NHL Salaries

SUTRO BIOPHARMA, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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

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

Insight

We are a clinical-stage oncology company developing site-specific and
novel-format antibody drug conjugates, or ADCs, enabled by our proprietary
integrated cell-free protein synthesis platform, XpressCF®, and our site
specific conjugation platform, XpressCF+®. We aim to design and develop the most
relevant and potent modalities, including ADCs, bispecific ADCs,
immunostimulatory ADCs, or iADCs, cytokine-based therapeutics, and bispecific
antibodies, that are directed primarily against clinically validated targets
where the current standard of care is suboptimal. We believe our platform allows
us to accelerate the discovery and development of potential first-in-class and
best-in-class molecules by enabling the rapid and systematic evaluation of
protein structure-activity relationships to create optimized homogeneous product
candidates. Our mission is to transform the lives of patients by using our
XpressCF® and XpressCF+® platforms to create medicines with improved therapeutic
profiles for areas of unmet need.

Once identified, production of protein drug candidates can be rapidly and
predictably scaled in our current Good Manufacturing Practices (GMP) compliant
manufacturing facility. We have the ability to manufacture our proprietary
cell-free extract that supports our production of proteins on a large scale
using a semi-continuous fermentation process. Our two most advanced product
candidates are wholly owned: STRO-002, an ADC directed against folate
receptor-alpha, or FolR?, for patients with FolR?-expressing cancers, such as
ovarian and endometrial cancers, and STRO-001, an ADC directed against CD74, for
patients with B-cell malignancies, such as multiple myeloma and non-Hodgkin
lymphoma, or NHL.

STRO-002 is designed and optimized for an improved therapeutic index by placing
a precise number of linker-warheads at four specific locations within the
antibody using our proprietary XpressCF+® platform. Our first Phase 1 trial for
STRO-002 is an open-label study evaluating STRO-002 as a monotherapy for
patients with ovarian and endometrial cancers. This trial is being conducted in
two-parts, dose escalation and dose expansion. The primary objectives of the
STRO-002 clinical trial are to determine the safety and tolerability profile, to
define the recommended Phase 2 dose level and interval and to evaluate
preliminary anti-tumor activity. Our secondary objectives are to characterize
the human pharmacokinetics and additional safety, tolerability and efficacy
measures.

We are developing STRO-001, an optimally designed ADC directed against the
cancer target CD74, for multiple myeloma and NHL. STRO-001 was designed and
optimized for maximal therapeutic index by placing linker-warheads at specific
locations within the antibody using our proprietary XpressCF+® platform. The
Phase 1 trial for STRO-001 is an open-label study evaluating STRO-001 as a
monotherapy for patients with multiple myeloma and NHL. The trial is being
conducted in two parts: dose escalation and dose expansion. The primary
objectives of the trial are to determine the safety and tolerability profile of
STRO-001, to determine the recommended Phase 2 dose level and interval and to
evaluate preliminary anti-tumor activity. Our secondary objectives are to
characterize the human pharmacokinetics of STRO-001 and additional safety,
tolerability and efficacy measures.

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In March 2019, STRO-002 began enrolling patients in a Phase 1 trial focused on
ovarian and endometrial cancers. The dose escalation portion of the STRO-002
Phase 1 trial has been completed and the dose expansion portion of the trial is
ongoing to assess the efficacy, safety and tolerability of STRO-002. In May
2021, we reported data from the dose-escalation cohort. Based on such reported
data, STRO-002 exhibited a manageable safety profile and promising preliminary
efficacy data. In January 2022, we released initial results of the dose
expansion portion of the STRO-002 Phase 1 trial. These data suggested that
STRO-002 exhibited a manageable safety profile together with promising
preliminary efficacy data in the tested patient population. In August 2021, we
were granted Fast Track designation for STRO-002 by the U.S. Food and Drug
Administration, or FDA for the treatment of patients with platinum-resistant
epithelial ovarian, fallopian tube, or primary peritoneal cancer who have
received one to three prior lines of systemic therapy. We have initiated
discussions with the FDA regarding an appropriate trial design for a
registration-directed trial of STRO-002 to potentially support an accelerated
approval; however, whether any trial is sufficient to receive FDA approval under
the accelerated approval pathway will depend on the safety and efficacy results
of such trial and will only be determined by the FDA upon review of a submitted
biologics license application, or BLA. In December 2021, we entered into a
licensing agreement with Tasly Biopharmaceuticals Co., Ltd, or Tasly, to grant
Tasly an exclusive license to develop and commercialize STRO-002 in China, Hong
Kong, Macau and Taiwan, referred to as Greater China, or the Tasly License
Agreement, which agreement was amended in April 2022, or the Amendment. Pursuant
to the Amendment, the initial nonrefundable upfront payment due from Tasly was
amended to $25.0 million, and a $15.0 million payment will be placed in escrow
by Tasly in the second half of 2022 and become payable to us upon achievement of
certain regulatory milestones. The Amendment also added an additional regulatory
milestone payment to the Tasly License Agreement, providing additional potential
payments totaling up to $350.0 million related to development, regulatory and
commercialization milestones, beyond the payments described above, and made
certain other ministerial edits. On November 3, 2022, an abstract was published
announcing an upcoming oral presentation at the 64th American Society of
Hematology Annual Meeting and Exposition (ASH 2022) showing the anti-leukemic
activity of STRO-002 for pediatric patients with relapsed/refractory
CBF2AT3-GLIS2 acute myeloid leukemia, or AML treated under compassionate use.

