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

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed financial statements
and related notes and other financial information included elsewhere in this
Quarterly Report on Form 10-Q and our audited financial statements and notes
thereto for the year ended December 31, 2022 filed with the Securities and
Exchange Commission, or the SEC, on February 27, 2023. This discussion and
analysis contains forward-looking statements based upon our current beliefs,
plans and expectations that involve risks, uncertainties and assumptions, such
as statements regarding our plans, objectives, expectations, intentions and
beliefs. Our actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under the section titled "Risk
Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should
carefully read the "Risk Factors" section of this Quarterly Report on Form 10-Q
to gain an understanding of the important factors that could cause actual
results to differ materially from our forward-looking statements. Please also
see the section titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a clinical-stage vaccine innovation company engineering high-fidelity
vaccines to protect humankind from the consequences of bacterial diseases. We
are developing broad-spectrum conjugate and novel protein vaccines to prevent or
treat bacterial infectious diseases. We are re-engineering the way highly
complex vaccines are made through modern synthetic techniques, including
advanced chemistry and the XpressCF cell-free protein synthesis platform,
exclusively licensed from Sutro Biopharma, Inc., or Sutro Biopharma. Unlike
conventional cell-based approaches, our system for producing difficult-to-make
proteins and antigens is intended to accelerate our ability to efficiently
create and deliver high-fidelity vaccines with enhanced immunological benefits.

Our pipeline includes:

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Pneumococcal conjugate vaccine, or PCV, candidates that we believe are among the
most broad-spectrum PCV candidates currently in development, targeting the
approximately $7 billion global pneumococcal vaccine market. Pneumococcal
disease is an infection caused by Streptococcus pneumoniae, or pneumococcus,
bacteria. It can result in invasive pneumococcal disease, or IPD, including
meningitis and bacteremia, and non-invasive pneumococcal disease, including
pneumonia, otitis media and sinusitis.


o

Our lead vaccine candidate, VAX-24, is a 24-valent, broad-spectrum investigational PCV being developed for the prevention of IPD. VAX-24 is intended to improve upon the standard-of-care PCV vaccines for both children and adults by covering the serotypes that are responsible for most of the pneumococcal disease currently in circulation.

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VAX-24 Adult Program:

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On October 24, 2022, we announced positive topline results from both the Phase 1
and Phase 2 portions of a clinical proof-of-concept study evaluating the safety,
tolerability and immunogenicity of VAX-24 in 800 healthy adults aged 18-64. The
Phase 1 portion of the study evaluated the safety and tolerability of a single
injection of VAX-24 at three dose levels, 1.1mcg, 2.2mcg and 2.2mcg/4.4mcg, and
compared to Pfizer Inc.'s, or Pfizer's, Prevnar 20®, or PCV20, in 64 healthy
adults aged 18-49. The Phase 2 portion evaluated the safety, tolerability and
immunogenicity of a single injection of VAX-24 at the same three dose levels and
compared to a single injection of PCV20 in 771 healthy adults aged 50-64. VAX-24
met the primary safety and tolerability objectives, demonstrating a safety
profile similar to PCV20, for all doses studied. In this study, VAX-24 met or
exceeded the established regulatory immunogenicity standards for all 24
serotypes at the conventional 2.2mcg dose, which we intend to move forward into
a Phase 3 program. At this dose, VAX-24 met the standard opsonophagocytic
activity, or OPA, response non-inferiority criteria for all 20 serotypes common
with PCV20, of which 16 achieved higher immune responses. Additionally, at all
three doses, VAX-24 met the standard superiority criteria for all four serotypes
unique to VAX-24. VAX-24 has the potential to cover an additional 10-28 percent
of strains causing IPD in adults over the current standard-of-care PCVs.

?
On April 17, 2023, we announced positive results from a Phase 2 study of VAX-24
in adults aged 65 and older, as well as data from the full six-month safety
assessment and prespecified pooled immunogenicity analyses from both the Phase 2
study in adults aged 65 and older and the prior Phase 1/2 study in adults aged
18-64. The Phase 2 study in adults aged 65 and older evaluated the

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safety, tolerability and immunogenicity of a single injection of VAX-24 at three
dose levels, 1.1mcg, 2.2mcg and 2.2mcg/4.4mcg, and compared to a single
injection of PCV20 in 207 healthy adults aged 65 and older. In this Phase 2
study, VAX-24 demonstrated robust OPA immune responses for all 24 serotypes at
all doses studied, confirming the prior adult study results. The VAX-24 2.2mcg
dose, which we plan to advance to Phase 3, showed an overall improvement in
immune responses compared to PCV20 relative to the results from the prior Phase
2 study in adults aged 50-64. The six-month safety data from both adult studies
showed safety and tolerability results for VAX-24 similar to PCV20 at all doses
studied. In the prespecified pooled analyses of data from both adult studies,
VAX-24 met the OPA response non-inferiority criteria for all 20 serotypes common
with PCV20 and met the superiority criteria for the four additional serotypes
unique to VAX-24.

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We expect to hold regulatory interactions with the U.S. Food and Drug
Administration, or the FDA, in the second half of 2023 to inform the Phase 3
program. We expect topline safety, tolerability and immunogenicity data from the
Phase 3 pivotal, non-inferiority study in adults in 2025. The FDA has granted
Fast Track and Breakthrough Therapy designations for VAX-24 in adults.

•

VAX-24 Pediatric Program: In March 2023, we announced that the first
participants were dosed in a Phase 2 study of VAX-24 in healthy infants, after
the FDA cleared our Investigational New Drug, or IND, application in February
2023. The Phase 2 infant study is being conducted in two stages. Stage 1 of the
study is evaluating the safety and tolerability of a single injection of VAX-24
at three dose levels, 1.1mcg, 2.2mcg and 2.2mcg/4.4mcg, and compared to
VAXNEUVANCE®, or PCV15 in approximately 48 infants in a dose-escalation
approach. The Stage 2 portion will evaluate the safety, tolerability and
immunogenicity of VAX-24 at the same three dose levels and compared to PCV15 or
PCV20 in approximately 750 infants. The study design includes a primary
immunization series consisting of three doses followed by a subsequent booster
dose. We expect to share topline safety, tolerability and immunogenicity data
following the primary three-dose immunization series by 2025.

o
Our second PCV candidate, VAX-31, builds on what has been established with
VAX-24 and is designed to expand the breadth of coverage to 31 strains without
compromising immunogenicity due to carrier suppression. VAX-31 was designed to
provide coverage for approximately 90% of pneumococcal disease currently
circulating in the U.S. population. We anticipate the submission of the VAX-31
adult IND application to the FDA and announcement of subsequent FDA clearance in
the second half of 2023. We expect topline safety, tolerability and
immunogenicity data from a Phase 1/2 study in adults in 2024.


o
VAX-A1, a novel conjugate vaccine candidate designed to prevent disease caused
by Group A Streptococcus, or Group A Strep. Group A Strep is pervasive globally
and causes 700 million cases of illness annually, including pharyngitis, or
strep throat, and certain severe invasive infections such as sepsis, necrotizing
fasciitis and toxic shock syndrome. There is currently no vaccine against Group
A Strep, which is one of the leading infectious disease-related causes of death
and disability worldwide and a significant contributor to the prescription of
antibiotics in the very young. We believe we have demonstrated preclinical proof
of concept for VAX-A1, the data for which were published in December 2020. We
nominated the final vaccine candidate for VAX-A1 in the first quarter of 2021
and initiated IND-enabling activities in the second half of 2021. We continue to
advance the development of VAX-A1 and we intend to provide further information
about the anticipated timing of an IND application as the program progresses.


