May 13, 2024 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 001-38662

SUTRO BIOPHARMA, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	47-0926186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

111 Oyster Point Blvd, South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 881-6500

Not Applicable:

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

    Title of each class

    Trading Symbol

    Name of each exchange on which registered

    Common stock, $0.001 par value

    STRO

    The Nasdaq Stock Market LLC
(Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 8, 2024, the registrant had 81,794,334 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Condensed Balance Sheets	2
	Condensed Statements of Operations	3
	Condensed Statements of Comprehensive Loss	4
	Condensed Statements of Stockholders’ Equity	5
	Condensed Statements of Cash Flows	6
	Notes to Unaudited Interim Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	89
Item 3.	Defaults Upon Senior Securities	89
Item 4.	Mine Safety Disclosures	89
Item 5.	Other Information	89
Item 6.	Exhibits	90
Signatures		91

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Sutro Biopharma, Inc.

Condensed Balance Sheets

(Unaudited)

(In thousands, except share and per share data)


	March 31,			December 31,
	2024			2023
Assets
Current assets:
Cash and cash equivalents	$	65,218		$	69,268
Marketable securities		202,384			264,413
Investment in equity securities		45,616			41,937
Accounts receivable		31,300			36,078
Prepaid expenses and other current assets		10,064			9,846
Total current assets		354,582			421,542
Property and equipment, net		20,630			21,940
Operating lease right-of-use assets		21,594			22,815
Other non-current assets		5,739			3,567
Restricted cash		857			872
Total assets	$	403,402		$	470,736
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,511		$	9,440
Accrued compensation		7,077			14,686
Deferred revenue - current		20,502			20,666
Operating lease liability - current		6,673			6,420
Debt - current		-			4,061
Accrued expenses and other current liabilities		37,746			38,473
Total current liabilities		79,509			93,746
Deferred revenue - non-current		46,313			53,379
Operating lease liability - non-current		21,397			23,154
Deferred royalty obligation related to the sale of future royalties		156,465			149,114
Other non-current liabilities		1,694			1,694
Total liabilities		305,378			321,087
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value — 10,000,000 shares authorized as of March 31, 2024 and December 31, 2023; no shares issued and outstanding as of March 31, 2024 and December 31, 2023		-			-
Common stock, $0.001 par value — 300,000,000 shares authorized as of March 31, 2024 and December 31, 2023; 62,456,546 and 61,009,829 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively		62			61
Additional paid-in-capital		715,696			708,975
Accumulated other comprehensive income (loss)		(113	)		21
Accumulated deficit		(617,621	)		(559,408	)
Total stockholders’ equity		98,024			149,649
Total Liabilities and Stockholders’ Equity	$	403,402		$	470,736

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)


	Three Months Ended
	March 31,
	2024			2023
Revenue	$	13,008		$	12,674
Operating expenses
Research and development		56,878			39,399
General and administrative		12,721			15,512
Total operating expenses		69,599			54,911
Loss from operations		(56,591	)		(42,237	)
Interest income		4,096			2,560
Unrealized gain (loss) on equity securities		3,679			(6,992	)
Non-cash interest expense related to the sale of future royalties		(7,184	)		-
Interest and other income (expense), net		(2,213	)		(2,986	)
Loss before provision for income taxes		(58,213	)		(49,655	)
Provision for income taxes		-			395
Net loss	$	(58,213	)	$	(50,050	)
Net loss per share, basic and diluted	$	(0.95	)	$	(0.85	)
Weighted-average shares used in computing basic and diluted net loss per share		61,457,793			58,723,432

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

(In thousands)


	Three Months Ended
	March 31,
	2024			2023
Net loss	$	(58,213	)	$	(50,050	)
Other comprehensive (loss) income:
Net unrealized (loss) income on available-for-sale securities		(134	)		511
Comprehensive loss	$	(58,347	)	$	(49,539	)

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)