Our second candidate, STRO-001, is currently enrolling patients in a Phase 1
trial, with updated data reported in December 2020. Based on such reported data,
STRO-001 has been generally well-tolerated and, unlike certain other ADCs, no
ocular toxicity signals have been observed, with no patients receiving
prophylactic corticosteroid eye drops. Dose escalation in the STRO-001 Phase 1
trial is continuing, and the maximum tolerated dose has not yet been reached. In
October 2018, we were granted Orphan Drug Designation by the FDA for STRO-001
for the treatment of multiple myeloma. In October 2021, we granted BioNova
Pharmaceuticals Limited, or BioNova, an option to exclusively license the right
to develop and commercialize STRO-001 in Greater China, or the BioNova Option
Agreement.

Based on our proprietary XpressCF® and XpressCF+® platforms, we have also
entered into multi-target, product-focused collaborations with leaders in the
field of oncology, including an immunostimulatory antibody-drug conjugates
collaboration with Astellas Pharma Inc., or Astellas, a cytokine derivatives
collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc.,
Kenilworth, NJ, or Merck; a B Cell Maturation Antigen, or BCMA, ADC
collaboration with Celgene Corporation, or Celgene, a wholly owned subsidiary of
Bristol Myers Squibb Company, New York, NY, or BMS; a MUC1-EGFR ADC
collaboration with Merck KGaA, Darmstadt Germany (operating in the United States
and Canada under the name "EMD Serono"); BioNova; and Tasly. Our XpressCF® and
XpressCF+® platforms have also supported a spin-out company, Vaxcyte Inc., or
Vaxcyte, focused on discovery and development of vaccines for the treatment and
prophylaxis of infectious disease. In the first quarter of 2022, Vaxcyte
announced initiation of a Phase 1/2 clinical proof-of-concept study of its lead
product candidate, VAX-24, its 24-valent pneumococcal conjugate vaccine
candidate, under investigation for the prevention of invasive pneumococcal
disease in adults, and announced in October 2022 positive topline data from such
study in adults aged 18-64.

Since the commencement of our operations, we have devoted substantially all of
our resources to performing research and development and manufacturing
activities in support of our own product development efforts and those of our
collaborators, raising capital to support and expand such activities and
providing general and administrative support for these operations. We have
funded our operations to date primarily from upfront, milestone and other
payments under our collaboration agreements with BMS, Merck, EMD Serono,
BioNova, Tasly and Astellas, the issuance and sale of redeemable convertible
preferred stock, our initial public offering, or IPO, follow-on public offerings
of common stock and debt proceeds.

We do not have any products approved for commercial sale and have not generated
any revenue from commercial product sales. We had a loss from operations of
$79.7 million and a net loss of $84.6 million for the nine months ended
September 30, 2022, which net loss included the non-operating, unrealized gain
of $0.3 million related to our holdings of Vaxcyte common stock. We had a loss
from operations of $63.5 million and net loss of $67.4 million, which net loss
included the non-operating, unrealized loss of $1.9 million related to our
holdings of Vaxcyte common stock, for the nine months ended September 30, 2021.
Substantially all of our losses have resulted from expenses incurred in
connection with our research and development programs and from general and
administrative costs associated with our operations. We cannot assure you that
we will have net income or that we will generate positive cash flow from
operating activities in the future. As of September 30, 2022, we had an
accumulated deficit of $418.0 million. We do not expect to generate any revenue
from commercial product sales unless and until we successfully complete
development and obtain regulatory

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approval for one or more of our product candidates, which we expect will take a
number of years. If we obtain regulatory approval for any of our product
candidates, we expect to incur significant commercialization expenses related to
product sales, access, marketing, manufacturing and distribution. We expect our
operating expenses to significantly increase as we continue to develop, and seek
regulatory approvals for, our product candidates, engage in other research and
development activities, expand our pipeline of product candidates, continue to
develop our manufacturing facility and capabilities, maintain and expand our
intellectual property portfolio, seek regulatory and marketing approval for any
product candidates that we may develop, acquire or in-license other assets or
technologies, ultimately establish a sales, marketing and distribution
infrastructure to commercialize any products for which we may obtain marketing
approval, and operate as a public company. Our net losses may fluctuate
significantly from quarter-to-quarter and year-to-year, depending on the timing
of our clinical trials, our expenditures on other research and development
activities and the timing of achievement and receipt of upfront, milestones and
other collaboration agreement payments.

