SUTRO BIOPHARMA, INC. 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 endedDecember 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 (GMP) compliant
manufacturing facility. We have the ability to manufacture our proprietary
cell-free extract that supports our production of proteins on a large scale
using a semi-continuous fermentation process. Our 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 is 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 evaluating STRO-001 as a
monotherapy for patients with multiple myeloma and NHL. The trial is being
conducted in two parts: dose escalation and dose expansion. The primary
objectives of the trial are to determine the safety and tolerability profile of
STRO-001, to determine the recommended Phase 2 dose level and interval and to
evaluate preliminary anti-tumor activity. Our secondary objectives are to
characterize the human pharmacokinetics of STRO-001 and additional safety,
tolerability and efficacy measures.
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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. 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. On November 3, 2022 , an abstract was published
announcing an upcoming oral presentation at the 64th American Society of
Hematology Annual Meeting and Exposition (ASH 2022) showing the anti-leukemic
activity of STRO-002 for pediatric patients with relapsed/refractory
CBF2AT3-GLIS2 acute myeloid leukemia, or AML treated under compassionate use.
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. In the first quarter of 2022, Vaxcyte
announced initiation of a Phase 1/2 clinical proof-of-concept study of its lead
product candidate, VAX-24, its 24-valent pneumococcal conjugate vaccine
candidate, under investigation for the prevention of invasive pneumococcal
disease in adults, and announced in October 2022 positive topline data from such
study in adults aged 18-64.
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, Tasly and Astellas, 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
$79.7 million and a net loss of $84.6 million for the nine months ended
September 30, 2022 , which net loss included the non-operating, unrealized gain
of $0.3 million related to our holdings of Vaxcyte common stock. We had a loss
from operations of $63.5 million and net loss of $67.4 million , which net loss
included the non-operating, unrealized loss of $1.9 million related to our
holdings of Vaxcyte common stock, for the nine months ended September 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 September 30, 2022 , we had an
accumulated deficit of $418.0 million . We do not expect to generate any revenue
from commercial product sales unless and until we successfully complete
development and obtain regulatory
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approval for one or more of our product candidates, which we expect will take a
number of years. If we obtain regulatory approval for any of our product
candidates, we expect to incur significant commercialization expenses related to
product sales, access, marketing, manufacturing and distribution. We expect our
operating expenses to significantly increase as we continue to develop, and seek
regulatory approvals for, our product candidates, engage in other research and
development activities, expand our pipeline of product candidates, continue to
develop our manufacturing facility and capabilities, maintain and expand our
intellectual property portfolio, seek regulatory and marketing approval for any
product candidates that we may develop, acquire or in-license other assets or
technologies, ultimately establish a sales, marketing and distribution
infrastructure to commercialize any products for which we may obtain marketing
approval, and operate as a public company. Our net losses may fluctuate
significantly from quarter-to-quarter and year-to-year, depending on the timing
of our clinical trials, our expenditures on other research and development
activities and the timing of achievement and receipt of upfront, milestones and
other collaboration agreement payments.
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 had become 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 modification to our activities. Additionally, the COVID-19 pandemic has had, and may 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. 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 any change to the current status of the COVID-19 pandemic, or other infectious diseases, 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 , BioNova,Tasly and Astellas, 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. 28 -------------------------------------------------------------------------------- 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. 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.
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Internal costs:
Research and drug discovery $ 8,924 $ 6,708 $ 25,378 $ 19,409
Process and product development 3,857 4,470 11,302 11,201
Manufacturing 9,132 7,579 27,101 23,313
Clinical development 2,452 1,709 6,492 3,662
Total internal costs 24,365 20,466 70,273 57,585
External Program Costs:
Research and drug discovery 793 379 1,862 1,069
Toxicology and translational science 210 357 712 963
Process and product development 69 104 337 286
Manufacturing 3,149 3,249 11,857 7,718
Clinical development 3,128 2,047 8,995 6,852
Total external program costs 7,349 6,136
23,763 16,888
Total research and development expenses
General and Administrative Our general and administrative expenses consist primarily of personnel costs, expenses for outside professional services, including legal, human resources, audit, accounting and tax services and allocated facilities-related costs. Personnel costs include salaries, employee benefits and stock-based compensation. We expect to incur additional expenses operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and listing standards applicable to companies listed on the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function and our general and administrative expenses to support the anticipated growth of our business, and as we continue to advance our product candidates into and through the clinic.
