What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 128 added, 92 removed, 258 unchanged (46% of the section changed)

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Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below.

These forward-looking statements may include, but are not limited to, statements related to our expectations regarding the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, our future results of operations and financial position, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our public offering, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates.

These forward-looking statements may include, but are not limited to, statements related to our expectations regarding the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, our future results of operations and financial position, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our public offerings, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates.

The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

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We have no products approved for commercial sale and have not generated any revenue from commercial product sales.

We had a loss from operations of $35.6 million and net income of $10.3 million, due principally to an unrealized gain of $48.9 million related to our holdings of Vaxcyte common stock, for the six months ended June 30, 2020, and net loss of $28.0 million for the six months ended June 30, 2019.

We had a loss from operations of $46.2 million and net income of $27.4 million, due principally to an unrealized gain of $78.6 million related to our holdings of Vaxcyte common stock, for the nine months ended September 30, 2020, and a net loss of $41.0 million for the nine months ended September 30, 2019.

We cannot assure you that we will have net income or that we will generate positive cash flow from operating activities in the future.

As of June 30, 2020, we had an accumulated deficit of $185.5 million.

As of September 30, 2020, we had an accumulated deficit of $168.3 million.

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 product candidates, which we expect will take a number of years.

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We expect our operating expenses to significantly increase as we continue to develop, and seek regulatory approvals for, our product candidates, engage in other research and development activities, expand our pipeline of product candidates, continue to develop our manufacturing and research and development facilities and capabilities, maintain and expand our intellectual property portfolio, seek regulatory and marketing approval for any product candidates that we may develop, acquire or in-license other assets or technologies, ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval and operate as a public company.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, our expenditures on other research and development activities and the timing of achievement and receipt of upfront, milestones and other collaboration agreement payments.

Our losses from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, our expenditures on other research and development activities and the timing of achievement and receipt of upfront, milestones and other collaboration agreement payments.

Recent Developments

We began enrolling patients in a STRO-002 Phase 1 trial focused on ovarian and endometrial cancers in March 2019, with initial safety and efficacy data reported in late 2019.

On April 27, 2020, we announced updated interim data from our ongoing Phase 1 clinical trial of STRO-002 in patients with advanced platinum-resistant/refractory epithelial ovarian cancer, including fallopian or primary peritoneal cancers, and endometrial cancer.

As of April 20, 2020, 30 patients with heavily pre-treated ovarian cancer had been treated in the Phase 1 trial of STRO-002, with 25 patients being dosed at 2.9 milligrams per kilogram, or mpk, or higher.

Of 20 patients at dose levels of 2.9 mpk or higher with at least one post-baseline scan, the initial post-baseline scans showed one partial response and 14 stable disease.

These interim clinical data for STRO-002 in patients treated at dose levels of 2.9 mpk or higher consist of:

one patient with an ongoing confirmed partial response (36 weeks);

five patients with confirmed stable disease (three up to 18 weeks, two up to 27 weeks);

nine patients who had unconfirmed stable disease at the six-week assessment point (two of whom subsequently developed progressive disease);

and five patients with progressive disease at the six-week

assessment point.

Additionally, 35% (7 of 20) of patients who were evaluable for progression have stayed on study for longer than 24 weeks, and 11 patients dosed at 5.2 mpk or higher are continuing on study and have not yet reached 24 weeks.

Although neither stable disease nor remaining on study for more than 24 weeks qualify as objective response s for FDA approval purposes, we believe they provide encouraging evidence of tumor control and clinical benefit .

In this study, we also measured levels of the ovarian cancer tumor marker, cancer antigen 125, or CA-125.

Of 21 patients dosed at 2.9 mpk or higher with a post-base line assessment, 13 patients had a ≥50% reduction or normalization of CA-125, including six confirmed responses, six unconfirmed responses and one prolonged CA-125 normalization.

Of these 13 patients, one patient is not yet evaluable under RECIST criteria.

All of the other 12 patients (100%) have also achieved stable disease (confirmed or unconfirmed) or a confirmed partial response.

We began enrolling patients in a STRO-002 Phase 1 trial focused on ovarian and endometrial cancers in March 2019, with initial safety and efficacy data reported in late 2019 and in the second and third quarters of 2020.

