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SUTRO BIOPHARMA, INC.

(STRO)
  Report
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SUTRO BIOPHARMA, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/08/2022 | 04:45pm EST
You should read the following discussion of our financial condition and results
of operations in conjunction with our condensed financial statements and the
related notes and other financial information included elsewhere in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year
ended December 31, 2021. In addition to historical financial information, this
discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as statements of our plans,
objectives, expectations, intentions and belief. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth in the section titled "Risk
Factors" under Part II, Item 1A below. These forward-looking statements may
include, but are not limited to, statements related to our expectations
regarding the potential impacts of the COVID-19 pandemic on our business,
financial condition, and results of operations, our future results of operations
and financial position, business strategy, market size, potential growth
opportunities, preclinical and clinical development activities, efficacy and
safety profile of our product candidates, use of net proceeds from our public
offerings, our ability to maintain and recognize the benefits of certain
designations received by product candidates, the timing and results of
preclinical studies and clinical trials, commercial collaborations with third
parties and the receipt and timing of potential regulatory designations,
approvals and commercialization of product candidates. The words "believe,"
"may," "will," "potentially," "estimate," "continue," "anticipate," "predict,"
"target," "intend," "could," "would," "should," "project," "plan," "expect," and
similar expressions that convey uncertainty of future events or outcomes are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words.

These statements are based upon information available to us as of the date of
this Quarterly Report on Form 10-Q and, while we believe such information forms
a reasonable basis for such statements, such information may be limited or
incomplete; and our statements should not be read to indicate that we have
conducted an exhaustive inquiry into, or review of, all potentially available
relevant information. These statements are inherently uncertain and investors
are cautioned not to unduly rely upon these statements.

Overview


We are a clinical-stage oncology company developing site-specific and
novel-format antibody drug conjugates, or ADCs, enabled by our proprietary
integrated cell-free protein synthesis platform, XpressCF®, and our site
specific conjugation platform, XpressCF+®. We aim to design and develop the most
relevant and potent modalities, including ADCs, bispecific ADCs,
immunostimulatory ADCs, or iADCs, cytokine-based therapeutics, 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® and XpressCF+® platforms 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+® 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.

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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. In January
2022, we released initial results of the dose expansion 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. In August 2021, we were granted Fast Track designation for STRO-002
by the U.S. Food and Drug Administration, or FDA for the treatment of patients
with platinum-resistant epithelial ovarian, fallopian tube, or primary
peritoneal cancer who have received one to three prior lines of systemic
therapy. We have initiated discussions with the FDA regarding an appropriate
trial design for a registration-directed trial of STRO-002 to potentially
support an accelerated approval; however, whether any trial is sufficient to
receive FDA approval under the accelerated approval pathway will depend on the
safety and efficacy results of such trial and will only be determined by the FDA
upon review of a submitted biologics license application, or BLA. 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, which agreement was amended in April 2022, or the
Amendment. Pursuant to the Amendment, the initial nonrefundable upfront payment
due from Tasly was amended to $25.0 million, and a $15.0 million payment will be
placed in escrow by Tasly in the second half of 2022 and become payable to us
upon achievement of certain regulatory milestones. The Amendment also added an
additional regulatory milestone payment to the Tasly License Agreement,
providing additional potential payments totaling up to $350.0 million related to
development, regulatory and commercialization milestones, beyond the payments
described above, and made certain other ministerial edits.

Our second candidate, STRO-001, is currently enrolling patients in a Phase 1
trial, with updated data reported in December 2020. Based on such reported data,
STRO-001 has been generally well-tolerated and, unlike certain other ADCs, no
ocular toxicity signals have been observed, with no patients receiving
prophylactic corticosteroid eye drops. Dose escalation in the STRO-001 Phase 1
trial is continuing, and the maximum tolerated dose has not yet been reached. 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+® platforms, we have also
entered into multi-target, product-focused collaborations with leaders in the
field of oncology, including an immunostimulatory antibody-drug conjugates
collaboration with Astellas Pharma Inc., or Astellas, 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"); BioNova; and Tasly. Our XpressCF® and
XpressCF+® 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, EMD Serono, BioNova
and Tasly, 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
$58.5 million and a net loss of $65.1 million for the six months ended June 30,
2022, which net loss included the non-operating, unrealized loss of $3.2 million
related to our holdings of Vaxcyte common stock. We had a loss from operations
of $28.8 million and net loss of $36.5 million, which net loss included the
non-operating, unrealized loss of $6.4 million related to our holdings of
Vaxcyte common stock, for the six months ended June 30, 2021. Substantially all
of our losses have resulted from expenses incurred in connection with our
research and development programs and from general and administrative costs
associated with our operations. We cannot assure you that we will have net
income or that we will generate positive cash flow from operating activities in
the future. As of June 30, 2022, we had an accumulated deficit of $398.5
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