Impacts of the COVID-19 pandemic

The extent of the impact of COVID-19 on our operational and financial
performance will depend on certain developments, including the duration and
spread of the pandemic, impacts on our clinical studies, employee or industry
events, and effects on our collaboration partners, suppliers, service providers
and manufacturers, all of which are uncertain and cannot be predicted. The
COVID-19 pandemic and its adverse effects had become prevalent in the locations
where we, our CROs, suppliers or third-party business partners conduct business.
We are experiencing the impact of the COVID-19 pandemic on our business through
increased cost and modification to our activities. Additionally, the COVID-19
pandemic has had, and may continue to have, an adverse impact on our operations,
particularly as a result of preventive and precautionary measures that we, other
businesses, and governments are taking. We may experience more pronounced and
significant disruptions in our operations, liquidity, supply chain, facilities,
and clinical trials in the future as well. We may in the future experience more
significant delays in enrollment, participant dosing, distribution of clinical
trial materials, study monitoring and data analysis that could materially
adversely impact our business, results of operations, revenue earned from our
collaboration partners, and overall financial performance in future periods.
Specifically, we may experience impact from changes in how we and companies
worldwide conduct business due to any change to the current status of the
COVID-19 pandemic, or other infectious diseases, including but not limited to
restrictions on travel and in-person meetings, the speed and breadth of mass
vaccinations for COVID-19 and the efficacy of such vaccines, delays in site
activations and enrollment of clinical trials, prioritization of hospital
resources toward pandemic effort, delays in review by the FDA and comparable
foreign regulatory agencies, limitations on employee resources that would
otherwise be focused on the conduct of our research, preclinical studies,
clinical trials and manufacturing operations, including because of sickness of
employees or their families, the desire of employees to avoid contact with large
groups of people, an increased reliance on working from home or mass transit
disruptions, and disruptions in our supply chain for our product candidates.
Additionally, increased reliance on remote work by our employees as a result of
the COVID-19 pandemic poses incremental increased cybersecurity risks as our
employees' home networks are inherently less secure than our corporate networks.
As of the filing date of this Form 10-Q, the extent to which the COVID-19
pandemic may impact our financial condition, results of operations or guidance
is uncertain. The effect of the COVID-19 pandemic will not be fully reflected in
our results of operations and overall financial performance until future
periods. See the section titled "Risk Factors" for further discussion of the
possible impact of the ongoing COVID-19 pandemic on our business.

Overview of financial operations

Revenue

We do not have any products approved for commercial sale and have not generated
any revenue from commercial product sales. Our total revenue to date has been
generated principally from our collaboration and license agreements with BMS,
Merck, EMD Serono, BioNova, Tasly and Astellas, and to a lesser extent, from
manufacturing, supply and services and materials we provide to the above
collaborators and to Vaxcyte.

We derive revenue from collaboration arrangements, under which we may grant
licenses to our collaboration partners to further develop and commercialize our
proprietary product candidates. We may also perform research and development
activities under the collaboration agreements. Consideration under these
contracts generally includes a nonrefundable upfront payment, development,
regulatory and commercial milestones and other contingent payments, and
royalties based on net sales of approved products. Additionally, the
collaborations may provide options for the customer to acquire from us materials
and reagents, clinical product supply or additional research and development
services under separate agreements. We assess which activities in the
collaboration agreements are considered distinct performance obligations that
should be accounted for separately. We develop assumptions that require
judgement to determine whether the license to our intellectual property is
distinct from the research and development services or participation in
activities under the collaboration agreements.

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At the inception of each agreement, we determine the arrangement transaction
price, which includes variable consideration, based on the assessment of the
probability of achievement of future milestones and contingent payments and
other potential consideration. We recognize revenue over time by measuring our
progress towards the complete satisfaction of the relevant performance
obligation using an appropriate input or output method based on the nature of
the service promised to the customer.

For arrangements that include multiple performance obligations, we allocate the
transaction price to the identified performance obligations based on the
standalone selling price, or SSP, of each distinct performance obligation. In
instances where SSP is not directly observable, we develop assumptions that
require judgment to determine the SSP for each performance obligation identified
in the contract. These key assumptions may include full-time equivalent, or FTE,
personnel effort, estimated costs, discount rates and probabilities of clinical
development and regulatory success.