On September 9, 2020, we announced updated interim data from our ongoing Phase 1 clinical trial of STRO-002 in patients with advanced platinum-resistant/refractory epithelial ovarian cancer, including fallopian or primary peritoneal cancers.

As of August 31, 2020, the dose escalation portion of the Phase 1 trial for STRO-002 had completed enrollment of 39 patients with heavily pre-treated ovarian cancer, with 34 patients being dosed at 2.9 milligrams per kilogram, or mpk, or higher.

Of 33 patients at dose levels of 2.9 mpk or higher that were evaluable with at least one post-baseline scan, the observed overall response rate was 24% (8/33) with 2 confirmed and 6 unconfirmed partial responses.

T he observed disease control rate at twelve weeks or greater was 60% (20/33) , with seven partial responses (two confirmed and five unconfirmed) and thirteen patients with stable disease.

44% of patients remained on treatment for 16 weeks or greater and 12% of patients continue on treatment for 1 year or greater.

Although neither stable disease nor remaining on study for more than 16 weeks qualify as objective responses for FDA approval purposes, we believe they provide encouraging evidence of tumor control and clinical benefit.

In this study, we also measured levels of the ovarian cancer tumor-associated marker, cancer antigen 125, or CA-125.

Of 25 patients dosed at 2.9 mpk or higher with elevated CA-125 levels at base-line and a post-base line assessment, 18 patients had a ≥50% reduction of CA-125 in at least one post-treatment timepoint, including ten reductions of CA-125 of at least 50% that are maintained and confirmed 28 days later.

STRO-002 was generally well tolerated and was mostly associated with mild adverse events, or AEs.

Eighty-nine percent (89%) of AEs were grade 1 or grade 2 and prophylactic corticosteroid eye drops have not been necessary.

Grade 3 treatment emergent AEs included fatigue, neutropenia, arthralgia, diarrhea, peripheral neuropathy and myalgia with the only grade 4 treatment emergent AE being neutropenia, in six patients.

All neutropenias were reversible within one week.

We currently plan to report additional safety and initial efficacy data for STRO-002 in the second half of 2020 and to begin the dose expansion phase of the Phase 1 clinical study in the second half of 2020.

We are continuing to actively explore optimal dose levels as we seek to determine the recommended dose for expansion cohorts.

Eighty-seven percent (87%) of AEs were grade 1 or grade 2 and prophylactic corticosteroid eye drops have not been necessary.

Grade 3 treatment emergent AEs included fatigue, neutropenia, arthralgia, abdominal pain, increased aspartate aminotransferase (AST), diarrhea, and peripheral neuropathy.

The only grade 4 treatment emergent AEs observed were neutropenia, in twelve patients.

Neutropenia was generally reversible within one week without treatment with G-CSF.

We currently plan to provide further interim safety and initial efficacy data from the dose escalation portion and to begin the dose expansion portion of the Phase 1 clinical study in the fourth quarter of 2020.

We are continuing to actively explore optimal dose levels as we seek to determine the recommended dose regimen for expansion cohorts.

We are currently enrolling patients with non-Hodgkin’s lymphoma, or NHL, and multiple myeloma in the STRO-001 Phase 1 dose-escalation trial.

Dose escalation in the Phase 1 trial is ongoing for both the NHL and multiple myeloma cohorts and the maximum tolerated dose, or MTD, has not yet been reached.

On November 4, 2020, we disclosed updated interim data from our ongoing Phase 1 clinical trial of STRO-001 in patients with advanced, relapsed/refractory NHL.

As of July 31, 2020, the dose escalation portion of the Phase 1 trial for STRO-001 had enrolled 18 NHL patients, with 1.78 mpk being the highest dose administered as of that date.

NHL subtypes included 6 diffuse large B-cell lymphoma, or DLBCL, 5 follicular lymphoma, or FL, 2 mantle cell lymphoma, or MCL, 2 marginal zone lymphoma, 1 Burkitt’s lymphoma, 1 composite DLBCL/FL and 1 composite DLBCL/CLL.

The median number of prior therapies for these patients was 4, with a range of 1-12.

Of these 18 patients, 17 had completed at least one cycle of STRO-001 and were evaluable for safety and toxicity, while 16 patients were evaluable for response.