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expand our intellectual property portfolio, seek regulatory and marketing
approval for any product candidates that we may develop, acquire or in-license
other assets or technologies, ultimately establish a sales, marketing and
distribution infrastructure to commercialize any products for which we may
obtain marketing approval, and operate as a public company. Our net losses may
fluctuate significantly from quarter-to-quarter and year-to-year, depending on
the timing of our clinical trials, our expenditures on other research and
development activities and the timing of achievement and receipt of upfront,
milestones and other collaboration agreement payments.

Impacts of the COVID-19 Pandemic


The extent of the impact of COVID-19 on our operational and financial
performance will depend on certain developments, including the duration and
spread of the pandemic, impacts on our clinical studies, employee or industry
events, and effects on our collaboration partners, suppliers, service providers
and manufacturers, all of which are uncertain and cannot be predicted. The
COVID-19 pandemic and its adverse effects have become more prevalent in the
locations where we, our CROs, suppliers or third-party business partners conduct
business. We are experiencing the impact of the COVID-19 pandemic on our
business through 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-Q, the extent to which the COVID-19 pandemic may impact our financial
condition, results of operations or guidance is uncertain. The effect of the
COVID-19 pandemic will not be fully reflected in our results of operations and
overall financial performance until future periods. See the section titled "Risk
Factors" for further discussion of the possible impact of the ongoing COVID-19
pandemic on our business.

Financial Operations Overview

Revenue

We 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, EMD Serono, and Tasly, 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

                                       28
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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. Nonrefundable advance payments for
services that will be used or rendered for future research and development
activities are recorded as prepaid expenses and recognized as expenses as the
related services are performed.

We expect our research and development expenses to increase in the future as we
advance our product candidates into and through preclinical studies and clinical
trials, pursue regulatory approval of our product candidates, expand our
pipeline of product candidates and continue to develop our manufacturing
facility and capabilities. The process of conducting the necessary preclinical
and clinical research to obtain regulatory approval is costly and time
consuming. The actual probability of success for our product candidates may be
affected by a variety of factors including: the safety and efficacy of our
product candidates, early clinical data, investment in our clinical programs,
the ability of collaborators to successfully develop our licensed product
candidates, competition, manufacturing capability and commercial viability. We
may never succeed in achieving regulatory approval for any of our product
candidates. As a result of the uncertainties discussed above, we are unable to
determine the duration and completion costs of our research and development
projects or when and to what extent we will generate revenue from the
commercialization and sale of our product candidates.

The following table summarizes our research and development expenses incurred
during the indicated periods. The internal costs include personnel, facility
costs and research and scientific related activities associated with our
pipeline. The external program costs reflect external costs attributable to our
clinical development candidates and preclinical candidates selected for further
development. Such expenses include third-party costs for preclinical and
clinical studies and research, development and manufacturing services, and other
consulting costs.


