What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-05 · 100 added, 186 removed, 200 unchanged (59% of the section changed)

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We are a clinical stage drug discovery, development and manufacturing company focused on deploying our proprietary integrated cell-free protein synthesis platform, XpressCF ® , to create a broad variety of optimally designed, next-generation protein therapeutics, initially for cancer and autoimmune disorders.

We aim to design therapeutics using the most relevant and potent modalities, including cytokine-based targets, immuno-oncology, or I/O, agents, antibody-drug conjugates, or ADCs, and bispecific antibodies that are directed primarily against clinically validated targets where the current standard of care is suboptimal.

We aim to design therapeutics using the most relevant and potent modalities, including cytokine-based therapeutics, immuno-oncology, or I/O agents, antibody-drug conjugates, or ADCs, and bispecific antibodies that are directed primarily against clinically validated targets where the current standard of care is suboptimal.

We believe our platform allows us to accelerate the discovery and development of potential first-in-class and best-in-class molecules by enabling the rapid and systematic evaluation of protein structure-activity relationships to create optimized homogeneous product candidates.

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Our secondary objectives are to characterize the human pharmacokinetics and additional safety, tolerability and efficacy measures.

We have also entered into multi-target, product-focused collaborations with leaders in the field of oncology, including a cytokine derivatives collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., Kenilworth, NJ, or Merck, a B Cell Maturation Antigen, or BCMA, and an immuno-oncology directed alliance with Celgene Corporation, or Celgene, a wholly owned subsidiary of Bristol Myers Squibb Company, New York, NY, or BMS, and an oncology-focused collaboration with Merck KGaA, Darmstadt Germany (operating in the United States and Canada under the name “EMD Serono”).

In November 2019, BMS acquired Celgene, and Celgene became a wholly owned subsidiary of BMS.

However, we continue to refer to our agreements with Celgene throughout this Form 10-Q as being with Celgene.

Based on our proprietary XpressCF ® platform, we have also entered into multi-target, product-focused collaborations with leaders in the field of oncology, including a cytokine derivatives collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., Kenilworth, NJ, or Merck;

a B Cell Maturation Antigen, or BCMA, ADC collaboration with Celgene Corporation, or Celgene, a wholly owned subsidiary of Bristol-Myers Squibb Company, New York, NY, or BMS;

and a MUC1-EGFR ADC collaboration with Merck KGaA, Darmstadt Germany (operating in the United States and Canada under the name “EMD Serono”).

Our two most advanced product candidates are wholly owned:

STRO-001, an ADC directed against CD74, for patients with multiple myeloma and non-Hodgkin lymphoma, or NHL, and STRO-002, an ADC directed against folate receptor-alpha, or FolRα, for patients with ovarian and endometrial cancers.

STRO-001 is currently enrolling patients in a Phase 1 trial, with updated data reported in December 2020.

Based on such reported data, STRO-001 has been generally well-tolerated and, unlike certain other ADCs, no ocular toxicity signals have been observed, with no patients receiving prophylactic corticosteroid eye drops.

Dose escalation in the STRO-001 Phase 1 trial is continuing, and the maximum tolerated dose has not yet been reached.

We expect to begin the dose expansion portion of the Phase 1 trial in the second half of 2021.

The FDA has granted Orphan Drug Designation for STRO-001 for the treatment of multiple myeloma.

Our second candidate, STRO-002, is currently enrolling patients in a Phase 1 trial focused on ovarian and endometrial cancers with updated data reported in December 2020.

Based on such reported data, STRO-002 has been well-tolerated and no ocular toxicity signals have been observed, with no patients receiving prophylactic corticosteroid eye drops.

The dose escalation portion of the STRO-002 Phase 1 trial has been fully enrolled and the dose expansion portion of the trial is ongoing to assess the efficacy, safety and tolerability of STRO-002 at dose levels of 4.3 and 5.2mg/kg .

We expect to report updated dose-escalation data for STRO-002 in the second quarter of 2021.

For the dose-expansion portion, we dosed the first patient in January 2021 and are treating less heavily pre-treated ovarian cancer patients.