In these 16 patients evaluable for preliminary signs of efficacy, the preliminary clinical benefit/disease control rate was 25% (4/16) including 1 complete response, 2 partial responses and 1 patient with stable disease.

Based on the preliminary safety data, STRO-001 has been generally well tolerated with no ocular or neuropathy toxicity signals observed.

Most AEs have been grade 1 or 2 (90%) with the most common grade 1-2 treatment emergent AEs of chills, fatigue, nausea, anemia, headache, pyrexia, infusion reaction, decreased appetite, and abdominal pain occurring in greater than 20% of patients.

There was one dose-limiting toxicity in the NHL cohort, a grade 3 thromboembolic event at the 0.91 mpk dose level.

The study continues to enroll patients in the dose escalation portion of the Phase 1 trial, with next planned dose levels of 2.5 mpk and 3.5 mpk.

We expect to begin enrolling patients in the dose-expansion portion of the Phase 1 trial in first half of 2021, following completion of dose escalation and selection of a dose for dose expansion.

September 2020 Sublease Agreement

On September 3, 2020, we entered into a sublease agreement, or the Sublease, with Five Prime Therapeutics, Inc.

(the “Sublessor”), for approximately 115,466 square feet, located in South San Francisco, California (the “Premises”).

We expect to use the Premises as our new corporate headquarters and in which to conduct (or expand) research and development activities.

The commencement date for the first 85,755 square feet of the Premises (“Initial Premises”) is expected to be by mid-2021 at which time we will occupy the space and commence making monthly payments under the Sublease.

We will be provided early access to the Sublease space commencing in the fourth quarter of 2020 to conduct certain planning and tenant improvement work, which we expect will result in us recording rent expense prior to space occupancy and making actual lease payments.

The Sublease is subordinate to the lease agreement, effective December 12, 2016, between the Sublessor and HCP Oyster Point III LLC (the “Landlord”).

The commencement date for the remaining 29,711 square feet of the Premises (the “Expansion Premises”) is expected to be 24 months following the commencement date on the Initial Premises, although we have the right to accelerate the commencement date on the Expansion Premises to an earlier date upon six months’ prior written notice to the Sublessor.

The Sublease for both the Initial Premises and Expansion Premises will expire on December 31, 2027.

Assuming a commencement date on the Initial Premises of April 1, 2021, the aggregate estimated base rent payments due over the term of the Sublease are approximately $47.7 million, excluding the approximately $5.2 million in potential financial benefit to us of base rent abatement to be provided by Sublessor for months 7 – 18 of the Sublease period, subject to certain terms contained in the Sublease.

The Sublease contains customary provisions requiring us to pay our pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if we fail to remedy a breach of certain of our obligations within specified time periods.

Additionally, we posted a security deposit in the form of a bank standby letter of credit, which is reflected as restricted cash in non-current assets on our balance sheet as of September 30, 2020.

At-The-Market Sales

During the three months ended September 30, 2020, we sold an aggregate of 2,000,000 shares of our common stock through our At-the-Market ATM facility, or ATM Facility, pursuant to our Common Stock Sales Agreement dated October 4, 2019 with Cowen and Company, LLC, as sales agent.

The gross proceeds from these sales were approximately $17.4 million, before deducting fees of approximately $0.6 million, resulting in net proceeds of approximately $16.8 million.

May 2020 Public Offering

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Our net proceeds from this offering, after deducting underwriting discounts and commissions and other offering expenses, was approximately $91.4 million.

Vaxcyte Equity Ownership

In June 2020, Vaxcyte, Inc.

(“Vaxcyte”), formerly known as SutroVax, Inc., closed an initial public offering of its common stock at a price per share of $16.00.

As of June 30, 2020, we held 1,634,005 shares of Vaxcyte common stock, with a estimated fair value of $49.1 million, which are subject to a lock-up agreement that expires in December 2020.

Vaxcyte, Inc.

Equity Ownership

In June 2020, Vaxcyte, Inc., or Vaxcyte, formerly known as SutroVax, Inc., closed an initial public offering of its common stock at a price per share of $16.00.

As of September 30, 2020, we held 1,634,005 shares of Vaxcyte common stock, with an estimated fair value of $78.8 million, which shares are subject to a lock-up agreement that expires in December 2020.