Please see a more in-depth discussion on the treatment of performance obligation revenue recognition under critical accounting policies and estimates.

Functionnary costs

Research and development

Research and development expenses represent costs incurred in performing
research, development and manufacturing activities in support of our own product
development efforts and those of our collaborators, and include salaries,
employee benefits, stock-based compensation, laboratory supplies, outsourced
research and development expenses, professional services and allocated
facilities-related costs. We expense both internal and external research and
development costs as they are incurred. Nonrefundable advance payments for
services that will be used or rendered for future research and development
activities are recorded as prepaid expenses and recognized as expenses as the
related services are performed.

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

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

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                                            Three Months Ended          Nine Months Ended
                                               September 30,              September 30,
                                             2022          2021         2022          2021
                                              (in thousands)              (in thousands)
Internal costs:
Research and drug discovery               $    8,924     $  6,708     $  25,378     $ 19,409
Process and product development                3,857        4,470        11,302       11,201
Manufacturing                                  9,132        7,579        27,101       23,313
Clinical development                           2,452        1,709         6,492        3,662
Total internal costs                          24,365       20,466        70,273       57,585
External Program Costs:
Research and drug discovery                      793          379         1,862        1,069
Toxicology and translational science             210          357           712          963
Process and product development                   69          104           337          286
Manufacturing                                  3,149        3,249        11,857        7,718
Clinical development                           3,128        2,047         8,995        6,852
Total external program costs                   7,349        6,136       

23,763 16,888 Total research and development expenses $31,714 $26,602 $94,036 $74,473


General and Administrative

Our general and administrative expenses consist primarily of personnel costs,
expenses for outside professional services, including legal, human resources,
audit, accounting and tax services and allocated facilities-related costs.
Personnel costs include salaries, employee benefits and stock-based
compensation. We expect to incur additional expenses operating as a public
company, including expenses related to compliance with the rules and regulations
of the SEC and listing standards applicable to companies listed on the Nasdaq
Global Market, additional insurance expenses, investor relations activities and
other administrative and professional services. We also expect to increase the
size of our administrative function and our general and administrative expenses
to support the anticipated growth of our business, and as we continue to advance
our product candidates into and through the clinic.

interest income

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

Unrealized gain (loss) on Equity securities

The unrealized gain (loss) on equity securities consists of the revaluation of our investment in common shares of Vaxcyte.

Interest and other charges, net

Interest expense includes interest incurred on our debt and amortization of debt
issuance costs including accretion of final payment. Additionally, we identified
a financing component under the Astellas Agreement and recorded interest expense
associated with the upfront payment. Other income (expense) includes changes in
values attributable to the arrangement with our Call Option Plan whereby we
granted certain employees options to purchase shares of Vaxcyte common stock,
and realized gain (loss) on the sale of Vaxcyte common stock.

Income taxes

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

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Comparison of the three months ended September 30, 2022 and 2021

                                           Three Months Ended
                                              September 30,
                                                                                   Change
                                           2022          2021         Change        (%)
                                                    (in thousands)
Revenues                                 $  25,147     $   8,517     $ 16,630          195 %
Operating expenses
Research and development                    31,714        26,602        5,112           19 %
General and administrative                  14,643        16,589       (1,946 )        (12 )%
Total operating expenses                    46,357        43,191        3,166            7 %
Loss from operations                       (21,210 )     (34,674 )     13,464          (39 )%
Interest income                              1,014           109          905          830 %
Unrealized gain on equity securities         3,496         4,483         (987 )        (22 )%
Interest and other expense, net             (2,788 )        (820 )     (1,968 )        240 %
Loss before provision for income taxes     (19,488 )     (30,902 )     11,414          (37 )%
Provision for income taxes                       -             -            -            -
Net loss                                 $ (19,488 )   $ (30,902 )   $ 11,414          (37 )%


Revenue

We recognized revenue as follows during the periods indicated:

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

Bristol Myers Squibb Company (“BMS”) $4,343 $1,118 $3,225

             288 %
Merck Sharp & Dohme Corporation
("Merck")                                      10,157         6,414         3,743              58 %
Merck KGaA, Darmstadt, Germany
(operating in the United
  States and Canada under the name "EMD
Serono")                                          166           249           (83 )           (33 )%
Astellas Pharma Inc. ("Astellas")               4,985             -         4,985               *
Vaxcyte                                         1,496           736           760             103 %
BioNova Pharmaceuticals, Ltd.                   4,000
("BioNova")                                                       -         4,000               *
Total revenue                             $    25,147     $   8,517     $  16,630             195 %