o
VAX-PG, a novel protein vaccine candidate targeting the keystone pathogen
responsible for periodontitis, a chronic oral inflammatory disease affecting an
estimated 65 million adults in the United States. We believe we have generally
demonstrated preclinical proof of concept for a periodontitis protein vaccine,
the data for which was published in February 2019. We nominated a final vaccine
candidate for VAX-PG in the fourth quarter of 2022 and we continue to progress
the program. Our initial goal is to develop a therapeutic vaccine to slow or
stop disease progression; however, the results from clinical trials may inform
the potential adoption of prophylactic immunization.


o
VAX-GI, a new vaccine program designed to prevent Shigella, a bacterial illness
that affects an estimated 188 million people worldwide each year and results in
approximately 164,000 deaths annually, mostly among

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children under five years of age in low- and middle-income settings.

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Other discovery-stage programs that leverage our cell-free protein synthesis platform, which, if proven successful in preclinical studies, could also be advanced into IND-enabling activities and clinical studies.

Since January 1, 2023, key developments affecting our business include the following:

•

Reported VAX-24 Phase 2 Program Results, Including Adult 65+ Data and Full
Six-Month Safety Data from Both Studies: In April 2023, we announced positive
results from the VAX-24 Phase 2 study in adults aged 65 and older, as well as
data from the full six-month safety assessment and prespecified pooled
immunogenicity analyses from both the Phase 2 study in adults aged 65 and older
and the prior Phase 1/2 study in adults aged 18-64. The Phase 2 study in adults
aged 65 and older evaluated the safety, tolerability and immunogenicity of a
single injection of VAX-24 at three dose levels, 1.1mcg, 2.2mcg and
2.2mcg/4.4mcg, and compared to a single injection of PCV20 in 207 healthy adults
aged 65 and older. In this Phase 2 study, VAX-24 demonstrated robust OPA immune
responses for all 24 serotypes at all doses studied, confirming the prior adult
study results. The VAX-24 2.2mcg dose, which we plan to advance to Phase 3,
showed an overall improvement in immune responses compared to PCV20 relative to
the results from the prior Phase 2 study in adults aged 50-64. The six-month
safety data from both adult studies showed safety and tolerability results for
VAX-24 similar to PCV20 at all doses studied. In the prespecified pooled
analyses of data from both adult studies, VAX-24 met the OPA response
non-inferiority criteria for all 20 serotypes common with PCV20 and met the
superiority criteria for the four additional serotypes unique to VAX-24.

•

Completed Successful $575 Million Follow-On Financing: On April 21, 2023, we
completed an underwritten public offering of 13,030,000 shares of our common
stock, which included the full exercise of the underwriters' option to purchase
an additional 1,830,000 shares, at a price of $41.00 per share and pre-funded
warrants to purchase 1,000,000 shares of our common stock at a price of $40.999
per underlying share. The aggregate gross proceeds to us from the offering were
$575.2 million, before deducting underwriting discounts and commissions and
other estimated offering expenses payable by us, and excluding the exercise of
any pre-funded warrants.

•

Dosed First Participants in Infant Phase 2 Study Evaluating VAX-24 for the
Prevention of IPD: In March 2023, we announced that the first participants were
dosed in the Phase 2 study of VAX-24 in healthy infants, after the FDA cleared
our IND application in February 2023. This study is evaluating the safety,
tolerability and immunogenicity of VAX-24, our lead, broad-spectrum 24-valent
PCV candidate designed to prevent IPD.

•

Announced New Vaccine Program VAX-GI: In February 2023, we announced that we
added a new vaccine program, VAX-GI, designed to prevent Shigella, a bacterial
illness that affects an estimated 188 million people worldwide each year and
results in approximately 164,000 deaths annually, mostly among children under
five years of age in low- and middle-income settings.

•

VAX-24 Granted Breakthrough Therapy Designation from FDA for the Prevention of
IPD in Adults Aged 18 and Older: In January 2023, we announced that the FDA
granted Breakthrough Therapy designation for VAX-24 for the prevention of IPD in
adults. With Breakthrough Therapy designation, we will have access to all of the
elements of the FDA's Fast Track program, as well as the ability to receive
guidance and support from the FDA on an efficient drug development program and
an organizational commitment from senior managers within the FDA. The FDA's
decision was based on positive topline results from the Phase 1/2
proof-of-concept study of VAX-24 in adults 18-64 years of age.

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

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We have incurred net losses in each year since inception and expect to continue
to incur net losses in the foreseeable future. Our net losses may fluctuate
significantly from quarter-to-quarter and year-to-year, depending in large part
on the timing of our preclinical studies, clinical trials and manufacturing
activities, and our expenditures on other research and development activities.
Our net loss was $60.5 million for the three months ended March 31, 2023. As of
March 31, 2023, we had an accumulated deficit of $582.6 million. As of March 31,
2023, we had cash, cash equivalents and investments of $949.9 million, which we
believe will be sufficient to fund our operating expenses and capital
expenditure requirements through at least the next 12 months from the filing
date of this Quarterly Report on Form 10-Q.

We do not expect to generate any revenue from commercial product sales unless
and until we successfully complete development and obtain regulatory approval
for one or more of our vaccine candidates, which we expect will take a number of
years. We expect our expenses will increase substantially in connection with our
ongoing activities, as we:

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advance our vaccine candidates through preclinical studies and clinical trials;

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progress in the scale-up of our manufacturing capabilities, in particular to prepare for our Phase 3 program for and a potential commercial launch of VAX-24;

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incur additional costs that may be required for secondary supply sources;

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require the manufacture of supplies for our clinical trials, in particular our clinical trials for our PCV candidates, VAX-24 and VAX-31;

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pursue regulatory approval of our vaccine candidates;

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establish additional manufacturing capacity to meet potential incremental supply requirements following the potential initial commercial launch of VAX-24;

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hire additional personnel;

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operate as a public company;

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

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

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

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

Certain Significant Relationships

Lonza

In October 2016, we entered into a non-exclusive development and manufacturing
services agreement, as amended, with Lonza, or the 2016 Lonza DMSA, pursuant to
which Lonza was obligated to perform manufacturing process development and the
manufacture of components for VAX-24, including the polysaccharide antigens, our
proprietary eCRM protein carrier and conjugated drug substances. Subject to the
terms and conditions set forth in the 2016 Lonza DMSA, Lonza granted to us a
non-exclusive, worldwide, fully paid-up, irrevocable, transferable license,
including the right to grant sublicenses, under the New General Application
Intellectual Property, to research, develop, make, have made, use, sell and
import the Product manufactured under the 2016 Lonza DMSA (each term as defined
in the 2016 Lonza DMSA). The term of the 2016 Lonza DMSA expired on March 31,
2023.