Impacts of the COVID-19 Pandemic

The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our clinical studies, employee or industry events, and effect on our collaboration partners, suppliers and manufacturers, all of which are uncertain and cannot be predicted.

The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our clinical studies, employee or industry events, and effect on our collaboration partners, suppliers, service providers and manufacturers, all of which are uncertain and cannot be predicted.

The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our CROs, suppliers or third-party business partners conduct business and as a result, we may experience more pronounced disruptions in our operations, liquidity, supply chain, facilities, and clinical trials.

With respect to our clinical trials, we have experienced very minor delays in enrollment and occasional delays in data entry by trial sites, but overall enrollment and treatment remains on track.

With respect to our clinical trials, we have experienced delays in enrollment and occasional delays in data entry by trial sites, but overall enrollment and treatment remains on track.

We may in the future experience more significant delays in enrollment, participant dosing, distribution of clinical trial materials, study monitoring and data analysis that could materially adversely impact our business, results of operations and overall financial performance in future periods.

Specifically, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, delays in site activations and enrollment of clinical trials, prioritization of hospital resources toward pandemic effort, delays in review by the FDA and comparable foreign regulatory agencies, and disruptions in our supply chain for our product candidates.

foreign regulatory agencies, and disruptions in our supply chain for our product candidates .

As of the filing date of this Form 10-Q, the extent to which the COVID-19 pandemic may impact our financial condition, results of operations or guidance is uncertain.

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At the inception of each agreement, we determine the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration.

We also evaluate estimates of our resources, which are used as the basis of measurement for revenue to be recognized on a proportion of performance basis

For arrangements that include multiple performance obligations, we allocate the transaction price to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation.

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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 expect our research and development expenses to increase in the future as we advance our product candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our product candidates, expand our pipeline of product candidates and continue to develop our manufacturing facility and capabilities.

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 product candidates may be affected by a variety of factors including:

the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability.

and commercial viability.

We may never succeed in achieving regulatory approval for any of our product candidates.

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The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development.

Such expenses include third-party costs for preclinical and clinical studies and research services, and other consulting costs.

Such expenses include third-party costs for preclinical and clinical studies and research, development and manufacturing services, and other consulting costs.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Additionally, the Company identified a financing component under the Merck 2018 Agreement and recorded interest expense associated with the upfront payment.

Other income (expense) in the three months ended June 30, 2020 and June 30, 2019 includes changes in values attributable to the arrangement with the Leukemia & Lymphoma Society, Inc.

Other income (expense) in the three months ended September 30, 2020 and September 30, 2019 includes changes in values attributable to the arrangement with the Leukemia & Lymphoma Society, Inc.

and the Call Option Plan.

Comparison of the Three Months Ended June 30 , 20 20 and 201 9

Comparison of the Three Months Ended September 30 , 20 20 and 201 9

Three Months Ended

September 30,

(in thousands)

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Three Months Ended

September 30,

(in thousands)

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In January 2019, BMS announced the entry into a definitive agreement to acquire Celgene and the transaction was completed in November 2019.

Merck was a related party until the closing of the Company’s public offering on May 14, 2020.

Merck was a related party until the closing of our public offering on May 14, 2020.

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

* Percentage not meaningful

Total revenue decreased by $1.1 million, or 10%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

This was due primarily to a $2.5 million decrease in revenue from EMD Serono, of which $1.4 million was due to the completion in May 2019 of recognition of the transaction price under the EMD Serono Agreement, and a decrease of $1.1 million under the supply agreement.

A $1.8 million increase under the 2018 Merck Agreement was partially offset by a decrease of $0.3 million from the financing component associated with the upfront payment.

Additionally, there was a $0.2 million decrease from Celgene for contract research and manufacturing activities supporting clinical trial supply, and a $0.1 million increase in revenues from Vaxcyte.

Total revenue increased by $5.5 million, or 45%, during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

This was primarily due to a net increase of $3.8 million in Celgene revenue which reflects a $2.4 million increase for contract research and manufacturing activities supporting clinical trial supply and a $1.3 million increase in research and development services.