                                            Three Months Ended          Six Months Ended
                                                 June 30,                   June 30,
                                             2022          2021         2022         2021
                                              (in thousands)             (in thousands)
Internal costs:
Research and drug discovery               $    8,294     $  6,741     $ 16,454     $ 12,701
Process and product development                3,757        3,361        7,445        6,731
Manufacturing                                  9,320        7,918       17,969       15,734
Clinical development                           1,806        1,053        4,040        1,953
Total internal costs                          23,177       19,073       45,908       37,119
External Program Costs:
Research and drug discovery                      587          366        1,069          690
Toxicology and translational science             229          196          502          606
Process and product development                   87           20          268          182
Manufacturing                                  5,040        2,745        8,708        4,469
Clinical development                           3,212        2,909        5,867        4,805
Total external program costs                   9,155        6,236      

16,414 10,752 Total research and development expenses $ 32,332 $ 25,309 $ 62,322 $ 47,871





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General and Administrative


Our general and administrative expenses consist primarily of personnel costs,
expenses for outside professional services, including legal, human resources,
audit, accounting and tax services and allocated facilities-related costs.
Personnel costs include salaries, employee benefits and stock-based
compensation. We expect to incur additional expenses operating as a public
company, including expenses related to compliance with the rules and regulations
of 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, and as we continue to advance
our product candidates into and through the clinic.

Interest Income

Interest income consists primarily of interest earned on our invested funds.

Unrealized Gain (Loss) on 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. Other income (expense)
includes changes in values attributable to the arrangement with our Call Option
Plan whereby we granted certain employees options to purchase shares of Vaxcyte
common stock.

Income Taxes

We recorded a foreign income tax charge of $2.5 million due to a withholding tax
in China on an upfront license fee payment received from Tasly during the three
and six months ended June 30, 2022. All other income tax charges and benefits
for the three and six months ended June 30, 2022 and June 30, 2021, have been
immaterial, primarily due to the net loss in each period. Our deferred tax
assets continue to be fully offset by a valuation allowance.

                                       30
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Comparison of the Three Months Ended June 30, 2022 and 2021

                                                 Three Months Ended
                                                      June 30,
                                                                                            Change
                                                 2022          2021          Change          (%)
                                                          (in thousands)
Revenues                                      $   28,096     $  28,049     $       47              -
Operating expenses
Research and development                          32,332        25,309          7,023             28 %
General and administrative                        15,143        12,545          2,598             21 %
Total operating expenses                          47,475        37,854          9,621             25 %
Loss from operations                             (19,379 )      (9,805 )       (9,574 )           98 %
Interest income                                      197           175             22             13 %

Unrealized (loss) gain on equity securities (3,736 ) 4,325

    (8,061 )         (186 )%
Interest and other expense, net                     (594 )        (847 )          253            (30 )%
Loss before provision for income taxes           (23,512 )      (6,152 )      (17,360 )          282 %
Provision for income taxes                         2,500             -          2,500              *
Net loss                                      $  (26,012 )   $  (6,152 )   $  (19,860 )          323 %


*Percentage not meaningful

Revenue

We have recognized revenue as follows during the indicated periods:

                                             Three Months Ended
                                                  June 30,
                                                                                        Change
                                             2022          2021          Change           (%)
                                                      (in thousands)

Bristol Myers Squibb Company ("BMS") $ 2,266 $ 5,427 $ (3,161 )

           (58 )%
Merck Sharp & Dohme Corporation
("Merck")                                        146        19,878        (19,732 )           (99 )%
Merck KGaA, Darmstadt, Germany
(operating in the United
  States and Canada under the name "EMD
Serono")                                         137         2,375         (2,238 )           (94 )%
Vaxcyte                                          547           369            178              48 %
Tasly Biopharmaceuticals Co., Ltd.
("Tasly")                                     25,000             -         25,000               *
Total revenue                             $   28,096     $  28,049     $       47               -


*Percentage not meaningful

Total revenue decreased by $47,000 during the three months ended June 30, 2022
as compared to the three months ended June 30, 2021. This was due primarily to a
$19.7 million decrease from Merck, related to a $3.3 million decrease from the
2021 completion of the performance obligations associated with the first and
second target programs under the 2018 Merck Agreement, recognition of a $15.0
million contingent payment earned in the second quarter of 2021 for the
initiation of the first IND-enabling toxicology study under the first program in
the collaboration, a decrease of $1.2 million in research and development
services and materials supply, and a decrease of $0.2 million due to the absence
in 2022 of the financing component related to the 2018 Merck Agreement. Revenue
from BMS decreased by $3.2 million primarily due to a decrease in materials
supply and manufacturing activities supporting clinical trial supply, and
revenue from EMD Serono decreased by $2.2 million primarily due to a $2.0
million contingent payment earned in the second quarter of 2021. These decreases
were offset by an earned $25.0 million upfront payment under the Tasly License
Agreement, and a $0.2 million increase in Vaxcyte revenue.

