SUTRO BIOPHARMA, INC. The following discussion should be read in conjunction with the attached financial statements and notes thereto. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of this Annual Report on Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.
Overview
We are a clinical-stage oncology company developing site-specific and novel-format antibody drug conjugates, or ADCs, enabled by our proprietary integrated cell-free protein synthesis platform, XpressCF®, and our site specific conjugation platform, XpressCF+®. We aim to design and develop therapeutics using the most relevant and potent modalities, including ADCs, bispecific ADCs, immunostimulatory ADCs, or iADCs, dual conjugate ADCs, or ADC2s, and cytokine derivatives. Our molecules are directed primarily against clinically validated targets where the current standard of care is suboptimal. We believe that our platform allows us to accelerate the discovery and development of potential first-in-class and/or 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 creating 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, or cGMP, compliant manufacturing facility. We have the ability to manufacture our proprietary cell-free extract that supports our production of proteins on a large scale using a semi-continuous fermentation process. Our most advanced product candidate is STRO-002, or luveltamab tazevibulin, or luvelta, an ADC directed against folate receptor-alpha, or FolR?, for patients with FolR?-expressing cancers, including ovarian cancer.
Luvelta 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 first Phase 1 trial for luvelta is an open-label study evaluating luvelta as a monotherapy for patients with ovarian and endometrial cancers. This trial is being conducted in two-parts, dose escalation and dose expansion. The primary objectives of the 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. Our next most advanced product candidate is 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 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, to determine the recommended Phase 2 dose level and interval and to evaluate preliminary anti-tumor activity. Our secondary objectives are to characterize the human pharmacokinetics of STRO-001 and additional safety, tolerability and efficacy measures. In 2019, we began enrolling patients in a Phase 1 trial of luvelta that focused on ovarian and endometrial cancers. The dose escalation portion of the luvelta Phase 1 trial has been completed and the dose expansion portion of the trial to assess the efficacy, safety and tolerability of luvelta is ongoing. InJanuary 2023 , we reported preliminary final results from the dose-expansion cohort. The data from the dose-escalation and dose expansion cohorts suggested that luvelta exhibited a manageable safety profile together with promising preliminary efficacy data in the tested patient population. InAugust 2021 , Luvelta was granted Fast Track designation by theU.S. Food and Drug Administration , or FDA, for the treatment of patients with platinum-resistant epithelial ovarian, fallopian tube, or primary peritoneal cancer who have received one to three prior lines of systemic therapy. In mid-2022, we discussed with the FDA appropriate trial designs for a registration-directed trial of luvelta to potentially 106
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support accelerated approval. We expect to begin a registration-directed trial of luvelta for platinum-resistant ovarian cancer in the first half of 2023.
In addition, we have been offering compassionate use of luvelta to treat pediatric patients with relapsed/refractory CBF/GLIS AML, commonly known as RAM phenotype AML. Compassionate use data showed anti-leukemic activity of luvelta in pediatric patients with relapsed/refractory CBF/GLIS AML and was presented at the 64thAmerican Society of Hematology Annual Meeting and Exposition (ASH 2022). The data showed that luvelta was well tolerated as a monotherapy agent and in combination with standard cancer therapies. Luvelta was granted Orphan Drug Designation by the FDA inDecember 2022 in this pediatric patient population. We have completed enrollment for STRO-001 dose escalation in a Phase 1 trial for multiple myeloma and NHL. STRO-001 has been generally well-tolerated and no ocular toxicity signals have been observed, with no patients receiving prophylactic corticosteroid eye drops. We have completed dose escalation in the STRO-001 Phase 1 trial following identification of the maximum tolerated dose. InOctober 2021 , we granted BioNova, an option to exclusively license the right to develop and commercialize STRO-001 inGreater China , or the BioNova Option Agreement. InFebruary 2023 , BioNova announced that the first patient had been dosed in the Phase 1 clinical trial of STRO-001. We also have a preclinical product candidate - STRO-003, which is a single homogeneous ADC directed against an anti-Receptor tyrosine kinase-like orphan receptor 1, or ROR1, which we intend to develop for the treatment of solid tumors. Preparations are underway for IND enabling studies for STRO-003, which we expect will be completed in the first quarter of 2024. We expect to begin Phase 1 safety studies of STRO-003 in 2024. Enabled through our proprietary XpressCF® and XpressCF+®platforms, we have entered into multi-target, product-focused collaborations with leading