Revenue under the 2018 Merck Agreement increased by $3.5 million primarily due to a $3.9 million increase in ongoing performance and research and development services, partially offset by a $0.4 million decrease related to the financing component associated with the upfront payment.

Additionally, there was a decrease of $1.1 million from EMD Serono due to a $0.6 million decrease under the supply agreement and a $0.5 million lower earned milestone payment.

Also, there was a $0.6 million decrease in revenues from Vaxcyte.

Research and Development Expense

Research and development expense increased by $1.1 million, or 7%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The increase was due primarily to increases of $1.4 million in personnel-related expenses due to higher headcount, $0.5 million in consulting and outside services, and $0.3 million in facilities-related expenses, partially offset by a decrease of $1.0 million in laboratory supplies and production materials-related expenses.

Research and development expense increased by $2.5 million, or 15%, during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The increase was due primarily to increases of $1.1 million in personnel-related expenses due to higher headcount and $1.4 million in consulting and outside services.

General and Administrative Expense

General and administrative expense increased by $0.6 million, or 7% during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

General and administrative expense increased by $1.0 million, or 12% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The increase was due primarily to increases of $0.5 million in personnel-related expenses due to higher headcount and $0.7 million in legal and external services, partially offset by a $0.2 million decrease in equipment-related expenses.

Interest Income

Interest income decreased by $0.7 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due primarily to a decrease in the amortization of premiums on investments.

Interest income decreased by $0.7 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, due primarily to a decrease in the amortization of premiums on investments.

Unrealized Gain on Equity Securities

Unrealized gain on equity securities was $48.9 million during the three months ended June 30, 2020, as compared to $0 for the three months ended June 30, 2019, due to a $49.1 million unrealized gain from the remeasurement of the estimated fair value of our investment in Vaxcyte common stock in June 2020, offset by a $0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

Unrealized gain on equity securities was $29.7 million during the three months ended September 30, 2020, as compared to zero for the three months ended September 30, 2019, due to the unrealized gain from the remeasurement of the estimated fair value of our investment in Vaxcyte common stock.

Interest and Other Expense, Net

Interest and other expense, net changed by $1.7 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due primarily to a $1.8 million increase in other expenses related to the remeasurement of the vested call options under the Call Option Plan, a $0.2 million increase in interest expense related to our outstanding debt, which was partially offset by a $0.3 million decrease in interest expense associated with a financing component related to the 2018 Merck Agreement.

Comparison of the Six Months Ended June 30 , 20 20 and 201 9

Six Months Ended

Interest and other expense, net increased by $1.2 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, due primarily to a $1.1 million increase in other expenses related to the remeasurement of the vested call options under the Call Option Plan and a $0.5 million increase in interest expense related to our outstanding debt, which was partially offset by a $0.4 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended

September 30,

(in thousands)

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We have recognized revenue as follows during the periods indicated:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

5 unchanged sentences

In January 2019, BMS announced the entry into a definitive agreement to acquire Celgene and the transaction was completed in November 2019.

Merck was a related party until the closing of the Company’s public offering on May 14, 2020.

Merck was a related party until the closing of our public offering on May 14, 2020.

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

Total revenue decreased by $2.5 million, or 13%, during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

This was primarily due to a net decrease of $2.3 million in EMD Serono revenue which reflects a $3.1 million decrease due to the completion in May 2019 of recognition of the transaction price under the EMD Serono Agreement, partially offset by an increase of $0.8 million under the supply agreement with EMD Serono.

The $0.4 million revenue decrease under the 2018 Merck Agreement consists of a $2.3 million decrease from the change in estimate related to additional resources being assigned to the first target program and a reduced number of resources on the second target program, and the cumulative catch-up in revenue as a result of the change in transaction price, offset partially by an increase of $1.9 million in ongoing performance and research and development services.

Additionally, there was a $0.3 million increase from Celgene for research and development services and contract research and manufacturing activities supporting clinical trial supply, and a $0.1 million decrease in revenues from Vaxcyte.

Total revenue increased by $3.0 million, or 10%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

This was primarily due to an increase of $4.1 million in Celgene revenue for research and development services and contract research and manufacturing activities supporting clinical trial supply, and a $3.2 million increase under the 2018 Merck Agreement which consists of an increase of $5.5 million in ongoing performance and research and development services, offset partially by a $2.3 million net decrease from the change in estimate related to additional resources being assigned to the first target program and a reduced number of resources on the second target program, and the cumulative catch-up in revenue as a result of the change in transaction price.

