
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 endedDecember 31, 2021 filed with theSecurities and Exchange Commission , or theSEC , onFebruary 28, 2022 . 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: • 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.
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Our lead vaccine candidate, VAX-24, is a 24-valent broad-spectrum investigational PCV being developed for the prevention of IPD. VAX-24 aims to improve standard-of-care PCV vaccines for both children and adults by covering serotypes that are responsible for the majority of pneumococcal diseases currently in circulation.
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VAX-24 Adult Program: OnJanuary 6, 2022 , we announced that theU.S. Food and Drug Administration , or FDA, cleared our investigational new drug, or IND, application for VAX-24 in adults. OnFebruary 23, 2022 , we announced the initiation of our Phase 1/2 clinical proof-of-concept study in adults 18 to 64 years of age. The Phase 1 portion of the study included 64 healthy adults 18 to 49 years of age and the Phase 2 portion of the study includes 771 healthy adults 50 to 64 years of age. OnApril 4, 2022 , we announced the initiation of the Phase 2 portion of this study, which occurred after an independent Data Monitoring Committee completed a prespecified review of Phase 1 safety and tolerability data and recommended that the study progress as planned. OnJuly 12, 2022 , we announced the completion of enrollment in this Phase 2 portion of the study. OnOctober 24, 2022 , we announced positive topline results from both the Phase 1 and Phase 2 portions of the study as described below. We also announced onJuly 12, 2022 the initiation of a separate Phase 2 study in approximately 200 healthy adults aged 65 and older, and we anticipate announcing topline safety, tolerability and immunogenicity results from this study in the first half of 2023. We anticipate final results with the 6-month safety data from both Phase 2 adult studies in the first half of 2023 and regulatory interactions to inform the Phase 3 program in the second half of 2023. Topline safety, tolerability and immunogenicity data from the Phase 3 non-inferiority study in adults are expected in 2025.
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VAX-24 Pediatric Program: For the VAX-24 pediatric program, we anticipate submitting an infant IND application to the FDA and initiating a Phase 2 study in the first half of 2023. We expect topline safety, tolerability and immunogenicity data from the infant Phase 2 study primary 3-dose immunization series by 2025. The study design will include a primary immunization series consisting of three doses followed by a subsequent booster dose.
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Our second PCV candidate, VAX-XP, builds on what has been established with VAX-24 and is designed to expand coverage to 31 strains without compromising immunogenicity due to carrier.
23 -------------------------------------------------------------------------------- suppression. VAX-XP was designed to provide coverage for approximately 95% of the pneumococcal disease currently circulating in theU.S. population. We anticipate submitting an IND application to the FDA for VAX-XP in adults in the second half of 2023. We expect topline safety, tolerability and immunogenicity data from a Phase 1/2 study in adults in 2024.
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VAX-A1, a novel conjugate vaccine candidate designed to prevent Group A Strep, a pervasive disease that results in 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. We believe we have demonstrated preclinical proof of concept for VAX-A1, the data for which were published inDecember 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 expect to provide guidance for an anticipated IND application submission to the FDA in the second half of 2022.
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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 inthe United States . We believe we have demonstrated preclinical proof of concept, the data for which was published inFebruary 2019 . We expect to nominate a final vaccine candidate for VAX-PG by the end of 2022. 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.
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We have other discovery-stage programs leveraging our cell-free protein synthesis platform that, if proven successful in preclinical studies, could also move into IND-enabling activities and clinical studies.
As
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Enrollment Completed for the Phase 2 Portion of the VAX-24 Phase 1/2 Proof-of-Concept Clinical Study in Adults 18 to 64 Years of Age: In
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Initiated Separate VAX-24 Phase 2 Clinical Study in Adults 65 Years and Older: InJuly 2022 , we announced that we also dosed the first participants in a separate Phase 2 study for VAX-24 in adults 65 years of age and older. This study is intended to further build the body of clinical evidence to support the potential of VAX-24 as the broadest-spectrum PCV in adults.
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Received FDA Fast Track Designation for VAX-24 in Adults: InAugust 2022 , we announced that the FDA granted Fast Track designation to VAX-24 in adults ages 18 and older. The Fast Track designation is an FDA process that has been designed to facilitate the development and expedite the review of drugs, including vaccines, that treat or prevent serious conditions and fill an unmet medical need.
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Completed Successful Pre-IND Meeting with FDA Regarding VAX-24 Pediatric Development Program, Supporting Path to Proceed Directly into Infants: InAugust 2022 , we announced successful completion of a pre-IND meeting with the FDA regarding the pediatric clinical program for VAX-24. We received positive written feedback from the FDA supporting the initiation of a pediatric study that proceeds directly into infants contingent on satisfactory topline safety, tolerability and immunogenicity results from the VAX-24 Phase 1/2 clinical proof-of-concept study in adults 18 to 64 years of age. This approach provides us with an accelerated clinical path to deliver a potentially best-in-class PCV, VAX-24, to the pediatric population, which represents the largest portion of the pneumococcal vaccine market inthe United States .
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Completed Enrollment of Phase 2 Study Evaluating Safety, Tolerability and Immunogenicity of VAX-24 in Adults 65 Years and Older: InSeptember 2022 , we announced the completion of enrollment in the Phase 2 portion of the ongoing VAX-24 Phase 1/2 clinical proof-of-concept study in adults 65 years and older.
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Announced Positive Topline Results from VAX-24 Phase 1/2 Clinical Proof-of-Concept Study in Adults 18-64 Years of Age: In October, 2022, we announced positive topline results from the Phase 1/2 clinical proof-of-concept study evaluating the safety, tolerability and immunogenicity of VAX-24 in healthy adults aged 18-64. In this study, VAX-24 met the primary safety and tolerability objectives, demonstrating a safety profile similar to Prevnar 20™ (PCV20) for all doses studied. In the 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 response non-inferiority criteria for all 20 serotypes common with PCV20, of which 16 achieved higher immune responses. Additionally, at all three doses, 24 -------------------------------------------------------------------------------- VAX-24 met the standard superiority criteria for all four serotypes unique to VAX-24. These four incremental serotypes cover 10-15 percent of strains causing IPD over the current standard-of-care in adults.
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Confirmed VAX-XP Serotype Composition and Expected IND Submission Timing: InOctober 2022 , we unveiled the serotype composition for VAX-XP, the follow-on vaccine in our carrier-sparing PCV franchise, which is designed to contain 31 serotypes that collectively cover approximately 95% of the circulating strains causing IPD in adults inthe United States .
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Published New Research Supporting the Potential of Our Technology Platform: The paper, "Non-Native Amino Acid Click Chemistry-Based Technology for Site-Specific Polysaccharide Conjugation to a Bacterial Protein Serving as Both Carrier and Vaccine Antigen," published in theJuly 2022 edition of the journal ACS Omega, demonstrates the potential advantages of our site-specific conjugation technology, the XpressCF™ cell-free protein synthesis platform, over random conjugation associated with the limitations of traditional chemistry. Specifically, this study used our platform technology to preserve B-cell and T-cell epitopes that are critical for generating T-cell help and protective immune responses against Group A Streptococcus, or Strep.
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Expanded Executive Leadership Team with Key Appointments: In October, 2022, we announced the appointment ofMark Wiggins as Chief Business Officer andJakub Simon , M.D., as Chief Medical Officer.
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Completed Successful$690 Million Follow-On Offering: InOctober 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 approximately$650.7 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. Since our inception inNovember 2013 , we have devoted substantially all of our resources to performing research and development, undertaking preclinical studies, advance 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, 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, inJune 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. 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$57.9 million for the three months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , we had an accumulated deficit of$444.1 million . As ofSeptember 30, 2022 , we had cash, cash equivalents and investments of$366.2 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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advancing our candidate vaccines through preclinical studies and clinical trials;
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expand our manufacturing capabilities;
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manufacture supplies for our preclinical studies and clinical trials, in particular our PCV candidates, VAX-24 and VAX-XP;
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invest to establish additional manufacturing capacity to meet potential incremental supply requirements following the initial commercial launch of the VAX-24;
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seek regulatory approval of our candidate vaccines;
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• hire additional personnel; • operate as a public company; •
acquire, discover, validate and develop additional candidate vaccines; Y
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obtain, maintain, expand and protect our portfolio of intellectual property.
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
InOctober 2016 , we entered into a development and manufacturing services agreement, as amended, withLonza Ltd. , or the Lonza DMSA, pursuant to whichLonza Ltd. , or Lonza, is obligated to perform services including manufacturing process development and the manufacture of components for VAX-24, including the polysaccharide antigens, our proprietary eCRM protein carrier and conjugated drug substances. InSeptember 2017 , we and Lonza agreed to defer the completion payments for any stage that commenced afterDecember 31, 2019 or had not been completed byDecember 31, 2019 until the earlier of the completion of all IND-enabling activities orDecember 31, 2020 . InMarch 2020 , Lonza agreed to defer the completion payments until the earlier of the completion of all IND-enabling activities orApril 30, 2021 . InApril 2021 , Lonza further agreed to defer 50% of the completion payments until the earlier of the completion of all IND-enabling activities orDecember 31, 2021 . InJune 2018 , we entered into a letter agreement with Lonza, 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. Specifically, we and Lonza agreed that the initial pre-IND cash payments made by us to Lonza would be subject to a specified dollar cap, or the Initial Cash Cap. After the Initial Cash Cap has been reached, then at our election, we would have 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, provided that (i) Lonza had the right to elect to receive up to 25% of pre-IND payments in shares of our common stock, up to a maximum of$2.5 million , and (ii) we had the right to issue no more than$10.0 million of pre-IND payments in shares of our common stock. InApril 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 dueApril 30, 2021 . InJune 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 dueApril 30, 2021 . InOctober 2018 , we entered into a second development and manufacturing services agreement with Lonza (the "Lonza 2018 DMSA," and together with the Lonza DMSA, the "Lonza Agreements"), pursuant to which Lonza is obligated to perform services including manufacturing process development and the manufacture and supply of VAX-24 finished drug product. InApril 2022 , we entered into a master services agreement for drug product development and manufacturing (the "Master Services Agreement") with Lonza effective as ofMarch 22, 2022 , pursuant to which Lonza will perform manufacturing process development and clinical manufacture and supply of our proprietary PCV. Unless terminated earlier, the Master Services Agreement will remain in place for a period of five years. Either party may terminate the Master Services Agreement for any reason with 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 Master Services Agreement (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 Master Services Agreement upon an 26 -------------------------------------------------------------------------------- extended force majeure event. Upon expiration and/or termination of the Master Services Agreement and/or any purchase order, we will pay Lonza for all services rendered, all costs incurred, all unreimbursed capital equipment and any cancellation fees. Under the Lonza Agreements, we will pay Lonza agreed upon fees for Lonza's performance of manufacturing services, and we will reimburse Lonza for its out-of-pocket costs associated with purchasing raw materials, plus a customary handling fee. Each Lonza Agreement is managed by a steering committee and any dispute at the steering committee will be resolved by senior executives of the parties. Sutro BiopharmaVaxcyte was formed through its relationship with Sutro Biopharma, in 2013 by our co-founders with the goal of utilizing Sutro Biopharma's proprietary XpressCF platform for protein synthesis in the field of vaccines addressing infectious diseases. In addition to receiving funding, we entered into a license agreement with Sutro Biopharma, or the Sutro License, onAugust 1, 2014 . The Sutro License was amended onOctober 12, 2015 and again onMay 9, 2018 andMay 29, 2018 . Under this license, 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, or CMO, 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 License, we are obligated to pay Sutro Biopharma a 4% royalty on worldwide aggregate net sales of 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. 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. InMay 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 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 ofJuly 31, 2022 and the date the parties enter into and commence activities under the supply agreement unless extended through a subsequent supply agreement for the supply of extract and custom reagents for vaccine compositions for Phase 3 and commercial uses as contemplated in the Supply Agreement. We are currently in the process of negotiating and extending the term of the Sutro Biopharma Supply Agreement. For additional details regarding our relationship with Sutro Biopharma, see Note 13, "Related Party Transactions," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
For additional details on our outstanding non-cancellable purchase commitments with our manufacturing partners, please 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
We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive efforts designed to protect the health and safety of our employees and to maintain business continuity. We believe that the measures we have implemented and continue to implement are appropriate, and we will continue to monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate. Based on guidance issued by federal, state and local authorities, we transitioned to a remote work model for our non-lab-based employees inMarch 2020 , while maintaining essential in-person laboratory functions in order to advance key research and development initiatives, supported by the implementation of updated onsite safety procedures, including routine testing of employees. In 2021, we began to allow non-lab employees who have been fully vaccinated to return to the office on a voluntary and limited basis. In addition, we implemented requirements for employees to obtain COVID-19 booster shots. InApril 2022 , we began to require non-lab employees to return to the office pursuant to a hybrid approach, which allows for partial remote work. 27 -------------------------------------------------------------------------------- In particular, the COVID-19 pandemic has 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 and other manufacturers, enroll participants in our clinical trials 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 to persist 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. In addition, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic could result in significant and prolonged disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the continued spread of COVID-19 could materially affect our business and the potential value of our common stock. The extent of the impact of the COVID-19 pandemic on our development and regulatory efforts, our ability to raise sufficient additional capital on acceptable terms, if at all, and the value of and market for our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements inthe United States and in other countries, and the effectiveness of actions taken globally to contain and treat COVID-19. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, see the section titled "Risk Factors."
Components of Results of Operations
operating expenses
Investigation 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 (such as 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, 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, 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 of our vaccine candidates, early clinical data, investment in our clinical programs, competition, manufacturing capability 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 clinical research organizations, or CROs, that conduct research and development 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 28 -------------------------------------------------------------------------------- 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 can vary significantly based on factors such as:
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the costs and timing of our chemistry, manufacturing and controls, activities, including fulfilling GMP-related standards and compliance, and identifying and qualifying second suppliers;
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costs related to raw material estimates from our third-party manufacturing and supply partners;
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the costs of clinical trials of our candidate vaccines;
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changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;
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the number of sites included in the trials;
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the countries in which the trials are carried out;
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delays in adding a sufficient number of trial sites and recruiting suitable volunteers to participate in our clinical trials;
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the number of subjects participating in the trials;
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the number of doses subjects receive;
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subjects who dropped out of a study or were lost to follow-up;
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possible additional safety monitoring requested by regulatory agencies;
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the duration of the subjects’ participation in the trials and follow-up;
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the cost and manufacturing time of our candidate vaccines;
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the stage of development of our candidate vaccines;
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the costs of establishing additional manufacturing capacity to meet potential incremental supply requirements following the initial commercial launch of the VAX-24; Y
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the efficacy and safety profile of our candidate vaccines.
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, including 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 increase substantially in absolute dollars for the foreseeable future as we increase our headcount 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 theSEC and The Nasdaq 29 --------------------------------------------------------------------------------
Other Income (Expenses), Net
Other income (expense), net includes interest income earned from our cash, cash equivalents and investments, grant income, realized gains (losses) on marketable securities and foreign currency transaction gains (losses) related to our Swiss Franc 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
InJuly 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 forPreparedness and Response/Biomedical Advanced Research and Development Authority and by awards fromWellcome Trust ,Germany's Federal Ministry of Education and Research , theUnited Kingdom Global Antimicrobial Resistance Innovation Fund and theBill & Melinda Gates Foundation . In connection with this funding, we entered into a cost-reimbursement sub-award agreement with the Trustees ofBoston University , the administrator of the program, or the CARB-X agreement. CARB-X awarded us up to$1.6 million in initial funding to advance the development of a universal vaccine to prevent infections caused by Group A Strep Bacteria. InJuly 2020 , the CARB-X agreement was amended with the initial funding amount increased from$1.6 million to$2.7 million . InDecember 2020 , we reached the maximum CARB-X funding limit for this initial funding period, and subsequently submitted our funding proposal to CARB-X for the next period under our agreement. InApril 2021 , we received approval for the next phase of CARB-X development and executed the cost-reimbursement sub-award agreement with the Trustees ofBoston University inAugust 2021 . Pursuant to the CARB-X agreement, the award committed additional funding of$3.2 million for IND-enabling activities and total potential funding of up to$29.7 million (including the current$3.2 million award and the prior$2.7 million award) upon the achievement of future VAX-A1 development milestones. InJanuary 2022 , CARB-X revised the parameters for the contribution of CARB-X funding and implemented maximum funding levels for all grant recipients. As a result, our total funding available upon achievement of development milestones through Phase 1 human clinical trials was revised from$29.7 million to$13.9 million (inclusive of the$5.9 million awarded to date). Separately, theNational Institute of Health , orNIH , awarded us up to$0.5 million inApril 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$0.2 and$0.3 million in grant income for funding research and development during the three months endedSeptember 30, 2022 and 2021, respectively, and$1 million and$0.7 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Grant income is included as a component of Other income (expense), net in the condensed statements of operations. 30 --------------------------------------------------------------------------------
Results of Operations
Comparison of the three months ended
The following table summarizes our results of operations for the periods presented: Three Months Ended September 30, Change 2022 2021 $ % (in thousands) Operating expenses: Research and development$ 47,679 $ 20,428$ 27,251 133.4 % General and administrative 10,898 6,523 4,375 67.1 % Total operating expenses 58,577 26,951 31,626 117.3 % Loss from operations (58,577 ) (26,951 ) (31,626 ) 117.3 % Other income (expense), net: Interest expense - - - - Interest income 1,190 90 1,100 * Grant income 157 299 (142 ) (47.5 )% Realized gain on marketable - 1 securities (1 ) (100.0 )% Foreign currency transaction gains (losses) (687 ) (54 ) (633 ) * Total other income (expense), net 660 336 324 96.4 % Net loss$ (57,917 ) $ (26,615 ) $ (31,302 ) 117.6 % * not meaningful Operating Expenses
Research and development expenses
The following table summarizes our research and development expenses for the periods presented: Three Months Ended September 30, Change 2022 2021 $ % (in thousands)
Product and clinical development (1)
8,957 4,305 4,652 108.1 % Professional and consulting services 1,447 1,153 294 25.5 % Research and development consumables 8,797 1,651 7,146 432.8 % Facility related and other allocated 4,313 2,173 2,140 98.5 % Laboratory supplies and equipment 1,654 810 844 104.2 % Other (2) 477 237 240 101.3 %
Total research and development expenses
(1)
Includes third-party manufacturing expenses and outsourced contract services, including outsourced preclinical studies and trials. (2) Includes travel expenses and other miscellaneous office expenses.
Research and development expenses increased by$27.3 million , or 133.4%, during the three months endedSeptember 30, 2022 compared to the corresponding period in 2021. The increase of$11.9 million in product and clinical development expenses was primarily due to VAX-24 Phase 3 and VAX-XP IND readiness activities and the initiations of our VAX-24 Phase 1/2 clinical proof-of-concept study in adults 18-64 years of age and VAX-24 Phase 2 clinical study in adults 65 years and older, partially offset by a decrease in VAX-24 IND readiness activities as the IND application for our VAX-24 adult program was submitted in late 2021. The increase of$4.7 million in personnel-related expenses was primarily due to higher salaries, benefits and stock-based compensation expense resulting from an increase in the number of options and restricted stock units, or RSUs, granted and the growth in the number of employees in our research and development functions. The increase of$7.1 million in research and development consumables was primarily related to costs incurred for extracts and reagents for our VAX-24 Phase 3 readiness activities. The increase of$2.1 million in facility related and other allocated expenses was primarily due to increases in lease expense related to our new corporate headquarters allocated to research and development. 31 --------------------------------------------------------------------------------
General and adminsitrative expenses
General and administrative expenses increased by$4.4 million , or 67.1%, during the three months endedSeptember 30, 2022 compared to the corresponding period in 2021. The increase was primarily due to increases of$3.1 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$1.3 million in professional and consulting services.
Other Income (Expenses), Net
Other income (expense), net increased by$0.3 million , during the three months endedSeptember 30, 2022 compared to the corresponding period in 2021. The increase was primarily attributable to a$1.1 million increase in interest income, partially offset by a$0.1 million decrease in grant income related to increased CARB-X activities and a$0.6 million increase in foreign currency losses generated from a decrease in Swiss Franc cash balances and appreciation of theU.S. dollar against the Swiss Franc.
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the periods presented: Nine Months Ended September 30, Change 2022 2021 $ % (in thousands) Operating expenses: Research and development$ 117,825 $ 55,337 $ 62,488 112.9 % General and administrative 27,858 18,487 9,371 50.7 % Total operating expenses 145,683 73,824 71,859 97.3 % Loss from operations (145,683 ) (73,824 ) (71,859 ) 97.3 % Other income (expense), net: Interest expense (2 ) (7 ) 5 (71.4 )% Interest income 1,723 245 1,478 603.3 % Grant income 1,006 677 329 48.6 % Realized gain on marketable - 2 securities (2 ) (100.0 )% Foreign currency transaction gains (losses) (2,479 ) 1,393 (3,872 ) (278.0 )% Total other income (expense), net 248 2,310 (2,062 ) (89.3 )% Net loss$ (145,435 ) $ (71,514 ) $ (73,921 ) 103.4 % Operating Expenses
Research and development expenses
The following table summarizes our research and development expenses for the periods presented: Nine Months Ended September 30, Change 2022 2021 $ % (in thousands)
Product and clinical development (1)
$ 25,447 95.1 % Personnel-related 22,394 12,325 10,069 81.7 % Professional and consulting services 4,153 3,245 908 28.0 % Research and development consumables 20,631 4,792 15,839 330.5 % Facility related and other allocated 12,851 5,261 7,590 144.3 % Laboratory supplies and equipment 4,028 2,377 1,651 69.5 % Other (2) 1,575 591 984 166.5 % Total research and development expenses$ 117,825 $ 55,337 $ 62,488 112.9 % (1)
Includes third-party manufacturing expenses and outsourced contract services, including outsourced preclinical studies and trials. (2) Includes travel expenses and other miscellaneous office expenses.
Research and development expenses increased by$62.5 million , or 112.9%, during the nine months endedSeptember 30, 2022 compared to the corresponding period in 2021. The increases of$25.4 million in product and clinical development expenses and$1.7 million in laboratory supplies and equipment were primarily due to increased VAX-XP IND readiness activities, the initiation of 32 -------------------------------------------------------------------------------- our VAX-24 Phase 1/2 clinical proof-of-concept study in adults 18-64 years of age in the first quarter of 2022, increased VAX-24 Phase 3 readiness activities, and the initiation of our VAX-24 Phase 2 clinical study in adults 65 years and older, partially offset by a decrease in VAX-24 IND readiness activities as the IND application for our VAX-24 adult program was submitted in late 2021. The increase of$10.1 million in personnel-related expenses was primarily due 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 research and development functions. The increase of$15.8 million in research and development consumables was primarily related to costs incurred for extracts and reagents for our VAX-24 Phase 3 readiness activities. The increase of$7.6 million in facility related and other allocated expenses was primarily due to increases in lease expense related to our new corporate headquarters allocated to research and development.
General and adminsitrative expenses
General and administrative expenses increased by$9.4 million , or 50.7%, during the nine months endedSeptember 30, 2022 compared to the corresponding period in 2021. The increase was primarily due to increases of$7.3 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$1.7 million in professional and consulting services.
Other Income (Expenses), Net
Other income (expense), net decreased by$2.1 million , or 89.3%, during the nine months endedSeptember 30, 2022 compared to the corresponding period in 2021. The decrease was primarily attributable to a$1.5 million increase in interest income, partially offset by a$0.3 million increase in grant income related to increased CARB-X activities and a$3.9 million increase in foreign currency losses generated from a decrease in Swiss Franc cash balances and appreciation of theU.S. dollar against the Swiss Franc.
Liquidity and Capital Resources
From inception throughSeptember 30, 2022 , 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$796.6 million in aggregate gross proceeds and$761.5 million net of underwriting discounts, commissions and offering expenses. As ofSeptember 30, 2022 , we had$278.4 million of cash and cash equivalents,$87.8 million in investments and an accumulated deficit of$444.1 million . OnJuly 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 onJuly 2, 2021 . InJuly 2021 , we entered into an Open Market Sales AgreementSM, or the ATM Sales Agreement, withJefferies LLC , which provides that, upon the terms and subject to the conditions and limitations set forth in the 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. Under the 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 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 ATM Sales Agreement; however, we are not obligated to make any sales of common stock. As ofSeptember 30, 2022 , we have sold 4,383,810 shares of our common stock under the ATM Sales Agreement at an average price of$25.56 per share for aggregate gross proceeds of$112.0 million ($108.7 million net of commissions and offering expenses). InJanuary 2022 , we completed an underwritten public offering in which we issued 2,500,000 shares of 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. InFebruary 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.
