Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in this Annual Report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk Factors.”
Overview
We are a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in four Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications. We expect our clinical-stage portfolio to continue to expand and to include molecules targeting immuno-oncology, cancer cell-intrinsic and immunological pathways. Our vision is to create, develop and commercialize highly differentiated therapies that have a meaningful impact on patients.
Recent Developments
Following is a summary of recent significant developments affecting our business:
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In November 2022, we announced the amended study design of ARC-10. Under the amended study design, we are comparing domvanalimab and zimberelimab to pembrolizumab and the study will no longer include a chemotherapy arm.
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In November 2022, we announced that we had initiated ARC-20, a Phase 1/1b study of HIF-2α inhibitor AB521 in cancer patients.
•
In December 2022, we announced positive results from the fourth interim analysis of the ARC-7 study in patients with first-line, metastatic NSCLC with PD-L1 tumor proportion score (TPS) ≥50% without epidermal growth factor receptor or anaplastic lymphoma kinase (EGFR/ALK) mutations. ARC-7 is a Phase 2, multicenter, three-arm, randomized, open-label study evaluating the combinations of Fc-silent anti-TIGIT monoclonal antibody domvanalimab plus anti-PD-1 monoclonal antibody zimberelimab (doublet) and domvanalimab plus zimberelimab and etrumadenant, an adenosine A2a/A2b receptor antagonist (triplet), versus zimberelimab monotherapy.
•
In the third quarter of 2022, together with Gilead, we initiated two new registrational Phase 3 trials including STAR-121 and STAR-221. STAR-121 is being operationalized by Gilead and is evaluating domvanalimab plus zimberelimab plus chemotherapy against the standard of care (pembrolizumab) in first line, PD-l all-comers NSCLC. STAR-221, which we are operationalizing, is evaluating domvanalimab plus zimberelimab and chemotherapy versus the standard of care (nivolumab) plus chemotherapy in first-line, locally advanced unresectable or metastatic gastric, esophageal and gastrointestinal junction adenocarcinomas. During the fourth quarter 2022, Taiho opted to participate in both studies.
Strategic Partnerships
Gilead
In 2020, we and Gilead entered into the Gilead Collaboration Agreement, the Stock Purchase Agreement, and Investor Rights Agreement. The Gilead Collaboration Agreement and the Stock Purchase Agreement were amended in 2021, and the Investor Rights Agreement was amended in 2022.
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Under the Gilead Collaboration Agreement, Gilead obtained an exclusive license to zimberelimab and time-limited exclusive options to all of our then-current and future programs during the 10-year collaboration term. In 2021, Gilead obtained rights to an additional four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308. For each program to which Gilead exercised or exercises its option, the parties will co-develop globally and co-commercialize the program in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners in certain territories.
Under the Stock Purchase Agreement Gilead has the right, at its option until July 2025, to purchase up to a maximum ownership of 35% of our then-outstanding voting common stock, and the Investor Rights Agreement provides for a three-year standstill, three-year lockup and the right to designate two individuals to be appointed to our Board of Directors. As of December 31, 2022, Gilead held approximately 18.9% of our outstanding common stock.
Taiho
In 2017, we entered into an Option and License Agreement (Taiho Agreement) with Taiho Pharmaceutical Co., Ltd. (Taiho) pursuant to which Taiho was granted time-limited options to exclusively license for Japan and certain other territories in Asia (excluding China) the development and commercialization rights to each of our programs that arose over a five-year period ending in September 2022. As of December 31, 2022, Taiho has licenses to our (i) adenosine receptor antagonist program (including etrumadenant); (ii) anti-PD-1 program (including zimberelimab); and (iii) our anti-TIGIT program (including domvanalimab and AB308).
Other Licenses, Collaborations, and R&D Arrangements
We in-licensed rights to zimberelimab and CD39 from WuXi Biologics Ireland Limited (WuXi Biologics), and in-licensed rights to domvanalimab from Abmuno Therapeutics LLC (Abmuno). We also have a clinical collaboration agreement with AstraZeneca for the PACIFIC-8 trial evaluating domvanalimab and durvalumab in Stage 3 NSCLC, and BVF Partners L.P. (BVF) to support the discovery and development of compounds for the treatment of inflammatory diseases.
Financial Overview
Since commencing operations in 2015, we have devoted substantially all of our efforts and financial resources to building our research and development capabilities, advancing our investigational product pipeline, and establishing our corporate infrastructure.
We expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our investigational products through clinical development, the regulatory approval process and, if approved, commercial launch activities. For example, in the near term we expect to incur substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our manufacturing processes, and other preclinical, research and discovery development activities. These expenditures will be partially offset by reimbursements for shared expenses from our collaborations, primarily the Gilead collaboration, for certain expenses incurred on their optioned programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs.
We have no internal manufacturing facilities, and thus all of our manufacturing activities are contracted to third parties. We also utilize third-party clinical research organizations to manage and execute various aspects of our clinical development and trials.
To date, we have financed our operations primarily from the sale of our equity securities and revenue through research, collaboration and license agreements with our strategic partners including Gilead. We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time that we can generate significant revenue from sales of our investigational products, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including existing or potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our investigational products or delay our efforts to expand our product pipeline.
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As of December 31, 2022, we had $1.14 billion of cash, cash equivalents and marketable securities, which we believe will be sufficient to fund our planned operations into 2026. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.
Components of Operating Results
Revenues
We have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been through research, collaboration and license arrangements with strategic partners.
License and Development Services Revenue
Our license and development services revenue consists of amounts recognized from the portions of the nonrefundable upfront and milestone payments received from Gilead and Taiho and allocated to performance obligations for licenses or R&D activities performed by us as we develop our investigational products under the terms of our collaboration agreements. License and development services revenues are recognized based upon the timing of the delivery of a license or service if delivery is complete, or based on estimates of each performance obligation's percentage of completion at the period end if it is still in process. We calculate percentage of completion as a ratio of effort incurred to date on each performance obligation to the total estimated effort to be incurred to satisfy that performance obligation.
Other Collaboration Revenue
Other collaboration revenue consists of amounts recognized from the portions of the nonrefundable upfront payments received from Gilead and Taiho and allocated to performance obligations relating to the customer's access to our investigational pipeline over the collaboration period. Other collaboration revenues are recognized throughout the collaboration period.
Operating Expenses
Research and Development Expenses
Our research and development expenses consist of expenses incurred in connection with the research and development of our pipeline programs. These expenses include preclinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, and depreciation. Shared facility expenses are allocated to functional groups proportionally based on usage. Under certain collaboration agreements we agree to share research and development expenses with our partners. Such cost sharing arrangements may result in receiving reimbursement from our partners or require that we reimburse our partners for qualified expenses. We expense both internal and external research and development costs as they are incurred. We record advance payments for services that will be used or rendered for future research and development activities as prepaid expenses and recognize them as an expense as the related services are performed. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense.
We do not allocate our costs by investigational product, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, and certain external costs that are not recorded at the investigational product level. In particular, with respect to internal costs, several of our departments support multiple research and development programs, and we do not allocate those costs by investigational product.
The level of our future research and development investment will depend on a number of factors and uncertainties, including the breadth of the joint development program agreed to with Gilead for the optioned programs, the outcome of our efforts, and the amount of cost reimbursements or milestone payments we receive from our collaborators. We expect our research and development expenses to increase substantially during the next few years as we pursue joint development programs with Gilead for our five optioned molecules and advance these programs towards regulatory approval. We also expect to advance new programs into the clinic. All of this will require significant growth in our development capabilities and infrastructure. In addition, our joint development programs with Gilead for the optioned molecules are anticipated to include a significant number of later-stage clinical trials, which typically include a larger number of subjects, are of a longer duration and include more geographic regions. As
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we advance our clinical-stage programs and prepare to seek regulatory approval, we will also need to increase our late-stage manufacturing activities. As a result, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date.