pharmaceutical and biotechnology companies in the field of oncology, including an immunostimulatory antibody-drug conjugates collaboration with Astellas, a cytokine derivatives collaboration with Merck; a B Cell Maturation Antigen, or BCMA, ADC collaboration with BMS; a MUC1-EGFR ADC collaboration withEMD Serono ; BioNova; andTasly . Our XpressCF® and XpressCF+® platforms have also supported Vaxcyte, focused on discovery and development of vaccines for the treatment and prophylaxis of infectious disease. In the fourth quarter of 2022, Vaxcyte announced positive topline data from a Phase 1/2 clinical proof-of-concept study of its lead product candidate, VAX-24, its 24-valent pneumococcal conjugate vaccine candidate, under investigation for the prevention of invasive pneumococcal disease in adults aged 18-64. Also in the fourth quarter of 2022, we entered into an agreement with Vaxcyte, granting it an option to access expanded rights to develop and manufacture cell-free extract for use in development and manufacture of its vaccine products, among certain other rights. Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development and manufacturing activities in support of our own product development efforts and those of our collaborators, raising capital to support and expand such activities and providing general and administrative support for these operations. We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with BMS, Merck, Astellas,EMD Serono , Vaxcyte, BioNova, andTasly , the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, follow-on public offerings of common stock, sales of our common stock through our ATM Facility, and debt proceeds. 107
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We do not have any products approved for commercial sale and have not generated any revenue from commercial product sales. We had a loss from operations of$128.9 million and a net loss of$119.2 million for the year endedDecember 31, 2022 , which net loss included the non-operating, unrealized gain of$12.1 million related to our holdings of Vaxcyte common stock. We had a loss from operations of$98.5 million and net loss of$105.5 million , which net loss included the non-operating, unrealized loss of$4.5 million related to our holdings of Vaxcyte common stock, for the year endedDecember 31, 2021 . Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. 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 ofDecember 31, 2022 , we had an accumulated deficit of$452.6 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, access, 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. A discussion and analysis of our financial condition, results of operations, and cash flows for the year endedDecember 31, 2020 is included in Item 7 of Part II "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 28, 2022 .
Financial Operations Overview
Revenue
We do not have any 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, Astellas,EMD Serono , Vaxcyte, BioNova andTasly , and to a lesser extent, from manufacturing, supply and services and materials we provide to the above collaborators. 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 nonrefundable 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
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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. Nonrefundable advance payments for
services that will be used or rendered for future research and development
activities are recorded as prepaid expenses and recognized as expenses as the
related services are performed.
We expect our research and development expenses to increase in the future as we
advance our product candidates into and through preclinical studies and clinical
trials, pursue regulatory approval of our product candidates, expand our
pipeline of product candidates and continue to develop our manufacturing
facility and capabilities. The process of conducting the necessary preclinical
and clinical research to obtain regulatory approval is costly and time
consuming. The actual probability of success for our product candidates may be
affected by a variety of factors including: the safety and efficacy of our
product candidates, early clinical data, investment in our clinical programs,
the ability of collaborators to successfully develop our licensed product
candidates, competition, manufacturing capability and commercial viability. 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.
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.
Year ended December 31,
2022 2021
(in thousands)
Internal costs:
Research and drug discovery $ 34,571 $ 25,908
Process and product development 15,708 15,514
Manufacturing 39,613 31,336
Clinical development 9,159 6,009
Total internal costs 99,051 78,767
External Program Costs:
Research and drug discovery 2,759 1,518
Toxicology and translational science 862 1,227
Process and product development 642 314
Manufacturing 20,758 12,822
Clinical development 13,099 9,752
Total external program costs 38,120 25,633
Total research and development expenses
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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 theSEC 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 and our general and administrative expenses to support the anticipated growth of our business, and as we continue to advance our product candidates into and through the clinic.