Additionally, there was a $3.5 million decrease from EMD Serono which reflects a $2.3 million decrease due to the completion in May 2019 of recognition of the transaction price under the EMD Serono Agreement, a $0.5 million lower earned milestone payment, and a net $0.7 million decrease in research and development services and materials under the supply agreement.

Also, there was a $0.8 million decrease in revenues from Vaxcyte.

Research and Development Expense

Research and development expense increased by $3.5 million, or 11%, during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Research and development expense increased by $6.0 million, or 12%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase was due primarily to increases of $3.5 million in personnel-related expenses due to higher headcount, $3.3 million in consulting and outside services, and $0.4 million in facilities-related expenses, partially offset by a decrease of $1.2 million in laboratory supplies and production materials-related expenses.

General and Administrative Expense

General and administrative expense increased by $1.6 million, or 10% during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

General and administrative expense increased by $2.5 million, or 11% during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase was due primarily to increases of $1.9 million in personnel-related expenses due to higher headcount and $1.3 million in legal and external services, partially offset by a decrease of $0.2 million in travel expenses and $0.5 million in equipment-related expenses.

Interest Income

Interest income decreased by $1.3 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due primarily to a decrease of $0.2 million from lower average investment balances in the six months of 2020 and a $1.1 million decrease in the amortization of premiums on investments.

Unrealized Gain on Equity Securities

Unrealized gain on equity securities was $48.9 million during the six months ended June 30, 2020, as compared to $0 for the six months ended June 30, 2019, due to a $49.1 million unrealized gain from the remeasurement of the estimated fair value of our investment in Vaxcyte common stock in June 2020, offset by a $0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

Interest income decreased by $1.9 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, due primarily to a decrease in the amortization of premiums on investments.

Unrealized G ain on E quity S ecurities

Unrealized gain on equity securities was $78.6 million during the nine months ended September 30, 2020, as compared to $0 for the nine months ended September 30, 2019, due to a $78.8 million unrealized gain from the remeasurement of the estimated fair value of our investment in Vaxcyte common stock in September 2020, offset by a $0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

Interest and Other Expense, Net

Interest and other expense, net changed by $1.6 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due primarily to a $2.0 million increase in other expenses related to the remeasurement of the vested call options under the Call Option Plan, partially offset by a $0.4 million decrease in interest expense associated with a financing component related to the 2018 Merck Agreement.

Interest and other expense, net increased by $2.8 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, due primarily to a $3.1 million increase in other expenses related to the remeasurement of the vested call options under the Call Option Plan and a $0.5 million increase in interest expense related to our outstanding debt, which was partially offset by a $0.9 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement.

Liquidity and Capital Resources

To date, we have incurred significant net operating losses, and negative cash flows from operations.

Our operations have been funded primarily by payments received from our collaborators, and net proceeds from equity sales and debt.

As of September 30, 2020, we had cash, cash equivalents and marketable securities of $202.4 million, equity securities of $78.8 million, outstanding debt of $24.4 million and an accumulated deficit of $168.3 million.

Sources of Liquidity

At-The-Market Sales

During the three months ended September 30, 2020, we sold an aggregate of 2,000,000 shares of our common stock through our ATM Facility pursuant to our Common Stock Sales Agreement dated October 4, 2019 with Cowen and Company, LLC, as sales agent.

The gross proceeds from these sales were approximately $17.4 million, before deducting fees of approximately $0.6 million, resulting in net proceeds of approximately $16.8 million.

May 2020 Public Offering

1 unchanged sentence

Our net proceeds from this offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $91.4 million.

Vaxcyte Equity Ownership

In June 2020, Vaxcyte closed its initial public offering of its common stock at a price per share of $16.00.

As of June 30, 2020, we held 1,634,005 shares of Vaxcyte common stock, which are subject to a lock-up agreement that expires in December 2020.

Vaxcyte, Inc.

Equity Ownership

In June 2020, Vaxcyte closed an initial public offering of its common stock at a price per share of $16.00.