In addition, under our arrangements with WuXi Biologics, Abmuno, AstraZeneca and BVF, we may incur additional clinical and regulatory milestone payments based on the development progress of our investigational products. We may also be required to pay royalties in the event of a successful product launch and our receipt of commercial revenues. Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors. Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A. Risk Factors.”
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses. We do not receive significant reimbursements of these costs through our collaboration with Gilead.
We anticipate that our general and administrative expenses will increase during the next few years as we support our growing research and development activities, including due to staff expansion, and other costs associated with increased infrastructure needs.
Non-Operating Income, net
Non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities and non-cash interest expense incurred under the effective interest method on our liability for sale of future royalties to BVF.
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Results of Operations
The following table summarizes our results of operations (in millions):
Revenues:
License and development service revenue $ 74 (79 )% $ 345 * $ 55
Other collaboration revenue 38 - 38 65 % 23
Operating expenses:
Income (loss) from operations (280 ) * 54 (144 )% (124 )
Non-operating income, net 14 * 1 - 1
Income (loss) before income taxes (266 ) * 55 (145 )% (123 )
Income tax expense (1 ) (50 )% (2 ) * -
* Not meaningful
Total Revenues
The decrease in Total revenues for 2022 as compared to 2021 was primarily driven by higher revenues in 2021 due to Gilead's exercise of its options, partially offset by increased revenues from R&D services in 2022 including $4 million in revenue recognized due to changes in the total estimated percentage of completion based on management's estimated total effort for the program to be incurred in the future to satisfy the performance obligations, primarily related to revised clinical trial assumptions for R&D and commercial activities.
The increase in Total revenues for 2021 as compared to 2020 was primarily driven by Gilead's exercise of its options and consisted of increases of $290 million in license and development services revenues and $15 million in collaboration revenues.
See Note 5, Revenues to our Consolidated Financial Statements, in Part II, Item 8 for further discussion of the amount and timing of revenues recognized from our collaboration agreements.
Research and Development Expenses
The increase of 12%, or $31 million, in Research and development expenses for 2022 as compared to 2021 was driven by $167 million in higher costs incurred to support our expanded clinical and development activities partially offset by $136 million in higher reimbursements for shared expenses from our collaborations, primarily the Gilead collaboration which was expanded in December 2021. Our expanding clinical and development activities as we enrolled more patients in our existing and new studies including domvanalimab and zimberelimab combination studies drove increases of $10 million in net manufacturing costs and $9 million in net clinical costs. Our growing headcount drove a $13 million increase in net employee compensation costs. The overall increase was partially offset by a $7 million decrease in net scientific licenses expense.
The increase of 62%, or $98 million, in Research and development expenses for 2021 as compared to 2020 was driven by $119 million in higher costs incurred to support our expanded clinical and development activities partially offset by $21 million in higher reimbursements for shared expenses from our collaborations, primarily the Gilead
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collaboration which was expanded in December 2021. Our growing headcount and our 2021 stock awards drove a $42 million increase in net employee compensation costs. Net costs for our ongoing clinical studies and related manufacturing increased $33 million and $6 million, respectively, as a result of the increased number of clinical-stage programs and trials compared to the prior year. We incurred increases of $10 million in office facilities and technology expense, $7 million in consulting services, and $5 million in lab supplies and equipment, as we expanded our development efforts. The overall increase was partially offset by a $7 million decrease in net scientific licenses expense.
For 2022 and 2021, we recognized gross reimbursements of $161 million and $25 million, respectively, for shared expenses from our collaborations, primarily the Gilead collaboration which was expanded in December 2021.
General and Administrative Expenses
The increase in General and administrative expenses for 2022 as compared to 2021 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. Our growing headcount and our 2022 stock awards drove a $15 million increase in employee compensation costs, including $6 million in increased non-cash stock-based compensation. We also incurred a $13 million increase in office facilities expense due to the expansion of our office space to support our higher headcount.
The increase in General and administrative expenses for 2021 as compared to 2020 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations, as well as costs associated with being a public company. Our growing headcount and our 2021 stock awards drove a $24 million increase in employee compensation costs, including $16 million in increased non-cash stock-based compensation. We also incurred a $4 million increase in office facilities expense due to our expanding office space to support our higher headcount and an increase of $2 million in consulting expenses due to corporate development activities.
Non-operating Income, Net
The increase in Non-operating income, net for 2022 as compared to 2021 was primarily due to a larger portfolio of marketable fixed-income securities and higher interest income resulting from increased investment yields as compared to the prior year.
Non-operating income, net was flat for 2021 as compared to 2020.
Income Tax Expense
The decrease in Income tax expense for 2022 as compared to 2021 was due primarily to lower pretax income. The 2022 income tax expense considers the impact of the capitalization of R&D expenses for income tax purposes due to changes in U.S. legislation. The capitalization of R&D expenses may materially impact income tax expense in future years.
The increase in Income tax expense for 2021 as compared to 2020 was due to an increase in pretax income, primarily resulting from Gilead's exercise of its options to our programs.
Liquidity and Capital Resources
Sources of Liquidity
To date, we have financed our operations primarily from the sale of our equity securities and payments received under our research, collaboration and license agreements with our strategic partners, including Gilead. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our investigational products and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs.
As of December 31, 2022, we had $1.14 billion of cash, cash equivalents and marketable securities, compared to $681 million as of December 31, 2021. The increase in cash from the prior year end is primarily due to the receipt of $725 million in payments from Gilead in January 2022, related to their option exercises in December 2021. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. treasury securities, and corporate securities and commercial paper.
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Based on our existing business plan, we believe that our existing cash, cash equivalents, and marketable securities will be sufficient to fund our planned level of operations into 2026.
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets. It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our investigational products. This is made more challenging by events outside of our control, such as the evolving COVID-19 pandemic. Accordingly, our operating plan may change, including as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
See “Item 1A. Risk Factors” for additional risks associated with our substantial capital requirements.
Cash Flows
The following table summarizes our cash flow activities for each of the periods presented below (in millions):
Year Ended December 31,
Investing activities (413 ) (4 ) (434 )
Operating Activities
Net cash provided by operating activities for 2022 was $438 million as compared to net cash used in operating activities of $256 million for the prior year. The change in operating cash flows is primarily due to the $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement, partially offset by increased expenses incurred to support our expanded clinical development activities.
Net cash used in operating activities for 2021 was $256 million as compared to net cash provided by operating activities of $111 million for the prior year. The change in operating cash flows is primarily due to the expenses incurred to support our expanded clinical development activities and general and administrative costs incurred to support our operations, partially offset by our net income of $53 million and the timing of payments from Gilead. The increase in expenses incurred for development activities is partially offset by year-over-year changes in non-cash items, including $33 million increased expense from stock-based compensation, and changes in our asset and liability balances due to the timing of payments to or from our vendors and collaborators.
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Investing Activities
Cash used in investing activities for 2022 was primarily due to net purchases of marketable securities of $404 million as we invested a portion of the $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement.
Cash used in investing activities for 2021 was primarily due to purchases of property and equipment of $26 million, partially offset by net cash proceeds related to our marketable securities of $22 million.
Cash used in investing activities for 2020 was primarily due to net purchases of marketable securities of $431 million as we invested a portion of the proceeds received from our May 2020 public offering and from Gilead for stock issued under the Stock Purchase Agreement.
Financing Activities
Cash provided by financing activities for 2022 was primarily due to net proceeds of $23 million for stock issued under our equity award plans and $10 million received under the BVF agreement.
Cash provided by financing activities for 2021 was primarily due to proceeds of $220 million from Gilead for stock issued under the Stock Purchase Agreement.
Cash provided by financing activities for 2020 was primarily due to net proceeds of $326 million from our May 2020 public offering and $108 million in net proceeds from Gilead for stock issued under the Stock Purchase Agreement.