Interest Income
Interest income consists primarily of interest earned on our invested funds.
Unrealized Gain (Loss) on
Unrealized gain (loss) on equity securities consists of the remeasurement of our investment in Vaxcyte common stock.
Interest and Other Expense, Net
Interest expense includes interest incurred on our debt and amortization of debt issuance costs including accretion of final payment. Additionally, we identified a financing component under the Astellas Agreement and recorded interest expense associated with the upfront payment. Other income (expense) includes changes in values attributable to the arrangement with our Call Option Plan whereby we granted certain employees options to purchase shares of Vaxcyte common stock, and realized gain (loss) on the sale of Vaxcyte common stock.
Income Taxes
We recorded a foreign income tax charge of zero and$2.5 million due to a withholding tax inChina on an upfront license fee payment received fromTasly during the three and nine months endedSeptember 30, 2022 , respectively. All other income tax charges and benefits for the three and nine months endedSeptember 30, 2022 andSeptember 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 --------------------------------------------------------------------------------
Comparison of the Three Months Ended
Three Months Ended
September 30,
Change
2022 2021 Change (%)
(in thousands)
Revenues $ 25,147 $ 8,517 $ 16,630 195 %
Operating expenses
Research and development 31,714 26,602 5,112 19 %
General and administrative 14,643 16,589 (1,946 ) (12 )%
Total operating expenses 46,357 43,191 3,166 7 %
Loss from operations (21,210 ) (34,674 ) 13,464 (39 )%
Interest income 1,014 109 905 830 %
Unrealized gain on equity securities 3,496 4,483 (987 ) (22 )%
Interest and other expense, net (2,788 ) (820 ) (1,968 ) 240 %
Loss before provision for income taxes (19,488 ) (30,902 ) 11,414 (37 )%
Provision for income taxes - - - -
Net loss $ (19,488 ) $ (30,902 ) $ 11,414 (37 )%
Revenue
We have recognized revenue as follows during the indicated periods:
Three Months Ended
September 30,
Change
2022 2021 Change (%)
(in thousands)
Bristol Myers Squibb Company ("BMS")
288 %
Merck Sharp & Dohme Corporation
("Merck") 10,157 6,414 3,743 58 %
Merck KGaA, Darmstadt, Germany
(operating in the United
States and Canada under the name "EMD
Serono") 166 249 (83 ) (33 )%
Astellas Pharma Inc. ("Astellas") 4,985 - 4,985 *
Vaxcyte 1,496 736 760 103 %
BioNova Pharmaceuticals, Ltd. 4,000
("BioNova") - 4,000 *
Total revenue $ 25,147 $ 8,517 $ 16,630 195 %
*Percentage not meaningful
Total revenue increased by $16.6 million during the three months ended September
30, 2022 as compared to the three months ended September 30, 2021 . This was due
primarily to revenue from Astellas of $5.0 million , of which $1.9 million was
from the ongoing performance related to partially unsatisfied performance
obligations, $2.3 million was from the financing component related to the
Astellas Agreement, and $0.8 million was from research and development services,
revenue from BioNova of $4.0 million from the satisfaction of the performance
obligation under the BioNova Option Agreement, a $3.2 million increase in BMS
revenue primarily due to an increase in materials supply and manufacturing
activities supporting clinical trial supply, a $0.8 million increase in Vaxcyte
revenue, and a $3.7 million increase from Merck related to a $10.0 million
contingent payment earned in the third quarter of 2022 with the first patient
dosed in a Phase 1 study of an investigational candidate resulting from the 2018
Merck Agreement for the development of a novel cytokine derivative therapeutic
for the treatment of cancer, partially offset by a $3.5 million decrease from
the 2021 completion of the performance obligations associated with the first and
second target programs under the 2018 Merck Agreement, a $2.6 million decrease
in research and development services and materials supply, and a $0.2 million
decrease due to the absence in 2022 of the financing component related to the
2018 Merck Agreement. These increases were partially offset by a $0.1 million
decrease in EMD Serono revenue.