Research and Development Expense


Research and development expense increased by $7.0 million, or 28%, during the
three months ended June 30, 2022 as compared to the three months ended June 30,
2021. The increase was due primarily to increases of $2.0 million in
personnel-related expenses due to higher headcount, $3.1 million in consulting
and outside services, $1.8 million in laboratory supplies and preclinical
research and clinical development expenses, and $0.1 million in travel-related
expenses.

                                       31
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General and Administrative Expense


General and administrative expense increased by $2.6 million, or 21%, during the
three months ended June 30, 2022 as compared to the three months ended June 30,
2021. The increase was due primarily to increases of $1.4 million in
personnel-related expenses due to higher headcount, $0.6 million in external
services, $0.4 million in equipment and office-related expenses, $0.1 million in
travel-related expenses, and $0.1 million in facilities-related expenses.


Interest Income


Interest income increased by $22,000 during the three months ended June 30, 2022
as compared to the three months ended June 30, 2021, due primarily to a $0.3
million increase in the amortization of premiums on investments, partially
offset by a $0.3 million decrease in interest income due to lower investment
balances.

Unrealized (Loss) Gain on Equity Securities


Unrealized loss on equity securities was $3.7 million during the three months
ended June 30, 2022 as compared to an unrealized gain of $4.3 million for the
three months ended June 30, 2021. The unrealized (loss) gain on equity
securities in each period was entirely due to the remeasurement of the fair
value of our investment in Vaxcyte common stock.

Interest and Other Expense, Net


Interest and other expense, net, decreased by $0.3 million during the three
months ended June 30, 2022 as compared to the three months ended June 30, 2021,
due primarily to the absence in 2022 of the financing component related to the
2018 Merck Agreement.

Comparison of the Six Months Ended June 30, 2022 and 2021

                                                 Six Months Ended
                                                     June 30,
                                                                                           Change
                                                2022          2021          Change           (%)
                                                          (in thousands)
Revenues                                      $  33,993     $  42,709     $   (8,716 )           (20 )%
Operating expenses
Research and development                         62,322        47,871         14,451              30 %
General administrative                           30,182        23,652          6,530              28 %
Total operating expenses                         92,504        71,523         20,981              29 %
Loss from operations                            (58,511 )     (28,814 )      (29,697 )           103 %
Interest income                                     313           372            (59 )           (16 )%

Unrealized (loss) gain on equity securities (3,173 ) (6,364 )

    3,191             (50 )%
Interest and other expense, net                  (1,251 )      (1,705 )          454             (27 )%

Loss before provision for income taxes (62,622 ) (36,511 )

 (26,111 )            72 %
Provision for income taxes                        2,500             -          2,500               *
Net loss                                      $ (65,122 )   $ (36,511 )   $  (28,611 )            78 %


*Percentage not meaningful

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Revenue

We have recognized revenue as follows during the indicated periods:

                                       Six Months Ended
                                           June 30,
                                                                              Change
                                       2022         2021        Change         (%)
                                               (in thousands)

Bristol Myers Squibb Company $ 4,431 $ 6,666 $ (2,235 )

       (34 )%
Merck Sharp & Dohme Corporation         1,210       31,761       (30,551 )        (96 )%
Merck KGaA, Darmstadt, Germany          2,034        2,595          (561 )        (22 )%
Vaxcyte                                 1,318        1,687          (369 )        (22 )%
Tasly Biopharmaceuticals Co., Ltd.     25,000            -        25,000            *
Total revenue                        $ 33,993     $ 42,709     $  (8,716 )        (20 )%


