Vir Biotechnology, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and notes and other financial information included elsewhere in this Annual Report on Form 10-K. Unless the context requires otherwise, references in this Annual Report on Form 10-K to the “Company”, “Vir,” “we,” “us” and “our” refer to Vir Biotechnology, Inc. and its consolidated subsidiaries. Our discussion and analysis below are focused on our financial results and liquidity and capital resources for the years ended December 31, 2020 and 2019, including year-over-year comparisons of our financial performance and condition for these years. Discussion and analysis of the year ended December 31, 2018 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31, 2019 and 2018, are located in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 26, 2020. Overview We are a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Infectious diseases are among the leading causes of death worldwide and can cause trillions of dollars of direct and indirect economic burden each year – as evidenced by the current coronavirus disease 2019, or COVID-19 pandemic. We believe that now is the time to apply the recent and remarkable advances in immunology to combat current and prepare for potential future infectious diseases. Our approach begins with identifying the limitations of the immune system in combating a particular pathogen, the vulnerabilities of that pathogen and the reasons why previous approaches have failed. We then bring to bear powerful technologies that we believe, individually or in combination, will lead to effective therapies. Our current development pipeline consists of product candidates targeting COVID-19, hepatitis B virus, or HBV, influenza A virus, and human immunodeficiency virus, or HIV. We have assembled four technology platforms, focused on antibodies, T cells, innate immunity and small interfering ribonucleic acid, or siRNA, through internal development, collaborations and acquisitions. We have built an industry-leading team that has deep experience in immunology, infectious diseases and product development. Given the global impact of infectious diseases, we are committed to developing cost-effective treatments that can be delivered at scale. COVID-19 • VIR-7831, a severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2, -neutralizing monoclonal antibody, or mAb, started the lead-in phase of a Phase 2/3 trial named COVID-19 Monoclonal antibody Efficacy Trial - Intent to Care Early, or COMET-ICE, in August 2020 for the treatment of adults at high risk of hospitalization or death from COVID-19. In October 2020, the trial continued into Phase 3 based on a positive evaluation of the safety and tolerability data from the Phase 2 lead-in. Results for the primary endpoint of COMET-ICE are expected in the first quarter of 2021, and if positive, will be used to seek Emergency Use Authorization from the Food and Drug Administration and ultimately approval through the submission of a biologics license application. In December 2020, we initiated a Phase 3 trial named Therapeutics for Inpatients with COVID-19, or TICO, of VIR-7831 for the treatment of hospitalized adults with COVID-19 as part of a new sub-trial of the National Institutes of Health’s Accelerating COVID-19 Therapeutic Interventions and Vaccines, or ACTIV, Program, specifically ACTIV-3. An evaluation of the benefit/risk profile of VIR-7831 is expected in the first quarter of 2021 and will determine if VIR-7831 continues in the next part of the ACTIV-3 trial. In January 2021, we initiated a Phase 2 combination trial of VIR-7831 and bamlanivimab (LY-CoV555) for the treatment of mild to moderate COVID-19 in low-risk adults as part of Eli Lilly and Company’s BLAZE-4 trial. Initial results for this arm of the BLAZE-4 trial are expected in the first half of 2021. In February 2021, we initiated COMET-Patient SafEty, TolerAbility, PharmacoKinetics, or COMET-PEAK, a Phase 2 trial evaluating an intramuscular, or IM, formulation of VIR-7831 in low-risk adults with mild to moderate COVID-19. In the second quarter of 2021, we plan to initiate two additional IM trials of VIR-7831. • VIR-7832, a vaccinal SARS-CoV-2-neutralizing mAb, is anticipated to initiate a Phase 1b/2a trial in the first quarter of 2021 for the treatment of adults with mild to moderate COVID-19 at high risk of hospitalization as part of the U.K.-based and National Health Service supported AGILE initiative. 111 HBV • VIR-2218, an HBV-targeting siRNA, is currently in a Phase 2 clinical trial. Initial Phase 2 data have demonstrated substantial, durable, and dose dependent reduction of hepatitis B virus surface antigen, and VIR-2218 has been generally well-tolerated. In July 2020, we initiated a Phase 2 combination clinical trial of VIR-2218 with pegylated interferon-alpha, an approved immune modulatory agent, and anticipate initial clinical data in the second quarter of 2021. • VIR-3434, an HBV-neutralizing mAb, is currently in a Phase 1 clinical trial. We anticipate additional clinical data from our Phase 1 trial in the second quarter of 2021. We also expect to initiate a Phase 2 clinical trial of VIR-3434 in combination with VIR-2218 in the second half of 2021. Influenza A virus • VIR-2482, a mAb designed for the prevention of influenza A, is currently in a Phase 1/2 clinical trial and has been generally well-tolerated. Initiation of the Phase 2 trial for VIR-2482, which was delayed due to the impact of COVID-19, is now planned for the fourth quarter of 2021 with proof-of-concept results anticipated in the first half of 2022. HIV • VIR-1111, an HIV T cell vaccine based on human cytomegalovirus, or HCMV, is currently in a Phase 1 trial. We anticipate initial clinical data for VIR-1111 in the second half of 2021. We were incorporated in April 2016 and commenced principal operations later that year. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials. Prior to our initial public offering, or IPO, we funded our operations primarily from the issuance and sale of convertible preferred stock, and to a lesser extent from revenue from grant agreements with government-sponsored and private organizations, as well as research and development services. In October 2019, we completed our IPO pursuant to which we received net proceeds of $126.4 million, after deducting underwriting discounts, commissions and offering expenses. In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323.2 million, after deducting underwriting discounts, commissions and offering expenses. As of December 31, 2020, we had $736.9 million in cash, cash equivalents and short-term investments. Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of December 31, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our net losses were $298.7 million, $174.7 million and $115.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $667.2 million. Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing, manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years. In particular, we expect our expenses and losses to increase as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, seek regulatory approval, prepare for commercialization, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We are currently manufacturing product candidates from three of our platforms: antibodies, T cells and siRNAs. We have established our own internal chemistry, manufacturing and control, or CMC, capabilities and are working with contract 112 development and manufacturing organizations, or CDMOs , to supply our early stage product candidates in the near-term. We have completed our internal capacity build in process development, analytical development, quality, manufacturing and supply chain. Specifically, our San Francisco, California and Portland, Oregon facilities include laboratories that support process development, production of HCMV research viral seed stock and selected quality control testing for our product candidates. We have established relationships with multiple CDMOs and have produced material to support preclinical studies and Phase 1 and Phase 2 clinical trials. Material for Phase 3 clinical trials and commercial supply will generally require large-volume, low-cost-of-goods production . For example , for our COVID-19 program, we and our partner GSK have executed manufacturing agreements with large-scale CDMOs to support future scale-up and capacity , particularly for potential commercialization . COVID-19 Activities Since February 2020, we have entered into a number of collaboration agreements to accelerate the development, manufacture, and potential commercialization of therapies to treat and prevent COVID-19 and other coronaviruses. We have also made substantial efforts to protect our intellectual property in this area, as evidenced by the expansion of our patent portfolio. Development and Commercialization • In June 2020, we, Glaxo Wellcome UK Limited and Beecham S.A. (collectively referred to as GSK), entered into a definitive collaboration agreement, or the GSK Agreement, pursuant to which we agreed to collaborate to research, develop and commercialize products for the prevention, treatment and prophylaxis of diseases caused by SARS-CoV-2 and potentially other coronaviruses. The collaboration is focused on the development and commercialization of three types of collaboration products under three programs: (1) antibodies targeting SARS-CoV-2, and potentially other coronaviruses, or the Antibody Program; (2) vaccines targeting SARS-CoV-2, and potentially other coronaviruses, and (3) products based on genome-wide CRISPR screening of host targets expressed in connection with exposure to SARS-CoV-2. The initial antibodies under the Antibody Program are VIR-7831 and VIR-7832, which have demonstrated high affinity for the SARS-CoV-2 spike protein and are highly potent in neutralizing SARS-CoV-2 in live-virus cellular assays. • In March and April 2020, we entered into two further amendments to our collaboration and license agreement with Alnylam Pharmaceuticals, Inc., or the Alnylam Agreement, to expand our existing collaboration of five infectious disease targets to nine, including one targeting SARS-CoV-2 and potentially other coronaviruses, and up to three targeting human host factors for SARS-CoV-2. In December 2020, we entered into a letter agreement with Alnylam to modify certain funding and governance provisions in connection with RNAi programs directed to certain specified targets directed to coronaviruses, including VIR-2703, and to modify certain rights of each party with respect to products arising from such programs. Manufacturing • In February 2020, we entered into a development and manufacturing collaboration with WuXi Biologics (Hong Kong) Limited, or WuXi Biologics, for