									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In-			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balances at December 31, 2023		61,009,829		$	61	$	708,975		$	21		$	(559,408	)	$	149,649
Exercise of common stock options		23,748			—		117			—			—			117
Issuance of common stock under Employee Stock Purchase Plan		284,362			—		911			—			—			911
Vesting of restricted stock units		1,215,729			1		(1	)		—			—			—
Stock transaction associated with taxes withheld on restricted stock units		(77,122	)		—		(374	)		—			—			(374	)
Stock-based compensation expense		—			—		6,068			—			—			6,068
Net unrealized income on available-for-sale securities		—			—		—			(134	)		—			(134	)
Net loss		—			—		—			—			(58,213	)		(58,213	)
Balances at March 31, 2024		62,456,546		$	62	$	715,696		$	(113	)	$	(617,621	)	$	98,024


									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In-			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			(Loss)			Deficit			Equity
Balances at December 31, 2022		57,499,541		$	58	$	670,223		$	(618	)	$	(452,615	)	$	217,048
Exercise of common stock options		53,060			—		314			—			—			314
Issuance of common stock under Employee Stock Purchase Plan		239,060			—		1,097			—			—			1,097
Vesting of restricted stock units		801,769			—		—			—			—			—
Stock transaction associated with taxes withheld on restricted stock units		(73,003	)		—		(451	)		—			—			(451	)
Stock-based compensation expense		—			—		6,021			—			—			6,021
Issuance of common stock in connection with At-The-Market sale, net of issuance costs of $308		1,641,374			2		10,921			—			—			10,923
Net unrealized income on available-for- sale securities		—			—		—			511			—			511
Net loss		—			—		—			—			(50,050	)		(50,050	)
Balances at March 31, 2023		60,161,801		$	60	$	688,125		$	(107	)	$	(502,665	)	$	185,413

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)


	Three Months Ended
	March 31,
	2024			2023
Operating activities
Net loss	$	(58,213	)	$	(50,050	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,761			1,615
Accretion of discount on marketable securities		(2,656	)		(1,786	)
Stock-based compensation		6,068			6,021
Non-cash lease expenses		1,221			641
Unrealized (gain) / loss on equity securities		(3,679	)		6,992
Non-cash interest expense on deferred royalty obligation		7,184			—
Other		189			(13	)
Changes in operating assets and liabilities:
Accounts receivable		4,778			(2,751	)
Prepaid expenses and other assets		(2,390	)		(7,424	)
Accounts payable		(1,897	)		198
Accrued compensation		(7,609	)		(6,786	)
Accrued expenses and other liabilities		(765	)		(2,399	)
Deferred revenue		(7,230	)		(4,412	)
Change in operating lease liability		(1,503	)		(837	)
Net cash used in operating activities		(64,741	)		(60,991	)
Investing activities
Purchases of marketable securities		(135,001	)		(52,764	)
Maturities of marketable securities		199,262			112,102
Sales of marketable securities		290			9,055
Purchases of equipment and leasehold improvements		(446	)		(942	)
Net cash provided by investing activities		64,105			67,451
Financing activities
Proceeds from sales of common stock, net of issuance costs		—			10,923
Payment of debt		(4,083	)		(3,125	)
Proceeds from exercise of common stock options		117			314
Taxes paid related to net shares settlement of restricted stock units		(374	)		(451	)
Proceeds from employee stock purchase plan		911			1,097
Net cash (used in) provided by financing activities		(3,429	)		8,758
Net (decrease) increase in cash, cash equivalents and restricted cash		(4,065	)		15,218
Cash, cash equivalents and restricted cash at beginning of period		70,140			48,126
Cash, cash equivalents and restricted cash at end of period	$	66,075		$	63,344
Supplemental disclosure of cash flow information:
Cash paid for interest	$	63		$	393
Income tax paid	$	10		$	-
Supplemental disclosure of non-cash investing and financing information:
Purchases of equipment included in accounts payable and accrued expense	$	219		$	371
Financing component associated with program fees	$	2,160		$	2,543
Deferred offering cost included in accounts payable and accrued expenses	$	528		$	101

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Notes to Unaudited Interim Condensed Financial Statements

1. Organization and Principal Activities

Description of Business

Sutro Biopharma, Inc. (the “Company”), is a clinical-stage oncology company developing site-specific and novel-format antibody drug conjugates, or ADCs. The Company was incorporated on April 21, 2003, and is headquartered in South San Francisco, California.

The Company operates in one business segment, the development of biopharmaceutical products. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Chief Executive Officer, the Company’s chief operating decision maker, in deciding how to allocate resources and assessing performance. The Company operates and manages its business as one operating segment. The Company’s Chief Executive Officer reviews financial information on an aggregate basis for the purposes of allocating and evaluating financial performance.

All of the Company’s long-lived assets are maintained in the United States.

Liquidity

The Company has incurred significant losses and has negative cash flows from operations. As of March 31, 2024, there was an accumulated deficit of $617.6 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development and other operational activities.

As of March 31, 2024, the Company had unrestricted cash, cash equivalents, and marketable securities of $267.6 million and equity securities of $45.6 million, consisting solely of common stock of Vaxcyte, which are available to fund future operations. The Company will need to raise additional capital to support the completion of its research and development activities and to support its operations.

The Company believes that its unrestricted cash, cash equivalents, marketable securities and investments in equity securities as of March 31, 2024, will enable the Company to maintain its operations for a period of at least 12 months following the filing date of its condensed financial statements.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim condensed financial statements of the Company are unaudited. These interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2023 condensed balance sheet was derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s condensed Balance Sheets and the amounts of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining research and development periods under collaboration arrangements, stock-based compensation expense, valuation of marketable securities, impairment of long-lived assets, income taxes, deferred royalty obligation related to the sale of future royalties and related non-cash interest expense, and certain accrued liabilities. Actual results could differ from such estimates or assumptions.

The accompanying unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company’s financial position, results of operations, comprehensive loss, and cash flows for the interim periods. The interim results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the year ended December 31, 2023.

Recent Accounting Pronouncements Not Yet Adopted

There were no new accounting pronouncements issued since the Company's filing of the Annual Report on Form 10-K for the year ended December 31, 2023, which could have a significant effect on the Company's condensed financial statements.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company's condensed Balance Sheets that sum to the total of the same amounts shown in the Company's condensed Statements of Cash Flows.


	March 31,
	2024		2023
	(in thousands)
Cash and cash equivalents	$	65,218	$	62,472
Restricted cash		857		872
Total cash, cash equivalents, and restricted cash shown in the condensed Statements of Cash Flows	$	66,075	$	63,344

Investments in Equity Securities

Vaxcyte common stock held by the Company is measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, with any realized or unrealized gains and losses recorded in the Company’s condensed Statements of Operations.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:

Level 1—Quoted prices in active markets for identical assets and liabilities;

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of accounts receivable, prepaid expenses, accounts payable, accrued liabilities and accrued compensation and benefits approximate fair value due to the short-term nature of these items.

The carrying value of the deferred royalty obligation related to the sale of future royalties under the 2015 License Agreement with Vaxcyte approximates its fair value as of March 31, 2024, and is based on our current estimates of future royalties expected to be earned over the estimated life of the royalty term arrangement. See Note 8. Deferred Royalty Obligation Related to the Sale of Future Royalties for a description of the Level 3 inputs used to estimate the fair value of the liability.

Revenue Recognition

When the Company enters into collaboration agreements, it assesses whether the arrangements fall within the scope of ASC 808, Collaborative Arrangements ("ASC 808") based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, the Company assesses whether the payments between the Company and its collaboration partner fall within the scope of other accounting literature. If it concludes that payments from the collaboration partner to the Company represent consideration from a customer, such as license fees and contract research and development activities, the Company accounts for those payments within the scope of Accounting Standards Update (ASU) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASC 606”).

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. However, if the Company concludes that its collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, the Company presents such payments as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense.

The Company has no products approved for commercial sale and has not generated any revenue from commercial product sales. The total revenue to date has been generated principally from collaboration and license agreements and to a lesser extent, from manufacturing, supply and services, and materials the Company provides to its collaboration partners.

Collaboration Revenue: The Company derives revenue from collaboration arrangements, under which the Company may grant licenses to its collaboration partners to further develop and commercialize its proprietary product candidates. The Company 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 the Company materials and reagents, clinical product supply or additional research and development services under separate agreements.

The Company assesses which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. The Company develops assumptions that require judgement to determine whether the license to the Company’s intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements.

At the inception of each agreement, the Company determines 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. The Company recognizes revenue over time by measuring its 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, the Company allocates 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, the Company develops assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success.

Upfront Payments: For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company uses judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by the Company over the estimated service performance period.

License Grants: For collaboration arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event.

Research and Development Services: For amounts allocated to the Company’s research and development obligations in a collaboration arrangement, the Company recognizes revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement.

Materials Supply: The Company provides materials and reagents, clinical materials, and services to certain of its collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials, reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by the Company.

Revenue subject to governmental withholding taxes is recognized on a gross basis with the withholding taxes recorded as a component of income tax expense.

3. Fair Value Measurements

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy:


	March 31, 2024
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Money market funds	$	42,498	$	42,498	$	-	$	-
Commercial paper		21,379	-			21,379		-
Corporate debt securities		44,036	-			44,036		-
Equity securities		45,616		45,616		-		-
Asset-backed securities		44,598	-			44,598		-
U.S. government securities		113,130		113,130		-		-
Total	$	311,257	$	201,244	$	110,013	$	-


	December 31, 2023
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Money market funds	$	56,397	$	56,397	$	-	$	-
Commercial paper		82,152		-		82,152		-
Corporate debt securities		61,894		-		61,894		-
Equity securities		41,937		41,937		-		-
Asset-backed securities		10,505		-		10,505		-
U.S. government securities		113,652		113,652		-		-
U.S. agency securities		4,961		-		4,961		-
Total	$	371,498	$	211,986	$	159,512	$	-

Where applicable, the Company uses quoted market prices in active markets for identical assets to determine fair value. This pricing methodology applies to Level 1 investments, which are comprised of money market funds, U.S. government securities and the shares of Vaxcyte common stock held by the Company.

If quoted prices in active markets for identical assets are not available, then the Company uses quoted prices for similar assets or inputs other than quoted prices that are observable, either directly or indirectly. These investments are included in Level 2 and consist of commercial paper, corporate debt securities, asset-backed securities, and U.S. agency securities. These assets are valued using market prices when available, adjusting for accretion of the purchase price to face value at maturity.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. As of March 31, 2024 and December 31, 2023, the deferred royalty obligation related to the sale of future Vaxcyte royalties was classified as Level 3 within the valuation hierarchy. Refer to Note 8 below for information relating to the Purchase Agreement between the Company and Blackstone, pursuant to which the Company sold to Blackstone its 4% royalty, or revenue interest, in potential future net sales of Vaxcyte’s pneumococcal conjugate vaccine, or PCV, products, including VAX-24 and VAX-31.

Investments in Equity Securities

As of March 31, 2024 and December 31, 2023, the Company held 667,780 shares of Vaxcyte common stock with an estimated fair value of $45.6 million and $41.9 million, respectively. The Company recognized an unrealized gain of $3.7 million and an unrealized loss of $7.0 million for the three months ended March 31, 2024 and 2023, respectively.

4. Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following:


	March 31, 2024
	Amortized Cost Basis			Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Money market funds	$	42,498		$	-	$	-		$	42,498
Commercial paper		21,391			-		(12	)		21,379
Corporate debt securities		44,044			3		(11	)		44,036
Asset-based securities		44,641			-		(43	)		44,598
U.S. government securities		113,180			-		(50	)		113,130
Total		265,754			3		(116	)		265,641
Less amounts classified as cash equivalents		(63,257	)		-		-			(63,257	)
Total marketable securities	$	202,497		$	3	$	(116	)	$	202,384


	December 31, 2023
	Amortized Cost Basis			Unrealized Gains			Unrealized Losses			Fair Value
	(in thousands)
Money market funds	$	56,397		$	-		$	-		$	56,397
Commercial paper		82,179			1			(28	)		82,152
Corporate debt securities		61,887			12			(5	)		61,894
Asset-based securities		10,505			-			–			10,505
U.S. government securities		113,612			40			–			113,652
U.S. agency securities		4,960			1			–			4,961
Total		329,540			54			(33	)		329,561
Less amounts classified as cash equivalents		(65,144	)		(4	)		-			(65,148	)
Total marketable securities	$	264,396		$	50		$	(33	)	$	264,413

No marketable securities had maturities of more than one year as of March 31, 2024 and December 31, 2023.

There were $190.5 million and $110.9 million of investments in an unrealized loss position of $0.1 million and $33,000 as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, the Company did not record any other-than-temporary impairment charges on its available-for-sale securities. Based on the Company’s procedures under the expected credit loss model, including an assessment of unrealized losses on the portfolio after March 31, 2024 and 2023, the Company concluded that the unrealized losses for its marketable securities were not attributable to credit and therefore an allowance for credit losses for these securities has not been recorded as of March 31, 2024. Also, based on the scheduled maturities of the investments, the Company was more likely than not to hold these investments for a period of time sufficient for a recovery of the Company’s cost basis.

