SUTRO BIOPHARMA, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and belief. 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 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. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements . Overview 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 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. Our mission is to transform the lives of patients by using our XpressCF ® Platform to create medicines with improved therapeutic profiles for areas of unmet need. Once identified, production of protein drug candidates can be rapidly and predictably scaled in our current Good Manufacturing Practices compliant manufacturing facility. We have the ability to manufacture our cell-free extract that supports our production of proteins on a large scale using a semi-continuous fermentation process. 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. We are developing STRO-001, an optimally designed ADC directed against the cancer target CD74, for multiple myeloma and NHL. STRO-001 was designed and optimized for maximal therapeutic index by placing linker-warheads at specific locations within the antibody using our proprietary XpressCF+™ Platform. The Phase 1 trial for STRO-001 is an open-label study that is evaluating STRO-001 as a monotherapy for patients with multiple myeloma and NHL. The trial is being conducted in two parts: dose escalation and dose expansion. The primary objectives of the trial are to determine the safety and tolerability profile of STRO-001, determine the recommended Phase 2 dose and interval and evaluate preliminary anti-tumor activity. The secondary objectives are to characterize the human pharmacokinetics of STRO-001 and additional safety, tolerability and efficacy measures. 23 STRO-002 was designed and optimized for an improved therapeutic index by placing a precise number of linker-warheads at four specific locations within the antibody using our proprietary XpressCF+™ Platform. Our Phase 1 trial for STRO-002 is an open-label study evaluating STRO-002 as a monotherapy for patients with ovarian and endometrial cancers. The trial is being conducted in two-parts, dose escalation and dose expansion. The primary objectives of the STRO-002 clinical trial are to determine the safety and tolerability profile, to define the recommended Phase 2 dose level and interval and to evaluate preliminary anti-tumor activity. Our secondary objectives are to characterize the human pharmacokinetics and additional safety, tolerability and efficacy measures. 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. 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 from the dose-escalation portion of the trial most recently reported in May 2021. As of April 23, 2021, the dose-escalation cohort of the Phase 1 trial had enrolled 39 ovarian cancer patients and included 34 patients treated with clinically active dose levels at 2.9 mg/kg or higher, of which 31 patients had at least one post-baseline scan and were evaluable for RECIST responses. The results of this data is summarized as follows: • Of the 31 patients evaluable for RECIST, 10 patients met criteria for response. One patient achieved a complete response, or CR, and nine patients achieved a partial response, or PR. Of the nine PRs, four were confirmed PRs, or cPRs, and five were unconfirmed PRs, or uPRs; • For the five confirmed responders (1 CR and 4 cPRs), the median duration of response, or DOR, was 5.8 months; • Median study follow-up was 8.4 months and median progression-free survival, or PFS, was 7.2 months; • 86% of all observed treatment-emergent adverse events, or AEs, were Grade 1 or 2. The most common Grade 3 and 4 AEs were neutropenia (64%), arthralgia (13%), fatigue (10%), neuropathy (8%), and abdominal pain (8%); percentages of Grade 3 and 4 AEs are the percentage of the 39 patients evaluable for safety that manifested the applicable Grade 3 or 4 AE. All Grade 3 or 4 AEs were managed with standard medical treatment, dose reductions or dose delays; and • Dose limiting toxicities, or DLTs, were observed at higher dose levels in two patients – at 6.0 mg/kg (Grade 2 neuropathy/Grade 3 arthralgia) and at 6.4 mg/kg (Grade 3 bone pain). Tissue samples for FolRα-expression analysis were provided by clinical sites retrospectively and were available in 18 patients treated at ≥ 2.9 mg/kg in the dose-escalation cohort. Antitumor activity was observed across a broad range of FolRα-expression levels. 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 . 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 24 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, follow-on public offerings 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 net loss of $36.5 million for the six months ended June 30, 2021. 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. 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, 2021, we had an accumulated deficit of $264.4 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 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 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 experiencing 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 has the potential to cause delays in our research, development and/or manufacturing activities , but overall patient enrollment and treatment remains on track. We may experience more pronounced and significant 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, revenue earned from our collaboration partners, 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, 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. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See the section titled “Risk Factors” for further discussion of the possible impact of the ongoing COVID-19 pandemic on our business. Financial Operations Overview Revenue 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 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. 