Contractual Obligations and Commitments
The following table summarizes our current and noncurrent anticipated cash requirements under contractual obligations as of December 31, 2022 (in millions):
Total Current Noncurrent
Operating lease obligations (1) $ 159 $ 15 $ 144
Liability for sale of future royalties (2) 17 - 17
(1)
Consists of cash payments due to landlord for our leased office and laboratory space. As of December 31, 2022, we had obligations consisting of operating leases for our operating facilities for approximately 260,000 square feet. Under the terms of the agreements, we have lease obligations consisting of $159 million in undiscounted minimum lease payments through 2031. In October 2022, we entered into an agreement to sublease approximately 31,000 unfinished square feet of our Brisbane office to another company through 2028. This sublease includes a tenant improvement allowance to be paid by us of $9 million upon lease commencement and we will receive sublease income of approximately $3 million per year (see Note 13 to our Consolidated Financial Statements in Item 8 for further discussion).
(2)
Consists of current balance of estimated contingent milestone and royalty payments under the BVF Agreement (see Note 15 to our Consolidated Financial Statements in Item 8 for further discussion).
(3)
We have not included contingent milestone or royalty payments or other contractual payment obligations in the table to the extent the timing and amount of such obligations are unknown or uncertain.
We enter into contracts in the normal course of business with third parties for clinical trial management and execution, non-clinical studies and testing, manufacturing, and other services and products for operating purposes. These contracts are generally cancelable on 30 days’ notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
See "Liquidity and capital resources" above for further discussion of our cash requirements.
Critical Accounting Judgments and Estimates
Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these Consolidated 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 Consolidated Financial Statements, as well as the reported revenue 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
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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. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s significant judgments and estimates.
While our significant accounting policies are described in the notes to our Consolidated Financial Statements, we believe that the following critical accounting estimates are most important to understanding and evaluating our reported financial results.
Revenue Recognition
At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when a customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. In addition, variable consideration such as milestone payments are evaluated to determine if they are constrained and, therefore, excluded from the transaction price. We then allocate the total transaction price to each performance obligation based on their relative estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
For the recognition of revenue relating to the Gilead Agreements, as disclosed in Note 5, Revenues, to our Consolidated Financial Statements in Part II, Item 8, we allocated the total transaction price to each performance obligation on a relative standalone selling price basis and determined whether revenue should be recognized at a point in time or over time as services are performed. The estimation of the standalone selling price included estimates for forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time as services are performed, and we measure the services delivered to Gilead, which we periodically review based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) is evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
Revenue related to certain performance obligations that are satisfied over time could be materially impacted as a result of changes in the total estimated effort required to satisfy those obligations. A hypothetical 10% change in the total estimated effort required to satisfy the combined license and R&D activities performance obligations related to the agreement with Gilead would have changed the related revenue recognized during the current year by as much as $7 million. For the year ended December 31, 2022, we recognized $4 million in cumulative catch-up revenues from such changes in estimates. See Results of Operations above for further discussion. These changes in estimate could have a material impact on the revenue recognized in a future period.
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For performance obligations that are distinct and determined to be transferred or satisfied at a point in time, the estimated standalone selling price will affect the amount of revenue recognized upon satisfaction of the related performance obligation such as the transfer of control of a license. For the domvanalimab license with Gilead, transfer of the license and satisfaction of the related performance obligation occurred in 2021. The estimated standalone selling price of the domvanalimab license utilized assumptions of discounted cash flows which require judgment. A 10% change in the total estimated cash flows used in determining the estimated standalone selling price of the domvanalimab license would have resulted in a change in the amount of revenue recognized in 2021 of approximately $20 million with a corresponding change in the transaction price allocated to the remaining performance obligations in the Gilead Collaboration Agreement.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” in Note 2 to our Consolidated Financial Statements in Item 8 for a discussion of recently adopted accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks that may result from changes in interest rates and foreign currency exchange rates.
Interest Rate Risk
As of December 31, 2022 and 2021, we had cash, cash equivalents and marketable securities of $1.14 billion, and $681 million, respectively. This consisted of interest-bearing money market accounts and investments in corporate notes and U.S. government securities, which create an exposure to interest rate risk. A hypothetical 100 basis point increase in interest rates as of December 31, 2022 and 2021 would not have resulted in a material effect on the fair market value of our cash, cash equivalents and marketable securities. In addition, a hypothetical 100 basis point decrease in interest rates as of December 31, 2022 and 2021 would not result in a material effect on income in the respective ensuing year.
Foreign Currency Exchange Risk
We do not have any foreign currency forward or cross currency swap contracts. We are exposed to foreign currency exchange rate risk inherent in our contracts with research institutions, contract research organizations, and contract manufacturing organizations as certain services are performed by them outside the United States and billed in other currencies. A hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2022 and 2021, respectively would not result in material impact to our financial position or income in the respective ensuing year.
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Item 8. Financial Statements and Supplementary Data
ARCUS BIOSCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42) 79
Audited Consolidated Financial Statements
Consolidated Statements of Operations 81
Consolidated Statements of Comprehensive Income (Loss) 82
Consolidated Balance Sheets 83
Consolidated Statements of Stockholders’ Equity 84
Consolidated Statements of Cash Flows 85
Notes to Consolidated Financial Statements 86
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Arcus Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Arcus Biosciences, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Accounting for license and collaboration agreements with Gilead Sciences, Inc.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
San Mateo, California
February 28, 2023
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ARCUS BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Years Ended December 31,
Revenues:
Operating expenses:
Income (loss) from operations (280 ) 54 (124 )
Non-operating income (expense):
Interest and other income, net 16 1 1
Effective interest on liability for sale of future royalties (2 ) - -
Total non-operating income, net 14 1 1
Income (loss) before income taxes (266 ) 55 (123 )
Income tax expense (1 ) (2 ) -
Net income (loss) per share:
Shares used to compute net income (loss) per share:
See accompanying notes.
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ARCUS BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Years Ended December 31,
Other comprehensive loss (6 ) (1 ) -
Comprehensive income (loss) $ (273 ) $ 52 $ (123 )
See accompanying notes.
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ARCUS BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2022 and 2021
(In millions, except per share amounts)
December 31,
ASSETS
Current assets:
Cash and cash equivalents $ 206 $ 148
Prepaid and other current assets 19 18
Long-term marketable securities 129 182
Property and equipment, net 35 32
Other noncurrent assets ($2 and $ - from a related party) 114 116
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20 $ 10
Deferred revenue ($97 and $97 to a related party) 97 102
Other current liabilities 76 54
Total current liabilities 193 166
Deferred revenue, noncurrent ($355 and $462 to a related party) 355 462
Other noncurrent liabilities 140 122
Commitments (Note 16)
Stockholders’ equity:
Accumulated deficit (542 ) (275 )
Accumulated other comprehensive loss (7 ) (1 )
Total stockholders’ equity 657 842
Total liabilities and stockholders’ equity $ 1,345 $ 1,592
See accompanying notes.
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ARCUS BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2022, 2021 and 2020
(In millions)
Issuance of common stock in public offering 12.7 326 - - 326
Stock-based compensation - 22 - - 22
Stock-based compensation - 55 - - 55
Other comprehensive loss - - - (1 ) (1 )
Net income - - 53 - 53
Stock-based compensation - 65 - - 65
Other comprehensive loss - - - (6 ) (6 )
See accompanying notes.