We expect to report initial dose-expansion data in the second half of 2021.

Additionally, initiation of a STRO-002 combination expansion cohort in ovarian cancer and an expansion cohort for FolR a -selected endometrial cancer are planned for the second half of 2021.

Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development and manufacturing activities in support of our own product development efforts and those of our collaborators, raising capital to support and expand such activities and providing general and administrative support for these operations.

We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with Celgene (now BMS), Merck and EMD Serono, the issuance and sale of redeemable convertible preferred stock, our public offerings of common stock and debt proceeds.

We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with Celgene (now BMS), Merck and EMD Serono, the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, of common stock and debt proceeds.

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 $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 had a net loss of $30.4 million and $19.6 million for the three months ended March 31, 2021 and 2020, respectively.

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

As of March 31, 2021, we had an accumulated deficit of $258.2 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.

If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution.

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 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 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-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

On May 14, 2020, we closed a public offering of 12,650,000 shares of our common stock at a public offering price of $7.75 per share, which included the exercise in full of the underwriters’ option to purchase 1,650,000 shares of common stock.

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

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.

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 facility 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.

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, 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 delays in enrollment and occasional delays in data entry by trial sites, but overall enrollment and treatment remains on track.

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 pandemic, impacts on our clinical studies, employee or industry events, and effects 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.

We are beginning to experience the impact of the COVID-19 pandemic on our business through delays in the availability of materials routinely used in biologic therapeutic development and manufacturing, which may cause delays in our research, development and/or manufacturing activities , but overall patient enrollment and treatment remains on track.

We may experience more pronounced disruptions in our operations, liquidity, supply chain, facilities, and clinical trials in the future as well.

With respect to our clinical trials, we have experienced minor 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 .

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, the speed and breadth of mass vaccinations for COVID-19 and the efficacy of such vaccines, 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.

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

Our total revenue to date has been generated principally from our collaboration and license agreements with Celgene (now BMS), Merck and EMD Serono, and to a lesser extent, from manufacturing, supply and services and products we provide to Celgene, Vaxcyte and EMD Serono.

Our total revenue to date has been generated principally from our collaboration and license agreements with BMS, Merck and EMD Serono, and to a lesser extent, from manufacturing, supply and services and products we provide to the above collaborators and to Vaxcyte.

We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates.

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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

We recognize revenue over time by measuring our progress towards the complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer.

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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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.

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

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Internal costs:

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Personnel costs include salaries, employee benefits and stock-based compensation.

As we continue to advance our product candidates into and through the clinic, we expect the growth of our business to require increased general and administrative expenses.

We expect to incur additional expenses operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards applicable to companies listed on the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.

We also expect to increase the size of our administrative function to support the anticipated growth of our business, and as we continue to advance our product candidates into and through the clinic, we expect the growth of our business to require increased general and administrative expenses.

Interest Income

Interest income consists primarily of interest received on our invested funds.

Unrealized Gain on Equity Securities

Unrealized gain on equity securities consists of the remeasurement of our investment in Vaxcyte common stock.

Interest income consists primarily of interest earned on our invested funds.

Unrealized Loss on Equity Securities

Unrealized loss on equity securities consists of the remeasurement of our investment in Vaxcyte common stock.

Interest and Other Expense, Net

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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 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 September 30 , 20 20 and 201 9

Other income (expense) in the three months ended March 31, 2021 and 2020 includes changes in values attributable to the arrangement with the Leukemia & Lymphoma Society, Inc.

and the Call Option Plan (each as defined in the notes to our financial statements included elsewhere in this report).