Total revenue decreased by $8.7 million, or 20%, during the six months ended
June 30, 2022 compared to the six months ended June 30, 2021. This was primarily
due to a $30.6 million decrease from Merck, related to a $5.5 million decrease
from the 2021 completion of the performance obligations associated with the
first and second target programs under the 2018 Merck Agreement, full
recognition of $6.0 million of revenue earned in the first quarter of 2021
associated with the contingent third target program upon the termination of the
related performance obligation, recognition of a $15.0 million contingent
payment earned in the second quarter of 2021 for the initiation of the first
IND-enabling toxicology study under the first program in the collaboration, a
decrease of $2.6 million in research and development services and materials
supply, a decrease of $1.0 million in manufacturing activities supporting
clinical trial supply, and a decrease of $0.4 million due to the absence in 2022
of the financing component related to the 2018 Merck Agreement. BMS revenue
decreased by $2.2 million from materials supply and manufacturing activities
supporting clinical trials supply, EMD Serono revenue decreased by $0.6 million
primarily due to a $2.0 million contingent payment earned in the second quarter
of 2021, partially offset by a $1.4 million increase in materials supply and
manufacturing activities supporting clinical trial supply, and Vaxcyte revenue
decreased by $0.4 million, which reflects a $1.0 million decrease in
manufacturing activities offset by a $0.6 million increase in research and
development services. These decreases were offset by an earned $25.0 million
upfront payment under the Tasly License Agreement.

Research and Development Expense


Research and development expense increased by $14.5 million, or 30%, during the
six months ended June 30, 2022 as compared to the six months ended June 30,
2021. The increase was due primarily to increases of $5.3 million in
personnel-related expenses due to higher headcount, $5.8 million in consulting
and outside services, $3.3 million in laboratory supplies and preclinical
research and clinical development expenses, $0.2 million in travel, equipment
and office-related expenses, partially offset by a $0.1 million decrease in
facilities-related expenses.

General and Administrative Expense


General and administrative expense increased by $6.5 million, or 28%, during the
six months ended June 30, 2022 as compared to the six months ended June 30,
2021. The increase was due primarily to increases of $3.6 million in
personnel-related expenses due to higher headcount, $1.9 million in external
services, $0.5 million in equipment and office-related expenses, $0.3 million in
facilities-related expenses, and $0.2 million in travel-related and other
expenses.


Interest Income

Interest income decreased by $0.1 million during the six months ended June 30,
2022 as compared to the six months ended June 30, 2021, due primarily to a $0.3
million increase in the amortization of premiums on investments, partially
offset by a $0.3 million decrease in interest income due to lower investment
balances.

Unrealized Loss on Equity Securities


Unrealized loss on equity securities was $3.2 million during the six months
ended June 30, 2022 as compared to an unrealized loss of $6.4 million for the
six months ended June 30, 2021. The unrealized loss on equity securities in each
period was entirely due to the remeasurement of the fair value of our investment
in Vaxcyte common stock.

                                       33
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Interest and Other Expense, Net


Interest and other expense, net, decreased by $0.5 million during the six months
ended June 30, 2022 as compared to the six months ended June 30, 2021, due
primarily to the absence in 2022 of the financing component related to the 2018
Merck Agreement.

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 June 30,
2022, we had cash, cash equivalents and marketable securities of $191.6 million,
equity securities of $34.0 million, outstanding debt of $22.3 million and an
accumulated deficit of $398.5 million.

In June 2022, we entered into a License and Collaboration Agreement with
Astellas Pharma Inc., or Astellas, for the development of immunostimulatory
antibody-drug conjugates for up to three biological targets, to be identified by
Astellas. Pursuant to the agreement with Astellas, we will receive from Astellas
a one-time, nonrefundable, non-creditable, upfront payment of $90.0 million,
which amount is reflected in our condensed financial statements as a receivable
as of June 30, 2022.

At-The-Market Sales

During the three months ended June 30, 2022, we sold an aggregate of 1,716,996
shares of our common stock through our ATM Facility pursuant to the Sales
Agreement with Jefferies. The gross proceeds from these sales were approximately
$8.9 million, before deducting fees of approximately $0.7 million, resulting in
net proceeds of approximately $8.2 million.

2022 Upfront Payment from Tasly


During the three months ended June 30, 2022, we earned a $25.0 million
nonrefundable upfront payment from Tasly under the Tasly License Agreement to
grant Tasly an exclusive license to develop and commercialize STRO-002 in
Greater China. The upfront payment, net of a withholding tax of $2.5 million,
resulted in a net payment to us of $22.5 million.