As of September 30, 2020, we held 1,634,005 shares of Vaxcyte common stock, with an estimated fair value of $78.8 million, which are subject to a lock-up agreement that expires in December 2020.

The Vaxcyte common stock held by us will be measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, adjusted for a DLOM due to the lock-up agreement, with any unrealized gains and losses recorded in our statements of operations.

As of June 30, 2020, the estimated fair value of the Vaxcyte common stock held by us was $49.1 million.

We recognized an unrealized gain related to Vaxcyte common stock of $48.9 million for the three and six months ended June 30, 2020, of which $49.1 million was from the fair value of Vaxcyte common stock, offset by a $0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

To date, we have incurred significant net operating losses , and negative cash flows from operations.

O ur operations have been funded primarily by payments received from our collaborators, and net proceeds from equity sale s and debt.

As of June 3 0 , 20 20 , we had cash, cash equivalents and marketable securities of $ 207 .

0 million , equity securities of $ 49.1 million , outstanding debt of $24.

3 million and an accumulated deficit of $ 185 .

As of September 30, 2020, the estimated fair value of the Vaxcyte common stock held by us was $78.8 million.

We recognized an unrealized gain related to Vaxcyte common stock of $29.7 million and $78.6 million for the three-month and nine-month periods ended September 30, 2020, respectively.

The unrealized gain for the nine months ended September 30, 2020 was $78.8 million from the change in estimated fair value of Vaxcyte common stock, partially offset by a $0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

For a description of our Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, please see Note 6 to our condensed financial statements.

Funding Requirements

Based upon our current operating plan, we believe that our existing capital resources will enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months after the date of this filing.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

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Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, and may cause us to delay, reduce the scope of or suspend one or more of our pre-clinical and clinical studies, research and development programs or commercialization efforts, and may necessitate us to delay, reduce or terminate planned activities in order to reduce costs.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.

Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.

To the extent we raise additional capital through new collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

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The following table summarizes our cash flows during the periods indicated:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Cash Flows from Operating Activities

Cash used in operating activities for the six months ended June 30, 2020 was $31.2 million.

Our net income of $10.3 million included $48.9 million of unrealized gain on equity securities as a result of the remeasurement of our investment in Vaxcyte common stock, which was partially offset by non-cash charges of $5.7 million for stock-based compensation, $2.2 million for depreciation and amortization, $2.0 million for the remeasurement of the vested call options, and $0.3 million for financing costs related to the public offering.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $2.9 million, comprised of a decrease of $1.5 million in accrued compensation expense primarily due to 2019 bonuses paid in 2020, a decrease of $2.5 million in accounts payable and other liabilities due to timing of payments, and a decrease of $1.6 million in our deferred revenue balance from revenue recognized under our collaboration agreements, offset partially by a $1.2 million decrease in accounts receivable from our collaborators, and a decrease of $1.5 million in prepaid expenses and other assets.

Cash used in operating activities for the six months ended June 30, 2019 was $35.7 million.

Our net loss of $28.0 million included non-cash charges of $4.7 million for stock-based compensation, $2.3 million for depreciation and amortization, and a $0.2 million loss on disposal of property and equipment, which were offset partially by a $1.3 million increase in the accretion of discount on our marketable securities and a $0.1 million reduction of a liability attributable to an agreement.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $13.8 million, due to a decrease in our deferred revenue balance of $8.9 million from revenue recognized under our collaboration agreements, a decrease of $2.7 million in accrued compensation expense primarily due to bonuses paid in connection with certain goal achievements, and an increase in accounts receivable of $4.0 million from higher research and development services revenues from our collaborators.

This was offset partially by a decrease in $0.4 million in prepaid expenses and other current assets, a $1.3 million increase in accounts payable due to timing of payments, and a $0.1 million increase in other liabilities.

Cash used in operating activities for the nine months ended September 30, 2020 was $48.9 million.

Our net income of $27.4 million included $78.6 million of unrealized gain on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock, and was partially offset by non-cash charges of $8.8 million for stock-based compensation, $3.1 million for depreciation and amortization, $3.2 million for the remeasurement of the vested options under the Call Option Plan, $0.3 million for the amortization of premium on our marketable securities, and $0.3 million for financing costs related to the public offering.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $13.7 million, comprised of a decrease of $1.6 million in accounts payable and other liabilities due to timing of payments, a decrease of $11.6 million in our deferred revenue balance from revenue recognized under our collaboration agreements, an increase of $1.2 million in accounts receivable from our collaborators, and a $0.8 million decrease in prepaid expenses and other assets.