Interest Income
Interest income consists primarily of interest earned on our invested funds.
Unrealized Gain (Loss) on
Unrealized gain (loss) on equity securities consists of the remeasurement of our investment in Vaxcyte common stock.
Interest and Other Income (Expense), Net
Interest expense includes interest incurred on our debt and amortization of debt issuance costs, including accretion of the final payment. Additionally, we identified a financing component under the Astellas Agreement and recorded interest expense associated with the upfront payment. Other income (expense) includes changes in values attributable to the arrangement with our Call Option Plan whereby we granted certain employee options to purchase shares of Vaxcyte common stock, and realized gain (loss) on the equity securities.
Income Taxes
We recorded a foreign income tax charge of$2.5 million due to a withholding tax inChina on an upfront license fee payment received fromTasly for the year endedDecember 31, 2022 . All other income tax charges and benefits during the years endedDecember 31, 2022 and 2021 have been immaterial, primarily due to the net loss in each year. Our deferred assets continue to be subject to full valuation allowance for the tax years endedDecember 31, 2022 and 2021. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, future tax rates, projected future taxable income, tax-planning strategies, and results of recent operations. 110
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Comparison of the Years Ended
Year ended December 31, Change
2022 2021 $ %
(in thousands)
Revenue $ 67,772 $ 61,880 $ 5,892 10 %
Operating expenses:
Research and development 137,171 104,400 32,771 31 %
General and administrative 59,544 56,004 3,540 6 %
Total operating expenses 196,715 160,404 36,311 23 %
Loss from operations (128,943 ) (98,524 ) (30,419 ) 31 %
Interest income 3,455 577 2,878 499 %
Unrealized gain (loss) on equity securities 12,130 (4,454 ) 16,584 (372 )%
Interest and other income (expense), net (3,346 ) (3,137 ) (209 ) 7 %
Loss before provision for income taxes (116,704 ) (105,538 ) (11,166 ) 11 %
Provision for income taxes 2,500 - 2,500 *
Net loss $ (119,204 ) $ (105,538 ) $ (13,666 ) 13 %
*Percentage not meaningful
Revenue
We have recognized revenue as follows during the indicated periods:
Year Ended December 31, Change
2022 2021 $ %
(in thousands)
Bristol-Myers Squibb Company ("BMS")
$ (1,731 ) (15 )%Merck Sharp & Dohme Corporation ("Merck") 11,600 42,780 (31,180 ) (73 )% Merck KGaA, Darmstadt,Germany (operating inthe United States andCanada under the name "EMD Serono") 2,695 4,576 (1,881 ) (41 )% Astellas Pharma Inc. ("Astellas") 10,897 - 10,897 * Vaxcyte 3,828 3,041 787 26 % BioNova Pharmaceuticals, Ltd. ("BioNova") 4,000 - 4,000 *Tasly Biopharmaceuticals Co., Ltd. ("Tasly") 25,000 - 25,000 * Total revenue$ 67,772 $ 61,880 $ 5,892 10 % *Percentage not meaningful 111
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Total revenue increased by$5.9 million , or 10%, during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . This was primarily due to an earned$25.0 million upfront payment under the Tasly License Agreement, revenue from Astellas of$10.9 million , of which$3.9 million was from the ongoing performance related to partially unsatisfied performance obligations,$5.1 million was from the financing component related to the Astellas Agreement, and$1.9 million was from research and development services, revenue from BioNova of$4.0 million from the satisfaction of the performance obligation under the BioNova Option Agreement, and a$0.8 million increase in Vaxcyte revenue. These increases were partially offset by a$31.2 million decrease from Merck, related to a$13.3 million decrease from the 2021 completion of the performance obligations associated with the first and second target programs under the 2018 Merck Agreement, full recognition of$6.0 million of revenue earned in the first quarter of 2021 associated with the contingent third target program upon the termination of the related performance obligation, recognition of 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 decrease of$3.2 million in research and development services and materials supply, a decrease of$3.1 million in manufacturing activities supporting clinical trial supply, and a decrease of$0.6 million due to the absence in 2022 of the financing component related to the 2018 Merck Agreement, partially offset by a$10.0 million contingent payment earned in the third quarter of 2022 with the first patient dosed in a Phase 1 study of an investigational candidate under the first program in the collaboration.EMD Serono revenue decreased by$1.9 million primarily due to a$2.0 million contingent payment earned in the second quarter of 2021, partially offset by a$0.1 million increase in 2022 materials supply and manufacturing activities supporting clinical trial supply. BMS revenue decreased by$1.7 million primarily due to a decrease of$3.7 million in research and development services and materials supply, partially offset by a$2.0 million increase in manufacturing activities supporting clinical trial supply.