*Percentage not meaningful

Total revenue increased by $16.6 million during the three months ended September
30, 2022 as compared to the three months ended September 30, 2021. This was due
primarily to revenue from Astellas of $5.0 million, of which $1.9 million was
from the ongoing performance related to partially unsatisfied performance
obligations, $2.3 million was from the financing component related to the
Astellas Agreement, and $0.8 million was from research and development services,
revenue from BioNova of $4.0 million from the satisfaction of the performance
obligation under the BioNova Option Agreement, a $3.2 million increase in BMS
revenue primarily due to an increase in materials supply and manufacturing
activities supporting clinical trial supply, a $0.8 million increase in Vaxcyte
revenue, and a $3.7 million increase from Merck related to a $10.0 million
contingent payment earned in the third quarter of 2022 with the first patient
dosed in a Phase 1 study of an investigational candidate resulting from the 2018
Merck Agreement for the development of a novel cytokine derivative therapeutic
for the treatment of cancer, partially offset by a $3.5 million decrease from
the 2021 completion of the performance obligations associated with the first and
second target programs under the 2018 Merck Agreement, a $2.6 million decrease
in research and development services and materials supply, and a $0.2 million
decrease due to the absence in 2022 of the financing component related to the
2018 Merck Agreement. These increases were partially offset by a $0.1 million
decrease in EMD Serono revenue.

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Research and development costs

Research and development expense increased by $5.1 million, or 19%, during the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021. The overall increase was due primarily to increases of $3.2
million in laboratory supplies and preclinical research and clinical development
expenses and $2.9 million in personnel-related expenses due to higher headcount,
partially offset by decreases of $0.9 million in facilities-related expenses and
$0.1 million in consulting and outside services.

General and administrative costs

General and administrative expense decreased by $1.9 million, or 12%, during the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021. The decrease was due primarily to decreases of $1.2 million
in consulting and outside services and $1.0 million in facilities-related
expenses, partially offset by a $0.3 million increase in equipment and
office-related expenses.


interest income

Interest income increased by $0.9 million in the three months ended
September 30, 2022 compared to the three months ended September 30, 2021mainly due to an increase in the amortization of investment premiums.

Unrealized gain on Equity securities

Unrealized gain on equity securities was $3.5 million during the three months
ended September 30, 2022 as compared to an unrealized gain of $4.5 million for
the three months ended September 30, 2021. The unrealized gain on equity
securities in each period was entirely due to the remeasurement of the fair
value of our investment in Vaxcyte common stock.

Interest and other charges, net

Interest and other expense, net, increased by $2.0 million during the three
months ended September 30, 2022 as compared to the three months ended September
30, 2021, due primarily to the increase of $2.3 million from the financing
component related to the Astellas Agreement, partially offset by a decrease of
$0.2 million due to the absence in 2022 of the financing component related to
the 2018 Merck Agreement, and a decrease of $0.1 million in interest incurred on
our outstanding loan.

Comparison of the nine months ended September 30, 2022 and 2021

                                                 Nine Months Ended
                                                   September 30,
                                                                                          Change
                                                2022          2021         Change          (%)
                                                         (in thousands)
Revenues                                      $  59,140     $  51,226     $   7,914             15 %
Operating expenses
Research and development                         94,036        74,473        19,563             26 %
General administrative                           44,825        40,241         4,584             11 %
Total operating expenses                        138,861       114,714        24,147             21 %
Loss from operations                            (79,721 )     (63,488 )     (16,233 )           26 %
Interest income                                   1,327           481           846            176 %

Unrealized gain (loss) on equity securities 323 (1,881 )

   2,204           (117 )%
Interest and other expense, net                  (4,039 )      (2,525 )      (1,514 )           60 %
Loss before provision for income taxes          (82,110 )     (67,413 )     (14,697 )           22 %
Provision for income taxes                        2,500             -         2,500              *
Net loss                                      $ (84,610 )   $ (67,413 )   $ (17,197 )           26 %


*Percentage not meaningful

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Revenue

We recognized revenue as follows during the periods indicated:

                                             Nine Months Ended
                                               September 30,
                                                                                      Change
                                            2022          2021         Change           (%)
                                                     (in thousands)

Bristol Myers Squibb Company (“BMS”) $8,774 $7,784 $990

              13 %
Merck Sharp & Dohme Corporation
("Merck")                                    11,367        38,175       (26,808 )           (70 )%
Merck KGaA, Darmstadt, Germany
(operating in the United
  States and Canada under the name "EMD
Serono")                                      2,200         2,844          (644 )           (23 )%
Astellas Pharma Inc. ("Astellas")             4,985             -         4,985               *
Vaxcyte                                       2,814         2,423           391              16 %
BioNova Pharmaceuticals, Ltd.
("BioNova")                                   4,000             -         4,000               *
Tasly Biopharmaceuticals Co., Ltd.
("Tasly")                                    25,000             -        25,000               *
Total revenue                             $  59,140     $  51,226     $   7,914              15 %