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Research and development expense increased by$5.1 million , or 19%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The overall increase was due primarily to increases of$3.2 million in laboratory supplies and preclinical research and clinical development expenses and$2.9 million in personnel-related expenses due to higher headcount, partially offset by decreases of$0.9 million in facilities-related expenses and$0.1 million in consulting and outside services.
General and Administrative Expense
General and administrative expense decreased by$1.9 million , or 12%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The decrease was due primarily to decreases of$1.2 million in consulting and outside services and$1.0 million in facilities-related expenses, partially offset by a$0.3 million increase in equipment and office-related expenses.
Interest Income
Interest income increased by
Unrealized Gain on
Unrealized gain on equity securities was$3.5 million during the three months endedSeptember 30, 2022 as compared to an unrealized gain of$4.5 million for the three months endedSeptember 30, 2021 . The unrealized 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, increased by$2.0 million during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , due primarily to the increase of$2.3 million from the financing component related to the Astellas Agreement, partially offset by a decrease of$0.2 million due to the absence in 2022 of the financing component related to the 2018 Merck Agreement, and a decrease of$0.1 million in interest incurred on our outstanding loan.
Comparison of the Nine Months Ended
Nine Months Ended
September 30,
Change
2022 2021 Change (%)
(in thousands)
Revenues $ 59,140 $ 51,226 $ 7,914 15 %
Operating expenses
Research and development 94,036 74,473 19,563 26 %
General administrative 44,825 40,241 4,584 11 %
Total operating expenses 138,861 114,714 24,147 21 %
Loss from operations (79,721 ) (63,488 ) (16,233 ) 26 %
Interest income 1,327 481 846 176 %Unrealized gain (loss) on equity securities 323 (1,881 )
2,204 (117 )% Interest and other expense, net (4,039 ) (2,525 ) (1,514 ) 60 % Loss before provision for income taxes (82,110 ) (67,413 ) (14,697 ) 22 % Provision for income taxes 2,500 - 2,500 * Net loss$ (84,610 ) $ (67,413 ) $ (17,197 ) 26 % *Percentage not meaningful 32
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Revenue
We have recognized revenue as follows during the indicated periods:
Nine Months Ended
September 30,
Change
2022 2021 Change (%)
(in thousands)
Bristol Myers Squibb Company ("BMS")
13 %
Merck Sharp & Dohme Corporation
("Merck") 11,367 38,175 (26,808 ) (70 )%
Merck KGaA, Darmstadt, Germany
(operating in the United
States and Canada under the name "EMD
Serono") 2,200 2,844 (644 ) (23 )%
Astellas Pharma Inc. ("Astellas") 4,985 - 4,985 *
Vaxcyte 2,814 2,423 391 16 %
BioNova Pharmaceuticals, Ltd.
("BioNova") 4,000 - 4,000 *
Tasly Biopharmaceuticals Co., Ltd.
("Tasly") 25,000 - 25,000 *
Total revenue $ 59,140 $ 51,226 $ 7,914 15 %
Total revenue increased by $7.9 million , or 15%, during the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021 . This
was primarily due to an earned $25.0 million upfront payment under the Tasly
License Agreement, revenue from Astellas of $5.0 million , of which $1.9 million
was from the ongoing performance related to partially unsatisfied performance
obligations, $2.3 million was from the financing component related to the
Astellas Agreement, and $0.8 million was from research and development services,
revenue from BioNova of $4.0 million from the satisfaction of the performance
obligations under the BioNova Option Agreement, a $1.0 million increase in BMS
revenue from materials supply and manufacturing activities supporting clinical
trial supply, and a $0.4 million increase in Vaxcyte revenue. These increases
were partially offset by a $26.8 million decrease from Merck, related to a $9.0
million decrease from the 2021 completion of the performance obligations
associated with the first and second target programs under the 2018 Merck
Agreement, full recognition of $6.0 million of revenue earned in the first
quarter of 2021 associated with the contingent third target program upon the
termination of the related performance obligation, recognition of a $15.0
million contingent payment earned in the second quarter of 2021 for the
initiation of the first IND-enabling toxicology study under the first program in
the collaboration, a decrease of $3.1 million in research and development
services and materials supply, a decrease of $3.1 million in manufacturing
activities supporting clinical trial supply, and a decrease of $0.6 million due
to the absence in 2022 of the financing component related to the 2018 Merck
Agreement, partially offset by a $10.0 million contingent payment earned in the
third quarter of 2022 with the first patient dosed in a Phase 1 study of an
investigational candidate resulting from the 2018 Merck Agreement for the
development of a novel cytokine derivative therapeutic for the treatment of
cancer. 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.
