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 in conjunction with our audited consolidated financial statements and notes and other financial information included elsewhere in this Annual Report on Form 10-K. Unless the context requires otherwise, references in this Annual Report on Form 10-K to the “Company”, “Vir,” “we,” “us” and “our” refer to Vir Biotechnology, Inc. and its consolidated subsidiaries.
Our discussion and analysis below are focused on our financial results and liquidity and capital resources for the years ended December 31, 2020 and 2019, including year-over-year comparisons of our financial performance and condition for these years. Discussion and analysis of the year ended December 31, 2018 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31, 2019 and 2018, are located in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 26, 2020.
Overview
We are a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Infectious diseases are among the leading causes of death worldwide and can cause trillions of dollars of direct and indirect economic burden each year – as evidenced by the current coronavirus disease 2019, or COVID-19 pandemic. We believe that now is the time to apply the recent and remarkable advances in immunology to combat current and prepare for potential future infectious diseases. Our approach begins with identifying the limitations of the immune system in combating a particular pathogen, the vulnerabilities of that pathogen and the reasons why previous approaches have failed. We then bring to bear powerful technologies that we believe, individually or in combination, will lead to effective therapies.
Our current development pipeline consists of product candidates targeting COVID-19, hepatitis B virus, or HBV, influenza A virus, and human immunodeficiency virus, or HIV. We have assembled four technology platforms, focused on antibodies, T cells, innate immunity and small interfering ribonucleic acid, or siRNA, through internal development, collaborations and acquisitions. We have built an industry-leading team that has deep experience in immunology, infectious diseases and product development. Given the global impact of infectious diseases, we are committed to developing cost-effective treatments that can be delivered at scale.
COVID-19
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HBV
Influenza A virus
HIV
We were incorporated in April 2016 and commenced principal operations later that year. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials.
Prior to our initial public offering, or IPO, we funded our operations primarily from the issuance and sale of convertible preferred stock, and to a lesser extent from revenue from grant agreements with government-sponsored and private organizations, as well as research and development services. In October 2019, we completed our IPO pursuant to which we received net proceeds of $126.4 million, after deducting underwriting discounts, commissions and offering expenses. In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323.2 million, after deducting underwriting discounts, commissions and offering expenses. As of December 31, 2020, we had $736.9 million in cash, cash equivalents and short-term investments. Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of December 31, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our net losses were $298.7 million, $174.7 million and $115.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $667.2 million. Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing, manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years. In particular, we expect our expenses and losses to increase as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, seek regulatory approval, prepare for commercialization, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
We are currently manufacturing product candidates from three of our platforms: antibodies, T cells and siRNAs. We have established our own internal chemistry, manufacturing and control, or CMC, capabilities and are working with contract
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development and manufacturing organizations, or CDMOs, to supply our early stage product candidates in the near-term. We have completed our internal capacity build in process development, analytical development, quality, manufacturing and supply chain. Specifically, our San Francisco, California and Portland, Oregon facilities include laboratories that support process development, production of HCMV research viral seed stock and selected quality control testing for our product candidates. We have established relationships with multiple CDMOs and have produced material to support preclinical studiesand Phase 1 and Phase 2 clinical trials. Material for Phase 3 clinical trials and commercial supply will generally require large-volume, low-cost-of-goods production. For example, for our COVID-19 program, we and our partner GSK have executed manufacturing agreements with large-scale CDMOs to support future scale-up and capacity, particularly for potential commercialization.
COVID-19 Activities
Since February 2020, we have entered into a number of collaboration agreements to accelerate the development, manufacture, and potential commercialization of therapies to treat and prevent COVID-19 and other coronaviruses. We have also made substantial efforts to protect our intellectual property in this area, as evidenced by the expansion of our patent portfolio.
Development and Commercialization
Manufacturing
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COVID-19 Business Update
With the global spread of the current COVID-19 pandemic, we have implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business. We continue to closely monitor the COVID-19 situation and will evolve our plans and policies as needed going forward. As a result of these developments, in March 2020, we implemented work-from-home policies for most of our employees. We have also implemented plans to reopen our offices to allow employees to return when appropriate. Although these plans are based on a phased approach consistent with local government requirements, and focused on employee safety, and contemplate returning to remote work should new restrictions be implemented, there is uncertainty regarding recent phased reopening, which may be rolled back, and restrictions re-implemented. We are also working to provide our employees with the support they need to ensure continuity of business operations. We are working closely with our CDMOs to manage our supply chain activities and mitigate any potential disruptions to our clinical trial supplies as a result of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and begins to impact essential distribution systems, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing of clinical trial supply. For some of our clinical development programs, we are experiencing, and may continue to experience, a disruption or delay in our ability to initiate trial sites and enroll and assess patients. For example, the initiation of the Phase 2 trial for VIR-2482, which was delayed due to the impact of COVID-19, is now planned for the fourth quarter of 2021. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic.