25 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. We may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a n onrefundable upfront payment, development , regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from us materials and reagents , clinical product supply or additional research and development services under separate agreements. We assess which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately . We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements. 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 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. 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. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success. Please see further discussion on the revenue recognition treatment of performance obligations under Critical Accounting Policies and Estimates. Operating Expenses Research and Development Research and development expenses represent costs incurred in performing research, development and manufacturing activities in support of our own product development efforts and those of our collaborators, and include salaries, employee benefits, stock-based compensation, laboratory supplies, outsourced research and development expenses, professional services and allocated facilities-related costs. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed. We 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 and research and development facilities 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. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates. 26 The following table summarizes our research and development expenses incurred during the periods indicated. The internal costs include personnel, facility costs and research and scientific related activities associated with our pipeline. 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 , development and manufacturing services , and other consulting costs. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Internal costs: Research and drug discovery $ 6,741 $ 4,423 $ 12,701 $ 8,976 Process and product development 3,361 2,604 6,731 5,264 Manufacturing 7,918 5,821 15,734 11,362 Clinical development 1,053 646 1,953 1,158 Total internal costs 19,073 13,494 37,119 26,760 External Program Costs: Research and drug discovery 366 328 690 583 Toxicology and translational science 196 292 606 611 Process and product development 20 108 182 166 Manufacturing 2,745 1,456 4,469 3,799 Clinical development 2,909 1,565 4,805 2,943 Total external program costs 6,236 3,749 10,752 8,102 Total research and development expenses $ 25,309 $ 17,243 $ 47,871 $ 34,862 General and Administrative Our general and administrative expenses consist primarily of personnel costs, expenses for outside professional services, including legal, human resources, audit, accounting and tax services and allocated facilities-related costs. Personnel costs include salaries, employee benefits and stock-based compensation. 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 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 Interest expense includes interest incurred on our debt and amortization of debt issuance costs. Additionally, we 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, 2021 and 2020 includes changes in values attributable to the arrangement with the Call Option Plan as defined in the notes to our financial statements included elsewhere in this report. 27 Comparison of the Three Months Ended June 3 0 , 20 2 1 and 20 20 Three Months Ended June 30, 2021 2020 Change Change (%) (in thousands) Revenues $ 28,049 $ 9,469 $ 18,580 196 % Operating expenses Research and development 25,309 17,243 8,066 47 % General and administrative 12,545 8,643 3,902 45 % Total operating expenses 37,854 25,886 11,968 46 % Loss from operations (9,805 ) (16,417 ) 6,612 (40 )% Interest income 175 384 (209 ) (54 )% Unrealized gain on equity securities 4,325 48,860 (44,535 ) (91 )% Interest and other expense, net (847 ) (2,955 ) 2,108 (71 )% Net (loss) income $ (6,152 ) $ 29,872 $ (36,024 ) (121 )% Revenue We have recognized revenue as follows during the periods indicated: Three Months Ended June 30, 2021 2020 Change Change (%) (in thousands) Bristol Myers Squibb Company (“BMS”) $ 5,427 $ 1,509 $ 3,918 260 % Merck Sharp & Dohme Corporation (“Merck”) (1) $ 19,878 $ 7,005 $ 12,873 184 % Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name “EMD Serono”) $ 2,375 855 1,520 178 % Vaxcyte (2) $ 369 100 269 269 % Total revenue $ 28,049 $ 9,469 $ 18,580 196 % (1) Merck was a related party until the closing of our public offering on May 14, 2020. (2) Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020. 28 Total revenue increased by $18.6 million, or 196%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. This was due to an increase of $12.8 million from Merck, which reflects the cumulative catch-up in revenue as a result of the change in transaction price due to a $15.0 million contingent payment earned in the second quarter of 2021 for the initiation of the first IND-enabling toxicology study under the first program in the collaboration and an increase of $0.1 million in clinical supply. Further, there was an increase of $3.9 million from BMS, which was comprised of a $5.0 million increase in contract research and manufacturing activities supporting clinical trial supply, partially offset by a $1.0 decrease associated with the ongoing performance related to the partially unsatisfied performance obligations. Additionally, there was an increase of $1.5 million from EMD Serono, which reflects a $2.0 million contingent payment earned in the second quarter of 2021 related to a patient enrollment achievement in the Phase 1 dose escalation portion of the study of M1231, partially offset by a $0.5 million decrease in research and development services. Research and Development Expense Research and development expense increased by $8.1 million, or 47%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was due primarily to increases of $2.6 million in personnel-related expenses due to higher headcount, $3.1 million in laboratory supplies, clinical trial costs and production materials-related expenses, $1.3 million in consulting and outside services, and $1.0 million in facility-related expenses. General and Administrative Expense General and