2021 Contingent Payment from Merck

During the three months ended June 30, 2021, we earned and received a $15.0 million contingent payment from Merck for the initiation of an IND enabling toxicology study for the first program in its collaboration to develop novel cytokine derivative therapeutics for cancer and autoimmune disorders.

Vaxcyte, Inc. Equity Ownership

As of June 30, 2022, we held 1,562,879 shares of Vaxcyte common stock with an estimated fair value of $34.0 million.

Term Loan

For a description of our Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, please see Note 6 to our condensed financial statements.

Leases


In June 2021, we entered into a third amendment, 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 the 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.

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In June 2021, we entered into a first amendment, or 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.

In September 2020, we entered into a sublease agreement, or the Sublease, with
Five Prime Therapeutics, Inc., or the Sublessor, for approximately 115,466
square feet, in a building located in South San Francisco, California, or the
Premises. We use the Premises as our new corporate headquarters and to conduct
(or expand) research and development activities. We commenced making monthly
payments for the first 85,755 square feet of the Premises, or Initial Premises,
in July 2021, with occupancy of such space commencing in August 2021. We were
provided early access to the Initial Premises in the fourth quarter of 2020 to
conduct certain planning and tenant improvement work. The Sublease is
subordinate to the lease agreement, 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, we have the right to accelerate the commencement date on the
Expansion Premises to an earlier date upon six months' prior written notice to
the Sublessor. The Sublease for both the Initial Premises and Expansion Premises
will expire 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 us of base rent
abatement to be provided by the Sublessor, subject to certain terms contained in
the Sublease. The Sublease contains customary provisions requiring us to pay our
pro rata share of utilities and a portion of the operating expenses and certain
taxes, assessments and fees of the Premises and provisions allowing the
Sublessor to terminate the Sublease upon the termination of the lease with the
Landlord or if we fail to remedy a breach of certain of its obligations within
specified time periods. Additionally, we posted a security deposit of $0.9
million, which is reflected as restricted cash in non-current assets on our
balance sheet as of June 30, 2022 and December 31, 2021.

Funding Requirements


Based upon our current operating plan, we believe that our existing capital
resources will enable us to fund our operating expenses and capital expenditure
requirements through at least the next twelve months after the date of this
filing. We have based this estimate on assumptions that may prove to be wrong,
and we could utilize our available capital resources sooner than we currently
expect. We will continue to require additional financing to advance our current
product candidates into and through clinical development, to develop, acquire or
in-license other potential product candidates, pay our obligations and to fund
operations for the foreseeable future.

We may seek to raise any necessary additional capital through a combination of
public or private equity offerings, debt financings, collaborations, strategic
alliances, licensing arrangements, marketing and distribution arrangements, or
other sources of financing. Adequate additional funding may not be available to
us on acceptable terms, or at all. Any failure to raise capital as and when
needed could have a negative impact on our financial condition and on our
ability to pursue our business plans and strategies, and may cause us to delay,
reduce the scope of or suspend one or more of our pre-clinical and clinical
studies, research and development programs or commercialization efforts, and may
necessitate us to delay, reduce or terminate planned activities in order to
reduce costs. Due to the numerous risks and uncertainties associated with the
development and commercialization of our product candidates and the extent to
which we may enter into additional collaborations with third parties to
participate in their development and commercialization, we are unable to
estimate the amounts of increased capital outlays and operating expenditures
associated with our current and anticipated clinical studies.

To the extent we raise additional capital through new collaborations, strategic
alliances or licensing arrangements with third parties, we may have to
relinquish valuable rights to our product candidates, future revenue streams,
research programs or product candidates or to grant licenses on terms that may
not be favorable to us. If we do raise additional capital through public or
private equity or convertible debt offerings, the ownership interest of our
existing stockholders will be diluted, and the terms of these securities may
include liquidation or other preferences that adversely affect our stockholders'
rights. If we raise additional capital through debt financing, we may be subject
to covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, making capital expenditures or declaring
dividends.