the clinical development, manufacturing, and commercialization of our proprietary antibodies developed for SARS-CoV-2. In addition, in June 2020, we entered into a binding letter of intent with WuXi Biologics, or the WuXi Biologics Letter Agreement, under which WuXi Biologics will perform certain development and manufacturing services for our SARS-CoV-2 antibody program. In July 2020, we assigned the WuXi Biologics Letter Agreement to GlaxoSmithKline Trading Services Limited, or GSKTSL, and GSKTSL entered into a non-exclusive Master Services Agreement for Commercial Manufacture of Drug Substance with WuXi Biologics, or the WuXi Biologics MSA, thereby superseding the WuXi Biologics Letter Agreement, and pursuant to which, among other things, WuXi Biologics will perform development and manufacturing services for clinical and commercial supply of antibody products under our SARS-CoV-2 antibody program. In accordance with the terms of the GSK Agreement, we will continue to be responsible for 72.5% of the costs under the WuXi Biologics MSA, and GSK will bear 27.5% of such costs, subject to certain conditions and exceptions. • In May 2020, we entered into a clinical development and manufacturing agreement with Biogen, Inc., or Biogen, under which Biogen will perform process development activities and specified manufacturing services under agreed statements of work for certain pre-commercial and clinical supply of SARS-CoV-2 antibodies. • In April 2020, we entered into a binding letter agreement, or the Samsung Letter Agreement, with Samsung Biologics Co., Ltd., or Samsung, under which Samsung will perform development and manufacturing services for 113 our SARS-CoV-2 antibody program. In July 2020, we assigned the Samsung Letter Agreement to GSKTSL , and GSKTSL entered into a Master Services Agreement with Samsung , or the Samsung MSA, thereby superseding the Samsung Letter Agreement , and pursuant to which , among other things, Samsung will perform development and manufacturing services for clinical and commercial supply of antibody products under our SARS-CoV-2 antibody program . In accordance with the terms of the GSK Agreement, we will continue to be responsible for 72.5% of the costs under the Samsung MSA , and GSK will bear 27.5% of such costs, subject to certain conditions and exceptions. COVID-19 Business Update With the global spread of the current COVID-19 pandemic, we have implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business. We continue to closely monitor the COVID-19 situation and will evolve our plans and policies as needed going forward. As a result of these developments, in March 2020, we implemented work-from-home policies for most of our employees. We have also implemented plans to reopen our offices to allow employees to return when appropriate. Although these plans are based on a phased approach consistent with local government requirements, and focused on employee safety, and contemplate returning to remote work should new restrictions be implemented, there is uncertainty regarding recent phased reopening, which may be rolled back, and restrictions re-implemented. We are also working to provide our employees with the support they need to ensure continuity of business operations. We are working closely with our CDMOs to manage our supply chain activities and mitigate any potential disruptions to our clinical trial supplies as a result of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and begins to impact essential distribution systems, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing of clinical trial supply. For some of our clinical development programs, we are experiencing, and may continue to experience, a disruption or delay in our ability to initiate trial sites and enroll and assess patients. For example, the initiation of the Phase 2 trial for VIR-2482, which was delayed due to the impact of COVID-19, is now planned for the fourth quarter of 2021. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. Our Collaboration, License and Grant Agreements We have entered into collaboration, license and grant arrangements with various third parties. For details regarding these and other agreements, see the section titled “Business—Our Collaboration, License and Grant Agreements” and Note 6—Grant Agreements and Note 7—Collaboration and License Agreements to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our Acquisitions We have completed various acquisitions. For details regarding our acquisitions, see the section titled “Business—Our Acquisition Agreements” and Note 4—Acquisitions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Components of Operating Results Revenue We do not have any products approved for sale, we have not generated any revenue from the sale of our products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our revenue consists of: (i) grant revenue; and (ii) license and contract revenue. Grant revenue is comprised of revenue derived from grant agreements with government-sponsored and private organizations. License and contract revenue is comprised of revenue generated from license rights issued and research and development services. 114 Operating Expenses Research and Development To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We do not track research and development expenses by product candidate. Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include: • expenses related to license and collaboration agreements, and contingent consideration from business acquisitions; • personnel-related expenses, including salaries, benefits and stock-based compensation for personnel contributing to research and development activities; • expenses incurred under agreements with third-party contract manufacturing organizations, contract research organizations, and consultants; • clinical costs, including laboratory supplies and costs related to compliance with regulatory requirements; and • other allocated expenses, including expenses for rent and facilities maintenance, and depreciation and amortization. We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary 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. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, our ongoing assessments as to each product candidate’s commercial potential and the impact of public health epidemics, such as the COVID-19 pandemic. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. Our clinical development costs may vary significantly based on factors such as: • whether a collaborator is paying for some or all of the costs; • per patient trial costs; • the number of trials required for approval; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the trials; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients; • potential additional safety monitoring requested by regulatory agencies; • the duration of patient participation in the trials and follow-up; • the cost and timing of manufacturing our product candidates; 115 • the phase of development of our product candidates; and • the efficacy and safety profile of our product candidates. General and Administrative Our general and administrative expenses consist primarily of personnel-related expenses for personnel in executive, finance and other administrative functions, facilities and other allocated expenses, and other expenses for outside professional services, including legal, audit and accounting services, and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation. We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we continue to support our continued research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. Interest Income Interest income consists of interest earned on our cash, cash equivalents and investments. Other Income (Expense), Net Other income (expense), net consists of gains and losses from foreign currency transactions and the remeasurement of contingent consideration related to our acquisition of TomegaVax, Inc., or TomegaVax, and convertible preferred stock warrant liability prior to the IPO. Upon completion of our IPO, the outstanding warrant to purchase shares of our Series A-1 convertible preferred stock automatically converted into a warrant to purchase shares of common stock and therefore, was no longer subject to remeasurement each period. Provision for Income Taxes Provision for income taxes consisted of immaterial international income tax. 116 Results of Operations Comparison of Years Ended December 31, 2020 and 2019 The following table summarizes our results of operations for the periods presented: Year Ended December 31, 2020 2019 Change (in thousands) Revenue: Grant revenue $ 9,123 $ 7,380 $ 1,743 License revenue from a related party 22,747 — 22,747 Contract revenue 44,498 711 43,787 Total revenue 76,368 8,091 68,277 Operating expenses: Research and development 302,411 148,472 153,939 General and administrative 70,937 37,598 33,339 Total operating expenses 373,348 186,070 187,278 Loss from operations (296,980 ) (177,979 ) (119,001 ) Other income (expense): Interest income 2,836 8,511 (5,675 ) Other expense, net (4,467 ) (5,061 ) 594 Total other income (expense) (1,631 ) 3,450 (5,081 ) Loss before provision for income taxes (298,611 ) (174,529 ) (124,082 ) Provision for income taxes (54 ) (154 ) 100 Net loss $ (298,665 ) $ (174,683 ) $ (123,982 ) Revenue Total revenue was $76.4 million and $8.1 million for the years ended December 31, 2020 and 2019, respectively. The increase in total revenue was primarily due to $43.3 million of revenue related to the license granted to GSK under our collaboration agreement, and $22.7 million of revenue related to Brii Biosciences Offshore Limited’s, or Brii Bio’s, exercise of its option to obtain exclusive rights to develop and commercialize compounds arising from VIR-2218 in the China territory. Research and Development Expenses The following table shows the primary components of our research and development expenses for the periods presented: Year Ended December 31, 2020 2019 Change (in thousands) Licenses, collaborations and contingent consideration $ 110,378 $ 35,483 $ 74,895 Personnel 69,624 44,675 24,949 Contract manufacturing 36,985 18,227 18,758 Clinical costs 29,660 8,629 21,031 Other 55,764 41,458 14,306 Total research and development expenses $ 302,411 $ 148,472 $ 153,939 Research and development expenses were $302.4 million and $148.5 million for the years ended December 31, 2020 and 2019, respectively. This increase was primarily due to the following factors: • licenses, collaborations and contingent consideration expenses increased by $74.9 million, which was primarily attributable to increases of $28.7 million related to the change in fair value of the contingent consideration from our acquisition of Humabs Biomed SA, or Humabs, $25.4 