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VAXCYTE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/12/2020 | 04:04pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed financial statements
and related notes and other financial information included elsewhere in this
Quarterly Report on Form 10-Q and our final prospectus for our initial public
offering, or IPO, filed with the Securities and Exchange Commission, or the SEC,
pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on June
11, 2020, or the Prospectus. This discussion and analysis contains
forward-looking statements based upon our current plans and expectations that
involve risks, uncertainties and assumptions, such as statements regarding our
plans, objectives, expectations, intentions and beliefs. Our actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under the section entitled "Risk Factors" and elsewhere in this Quarterly
Report on Form 10-Q. You should carefully read the "Risk Factors" section of
this Quarterly Report on Form 10-Q to gain an understanding of the important
factors that could cause actual results to differ materially from our
forward-looking statements. Please also see the section entitled "Special Note
Regarding Forward-Looking Statements."

Overview


We are a next-generation vaccine company seeking to improve global health by
developing superior and novel vaccines designed to prevent or treat some of the
most common and deadly infectious diseases worldwide. Our cell-free protein
synthesis platform enables us to design and produce protein carriers and
antigens, the critical building blocks of vaccines, in ways that we believe
conventional vaccine technologies currently cannot. Our pipeline includes
pneumococcal conjugate vaccine, or PCV, candidates that we believe are the most
broad-spectrum PCV candidates currently in development, targeting the $7 billion
global pneumococcal vaccine market. Our lead vaccine candidate is VAX-24, a
24-valent investigational PCV. We anticipate submitting our initial
investigational new drug, or IND, application to the U.S. Food and Drug
Administration, or FDA, for VAX-24 and initiating our Phase 1/2 clinical
proof-of-concept study in the second half of 2021. We expect to announce topline
data from this study in 2022. Our second PCV, known as VAX-XP, leverages our
scalable and modular platform and builds on the technical proof of concept
established by VAX-24 and, if approved, would expand the breadth of coverage to
at least 30 strains, including emerging strains responsible for invasive
pneumococcal disease, or IPD, without compromising immunogenicity due to carrier
suppression. In addition to our PCV franchise, we are developing a novel
conjugate vaccine candidate for Group A Strep and a novel protein vaccine
candidate targeting the keystone pathogen responsible for periodontitis.

Since March 31, 2020, key developments affecting our business include the following:

• In June 2020, we completed our IPO and sold and issued an aggregate of

           17,968,750 shares of common stock, including 2,343,750 shares 

issued in

           connection with the full exercise by the underwriters of their 

option

           to purchase additional shares of common stock, at $16.00 per 

share for

           gross proceeds of $287.5 million. The net proceeds were 

approximately

           $264.1 million after deducting underwriting discounts and

commissions

           and other offering costs. In connection with the IPO, we also completed
           a one-for-1.6870 reverse stock split in June 2020.


        •  During and since the second quarter 2020, we achieved several key
           manufacturing milestones for VAX-24, including release of the good
           manufacturing practices or GMP batches of the eCRM protein carrier,
           completion of the GMP batches of the 24 polysaccharide antigens and
           initiation of the GMP batches of the conjugate drug substances in
           preparation of our anticipated IND filing and Phase 1/2 clinical study
           initiation in the second half of 2021.


        •  In July 2020, our agreement with CARB-X related to our VAX-A1 program
           for Group A Strep was amended to increase the funding percentage from
           50% to 90% for reimbursable expenses during the initial funding period.
           As a result, the initial funding amount increased from $1.6

million to

           $2.7 million. We anticipate that the increase in the funding 

percentage

           for reimbursable expenses may apply to future funding periods and, if
           so, the total funding amount over the four-year period, if the options
           to extend are exercised by CARB-X, would increase from the $15.1
           million in the original agreement.


        •  In May 2020, we appointed Andrew Guggenhime as Chief Financial Officer
           and Chief Business Officer. In April 2020, we appointed Halley Gilbert
           to our board of directors.


                                       18
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Since our inception in November 2013, we have devoted substantially all of our
resources to performing research and development, undertaking preclinical
studies and enabling manufacturing activities in support of our product
development efforts, acquiring and developing our technology and vaccine
candidates, organizing and staffing our company, performing business planning,
establishing our intellectual property portfolio and raising capital to support
and expand such activities. We do not have any products approved for sale and
have not generated any revenue from product sales. To date, we have financed our
operations primarily with proceeds from the sales of our redeemable convertible
preferred stock and our IPO. Through June 30, 2020, we have raised approximately
$569.5 million in gross proceeds from the sale of our capital stock. We will
continue to require additional capital to develop our vaccine candidates and
fund operations for the foreseeable future. Accordingly, until such time as we
can generate significant revenue from sales of our vaccine candidates, if ever,
we expect to finance our cash needs through public or private equity or debt
financings, third-party (including government) funding and marketing and
distribution arrangements, as well as other collaborations, strategic alliances
and licensing arrangements, or any combination of these approaches.

We have incurred net losses in each year since inception and expect to continue
to incur net losses in the foreseeable future. Our net losses may fluctuate
significantly from quarter-to-quarter and year-to-year, depending in large part
on the timing of our preclinical studies, clinical trials and manufacturing
activities, and our expenditures on other research and development activities.
Our net losses were $20.3 million and $47.5 million for the three and six months
ended June 30, 2020, respectively. As of June 30, 2020, we had an accumulated
deficit of $156.8 million. As of June 30, 2020, we had cash and cash equivalents
of $410.0 million, which we believe will be sufficient to fund our operating
expenses and capital expenditure requirements through at least the completion
and announcement of the topline data from our Phase 1/2 clinical
proof-of-concept study of VAX-24 in adults, which we expect in 2022, and to
continue to advance our pipeline of other vaccine candidates.

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 vaccine candidates, which we expect will take a number of
years. We expect our expenses will increase substantially in connection with our
ongoing activities, as we:

  • advance vaccine candidates through preclinical studies and clinical trials;


        •  require the manufacture of supplies for our preclinical studies and
           clinical trials, in particular our lead vaccine candidate,

VAX-24;


  • pursue regulatory approval of vaccine candidates;


  • hire additional personnel;


  • operate as a public company;

• acquire, discover, validate and develop additional vaccine candidates; and

• obtain, maintain, expand and protect our intellectual property portfolio.



We rely and will continue to rely on third parties to conduct our preclinical
studies and clinical trials and for manufacturing and supply of our vaccine
candidates. We have no internal manufacturing capabilities, and we will continue
to rely on third parties, of which the main suppliers are single-source
suppliers, for our preclinical and clinical trial materials. Given our stage of
development, we do not yet have a marketing or sales organization or commercial
infrastructure. Accordingly, if we obtain regulatory approval for any of our
vaccine candidates, we also would expect to incur significant commercialization
expenses related to product sales, marketing, manufacturing and distribution.

Because of the numerous risks and uncertainties associated with vaccine
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate revenue from the sale of our vaccines, we may not become
profitable. If we fail to become profitable or are unable to sustain
profitability on a continuing basis, then we may be unable to continue our
operations at planned levels and may be forced to reduce our operations.

                                       19

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Certain Significant Relationships

Sutro Biopharma


Vaxcyte was formed through its relationship with Sutro Biopharma, Inc., or Sutro
Biopharma, in 2013 by our co-founders with the goal of utilizing Sutro
Biopharma's proprietary XpressCF platform for protein synthesis in the field of
vaccines addressing infectious diseases.

In addition to receiving funding, we entered into a license agreement with Sutro
Biopharma, or the Sutro License, on August 1, 2014. The Sutro License was
amended on October 12, 2015 and again on May 9, 2018 and May 29, 2018. Under
this license, we received an exclusive, worldwide, royalty-bearing,
sublicensable license under Sutro Biopharma's patents and know-how relating to
cell-free expression of proteins to (i) research, develop, use, sell, offer for
sale, export, import and otherwise exploit specified vaccine compositions, such
rights being sublicensable, for the treatment or prophylaxis of infectious
diseases, excluding cancer vaccines, and (ii) manufacture, or have manufactured
by an approved contract manufacturing organization, such vaccine compositions
from extracts supplied by Sutro Biopharma pursuant to the Sutro Biopharma Supply
Agreement (as described below). We are obligated to use commercially reasonable
efforts to develop, obtain regulatory approval for and commercialize the vaccine
compositions. In consideration of the rights granted under the Sutro License, we
are obligated to pay Sutro Biopharma a 4% royalty on worldwide aggregate net
sales of vaccine products for human health and a 2% royalty on such net sales of
vaccine products for animal health. Such royalty rates are subject to specified
reductions, including standard reductions for third-party payments and for
expiration of relevant patent claims. Royalties are payable on a vaccine
composition-by-vaccine composition and country-by-country basis until the later
of expiration of the last valid claim in the licensed patents covering such
vaccine composition in such country and ten years after the first commercial
sale of such vaccine composition. In addition, we are obligated to pay Sutro
Biopharma a percentage in the low-double digits of any net sublicensing revenue
received for sublicense agreements executed before July 2020. Our obligation to
pay sublicense fees to Sutro Biopharma expired in July 2020.

In May 2018, we entered into a supply agreement, which we refer to as the Sutro
Biopharma Supply Agreement, with Sutro Biopharma pursuant to which we purchase
from Sutro Biopharma extract and custom reagents for use in manufacturing
non-clinical and certain clinical supply of vaccine compositions utilizing the
technology licensed under the Sutro License at prices not to exceed a specified
percentage above Sutro Biopharma's fully burdened manufacturing cost. If any
extracts or custom reagents do not meet the specifications and warranties
provided, then we will not have an obligation to pay for the non-conforming
product, and Sutro Biopharma will be obligated to replace the non-conforming
product within the shortest possible time with conforming product at our cost.

For additional details regarding our relationship with Sutro Biopharma, see Note
13, "Related Party Transactions," to our condensed financial statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Lonza


In October 2016, we entered into a development and manufacturing services
agreement with Lonza Ltd., or Lonza, which we refer to, as amended, as the 2016
Lonza Agreement, pursuant to which Lonza is obligated to perform manufacturing
process development and clinical manufacture and supply of components for
VAX-24, including the manufacture of polysaccharide antigens, our proprietary
eCRM protein carrier and conjugated drug substances.

In October 2018, we entered into a second development and manufacturing services
agreement with Lonza, which we refer to as the 2018 Lonza Agreement, and
together with the 2016 Lonza Agreement, as the Lonza Agreements, pursuant to
which Lonza is obligated to perform manufacturing process development and
clinical manufacture and supply of VAX-24 finished drug product.

In June 2018, we entered into a letter agreement, or the Lonza Letter Agreement,
with Lonza, pursuant to which we agreed to certain terms for potential future
equity payments as partial satisfaction of future obligations to Lonza under the
Lonza Agreements. Specifically, we and Lonza agreed that the initial pre-IND
cash payments made by us to Lonza are subject to a specified dollar cap, which
we refer to as the Initial Cash Cap. After the Initial Cash Cap has been
reached, then at our election, we can make any further pre-IND payments owed to
Lonza under the Lonza Agreements in cash, equity at then market prevailing
prices, or a combination of both. Lonza may elect to receive up to 25% of
pre-IND payments in equity, up to a maximum of $2.5 million, and no more than
$10 million of pre-IND payments may be satisfied by issuances of our common
stock.

                                       20

--------------------------------------------------------------------------------


Under the Lonza Agreements, we will pay Lonza agreed upon fees for Lonza's
performance of manufacturing services, and we will reimburse Lonza for its
out-of-pocket costs associated with purchasing raw materials, plus a customary
handling fee. Each Lonza Agreement is managed by a steering committee and any
dispute at the steering committee will be resolved by senior executives of the
parties.

For additional details regarding our relationship with Lonza, see Note 5, "Commitments and Contingencies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Impact of COVID-19


We are continuing to closely monitor the impact of the global COVID-19 pandemic
on our business and are taking proactive efforts designed to protect the health
and safety of our employees and to maintain business continuity. We believe that
the measures we are implementing are appropriate and we will continue to monitor
and seek to comply with guidance from governmental authorities and adjust our
activities as appropriate. Based on guidance issued by federal, state and local
authorities, we transitioned to a remote work model for our non-lab based
employees in March 2020, while maintaining essential in-person laboratory
functions in order to advance key research and development initiatives,
supported by the implementation of updated onsite safety procedures.

While the COVID-19 pandemic has not yet resulted in a significant impact to our
development timelines, as the pandemic continues, we could see an impact on our
ability to advance our programs, obtain supplies from our contract manufacturer
or interact with regulators, ethics committees or other important agencies due
to limitations in regulatory authority, employee resources or otherwise. In any
event, if the COVID-19 pandemic continues and persists for an extended period of
time, we could experience significant disruptions to our development timelines,
which would adversely affect our business, financial condition, results of
operations and growth prospects.

In addition, while the potential economic impact brought by, and the duration
of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic
could result in significant and prolonged disruption of global financial
markets, reducing our ability to access capital, which could in the future
negatively affect our liquidity. In addition, a recession or market correction
resulting from the spread of COVID-19 could materially affect our business and
the potential value of our common stock.

The extent of the impact of the COVID-19 pandemic on our development and
regulatory efforts, our ability to raise sufficient additional capital on
acceptable terms, if at all, and the value of and market for our common stock
will depend on future developments that are highly uncertain and cannot be
predicted with confidence at this time, such as the ultimate duration of the
pandemic, travel restrictions, quarantines, social distancing and business
closure requirements in the United States and in other countries, and the
effectiveness of actions taken globally to contain and treat COVID-19. For
additional information about risks and uncertainties related to the COVID-19
pandemic that may impact our business, financial condition and results of
operations, see the section titled "Risk Factors."

Components of Results of Operations

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 include personnel-related costs (such as salaries,
employee benefits and stock-based compensation) for our personnel in research
and development functions; costs related to acquiring, developing and
manufacturing supplies for preclinical studies, clinical trials and other
studies, including fees paid to contract manufacturing organizations; costs and
expenses related to agreements with contract research organizations,
investigative sites and consultants to conduct non-clinical and preclinical
studies and clinical trials; professional and consulting services costs;
research and development consumables costs; laboratory supplies and equipment
costs; and facility and other allocated costs.

Research and development expenses are expensed as incurred. Non-refundable
advance payments for services that will be used or rendered for future research
and development activities are recorded as prepaid expenses and recognized as
expenses as the related services are performed. We do not allocate our costs by
vaccine candidates, as our vaccine candidates are at an early stage of
development and our research and development expenses include internal costs,
such as payroll and other personnel expenses, which are not tracked by vaccine
candidate. In particular, with respect to internal costs, several of our
departments support multiple vaccine candidate research and development
programs.

                                       21

--------------------------------------------------------------------------------


We expect our research and development expenses to increase substantially in
absolute dollars for the foreseeable future as we advance our vaccine candidates
into and through preclinical studies and clinical trials, pursue regulatory
approval of our vaccine candidates and expand our pipeline of vaccine
candidates. 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 vaccine candidates may be affected by a variety
of factors, including the safety and efficacy of our vaccine candidates, early
clinical data, investment in our clinical programs, competition, manufacturing
capability and commercial viability. We may never succeed in achieving
regulatory approval for any of our vaccine 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 if, when and to
what extent we will generate revenue from the commercialization and sale of our
vaccine candidates.

Our clinical development costs may vary significantly based on factors such as:

• the costs and timing of our CMC activities, including fulfilling

           GMP-related standards and compliance, and identifying and

qualifying a

           second supplier;


• the cost of clinical trials of our vaccine candidates being greater

           than we anticipate;


• changes in the standard of care on which a clinical development plan

           was based, which may require new or additional trials;


  • the number of sites included in the trials;


  • the countries in which the trials are conducted;

• delays in adding a sufficient number of trial sites and recruiting

           suitable volunteers to participate in our clinical trials;


  • the number of subjects that participate in the trials;


  • the number of doses that subjects receive;


  • subjects dropping out of a study or lost in follow-up;

• potential additional safety monitoring requested by regulatory agencies;


  • the duration of subject participation in the trials and follow-up;


  • the cost and timing of manufacturing our vaccine candidates;


  • the phase of development of our vaccine candidates; and


  • the efficacy and safety profile of our vaccine candidates.

General and Administrative


General and administrative expenses consist primarily of costs and expenses
related to personnel (including salaries, employee benefits and stock-based
compensation) in our executive, legal, finance and accounting, human resources
and other administrative functions; legal services, including relating to
intellectual property and corporate matters; accounting, auditing, consulting
and tax services; insurance; and facility and other allocated costs not
otherwise included in research and development expenses. We expect our general
and administrative expenses to increase substantially in absolute dollars for
the foreseeable future as we increase our headcount to support our continued
research and development activities and grow our business. We also anticipate
that we will incur increased expenses as a result of operating as a public
company, including expenses related to audit, legal, regulatory and tax-related
services associated with maintaining compliance with SEC rules and regulations
and those of any national securities exchange on which our securities are
traded, additional insurance expenses, investor relations activities and other
administrative and professional services.

                                       22

--------------------------------------------------------------------------------

Other Income (Expense), Net


Other income (expense), net includes interest expense incurred on our capital
leases for lab equipment, interest income earned from our cash and cash
equivalents, grant income, foreign currency transaction gains (losses) related
to our Swiss Franc cash and liability balances and changes in the fair value of
our redeemable convertible preferred stock tranche liability (see Note 2, "Basis
of Presentation and Summary of Significant Accounting Policies," Note 3, "Fair
Value Measurements and Fair Value of Financial Instruments," and Note 6,
"Redeemable Convertible Preferred Stock," to our condensed financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more
detail).

Grant Income


In July 2019, CARB-X awarded us up to $1.6 million in initial funding to advance
the development of a universal vaccine to prevent infections caused by Group A
Strep Bacteria. In July 2020, the CARB-X agreement was amended to increase the
funding percentage for reimbursable expenses during the initial funding period
from 50% to 90%. As a result, the initial funding amount increased from $1.6
million to $2.7 million. Income is recognized as we incur and pay qualifying
expenses over a period that ends on December 31, 2020. Qualifying expenses under
this funding arrangement are recorded as a receivable when we have both incurred
and paid the expenses. We recognized $1.0 million and $1.4 million in grant
income for funding research and development under this award during the three
and six months ended June 30, 2020, respectively. We did not recognize any grant
income during the three and six months ended June 30, 2019. Grant income is
included as a component of Other income (expense), net in the condensed
statements of operations and comprehensive loss.

Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019


The following table summarizes our results of operations for the periods
presented:



                                            Three Months Ended June 30,                  Change
                                             2020                 2019              $              %
Operating expenses:
Research and development                $       18,178       $        9,968     $    8,210           82.4 %
General and administrative                       3,046                2,264            782           34.5 %
Total operating expenses                        21,224               12,232          8,992           73.5 %
Loss from operations                           (21,224 )            (12,232 )       (8,992 )         73.5 %
Other income (expense), net:
Interest expense                                     -                  (11 )           11         (100.0 )%
Interest income                                     44                  181           (137 )        (75.7 )%
Grant income                                     1,036                    -          1,036              *
Foreign currency transaction losses               (176 )                (53 )         (123 )        232.1 %
Change in fair value of the
redeemable
  convertible preferred stock tranche
liability                                            -                1,450         (1,450 )            *
Total other income (expense), net                  904                1,567 

(663 ) (42.3 )% Net loss and comprehensive loss $ (20,320 ) $ (10,665 ) $ (9,655 ) 90.5 %




* not meaningful


                                       23
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Operating Expenses

Research and Development Expenses


The following table summarizes our research and development expenses for the
periods presented:



                                             Three Months Ended June 30,                 Change
                                               2020                2019             $              %

Product and clinical development (1) $ 12,840 $ 6,334

     $    6,506          102.7 %
Personnel related                                  2,142              1,483            659           44.4 %
Professional and consulting services                 980              1,137           (157 )        (13.8 )%
Research and development consumables                 603                (82 )          685              *
Facility related and other allocated                 997                545            452           82.9 %
Laboratory supplies and equipment                    452                376             76           20.2 %
Other (2)                                            164                175            (11 )         (6.3 )%

Total research and development expenses $ 18,178 $ 9,968

    $    8,210           82.4 %



(1) Includes expenses for third-party manufacturing and outsourced contract

services, including preclinical studies and outsourced assays.

(2) Includes travel-related expenses, warrant expense and other miscellaneous

    office expenses.


* not meaningful


Research and development expenses increased by $8.2 million, or 82.4%, during
the three months ended June 30, 2020 compared to the corresponding period in
2019. The increase was primarily attributable to an increase of $6.5 million in
product and clinical development expenses mainly related to our lead vaccine
candidate, VAX-24, driven by a $5.3 million increase in costs related to
outsourced manufacturing activities and a $1.6 million increase related to
outsourced research services as a result of the ramp up of eCRM and
polysaccharide GMP campaigns in preparation of our anticipated IND filing and
Phase 1/2 clinical study initiation in the second half of 2021. The increase in
research and development consumables was due to the progression of our VAX-24
program. In addition, we received a credit of $0.2 million from Sutro Biopharma
during the quarter ended June 30, 2019 as a result of the efficiency they gained
in making extracts and reagents. The increase in personnel-related expenses of
$0.7 million was primarily related to the increase in the number of employees to
support the expanded activities in research and development.

General and Administrative Expenses


General and administrative expenses increased by $0.8 million, or 34.5%, during
the three months ended June 30, 2020 compared to the corresponding period in
2019. The increase was mainly due to an increase in personnel-related costs of
$0.6 million related to higher stock-based compensation expense resulting from
an increase in the fair value of our common stock and an increase in the number
of employees in our general and administrative functions to support our growth.

Other Income (Expense), Net


Other income (expense), net decreased by $0.7 million, or 42.3%, during the
three months ended June 30, 2020 compared to the corresponding period in 2019.
The decrease was primarily due to a $1.5 million decrease in the gain resulting
from a change in the fair value of the redeemable convertible preferred stock
tranche liability, which was settled in December 2019, partially offset by an
increase of $1.0 million in grant income for the CARB-X program, which started
in July 2019.

                                       24
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Comparison of the Six Months Ended June 30, 2020 and 2019


The following table summarizes our results of operations for the periods
presented:



                                           Six Months Ended June 30,                 Change
                                            2020               2019             $              %
Operating expenses:
Research and development                $      42,493       $    22,595     $   19,898           88.1 %
General and administrative                      6,327             3,580          2,747           76.7 %
Total operating expenses                       48,820            26,175         22,645           86.5 %
Loss from operations                          (48,820 )         (26,175 )      (22,645 )         86.5 %
Other income (expense), net:
Interest expense                                   (7 )             (24 )           17          (70.8 )%
Interest income                                   179               418           (239 )        (57.2 )%
Grant income                                    1,365                 -          1,365              *
Foreign currency transaction losses              (179 )            (231 )           52          (22.5 )%
Change in fair value of the
redeemable
  convertible preferred stock tranche
liability                                           -             1,676         (1,676 )            *
Total other income (expense), net               1,358             1,839     

(481 ) (26.2 )% Net loss and comprehensive loss $ (47,462 ) $ (24,336 ) $ (23,126 ) 95.0 %




* not meaningful

Research and Development Expenses


The following table summarizes our research and development expenses for the
periods presented:



                                              Six Months Ended June 30,                  Change
                                              2020                2019              $              %

Product and clinical development (1) $ 32,567 $ 14,961

     $   17,606          117.7 %
Personnel related                                 4,098               2,816          1,282           45.5 %
Professional and consulting services              2,032               2,221           (189 )         (8.5 )%
Research and development consumables                698                 392            306           78.1 %
Facility related and other allocated              1,740               1,072            668           62.3 %
Laboratory supplies and equipment                   811                 614            197           32.1 %
Other (2)                                           547                 519             28            5.4 %

Total research and development expenses $ 42,493 $ 22,595

    $   19,898           88.1 %



(1) Includes expenses for third-party manufacturing and outsourced contract

services, including preclinical studies and outsourced assays.

(2) Includes travel-related expenses, warrant expense and other miscellaneous

office expenses.



Research and development expenses increased by $19.9 million, or 88.1%, during
the six months ended June 30, 2020 compared to the corresponding period in 2019.
The increase was primarily attributable to an increase of $17.6 million in
product and clinical development expenses mainly related to our lead vaccine
candidate, VAX-24, which was driven by a $14.8 million increase in costs related
to outsourced manufacturing activities and a $3.7 million increase in contracted
research services as a result of the ramp up of eCRM and polysaccharide GMP
campaigns in preparation of our anticipated IND filing and Phase 1/2 clinical
study initiation in the second half of 2021. The increase in personnel-related
expenses of $1.3 million was primarily related to the increase in the number of
employees to support the expanded activities in research and development.

General and Administrative Expenses


General and administrative expenses increased by $2.7 million, or 76.7%, during
the six months ended June 30, 2020 compared to the corresponding period in 2019.
The increase was primarily attributable to increases of $1.4 million related to
increases in audit, tax and legal fees, and $1.0 million in personnel-related
costs due to higher stock-based compensation expense resulting from an increase
in the fair value of our common stock and an increase in the number of employees
in our general and administrative functions to support our growth.

                                       25

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Other Income (Expense), Net


Other income (expense), net decreased by $0.5 million, or 26.2%, during the six
months ended June 30, 2020 compared to the corresponding period in 2019. The
decrease was primarily attributable to a $1.7 million decrease in income
resulting from a change in the fair value of the redeemable convertible
preferred stock tranche liability, which was settled in 2019, partially offset
by $1.4 million in grant income for the CARB-X program, which commenced in July
2019.

Liquidity and Capital Resources


We have incurred losses since inception and have incurred negative cash flows
from operations from inception through June 30, 2020. We have funded our
operations to date primarily through equity financings totaling approximately
$569.5 million in aggregate gross proceeds and $545.3 million net of
underwriting discounts, commissions and offering expenses, including our IPO
that was completed in June 2020. As of June 30, 2020, we had $410.0 million of
cash and cash equivalents and an accumulated deficit of $156.8 million.

Future Funding Requirements


Our primary uses of cash are to fund our operations, which consist primarily of
research and development expenditures related to our programs and, to a lesser
extent, general and administrative expenditures. We anticipate that we will
continue to incur significant expenses for the foreseeable future as we continue
to advance our vaccine candidates, expand our corporate infrastructure,
including the costs associated with being a public company, further our research
and development initiatives for our vaccine candidates and scale our laboratory
and manufacturing operations. We are subject to all of the risks typically
related to the development of new drug candidates, and we may encounter
unforeseen expenses, difficulties, complications, delays and other unknown
factors that may adversely affect our business. We anticipate that we will need
substantial additional funding in connection with our continuing operations.

We believe that our existing cash and cash equivalents as of the date of this
Quarterly Report on Form 10-Q, which includes the net proceeds from our IPO
completed in June 2020, will be sufficient to fund our operating expenses and
capital expenditure requirements through at least the completion and
announcement of the topline data from our Phase 1/2 clinical proof-of-concept
study of VAX-24 in adults, which we expect in 2022, and to continue to advance
our pipeline of other vaccine candidates. However, we will need to raise
additional capital prior to commencing pivotal trials for any of our vaccine
candidates. Until we can generate a sufficient amount of revenue from the
commercialization of our vaccine candidates or from collaboration agreements
with third parties, if ever, we expect to finance our future cash needs through
public or private equity or debt financings, third-party (including government)
funding and marketing and distribution arrangements, as well as other
collaborations, strategic alliances and licensing arrangements, or any
combination of these approaches. The sale of equity or convertible debt
securities may result in dilution to our stockholders and, in the case of
preferred equity securities or convertible debt, those securities could provide
for rights, preferences or privileges senior to those of our common stock. Debt
financings may subject us to covenant limitations or restrictions on our ability
to take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends. Our ability to raise additional funds may
be adversely impacted by deteriorating global economic conditions and the recent
disruptions to and volatility in the credit and financial markets in the United
States and worldwide resulting from the ongoing COVID-19 pandemic. There can be
no assurance that we will be successful in acquiring additional funding at
levels sufficient to fund our operations or on terms favorable or acceptable to
us. If we are unable to obtain adequate financing when needed or on terms
favorable or acceptable to us, we may be forced to delay, reduce the scope of or
eliminate one or more of our research and development programs.

Our future capital requirements will depend on many factors, including:

• the timing, scope, progress, results and costs of research and

           development, testing, screening, manufacturing, preclinical and
           non-clinical studies and clinical trials, including any impacts related
           to the COVID-19 pandemic;

• the outcome, timing and cost of seeking and obtaining regulatory

           approvals from the FDA and comparable foreign regulatory 

authorities,

           including the potential for such authorities to require that we perform
           field efficacy studies for our PCV candidates, require more studies
           than those that we currently expect or change their requirements
           regarding the data required to support a marketing application;

• the cost of building a sales force in anticipation of any product

           commercialization;


        •  the costs of future commercialization activities, including product
           manufacturing, marketing, sales, royalties and distribution, for any of
           our vaccine candidates for which we receive marketing approval;


                                       26
--------------------------------------------------------------------------------

• our ability to maintain existing, and establish new, strategic

           collaborations, licensing or other arrangements and the 

financial terms

           of any such agreements, including the timing and amount of any 

future

           milestone, royalty or other payments due under any such 

agreement;


  • any product liability or other lawsuits related to our products;


        •  the revenue, if any, received from commercial sales, or sales to
           foreign governments, of our vaccine candidates for which we may receive
           marketing approval;

• the costs to establish, maintain, expand, enforce and defend the scope

           of our intellectual property portfolio, including the amount and 

timing

           of any payments we may be required to make, or that we may

receive, in

           connection with licensing, preparing, filing, prosecuting, defending
           and enforcing our patents or other intellectual property rights;


  • expenses needed to attract, hire and retain skilled personnel;


  • the costs of operating as a public company; and

• the impact of the COVID-19 pandemic, which may exacerbate the magnitude

           of the factors discussed above.


A change in the outcome of any of these or other variables could significantly
change the costs and timing associated with the development of our vaccine
candidates. Furthermore, our operating plans may change in the future, and we
may need additional funds to meet operational needs and capital requirements
associated with such change.

Cash Flows

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



                                                         Six Months Ended June 30,
                                                           2020               2019
                                                               (in thousands)
Net cash used in operating activities                  $     (22,805 )     $  (23,281 )
Net cash used in investing activities                           (404 )           (182 )
Net cash provided by (used in) financing activities          374,279        

(153 ) Net increase (decrease) in cash and cash equivalents $ 351,070 $ (23,616 )

Cash Flows from Operating Activities


Net cash used in operating activities for the six months ended June 30, 2020 was
$22.8 million, which primarily resulted from a net loss of $47.5 million,
partially offset by a net change in our operating assets and liabilities of
$21.8 million and non-cash charges of $2.9 million. The net change in operating
assets and liabilities of $21.8 million was primarily due to increases in
accrued manufacturing expenses of $20.5 million related to outsourced
manufacturing activities and accrued expenses of $2.0 million related primarily
to increases in legal fees associated with our IPO, Series D preferred stock
financing and patent filings, which were partially offset by a $0.8 million
decrease in accounts payable due to timing of payments. Non-cash charges
primarily consisted of $1.7 million in stock-based compensation expense and
$0.7 million in depreciation and amortization.

Net cash used in operating activities for the six months ended June 30, 2019 was
$23.3 million, which primarily resulted from a net loss of $24.3 million,
partially offset by a net change in operating assets and liabilities of
$1.6 million. The net change in operating assets and liabilities of $1.6 million
was primarily due to an increase of $3.3 million related to outsourced
manufacturing activities, partially offset by an increase of $0.8 million in
prepaid expenses and other current assets and a decrease of $0.6 million in
accrued compensation resulting from a partial bonus payout in December 2019.
Non-cash charges primarily consisted of a $1.7 million decrease in the fair
value of our Series C redeemable convertible preferred stock tranche liability,
partially offset by $0.6 million in depreciation and amortization expense and
$0.5 million in stock-based compensation expense.

                                       27

--------------------------------------------------------------------------------

Cash Flows from Investing Activities


Cash used in investing activities for the six months ended June 30, 2020 and
2019 was $0.4 million and $0.2 million, respectively, which related primarily to
purchases of lab equipment.

Cash Flows from Financing Activities


Cash provided by financing activities for the six months ended June 30, 2020 was
$374.3 million, which primarily consisted of net proceeds from our IPO of $264.1
million and net proceeds from the issuance of our Series D redeemable
convertible preferred stock of $109.9 million.

Cash used in financing activities for the six months ended June 30, 2019 was $0.2 million, which primarily consisted of payments for capital lease obligations.

Contractual Obligations and Commitments


The following table summarizes our contractual obligations and commitments at
June 30, 2020:



                                                      Payments Due by Period
                                       Less                                More
                                       than       1 - 3       3 - 5        than
                                      1 Year      Years       Years       5 Years      Total
                                                          (in thousands)
    Operating lease obligations(1)   $    725     $  168     $     -     $       -     $  893
    Capital lease obligations               -          -           -       
     -          -
    Total                            $    725     $  168     $     -     $       -     $  893



(1) Consists of our corporate headquarters lease in Foster City, California that

expires in August 2021, our second lease in Foster City, California that

expires in October 2021 and a small office lease in San Diego, California

that expires in March 2021.



We have certain payment obligations under various license agreements. Under
these agreements, we are required to make milestone payments upon successful
completion and achievement of certain intellectual property, clinical,
regulatory and sales milestones. The payment obligations under the license
agreements are contingent upon future events such as our achievement of
specified development, clinical, regulatory and commercial milestones, and we
will be required to make development milestone payments and royalty payments in
connection with the sale of products developed under these agreements. As the
achievement and timing of these future milestone payments are not probable or
estimable, such amounts have not been included in our balance sheets as of
December 31, 2019 and June 30, 2020, or in the contractual obligations table
above. See Note 13, "Related Party Transactions," to our condensed financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We enter into agreements in the normal course of business with vendors for
preclinical and non-clinical studies, manufacturing and supply of our
preclinical materials and for other services and products used for operating
purposes. These contracts are generally cancelable following a certain period
after written notice, and therefore, we believe that our non-cancelable
obligations under these agreements are not material and have not been included
in the table above.

Legal Contingencies

From time to time, we may become involved in legal proceedings arising from the
ordinary course of business. We record a liability for such matters when it is
probable that future losses will be incurred and that such losses can be
reasonably estimated. Significant judgment by us is required to determine both
probability and the estimated amount.

Off-Balance Sheet Arrangements

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC.


                                       28

--------------------------------------------------------------------------------

Critical Accounting Policies and Significant Judgments and Estimates


Our management's discussion and analysis of our financial condition and results
of operations are based on our condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these condensed financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities and expenses and the disclosure of contingent
assets and liabilities in our condensed financial statements. On an ongoing
basis, we evaluate our estimates and judgments, including those related to
accrued expenses and stock-based compensation. We base our estimates on
historical experience, known trends and events and various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies and
estimates as compared to the critical accounting policies and significant
judgments and estimates disclosed in Note 2, "Basis of Presentation and Summary
of Significant Accounting Policies" to our condensed financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Emerging Growth Company Status


We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act, or the JOBS Act. Under the JOBS Act, emerging growth companies can
delay the adoption of new or revised accounting standards issued subsequent to
the enactment of the JOBS Act until such time as those standards apply to
private companies. Other exemptions and reduced reporting requirements under the
JOBS Act for emerging growth companies include presentation of only two years of
audited financial statements in a registration statement for an initial public
offering, an exemption from the requirement to provide an auditor's report on
internal controls over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that
may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation and less extensive disclosure about our executive
compensation arrangements. We have elected to use the extended transition period
for complying with new or revised accounting standards that have different
effective dates for public and private companies until the earlier of the date
that (i) we are no longer an emerging growth company or (ii) we affirmatively
and irrevocably opt out of the extended transition period provided in the JOBS
Act. However, as described in Note 3 to our financial statements included
elsewhere in this Quarterly Report on Form 10-Q, we early adopted certain
accounting standards, as the JOBS Act does not preclude an emerging growth
company from adopting a new or revised accounting standard earlier than the time
that such standard applies to private companies to the extent early adoption is
permitted. As a result, our financial statements may not be comparable to
companies that comply with the new or revised accounting pronouncements as of
public company effective dates.

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

Recently Adopted Accounting Pronouncements

See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

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