In June 2018, we entered into a letter agreement with Lonza, or the Lonza Letter
Agreement, pursuant to which we agreed to certain terms for potential future
payments in shares of our common stock as partial satisfaction of future
obligations to Lonza. The Lonza Letter Agreement stated that the initial pre-IND
cash payments under the 2016 Lonza DMSA were subject to a specified dollar

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cap, or the Initial Cash Cap. After the Initial Cash Cap was reached, we had the
option to make any further pre-IND payments owed to Lonza in cash, in shares of
our common stock at then market prevailing prices, or a combination of both, at
our election. In April 2021, we reached the Initial Cash Cap and notified Lonza
that we would be exercising our option to issue approximately $10.0 million in
shares of our common stock as payment for a portion of pre-IND payments due
April 30, 2021. In June 2021, we issued 399,680 shares of our common stock to
Lonza at a price of $25.02 per share to pay for $10.0 million of the pre-IND
payments due April 30, 2021.

In October 2018, we entered into a second non-exclusive development and
manufacturing services agreement with Lonza, or the 2018 Lonza DMSA, pursuant to
which Lonza is obligated to perform services including manufacturing process
development and the manufacture and supply of VAX-24 finished drug product.
Subject to the terms and conditions set forth in the 2018 Lonza DMSA, Lonza has
granted to us a non-exclusive, worldwide, fully paid-up, irrevocable,
transferable license, including the right to grant sublicenses, under the New
General Application Intellectual Property, to research, develop, make, have
made, use, sell and import the Product (each term as defined in the 2018 Lonza
DMSA). Unless earlier terminated, the 2018 Lonza DMSA will remain in place for a
period of five years. Either party has the right to terminate the 2018 Lonza
DMSA upon a six-month notice period, provided that Lonza may not exercise such
right until a specified future date. Either party has the right to terminate the
2018 Lonza DMSA if the other party commits a material breach under the
applicable agreement and does not cure such breach within a given time period,
for specified bankruptcy events or if a party receives a notice from the other
party or otherwise becomes aware that a debarment, suspension, exclusion,
sanction or declaration of ineligibility action has been brought against the
other party, and we may terminate the 2018 Lonza DMSA for an extended force
majeure event.

In April 2022, we entered into a third non-exclusive development and
manufacturing services agreement with Lonza, as amended, or the 2022 Lonza DMSA,
effective as of March 22, 2022. Pursuant to the 2022 Lonza DMSA, Lonza is
obligated to perform services including manufacturing process development and
clinical manufacture and supply of our proprietary PCV candidates. Subject to
the terms and conditions set forth in the 2022 Lonza DMSA, Lonza has granted to
us a non-exclusive, worldwide, fully paid-up, irrevocable, transferable license,
including the right to grant sublicenses, under the New General Application
Intellectual Property, to research, develop, make, have made, use, sell and
import the Product. Unless earlier terminated, the 2022 Lonza DMSA shall remain
in place for a period of five years. Either party may terminate the 2022 Lonza
DMSA for any reason on prior written notice to the other party, provided that
Lonza may not exercise such right until a specified future date. In addition,
either party may terminate the 2022 Lonza DMSA (i) within a given time period
upon any material breach that is left uncured by the other party, or (ii)
immediately if the other party becomes insolvent. We may also terminate the 2022
Lonza DMSA upon an extended force majeure event. Upon expiration and/or
termination of the 2022 Lonza DMSA and/or any purchase order, we will pay Lonza
for all service rendered, all costs incurred, all unreimbursed capital equipment
and any cancellation fees (each term as defined in the 2022 Lonza DMSA).

In February 2023, we entered into a fourth non-exclusive development and
manufacturing services agreement with Lonza, or the 2023 Lonza DMSA, effective
as of March 1, 2023. Pursuant to the 2023 Lonza DMSA, Lonza will perform
manufacturing process development and the manufacture of components for VAX-24
and VAX-31, including the polysaccharide antigens, our proprietary eCRM protein
carrier and conjugated drug substances. Subject to the terms and conditions set
forth in the 2023 Lonza DMSA, Lonza has granted to us a non-exclusive,
worldwide, fully paid-up, transferable license, including the right to grant
sublicenses (subject to the prior written consent of Lonza), under the New
General Application Intellectual Property, to use, sell and import the Product
manufactured under the 2023 Lonza DMSA (but no other products). Unless earlier
terminated, the 2023 Lonza DMSA shall remain in place for a period of five years
and shall automatically renew for one additional two-year period unless either
party provides written notice of non-renewal at least two years prior to the
fifth anniversary of the effective date. We may terminate the 2023 Lonza DMSA
for any reason on prior written notice to the other party on a Project
Plan-by-Project Plan basis. Either party may terminate the 2023 Lonza DMSA (i)
within a given time period upon any material breach that is left uncured by the
other party, (ii) immediately if the other party becomes insolvent, is dissolved
or liquidated, makes a general assignment for the benefit of its creditors, or
files or has filed against it, a petition in bankruptcy or has a receiver
appointed for a substantial part of its assets, (iii) upon an extended force
majeure event, or (iv) if it becomes apparent to either party at any stage in
the provision of the Services that it will be impossible to complete the
Services for scientific or technical reasons despite exercise of best commercial
efforts by both parties. Pursuant to the reason for termination and the party
initiating the termination, we will pay Lonza for some combination of services
rendered, costs incurred, unreimbursed capital equipment and/or any cancellation
fees. Upon an extended force majeure event, neither party shall have any further
liability to the other party (each term as defined in the 2023 Lonza DMSA).

Under each of the 2016 Lonza DMSA, 2018 Lonza DMSA, 2022 Lonza DMSA and 2023
Lonza DMSA, collectively the Lonza Agreements, we pay Lonza agreed-upon fees for
their performance of development and manufacturing services and pass through
expenses incurred by Lonza for raw materials, as well as customary procurement
and handling fees. Under each Lonza Agreement, we own all rights, title and
interest in and to any and all New Customer Intellectual Property (as defined in
each Lonza Agreement), and Lonza owns all right, title and interest in New
General Application Intellectual Property (as defined in each Lonza Agreement).

For additional details regarding our relationship with Lonza, see Note 6, "Commitments and Contingencies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Sutro Biopharma

Sutro Biopharma is a clinical stage, publicly traded drug discovery, development
and manufacturing company using precise protein engineering and rational design
(enabled by Sutro Biopharma's proprietary XpressCF platform technology) to
advance next-generation oncology therapeutics. Following our corporate
formation, we acquired an exclusive license to Sutro Biopharma's proprietary
cell-free protein synthesis platform, XpressCF, for the discovery, development
and sale of vaccines for the treatment or prevention of infectious diseases,
excluding cancer vaccines. Under a related supply agreement with Sutro
Biopharma, we have an exclusive relationship in our field to buy extract and
certain custom reagents for use in manufacturing the vaccine compositions
covered by the exclusive license, which we use to produce our protein carriers
and certain of our antigens. Under a separate agreement with Sutro Biopharma, we
enhanced our rights with respect to access to a second supplier of extract and
acquired an option to access expanded rights to develop and manufacture extract,
among other rights.