                                       35
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Cash Flows

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

                                                                 Six Months Ended
                                                                     June 30,
                                                               2022           2021
                                                                  (in thousands)
Net cash used in operating activities                        $ (38,441 )   $  (35,693 )
Net cash provided by (used in) investing activities             80,897       (115,854 )
Net cash provided by financing activities                        6,245      

1,787

Net decrease in cash, cash equivalents and restricted cash $ 48,701 $ (149,760 )

Cash Flows from Operating Activities


Cash used in operating activities for the six months ended June 30, 2022 was
$38.4 million. Our net loss of $65.1 million included non-cash charges of $13.7
million for stock-based compensation, $3.2 million for unrealized loss on equity
securities as a result of the remeasurement of the estimated fair value of our
investment in Vaxcyte common stock, $2.7 million for depreciation and
amortization, $1.3 million for noncash lease expense, and $0.9 million for the
amortization of premium on marketable securities. Cash used in operating
activities also reflected a net change in operating assets and liabilities of
$4.9 million, due to an increase of $85.2 million in accounts receivable from
our collaborators, an increase of $0.1 million in prepaid expenses and other
assets, an increase of $1.9 million in accounts payable and other liabilities
due to timing of payments, an increase of $91.0 million in deferred revenue
primarily due to the $90.0 million upfront payment receivable from Astellas, and
an increase of $0.9 million in our operating lease liability, partially offset
by a decrease of $3.7 million in accrued compensation expense primarily due to
bonuses paid in connection with certain company goal achievements.

Cash used in operating activities for the six months ended June 30, 2021 was
$35.7 million. Our net loss of $36.5 million included non-cash charges of $9.9
million for stock-based compensation, $6.4 million of unrealized loss on equity
securities as a result of the remeasurement of the estimated fair value of our
investment in Vaxcyte common stock, $2.4 million for depreciation and
amortization, $2.4 million for noncash lease expenses, $1.2 million for the
amortization of premium on marketable securities, and $0.3 million for other
noncash expenses. Cash used in operating activities also reflected a net change
in operating assets and liabilities of $21.7 million, due to a decrease of $12.4
million in our deferred revenue balance from revenue recognized under our
collaboration agreements, an increase of $3.6 million in accounts receivable
from our collaborators, an increase of $4.8 million in prepaid expenses and
other assets, a decrease of $2.3 million in accrued compensation expense
primarily due to bonuses paid in connection with certain company goal
achievements, and a decrease of $0.8 million in our operating lease liability,
partially offset by an increase of $2.2 million in accounts payable and other
liabilities due to timing of payments.

Cash Flows from Investing Activities

Cash provided by investing activities of $80.9 million for the six months ended June 30, 2022 was primarily related to maturities and sales of marketable securities of $99.6 million, partially offset by purchases of marketable securities of $14.9 million and purchases of $3.8 million principally for laboratory equipment.


Cash used in investing activities of $115.9 million for the six months ended
June 30, 2021 was primarily related to purchases of marketable securities of
$202.3 million and purchases of property and equipment of $7.8 million,
principally for leasehold improvements to the premises under the Sublease,
offset partially by maturities and sales of marketable securities of $94.3
million.

                                       36
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Cash Flows from Financing Activities


Cash provided by financing activities of $6.2 million for the six months ended
June 30, 2022 was primarily related to $8.6 million of net proceeds from our ATM
Facility sales of common stock, $1.0 million of net proceeds received from
participants in our employee equity plans and $0.2 million of proceeds received
from the exercise of common stock options, partially offset by a debt repayment
of $3.1 million, and a $0.4 million tax payment related to the net shares
settlement of vested restricted stock units.

Cash provided by financing activities of $1.8 million for the six months ended
June 30, 2021 was primarily related to $1.8 million of proceeds received from
the exercise of common stock options and $0.9 million of net proceeds received
from participants in our employee equity plans, partially offset by a $0.5
million payment related to issuance costs and a $0.4 million tax payment related
to the net shares settlement of vested restricted stock units.

Contractual Obligations and Other Commitments


In addition to the contractual obligations and commitments as noted above and
elsewhere in this Quarterly Report on Form 10-Q 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.

There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

See Note 2 to our financial statements included elsewhere in this report for more information.

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