Our Collaboration, License and Grant Agreements
We have entered into collaboration, license and grant arrangements with various third parties. For details regarding these and other agreements, see the section titled “Business—Our Collaboration, License and Grant Agreements” and Note6—Grant Agreements and Note 7—Collaboration and License Agreements to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Our Acquisitions
We have completed various acquisitions. For details regarding our acquisitions, see the section titled “Business—Our Acquisition Agreements” and Note 4—Acquisitions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Components of Operating Results
Revenue
We do not have any products approved for sale, we have not generated any revenue from the sale of our products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever.
Our revenue consists of: (i) grant revenue; and (ii) license and contract revenue. Grant revenue is comprised of revenue derived from grant agreements with government-sponsored and private organizations. License and contract revenue is comprised of revenue generated from license rights issued and research and development services.
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Operating Expenses
Research and Development
To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We do not track research and development expenses by product candidate.
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, our ongoing assessments as to each product candidate’s commercial potential and the impact of public health epidemics, such as the COVID-19 pandemic. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our clinical development costs may vary significantly based on factors such as:
• whether a collaborator is paying for some or all of the costs;
• per patient trial costs;
• the number of trials required for approval;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the length of time required to enroll eligible patients;
• the number of patients that participate in the trials;
• the number of doses that patients receive;
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up;
• the cost and timing of manufacturing our product candidates;
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• the phase of development of our product candidates; and
• the efficacy and safety profile of our product candidates.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related expenses for personnel in executive, finance and other administrative functions, facilities and other allocated expenses, and other expenses for outside professional services, including legal, audit and accounting services, and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation.
We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we continue to support our continued research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and investments.
Other Income (Expense), Net
Other income (expense), net consists of gains and losses from foreign currency transactions and the remeasurement of contingent consideration related to our acquisition of TomegaVax, Inc., or TomegaVax, and convertible preferred stock warrant liability prior to the IPO. Upon completion of our IPO, the outstanding warrant to purchase shares of our Series A-1 convertible preferred stock automatically converted into a warrant to purchase shares of common stock and therefore, was no longer subject to remeasurement each period.
Provision for Income Taxes
Provision for income taxes consisted of immaterial international income tax.
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Results of Operations
Comparison of Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the periods presented:
Year Ended December 31,
(in thousands)
Revenue:
License revenue from a related party 22,747 — 22,747
Operating expenses:
Other income (expense):
Provision for income taxes (54 ) (154 ) 100
Revenue
Total revenue was $76.4 million and $8.1 million for the years ended December 31, 2020 and 2019, respectively. The increase in total revenue was primarily due to $43.3 million of revenue related to the license granted to GSK under our collaboration agreement, and $22.7 million of revenue related to Brii Biosciences Offshore Limited’s, or Brii Bio’s, exercise of its option to obtain exclusive rights to develop and commercialize compounds arising from VIR-2218 in the China territory.
Research and Development Expenses
The following table shows the primary components of our research and development expenses for the periods presented:
Year Ended December 31,
(in thousands)
Research and development expenses were $302.4 million and $148.5 million for the years ended December 31, 2020 and 2019, respectively. This increase was primarily due to the following factors:
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General and Administrative Expenses
General and administrative expenses were $70.9 million and $37.6 million for the years ended December 31, 2020 and 2019, respectively. The increase was primarily due to an increase in personnel-related expenses related to additional headcount, legal fees, external consulting and other expenses due to costs associated with operating as a public company, including additional compliance-related expenses as a result of no longer being an emerging growth company.
Interest Income
Interest income were $2.8 million and $8.5 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to lower interest rates and accretion income on investment balances in 2020 compared to 2019.
Other Expense, Net
Other expense, net were $4.5 million and $5.1 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to the $2.0 million final revaluation of the convertible preferred stock warrant liability prior to the IPO, partially offset by an increase of $1.4 million in the fair value of the contingent consideration related to the TomegaVax acquisition.