administrative expense increased by $3.9 million, or 45%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was due primarily to increases of $2.6 million in personnel-related expenses due to higher headcount, $0.5 million in insurance and external services, and $0.6 million in facility-related expenses. Interest Income Interest income decreased by $0.2 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due primarily to a decrease in the amortization of premiums on investments. Unrealized Gain on Equity Securities Unrealized gain on equity securities was $4.3 million during the three months ended June 30, 2021, as compared to $48.9 million for the three months ended June 30, 2020. The unrealized gain on equity securities in each period 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, decreased by $2.1 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due primarily to a $1.8 million decrease related to the remeasurement of the vested call options under the Call Option Plan and a $0.3 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement. 29 Comparison of the Six Months Ended June 3 0 , 20 21 and 20 20 Six Months Ended June 30, 2021 2020 Change Change (%) (in thousands) Revenues $ 42,709 $ 16,621 $ 26,088 157 % Operating expenses Research and development 47,871 34,862 13,009 37 % General administrative 23,652 17,356 6,296 36 % Total operating expenses 71,523 52,218 19,305 37 % Loss from operations (28,814 ) (35,597 ) 6,783 (19 )% Interest income 372 1,025 (653 ) (64 )% Unrealized (loss) gain on equity securities (6,364 ) 48,860 (55,224 ) (113 )% Interest and other expense, net (1,705 ) (4,011 ) 2,306 (57 )% Net (loss) income $ (36,511 ) $ 10,277 $ (46,788 ) (455 )% Revenue We have recognized revenue as follows during the periods indicated: Six Months Ended June 30, 2021 2020 Change Change (%) (in thousands) Bristol Myers Squibb Company $ 6,666 $ 3,554 $ 3,112 88 % Merck Sharp & Dohme Corporation (1) $ 31,761 $ 9,782 $ 21,979 225 % Merck KGaA, Darmstadt, Germany $ 2,595 3,149 (554 ) (18 )% Vaxcyte (2) $ 1,687 136 1,551 1,140 % Total revenue $ 42,709 $ 16,621 $ 26,088 157 % (1) Merck was a related party until the closing of our public offering on May 14, 2020. (2) Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020. Total revenue increased by $26.1 million, or 157%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This was due to an increase of $22.0 million from Merck, primarily 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 $14.0 million was a cumulative catch-up in revenue as a result of the change in transaction price, due to a $15.0 million contingent payment earned in the second quarter of 2021 for the initiation of the first IND-enabling toxicology study under the first program in the collaboration, a $2.1 million increase in clinical trial materials supply, partially offset by a $0.6 million decrease in research and development services and a $0.7 million decrease related to the financing component associated with the upfront payment. Further, there was an increase of $3.1 million from BMS, which was comprised of a $5.0 million increase in contract research and manufacturing activities supporting clinical trial supply, partially offset by a $2.0 million decrease due to the completion in September 2020 of revenue recognition of the transaction price under the BMS Agreement. Additionally, there was an increase of $1.6 million of Vaxcyte revenue under our supply agreement, which was partially offset by a decrease of $0.6 million in EMD Serono revenue. 30 Research and Development Expense Research and development expense increased by $13.0 million, or 37%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was due primarily to increases of $4.7 million in personnel-related expenses due to higher headcount, $3.4 million in laboratory supplies and production materials-related expenses, $2.1 million in facility-related expenses, $1.7 million in clinical trial costs, and $1.1 million in consulting and outside services. General and Administrative Expense General and administrative expense increased by $6.3 million, or 36% during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was due primarily to increases of $4.1 million in personnel-related expenses due to higher headcount, $0.5 million in equipment-related expenses, $0.4 million in insurance and other fees associated with being a public company, and $1.1 million in facility-related expenses. Interest Income Interest income decreased by $0.7 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due primarily to a $1.1 million decrease in the amortization of premiums on investments, partially offset by an increase of $0.5 million from higher average investment balances in the first half of 2021. Unrealized (Loss) Gain on Equity Securities Unrealized loss on equity securities was $6.4 million during the six months ended June 30, 2021, as compared to an unrealized gain of $48.9 million for the six months ended June 30, 2020. The unrealized (loss) gain on equity securities in each period 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, decreased by $2.3 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due primarily to a $1.9 million decrease in other expenses related to the remeasurement of the vested call options under the Call Option Plan and a $0.7 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement, partially offset by a $0.3 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 June 30, 2021, we had cash, cash equivalents and marketable securities of $283.4 million, equity securities of $35.3 million, outstanding debt of $24.8 million and an accumulated deficit of $264.4 million. 2021 Contingent Payment from Merck In the second quarter of 2021, we earned and received a $15.0 million contingent payment from Merck 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. 31 2020 Public Offering s 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. 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 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. During the six months ended June 30, 2021, we did not sell any shares under the ATM Facility. 