Amended and Restated License Agreement with Sutro Biopharma

We are party to a license agreement with Sutro Biopharma, or the Sutro Biopharma
License Agreement, on August 1, 2014. The Sutro Biopharma License Agreement was
amended on October 12, 2015 and again on May 9, 2018 and May 29, 2018. Under the
Sutro Biopharma License Agreement, we received an exclusive, worldwide,
royalty-bearing, sublicensable license under Sutro Biopharma's patents and
know-how relating to cell-free expression of proteins to (i) research, develop,
use, sell, offer for sale, export, import and otherwise exploit specified
vaccine compositions, such rights being sublicensable, for the treatment or
prophylaxis of infectious diseases, excluding cancer vaccines, and (ii)
manufacture, or have manufactured by an approved contract manufacturing
organization, such vaccine compositions from extracts supplied by Sutro
Biopharma pursuant to the Sutro Biopharma Supply Agreement (as described below).
We are obligated to use commercially reasonable efforts to develop, obtain
regulatory approval for and commercialize the vaccine compositions. In
consideration of the rights granted under the Sutro Biopharma License Agreement,
we are obligated to pay Sutro Biopharma a 4% royalty on worldwide aggregate
annual net sales of our vaccine products for human health and a 2% royalty on
such net sales of vaccine products for animal health. Such royalty rates are
subject to specified reductions, including standard reductions for third-party
payments and for expiration of relevant patent claims. We are also obligated to
pay Sutro Biopharma any royalties due to Stanford University (the upstream
licensor of Sutro Biopharma), to the extent the royalties payable by Sutro
Biopharma to Stanford University are greater than the royalties payable by us to
Sutro Biopharma. Royalties are payable on a vaccine composition-by-vaccine
composition and country-by-country basis until the later of expiration of the
last valid claim in the licensed patents covering such vaccine composition in
such country and ten years after the first commercial sale of such vaccine
composition. The latest expiration date of a licensed Sutro Biopharma patent
application, if issued, would be 2036, subject to any adjustment or extension of
patent term that may be available in a particular country. In addition, we are
obligated to pay Sutro Biopharma a percentage of net sublicensing revenue
received in the low teen percentages. In addition, in the event we sublicense
our non-manufacturing rights under the Sutro Biopharma License Agreement before
a specified date, we are obligated to pay Sutro Biopharma a percentage, in the
low double-digits, of the sublicensing revenue we receive under such agreement.


The Sutro Biopharma License Agreement will remain in effect until terminated.
The agreement may be terminated by either party for the other party's material
breach uncured within 60 days' notice, by us at will with 60 days' notice, or by
Sutro Biopharma if we challenge Sutro Biopharma's patents or if we undergo a
change of control with a specified competitor of Sutro Biopharma.

Supply Agreement with Sutro Biopharma

In May 2018, we entered into a supply agreement, or the Sutro Biopharma Supply
Agreement, with Sutro Biopharma pursuant to which we purchase from Sutro
Biopharma extract and custom reagents for use in manufacturing non-clinical and
certain clinical supply of vaccine compositions utilizing the technology
licensed under the Sutro Biopharma License at prices not to exceed a specified
percentage above Sutro Biopharma's fully burdened manufacturing cost. If any
extracts or custom reagents do not meet the specifications and warranties
provided, then we will not have an obligation to pay for the non-conforming
product, and Sutro Biopharma will be obligated to replace the non-conforming
product within the shortest possible time with conforming product at our cost.
The term of the Sutro Biopharma Supply Agreement is from execution until the
later of (i) July 31, 2022, or (ii) or the date that we and Sutro Biopharma
enter into the Phase 3/Commercial Supply Agreement and Sutro is supplying to us
each Product under the Phase 3/Commercial Supply Agreement (each term as defined
in the Sutro Biopharma Supply Agreement). The Sutro Biopharma Supply Agreement
may be terminated by either party for the other party's material breach uncured
within 60 days' notice, by us at will with 60 days' notice, or by mutual
agreement of the parties. In December 2019, we exercised our right to require
Sutro Biopharma to establish a second supplier for extract and custom reagents
to support our anticipated clinical and commercial needs.





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Option Agreement with Sutro Biopharma

In December 2022, we entered into an option grant agreement with Sutro
Biopharma, or the Option Agreement. Pursuant to the Option Agreement, we
acquired from Sutro Biopharma (i) authorization to enter into an agreement with
an independent alternate CMO to directly source Sutro Biopharma's cell-free
extract, allowing us to have direct oversight over financial and operational
aspects of the relationship with the CMO; and (ii) a right, but not an
obligation, to obtain certain exclusive rights to internally manufacture and/or
source extract from certain CMOs and the right to independently develop and make
improvements to extract (including the right to make improvements to the extract
manufacturing process as well as cell lines) for use in connection with the
exploitation of certain vaccine compositions, or the Option. We and Sutro
Biopharma have agreed to negotiate the terms and conditions of a form definitive
agreement to be entered into in the event we exercise the Option, which shall
include the terms and conditions set forth in an executed term sheet between us,
or the Term Sheet, and such terms that are necessary to give effect to each of
the terms and conditions set forth in the Term Sheet, or the Form Definitive
Agreement. The Option period is five years from the date of the Option
Agreement, subject to potential acceleration in the event we undergo a change of
control.

As consideration for the Option and other rights and authorizations granted to
us under the Option Agreement, we agreed to pay Sutro Biopharma upfront
consideration of $22.5 million, consisting of (i) $10.0 million in cash and $7.5
million worth of shares of our common stock (the number of shares to be
calculated based on the arithmetic average of the daily volume weighted average
price of our common stock as traded on Nasdaq in the three consecutive trading
days immediately prior to the issuance thereof), and (ii) $5.0 million payable
within five business days after we and Sutro Biopharma mutually agree in writing
upon the Form Definitive Agreement. The 167,780 shares of common stock issued
was recorded at fair value of $8.0 million on the date of settlement, December
22, 2022. In the event that we elect to exercise the Option, we would pay Sutro
Biopharma an aggregate Option exercise price of $75.0 million in cash in two
installments and, upon the occurrence of certain regulatory milestones, certain
additional milestone payments totaling up to $60.0 million in cash. In the event
that we undergo a change of control, certain rights and payments may be
accelerated.

For additional details regarding our outstanding non-cancelable purchase commitments with our manufacturing partners, see Note 6, "Commitments and Contingencies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Impact of COVID-19 and Other Trends

We are continuing to closely monitor the impact of the global COVID-19 pandemic
on our business. In particular, the COVID-19 pandemic slowed raw material supply
chains and travel restrictions delayed the qualification of key analytical
equipment used in manufacturing and curtailed in-person CMO oversight of
manufacturing, affecting our manufacturing processes. As the pandemic continues,
we could see an additional impact on our ability to advance our programs, obtain
supplies from our contract manufacturers or interact with regulators, ethics
committees or other important agencies due to limitations in regulatory
authority, employee resources or otherwise. In any event, if the COVID-19
pandemic continues and persists for an extended period of time, we could
experience significant disruptions to our development timelines, which would
adversely affect our business, financial condition, results of operations and
growth prospects.


Additionally, the recent trends towards rising inflation may also materially
adversely affect our business and corresponding financial position and cash
flows. Inflationary factors, such as increases in the cost of our clinical trial
materials and supplies, interest rates and overhead costs may adversely affect
our operating results. Rising interest and inflation rates also present a recent
challenge impacting the U.S. economy and could make it more difficult for us to
obtain traditional financing on acceptable terms, if at all, in the future.