Research and Development Expense
Research and development expense increased by$19.6 million , or 26%, during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase was due primarily to increases of$8.2 million in personnel-related expenses due to higher headcount,$6.5 million in laboratory supplies and preclinical research and clinical development expenses,$5.6 million in consulting and outside services, and$0.3 million in travel, equipment and office-related expenses, partially offset by a$1.0 million decrease in facilities-related expenses.
General and Administrative Expense
General and administrative expense increased by$4.6 million , or 11%, during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase was due primarily to increases of$3.7 million in personnel-related expenses due to higher headcount,$0.8 million in equipment and office-related expenses,$0.6 million in external services, and$0.2 million in travel-related expenses, partially offset by a$0.7 million decrease in facilities-related expenses. Interest Income Interest income increased by$0.8 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due primarily to an increase in the amortization of premiums on investments. 33 --------------------------------------------------------------------------------
Unrealized Gain / (Loss) on
Unrealized gain on equity securities was$0.3 million during the nine months endedSeptember 30, 2022 as compared to an unrealized loss of$1.9 million for the nine months endedSeptember 30, 2021 . The unrealized gain / (loss) 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, increased by$1.5 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due primarily to the increase of$2.3 million from the financing component related to the Astellas Agreement, partially offset by a decrease of$0.6 million due to the absence in 2022 of the financing component related to the 2018 Merck Agreement, and a decrease of$0.2 million in interest incurred on our outstanding loan.
Liquidity and Capital Resources
Sources of Liquidity
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 ofSeptember 30, 2022 , we had cash, cash equivalents and marketable securities of$287.3 million , equity securities of$36.9 million , outstanding debt of$19.3 million and an accumulated deficit of$418.0 million .
At-The-Market Sales
During the nine months ended
2022 Upfront Payment from Astellas
InJune 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 received from Astellas a one-time, nonrefundable, non-creditable, upfront payment of$90.0 million during the three months endedSeptember 30, 2022 .
2022 Upfront Payment from
During the nine months endedSeptember 30, 2022 , we earned a$25.0 million nonrefundable upfront payment fromTasly under the Tasly License Agreement to grantTasly an exclusive license to develop and commercialize STRO-002 inGreater China . The upfront payment, net of a withholding tax of$2.5 million , resulted in a net payment to us of$22.5 million received in the second quarter of 2022.
Contingent Payments from Merck
In
During the three months ended
Vaxcyte, Inc. Equity Ownership
As of
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proceeds of
Term Loan
For a description of our Loan and Security Agreement with
Leases
InJune 2021 , we entered into a third amendment, or Third Amendment, to our manufacturing facility lease, datedMay 18, 2011 , as amended, by and betweenAlemany Plaza LLC , located atSan Carlos, California , or 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, theSan Carlos Lease will expire onJuly 31, 2026 , and it includes an option to renew the SanCarlos Lease for an additional five years. The aggregate estimated base rent payments due over the Lease Extension Period is approximately$4.2 million , subject to certain terms contained in the San Carlos Lease. InJune 2021 , we entered into a first amendment, or First Amendment, to our manufacturing facility lease, datedMay 4, 2015 , as amended, by and between 870Industrial Road LLC , located atSan Carlos, California , or the Industrial Lease, as an extension to the term of the Industrial Lease for a period of five years, or the Industrial Lease Extension Period. Pursuant to the first Amendment, the Industrial Lease will expire onJune 30, 2026 , and it includes an option to renew the Industrial Lease for an additional five years. The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately$4.3 million , subject to certain terms contained in the Industrial Lease. InSeptember 2020 , we entered into a sublease agreement, or the Sublease, with Five Prime Therapeutics, Inc., or the Sublessor, for approximately 115,466 square feet, in a building located inSouth San Francisco, California , or the Premises. We use the Premises as our 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, inJuly 2021 , with occupancy of such space commencing inAugust 2021 . We were provided early access to the Initial Premises in the fourth quarter of 2020 to conduct certain planning and tenant improvement work. The Sublease is subordinate to the lease agreement, effectiveDecember 12, 2016 , between theSublessor and HCP Oyster Point III LLC , or the Landlord. The commencement date for the remaining 29,711 square feet of the Premises, or the Expansion Premises, is expected to be 24 months following the commencement date on the Initial Premises. However, we have the right to accelerate the commencement date on the Expansion Premises to an earlier date upon six months' prior written notice to the Sublessor. The Sublease for both the Initial Premises and Expansion Premises will expire onDecember 31, 2027 . With a commencement date on the Initial Premises ofJuly 1, 2021 , the aggregate estimated base rent payments due over the term of the Sublease are approximately$39.1 million , including the approximately$5.2 million in potential financial benefit to us of base rent abatement to be provided by the Sublessor, subject to certain terms contained in the Sublease. The Sublease contains customary provisions requiring us to pay our pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if we fail to remedy a breach of certain of its obligations within specified time periods. Additionally, we posted a security deposit of$0.9 million , which is reflected as restricted cash in non-current assets on our balance sheet as ofSeptember 30, 2022 andDecember 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
35
--------------------------------------------------------------------------------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.