Liquidity, Capital Resources and Capital Requirements
Sources of Liquidity
As of December 31, 2020, we had $736.9 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $667.2 million. We have financed our operations primarily through sales of our common stock and convertible preferred securities and payments received under our grant and collaboration agreements.
On October 10, 2019, our registration statement on Form S-1 was declared effective by the SEC and our shares began trading on The Nasdaq Global Select Market on October 11, 2019. We sold an aggregate of 7,142,858 shares of our common stock at an initial offering price of $20.00 per share. As a result of the IPO, we received $126.4 million in net proceeds, after deducting underwriting discounts and commissions of approximately $10.0 million and offering expenses of approximately $6.4 million. In April 2020, we issued 6,626,027 shares of our common stock to Glaxo Group Limited (an affiliate of GSK) at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million. In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323.2 million, after deducting underwriting discounts, commissions and offering expenses. In November 2020, we also entered into a sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which we may from time to time offer and sell shares of our common stock for an aggregate offering price of up to $300.0 million, through or to Cowen, acting as sales agent or principal. We will pay Cowen a commission of up to 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal fees and disbursements and provide Cowen with customary indemnification and contribution rights. As of December 31, 2020, no shares have been issued under the Sales Agreement.
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Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing, manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studiesand early clinical trials, and to a lesser extent, general and administrative expenditures.
Future Funding Requirements
Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of December 31, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the consolidated financial statements included elsewhere in this Form 10-K. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned. Moreover, it is particularly difficult to estimate with certainty our future expenses given the dynamic and rapidly evolving nature of our business and the COVID-19 pandemic environment generally. We will also need to raise additional capital to complete the development and commercialization of our product candidates and fund certain of our existing manufacturing and other commitments. We anticipate raising additional capital through the sale of our equity securities, incurring debt, entering into collaboration, licensing or similar arrangements with third parties, or receiving research contributions, grants or other sources of financing to fund our operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. There can be no assurance that sufficient funds will be available to us on attractive terms or at all. If we are unable to obtain additional funding from these or other sources, it may be necessary to significantly reduce our rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. In addition, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of biotechnology products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
• the costs, timing and outcome of regulatory review of our product candidates;
• any expenses needed to attract, hire and retain skilled personnel;
• the costs of operating as a public company; and
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
(in thousands)
Net cash provided by (used in):
Operating Activities
During the year ended December 31, 2020, net cash used in operating activities was $190.9 million. This consisted primarily of a net loss of $298.7 millionand payments on contingent consideration of $15.8 million related to the milestones achieved related to our Humabs acquisition, partially offset by a decrease in our net operating assets of $29.5 million and non-cash charges of $94.0 million. The change in our net operating assets of $29.5 million was primarily due to an increase in accrued liabilities and other long-term liabilities by $46.6 million, which was partially offset by a decrease in deferred revenue of $7.0 million related to revenue recognized from the Bill & Melinda Gates Foundation grants, a decrease in operating lease liabilities of $3.7 million due to lease payments, and an increase of $4.5 million in prepaid expenses and other current assets primarily related to prepayment of clinical trial cost for our research and development activities. The non-cash charges of $94.0 million primarily consisted of $38.4 million for revaluation of contingent consideration related to our Humabs acquisition, $16.8 million for the change in fair value of the derivative liability under the Alnylam Agreement, $27.6 million for stock-based compensation expense, and $4.4 million for depreciation and amortization.
During the year ended December 31, 2019, net cash used in operating activities was $129.6 million. This consisted primarily of a net loss of $174.7 million, partially offset by a decrease in our net operating assets of $8.2 million and non-cash charges of $36.8 million. The change in our net operating assets of $8.2 million was primarily driven by increases in accrued liabilities related to expenses incurred under the Alnylam Agreement, and employee related expenses due to higher headcount. The non-cash charges of $36.8 million primarily consisted of $12.4 million for the fair value of the derivative liability under the Alnylam Agreement, $8.7 million for stock-based compensation expense, $8.3 million for revaluation of contingent consideration, $4.5 million for depreciation and amortization expense, and $2.0 million for revaluation of convertible preferred stock liability.
Investing Activities
During the year ended December 31, 2020, net cash used in investing activities was $9.9 million. This consisted primarily of purchases of investments of $403.8 million and purchases of property and equipment of $6.5 million, partially offset by $400.3 million in proceeds received from investments which matured during the period.