Comparison of the Three Months Ended March 31, 2021 and 2020

Three Months Ended

September 30,

(in thousands)

1 unchanged sentence

Research and development

General administrative

General and administrative

Total operating expenses

1 unchanged sentence

Interest income

Unrealized gain on equity securities

Unrealized loss on equity securities

Interest and other expense, net

Net income (loss)

* Percentage not meaningful

1 unchanged sentence

Three Months Ended

September 30,

(in thousands)

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Total revenue

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 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 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 $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 $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 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 $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 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)

Operating expenses

Research and development

General administrative

Total operating expenses

Loss from operations

Interest income

Unrealized gain on equity securities

Interest and other expense, net

Net income (loss)

* Percentage not meaningful

We have recognized revenue as follows during the periods indicated:

Nine Months Ended

September 30,

(in thousands)

Bristol Myers Squibb Company ("BMS") (1)

Merck Sharp & Dohme Corporation (“Merck”) (2)

Merck KGaA, Darmstadt, Germany (operating in the United

States and Canada under the name “EMD Serono”)

Total revenue

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 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 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.

Total revenue increased by $7.5 million, or 105%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

This was due to an increase of $9.1 million of Merck revenue, which reflects a $8.1 million increase in revenue from ongoing performance of research and development services, of which $5.9 million was associated with the contingent third program that was fully recognized upon the determination that the related performance obligation had terminated during the first quarter of 2021, and an increase of $1.4 million in clinical trial materials supply, partially offset by a $0.4 million decrease related to the financing component associated with the upfront payment, and an increase of $1.3 million of Vaxcyte revenue under our supply agreement.

These increases were partially offset by a decrease of $2.1 million in EMD Serono revenue and a decrease of $0.8 million in BMS revenue.

Research and Development Expense

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.

Research and development expense increased by $4.9 million, or 28%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was due primarily to increases of $2.1 million in personnel-related expenses due to higher headcount, $2.0 million in laboratory supplies and production materials-related expenses, and $1.1 million in facility-related expenses, partially offset by a $0.3 million decrease in consulting and outside services.

General and Administrative Expense

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.

General and administrative expense increased by $2.4 million, or 27% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was due primarily to increases of $1.5 million in personnel-related expenses due to higher headcount, $0.2 million in insurance and external services, $0.2 million in equipment-related expenses, and $0.5 million in facility-related expenses.

Interest Income

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 income decreased by $0.4 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due primarily to a decrease in the amortization of premiums on investments.

Unrealized Loss on Equity Securities

Unrealized loss on equity securities was $10.7 million during the three months ended March 31, 2021, as compared to zero for the three months ended March 31, 2020.

The unrealized loss on equity securities was entirely due to the remeasurement of the estimated fair value of our investment in Vaxcyte common stock.

Interest and Other Expense, Net

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.

Interest and other expense, net, decreased by $0.2 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due primarily to a $0.1 million decrease in other expenses related to the

remeasurement of the vested c all o ption s under the Call Option Plan and a $0.

4 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreemen t , partially offset by a $0.

2 million increase in interest expense related to our outstanding debt .

Liquidity and Capital Resources

Sources of Liquidity

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

As of March 31, 2021, we had cash, cash equivalents and marketable securities of $294.9 million, equity securities of $31.0 million, outstanding debt of $24.7 million and an accumulated deficit of $258.2 million.

2021 Milestone Payment from Merck

On April 14, 2021, we announced that Merck, known as MSD outside the United States and Canada, will make to us a $15 million milestone payment for the initiation of an IND enabling toxicology study for the first program in its collaboration to develop novel cytokine derivative therapeutics for cancer and autoimmune disorders.

2020 Public Offerings

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

On December 11, 2020, we closed a public offering of 6,900,000 shares of our common stock at a public offering price of $21.00 per share, which included the exercise in full of the underwriters’ option to purchase 900,000 shares of common stock.

Our net proceeds from this offering, after deducting underwriting discounts and commissions and other offering expenses, was approximately $135.8 million.

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.

During the year ended December 31, 2020, we sold an aggregate of 2,614,286 shares of our common stock through our At-the-Market ATM facility, or ATM Facility, pursuant to a sales agreement dated October 4, 2019 with Cowen and Company, LLC, as sales agent.

The gross proceeds from these sales were approximately $24.6 million, before deducting fees of approximately $0.8 million, resulting in net proceeds of approximately $23.8 million.

May 2020 Public Offering

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

Vaxcyte, Inc.

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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 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.

The Vaxcyte common stock held by us is 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 discount for lack of marketability due to the presence of a lock-up agreement during certain periods in 2020, with any unrealized gains and losses recorded in our statements of operations.