In
33 -------------------------------------------------------------------------------- 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 approximately$650.7 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. 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 inthe 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;
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the costs of establishing additional manufacturing capacity to meet potential incremental supply requirements following the initial commercial launch of the VAX-24;
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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;
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the cost of building a sales force prior to the commercialization of any product;
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the costs of future marketing activities, including manufacturing, marketing, sales, royalties and product distribution, for any of our candidate vaccines for which we receive marketing approval;
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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;
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any product liability or other claims related to our products;
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revenue, if any, received from commercial sales, or sales to foreign governments, of our candidate vaccines for which we may receive marketing approval;
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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;
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expenses necessary to attract, hire and retain qualified personnel;
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the costs of operating as a public company; Y
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the impact of the COVID-19 pandemic, 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 flow
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30, 2022 2021 (in thousands) Net cash used in operating activities$ (105,376 ) $ (70,300 ) Net cash provided by (used in) investing activities 110,537 (212,390 ) Net cash provided by financing activities 204,914 9,042 Effect of exchange rate changes on cash and cash equivalents (659 ) 363 Net increase (decrease) in cash, cash equivalents and restricted cash$ 209,416 $ (273,285 )
Cash flows from operating activities
Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$105.4 million , which primarily resulted from a net loss of$145.4 million , partially offset by non-cash charges of$24.0 million and a net change in our operating assets and liabilities of$16.0 million . Non-cash charges primarily consisted of$16.6 million in stock-based compensation expense,$5.0 million in amortization of right-of-use, or ROU, assets and$1.9 million in depreciation and amortization. The net change in operating assets and liabilities of$16.0 million was primarily due to (i) an increase in operating lease liabilities of$3.0 million related to our San Carlos office, (ii) an increase in accrued expenses of$5.5 million (iii) an increase in accrued manufacturing expenses of$5.8 million and (iv) a decrease in prepaid and other current assets of$2.9 million related to prepaid insurance and research costs. Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$70.3 million , which primarily resulted from a net loss of$71.5 million and a net change in our operating assets and liabilities of$9.6 million , partially offset by non-cash charges of$10.8 million . The net change in operating assets and liabilities of$9.6 million was primarily due to (i) an increase in prepaid and other current assets of$16.3 million related to prepaid rent expenses resulting from the San Carlos office leasehold improvements, (ii) an increase in other assets of$3.0 million related to assets purchased to support manufacturing activities and (iii) a decrease in accrued manufacturing expenses of$6.0 million resulting from timing of receipt of invoices, partially offset by increases in (a) accrued expenses of$8.4 million related primarily to an increase in outsourced research services for the VAX-24 program and (b) accounts payable of$5.6 million resulting from the timing of payments. Non-cash charges primarily consisted of$7.6 million in stock-based compensation expense and$1.3 million in depreciation and amortization. 35 --------------------------------------------------------------------------------
Cash flows from investing activities
Cash provided by investing activities for the nine months endedSeptember 30, 2022 was$110.5 million , which related primarily to$136.2 million in maturities of investments and$10.5 million in sales of investments, partially offset by$31.5 million in purchases of investments and$4.7 million of purchases of lab equipment and leasehold improvements. Cash used in investing activities for the nine months endedSeptember 30, 2021 was$212.4 million , which related primarily to$295.3 million in purchases of investments and$5.2 million in purchases of lab equipment, partially offset by$58.0 million in maturities of investments and$30.1 million in sales of investments.
Cash flows from financing activities
Cash provided by financing activities for the nine months endedSeptember 30, 2022 was$204.9 million , which primarily consisted of net proceeds from our follow-on public offering of$107.6 million and under our ATM Sales Agreement of$95.2 million . Cash provided by financing activities for the nine months endedSeptember 30, 2021 was$9.0 million , which primarily consisted of net proceeds from shares issued under our ATM Sales Agreement of$7.1 million and proceeds from exercises of common stock options and shares issued under our employee stock purchase plan of$1.9 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 ofSeptember 30, 2022 , we had total lease payment obligations of$22.2 million , of which$6.6 million is payable within one year.
purchase commitments
We have certain payment obligations under various license agreements. Under these agreements, we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory and sales milestones. The payment obligations under the license agreements are contingent upon future events such as our achievement of specified development, clinical, regulatory and commercial milestones, and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our condensed balance sheets as ofSeptember 30, 2022 orDecember 31, 2021 . We enter into agreements in the normal course of business with CMOs and other vendors for manufacturing services and raw materials purchases. We rely on several third-party manufacturers for our manufacturing requirements. As ofSeptember 30, 2022 , we had the following amounts due of non-cancelable purchase commitments related to manufacturing services and raw materials purchased due to our key manufacturing partners. These amounts represent our minimum contractual obligations, including termination fees. If we terminate certain firm orders with our key manufacturing partners, we will be required to pay for the manufacturing services scheduled or raw materials purchased under our arrangements. The actual amounts we pay in the future to the vendors under such agreements may differ from the purchase order amounts. Years ending December 31, (in thousands) Remainder of 2022$ 40,156 2023 40,837 Total non-cancelable purchase commitments due to our key manufacturing partners$ 80,993 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. 36 --------------------------------------------------------------------------------
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 inthe 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:
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. 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. 37 -------------------------------------------------------------------------------- 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) onJanuary 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 ofSeptember 30, 2022 , 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 right-of-use 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 us. 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.
Recently Adopted Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
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