million of costs pursuant to our collaboration with GSK, $19.3 million on achievement of the first development milestone related to our Alnylam Agreement, and $10.0 million payment to Alnylam resulting from Brii Bio's exercise of its option for VIR-2218, partially offset by a $5.0 million milestone achieved in 2019 under our 2018 MedImmune Agreement and $2.8 million decrease in costs incurred under our Alnylam Agreement; 117 • personnel-related expenses increased by $ 24.9 million , which was primarily attributable to an increase in our headcount; • clinical costs increased by $21.0 million, which was primarily attributable to activities related to our VIR-7831, VIR-2218 and VIR-3434 clinical trials; • contract manufacturing expense increased by $18.8 million, which was primarily attributable to an increase of $30.2 million related to initiation of manufacturing activities and process development for our COVID-19 programs, partially offset by a decrease of $11.3 million related to the manufacturing for HBV, HIV and influenza A drug products completed in 2019; and • other research and development expenses increased by $14.3 million, which was primarily attributable to increases of $5.4 million in external research costs due to increased clinical and manufacturing activities, $4.6 million in the allocation of facilities and other costs due to an increase in our headcount, and $4.3 million in supplies and equipment costs to support our programs related to COVID-19. General and Administrative Expenses General and administrative expenses were $70.9 million and $37.6 million for the years ended December 31, 2020 and 2019, respectively. The increase was primarily due to an increase in personnel-related expenses related to additional headcount, legal fees, external consulting and other expenses due to costs associated with operating as a public company, including additional compliance-related expenses as a result of no longer being an emerging growth company. Interest Income Interest income were $2.8 million and $8.5 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to lower interest rates and accretion income on investment balances in 2020 compared to 2019. Other Expense, Net Other expense, net were $4.5 million and $5.1 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to the $2.0 million final revaluation of the convertible preferred stock warrant liability prior to the IPO, partially offset by an increase of $1.4 million in the fair value of the contingent consideration related to the TomegaVax acquisition. Liquidity, Capital Resources and Capital Requirements Sources of Liquidity As of December 31, 2020, we had $736.9 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $667.2 million. We have financed our operations primarily through sales of our common stock and convertible preferred securities and payments received under our grant and collaboration agreements. On October 10, 2019, our registration statement on Form S-1 was declared effective by the SEC and our shares began trading on The Nasdaq Global Select Market on October 11, 2019. We sold an aggregate of 7,142,858 shares of our common stock at an initial offering price of $20.00 per share. As a result of the IPO, we received $126.4 million in net proceeds, after deducting underwriting discounts and commissions of approximately $10.0 million and offering expenses of approximately $6.4 million. In April 2020, we issued 6,626,027 shares of our common stock to Glaxo Group Limited (an affiliate of GSK) at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million. In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323.2 million, after deducting underwriting discounts, commissions and offering expenses. In November 2020, we also entered into a sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which we may from time to time offer and sell shares of our common stock for an aggregate offering price of up to $300.0 million, through or to Cowen, acting as sales agent or principal. We will pay Cowen a commission of up to 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal fees and disbursements and provide Cowen with customary indemnification and contribution rights. As of December 31, 2020, no shares have been issued under the Sales Agreement. 118 Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing , manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Future Funding Requirements Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of December 31, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the consolidated financial statements included elsewhere in this Form 10-K. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned. Moreover, it is particularly difficult to estimate with certainty our future expenses given the dynamic and rapidly evolving nature of our business and the COVID-19 pandemic environment generally. We will also need to raise additional capital to complete the development and commercialization of our product candidates and fund certain of our existing manufacturing and other commitments. We anticipate raising additional capital through the sale of our equity securities, incurring debt, entering into collaboration, licensing or similar arrangements with third parties, or receiving research contributions, grants or other sources of financing to fund our operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. There can be no assurance that sufficient funds will be available to us on attractive terms or at all. If we are unable to obtain additional funding from these or other sources, it may be necessary to significantly reduce our rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. In addition, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of biotechnology products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the timing, progress and results of our ongoing preclinical studies and clinical trials of our product candidates; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials of other product candidates that we may pursue; • our ability to establish and maintain collaboration, license, grant and other similar arrangements, and the financial terms of any such arrangements, including the timing and amount of any future milestone, royalty or other payments due thereunder; • the costs, timing and outcome of regulatory review of our product candidates; • the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; • the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; • any expenses needed to attract, hire and retain skilled personnel; • the costs of operating as a public company; and • the extent to which we acquire or in-license other companies’ product candidates and technologies. 119 Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2020 2019 (in thousands) Net cash provided by (used in): Operating activities $ (190,941 ) $ (129,632 ) Investing activities (9,862 ) (256,158 ) Financing activities 529,474 449,244 Net increase in cash and cash equivalents and restricted cash and cash equivalents $ 328,671 $ 63,454 Operating Activities During the year ended December 31, 2020, net cash used in operating activities was $190.9 million. This consisted primarily of a net loss of $298.7 million and payments on contingent consideration of $15.8 million related to the milestones achieved related to our Humabs acquisition, partially offset by a decrease in our net operating assets of $29.5 million and non-cash charges of $94.0 million. The change in our net operating assets of $29.5 million was primarily due to an increase in accrued liabilities and other long-term liabilities by $46.6 million, which was partially offset by a decrease in deferred revenue of $7.0 million related to revenue recognized from the Bill & Melinda Gates Foundation grants, a decrease in operating lease liabilities of $3.7 million due to lease payments, and an increase of $4.5 million in prepaid expenses and other current assets primarily related to prepayment of c linical trial cost for our research and development activities. The non-cash charges of $94.0 million primarily consisted of $38.4 million for revaluation of contingent consideration related to our Humabs acquisition, $16.8 million for the change in fair value of the derivative liability under the Alnylam Agreement, $27.6 million for stock-based compensation expense, and $4.4 million for depreciation and amortization. During the year ended December 31, 2019, net cash used in operating activities was $129.6 million. This consisted primarily of a net loss of $174.7 million, partially offset by a decrease in our net operating assets of $8.2 million and non-cash charges of $36.8 million. The change in our net operating assets of $8.2 million was primarily driven by increases in accrued liabilities related to expenses incurred under the Alnylam Agreement, and employee related expenses due to higher headcount. The non-cash charges of $36.8 million primarily consisted of $12.4 million for the fair value of the derivative liability under the Alnylam Agreement, $8.7 million for stock-based compensation expense, $8.3 million for revaluation of contingent consideration, $4.5 million for depreciation and amortization expense, and $2.0 million for revaluation of convertible preferred stock liability. Investing Activities During the year ended December 31, 2020, net cash used in investing activities was $9.9 million. This consisted primarily of purchases of investments of $403.8 million and purchases of property and equipment of $6.5 million, partially offset by $400.3 million in proceeds received from investments which matured during the period. During the year ended December 31, 2019, net cash used in investing activities was $256.2 million. This consisted of purchases of short and long-term investments of $643.9 million and purchases of property and equipment of $8.9 million, partially offset by $396.7 million in proceeds received from investments which matured during the period. Financing Activities During the year ended December 31, 2020, net cash provided by financing activities was $529.5 million. This consisted primarily of proceeds received from the issuance of our common stock to GSK of $206.7 million in April 2020, the issuance of our common stock related to our follow-on offering of $323.2 million and from exercises of stock options of $4.1 million, partially offset by payments of contingent consideration related to our Humabs acquisition of $4.2 million. 120 During the year ended December 31 , 2019, net cash provided in financing activities was $ 449.2 million. This consisted primarily of net proceeds received from the issuance of our Series B convertible preferred stock of $317.3 million in January 2019 , issuance of common stock upon completion of our IPO of $126.4 million in October 2019 , repayment of promissory note s of $3.3 million, and financing lease obligation of $1.2 million. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2020: Payments Due by Period Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Total (in thousands) Operating lease obligations $ 6,247 $ 21,124 $ 18,630 $ 67,503 $ 113,504 Financing lease obligation 265 270 275 169 979 Total $ 6,512 $ 21,394 $ 18,905 $ 67,672 $ 114,483 Under our collaboration, license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements. We have not included any such milestone or royalty payments in the above table. In addition, our commitments to GSK under the Samsung MSA and WuXi Biologics MSA for drug substance, drug product and raw material were approximately $370.0 million as of December 31, 2020, excluding the approximate “access fee” payable to Biogen. We have not included any such commitments in the above table. For additional information regarding these agreements, including our payment obligations thereunder, see the sections titled “Business—Our Collaboration, License and Grant Agreements,” “Business—Manufacturing—Manufacturing Agreements” and “Business—Our Acquisition Agreements,” as well as Note 4—Acquisitions and Note 7—Collaboration and License Agreements to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We enter into agreements in the normal course of business with contract manufacturing organizations and contract research organizations for clinical trials, preclinical studies, manufacturing, and other services and products for operating purposes, which are generally cancelable upon written notice. These obligations and commitments are also not included in the table above. Off-Balance Sheet Arrangements During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC. Brii Biosciences Limited, or Brii Bio Parent, and its wholly owned subsidiary Brii Bio, are variable interest entities due to their reliance on future financing and insufficient equity at risk. However, we do not have the power to direct activities which most significantly impact the economic success of these entities and are not the primary beneficiary, and therefore we do not consolidate Brii Bio Parent or Brii Bio. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The critical accounting policies, estimates and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below. 121 Revenue Recognition License and Contract Revenue In accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as we satisfy a performance obligation. For collaborative arrangements that fall within the scope of ASC 808, Collaborative Arrangements, or ASC 808, we first determine which elements of the collaboration are deemed to be a performance obligation with a customer within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808 and are not subject to the guidance in ASC 606, we apply the revenue recognition model under ASC 606 or other guidance, as deemed appropriate. We have entered into a number of license and collaboration agreements that fall within the scope of ASC 606. We evaluate the promised goods or services in these agreements to determine which ones represent distinct performance obligations. These agreements may include the following types of promised goods or services: (i) grants of licenses, (ii) performance of research and development services, and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to our intellectual property. Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period as required. These agreements may include the following types of consideration: non-refundable upfront payments, reimbursement for research services, research, development or regulatory milestone payments, and royalty and commercial sales milestone payments. If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on their estimated standalone selling prices, or SSP. For performance obligations satisfied over time, we estimate the efforts needed to complete the performance obligation and recognize revenue by measuring the progress towards complete satisfaction of the performance obligation using an input measure. For arrangements that include sales-based royalties, including commercial milestone payments based on pre-specified level of sales, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Achievement of these royalties and commercial milestones may solely depend upon performance of the licensee. Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the SSP of identified performance obligations, which may include development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations. Research and Development Expenses We expense all research and development costs in the periods in which they are incurred. We estimate preclinical and clinical expenses based on the services performed, pursuant to contracts with third parties that conduct and manage preclinical studies and clinical trials, research services, and clinical manufacturing services on our behalf. When billing terms under these contracts do not coincide with the timing of when the work is performed, we are required to make estimates of our outstanding obligations to those third parties as of period end. Our accrual estimates are based on a number of factors, including our knowledge of the research and development programs and clinical manufacturing activities, status of the programs and activities, invoicing to date, and