Research and Development Expense
Research and development expense increased by$32.8 million , or 31%, during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The overall increase was due primarily to increases of$11.6 million in personnel-related expenses due to higher headcount,$11.0 million in laboratory supplies and preclinical research and clinical development expenses,$10.5 million in consulting and outside services, and$0.5 million in travel, equipment and office-related expenses, partially offset by a$0.8 million decrease in facilities-related expenses.
General and Administrative Expense
General and administrative expense increased by$3.5 million , or 6%, during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The increase was due primarily to increases of$2.2 million in personnel-related expenses due to higher headcount,$1.3 million in external services,$1.2 million in equipment and office-related expenses, and$0.3 million in travel-related expenses, partially offset by a$1.5 million decrease in facilities-related expenses.
Interest Income
Interest income increased by$2.9 million during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , due primarily to higher average investment balances and higher average rates of return in 2022.
Unrealized Gain / (Loss) on
Unrealized gain on equity securities was$12.1 million during the year endedDecember 31, 2022 as compared to an unrealized (loss) of$4.5 million for the year endedDecember 31, 2021 . The unrealized gain (loss) 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 Income (Expense), Net
Interest and other income (expense), net, increased by$0.2 million during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , due primarily to the increase of$5.1 million from the financing component related to the Astellas Agreement, partially offset by a recognized gain of$4.1 million on 112
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equity securities during the year endedDecember 31, 2022 , a decrease of$0.6 million due to the absence of the financing component in the year endedDecember 31, 2022 related to the 2018 Merck Agreement, and a decrease of$0.2 million in interest incurred on our outstanding loan.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred significant net losses to date. We have also incurred negative cash flows from operations in the years prior to 2022. Our operations have been funded primarily by payments received from our collaborators, and net proceeds from equity sales and debt. As ofDecember 31, 2022 , we had$302.3 million in cash, cash equivalents and marketable securities, equity securities of$32.0 million , outstanding debt of$16.3 million and an accumulated deficit of$452.6 million . At-The-Market Sales During the year endedDecember 31, 2022 , we sold an aggregate of 10,285,160 shares of our common stock through our ATM Facility pursuant to the Sales Agreement with Jefferies. The gross proceeds from these sales were approximately$58.3 million , before deducting fees of approximately$2.0 million , resulting in net proceeds of approximately$56.3 million .
Upfront Payment from Astellas
InJune 2022 , we entered into a License and Collaboration Agreement with Astellas, for the development of immunostimulatory antibody-drug conjugates for up to three biological targets, to be identified by Astellas. Pursuant to the agreement with Astellas, we received from Astellas a one-time, nonrefundable, non-creditable, upfront payment of$90.0 million during the year endedDecember 31, 2022 . Upfront Payment fromTasly During the year endedDecember 31, 2022 , we earned a$25.0 million nonrefundable upfront payment fromTasly under the Tasly License Agreement to grantTasly an exclusive license to develop and commercialize luvelta inGreater China . The upfront payment, net of a withholding tax of$2.5 million , resulted in a net payment to us of$22.5 million received during the year endedDecember 31, 2022 .
Upfront Payment from Vaxcyte and Vaxcyte Equity Ownership
InDecember 2022 , we entered into a letter agreement (the "Vaxcyte Agreement") with Vaxcyte under which the Company granted to Vaxcyte (i) authorization to enter into an agreement with an independent alternate contract manufacturing organization, or CMO, to source cell-free extract solely for the products it licensed from the us, allowing Vaxcyte to have direct oversight over financial and operational aspects of the relationship with the CMO, and (ii) a right, but not an obligation, to obtain certain exclusive rights to internally manufacture and/or source extract from certain CMOs and the right to independently develop and make improvements to extract for use in connection with the exploitation of certain vaccine compositions (the "Option"). Pursuant to the Vaxcyte Agreement, we received from Vaxcyte a one-time, nonrefundable, non-creditable, upfront payment of$10.0 million in cash, and 167,780 shares of Vaxcyte's common stock with a fair value of$7.5 million at the date of the transaction inDecember 2022 . As ofDecember 31, 2022 , we held 667,780 shares of Vaxcyte common stock, which include the 167,780 shares received from Vaxcyte under the Vaxcyte Agreement. The estimated fair value of Vaxcyte common stock was$32.0 million as ofDecember 31, 2022 . During the year endedDecember 31, 2022 , we sold 1,058,434 shares of Vaxcyte common stock for net proceeds of$28.7 million .
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Contingent Payments from Merck
InJuly 2022 , the first patient was dosed in a Phase 1 study of an investigational candidate resulting from the 2018 Merck Agreement for the first program in our collaboration to develop novel cytokine derivative therapeutics for cancer. As a result of this achievement, we earned and received a$10.0 million contingent payment from Merck during the year endedDecember 31, 2022 . During the year endedDecember 31, 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 our collaboration to develop novel cytokine derivative therapeutics for cancer.
Term Loan
OnFebruary 28, 2020 , or the Effective Date, we entered into a loan and security agreement, or the Loan and Security Agreement, withOxford Finance LLC , or Oxford, as the collateral agent and a lender, andSilicon Valley Bank , as a lender, together with Oxford, the Lenders, pursuant to which the Lenders have agreed to lend us up to an aggregate of$25.0 million , or the Term A Loan. Upon entering into the Loan and Security Agreement, we borrowed$25.0 million from the Lenders, with approximately$9.6 million of such amount applied to the repayment of the outstanding principal, interest and final payment fees owed pursuant to the prior loan and security agreement datedAugust 4, 2017 . InJune 2022 , we entered into an amendment to the LSA with Oxford and SVB (the "LSA Amendment"). The LSA Amendment added a financial covenant that requires us to maintain a minimum unrestricted cash balance of$10.0 million . We were in compliance with the financial covenant under the LSA Amendment as ofDecember 31, 2022 . The proceeds from the Term A Loan under the Loan and Security Agreement may be used to satisfy our future working capital needs and to fund our general business requirements. Our obligations under the Loan and Security Agreement are secured by all our assets, other than our intellectual property. We have also agreed not to encumber our intellectual property assets, except as permitted by the Loan and Security Agreement. The Term A Loan matures onMarch 1, 2024 , or the Maturity Date, and was interest-only throughMarch 1, 2022 , followed by 24 equal monthly payments of principal and interest. The Term A Loan will bear interest at a floating per annum rate equal to the greater of (i) 8.07% or (ii) the sum of (a) the greater of (1) the thirty (30) dayU.S. LIBOR rate reported in theWall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (2) 1.67%, plus (b) 6.40%. We will be required to make a final payment of 3.83% of the original principal amount of the Term A Loan drawn, payable on the earlier of (i) the Maturity Date, (ii) the acceleration of the Term A Loan, or (iii) the prepayment of the Term A Loan, or the Final Payment. We may prepay all, but not less than all, of the Term A Loan upon 30 days' advance written notice to Oxford, provided that we will be obligated to pay a prepayment fee equal to (i) 3.00% of the principal amount of the Term A Loan prepaid on or before the first anniversary of the applicable funding date, or (ii) 2.00% of the principal amount of the Term A Loan prepaid between the first and second anniversary of the applicable funding date, or (iii) 1.00% of the principal amount of the Term A Loan prepaid thereafter, and prior to the Maturity Date, each, a Prepayment Fee.
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The Loan and Security Agreement contains customary affirmative and restrictive covenants, including covenants regarding incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, protection of intellectual property rights, dispositions of property, business combinations or acquisitions, among other customary covenants. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. The Loan and Security Agreement provides that an event of default will occur if, among other triggers, there occurs any circumstances that could reasonably be expected to result in a material adverse change in our business, or operations or condition (financial or otherwise) or a material impairment of the prospect of us to repay any portion of our obligations under the Loan and Security Agreement. The Loan and Security Agreement previously included a covenant requiring us to keep substantially all of our cash and investments with SVB, the substantial majority of which was held in a custodial account with another institution, for which SVB Asset Management was the advisor. InMarch 2023 , we amended our Loan and Security Agreement to allow us to hold cash and investments at multiple financial institutions and we began the process of moving cash and investments into accounts at other financial institutions. The Loan and Security Agreement also includes customary representations and warranties, other events of default and termination provisions. In connection with entering into the Loan and Security Agreement, we issued to the Lenders warrants exercisable for 81,257 shares of our common stock, or the Debt Warrants. The Debt Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of$9.23 , which is the closing price of our common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The Debt Warrants will terminate on the earlier ofFebruary 28, 2030 or the closing of certain merger or consolidation transactions.
Leases
InJune 2021 , we entered into a third amendment, or Third Amendment, to our manufacturing facility lease, datedMay 18, 2011 , as amended, by and betweenAlemany Plaza LLC , located atSan Carlos, California , or San Carlos Lease, as an extension to the term of the San Carlos Lease for a period of five years, or the Lease Extension Period. Pursuant to the Third Amendment, the San Carlos Lease will expire onJuly 31, 2026 , and it includes an option to renew theSan 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. InJune 2021 , we entered into a first amendment, or First Amendment, to our manufacturing facility lease, datedMay 4, 2015 , as amended, by and between 870Industrial Road LLC , located atSan Carlos, California , or the Industrial Lease, as an extension to the term of the Industrial Lease for a period of five years, or the Industrial Lease Extension Period. Pursuant to the first Amendment, the Industrial Lease will expire onJune 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. 115
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InSeptember 2020 , we entered into a sublease agreement, or the Sublease with Five Prime Therapeutics, Inc., or the Sublessor, for approximately 115,466 square feet, in a building located inSouth San Francisco, California , or the Premises. We use the Premises as our corporate headquarters and to conduct (or expand) research and development activities. We commenced making monthly payments for the first 85,755 square feet of the Premises, or Initial Premises, inJuly 2021 , with occupancy of such space commencing inAugust 2021 . We were provided early access to the Initial Premises in the fourth quarter of 2020 to conduct certain planning and tenant improvement work. The Sublease is subordinate to the lease agreement, effectiveDecember 12, 2016 , between theSublessor and HCP Oyster Point III LLC , or the Landlord. The commencement date for the remaining 29,711 square feet of the Premises, or the Expansion Premises, is expected to be 24 months following the commencement date on the Initial Premises. However, we have the right to accelerate the commencement date on the Expansion Premises to an earlier date upon six months' prior written notice to the Sublessor. The Sublease for both the Initial Premises and Expansion Premises will expire onDecember 31, 2027 . With a commencement date on the Initial Premises ofJuly 1, 2021 , the aggregate estimated base rent payments due over the term of the Sublease are approximately$39.1 million , including the approximately$5.2 million in potential financial benefit to us of base rent abatement to be provided by the Sublessor, subject to certain terms contained in the Sublease. The Sublease contains customary provisions requiring us to pay our pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if we fail to remedy a breach of certain of its obligations within specified time periods. Additionally, we posted a security deposit of$0.9 million , which is reflected as restricted cash in non-current assets on our balance sheet as ofDecember 31, 2022 and 2021.
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. 116
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Cash Flows
The following table summarizes our cash flows during the periods indicated:
Year Ended December 31,
2022 2021
(in thousands)
Cash provided by (used in) operating activities
(35,022 ) (97,315 )
Cash provided by financing activities 48,313 3,256
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 16,840
Cash Flows from Operating Activities
Cash provided by operating activities for the year endedDecember 31, 2022 was$3.5 million . Our net loss of$119.2 million included non-cash charges of$26.3 million for stock-based compensation,$12.1 million for the unrealized gain on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock,$5.7 million for depreciation and amortization,$4.1 million for the realized gain on equity securities,$2.6 million for noncash lease expenses,$0.4 million for the accretion of discount on our marketable securities and$0.3 million in other non-cash charges. Cash provided by operating activities also reflected a net change in operating assets and liabilities of$104.4 million , due to an increase of$93.6 million in our deferred revenue balance primarily due to the upfront payment from Astellas, a decrease of$5.3 million in accounts receivable from our collaborators, an increase of$5.3 million in accounts payable, accrued expenses and other liabilities due to timing of payments, an increase of$1.7 million in accrued compensation due to increased headcount, and an increase of$1.9 million in our operating lease liability, which were partially offset by an increase of$3.5 million in prepaid expenses and other assets. Cash used in operating activities for the year endedDecember 31, 2021 was$81.7 million . Our net loss of$105.5 million included non-cash charges of$23.2 million for stock-based compensation,$4.9 million for noncash lease expenses,$4.8 million for depreciation and amortization,$4.5 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,$2.8 million for the amortization of premiums on our marketable securities, and$1.2 million in other non-cash charges. Cash used in operating activities also reflected a net change in operating assets and liabilities of$17.6 million , due to a decrease of$15.2 million in our deferred revenue balance from revenue recognized under our collaboration agreements, an increase of$6.9 million in accounts receivable from our collaborators, an increase of$4.0 million in prepaid expenses and other assets and a decrease of$2.7 million in our operating lease liability, which were partially offset by an increase of$8.6 million in accounts payable, accrued expenses and other liabilities due to timing of payments and an increase of$2.6 million in accrued compensation due to increased headcount.
Cash Flows from Investing Activities
Cash used in investing activities of$35.0 million for the year endedDecember 31, 2022 was primarily related to purchases of marketable securities of$216.7 million and purchases of property and equipment of$7.9 million , principally for laboratory equipment, partially offset by maturities and sales of marketable securities of$160.8 million and proceeds from sale of Vaxcyte equity securities of$28.7 million . Cash used in investing activities of$97.3 million for the year endedDecember 31, 2021 was primarily related to purchases of marketable securities of$248.7 million and purchases of property and equipment of$15.3 million , principally for leasehold improvements to the Premises under the Sublease, partially offset by maturities and sales of marketable securities of$166.7 million .
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Cash Flows from Financing Activities
Cash provided by financing activities of$48.3 million for the year endedDecember 31, 2022 was primarily related to$56.3 million of net proceeds from our ATM Facility sales of common stock,$1.6 million of net proceeds received from participants in our employee equity plans and$0.3 million of proceeds received from the exercise of common stock options, partially offset by debt repayment of$9.4 million and a$0.5 million tax payment related to the net share settlement of certain vested restricted stock units. Cash provided by financing activities of$3.3 million for the year endedDecember 31, 2021 was primarily related to$2.5 million of proceeds received from the exercise of common stock options, and$1.8 million of net proceeds received from participants in our employee equity plans, partially offset by a$1.0 million tax payment related to the net share settlement of certain vested restricted stock units.
Contractual Obligations and Other Commitments
In addition to the contractual obligations and commitments as noted above and elsewhere in this Annual Report with regards to the leases and term loans, we enter into agreements in the normal course of business, including with contract research organizations for clinical trials, contract manufacturing organizations for certain manufacturing services, and vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable upon written notice.
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 withUnited States generally accepted accounting principles. 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 reported 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.
While our significant accounting policies are described in the notes to our financial statements included elsewhere in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Revenue Recognition
We do not have any 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, Astellas,EMD Serono , Vaxcyte, BioNova,Tasly , and to a lesser extent, from manufacturing, supply and services and materials we provide to our collaborators. When we enter into collaboration agreements, we assess whether the arrangements fall within the scope of ASC 808, Collaborative Arrangements (ASC 808) based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, we assess whether the payments between us and our collaboration partner fall within the scope of other accounting literature. If we conclude that payments from the collaboration partner to us represent consideration from a customer, such as license fees and contract research and development activities, we account for those payments within the scope of ASC 606, Revenue from Contracts with Customers. However, if we conclude that our collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, we present such payments as a reduction of research and development expense or general and administrative expense, based on where we present the underlying expense. Collaboration revenue: We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates.
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We may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable 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 the 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. Upfront Payments: For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. We use judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by us over the estimated service performance period. License Grants: For collaboration arrangements that include a grant of a license to our intellectual property, we consider whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, we recognize revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and we have provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, we assess whether we should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and, if necessary, adjust our estimate of the overall transaction price. Since milestone and contingent payments may become payable to us upon the initiation of a clinical study or filing for or receipt of regulatory approval, we review the relevant facts and circumstances to determine when we should update the transaction price, which may occur before the triggering event. When we update the transaction price for milestone and contingent payments, we allocate the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. Our collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event. 119
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Research and Development Services: For amounts allocated to our research and development obligations in a collaboration arrangement, we recognize revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement. Materials Supply: We provide materials and reagents, clinical materials and services to certain of our collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials, reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by us.
Revenue subject to governmental withholding taxes is recognized on a gross basis with the withholding taxes recorded as a component of income tax expense.
Research and Development
We record accrued expenses for estimated costs of our research and development activities conducted by third party service providers, which include outsourced research and development expenses, professional services and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and include these costs in current liabilities in the Balance Sheets and within research and development expense in the Statements of Operations.
Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research services and other consulting costs, we estimate the expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services on our behalf. We estimate these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.
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Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards, including restricted stock units, stock options, and the ESPP, to employees, consultants and nonemployee directors based on the estimated fair value of the awards on the grant date. The fair value of stock options and purchase rights under the ESPP are estimated using the Black-Scholes option-pricing model. The Black-Scholes model requires use of assumptions and judgments about the variables used in the calculations, including the expected term, the expected volatility of the underlying stock, the related risk-free interest rate for the expected term of the award and the expected dividends. Stock-based compensation expense for restricted stock units and stock options is generally recognized on a straight line basis over the requisite service period. Stock-based compensation expense for the ESPP is recognized on a straight-line basis over the offering period. We account for forfeitures of stock-based awards as they occur. The closing sale price per share of our common stock as reported on the Nasdaq Global Market on the date of grant is used to determine the exercise price per share of our stock-based awards to purchase common stock.
Income Taxes
As ofDecember 31, 2022 , we had federal net operating loss, or NOL, carryforwards of$246.4 million and federal general business credits from research and development expenses totaling$32.5 million , as well as state NOL carryforwards of$118.5 million and state research and development credits of$21.3 million . If not utilized, the federal NOL carryforwards will expire at various dates beginning in 2036, and the federal credits will expire at various dates beginning in 2023. The state NOL carryforwards will expire at various dates beginning in 2030, if not utilized. The state research and development tax credits can be carried forward indefinitely. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Tax Reform Act of 1986, or the Tax Reform Act, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before utilization. We have performed a Section 382 study for the period ofJune 16, 2003 throughDecember 31, 2021 and concluded that it is more likely than not that we experienced an ownership change onNovember 20, 2019 . This change does not limit our ability to use our existing NOLs within the carryforward period provided by the Internal Revenue Code, subject to availability of taxable income. We may experience ownership changes in the future as a result of equity offerings or other shifts in our stock ownership, some of which are outside our control. If there is a subsequent event or further change in ownership, these losses may be subject to limitations, resulting in their expiration before they can be utilized. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
Recent Accounting Pronouncements
See Note 2 to our audited financial statements included elsewhere in this report for more information.
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