During the year ended December 31, 2019, net cash used in investing activities was $256.2 million. This consisted of purchases of short and long-term investments of $643.9 million and purchases of property and equipment of $8.9 million, partially offset by $396.7 million in proceeds received from investments which matured during the period.
Financing Activities
During the year ended December 31, 2020, net cash provided by financing activities was $529.5 million. This consisted primarily of proceeds received from the issuance of our common stock to GSK of $206.7 million in April 2020, the issuance of our common stock related to our follow-on offering of $323.2 million and from exercises of stock options of $4.1 million, partially offset by payments of contingent consideration related to our Humabs acquisition of $4.2 million.
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During the year ended December 31, 2019, net cash provided in financing activities was $449.2 million. This consisted primarily of net proceeds received from the issuance of our Series B convertible preferred stock of $317.3 million in January 2019,issuance of common stock upon completion of our IPO of $126.4 million in October 2019, repayment of promissory notes of $3.3 million, and financing lease obligation of $1.2 million.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2020:
Payments Due by Period
Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Total
(in thousands)
Under our collaboration, license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements. We have not included any such milestone or royalty payments in the above table. In addition, our commitments to GSK under the Samsung MSA and WuXi Biologics MSA for drug substance, drug product and raw material wereapproximately $370.0 million as of December 31, 2020, excluding the approximate “access fee” payable to Biogen. We have not included any such commitments in the above table. For additional information regarding these agreements, including our payment obligations thereunder, see the sections titled “Business—Our Collaboration, License and Grant Agreements,” “Business—Manufacturing—Manufacturing Agreements” and “Business—Our Acquisition Agreements,” as well as Note 4—Acquisitions and Note 7—Collaboration and License Agreements to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We enter into agreements in the normal course of business with contract manufacturing organizations and contract research organizations for clinical trials, preclinical studies, manufacturing, and other services and products for operating purposes, which are generally cancelable upon written notice. These obligations and commitments are also not included in the table above.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC. Brii Biosciences Limited, or Brii Bio Parent, and its wholly owned subsidiary Brii Bio, are variable interest entities due to their reliance on future financing and insufficient equity at risk. However, we do not have the power to direct activities which most significantly impact the economic success of these entities and are not the primary beneficiary, and therefore we do not consolidate Brii Bio Parent or Brii Bio.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The critical accounting policies, estimates and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below.
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Revenue Recognition
License and Contract Revenue
In accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, 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 a performance obligation.
For collaborative arrangements that fall within the scope of ASC 808, Collaborative Arrangements, or ASC 808, we first determine which elements of the collaboration are deemed to be a performance obligation with a customer within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808 and are not subject to the guidance in ASC 606, we apply the revenue recognition model under ASC 606 or other guidance, as deemed appropriate. We have entered into a number of license and collaboration agreements that fall within the scope of ASC 606. We evaluate the promised goods or services in these agreements to determine which ones represent distinct performance obligations. These agreements may include the following types of promised goods or services: (i) grants of licenses, (ii) performance of research and development services, and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to our intellectual property.
Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period as required. These agreements may include the following types of consideration: non-refundable upfront payments, reimbursement for research services, research, development or regulatory milestone payments, and royalty and commercial sales milestone payments.
If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on their estimated standalone selling prices, or SSP. For performance obligations satisfied over time, we estimate the efforts needed to complete the performance obligation and recognize revenue by measuring the progress towards complete satisfaction of the performance obligation using an input measure.
For arrangements that include sales-based royalties, including commercial milestone payments based on pre-specified level of sales, 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). Achievement of these royalties and commercial milestones may solely depend upon performance of the licensee.
Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the SSP of identified performance obligations, which may include development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.
Research and Development Expenses
We expense all research and development costs in the periods in which they are incurred. We estimate preclinical and clinical expenses based on the services performed, pursuant to contracts with third parties that conduct and manage preclinical studies and clinical trials, research services, and clinical manufacturing services on our behalf. When billing terms under these contracts do not coincide with the timing of when the work is performed, we are required to make estimates of our outstanding obligations to those third parties as of period end. Our accrual estimates are based on a number of factors, including our knowledge of the research and development programs and clinical manufacturing activities, status of the programs and activities, invoicing to date, and the provisions in the contracts. We obtain information regarding unbilled services directly from these service providers and perform procedures to support our estimates based on our internal understanding of the services provided to date. However, we may also be required to estimate these services based on information available to our internal clinical and manufacturing administrative staff if such information is not able to be obtained timely from our service providers. We record the costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued and other liabilities in the
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consolidated balance sheets. The status and timing of actual services performed may vary from our estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to our accruals could materially affect our results of operations.