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ARCUS BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended December 31,
Cash flow from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 65 55 22
Depreciation and amortization 6 4 3
Noncash lease expense 8 3 1
Amortization of premiums on marketable securities - 5 -
Other items, net 3 - -
Changes in operating assets and liabilities:
Other assets (($2), $ - and $ - from a related party) 2 (3 ) (6 )
Accounts payable 8 (5 ) 9
Net cash provided by (used in) operating activities 438 (256 ) 111
Cash flow from investing activities
Purchases of marketable securities (1,241 ) (719 ) (740 )
Proceeds from maturities of marketable securities 694 690 308
Proceeds from sales of marketable securities 143 51 1
Purchases of property and equipment (6 ) (26 ) (3 )
Purchases of in-process research and development (6 ) - -
Net cash used in investing activities (413 ) (4 ) (434 )
Cash flow from financing activities
Proceeds from sale of future royalties 10 5 -
Proceeds from issuance of common stock pursuant to equity award plans 23 12 5
Net cash provided by financing activities 33 237 439
Cash, cash equivalents and restricted cash at beginning of period 151 174 58
Cash, cash equivalents and restricted cash at end of period $ 209 $ 151 $ 174
Supplemental disclosure of cash flow information
Income taxes paid $ 3 $ - $ -
Non-cash investing and financing activities:
Vesting of early exercised stock options and restricted stock $ - $ 1 $ 1
See accompanying notes.
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ARCUS BIOSCIENCES, INC.
Notes to Consolidated Financial Statements
Note 1. Organization, liquidity and capital resources
Organization
Arcus Biosciences, Inc. (referred to as “Arcus,” “we,” “our,” “us,” or the “Company”) is a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in four Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications.
We operate and manage our business as one reportable and operating segment, which is the business of developing and commercializing highly differentiated therapies that have a meaningful impact on patients.
Liquidity and Capital Resources
As of December 31, 2022, we had cash, cash equivalents and marketable securities of $1.14 billion, which we believe will be sufficient to fund our planned operations for a period of at least twelve months following the date of filing of this report.
Note 2. Summary of significant accounting policies
Basis of Presentation
The Consolidated Financial Statements, which include the accounts of Arcus as well as its wholly owned subsidiary, have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. All intercompany transactions and balances have been eliminated in consolidation.
We assess whether we are the primary beneficiary of a variable interest entity (“VIE”) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not have any significant interests in any variable interest entities of which we are the primary beneficiary.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe 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. Estimates are assessed each period and updated to reflect current information. Actual results may differ materially from those estimates.
Collaborative Arrangements
We assess whether our licensing and other agreements are collaborative arrangements based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. For arrangements that we determine are collaborations, we identify each distinct performance obligation, and then determine whether a customer relationship exists for that distinct performance obligation. If we determine a performance obligation within the collaborative arrangement to be with a customer, we apply our revenue accounting policy. If a portion of a distinct bundle of goods or services within the collaborative arrangement is not with a customer, we apply recognition and measurement based on an analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.
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Revenues
We recognize revenue when a customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine the standalone selling price of
each performance obligation identified in the contract. In addition, variable consideration such as milestone payments are evaluated to determine if they are constrained and, therefore, excluded from the transaction price. We then allocate the total transaction price proportionally to each performance obligation based on their estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
We currently do not have product sales and our revenues are derived from arrangements for the development of our investigational products. Such arrangements may require us to deliver various rights, services and/or goods, including intellectual property rights/licenses, R&D services, manufacturing services and/or commercialization services. The underlying terms of these arrangements may generally include consideration to Arcus in the form of one or more of the following: (i) nonrefundable, up-front license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) fees attributable to options to intellectual property; and (v) profit sharing.
In arrangements involving more than one performance obligation, each performance obligation is evaluated to determine whether it qualifies as distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or by using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods is transferred or services are performed. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time as services are performed. For performance obligations that are determined to be satisfied over time we determine an appropriate method of measuring progress for purposes of recognizing revenue.
Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur.
For arrangements that include sales-based royalties, including milestone payments based on sales thresholds, and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our arrangements.
The accounting for these arrangements requires us to develop estimates and assumptions that require judgment. These estimates may include items such as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. Actual results may differ materially from those estimates.
See Note 5, Revenues, for more information.
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Research and Development Expenses
Research and development (“R&D”) costs are expensed as incurred and primarily include: salaries, benefits and other staff-related costs; facilities and overhead costs; third-party service provider costs for preclinical and clinical studies; laboratory supplies and equipment maintenance costs; consulting; payments under collaborative and other arrangements including milestone payments, licenses and fees; expense reimbursements to collaboration partners; and other related expenses. Under certain collaborative arrangements, we are reimbursed for a portion of the research and development expenses, including costs of drug supplies. When these R&D expenses are incurred under a reimbursement or cost sharing model with a collaboration partner, we record the related reimbursements as a reduction of R&D expense in our Consolidated Statements of Operations. Acquired in-process research and development projects with no alternative future use are recorded in R&D expense upon acquisition.
Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 4, License and collaboration agreements, for more information.
Clinical study costs are a significant component of R&D expenses. Our clinical studies are primarily performed by third-party contract research organizations (“CROs”). We monitor levels of performance under each significant contract including the extent of patient enrollment and other activities and accrue costs for clinical studies performed over the service periods specified in the contract. We adjust our estimates, if required, based upon our ongoing review of the level of effort and costs actually incurred by the CROs. All of our material CRO contracts are terminable by us upon written notice, and we are generally only liable for actual services completed by the CRO and certain noncancelable expenses incurred at termination.
General and Administrative Expenses
General and administrative (“G&A”) expenses relate to: finance; human resources; legal and other administrative activities which consist primarily of personnel costs; facilities and overhead costs; legal expenses; and other general and administrative costs. G&A expenses also include cost recoveries associated with collaborative R&D arrangements.
Stock-Based Compensation
We provide share-based compensation in the form of various types of equity-based awards, including restricted stock units (“RSU”s) and stock options. The fair values of RSU’s and stock options, which are subject to service conditions and vesting, are recognized as compensation expense on a straight-line basis over the service period net of forfeitures as they occur. See Note 8, Stock-based compensation, for more information.
Income Taxes
We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when we determine it is more likely than not that some or all of the tax benefits will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.
We include any penalties and interest expense related to income taxes as a component of other expense and interest income, net, as necessary.
See Note 6, Income taxes, for more information.
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Cash Equivalents
Cash equivalents consist of marketable securities having an original maturity of three months or less at the time of purchase.
Marketable securities
We consider our interest-bearing securities investment portfolio as available-for-sale, and accordingly, these investments are recorded at fair value, with unrealized gains and losses recorded in Accumulated Other Comprehensive Income (AOCI). See Note 10, Cash, cash equivalents and marketable securities, and Note 15, Fair value measurements, for more information.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to ten years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. We review property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. See Note 11, Property and equipment, for more information.
Leases
We determine whether an arrangement is or contains a lease at contract inception. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term, which is the non-cancelable period stated in the contract adjusted for any options to extend or terminate when it is reasonably certain that we will exercise that option. Right-of-use assets are adjusted for prepaid lease payments, lease incentives and initial direct costs incurred. Operating lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. When our operating leases do not provide an implicit interest rate, we generally utilize our incremental borrowing rate, based on the information available at the commencement date to determine the lease liability. We do not recognize the right-of-use assets and liabilities for leases with lease terms of one year or less with payments recognized as operating expenses on a straight-line basis over the lease term. See Note 13, Leases, for more information.
Fair Value of Financial Instruments
We apply fair value accounting for all financial and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks. See Note 15, Fair value measurements, for more information.
Other Significant Accounting Policies
Our other significant accounting policies are described in the remaining appropriate notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
There have been no new accounting pronouncements issued or adopted during the year ended December 31, 2022 with a significant impact to our financial statements.
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Note 3. Related party - Gilead Sciences, Inc.
In 2020, we and Gilead Sciences, Inc. (Gilead) entered into an Option, License and Collaboration Agreement (the Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement (Investor Rights Agreement). In 2021, we amended the Gilead Collaboration Agreement (the Amended Gilead Collaboration Agreement) and the Stock Purchase Agreement (the Amended Stock Purchase Agreement) and in 2022, we amended the Investor Rights Agreement (Amended Investor Rights Agreement). We refer to these agreements collectively as the Gilead Agreements.