We may experience increases in our operating costs in the near future including
our labor costs and research and development costs, due to rising inflation,
supply chain constraints, and consequences associated with COVID-19 and civil
and political unrest in certain countries and regions.

                                       28
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Components of Results of Operations

Operating Expenses

Research and Development

Research and development expenses represent costs incurred in performing
research, development and manufacturing activities in support of our own product
development efforts and include personnel-related costs (including salaries,
employee benefits and stock-based compensation) for our personnel in research
and development functions; costs related to acquiring, developing and
manufacturing supplies for preclinical studies, clinical trials and other
studies, including fees paid to CMOs; costs and expenses related to agreements
with contract research organizations, or CROs, investigative sites and
consultants to conduct non-clinical and preclinical studies and clinical trials;
professional and consulting services costs; research and development consumables
costs; laboratory supplies and equipment costs; and facility and other allocated
costs.

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

We expect our research and development expenses to increase substantially in
absolute dollars for the foreseeable future as we advance our vaccine candidates
into and through preclinical studies and clinical trials, scale up our
manufacturing activities, establish additional manufacturing capacity to meet
potential incremental supply requirements following the potential initial
commercial launch of VAX-24, pursue regulatory approval of our vaccine
candidates and expand our pipeline of vaccine candidates. The process of
conducting the necessary preclinical and clinical research and completing the
manufacturing requirements to obtain regulatory approval is costly and
time-consuming. The actual probability of success for our vaccine candidates may
be affected by a variety of factors, including the safety and efficacy or
immunogenicity of our vaccine candidates, clinical data, investment in our
clinical programs, competition, manufacturing capabilities and commercial
viability. We may never succeed in achieving regulatory approval for any of our
vaccine candidates. As a result of the uncertainties discussed above, we are
unable to determine the duration and completion costs of our research and
development projects or if, when and to what extent we will generate revenue
from the commercialization and sale of our vaccine candidates.

We accrue for costs related to research and development activities based on our
estimates of the services received and efforts expended pursuant to quotes and
contracts with vendors, including CMOs and CROs, that conduct research,
development and manufacturing activities on our behalf. The financial terms of
these agreements are subject to negotiation, vary from contract to contract and
may result in uneven payment flows. There may be instances in which payments
made to our vendors exceed the level of services provided and result in a
prepayment of the research and development expense. Advance payments for goods
and services to be used in future research and development activities are
expensed when the activity has been performed or when the goods have been
received. We make significant judgments and estimates in determining accrued
research and development liabilities as of each reporting period based on the
estimated time period over which services will be performed and the level of
effort to be expended. If the actual timing of the performance of services or
the level of effort varies from our estimate, we adjust the accrual or prepaid
expense accordingly.

Although we do not expect our estimates to be materially different from amounts
actually incurred, if our estimates of the status and timing of services
performed differ from the actual status and timing of services performed, it
could result in us reporting amounts that are too high or too low in any
particular period.

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

•

the costs and timing of our chemistry, manufacturing and controls, or CMC, activities, including fulfilling good manufacturing practice, or GMP, related standards and compliance, and identifying and qualifying second suppliers;

•

the costs related to raw materials estimates from our third-party manufacturing and supply partners;

•

the cost of clinical trials of our vaccine candidates being greater than we anticipate;

•

changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;

                                       29
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•

the number of sites included in the trials;

•

the countries in which the trials are conducted;

•

delays in adding a sufficient number of trial sites and recruiting suitable volunteers to participate in our clinical trials;

•

the number of subjects that participate in the trials;

•

the number of doses that subjects receive;

•

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

•

potential additional safety monitoring requested by regulatory agencies;

•

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

•

the cost and timing of manufacturing our vaccine candidates;

•

the phase of development of our vaccine candidates;

•

the costs of establishing additional manufacturing capacity to meet potential incremental supply requirements following the potential initial commercial launch of VAX-24;

•

the costs that may be required for secondary supply sources; and

•

the immunogenicity or efficacy and safety profile of our vaccine candidates.

General and Administrative

General and administrative expenses consist primarily of costs and expenses
related to personnel (including salaries, employee benefits and stock-based
compensation) in our executive, legal, finance and accounting, human resources
and other administrative functions; legal services relating to intellectual
property and corporate matters; accounting, auditing, consulting and tax
services; insurance; and facility and other allocated costs not otherwise
included in research and development expenses. We expect our general and
administrative expenses to continue to increase in absolute dollars for the
foreseeable future as we increase our headcount and expand our services to
support our continued research and development activities and grow our business.
We expect continued increases in general and administrative expenses related to
compliance with the rules and regulations of the SEC and The Nasdaq Stock Market
LLC, or Nasdaq, insurance expenses, investor relations and corporate
communications activities and other administrative and professional services.

Other Income (Expense), Net

Other income (expense), net includes interest income earned from our cash and
cash equivalents, grant income and foreign currency transaction gains (losses)
related to our Swiss Franc and Euro cash and liability balances (see Note 2,
"Basis of Presentation and Summary of Significant Accounting Policies" and Note
3, "Fair Value Measurements and Fair Value of Financial Instruments" to our
condensed financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q for more detail).

Grant Income

In July 2019, we received a cost-reimbursement research award from Combating
Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, or CARB-X, a
public-private partnership funded under a Cooperative Agreement from Assistant
Secretary for Preparedness and Response/Biomedical Advanced Research and
Development Authority and by awards from Wellcome Trust, Germany's Federal
Ministry of Education and Research, the United Kingdom Global Antimicrobial
Resistance Innovation Fund and the Bill & Melinda Gates Foundation. In
connection with this funding, we entered into a cost-reimbursement sub-award
agreement with the Trustees of Boston University, the administrator of the
program, or the CARB-X agreement. CARB-X has awarded us total funding to date of
$11.7 million, with potential funding of up to $14.6 million upon the
achievement of future VAX-A1 development milestones. Separately, the National
Institute of Health, or NIH, awarded us up to $0.5 million in April 2021 to
advance the development of a vaccine against Shigella infection. Grant income
pursuant to our award agreements is recognized as we incur and pay qualifying
expenses over the periods of the awards. We recognized $0.7 and $0.2 million in
grant income for funding research and development during the three months ended
March 31, 2023 and 2022, respectively. Grant income is included as a component
of Other income (expense), net in the condensed statements of operations.