Business Combinations
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to estimated cash flows and development timelines related to acquired developed technologies and in-process research and development. Our estimates may also impact our deferred income tax assets and liabilities. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Contingent Consideration and Embedded Derivatives
Contingent consideration related to business combinations and obligations required to be accounted for as embedded derivative financial instruments under Topic ASC 815, Derivatives and Hedging, are considered to be Level 3 instruments that are initially measured at their estimated fair values on the transaction date and subsequently remeasured with changes recorded in the consolidated statement of operations each subsequent reporting period.
The estimated fair value of the contingent consideration related to the Humabs acquisition was determined by calculating the probability-weighted clinical and regulatory milestone payments based on the assessment of the likelihood and estimated timing that certain milestones would be achieved, as well as the use of Monte Carlo simulation model that includes significant estimates and assumptions pertaining to commercialization events and sales targets. The most significant unobservable inputs are the probabilities of achieving clinical and regulatory approval of the development projects and the subsequent commercial success and discount rates.
The estimated fair value of the contingent consideration related to our acquisition of TomegaVax was determined based on a Monte Carlo simulation model that includes significant estimates and assumptions pertaining to probability and timing to achieve the required share price of our common stock, expected volatility and discount rate. Although the TomegaVax acquisition was accounted for as an asset acquisition, such contingent consideration met the definition of an embedded derivative financial instrument.
The estimated fair value of the embedded derivative related to our Alnylam Agreement was determined based on estimates and assumptions over the likelihood and timing to achieve the specified development milestone. Significant changes in the probabilities of the likelihood and timing to achieve the milestones would result in a significantly higher or lower fair value measurement. We remeasured and reclassified the derivative liability to additional paid-in capital upon achievement of the milestone and settlement of the liability in 2020. As such, the derivative liability is no longer outstanding as of December 31, 2020.
Stock-Based Compensation
We recognize compensation costs related to stock options granted to employees and nonemployees based on the estimated fair value of the awards on the date of grant, and we recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is typically the vesting period of the respective awards.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
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See Note 13—Stock-Based Awards to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option-pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2020, 2019, and 2018. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Recent Accounting Pronouncements Not Yet Adopted
See Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rate sensitivities.
Interest Rate Risk
We had cash, cash equivalents and restricted cash and cash equivalents of $451.5 million as of December 31, 2020, which consisted of money market funds. We also had short-term investments of $300.3 million as of December 31, 2020. The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. Because our investments are primarily short-term in duration and our holdings in U.S. government treasury bonds mature prior to our expected need for liquidity, we believe that our exposure to interest rate risk is not significant, and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We had no debt outstanding as of December 31, 2020.
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Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at period-end exchange rates and non-monetary assets and liabilities are translated to U.S. dollars using historical exchange rates. Revenue and expenses are translated at average rates throughout the respective periods. As of the date of this Annual Report on Form 10-K, we are exposed to foreign currency risk related to the operations of our Swiss and Australian subsidiaries and consequently the Swiss Franc and Australian dollar. Transaction gains and losses are included in other income (expenses), net on the consolidated statements of operations and were not material for the years ended December 31, 2020, 2019 and 2018.
Effects of Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented.
Item 8. Financial Statements and Supplementary Data.
Page
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 126
Notes to Consolidated Financial Statements 134
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
of Vir Biotechnology, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vir Biotechnology, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments, effective January 1, 2020, using the modified retrospective approach.
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 Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Fair value of Humabs Biomed SA (“Humabs”) contingent consideration
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
Redwood City, California
February 25, 2021
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VIR BIOTECHNOLOGY, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
ASSETS
CURRENT ASSETS:
Restricted cash and cash equivalents, current 7,993 6,181
Prepaid expenses and other current assets 27,511 13,378
Operating right-of-use assets 61,947 —
Restricted cash and cash equivalents, noncurrent 6,919 7,300
Long-term investments — 24,290
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Deferred revenue, current portion 6,451 6,181
Contingent consideration, current portion 10,600 8,200
Derivative liability — 12,449
Operating lease liabilities, noncurrent 66,556 —
Contingent consideration, noncurrent 25,374 9,380
Commitments and contingencies (Note 9)
STOCKHOLDERS’ EQUITY:
Accumulated other comprehensive loss (1,278 ) (601 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 918,761 $ 512,071
The accompanying notes are an integral part of these consolidated financial statements.