Stock Purchase Agreement and Investor Rights Agreement
In 2020, under the Stock Purchase Agreement, Gilead purchased 5,963,029 shares for a total cost of $200 million, of which $91 million was allocated to the revenue related performance obligations (See Note 5, Revenues for more information) created by the Gilead Collaboration Agreement.
In 2021, under the Amended Stock Purchase Agreement, Gilead purchased 5,650,000 shares for a total cost of $220 million.
Gilead has the right, at its option until July 2025, to purchase up to a maximum of 35% of the Company’s then-outstanding voting common stock, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price at option exercise) or the $33.54 initial purchase price. Based on the value of our common stock at each contract closing, the right to purchase additional shares had no value.
Under the Investor Rights Agreement, Gilead has the right, which they have exercised, to designate two members of our Board of Directors. This agreement also includes a three-year standstill, included a two-year lockup, provided Gilead with registration rights commencing at the end of the lockup period and provides Gilead with pro rata participation rights in certain future financings. In October 2022, we registered Gilead’s shares and the agreement was amended, primarily to extend the two-year lockup period to three-years expiring July 13, 2023.
As of December 31, 2022, Gilead held approximately 18.9% of the Company’s outstanding common stock arising from purchases in our May 2020 public offering and purchases under the Stock Purchase Agreement and Amended Stock Purchase Agreement.
Collaboration Agreements
In 2020, we entered into the Gilead Collaboration Agreement, which gave Gilead an exclusive license to develop and commercialize zimberelimab (the anti PD-1 program) in certain markets and time-limited options to acquire exclusive licenses to develop and commercialize any of our then-current and future clinical programs arising during the 10-year collaboration term, contingent upon $100 million option continuation payments payable on each of the second, fourth, sixth and eighth anniversaries of the agreement. Upon closing of the transaction in July 2020, Gilead made an upfront payment of $175 million.
In 2021, we entered into the Amended Gilead Collaboration Agreement pursuant to which Gilead exercised its option to three programs—providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets—for a total payment of $725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement.
Gilead's option, on a program-by-program basis, will expire after a prescribed period following the achievement of a clinical development milestone in such program and our delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option and will pay Arcus an option fee of $150 million per program. With respect to domvanalimab, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.
For each program that Gilead opts into, both companies will co-develop and equally share global development costs, subject to certain opt-out rights that we have, and caps on our spending and related subsequent adjustments. For each program, provided we have not exercised our opt-out rights, we have the option to co-promote in the United
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States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize outside of the U.S., subject to the rights of our existing partners in any territories.
Under the Amended Gilead Collaboration Agreement, Gilead also has option rights to two research programs for which we will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $60 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million. These research programs were not determined to be performance obligations at contract inception, due to the very early stages of the programs.
As of December 31, 2022, Gilead has licenses to domvanalimab, AB308, etrumadenant, quemliclustat and zimberelimab.
For the years ended December 31, 2022, 2021 and 2020; we recognized revenue under this agreement of $107 million, $361 million and $71 million, respectively; and reimbursements from Gilead recognized as reductions in R&D expense of $132 million, $25 million and $3 million, respectively. For the year ended December 31, 2022, we recognized reimbursements from Gilead as reductions in G&A expense of $1 million.
For a more detailed discussion on revenues recognized under this collaboration see Note 5, Revenues.
Note 4. License and collaborations
We enter into licensing agreements, strategic collaborations and other similar arrangements with third parties for the development and commercialization of certain investigational products. These arrangements may be collaborative and involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include: non-refundable upfront payments; payments for options to acquire certain rights; potential development and regulatory milestone payments and/or sales-based milestone payments; royalty payments; revenue or profit-sharing arrangements; expense reimbursements; and cost-sharing arrangements.
See Note 2, Summary of significant accounting policies, for additional discussion of revenues recognized under these types of arrangements. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line items in the Consolidated Statements of Operations, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Our significant arrangements are discussed below.
Gilead Collaboration
See Note 3, Related party - Gilead Sciences, Inc.
AstraZeneca Collaboration
In 2020, we entered into a collaboration with AstraZeneca to evaluate domvanalimab, our investigational anti-TIGIT antibody, in combination with AstraZeneca’s durvalumab in a registrational Phase 3 clinical trial in patients with unresectable Stage 3 non-small cell lung cancer (NSCLC), known as the PACIFIC-8 trial. Under the collaboration, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply their respective investigational product to support the trial. Under the terms of the agreement, we will reimburse AstraZeneca for its share of the trial costs upon the achievement of certain milestones or under certain circumstances if the agreement is terminated early. The portion of the costs that we consider to be unavoidable are accrued in advance of the achievement of the milestone.
The PACIFIC-8 trial forms part of the Arcus and Gilead joint development program for domvanalimab and our portion of the trial costs are shared with Gilead. We have recognized a receivable of $2 million from Gilead at December 31, 2022 which is recorded in Other noncurrent assets.
For the years ended December 31, 2022 and 2021, under this arrangement we recognized as R&D expense $4 million and $1 million, respectively, before expected recoveries from our cost-sharing agreement with Gilead. At December 31, 2022 and 2021, we have recognized a liability of $5 million and $1 million, respectively, which is recorded in Other noncurrent liabilities.
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Taiho License
In 2017, we entered into an agreement with Taiho Pharmaceutical Co., Ltd (Taiho) under which we granted Taiho exclusive options to programs arising over a five-year period which ended in September 2022 (the Option Period) for an upfront payment of $35 million. Upon an option exercise of a program, Taiho would obtain exclusive development and commercialization rights to investigational products under the program for Japan and certain other territories in Asia (excluding China) (the Taiho Territory).
For each option that Taiho exercises, they will be obligated to make a payment of $3 million to $15 million, depending on the development stage of the optioned program. Upon exercise, Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, for each optioned program we would be eligible to receive clinical and regulatory milestones of up to $130 million and commercial milestone payments of up to $145 million with the achievement of certain sales thresholds in the Taiho Territory. We will also receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable by product and country commencing on the first commercial sale and ending upon the later of: (a) 10 years; and (b) expiration of the last-to-expire valid claim of our patents covering the manufacture, use or sale.
As of December 31, 2022, Taiho has exercised its options to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti PD-1 program); and (iii) domvanalimab and AB308 (collectively, the anti-TIGIT program).
For the year ended December 31, 2021, option payments totaling $15 million were recognized as revenue. For the years ended December 31, 2022, 2021 and 2020 we recognized revenue of $5 million, $7 million, and $7 million, respectively, related to the upfront payment. For a more detailed discussion on revenues see Note 5, Revenues.
WuXi Biologics License – anti-PD-1
In 2017, we entered into an agreement with WuXi Biologics Ireland Limited (WuXi Biologics) which, as amended, provides us with exclusive rights to (i) develop, use and manufacture products that include an anti-PD-1 antibody, including zimberelimab, worldwide and (ii) commercialize any such products worldwide, except in Greater China. Under the agreement, as of December 31, 2022 we may incur (i) clinical and regulatory milestone payments, and commercialization milestone payments of up to $375 million, (ii) tiered royalties that range from the high single-digits to low teens on net sales of the licensed products and (iii) fees related to any sublicenses.
During the years ended December 31, 2021 and 2020, we incurred milestones of $10 million and $5 million, respectively, and for the year ended December 31, 2020, we incurred sub-license fees of $10 million in connection with the Gilead Collaboration Agreement. All payments were recorded as R&D expense.
WuXi Biologics License – anti-CD39
In 2020, we entered into an agreement with WuXi Biologics, under which we obtained the exclusive worldwide license to anti-CD39 antibodies discovered under the agreement. We will be responsible for the further development and commercialization of these antibodies. Under the agreement, as of December 31, 2022 we may incur additional clinical and regulatory milestone payments of up to $15 million and royalty payments in the low single digits on net sales of the licensed products.
During the year ended December 31, 2022, we made a milestone payment of $2 million which was recorded as R&D expense.