the provisions in the contracts. We obtain information regarding unbilled services directly from these service providers and perform procedures to support our estimates based on our internal understanding of the services provided to date. However, we may also be required to estimate these services based on information available to our internal clinical and manufacturing administrative staff if such information is not able to be obtained timely from our service providers. We record the costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued and other liabilities in the 122 consolidated balance sheets. The status and timing of actual services performed may vary from our estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to our accruals could materially affect our results of operations. Business Combinations Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to estimated cash flows and development timelines related to acquired developed technologies and in-process research and development. Our estimates may also impact our deferred income tax assets and liabilities. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Contingent Consideration and Embedded Derivatives Contingent consideration related to business combinations and obligations required to be accounted for as embedded derivative financial instruments under Topic ASC 815, Derivatives and Hedging, are considered to be Level 3 instruments that are initially measured at their estimated fair values on the transaction date and subsequently remeasured with changes recorded in the consolidated statement of operations each subsequent reporting period. The estimated fair value of the contingent consideration related to the Humabs acquisition was determined by calculating the probability-weighted clinical and regulatory milestone payments based on the assessment of the likelihood and estimated timing that certain milestones would be achieved, as well as the use of Monte Carlo simulation model that includes significant estimates and assumptions pertaining to commercialization events and sales targets. The most significant unobservable inputs are the probabilities of achieving clinical and regulatory approval of the development projects and the subsequent commercial success and discount rates. The estimated fair value of the contingent consideration related to our acquisition of TomegaVax was determined based on a Monte Carlo simulation model that includes significant estimates and assumptions pertaining to probability and timing to achieve the required share price of our common stock, expected volatility and discount rate. Although the TomegaVax acquisition was accounted for as an asset acquisition, such contingent consideration met the definition of an embedded derivative financial instrument. The estimated fair value of the embedded derivative related to our Alnylam Agreement was determined based on estimates and assumptions over the likelihood and timing to achieve the specified development milestone. Significant changes in the probabilities of the likelihood and timing to achieve the milestones would result in a significantly higher or lower fair value measurement. We remeasured and reclassified the derivative liability to additional paid-in capital upon achievement of the milestone and settlement of the liability in 2020. As such, the derivative liability is no longer outstanding as of December 31, 2020. Stock-Based Compensation We recognize compensation costs related to stock options granted to employees and nonemployees based on the estimated fair value of the awards on the date of grant, and we recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is typically 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. These assumptions include: • Fair Value of Common Stock— For all periods prior to the IPO, because there was no public market of our common stock, the fair value of the shares of common stock underlying our share-based awards was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, input from management, valuations of our common stock prepared by unrelated third-party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities 123 Issued as Compensation , and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant. Following the closing of our IPO, our board of directors determined the fair market value of our common stock based on its closing price as reported on The Nasdaq Global Select Market on the date of grant. • Expected Term —The expected term represents the period that the options granted are expected to be outstanding. We use the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the options. • Expected Volatility —Because we do not have sufficient trading history for our common stock, the expected volatility is estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their size, stage in the product development cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. • Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards. • Expected Dividend —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. See Note 13—Stock-Based Awards to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option-pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2020, 2019, and 2018. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. Recent Accounting Pronouncements Not Yet Adopted See Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.