Cash Flows
The following table summarizes our cash flows during the periods indicated:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities
(60,099 ) Net cash provided by (used in) investing activities 2,860 (118,096 ) Net cash provided by financing activities 36,092
2,750
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 66,365 $
(175,445 )
Cash Flows from Operating Activities
Cash provided by operating activities for the nine months endedSeptember 30, 2022 was$27.4 million . Our net loss of$84.6 million included non-cash charges of$20.5 million for stock-based compensation,$4.2 million for depreciation and amortization,$2.0 million for noncash lease expense,$0.8 million for the amortization of premium on marketable securities, and$0.3 million for the unrealized gain on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock. Cash provided by operating activities also reflected a net change in operating assets and liabilities of$84.8 million , due to an increase of$85.2 million in deferred revenue primarily due to the upfront payment from Astellas, a decrease of$1.2 million in accounts receivable from our collaborators, an increase of$1.0 million in accounts payable and other liabilities due to timing of payments, and an increase of$1.4 million in our operating lease liability, partially offset by an increase of$2.9 million in prepaid expenses and other assets, and a decrease of$1.0 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements. Cash used in operating activities for the nine months endedSeptember 30, 2021 was$60.1 million . Our net loss of$67.4 million included non-cash charges of$16.4 million for stock-based compensation,$3.8 million for noncash lease expenses,$3.5 million for depreciation and amortization,$2.0 million for the amortization of premium on our marketable securities,$1.9 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, and$0.5 million in other non-cash charges. Cash used in operating activities also reflected a net change in operating assets and liabilities of$20.8 million , due to an a decrease of$12.8 million in our deferred revenue balance from revenue recognized under our collaboration agreements, an increase of$6.8 million in accounts receivable from our collaborators, an increase of$4.5 million in prepaid expenses and other assets, a decrease of$1.5 million in our operating lease liability, and a decrease of$0.3 million in accrued compensation expense, partially offset by an increase of$5.1 million in accounts payable and other liabilities due to timing of payments.
Cash Flows from Investing Activities
Cash provided by investing activities of$2.9 million for the nine months endedSeptember 30, 2022 was primarily related to maturities and sales of marketable securities of$121.2 million and proceeds from sale of equity securities of$0.6 million , partially offset by purchases of marketable securities of$114.5 million and purchases of$4.5 million principally for laboratory equipment. Cash used in investing activities of$118.1 million for the nine months endedSeptember 30, 2021 was primarily related to purchases of marketable securities of$226.1 million and purchases of property and equipment of$12.8 million , principally for leasehold improvements to the premises under the Sublease, partially offset by maturities and sales of marketable securities of$120.8 million . 36 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash provided by financing activities of$36.1 million for the nine months endedSeptember 30, 2022 was primarily related to$40.9 million of net proceeds from our ATM Facility sales of common stock,$1.6 million of net proceeds received from participants in our employee equity plans and$0.3 million of proceeds received from the exercise of common stock options, partially offset by debt repayment of$6.3 million and a$0.5 million tax payment related to the net shares settlement of vested restricted stock units. Cash provided by financing activities of$2.8 million for the nine months endedSeptember 30, 2021 was primarily related to$2.0 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 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 withUnited States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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
Recent Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this report for more information.
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