                                       30
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Results of Operations

Comparison of the Three Months Ended March 31, 2023 and 2022

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


                                           Three Months Ended March 31,                  Change
                                             2023                 2022              $             %
                                                         (in thousands)
Operating expenses:
Research and development                $       58,080       $       31,678     $  26,402           83.3 %
General and administrative                      13,112                7,543         5,569           73.8 %
Total operating expenses                        71,192               39,221        31,971           81.5 %
Loss from operations                           (71,192 )            (39,221 )     (31,971 )         81.5 %
Other income (expense), net:
Interest income                                 10,393                  134        10,259              *
Grant income                                       654                  160           494          308.8 %
Realized loss on marketable                          -                  (65 )
securities                                                                             65         (100.0 )%
Foreign currency transaction gains
(losses)                                          (317 )                  6          (323 )            *
Total other income (expense), net               10,730                  235        10,495              *
Net loss                                $      (60,462 )     $      (38,986 )   $ (21,476 )         55.1 %




* not meaningful

Operating Expenses

Research and Development Expenses

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

                                             Three Months Ended March 31,                  Change
                                               2023                 2022              $             %
                                                           (in thousands)

Product and clinical development (1) $ 33,095 $ 13,802 $ 19,293 139.8 % Personnel-related

                                 12,981                6,230         6,751          108.4 %
Professional and consulting services               1,592                1,270           322           25.4 %
Research and development consumables               3,259                4,199          (940 )        (22.4 )%
Facility related and other allocated               4,599                4,492           107            2.4 %
Laboratory supplies and equipment                  1,914                1,250           664           53.1 %
Other (2)                                            640                  435           205           47.1 %

Total research and development expenses $ 58,080 $ 31,678 $ 26,402

           83.3 %

(1)

Includes expenses for third-party manufacturing and outsourced contract
services, including preclinical studies, clinical trials and outsourced assays.
(2)
Includes travel-related expenses and other miscellaneous office expenses.

Research and development expenses increased by $26.4 million, or 83.3%, during
the three months ended March 31, 2023 compared to the corresponding period in
2022. The increase of $19.3 million in product and clinical development expenses
was primarily due to VAX-24 adult Phase 3 readiness activities and the
initiation of our VAX-24 Phase 2 study in healthy infants. The increase of $6.8
million in personnel-related expenses was primarily due to higher salaries,
benefits and stock-based compensation expense resulting from the growth in the
number of employees in our research and development functions and associated
increase in the number of options and restricted stock units, or RSUs, granted.

                                       31
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General and Administrative Expenses

General and administrative expenses increased by $5.6 million, or 73.8%, during
the three months ended March 31, 2023 compared to the corresponding period in
2022. The increase was primarily due to increases of $4.4 million in
personnel-related expenses, which was related to higher salaries, benefits and
stock-based compensation expense resulting from an increase in the number of
options and RSUs granted and the growth in the number of employees in our
general and administrative functions, and $1.4 million in higher professional
and consulting services.

Other Income (Expense), Net

Other income (expense), net increased by $10.5 million, during the three months
ended March 31, 2023 compared to the corresponding period in 2022. The increase
was primarily attributable to $10.4 million in interest income as a result of
higher cash and investment balances resulting from our follow-on offerings in
2022 combined with an increase in the interest rates earned by such cash and
investments.

Liquidity and Capital Resources

From inception through March 31, 2023, we have incurred losses and negative cash
flows from operations and have funded our operations primarily through the
issuance of common stock, pre-funded warrants to purchase our common stock and,
prior to our IPO, redeemable convertible preferred stock, totaling approximately
$1.53 billion in aggregate gross proceeds and $1.46 billion net of underwriting
discounts, commissions and offering expenses. As of March 31, 2023, we had
$380.5 million of cash and cash equivalents, $569.4 million in investments and
an accumulated deficit of $582.6 million.

On July 2, 2021, we filed a shelf registration statement on Form S-3ASR, or the
Shelf Registration Statement, under which we may, from time to time, sell
securities in one or more offerings of our common stock, preferred stock, debt
securities or warrants. The Shelf Registration Statement became automatically
effective upon the filing of the Form S-3ASR on July 2, 2021.

In July 2021, we entered into an Open Market Sales AgreementSM, or the Original
ATM Sales Agreement, with Jefferies LLC, or Jefferies, which provided that, upon
the terms and subject to the conditions and limitations set forth in the
Original ATM Sales Agreement, we may elect to issue and sell, from time to time,
shares of our common stock having an aggregate offering price of up to $150.0
million through Jefferies acting as our sales agent or principal. As of February
27, 2023, we had sold 4,995,709 shares of our common stock under the Original
ATM Sales Agreement at an average price of $27.57 per share for aggregate gross
proceeds of $137.8 million. On February 27, 2023, we and Jefferies entered into
an amendment to the Original ATM Sales Agreement, as amended, the Amended ATM
Sales Agreement, pursuant to which we may offer and sell shares of our common
stock having an aggregate offering price of up to $400.0 million, which is in
addition to the $150.0 million aggregate offering price under the Original ATM
Sales Agreement. The material terms and conditions of the Original ATM Sales
Agreement otherwise remain unchanged. Under the Amended ATM Sales Agreement,
Jefferies may sell the shares of common stock by any method permitted by law
deemed to be an "at-the-market offering" as defined under the Securities Act of
1933, as amended, in block transactions or in privately-negotiated transactions
with our consent. Jefferies will use commercially reasonable efforts to sell the
shares of common stock subject to the Amended ATM Sales Agreement from time to
time, based upon our instructions (including any price, time or size limits or
other customary parameters or conditions that we may impose). We will pay
Jefferies a commission of up to 3.0% of the gross sales proceeds of any common
stock sold through Jefferies under the Amended ATM Sales Agreement; however, we
are not obligated to make any sales of common stock. As of March 31, 2023, we
have sold 534,400 shares of our common stock under the Amended ATM Sales
Agreement at an average price of $37.42 per share for aggregate gross proceeds
of $20.0 million ($19.6 million net of commissions and offering expenses).

On January 13, 2022, we completed an underwritten public offering in which we
issued 2,500,000 shares of our common stock at a price of $20.00 per share and
pre-funded warrants to purchase 2,500,000 shares of our common stock at a price
of $19.999 per underlying share. In February 2022, the underwriters exercised
their option to purchase an additional 750,000 shares of common stock. In
aggregate, we received approximately $107.6 million in net proceeds after
deducting underwriting discounts and commissions and other offering expenses
payable by us, and excluding the exercise of any pre-funded warrants.

On October 28, 2022, we completed an underwritten public offering of 17,812,500
shares of our common stock, which included the full exercise of the
underwriters' option to purchase an additional 2,812,500 shares, at a price of
$32.00 per share and pre-funded warrants to purchase 3,750,000 shares of our
common stock at a price of $31.999 per underlying share. In aggregate, we
received $651.6 million in net proceeds after deducting underwriting discounts
and commissions and other offering expenses payable by us, and excluding the
exercise of any pre-funded warrants.

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On April 21, 2023, we completed an underwritten public offering of 13,030,000
shares of our common stock, which included the full exercise of the
underwriters' option to purchase an additional 1,830,000 shares, at a price of
$41.00 per share and pre-funded warrants to purchase 1,000,000 shares of our
common stock at a price of $40.999 per underlying share. In aggregate, we
received $545.1 million in net proceeds after deducting underwriting discounts
and commissions and other estimated offering expenses payable by us, and
excluding the exercise of any pre-funded warrants.