Abmuno License
In 2016, we entered into an agreement with Abmuno Therapeutics LLC (Abmuno), under which we obtained the exclusive worldwide license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under the agreement, as of December 31, 2022 we may incur additional clinical, regulatory and commercialization milestone payments of up to $88 million.
During the years ended December 31, 2022, 2021 and 2020, we incurred development milestone expenses of $5 million, $5 million and $3 million, respectively, which were recorded as R&D expense.
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Note 5. Revenues
The following table summarizes our revenues by collaboration, category of revenue, and the method of recognition (in millions):
Year Ended December 31,
Gilead Collaboration
License to domvanalimab * $ - $ 329 $ -
License to zimberelimab * - - 55
License and R&D services * 74 1 -
Taiho Collaboration
License to domvanalimab * - 15 -
Access rights * 5 7 7
Revenues from Gilead accounted for 96%, 94% and 91% of Total revenues for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table summarizes the revenue recognized as a result of changes in the deferred revenue balance (in millions):
Year Ended December 31,
Revenue from the Gilead Collaboration Agreement
We determined that the Amended Gilead Collaboration Agreement (see Note 3, Related party - Gilead Sciences, Inc., for more information) represented a contract modification and at the amendment closing date of December 21, 2021, we allocated the transaction price to the new and remaining performance obligations. The following table summarizes the transaction price and the allocation of the transaction price to the performance obligations (in millions):
Transaction price Amount
Deferred revenues as of December 21, 2021 $ 165
Option payment for Domvanalimab 275
Option payment for Etrumadenant 250
Option payment for Quemliclustat 200
Total transaction price $ 890
Allocation to performance obligations Distinct Combined Amount
Domvanalimab - License * $ 329
Domvanalimab - R&D services * 34
Etrumadenant - License and R&D services * 219
Quemliclustat - License and R&D services * 176
Zimberelimab - R&D and commercial services * 11
Access rights * 84
Option continuation periods * 37
Total allocated transaction price $ 890
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Our assessment of the transaction price for the Amended Gilead Collaboration Agreement included an analysis of amounts we expected to receive, which at contract inception consisted of the upfront cash payment of $725 million, as well as amounts totaling $165 million deferred from the original Gilead transaction. This excludes the $100 million option continuation payment that was eliminated in the amendment. We determined the entire $890 million to be the allocable transaction price as of the amendment closing date, due to the history of timely payments by Gilead including the receipt of $725 million in January 2022.
We had $452 million and $559 million of deferred revenue remaining on our Consolidated Balance Sheets related to this collaboration at December 31, 2022 and December 31, 2021, respectively, allocated between current and noncurrent based on the expected timing of future recognition. Total revenues recognized during the year ended December 31, 2022 includes cumulative catch-up revenue of $4 million, due to changes in the total estimated percentage of completion and management's estimated total effort to be incurred in the future to satisfy the performance obligations, primarily related to revised clinical trial assumptions for R&D and commercial activities. This cumulative catch-up reduced net loss per share in the year ended December 31, 2022 by $0.06.
We accounted for each performance obligation as follows:
Domvanalimab – License
Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our anti-TIGIT program, including domvanalimab and AB308, in exchange for an option payment of $275 million, if exercised. Prior to the closing of the Amended Gilead Collaboration Agreement, we had $37 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.
Effective December 2021, under the Amended Gilead Collaboration Agreement, Gilead exercised the option and obtained an exclusive license to domvanalimab. We determined that this license was distinct based on an evaluation of the delivery of the license, noting that the program was in the later stages of development and it met the criteria for being distinct from the R&D services required under the Amended Gilead Collaboration Agreement. Specifically, the domvanalimab program was in a Phase 3 clinical trial at the time that Gilead acquired the license and the Company concluded that: (i) the R&D services for such later-stage, Phase 3 IP, primarily involved validating the drug’s efficacy, and (ii) the ongoing R&D services do not significantly modify or customize the drug compound such that the IP is not significantly different at the end of the arrangement as a result of the services. We determined the standalone selling price of this license using a discounted cash flow method.
We recognized as revenue the full $329 million of the allocated transaction price in the year ended December 31, 2021.
Domvanalimab – R&D services
We determined that we retain a separate performance obligation to perform further R&D services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.
We recognized $5 million in license and R&D services revenue in the year ended December 31, 2022 and no revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2022 we had $30 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.
Etrumadenant – License and R&D services
Under the Gilead Collaboration Agreement Gilead obtained an option to the exclusive rights to our adenosine receptor program, etrumadenant, in exchange for an option payment of $250 million, if exercised. Prior to the closing of the Amended Gilead Collaboration Agreement, we had $127 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.
Effective December 2021, under the Amended Gilead Collaboration Agreement, Gilead exercised the option and obtained an exclusive license to etrumadenant and we were also obligated to perform further R&D services for Gilead related to etrumadenant. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services
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using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.
We recognized $34 million in license and R&D services revenue in the year ended December 31, 2022 and no revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2022 we had $185 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.
Quemliclustat – License and R&D services
Under the Gilead Collaboration Agreement Gilead obtained an option to the exclusive rights to the Company's CD73 program, quemliclustat, in exchange for an option payment of $200 million, if exercised. Prior to the closing of the Amended Gilead Collaboration Agreement, we had no deferred revenue on our Consolidated Balance Sheet related to this performance obligation.
Effective December 2021, under the Amended Gilead Collaboration Agreement, Gilead exercised the option and obtained an exclusive license to quemliclustat and we were also obligated to perform further R&D services for Gilead related to quemliclustat. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.
We recognized $26 million in license and R&D services revenue in the year ended December 31, 2022 and no revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2022 we had $149 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.
Zimberelimab – License
Effective July 2020, under the Gilead Collaboration Agreement, Gilead obtained an exclusive license to zimberelimab. We determined that this license was distinct based on an evaluation of the delivery of the license, noting that the program was in the later stages of development and it met the criteria for being distinct from the R&D services required under the Gilead Collaboration Agreement. We determined the standalone selling price of this license using a discounted cash flow method.
We recognized the full $55 million of the allocated transaction price as revenue in the year ended December 31, 2020.
Zimberelimab – R&D and commercialization services
We determined that we retained separate performance obligations to perform further R&D and commercialization services for Gilead related to zimberelimab, as a monotherapy and in combination with other agents. Prior to the closing of the Amended Gilead Collaboration Agreement, we had $10 million of deferred revenue on our Consolidated Balance Sheet, related to these performance obligations. The standalone selling price of these obligations were determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligations are satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.
We recognized $9 million and $1 million for R&D and commercialization services in the year ended December 31, 2022 and 2021, respectively. At December 31, 2022, we had $1 million of deferred revenue remaining on our Consolidated Balance Sheet related to these performance obligations.
Access rights and option continuation periods
Under the Amended Gilead Collaboration Agreement, Gilead has exclusive access to our current programs as well as the future programs for a period of ten years, contingent upon option continuation payments totaling $300 million, consisting of a $100 million payment on each of the fourth, sixth, and eighth anniversaries of the agreement.
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Prior to the closing of the Amended Gilead Collaboration Agreement, we had $92 million deferred revenue on our Consolidated Balance Sheet related to this performance obligation.
The standalone selling price of this ongoing R&D pipeline access was determined using an expected cost-plus margin approach. We use a time-elapsed input method to measure progress toward satisfying this obligation, which is the method we believe most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to our R&D pipeline. Accordingly, the revenue allocated to this performance obligation is being recognized using this input method over the minimum four-year period. We determined that Gilead is not obligated to pay the remaining $300 million due over the remainder of the term and excluded these payments from the transaction price. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from our R&D pipeline.
We recognized as revenue $33 million, $31 million and $16 million associated with this obligation in the years ended December 31, 2022, 2021 and 2020, respectively under the Gilead Collaboration Agreement and the Amended Gilead Collaboration Agreement. At December 31, 2022, we had $87 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.