The lock-up agreement expired in December 2020.

As of March 31, 2021, we held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $31.0 million.

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

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

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

Cash used in operating activities

Cash used in investing activities

Cash provided by (used in) provided by financing activities

Increase (decrease) in cash, cash equivalents and restricted cash

Net Cash used in operating activities

Net cash (used in) provided by investing activities

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Cash Flows from Operating Activities

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 used in operating activities for the three months ended March 31, 2021 was $30.4 million.

Our net loss of $30.4 million included $10.7 million of unrealized loss on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock, non-cash charges of $4.0 million for stock-based compensation, $1.3 million for depreciation and amortization, and $0.5 million for the amortization of premium on our marketable securities.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $16.5 million, due to an increase of $1.7 million in accounts receivable from our collaborators, an increase of $3.1 million in prepaid expenses and other assets, a decrease of $7.8 million in our deferred revenue balance from revenue recognized under our collaboration agreements, a decrease of $4.3 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, and a decrease of $0.7 million in accounts payable and other liabilities due to timing of payments, offset by an increase of $1.0 million in deferred rent from our sublease.

Cash used in operating activities for the three months ended March 31, 2020 was $18.7 million.

Our net loss of $19.6 million was reduced by non-cash charges of $2.7 million for stock-based compensation and $1.1 million for depreciation and amortization.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $2.9 million, due to an increase of $2.8 million in accounts receivable from research and development services revenues from our collaborators, a decrease of $3.1 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, a decrease of $0.7 million in other liabilities due to timing of payments, an increase of $2.3 million in our deferred revenue balance due to the $5.0 million received from Merck upon their exercise of an option to extend the research term of the collaboration’s first cytokine-derivative program by one year, which payment was earned in March 2020 and received in April 2020, offset by revenue recognized under our collaboration agreements, and a decrease of $1.4 million in prepaid expenses and other assets.

Cash Flows from Investing Activities

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 used in investing activities of $121.7 million for the three months ended March 31, 2021 was primarily related to purchases of marketable securities of $164.6 million and purchases of property and equipment of $2.4 million, principally for leasehold improvements to the premises under the Sublease, offset partially by maturities and sales of marketable securities of $45.3 million.

Cash provided by investing activities of $41.6 million for the three months ended March 31, 2020 was primarily related to maturities of marketable securities of $37.5 million and sales of marketable securities of $8.5 million, offset partially by purchases of marketable securities of $3.6 million and purchases of property and equipment of $0.8 million principally related to laboratory and manufacturing equipment.

Cash Flows from Financing Activities

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.

Cash provided by financing activities of $1.8 million for the three months ended March 31, 2021 was primarily related to $1.3 million of proceeds received from the exercise of common stock options and $0.5 million of net proceeds received from participants in our employee equity plans.

Cash provided by financing activities of $15.7 million for the three months ended March 31, 2020 was primarily related to $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 exercise of common stock options, partially offset by a $10.0 million repayment of the August 2017 Loan.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements, as defined under SEC rules.

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.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.07 billion, or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Critical Accounting Policies and Estimates

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

Collaboration revenue

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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.

We also evaluate estimates of our resources, which are used as the basis of measurement for revenue to be recognized on an input basis.

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

In instances where SSP is not directly observable, we develop assumptions that require judgment to determine the SSP for each performance obligation identified in the contract.

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Milestone and Contingent Payments :

At the inception of the arrangement and at each reporting date thereafter, we assess whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method.

At the inception of the arrangement and at each reporting date thereafter, we assess whether we should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method.

If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty , the associated milestone value is included in the transaction price .

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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, 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.

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.

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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The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards, including the expected term and the price volatility of the underlying stock.

These assumptions include:

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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 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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) in which we have total annual gross revenues of at least $1.07 billion, or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th , (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period and (3) December 31, 2023.

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, 2020.

Recent Accounting Pronouncements

See Note 2 to our financial statements included elsewhere in this document for more information.

See Note 2 to our financial statements included elsewhere in this report for more information.

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