven by expenses incurred as a result of our transaction with Gilead as well as costs incurred to support our growth and ongoing compliance with public company requirements.

Interest and Other Income, Net

Interest and other income, net decreased $1.0 million or 78%, from $1.3 million for the three months ended September 30, 2019 to $0.3 million for the three months ended September 30, 2020.

The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities in the three months ended September 30, 2020 as compared to the same period in the prior year.

Share of Loss from Equity Method Investee

We recognized no loss on our investment in PACT for the three months ended September 30, 2020 as the carrying value of the investment balance was zero.

We recognized $0.4 million in losses in the same period in 2019 due to equity method losses resulting from PACT’s expanding operations.

Nine Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

Collaboration and license revenue

Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended March 31,

Collaboration revenue

Total collaboration and license revenue

Operating expenses:

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General and administrative

Total operating expenses

Loss from operations

Non-operating income (expense):

Interest and other income, net

Gain on deemed sale from equity method investee

Share of loss from equity method investee

Total non-operating income, net

Non-operating income, net

* Not meaningful

Collaboration and License Revenue

Collaboration and license revenue increased $62.7 million, from $5.3 million for the nine months ended September 30, 2019 to $68.0 million for the nine months ended September 30, 2020.

Collaboration and license revenue increased $7.7 million, from $1.8 million for the three months ended March 31, 2020 to $9.5 million for the three months ended March 31, 2021.

In the three months ended March 31, 2021, we recognized $7.7 million in collaboration revenues related to Gilead’s ongoing rights to access our intellectual property in accordance with the Gilead Collaboration Agreement, as well as $1.8 million under the Taiho Agreement.

In the three months ended March 31, 2020, we recognized $1.8 million under the Taiho Agreement.

Research and Development Expenses

Research and development expenses increased $52.8 million, or 91%, from $57.8 million for the nine months ended September 30, 2019 to $110.6 million for the nine months ended September 30, 2020.

The increase in research and development expenses was primarily due to an increase of $17.7 million in manufacturing costs required to supply our clinical studies, an increase of $13.4 million in clinical costs for our ongoing clinical studies, and an increase of $12.2 million in employee compensation costs primarily due to additional headcount, approximately $4.5 million of which consists of non-cash stock-based compensation.

Expenses related to sublicense fees and milestone payments also increased $10.6 million, from $7.5 million for the nine months ended September 30, 2019 to $18.1 million for the nine months ended September 30, 2020 as a result of the sublicense fee paid to WuXi and milestone payments paid to WuXi and Abmuno.

Those increases were partially offset by a decrease of $1.4 million in lab supplies and equipment due to decreased lab activities caused by shelter-in-place orders amid the COVID pandemic.

Research and development expenses increased $43.3 million, or 187%, from $23.1 million for the three months ended March 31, 2020 to $66.4 million for the three months ended March 31, 2021.

The increase in research and development expenses included $15.0 million in development milestone expenses incurred, consisting of a $10.0 million milestone payment due to WuXi Biologics pertaining to zimberelimab and a $5.0 million milestone payment due to Abmuno pertaining to domvanalimab, with no similar expense in the same quarter in the prior year.

There was also an increase of $10.5 million in employee compensation costs, approximately $4.4 million of which consists of non-cash stock-based compensation.

This increase is driven by our growing headcount as well as our 2021 stock awards.

Manufacturing costs and clinical costs for our ongoing studies increased $9.9 million and $9.0 million, respectively, as a result of the increased number of programs and clinical trials compared to the same quarter in the prior year.

Office and facilities expense increased as we continued to grow.

The overall increase in research and development expense is partially offset by a $4.9 million reimbursement by Gilead of certain applicable costs of developing zimberelimab, including $4.0 million of cost sharing reimbursement related to milestone expense incurred, in accordance with the Gilead Collaboration Agreement.

General and Administrative Expenses

General and administrative expenses increased $11.0 million, or 59%, from $18.6 million for the nine months ended September 30, 2019 to $29.6 million for the nine months ended September 30, 2020.