Future Funding Requirements

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

We believe that our existing cash, cash equivalents and investments as of the
date of this Quarterly Report on Form 10-Q will be sufficient to fund our
operating expenses and capital expenditure requirements through at least 12
months from the filing date of this Quarterly Report on Form 10-Q. We have
raised substantial capital, however, we will need to raise substantial
additional capital to complete development and commercialization of our drug
candidates. Until we can generate sufficient revenue from the commercialization
of our vaccine candidates or from collaboration agreements with third parties,
if ever, we expect to finance our future cash needs through public or private
equity or debt financings, third-party (including government) funding and
marketing and distribution arrangements, as well as other collaborations,
strategic alliances and licensing arrangements, or any combination of these
approaches. The sale of equity, pre-funded warrants or convertible debt
securities may result in dilution to our stockholders and, in the case of
preferred equity securities or convertible debt, those securities could provide
for rights, preferences or privileges senior to those of our common stock. Debt
financings may subject us to covenant limitations or restrictions on our ability
to take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends. Our ability to raise additional funds may
be adversely impacted by deteriorating global economic conditions, including
higher inflation rates and changes in interest rates, and the recent disruptions
to and volatility in the credit and financial markets in the United States and
worldwide. There can be no assurance that we will be successful in acquiring
additional funding at levels sufficient to fund our operations or on terms
favorable or acceptable to us. If we are unable to obtain adequate financing
when needed or on terms favorable or acceptable to us, we may be forced to
delay, reduce the scope of or eliminate one or more of our research and
development programs.

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

•

the timing, scope, progress, results and costs of research and development, testing, screening, manufacturing, preclinical development and clinical trials;

•

the costs of establishing additional manufacturing capacity to meet potential incremental supply requirements following the potential initial commercial launch of VAX-24;

•

our potential exercise of the Option with Sutro Biopharma;

•

the outcome, timing and cost of seeking and obtaining regulatory approvals from
the FDA and comparable foreign regulatory authorities, including the potential
for such authorities to require that we perform field efficacy studies for our
PCV candidates, require more studies than those that we currently expect or
change their requirements regarding the data required to support a marketing
application;

•

the cost of building a sales force in anticipation of any product commercialization;

•

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

•

our ability to maintain existing, and establish new, strategic collaborations,
licensing or other arrangements and the financial terms of any such agreements,
including the timing and amount of any future milestone, royalty or other
payments due under any such agreement;

•

any product liability or other lawsuits related to our products;

•

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

                                       33
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•

the costs to establish, maintain, expand, enforce and defend the scope of our
intellectual property portfolio, including the amount and timing of any payments
we may be required to make, or that we may receive, in connection with
licensing, preparing, filing, prosecuting, defending and enforcing our patents
or other intellectual property rights;

•

expenses needed to attract, hire and retain skilled personnel;

•

the costs of operating as a public company; and

•

the impact of the COVID-19 pandemic and rising inflation which may impact labor
costs, research and development costs and supply chain constraints, as well as
civil and political unrest in certain countries and regions, which may
exacerbate the magnitude of the factors discussed above.

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

Cash Flows

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

                                                          Three Months Ended March 31,
                                                           2023                  2022
                                                                 (in thousands)
Net cash used in operating activities                 $       (47,690 )     $      (27,702 )
Net cash (used in) provided by investing activities          (448,101 )     

49,666

Net cash provided by financing activities                      41,562       

111,019

Effect of exchange rate changes on cash and cash
equivalents                                                        23                 (227 )
Net (decrease) increase in cash, cash equivalents
and restricted cash                                   $      (454,206 )     $      132,756

Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023
was $47.7 million, which primarily resulted from a net loss of $60.5 million,
partially offset by non-cash charges of $6.0 million and a net change in our
operating assets and liabilities of $6.8 million. Non-cash charges primarily
consisted of $9.6 million in stock-based compensation expense, $1.6 million in
amortization of right-of-use, or ROU, assets and $0.7 million in depreciation
and amortization, partially offset by a decrease of $6.0 million in net
amortization of premiums on investments. The net change in operating assets and
liabilities of $6.8 million was primarily due to increases (i) in accrued
manufacturing expenses of $6.7 million resulting from increased outsourced
manufacturing activities, (ii) in accounts payable and accrued expenses of $4.8
million resulting from the timing of payments and (iii) in accrued compensation
of $0.7 million related to higher headcount. These increases were partially
offset by (i) an increase in prepaid and other assets of $4.1 million related to
prepaid insurance and research costs and (ii) a decrease in operating lease
liabilities of $1.4 million related to our San Carlos office.

Net cash used in operating activities for the three months ended March 31, 2022
was $27.7 million, which primarily resulted from a net loss of $39.0 million,
partially offset by non-cash charges of $6.9 million and a net change in our
operating assets and liabilities of $4.4 million. Non-cash charges primarily
consisted of $4.1 million in stock-based compensation expense, $1.8 million in
amortization of ROU assets and $0.6 million in depreciation and amortization.
The net change in operating assets and liabilities of $4.4 million was primarily
due to (i) an increase in operating lease liabilities of $5.6 million related to
the San Carlos office, (ii) a decrease in prepaid and other current assets of
$2.8 million related to reduced prepaid insurance and prepaid research costs,
and (iii) an increase in accrued manufacturing expenses of $2.4 million
resulting from increased outsourced manufacturing activities. These changes were
partially offset by (i) a decrease in accrued compensation of $2.2 million
related to a 2021 accrued bonus payout in March 2022, (ii) a decrease in
accounts payable of $1.9 million resulting from the timing of payments and (iii)
an increase in other assets of $1.6 million related to purchases of equipment
for the transfer of technology in the manufacturing extracts and reagents from
Sutro Biopharma to other manufacturers.

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Cash Flows from Investing Activities

Cash used in investing activities for the three months ended March 31, 2023 was
$448.1 million, which was attributable primarily to $483.8 million in purchase
of investments and $5.6 million of purchases of lab equipment and leasehold
improvements, partially offset by $40.2 million in maturities of investments and
$1.1 million in sales of investments.

Cash used in investing activities for the three months ended March 31, 2022 was
$49.7 million, which related primarily to $59.6 million in maturities of
investments, partially offset by $7.0 million in purchases of investments and
$2.9 million of purchases of lab equipment.

Cash Flows from Financing Activities

Cash provided by financing activities for the three months ended March 31, 2023
was $41.6 million, which primarily consisted of net proceeds from our Original
and Amended ATM Sales Agreements of $41.8 million.

Cash provided by financing activities for the three months ended March 31, 2022
was $111.0 million, which primarily consisted of net proceeds from shares issued
for our follow-on public offering in January 2022 of $107.6 million and under
our Original ATM Sales Agreement of $3.1 million.

Contractual Obligations and Commitments

Our material cash requirements include the following contractual and other obligations:

Leases

We have operating lease agreements for our office spaces. As of March 31, 2023,
we had total lease payment obligations of $18.3 million, of which $6.2 million
is payable within one year.

Option Agreement

Pursuant to the Option Agreement, we and Sutro Biopharma have agreed to
negotiate the terms and conditions of the Form Definitive Agreement. Within five
business days after we and Sutro Biopharma mutually agree in writing upon the
Form Definitive Agreement, we have agreed to pay Sutro Biopharma $5.0 million.
Additionally, in the event that we elect to exercise the Option, we would pay
Sutro Biopharma an aggregate Option exercise price of $75.0 million in cash in
two installments and, upon the occurrence of certain regulatory milestones,
certain additional milestone payments totaling up to $60.0 million in cash. In
the event that we undergo a change of control, certain rights and payments may
be accelerated.