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. 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 June 30 , 2021, we held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $35.3 million. Term Loan 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. Leases In June 2021, we entered into a third amendment (the “Third Amendment”) to our manufacturing facility lease, dated May 18, 2011, as amended, by and between Alemany Plaza LLC, located at San Carlos, California (the “San Carlos Lease”), as an extension to the term of the San Carlos Lease for a period of five years (the “Lease Extension Period”). Pursuant to the Third Amendment, the San Carlos Lease will expire on July 31, 2026, and it includes an option to renew the San Carlos Lease for an additional five years. The aggregate estimated base rent payments due over the Lease Extension Period is approximately $4.2 million, subject to certain terms contained in the San Carlos Lease. In June 2021, we entered into a first amendment (the “First Amendment”) to our manufacturing facility lease, dated May 4, 2015, as amended, by and between 870 Industrial Road LLC, located at San Carlos, California (the “Industrial Lease”), as an extension to the term of the Industrial Lease for a period of five years (the “Industrial Lease Extension Period”). Pursuant to the first Amendment, the Industrial Lease will expire on June 30, 2026, and it includes an option to renew the Industrial Lease for an additional five years. The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately $4.3 million, subject to certain terms contained in the Industrial Lease. In September 2020, we entered into a sublease agreement with Five Prime Therapeutics, Inc. located in South San Francisco, California. P lease see Note 7 to our condensed financial statements. 32 The following table summarizes our contractual obligations as of June 3 0 , 20 21 : Payments due in the year 2021 2022-2023 2024-2026 Beyond 2026 Total (in thousands) Contractual obligations: Debt, principal $ - $ 21,875 $ 3,125 $ - $ 25,000 Debt, interest 1,032 2,451 21 - 3,504 Operating lease obligations 1,991 3,269 4,436 - 9,696 Sublease obligation (1) 2,547 11,493 23,221 8,289 45,550 Total contractual obligations $ 5,570 $ 39,088 $ 30,803 $ 8,289 $ 83,750 (1) Excludes 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. 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. We will continue to require additional financing to advance our current product candidates into and through clinical development, to develop, acquire or in-license other potential product candidates, pay our obligations and to fund operations for the foreseeable future. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, marketing and distribution arrangements, or other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. 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. 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. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Cash Flows The following table summarizes our cash flows during the periods indicated: Six Months Ended June 30, 2021 2020 (in thousands) Net cash used in operating activities $ (35,693 ) $ (31,234 ) Net cash used in investing activities (115,854 ) (15,499 ) Net cash provided by financing activities 1,787 107,121 Net (decrease) increase in cash, cash equivalents and restricted cash $ (149,760 ) $ 60,388 33 Cash Flows from Operating Activities Cash used in operating activities for the six months ended June 30, 2021 was $35.7 million. Our net loss of $36.5 million included $6.4 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 $9.9 million for stock-based compensation, $2.4 million for depreciation and amortization, and $1.2 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 $19.3 million, due to an a decrease of $12.4 million in our deferred revenue balance from revenue recognized under our collaboration agreements, an increase of $3.6 million in accounts receivable from our collaborators, an increase of $5.3 million in prepaid expenses and other assets, a decrease of $2.3 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, partially offset by an increase of $2.2 million in accounts payable and other liabilities due to timing of payments, and an increase of $2.1 million in deferred rent from our sublease. 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 Flows from Investing Activities Cash used in investing activities of $115.9 million for the six months ended June 30, 2021, 2021 was primarily related to purchases of marketable securities of $202.3 million and purchases of property and equipment of $7.8 million, principally for leasehold improvements to the premises under the Sublease, offset partially by maturities and sales of marketable securities of $94.3 million. 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 Flows from Financing Activities Cash provided by financing activities of $1.8 million for the six months ended June 30, 2021 was primarily related to $1.4 million of proceeds received from the exercise of common stock options and $0.9 million of net proceeds received from participants in our employee equity plans. 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 in 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. 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. 34 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, (ii) the date 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 (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. As the market value of our common stock that was held by non-affiliates exceeded $700 million as of June 30, 2021, we expect to be classified as a large accelerated filer and cease being an emerging growth company as of December 31, 2021, and to adopt ASC 842 in the third quarter of 2021 with an effective date of January 1, 2021. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. 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. Actual results may differ from these estimates under different assumptions or conditions. 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 report for more information. 35