The increase in general and administrative expenses was due primarily to $2.2 million in consulting expenses incurred in corporate development activities.

We also incurred increased expense of $3.7 million in employee compensation costs primarily due to additional headcount, approximately $2.9 million of which consists of non-cash stock-based compensation, and $3.5 million in legal and accounting expenses incurred to support our expanding operations and ongoing compliance with public company requirements.

Interest and Other Income, Net

Interest and other income, net decreased $3.1 million or 71%, from $4.3 million for the nine months ended September 30, 2019 to $1.2 million for the nine months ended September 30, 2020.

The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the nine months ended September 30, 2020 as compared to the same period in the prior year.

Gain on Deemed Sale from Equity Method Investee

Gain on deemed sale from equity method investee was $0.6 million for the nine months ended September 30, 2020 due to gains recorded in connection with PACT Pharma’s Series C and Series C-1 preferred financings in January 2020 and June 2020, respectively, in which we did not participate.

Share of Loss from Equity Method Investee

Share of loss from equity method investee was $0.6 million and $1.2 million for the nine months ended September 30, 2020 and 2019, respectively, due to equity method losses resulting from PACT’s expanding operations.

General and administrative expenses increased $8.8 million, or 126%, from $7.0 million for the three months ended March 31, 2020 to $15.8 million for the three months ended March 31, 2021.

The increase in general and administrative expenses was primarily due to $6.8 million in employee compensation costs, approximately $4.9 million of which consists of non-cash stock-based compensation.

This increase is driven by our growing headcount as well as our 2021 stock awards.

Additional increases in finance and legal expenses were largely driven by costs incurred to support our growth and ongoing compliance with public company requirements.

We also incurred additional facilities expense due to our expanding headcount and office space.

Non-Operating Income, Net

Non-operating income, net decreased $0.4 million or 76%, from $0.6 million for the three months ended March 31, 2020 to $0.2 million for the three months ended March 31, 2021.

The decrease was primarily due to lower interest income resulting from lower investment yields on our portfolio of marketable fixed-income securities during the quarter ended March 31, 2021 as compared to the same period in the prior year.

Liquidity and Capital Resources

To date, we have financed our operations primarily through net proceeds of $226.2 million from private placements of convertible preferred stock, $46.0 million in proceeds from the Taiho Agreement, net proceeds of $124.7 million from our initial public offering of our common stock in March 2018, and $326.2 million of net proceeds in our May 2020 Public Offering.

In addition, in July 2020 we received $375.0 million from Gilead upon the closing of the transactions under the Collaboration Agreement and Stock Purchase Agreement with Gilead.

As of September 30, 2020, we had $785.1 million of cash, cash equivalents, and investments in marketable securities, compared to $188.3 million as of December 31, 2019.

To date, we have financed our operations primarily through net proceeds of approximately $677.1 million from equity offerings and proceeds of approximately $641.4 million from our collaboration and stock purchase agreements, including $220.4 million gross proceeds raised in February 2021 from the sale to Gilead of 5,650,000 shares of our common stock.

As of March 31, 2021, we had $884.9 million of cash, cash equivalents, and investments in marketable securities, compared to $735.1 million as of December 31, 2020.

Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S.

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government agency securities, and investments in corporate securities.

Based on our existing business plan, we believe that our existing cash, cash equivalents, and investments will be sufficient to fund our planned level of operations through at least the next 12 months following the filing date of this report.

Based on our existing business plan, we believe that our existing cash, cash equivalents, and investments will be sufficient to fund our planned level of operations at least through 2023.

We may require additional capital to complete the development and any commercialization of our investigational products.