Purchase Commitments

We have certain payment obligations under various license agreements. Under
these agreements, we are required to make milestone payments upon successful
completion and achievement of certain intellectual property, clinical,
regulatory and sales milestones. The payment obligations under the license
agreements are contingent upon future events such as our achievement of
specified development, clinical, regulatory and commercial milestones, and we
will be required to make development milestone payments and royalty payments in
connection with the sale of products developed under these agreements. As the
achievement and timing of these future milestone payments are not probable or
estimable, such amounts have not been included in our condensed balance sheets
as of March 31, 2023 or December 31, 2022.

                                       35
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We enter into agreements in the normal course of business with CMOs and other
vendors for manufacturing services and raw materials purchases. We rely on
several third-party manufacturers for our manufacturing requirements. As of
March 31, 2023, we had the following amounts of non-cancelable purchase
commitments related to manufacturing services and raw materials purchased due to
our key manufacturing partners. These amounts represent our minimum contractual
obligations, including termination fees. If we terminate certain firm orders
with our key manufacturing partners, we will be required to pay for the
manufacturing services scheduled or raw materials purchased under our
arrangements. The actual amounts we pay in the future to the vendors under such
agreements may differ from the purchase order amounts.


Years ending December 31,                                             (in thousands)
Remainder of 2023                                                    $         97,648
2024                                                                           47,478
Total non-cancelable purchase commitments due to our key
manufacturing partners                                               $        145,126


Legal Contingencies

From time to time, we may become involved in legal proceedings arising from the
ordinary course of business. We record a liability for such matters when it is
probable that future losses will be incurred and that such losses can be
reasonably estimated. Significant judgment by us is required to determine both
probability and the estimated amount. We do not believe that there is any
litigation or asserted or unasserted claim pending that could, individually or
in the aggregate, have a material adverse effect on our results of operations or
financial condition.

Critical Accounting Policies and Significant Judgments and Estimates

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

While our significant accounting policies are described in the notes to our
financial statements included elsewhere in this Quarterly Report on Form 10-Q,
we believe that the following critical accounting policies are most important to
understanding and evaluating our reported financial results:
Accrued Research and Development Expenses
We have entered into various agreements with CMOs and CROs. As part of the
process of preparing our financial statements, we are required to estimate our
accrued research and development expenses, including accrued manufacturing
expenses, as of each balance sheet date. This process involves reviewing open
contracts and purchase orders, communicating with our personnel and third
parties to identify services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for
the service when we have not yet been invoiced or otherwise notified of the
actual cost. We make estimates of our accrued research and development expenses
as of each balance sheet date based on facts and circumstances known to us at
that time. We periodically confirm the accuracy of our estimates with the
service providers and make adjustments, if necessary. The significant estimates
in our accrued research and development expenses include the costs incurred for
services performed by our vendors in connection with research and development
activities for which we have not yet been invoiced.

We accrue for costs related to research and development activities based on our
estimates of the services received and efforts expended pursuant to quotes and
contracts with vendors, including CMOs and CROs, that conduct research,
development and manufacturing on our behalf. The financial terms of these
agreements are subject to negotiation, vary from contract to contract and may
result in uneven payment flows. There may be instances in which payments made to
our vendors will exceed the level of services provided and result in a
prepayment of the research and development expense. Advance payments for goods
and services that will be used in future research and development activities are
expensed when the activity has been performed or when the goods have been
received. We make significant judgments and estimates in determining accrued
research and development liabilities as of each reporting period based on the
estimated time period over which services will be performed and the level of
effort to be expended. If the actual timing of the performance of services or
the level of effort varies from our estimate, we adjust the accrual or prepaid
expense accordingly.

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Although we do not expect our estimates to be materially different from amounts
actually incurred, if our estimates of the status and timing of services
performed differ from the actual status and timing of services performed, it
could result in us reporting amounts that are too high or too low in any
particular period. To date, there have been no material differences between our
estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation Expense
Stock-based compensation expense related to awards to employees is measured at
the grant date based on the fair value of the award. The fair value of the award
that is ultimately expected to vest is recognized as expense on a straight-line
basis over the requisite service period, which is generally the vesting period,
net of the impact of actual forfeitures recorded in the period in which they
occur.
Stock-based compensation expense related to awards to non-employees is
recognized based on the then-current fair value at each measurement date over
the associated service period of the award, which is generally the vesting term,
using the straight-line method. The fair value of non-employee stock options is
estimated using the Black-Scholes valuation model with assumptions generally
consistent with those used for employee stock options, with the exception of the
expected term, which is the remaining contractual life at each measurement date.
Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting
Policies" and Note 9, "Equity Incentive Plans," to our condensed financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for
more information on assumptions used in estimating stock-based compensation
expense.
The Black-Scholes option-pricing model requires the use of subjective
assumptions, such as volatility, which determine the fair value of stock-based
awards. The assumptions utilized in the Black-Scholes option-pricing model are
expected term, expected volatility, expected dividend, risk-free interest rate
and fair value of common stock.
Leases
We adopted Accounting Standards Update, or ASU 2016-02, Leases (Topic 842) on
January 1, 2021, using the modified retrospective transition approach. There was
no cumulative-effect adjustment recorded to retained earnings upon adoption.
Under ASC 842, we assess all arrangements that convey the right to control the
use of property, plant and equipment, at inception, to determine if it is, or
contains, a lease based on the unique facts and circumstances present in the
arrangements. In addition, we determine whether leases meet the classification
criteria of a finance or operating lease at the lease commencement date
considering: (i) whether the lease transfers ownership of the underlying asset
to the lessee at the end of the lease term, (ii) whether the lease contains a
bargain purchase option, (iii) whether the lease term is for a major part of the
remaining economic life of the underlying asset, (iv) whether the present value
of the sum of the lease payments and residual value guaranteed by the lessee
equals or exceeds substantially all of the fair value of the underlying asset,
and (v) whether the underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end of the lease term.
As of March 31, 2023, our lease population consisted only of operating real
estate leases.
Once a lease is identified and its classification determined, we recognize a ROU
asset and a corresponding lease liability. Lease liabilities are recorded based
on the present value of lease payments over the expected least term. The
corresponding ROU asset is measured from the initial lease liability, adjusted
by (i) accrued or prepaid rents, (ii) remaining unamortized initial direct costs
and lease incentives, and (iii) any impairments of the ROU asset.
Significant assumptions utilized in recognizing the ROU assets and corresponding
lease liabilities included the expected lease term and the incremental borrowing
rate. The expected lease term includes both contractual lease periods and, as
applicable, extensions of the lease term when we have determined the exercise of
the option to extend is reasonably certain to occur. The incremental borrowing
rate was utilized to discount lease payments over the expected term given our
operating leases do not provide an implicit rate. We estimated the incremental
borrowing rate based on an analysis of corporate bond yields with a credit
rating similar to ours. The determination of our incremental borrowing rate
requires management judgment, including development of a synthetic credit rating
and cost of debt, as we currently do not carry any debt. We believe that the
estimates used in determining the incremental borrowing rate are reasonable
based upon current facts and circumstances.

For additional details regarding the impact of adoption and disclosure, see Note
5, "Leases," to our condensed financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.


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Recently Adopted Accounting Pronouncements

There were no applicable recent accounting pronouncements, and we did not adopt any new accounting standards during the quarter.

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