Capitalized costs to obtain a contract
We incurred $7 million in costs to obtain the Gilead Agreements in 2020, which consisted of consultant and legal fees. We determined that $2 million of these costs were related to the Stock Purchase Agreement which were recognized as offering costs and we allocated the remaining costs to the various performance obligations, to be recognized as the underlying performance obligation is satisfied and revenue is recognized. We incurred $4 million in costs to obtain the Amended Gilead Collaboration Agreement in 2021, which consisted of fees to a third party. These fees were combined with the $4 million of capitalized fees that remained from the original agreement at the amendment closing date, and the total $8 million was allocated to the performance obligations identified under the Amended Gilead Collaboration Agreement, to be recognized as expense as the underlying performance obligation is satisfied and revenue is recognized.
For the years ended December 31, 2022, 2021 and 2020, we recognized expense related to these capitalized costs of $1 million, $4 million and $1 million, respectively, which was recorded in G&A expense. As of December 31, 2022, we had $4 million in capitalized costs to obtain the contract, of which $1 million was recorded as Prepaid and other current assets and $3 million was recorded as Other noncurrent assets in our Consolidated Balance Sheet.
Note 6. Income taxes
Income (loss) before income taxes included the following (in millions):
Year Ended December 31,
Foreign 1 1 -
Income (loss) before income tax $ (266 ) $ 55 $ (123 )
The provision for income taxes included the following (in millions):
Year Ended December 31,
Current
Federal $ - $ 1 $ -
State 1 1 -
Total income tax expense $ 1 $ 2 $ -
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The 2022 income tax expense considers the impact of the capitalization of R&D expenses for income tax purposes due to changes in U.S. legislation.
The reconciliation between the federal statutory income tax rate and our effective tax rate was as follows:
Year Ended December 31,
Federal statutory income tax rate 21.0 % 21.0 % 21.0 %
State taxes, net of federal benefit (0.1 ) 0.8 -
Equity investment 0.9 (4.1 ) 4.2
Research and development credits 3.1 (11.9 ) 3.1
Change in valuation allowance (24.5 ) (2.6 ) (27.4 )
Stock based compensation 0.1 (0.8 ) (0.2 )
Non-deductible expenses and other (0.6 ) 0.9 (0.7 )
Provision for income taxes (0.1 ) % 3.3 % 0.0 %
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
Significant components of our deferred tax assets and liabilities were as follows (in millions):
Year Ended December 31,
Deferred tax assets:
Federal and state net operating loss carryforwards $ 24 $ 24
Research and development credits carryforwards 22 13
Stock-based compensation 16 10
Depreciation and amortization 6 6
Deferred revenue 19 24
Lease liability 25 25
Capitalized research and development costs 53 -
Total deferred tax assets 172 106
Deferred tax liabilities:
Right-of-use assets (22 ) (23 )
Total deferred tax liabilities (22 ) (23 )
Less valuation allowance (150 ) (83 )
Net deferred tax assets (liabilities) $ - $ -
The accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of net deferred tax assets. We considered factors such as our history of operating losses, the nature of our deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible, including amounts that may arise under the collaboration agreement with Gilead entered into in 2020 and the 2021 program opt-ins. As a result of our evaluation of these factors, including the uncertainty that exists with respect to the option fees and milestone payments, we do not believe that it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying Consolidated Balance Sheets. The valuation allowance increased by approximately $67 million for the year ended December 31, 2022 and decreased by approximately $1 million for the year ended December 31, 2021.
The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs for U.S. tax purposes, including software development costs, incurred in tax years beginning after December 21,2021. Beginning in 2022, for tax purposes we began capitalizing and amortizing R&D costs over a five-year period for domestic research and a fifteen-year period for international research rather than expensing these costs immediately.
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At December 31, 2022, we had total net operating loss carryforwards (NOLs) of $109 million that have no expiration date and federal research tax credits of approximately $18 million that begin to expire in 2039. We also have state NOLs of approximately $19 million that begin to expire in 2035, and state research tax credits of approximately $12 million that have no expiration date, and foreign research tax credits of approximately $3 million that have no expiration date. Use of the U.S. federal and state NOLs and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law, as defined in Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before use. We have determined that an ownership change, as defined under IRC Section 382, occurred in previous years. While we do not expect these ownership changes to result in the expiration of net operating loss and credit carryforwards prior to utilization, we are subject to an annual limitation on the use of its tax attributes. The limitation on the use of net operating loss and credit carryforwards could reduce our ability to use a portion of the tax attributes to offset future taxable income.
We have not been audited by the Internal Revenue Service, any state or foreign tax authority. We are subject to taxation in the United States and in Australia. Due to net operating loss and research credit carryforwards, all of our tax years, from 2015 to 2022, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2018 to 2022 are open to examination in Australia.
Uncertain Tax Positions
We follow the provisions of FASB Accounting Standards Codification (ASC 740-10), Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or are expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the Consolidated Financial Statements. The reserve for unrecognized tax benefits was approximately $8 million and $5 million at December 31, 2022, and 2021, respectively.
Due to the full valuation allowance at December 31, 2022 and 2021, current adjustments to the unrecognized tax benefit will have no impact on our effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate.
Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes. There were no interest or penalties accrued at December 31, 2022 or 2021.
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
Year Ended December 31,
Beginning balance $ 5 $ 3
Additions for tax positions taken in current year 3 2
Ending balance $ 8 $ 5
As of December 31, 2022, the total amount of gross unrecognized tax benefits was $8 million, of which, if recognized, none would impact our effective tax rate. We do not anticipate material changes to our uncertain tax positions through the next 12 months.
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Note 7. Net income (loss) per share
The computation of basic net income (loss) per share is based on the weighted-average number of our common shares outstanding during the period. The computation of diluted net income (loss) per share is based on the weighted-average number of our common shares and dilutive potential common shares, which primarily include shares that may be issued under our stock option, restricted stock award, and ESPP programs (collectively, dilutive securities) as determined under the treasury stock method.
The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data):
Year Ended December 31,
Net income (loss) (Numerator):
Weighted-average shares (Denominator):
Less: Subject to vesting - (1.0 ) (1.6 )
Weighted-average shares for basic EPS 72.0 69.3 54.8
Effect of dilutive securities - 4.7 -
Weighted-average shares for diluted EPS 72.0 74.0 54.8
Net income (loss) per share
The following table summarizes potentially dilutive securities excluded from the computation of diluted net income (loss) per share calculations because they would have been antidilutive (in millions):
At December 31,
Common stock options issued and outstanding 12.0 4.5 9.9
Restricted stock units issued 1.3 - 0.7
Unvested early exercised common stock options - - 0.2
Employee Stock Purchase Plan shares 0.2 0.1 -
Unvested restricted stock issued as part of collaboration agreement - - 1.3
We have also excluded the effect of Gilead's right to purchase additional shares of our common stock from the calculation as these rights had no intrinsic value at either December 31, 2022, 2021 or 2020.
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Note 8. Stock-based compensation
Stock-based compensation expense
The following table reflects the components of stock-based compensation expense recognized in our Consolidated Statements of Operations (in millions):
Year Ended December 31,
Research and development $ 33 $ 29 $ 11
General and administrative 32 26 11
Total stock-based compensation $ 65 $ 55 $ 22
As of December 31, 2022, unrecognized compensation costs related to non-vested stock option awards and RSUs totaled $90 million and $37 million, respectively, and is expected to be recognized over a weighted average period of 2.2 years and 2.4 years, respectively.
Stock Plans
We grant awards to employees and nonemployees under a series of equity incentive plans (collectively, the Stock Plans). Awards under our Stock Plans are made with newly issued shares reserved for this purpose.