Our future capital requirements will depend on many factors, including:

the scope, rate of progress and costs of our drug discovery, preclinical development activities, laboratory testing and clinical trials for our investigational products;

the scope, rate of progress and costs of clinical trials for our investigational products as well as drug discovery, preclinical development activities, and laboratory testing;

the number and scope of clinical programs we decide to pursue;

the scope and costs of manufacturing development and commercial manufacturing activities;

the timing and amount of programs Gilead exercises its option to obtain an exclusive license to our current and future clinical programs, subject to the rights of our existing partners, and the costs associated with our share of the global development plan for such optioned programs;

the timing and amount of expense related to our current and future clinical programs, subject to the rights of our existing partners, and the costs associated with our share of the global development plan for such programs;

the timing and amount of milestone payments we receive under the Taiho Agreement and Gilead Collaboration Agreement, and option fees under the Gilead Collaboration Agreement;

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Summary Condensed Consolidated Statement of Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in thousands):

Nine Months Ended September 30,

The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for each of the periods presented below (in thousands):

Three Months Ended March 31,

Net cash (used in) provided by:

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Net increase in cash, cash equivalents and restricted cash

Cash Provided by (Used in) Operating Activities

Net cash provided by (used in) operating activities was $161.1 million provided by operating activities for the nine months ended September 30, 2020, as compared to $64.0 million cash used in operating activities for the same period in the prior year.

The change in cash flow from operating activities is primarily due to cash received at the close of the Gilead Collaboration Agreement in July 2020, year-over-year changes in non-cash items, including $7.4 million of increased expense from stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

Cash Provided by (Used In) Investing Activities

Cash provided by (used in) investing activities was a $434.1 million use of cash for the nine months ended September 30, 2020 compared to $71.3 million provided by investing activities for the same period in the prior year.

The change in cash flow from investing activities was primarily due to net purchases of our investments in fixed-income marketable securities, as we invested proceeds received from our May 2020 Public Offering, the Gilead Collaboration Agreement, and the Stock Purchase Agreement.

Cash Used in Operating Activities

Net cash used in operating activities was $66.3 million for the three months ended March 31, 2021, as compared to $31.3 million for the same period in the prior year.

The change in cash flow from operating activities is primarily due to the $44.8 million increase in our net loss to $72.6 million.

The change in our net loss is primarily a result of our expanded clinical development activities and general and administrative costs incurred to support our operations.

The overall increase in cash used is partially offset by year-over-year changes in non-cash items, including $9.3 million of increased expense from stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.

Cash Provided by Investing Activities

Cash provided by investing activities was a $62.8 million for the three months ended March 31, 2021 compared to $40.1 million for the same period in the prior year.

The change in cash flow from investing activities was primarily due to net maturities of our investments in fixed-income marketable securities.

Cash Provided by Financing Activities

Cash provided by financing activities was $437.0 million for the nine months ended September 30, 2020 compared to an immaterial amount of cash provided in the same period in the prior year.

The increase in cash provided is primarily due to cash received from our May 2020 Public Offering, net of direct offering costs, the Stock Purchase Agreement, and funds received during the nine months ended September 30, 2020 for issuance of common stock pursuant to equity award plans.

Cash provided by financing activities was $222.1 million for the three months ended March 31, 2021 compared to $0.6 million in the same period in the prior year.

The increase in cash provided is primarily due to cash received from Gilead in February 2021 pursuant to the terms of the Amended and Restated Stock Purchase Agreement, as well as funds received during the three months ended March 31, 2021 for issuance of common stock pursuant to equity award plans.

Contractual Obligations and Commitments

In June 2020, we entered into a lease amendment for an additional 36,303 square feet of research and development offices in Hayward, California, that is expected to commence in January 2021 for an eight-year term with minimum lease payments of $10.1 million.

The lease amendment provides for one eight-year extension period.

Other than this lease, there have been no material changes outside the ordinary course of business during the nine months ended September 30, 2020, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and will remain an emerging growth company until December 31, 2020.

Under the JOBS Act, we elected the extended transition period for complying with new or revised accounting standards.

At June 30, 2020 we determined that we will become a large accelerated filer at December 31, 2020 and in the process will no longer qualify as an emerging growth company.

We will adopt any accounting pronouncements deferred under this election on or before December 31, 2020.

There have been no material changes to our contractual obligations outside the ordinary course of business during the three months ended March 31, 2021, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis