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SUTRO BIOPHARMA, INC.

(STRO)
  Report
Real-time Estimate Cboe BZX  -  01:26 2022-12-09 pm EST
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11/23Sutro Biopharma to Participate in Upcoming Investor Conferences
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SUTRO BIOPHARMA, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

02/28/2022 | 05:17pm EST
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 drug discovery, development and manufacturing company
focused on deploying our proprietary integrated cell-free protein synthesis
platform, XpressCF®, and our site specific conjugation platform, XpressCF+®TM,
to create a broad variety of optimally designed, next-generation protein
therapeutics, initially for cancer. We aim to design therapeutics using the most
relevant and potent modalities, including cytokine-based therapeutics,
immuno-oncology, or I/O agents, antibody-drug conjugates, or ADCs,
immunostimulatory ADCs, or iADCs, and bispecific antibodies that are directed
primarily against clinically validated targets where the current standard of
care is suboptimal. We believe our platform allows us to accelerate the
discovery and development of potential first-in-class and best-in-class
molecules by enabling the rapid and systematic evaluation of protein
structure-activity relationships to create optimized homogeneous product
candidates. Our mission is to transform the lives of patients by using our
XpressCF® platform to create medicines with improved therapeutic profiles for
areas of unmet need.

Once identified, production of protein drug candidates can be rapidly and
predictably scaled in our current Good Manufacturing Practices compliant
manufacturing facility. We have the ability to manufacture our cell-free extract
that supports our production of proteins on a large scale using a
semi-continuous fermentation process. Our two most advanced product candidates
are wholly owned: STRO-002, an ADC directed against folate receptor-alpha, or
FolR?, for patients with FolR?-expressing cancers, such as ovarian and
endometrial cancers, and STRO-001, an ADC directed against CD74, for patients
with B-cell malignancies, such as multiple myeloma and non-Hodgkin lymphoma, or
NHL.

STRO-002 was designed and optimized for an improved therapeutic index by placing
a precise number of linker-warheads at four specific locations within the
antibody using our proprietary XpressCF+®TM platform. Our first Phase 1 trial
for STRO-002 is an open-label study evaluating STRO-002 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
STRO-002 clinical trial are to determine the safety and tolerability profile, to
define the recommended Phase 2 dose level and interval and to evaluate
preliminary anti-tumor activity. Our secondary objectives are to characterize
the human pharmacokinetics and additional safety, tolerability and efficacy
measures.

We are developing STRO-001, an optimally designed ADC directed against the
cancer target CD74, for multiple myeloma and NHL. STRO-001 was designed and
optimized for maximal therapeutic index by placing linker-warheads at specific
locations within the antibody using our proprietary XpressCF+®™ platform. The
Phase 1 trial for STRO-001 is an open-label study that is evaluating STRO-001 as
a monotherapy for patients with multiple myeloma and NHL. The trial is being
conducted in two parts: dose escalation and dose expansion. The primary
objectives of the trial are to determine the safety and tolerability profile of
STRO-001, determine the recommended Phase 2 dose and interval and evaluate
preliminary anti-tumor activity. The secondary objectives are to characterize
the human pharmacokinetics of STRO-001 and additional safety, tolerability and
efficacy measures.

In March 2019, STRO-002 began enrolling patients in a Phase 1 trial focused on
ovarian and endometrial cancers. The dose escalation portion of the STRO-002
Phase 1 trial has been completed and the dose expansion portion of the trial is
ongoing to assess the efficacy, safety and tolerability of STRO-002 at dose
levels of 4.3 and 5.2 mg/kg. In May 2021, we reported data from the
dose-escalation cohort. Based on such reported data, STRO-002 exhibited a
manageable safety profile and promising preliminary efficacy data, as discussed
in more detail in Item 1 of Part I "Business" of this document. In January 2022,
we released initial results of the dose expansion

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portion of the STRO-002 Phase 1 trial. These data suggested that STRO-002
exhibited a manageable safety profile together with promising preliminary
efficacy data in the tested patient population, as discussed in more detail in
Item 1 of Part I "Business" of this document. In August 2021, we were granted
Fast Track designation for STRO-002 by the 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 December 2021, we entered into a licensing agreement with Tasly
Biopharmaceuticals Co., Ltd, or Tasly, to grant Tasly an exclusive license to
develop and commercialize STRO-002 in China, Hong Kong, Macau and Taiwan,
referred to as Greater China, or the Tasly License Agreement.

Our second candidate, STRO-001, is currently enrolling patients in a Phase 1
trial, with updated data reported in December 2020, as discussed in more detail
in Item 1 of Part I "Business" of this document. Based on such reported data,
STRO-001 has been generally well-tolerated and, unlike certain other ADCs, no
ocular toxicity signals have been observed, with no patients receiving
prophylactic corticosteroid eye drops. Dose escalation in the STRO-001 Phase 1
trial is continuing, and the maximum tolerated dose has not yet been reached. In
October 2018, we were granted Orphan Drug Designation by the FDA for STRO-001
for the treatment of multiple myeloma. In October 2021, we granted BioNova
Pharmaceuticals Limited, or BioNova, an option to exclusively license the right
to develop and commercialize STRO-001 in Greater China, or the BioNova Option
Agreement.

Based on our proprietary XpressCF® and XpressCF+®TM platforms, we have also
entered into multi-target, product-focused collaborations with leaders in the
field of oncology, including a cytokine derivatives collaboration with Merck
Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., Kenilworth, NJ, or
Merck; a B Cell Maturation Antigen, or BCMA, ADC collaboration with Celgene
Corporation, or Celgene, a wholly owned subsidiary of Bristol-Myers Squibb
Company, New York, NY, or BMS; a MUC1-EGFR ADC collaboration with Merck KGaA,
Darmstadt Germany (operating in the United States and Canada under the name "EMD
Serono"); and license agreement to develop and commercialize STRO-002 in Greater
China with Tasly. Our XpressCF® and XpressCF+®TM platforms have also supported a
spin-out company, Vaxcyte Inc., or Vaxcyte, focused on discovery and development
of vaccines for the treatment and prophylaxis of infectious disease.

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 and EMD Serono, the
issuance and sale of redeemable convertible preferred stock, our initial public
offering, or IPO, follow-on public offerings of common stock and debt proceeds.

We 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
$98.5 million and a net loss of $105.5 million for the year ended December 31,
2021, which net loss included the non-operating, unrealized loss of $4.5 million
related to our holdings of Vaxcyte common stock. We had a loss from operations
of $71.1 million and net loss of $32.1 million, due principally to an unrealized
gain of $41.5 million related to our holdings of Vaxcyte common stock, for the
year ended December 31, 2020. 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 of December 31, 2021, we had an
accumulated deficit of $333.4 million. We do not expect to generate any revenue
from commercial product sales unless and until we successfully complete
development and obtain regulatory approval for one or more of our product
candidates, which we expect will take a number of years. If we obtain regulatory
approval for any of our product candidates, we expect to incur significant
commercialization expenses related to product sales, marketing, manufacturing
and distribution. We expect our operating expenses to significantly increase as
we continue to develop, and seek regulatory approvals for, our product
candidates, engage in other research and development activities, expand our
pipeline of product candidates, continue to develop our manufacturing facility
and capabilities, maintain and expand our intellectual property portfolio, seek
regulatory and marketing approval for any product candidates that we may
develop, acquire or in-license other assets or technologies, ultimately
establish a sales, marketing and distribution infrastructure to commercialize
any products for which we may obtain marketing approval, and operate as a public
company. Our net losses may fluctuate significantly from quarter-to-quarter and
year-to-year, depending on the timing of our clinical trials, our expenditures
on other research and development activities and the timing of achievement and
receipt of upfront, milestones and other collaboration agreement payments.

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Impacts of the COVID-19 Pandemic


The extent of the impact of COVID-19 on our operational and financial
performance will depend on certain developments, including the duration and
spread of the pandemic, impacts on our clinical studies, employee or industry
events, and effects on our collaboration partners, suppliers, service providers
and manufacturers, all of which are uncertain and cannot be predicted. The
COVID-19 pandemic and its adverse effects have become more prevalent in the
locations where we, our CROs, suppliers or third-party business partners conduct
business. We are experiencing the impact of the COVID-19 pandemic on our
business through increased cost and delays in the availability of materials
routinely used in biologic therapeutic development and manufacturing, which has
the potential to cause delays in our research, development and/or manufacturing
activities, but overall patient enrollment and treatment remains on track.
Additionally, the COVID-19 pandemic has had, and is expected to continue to
have, an adverse impact on our operations, particularly as a result of
preventive and precautionary measures that we, other businesses, and governments
are taking. We may experience more pronounced and significant disruptions in our
operations, liquidity, supply chain, facilities, and clinical trials in the
future as well. With respect to our clinical trials, we have experienced minor
delays in enrollment and occasional delays in data entry by trial sites, but
overall enrollment and treatment remains on track. We may in the future
experience more significant delays in enrollment, participant dosing,
distribution of clinical trial materials, study monitoring and data analysis
that could materially adversely impact our business, results of operations,
revenue earned from our collaboration partners, and overall financial
performance in future periods. Specifically, we may experience impact from
changes in how we and companies worldwide conduct business due to the COVID-19
pandemic, including but not limited to restrictions on travel and in-person
meetings, the speed and breadth of mass vaccinations for COVID-19 and the
efficacy of such vaccines, delays in site activations and enrollment of clinical
trials, prioritization of hospital resources toward pandemic effort, delays in
review by the FDA and comparable foreign regulatory agencies, limitations on
employee resources that would otherwise be focused on the conduct of our
research, preclinical studies, clinical trials and manufacturing operations,
including because of sickness of employees or their families, the desire of
employees to avoid contact with large groups of people, an increased reliance on
working from home or mass transit disruptions, and disruptions in our supply
chain for our product candidates. Additionally, increased reliance on remote
work by our employees as a result of the COVID-19 pandemic poses incremental
increased cybersecurity risks as our employees' home networks are inherently
less secure than our corporate networks. As of the filing date of this Form
10-K, the extent to which the COVID-19 pandemic may impact our financial
condition, results of operations or guidance is uncertain. The effect of the
COVID-19 pandemic will not be fully reflected in our results of operations and
overall financial performance until future periods. See the section titled "Risk
Factors" for further discussion of the possible impact of the ongoing COVID-19
pandemic on our business.

A discussion and analysis of our financial condition, results of operations, and
cash flows for the year ended December 31, 2019 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 ended December 31,
2020 filed with the SEC on March 18, 2021.

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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, and EMD Serono, and to a lesser extent, from manufacturing, supply and
services and materials we provide to the above collaborators and to Vaxcyte.

We derive revenue from collaboration arrangements, under which we may grant
licenses to our collaboration partners to further develop and commercialize our
proprietary product candidates. 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 full-time equivalent, or FTE,
personnel effort, estimated costs, discount rates and probabilities of clinical
development and regulatory success.

Please see further discussion on the revenue recognition treatment of performance obligations under Critical Accounting Policies and Estimates.

Operating Expenses

Research and Development


Research and development expenses represent costs incurred in performing
research, development and manufacturing activities in support of our own product
development efforts and those of our collaborators, and include salaries,
employee benefits, stock-based compensation, laboratory supplies, outsourced
research and development expenses, professional services and allocated
facilities-related costs. We expense both internal and external research and
development costs as they are incurred. Non-refundable advance payments for
services that will be used or rendered for future research and development
activities are recorded as prepaid expenses and recognized as expenses as the
related services are performed.

We expect our research and development expenses to increase in the future as we
advance our product candidates into and through preclinical studies and clinical
trials, pursue regulatory approval of our product candidates, expand our
pipeline of product candidates and continue to develop our manufacturing
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

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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,
                                              2021              2020
                                                 (in thousands)
Internal costs:
Research and drug discovery               $      25,908       $ 19,043
Process and product development                  15,514         11,222
Manufacturing                                    31,336         23,455
Clinical development                              6,009          2,637
Total internal costs                             78,767         56,357
External Program Costs:
Research and drug discovery                       1,518          1,146
Toxicology and translational science              1,227          1,030
Process and product development                     314            376
Manufacturing                                    12,822         11,925
Clinical development                              9,752          6,127
Total external program costs                     25,633         20,604

Total research and development expenses $ 104,400 $ 76,961

General and Administrative


Our general and administrative expenses consist primarily of personnel costs,
expenses for outside professional services, including legal, human resources,
audit, accounting and tax services and allocated facilities-related costs.
Personnel costs include salaries, employee benefits and stock-based
compensation. We expect to incur additional expenses operating as a public
company, including expenses related to compliance with the rules and regulations
of the SEC and listing standards applicable to companies listed on the Nasdaq
Global Market, additional insurance expenses, investor relations activities and
other administrative and professional services. We also expect to increase the
size of our administrative function and our general and administrative expenses
to support the anticipated growth of our business, 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 Equity Securities

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

Interest and Other Expense, Net


Interest expense includes interest incurred on our debt and amortization of debt
issuance costs including accretion of final payment. Additionally, the Company
identified a financing component under the Merck 2018 Agreement and recorded
interest expense associated with the upfront payment. Other income (expense)
includes changes in values attributable to the arrangement with the Call Option
Plan as defined in the notes to our financial statements included elsewhere in
this report.

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Comparison of the Years Ended December 31, 2021 and 2020

                                                Year ended December 31,               Change
                                                  2021             2020            $           %
                                                            (in thousands)
Revenue                                       $      61,880      $  42,722     $  19,158         45 %
Operating expenses:
Research and development                            104,400         76,961        27,439         36 %
General and administrative                           56,004         36,818        19,186         52 %
Total operating expenses                            160,404        113,779        46,625         41 %
Loss from operations                                (98,524 )      (71,057 )     (27,467 )       39 %
Interest income                                         577          1,508          (931 )      (62 )%
Unrealized (loss) gain on equity securities          (4,454 )       41,498       (45,952 )     (111 )%
Interest and other expense, net                      (3,137 )       (4,077 )         940        (23 )%
Net loss                                      $    (105,538 )    $ (32,128 )   $ (73,410 )      228 %


Revenue

We have recognized revenue as follows during the periods indicated:

                                                Year Ended December 31,               Change
                                                 2021              2020           $            %
                                                           (in thousands)

Bristol-Myers Squibb Company ("BMS") $ 11,483 $ 11,407

    $     76           1 %
Merck Sharp & Dohme Corporation ("Merck")
(1)                                                42,780           26,075       16,705          64 %
Merck KGaA, Darmstadt, Germany (operating
in the United States and Canada under the
name "EMD Serono")                                  4,576            5,042         (466 )        (9 )%
Vaxcyte (2)                                         3,041              198        2,843       1,436 %
Total revenue                                $     61,880       $   42,722     $ 19,158          45 %




(1)

Merck was a related party until the closing of our public offering on May 14, 2020.

(2)

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.


Total revenue increased by $19.2 million, or 45%, during the year ended December
31, 2021 as compared to the year ended December 31, 2020. This was due primarily
to $16.7 million from Merck, primarily related to increased revenue from
performance obligations, with full recognition of revenue associated with the
contingent third program upon the determination that the related performance
obligation had terminated during the first quarter of 2021, and a cumulative
catch-up in revenue as a result of the change in transaction price, due to a
$15.0 million contingent payment earned in the second quarter of 2021 for the
initiation of the first IND-enabling toxicology study under the first program in
the collaboration. There was also a $4.1 million increase in contract research
and manufacturing activities supporting materials supply. The Merck revenue
increases noted above were partially offset by a $2.8 million decrease in
research and development services and a $1.2 million decrease related to the
financing component associated with the upfront payment. Revenue from Vaxcyte
under our supply agreement increased by $2.8 million, partially offset by an
overall $0.5 million decrease in revenue from EMD Serono.

Research and Development Expense


Research and development expense increased by $27.4 million, or 36%, during the
year ended December 31, 2021 as compared to the year ended December 31, 2020.
The increase was due primarily to increases of $11.2 million in
personnel-related expenses due to higher headcount, $6.3 million in laboratory
supplies and production materials-related expenses, $4.8 million in
facilities-related expenses, $3.4 million in clinical trial costs, $1.5 million
in consulting and outside services, and $0.2 million in equipment and
office-related expenses.

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General and Administrative Expense


General and administrative expense increased by $19.2 million, or 52%, during
the year ended December 31, 2021 as compared to the year ended December 31,
2020. The increase was due primarily to increases of $11.4 million in
personnel-related expenses due to higher headcount, $3.2 million in insurance
and external services, $3.6 million in facilities-related expenses, and $1.0
million in equipment and office-related expenses.

Interest Income


Interest income decreased by $0.9 million during the year ended December 31,
2021 as compared to the year ended December 31, 2020, due primarily to a $2.3
million decrease in the amortization of premiums on investments, partially
offset by an increase of $1.4 million from higher average investment balances in
2021.

Unrealized (Loss) Gain on Equity Securities


Unrealized (loss) on equity securities was $4.5 million during the year ended
December 31, 2021 as compared to an unrealized gain of $41.5 million for the
year ended December 31, 2020. The unrealized (loss) gain on equity securities in
each period was entirely due to the remeasurement of the estimated fair value of
our investment in Vaxcyte common stock.

Interest and Other Expense, Net


Interest and other expense, net decreased by $0.9 million during the year ended
December 31, 2021 as compared to the year ended December 31, 2020, due primarily
to a $1.2 million decrease in interest expense associated with the financing
component related to the 2018 Merck Agreement, partially offset by a $0.3
million increase in interest expense related to our outstanding debt.

Liquidity and Capital Resources

Sources of Liquidity


To date, we have incurred significant net losses, and negative cash flows from
operations. Our operations have been funded primarily by payments received from
our collaborators, and net proceeds from equity sales and debt. As of December
31, 2021, we had $229.5 million in cash, cash equivalents and marketable
securities, outstanding debt of $25.1 million and an accumulated deficit of
$333.4 million.

2021 Contingent Payment from Merck


During the year ended December 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.

2020 Public Offerings


On May 14, 2020, we closed a public offering of 12,650,000 shares of our common
stock at a public offering price of $7.75 per share, which included the exercise
in full of the underwriters' option to purchase 1,650,000 shares of common
stock. Our net proceeds from this offering, after deducting underwriting
discounts and commissions and other offering expenses, was approximately $91.4
million.

On December 11, 2020, we closed a public offering of 6,900,000 shares of our
common stock at a public offering price of $21.00 per share, which included the
exercise in full of the underwriters' option to purchase 900,000 shares of
common stock. Our net proceeds from this offering, after deducting underwriting
discounts and commissions and other offering expenses, was approximately $135.8
million.

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At-The-Market Sales


During the year ended December 31, 2020, we sold an aggregate of 2,614,286
shares of our common stock through our At-the-Market ATM facility, or ATM
Facility, pursuant to a sales agreement dated October 4, 2019 with Cowen and
Company, LLC, as sales agent. The gross proceeds from these sales were
approximately $24.6 million, before deducting fees of approximately $0.8
million, resulting in net proceeds of approximately $23.8 million. During the
year ended December 31, 2021, we did not sell any shares under an ATM facility.

Vaxcyte, Inc. Equity Ownership


In June 2020, Vaxcyte closed an initial public offering of its common stock at a
price per share of $16.00. The Vaxcyte common stock held by us is measured at
fair value at each reporting period based on the closing price of Vaxcyte's
common stock on the last trading day of each reporting period, adjusted for a
discount for lack of marketability due to the presence of a lock-up agreement
during certain periods in 2020, with any unrealized gains and losses recorded in
our statements of operations. The lock-up agreement expired in December 2020. As
of December 31, 2021, we held 1,562,879 shares of Vaxcyte common stock with an
estimated fair value of $37.2 million.

Term Loan


On February 28, 2020, or the Effective Date, we entered into a loan and security
agreement, or the Loan and Security Agreement, with Oxford Finance LLC, or
Oxford, as the collateral agent and a lender, and Silicon 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 dated August 4, 2017.

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 on March 1, 2024, or the Maturity Date, and will be
interest-only through March 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) day U.S. LIBOR rate reported in the Wall 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 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 of
February 28, 2030 or the closing of certain merger or consolidation
transactions.

Leases


In June 2021, we entered into a third amendment, or Third Amendment, to our
manufacturing facility lease, dated May 18, 2011, as amended, by and between
Alemany Plaza LLC, located at San 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 on July 31, 2026, and it includes an option to renew the San Carlos
Lease for an additional five years. The aggregate estimated base rent payments
due over the Lease Extension Period is approximately $4.2 million, subject to
certain terms contained in the San Carlos Lease.

In June 2021, we entered into a first amendment, or the First Amendment, to our
manufacturing facility lease, dated May 4, 2015, as amended, by and between 870
Industrial Road LLC, located at San Carlos, California, 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 on June 30, 2026, and it includes an option to
renew the Industrial Lease for an additional five years. The aggregate estimated
base rent payments due over the Industrial Lease Extension Period is
approximately $4.3 million, subject to certain terms contained in the Industrial
Lease.

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In September 2020, the Company 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 in South San Francisco, California,
or the Premises. The Company uses the Premises as its new corporate headquarters
and to conduct (or expand) research and development activities. The Company
commenced making monthly payments for the first 85,755 square feet of the
Premises, or Initial Premises, in July 2021, with occupancy of such space
commencing in August 2021. The Company was 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, effective
December 12, 2016, between the Sublessor 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, the Company has the right to
accelerate the commencement date on the Expansion Premises to an earlier date
upon six months' prior written notice to the Sublessor. The Sublease for both
the Initial Premises and Expansion Premises will expire on December 31, 2027.
With a commencement date on the Initial Premises of July 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 the Company of base rent abatement to be provided by the Sublessor,
subject to certain terms contained in the Sublease. The Sublease contains
customary provisions requiring the Company to pay its 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 the Company
fails to remedy a breach of certain of its obligations within specified time
periods. Additionally, the Company posted a security deposit of $0.9 million,
which is reflected as restricted cash in non-current assets on the Company's
balance sheet as of December 31, 2021 and 2020.

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.

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Cash Flows

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


                                                            Year Ended December 31,
                                                            2021               2020
                                                                (in thousands)
Cash used in operating activities                       $     (81,679 )    $    (67,802 )
Cash (used in) provided by investing activities               (97,315 )     

604

Cash provided by financing activities                           3,256       

269,247

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

                                         $    (175,738 )    

$ 202,049

Cash Flows from Operating Activities


Cash used in operating activities for the year ended December 31, 2021 was $81.7
million. Our net loss of $105.5 million included $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, non-cash charges of $23.2
million for stock-based compensation, $4.8 million for depreciation and
amortization, $4.9 million for noncash lease expenses, $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 an increase of $6.9
million in accounts receivable from our collaborators, a decrease of $15.2
million in our deferred revenue balance from revenue recognized under our
collaboration agreements, 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
and other liabilities due to timing of payments, and an increase of $2.6 million
in accrued compensation due to increased headcount.

Cash used in operating activities for the year ended December 31, 2020 was $67.8
million. Our net loss of $32.1 million included $41.5 million of unrealized gain
on equity securities as a result of the remeasurement of the estimated fair
value of our investment in Vaxcyte common stock, and was partially offset by
non-cash charges of $11.9 million for stock-based compensation, $4.3 million for
depreciation and amortization, $0.2 million related to revaluation of the vested
options under the Call Option Plan, $0.5 million for the amortization of
premiums on our marketable securities, and $0.3 million for the amortization of
debt issuance costs. Cash used in operating activities also reflected a net
change in operating assets and liabilities of $11.5 million, due principally to
a decrease of $15.0 million in our deferred revenue balance from revenue
recognized under our collaboration agreements, which was partially offset by an
increase of $2.8 million in accrued compensation due to increased headcount and
bonuses resulting from certain company goal achievements and a decrease of $0.7
million in accounts receivable from our collaborators.

Cash Flows from Investing Activities


Cash used in investing activities of $97.3 million for the year ended December
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, offset partially
by maturities and sales of marketable securities of $166.7 million.

Cash provided by investing activities of $0.6 million for the year ended December 31, 2020 was primarily related to purchases of marketable securities of $130.7 million and purchases of property and equipment of $7.1 million, principally for laboratory and manufacturing equipment, offset partially by maturities and sales of marketable securities of $138.4 million.

Cash Flows from Financing Activities


Cash provided by financing activities of $3.3 million for the year ended
December 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.

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Cash provided by financing activities of $269.2 million for the year ended
December 31, 2020 was primarily related to $251.4 million of net proceeds from
the issuance of common stock from our public offering and the sales of common
stock pursuant to our ATM Facility, $25.0 million of gross proceeds from our
debt refinancing, and $2.8 million of net proceeds received from participants in
our employee equity plans and from the exercise of common stock options,
partially offset by a $10.0 million repayment of the August 2017 Loan (as
defined in Note 7 to our financial statements included elsewhere in this
report).

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 with United 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 Celgene
(now BMS), Merck, and EMD Serono, and to a lesser extent, from manufacturing,
supply and services and materials we provide to the above collaborators and to
Vaxcyte.

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. 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

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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.

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.

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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.

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.

119

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Stock-Based Compensation


We recognize compensation costs related to stock-based awards granted to
employees based on the estimated fair value of the awards on the date of grant.
We account for forfeitures of stock-based awards as they occur. We estimate the
grant date fair value, and the resulting stock-based compensation expense, using
the Black-Scholes option-pricing model. The grant date fair value of the
stock-based awards is generally recognized on a straight-line basis over the
requisite service period, which is generally the vesting period of the
respective awards.

The Black-Scholes option-pricing model requires the use of highly subjective
assumptions to determine the fair value of stock-based awards, including the
expected term and expected volatility of the underlying stock. We will continue
to use judgment in evaluating the expected term and expected volatility utilized
for our stock-based compensation calculations on a prospective basis.

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 of December 31, 2021, we had federal net operating loss, or NOL,
carryforwards of $281.7 million and federal general business credits from
research and development expenses totaling $25.1 million, as well as state NOL
carryforwards of $109.2 million and state research and development credits of
$17.2 million. If not utilized, the federal NOL carryforwards will expire at
various dates beginning in 2032, 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
of June 16, 2003 through December 31, 2020 and concluded that it is more likely
than not that we experienced an ownership change on November 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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