2020 Stock Plan
In January 2020, we adopted the 2020 Inducement Plan (2020 Stock Plan). Under this plan, an initial 3.0 million shares of our common stock were authorized by the Board of Directors for the award of stock options and other equity-based awards as an inducement to eligible individuals to enter into employment with us. During the years ended December 31, 2021 and 2020, the Board of Directors authorized an increase of 5.0 million shares and 1.0 million shares, respectively. As of December 31, 2022, there were 3.2 million shares available for grant under this plan.
2018 Stock Plan
In March 2018, we adopted the 2018 Equity Incentive Plan (2018 Stock Plan), which replaced the 2015 Stock Plan. Under this plan, an initial 3.6 million shares were reserved together with 0.7 million shares that remained available for issuance at adoption under the 2015 Stock Plan. Any outstanding awards under the 2015 Stock Plan that subsequently expire, lapse unexercised or are forfeited to or repurchased by us are also added to the 2018 Stock Plan. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 3.6 million shares, (ii) 4% of the shares of common stock outstanding on the last business day of the prior fiscal year, or (iii) an amount as determined by the Board of Directors. As of December 31, 2022, there were 3.6 million shares available for grant under this plan. On January 1, 2023, the number of shares available for issuance under this Plan automatically increased by 2.9 million.
2015 Stock Plan
Our amended 2015 Stock Plan, which was in place prior to our public offering in March 2018, allowed option holders to exercise stock options prior to vesting, subject to certain limitations. Any exercised unvested shares were subject to repurchase by us at the original exercise price in the event the option holder’s service with the Company was terminated either voluntarily or involuntarily.
Employee Stock Purchase Plan
In March 2018, we adopted the 2018 Employee Stock Purchase Plan (2018 ESPP). The 2018 ESPP provides eligible employees with the opportunity to purchase shares of common stock through payroll deductions at a price equal to 85% of the lower of the fair market value per share on the first trading day of the applicable 24-month offering period or on the applicable purchase date. Employees are limited to a maximum purchase limit of 3,000 shares on each purchase date or $25,000 of shares purchased in a calendar year. The 2018 ESPP is intended to constitute an “employee stock purchase plan” under Section 423(b) of the Internal Revenue Code of 1986, as amended. The 2018 ESPP may be terminated by our board of directors at any time. Under this plan, an initial 0.7 million shares were reserved for issuance. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 1.1 million shares, (ii) 1% of the shares of common stock outstanding
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on the last business day of the prior fiscal year, or (iii) an amount as determined by the Board of Directors. As of December 31, 2022, there were 2.0 million shares available for purchase under this plan. On January 1, 2023, the number of shares available for purchase under this Plan automatically increased by 0.7 million shares. The number of shares issued under the 2018 ESPP during the years ended December 31, 2022, 2021 and 2020 was 0.3 million, 0.2 million, and 0.2 million, respectively.
Restricted Stock Units
We grant restricted stock units (RSUs) to our employees and directors under the 2018 Plan. The RSUs vest annually or quarterly over four years for employees and annually for directors. The following table summarizes information regarding our RSUs for the year ended December 31, 2022:
Total Restricted Stock Units(in millions) WeightedAverageGrant Date Fair Value
RSUs forfeited or canceled (0.2 ) 30.65
The total grant date fair value of shares vested during the years ended December 31, 2022, 2021 and 2020 was $15 million, $12 million and $0.1 million, respectively.
Stock Options
The exercise price of stock options is set at the closing price of our common stock on the grant date, and the related number of shares granted is fixed at that point in time. Awards expire 10years from the date of grant. The following table summarizes information regarding our stock options for the year ended December 31, 2022:
Options exercised (1.4 ) $ 13.17
Options forfeited or canceled (0.9 ) $ 25.93
During the years ended December 31, 2022, 2021 and 2020, the intrinsic value of shares exercised was $26 million, $17 million, and $7 million, respectively, and the fair value of shares vested during the same period was $48 million, $40 million, and $17 million, respectively.
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Valuation Assumptions for Stock Options and ESPP
We utilize the Black-Scholes pricing model to estimate the fair value of stock options and shares issued under our ESPP. The following table summarizes the key assumptions used to calculate the fair value and the resulting weighted-average grant date fair value of stock options granted:
Year Ended December 31,
Dividend yield 0% 0% 0%
Weighted average fair value of stock options granted $ 20.75 $ 22.05 $ 11.57
Year Ended December 31,
Dividend yield 0% 0% 0%
Closing price of our common stock on grant date — The exercise price of our stock options is set as the closing price of our common stock on the grant date.
Risk-free interest rate — The risk-free rate assumption is based on the U.S. treasury yield in effect at the time of grant for instruments with maturities similar to the expected term of our stock options.
Expected term — We have opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
Volatility — Due to our limited operating history and a lack of company specific historical and implied volatility data, our estimate of expected volatility is based on the historical volatility of a group of similar publicly traded companies. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.
Dividend yield — We have not issued any dividends in our history and do not expect to issue dividends over the life of the options.
Note 9. Employee benefit plan
We have a 401(k) defined contribution plan for all our employees which allows tax-deferred salary deductions. The Company matches, at its discretion, employee contributions. For the years ended December 31, 2022 and 2021, we made contributions of $2 million and $1 million to the plan. We made no contributions to the plan for the year ended December 31, 2020.
Note 10. Cash, cash equivalents and marketable securities
The following table summarizes amortized cost, gross unrealized gains and losses and the fair value of our cash, cash equivalents and marketable securities, all of which are considered available for sale, by type of securities:
Money market funds $ 169 $ - $ - $ 169
U.S. treasury securities 317 - (3 ) 314
Corporate securities and commercial paper 635 - (4 ) 631
U.S. government agency securities 20 - - 20
Certificate of deposit 4 - - 4
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Money market funds $ 148 $ - $ - $ 148
U.S. treasury securities 112 - - 112
Corporate securities and commercial paper 422 - (1 ) 421
The following table summarizes the fair values of our cash, cash equivalents and marketable securities by location in the Consolidated Balance Sheets and contractual maturity:
Contractual Year Ended December 31,
Location in Consolidated Balance Sheets Maturity 2022 2021
Cash and cash equivalents - $ 206 $ 148
Marketable securities Within one year 803 351
Long-term marketable securities Between one year and three years 129 182
Realized gains or losses recognized on the sale of available-for-sale marketable securities were not material for the years ended December 31, 2022, 2021 and 2020. Realized gains and losses are included in Interest and other income, net, in the Consolidated Statements of Operations. The cost of a security sold is determined using the specific-identification method.
We limit the credit risk associated with our investments by placing them with banks and institutions it believes are highly credit worthy and investing in highly rated investments. We held a total of 219 and 165 positions in securities which were in unrealized loss positions as of December 31, 2022 and 2021, respectively. We do not intend to sell our securities with unrealized loss positions and have concluded we will not be required to sell the securities before recovery of the amortized cost for the investment at maturity. No credit related losses have been recognized for any of the periods presented.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets to the total shown in the Consolidated Statements of Cash Flows (in millions):
As of December 31,
Cash and cash equivalents $ 206 $ 148
Restricted cash (included in Other noncurrent assets) 3 3
Cash, cash equivalents and restricted cash $ 209 $ 151
Restricted cash at December 31, 2022 and 2021 represents cash balances held as security in connection with our facility lease agreements.
Note 11. Property and equipment
Property and equipment, net was all located in the United States and consisted of the following (in millions):
Useful Life As of December 31,
Leasehold improvements 10 $ 34 $ 32
Scientific equipment 5 17 14
Furniture and equipment 3-5 3 2
Construction in progress - 4 2
Less: Accumulated depreciation and amortization (23 ) (18 )
Property and equipment, net $ 35 $ 32
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Note 12. Consolidated balance sheet components
Prepaid and Other Current Assets
Prepaid and other current assets consisted of the following (in millions):
As of December 31,
Prepaids and other assets $ 15 $ 16
Accrued interest receivable 4 2
Total prepaid and other current assets $ 19 $ 18
Other Current Liabilities
Other current liabilities consisted of the following (in millions):