The Company recognized no material gains or losses on its cash equivalents and current and non-current marketable securities as of March 31, 2024 and December 31, 2023 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the period then ended.

5. Collaboration and License Agreements and Supply Agreements

The Company has entered into collaboration and license agreements and supply agreements with various pharmaceutical and biotechnology companies. See “Note 5. Collaboration and License Agreements and Supply Agreements” to the Company’s financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023, or as further described below, for additional information on each of its collaboration agreements.

The Company’s accounts receivable balances may contain billed and unbilled amounts from upfront payments, milestones and other contingent payments, as well as reimbursable costs from collaboration and license agreements and supply agreements. The Company performs a regular review of its customers’ credit risk and payment histories, including payments made after the period end. Historically, the Company has not experienced credit loss from its accounts receivable and, therefore, has not recorded a reserve for estimated credit losses as of March 31, 2024 and December 31, 2023.

In accordance with the collaboration, license and supply agreements, the Company recognized revenue as follows:


	Three Months Ended
	March 31,
	2024		2023
	(in thousands)
Merck Sharp & Dohme Corporation (“Merck”)	$	6	$	2,553
Astellas Pharma Inc. (“Astellas”)		11,385		6,272
Tasly Biopharmaceuticals Co., Ltd. (“Tasly”)		970		-
Vaxcyte, Inc. ("Vaxcyte")		647		675
Bristol Myers Squibb Company (“BMS”)		-		3,166
Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name “EMD Serono”)		-		8
Total revenue	$	13,008	$	12,674

The following table presents the changes in the Company’s deferred revenue balance from the agreements during the three months ended March 31, 2024:


	Three Months Ended
	March 31, 2024
	(in thousands)
Deferred revenue—December 31, 2023	$	74,045
Additions to deferred revenue		-
Recognition of revenue in current period		(7,230	)
Deferred revenue—March 31, 2024	$	66,815

The Company’s balance of deferred revenue contains upfront and contingent payments for obligations from our agreements which remain partially unsatisfied. The Company expects to recognize approximately $20.5 million of the deferred revenue over the next twelve months.

Collaboration with Merck

2018 Merck Agreement

In July 2018, the Company entered into an agreement (the “2018 Merck Agreement”) with Merck for access to the Company’s technology and the identification and preclinical research and development of two target programs, with an option for Merck to engage the Company to continue these activities for a third program, upon the payment of an additional amount, focusing on cytokine derivatives for cancer and autoimmune disorders.

In April 2021, Merck initiated the first IND-enabling toxicology study under the first cytokine-derivative program in the collaboration.

In December 2021, Merck did not extend the research term for the second research program of the collaboration, which research program reverted to the Company. The first research program of the collaboration is focused on MK-1484, a distinct cytokine derivative molecule for the treatment of cancer. The Company is eligible to receive aggregate contingent payments of up to approximately $500 million for the target program selected by Merck, assuming the development and sale of the therapeutic candidate and all possible indications identified under the collaboration. If one or more products from the target program is developed for non-oncology or a single indication, the Company will be eligible for reduced aggregate contingent payments. In addition, the Company is eligible to receive tiered royalties ranging from mid-single digit to low-teen digit percentages on the worldwide sales of any commercial products that may result from the collaboration.

In July 2022, the first patient was dosed with MK-1484 in a Phase 1 study.

As of both March 31, 2024 and December 31, 2023, there was no deferred revenue under the 2018 Merck Agreement and 2021 Amendment.

2020 Merck Master Services Agreement

In August 2020, the Company entered into a Pre-Clinical and Clinical Supply Agreement (the “2020 Merck Master Services Agreement”) with Merck, wherein Merck requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply, upon completion of the research programs under the 2018 Merck Agreement.

As of both March 31, 2024 and December 31, 2023, there was no deferred revenue under the 2020 Merck Master Services Agreement.

Revenues under the 2018 Merck Agreement and the 2020 Merck Master Services Agreement were as follows:


		Three Months Ended

Form: 10-Q

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