Cash used in operating activities for the nine months ended September 30, 2019 was $51.9 million.

Our net loss of $41.0 million was decreased by non-cash charges of $7.6 million for stock-based compensation, $3.6 million for depreciation and amortization, and a $0.3 million loss on disposal of property and equipment, which were offset partially by a $1.3 million increase in the accretion of discount on our marketable securities and a $0.1 million reduction of a liability attributable to an agreement.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $21.0 million, due to a decrease in our deferred revenue balance of $15.7 million from revenue

recognized under our collaboration agreements, a decrease of $1.

6 million in accrued compensation expense primarily due to bonuses paid in connection with certain goal achievements, and an increase in accounts receivable of $5.0 million from higher research and development services revenues from our collaborators.

This was offset partially by a $1.5 million increase in accounts payable due to timing of payments.

Cash Flows from Investing Activities

Cash used in investing activities of $15.5 million for the six months ended June 30, 2020 was primarily related to purchases of marketable securities of $91.3 million and purchases of property and equipment of $2.5 million, principally to support laboratory and manufacturing activities, offset partially by maturities and sales of marketable securities of $78.0 million.

Cash used in investing activities of $68.9 million for the six months ended June 30, 2019 was primarily related to purchases of marketable securities of $147.4 million and purchases of property and equipment of $0.8 million, principally to support laboratory and manufacturing activities, offset partially by maturities and sales of marketable securities of $79.3 million.

Cash used in investing activities of $15.2 million for the nine months ended September 30, 2020 was primarily related to purchases of marketable securities of $114.0 million and purchases of property and equipment of $5.5 million, principally to support laboratory and manufacturing activities, offset partially by maturities and sales of marketable securities of $104.3 million.

Cash used in investing activities of $59.1 million for the nine months ended September 30, 2019 was primarily related to purchases of marketable securities of $191.7 million and purchases of property and equipment of $1.4 million, principally for laboratory and manufacturing equipment, offset partially by maturities and sales of marketable securities of $134.1 million.

Cash Flows from Financing Activities

Cash provided by financing activities of $107.1 million for the six months ended June 30, 2020 was primarily related to $91.4 million of net proceeds from the issuance of common stock from our public offering, $25.0 million of gross proceeds from our debt refinancing and $0.7 million of proceeds received from participants of our employee stock purchase plan and from the exercise of common stock options, partially offset by a $10.0 million repayment of the August 2017 Loan.

Cash used in financing activities of $1.3 million for the six months ended June 30, 2019 was primarily related to commencement of the repayment of the August 2017 Loan in March 2019 of $2.0 million, offset by $0.7 million of proceeds received from participants of our employee stock purchase plan.

Cash provided by financing activities of $124.4 million for the nine months ended September 30, 2020 was primarily related to $91.4 million of net proceeds from the issuance of common stock from our public offering, $16.8 million of net proceeds from the sales of common stock pursuant to our ATM, $25.0 million of gross proceeds from our debt refinancing, and $1.1 million of proceeds received from participants of our employee stock purchase plan and from the exercise of common stock options, partially offset by a $10.0 million repayment of the August 2017 Loan.

Cash used in financing activities of $2.4 million for the nine months ended September 30, 2019 was primarily related to commencement of the repayment of the August 2017 Loan in March 2019 of $3.5 million, partially offset by $1.3 million of proceeds received from participants of our employee stock purchase plan.

Off-Balance Sheet Arrangements

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The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue generated and expenses incurred during the reporting periods.

Our estimates are

based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

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Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research services and other consulting costs, we estimate the expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services on our behalf.

For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research, development and manufacturing services and other consulting costs, we estimate the expenses based on the services performed, pursuant to contracts with research institutions and other third-party organizations that conduct and manage such external services on our behalf.

We estimate these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services.

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We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our stock-based compensation calculations on a prospective basis.

There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2019.

There h ave been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 201 9 .

JOBS Act Accounting Election

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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