Total revenue increased by $7.9 million, or 15%, during the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021. This
was primarily due to an earned $25.0 million upfront payment under the Tasly
License Agreement, revenue from Astellas of $5.0 million, of which $1.9 million
was from the ongoing performance related to partially unsatisfied performance
obligations, $2.3 million was from the financing component related to the
Astellas Agreement, and $0.8 million was from research and development services,
revenue from BioNova of $4.0 million from the satisfaction of the performance
obligations under the BioNova Option Agreement, a $1.0 million increase in BMS
revenue from materials supply and manufacturing activities supporting clinical
trial supply, and a $0.4 million increase in Vaxcyte revenue. These increases
were partially offset by a $26.8 million decrease from Merck, related to a $9.0
million decrease from the 2021 completion of the performance obligations
associated with the first and second target programs under the 2018 Merck
Agreement, full recognition of $6.0 million of revenue earned in the first
quarter of 2021 associated with the contingent third target program upon the
termination of the related performance obligation, recognition of a $15.0
million contingent payment earned in the second quarter of 2021 for the
initiation of the first IND-enabling toxicology study under the first program in
the collaboration, a decrease of $3.1 million in research and development
services and materials supply, a decrease of $3.1 million in manufacturing
activities supporting clinical trial supply, and a decrease of $0.6 million due
to the absence in 2022 of the financing component related to the 2018 Merck
Agreement, partially offset by a $10.0 million contingent payment earned in the
third quarter of 2022 with the first patient dosed in a Phase 1 study of an
investigational candidate resulting from the 2018 Merck Agreement for the
development of a novel cytokine derivative therapeutic for the treatment of
cancer. EMD Serono revenue decreased by $0.6 million primarily due to a $2.0
million contingent payment earned in the second quarter of 2021, partially
offset by a $1.4 million increase in materials supply and manufacturing
activities supporting clinical trial supply.

Research and development costs

Research and development expense increased by $19.6 million, or 26%, during the
nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021. The increase was due primarily to increases of $8.2 million
in personnel-related expenses due to higher headcount, $6.5 million in
laboratory supplies and preclinical research and clinical development expenses,
$5.6 million in consulting and outside services, and $0.3 million in travel,
equipment and office-related expenses, partially offset by a $1.0 million
decrease in facilities-related expenses.

General and administrative costs

General and administrative expense increased by $4.6 million, or 11%, during the
nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021. The increase was due primarily to increases of $3.7 million
in personnel-related expenses due to higher headcount, $0.8 million in equipment
and office-related expenses, $0.6 million in external services, and $0.2 million
in travel-related expenses, partially offset by a $0.7 million decrease in
facilities-related expenses.


Interest Income

Interest income increased by $0.8 million during the nine months ended September
30, 2022 as compared to the nine months ended September 30, 2021, due primarily
to an increase in the amortization of premiums on investments.

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Unrealized Gain / (Loss) on Equity securities

Unrealized gain on equity securities was $0.3 million during the nine months
ended September 30, 2022 as compared to an unrealized loss of $1.9 million for
the nine months ended September 30, 2021. The unrealized gain / (loss) on equity
securities in each period was entirely due to the remeasurement of the fair
value of our investment in Vaxcyte common stock.

Interest and other charges, net

Interest and other expense, net, increased by $1.5 million during the nine
months ended September 30, 2022 as compared to the nine months ended September
30, 2021, due primarily to the increase of $2.3 million from the financing
component related to the Astellas Agreement, partially offset by a decrease of
$0.6 million due to the absence in 2022 of the financing component related to
the 2018 Merck Agreement, and a decrease of $0.2 million in interest incurred on
our outstanding loan.

Cash and capital resources

Sources of liquidity

To date, we have incurred significant net losses, and negative cash flows from
operations. Our operations have been funded primarily by payments received from
our collaborators, and net proceeds from equity sales and debt. As of September
30, 2022, we had cash, cash equivalents and marketable securities of $287.3
million, equity securities of $36.9 million, outstanding debt of $19.3 million
and an accumulated deficit of $418.0 million.

Market sales

In the nine months ended September 30, 2022, we sold a total of 7,463,845 shares of common stock through our ATM facility pursuant to the sale agreement with Jefferies. Gross proceeds from these sales were approximately $42.5 millionbefore deduction of costs of approximately $1.6 milliongenerating net proceeds of approximately $40.9 million.

Astellas 2022 Upfront Payment

In June 2022, we entered into a License and Collaboration Agreement with
Astellas Pharma Inc., or Astellas, for the development of immunostimulatory
antibody-drug conjugates for up to three biological targets, to be identified by
Astellas. Pursuant to the agreement with Astellas, we received from Astellas a
one-time, nonrefundable, non-creditable, upfront payment of $90.0 million during
the three months ended September 30, 2022.

Initial payment 2022 from Tasly

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

Contingent Payments from Merck

In July 2022, the first patient received a dose in a Phase 1 study of an investigational candidate resulting from the 2018 Merck agreement for the development of a novel therapeutic derivative of cytokines for the treatment of cancer. As a result of this achievement, we won and received a $10.0 million
conditional payment from Merck during the three months ended September 30, 2022.

In the three months ended June 30, 2021we won and received a $15.0 million conditional payment from Merck for the initiation of an IND toxicology study enabling the first program of its collaboration to develop novel cytokine-derived therapies for cancer and autoimmune diseases.

Vaxcyte, Inc. Ownership

From September 30, 2022we owned 1,537,879 common shares of Vaxcyte with an estimated fair value of $36.9 million. In the three months ended
September 30, 2022we sold 25,000 common shares of Vaxcyte for a net amount

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product of $0.6 million. See “Note 12. Subsequent Events” for more information on our recent sale of Vaxcyte common stock.

term loan

For a description of our loan and guarantee agreement with Oxford Finance LLC and
Bank of Silicon Valleyplease refer to note 6 of our summary financial statements.

Leases

In June 2021, we entered into a third amendment, or Third Amendment, to our
manufacturing facility lease, dated May 18, 2011, as amended, by and between
Alemany Plaza LLC, located at San Carlos, California, or the San Carlos Lease,
as an extension to the term of the San Carlos Lease for a period of five years,
or the Lease Extension Period. Pursuant to the Third Amendment, the San Carlos
Lease will expire on July 31, 2026, and it includes an option to renew the San
Carlos Lease for an additional five years. The aggregate estimated base rent
payments due over the Lease Extension Period is approximately $4.2 million,
subject to certain terms contained in the San Carlos Lease.

In June 2021, we entered into a first amendment, or First Amendment, to our
manufacturing facility lease, dated May 4, 2015, as amended, by and between 870
Industrial Road LLC, located at San Carlos, California, or the Industrial Lease,
as an extension to the term of the Industrial Lease for a period of five years,
or the Industrial Lease Extension Period. Pursuant to the first Amendment, the
Industrial Lease will expire on June 30, 2026, and it includes an option to
renew the Industrial Lease for an additional five years. The aggregate estimated
base rent payments due over the Industrial Lease Extension Period is
approximately $4.3 million, subject to certain terms contained in the Industrial
Lease.

In September 2020, we entered into a sublease agreement, or the Sublease, with
Five Prime Therapeutics, Inc., or the Sublessor, for approximately 115,466
square feet, in a building located in South San Francisco, California, or the
Premises. We use the Premises as our new corporate headquarters and to conduct
(or expand) research and development activities. We commenced making monthly
payments for the first 85,755 square feet of the Premises, or Initial Premises,
in July 2021, with occupancy of such space commencing in August 2021. We were
provided early access to the Initial Premises in the fourth quarter of 2020 to
conduct certain planning and tenant improvement work. The Sublease is
subordinate to the lease agreement, effective December 12, 2016, between the
Sublessor and HCP Oyster Point III LLC, or the Landlord. The commencement date
for the remaining 29,711 square feet of the Premises, or the Expansion Premises,
is expected to be 24 months following the commencement date on the Initial
Premises. However, we have the right to accelerate the commencement date on the
Expansion Premises to an earlier date upon six months' prior written notice to
the Sublessor. The Sublease for both the Initial Premises and Expansion Premises
will expire on December 31, 2027. With a commencement date on the Initial
Premises of July 1, 2021, the aggregate estimated base rent payments due over
the term of the Sublease are approximately $39.1 million, including the
approximately $5.2 million in potential financial benefit to us of base rent
abatement to be provided by the Sublessor, subject to certain terms contained in
the Sublease. The Sublease contains customary provisions requiring us to pay our
pro rata share of utilities and a portion of the operating expenses and certain
taxes, assessments and fees of the Premises and provisions allowing the
Sublessor to terminate the Sublease upon the termination of the lease with the
Landlord or if we fail to remedy a breach of certain of its obligations within
specified time periods. Additionally, we posted a security deposit of $0.9
million, which is reflected as restricted cash in non-current assets on our
balance sheet as of September 30, 2022 and December 31, 2021.

Financing needs

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

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

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estimate the amounts of increased capital expenditures and operating expenses associated with our current and planned clinical studies.

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

Cash flow

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

                                                              Nine Months Ended
                                                                September 30,
                                                            2022             2021
                                                               (in thousands)

Net cash provided by (used in) operating activities $27,413 $

   (60,099 )
Net cash provided by (used in) investing activities            2,860         (118,096 )
Net cash provided by financing activities                     36,092        

2,750

Net increase (decrease) in cash, cash equivalents and restricted cash

                                         $     66,365     $  

(175,445)

Cash flow from operating activities

Cash provided by operating activities for the nine months ended September 30,
2022 was $27.4 million. Our net loss of $84.6 million included non-cash charges
of $20.5 million for stock-based compensation, $4.2 million for depreciation and
amortization, $2.0 million for noncash lease expense, $0.8 million for the
amortization of premium on marketable securities, and $0.3 million for the
unrealized gain on equity securities as a result of the remeasurement of the
estimated fair value of our investment in Vaxcyte common stock. Cash provided by
operating activities also reflected a net change in operating assets and
liabilities of $84.8 million, due to an increase of $85.2 million in deferred
revenue primarily due to the upfront payment from Astellas, a decrease of $1.2
million in accounts receivable from our collaborators, an increase of $1.0
million in accounts payable and other liabilities due to timing of payments, and
an increase of $1.4 million in our operating lease liability, partially offset
by an increase of $2.9 million in prepaid expenses and other assets, and a
decrease of $1.0 million in accrued compensation expense primarily due to
bonuses paid in connection with certain company goal achievements.

Cash used in operating activities for the nine months ended September 30, 2021
was $60.1 million. Our net loss of $67.4 million included non-cash charges of
$16.4 million for stock-based compensation, $3.8 million for noncash lease
expenses, $3.5 million for depreciation and amortization, $2.0 million for the
amortization of premium on our marketable securities, $1.9 million of unrealized
loss on equity securities as a result of the remeasurement of the estimated fair
value of our investment in Vaxcyte common stock, and $0.5 million in other
non-cash charges. Cash used in operating activities also reflected a net change
in operating assets and liabilities of $20.8 million, due to an a decrease of
$12.8 million in our deferred revenue balance from revenue recognized under our
collaboration agreements, an increase of $6.8 million in accounts receivable
from our collaborators, an increase of $4.5 million in prepaid expenses and
other assets, a decrease of $1.5 million in our operating lease liability, and a
decrease of $0.3 million in accrued compensation expense, partially offset by an
increase of $5.1 million in accounts payable and other liabilities due to timing
of payments.

Cash flow from investing activities

Cash provided by investing activities of $2.9 million for the nine months ended
September 30, 2022 was primarily related to maturities and sales of marketable
securities of $121.2 million and proceeds from sale of equity securities of $0.6
million, partially offset by purchases of marketable securities of $114.5
million and purchases of $4.5 million principally for laboratory equipment.

Cash used in investing activities of $118.1 million for the nine months ended
September 30, 2021 was primarily related to purchases of marketable securities
of $226.1 million and purchases of property and equipment of $12.8 million,
principally for leasehold improvements to the premises under the Sublease,
partially offset by maturities and sales of marketable securities of $120.8
million.

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Cash flow from financing activities

Cash provided by financing activities of $36.1 million for the nine months ended
September 30, 2022 was primarily related to $40.9 million of net proceeds from
our ATM Facility sales of common stock, $1.6 million of net proceeds received
from participants in our employee equity plans and $0.3 million of proceeds
received from the exercise of common stock options, partially offset by debt
repayment of $6.3 million and a $0.5 million tax payment related to the net
shares settlement of vested restricted stock units.

Cash provided by financing activities of $2.8 million for the nine months ended
September 30, 2021 was primarily related to $2.0 million of proceeds received
from the exercise of common stock options and $1.8 million of net proceeds
received from participants in our employee equity plans, partially offset by a
$1.0 million tax payment related to the net shares settlement of vested
restricted stock units.

Contractual obligations and other commitments

In addition to the contractual obligations and commitments as noted above and
elsewhere in this Quarterly Report on Form 10-Q with regards to the leases and
term loans, we enter into agreements in the normal course of business, including
with contract research organizations for clinical trials, contract manufacturing
organizations for certain manufacturing services, and vendors for preclinical
studies and other services and products for operating purposes, which are
generally cancelable upon written notice.

Significant Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported revenue generated and expenses incurred
during the reporting periods. Our estimates are based on our historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

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

Recent accounting pronouncements

See note 2 of our financial statements included elsewhere in this report for more information.

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