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VIR BIOTECHNOLOGY, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31,
Revenue:
License revenue from a related party 22,747 — —
Operating expenses:
Other income (expense):
(Provision for) benefit from income taxes (54 ) (154 ) 480
Net loss per share, basic and diluted $ (2.51 ) $ (5.76 ) $ (15.12 )
The accompanying notes are an integral part of these consolidated financial statements.
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VIR BIOTECHNOLOGY, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended December 31,
Other comprehensive income (loss):
Unrealized gains (losses) on investments (50 ) 149 (14 )
Amortization of actuarial loss 23 — —
Adjustment to projected benefit obligations, net of tax (650 ) (736 ) —
Other comprehensive loss (677 ) (587 ) (14 )
The accompanying notes are an integral part of these consolidated financial statements.
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VIR BIOTECHNOLOGY, INC.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
Vesting of restricted common stock — — 2,247,673 — — — — —
Stock-based compensation — — — — 5,053 — — 5,053
Other comprehensive loss (14 ) (14 )
Settlement of fractional shares from reverse stock split — — — — (3 ) — — (3 )
Stock-based compensation — — — — 8,719 — — 8,719
Other comprehensive loss — — — — — (587 ) — (587 )
Issuance of common stock for cashless exercise of warrants — — 211,774 — — — — —
Other comprehensive loss — — — — — (677 ) — (677 )
The accompanying notes are an integral part of these consolidated financial statements.
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VIR BIOTECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of intangible assets 832 — —
Noncash lease expense 3,371 — —
Change in estimated fair value of contingent consideration 38,394 8,330 250
Initial fair value of derivative liability — 13,599 —
Change in estimated fair value of derivative liability 16,796 (1,150 ) —
Preferred stock issued in connection with asset acquisition — — 1,750
Common stock issued in connection with license agreement — 617 —
Change in deferred income taxes (52 ) — (480 )
Loss on write-off and disposal of property and equipment — 345 198
Other 23 — —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (4,475 ) (4,619 ) (4,172 )
Accrued liabilities and other long-term liabilities 46,614 10,211 7,171
Operating lease liabilities (3,684 ) — —
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,549 ) (8,940 ) (8,192 )
Proceeds from sale of property and equipment — — 25
Asset acquisitions — — (1,743 )
Proceeds from disposal of an asset held for sale 180 — —
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 323,214 126,411 —
Proceeds received from financing lease obligation — 1,202 —
Payment of contingent consideration (4,248 ) — —
Payment of principal on financing lease obligations (250 ) (95 ) —
Proceeds from repayment of promissory notes — 3,265 —
Cash paid in lieu of fractional shares related to reverse stock split — (3 ) —
Advanced proceeds from convertible preferred stock financing — — 10,140
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred stock in connection with asset acquisition $ — $ — $ 593
Restricted cash and cash equivalents, noncurrent 6,919 7,300 1,003
The accompanying notes are an integral part of these consolidated financial statements.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
1. Organization
Vir Biotechnology, Inc. (“Vir” or the “Company”) is a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Its development pipeline consists of product candidates targeting the current coronavirus disease 2019 (“COVID-19”), hepatitis B virus (“HBV”), influenza A virus, and human immunodeficiency virus (“HIV”). Vir has assembled four technology platforms that are designed to stimulate and enhance the immune system by exploiting critical observations of natural immune processes.
Reverse Stock Split
On September 16, 2019, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-4.5 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock, which was effected on September 27, 2019. The par value per share and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share and per share information included in the accompanying consolidated financial statements has been adjusted to reflect the Reverse Split.
Initial Public Offering
On October 10, 2019, the Company completed its initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 7,142,858 shares of its common stock at $20.00 per share. As a result of the IPO, the Company received $126.4 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. At the closing of the IPO, 88,112,733 shares of outstanding convertible preferred stock were automatically converted into 88,112,733 shares of common stock and a warrant to purchase 244,444 shares of convertible preferred stock was converted into a warrant to purchase 244,444 shares of common stock.
Follow-On Offering
On July 10, 2020, the Company issued and sold 8,214,285 shares of the Company’s common stock pursuant to a registration statement on Form S-1 (File No. 333-239689) and a registration statement on Form S-1 filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Securities Act”) (File No. 333-239747) (collectively, the “Registration Statements”). The Registration Statements became effective on July 7, 2020. The price of the shares sold in the follow-on offering was $42.00 per share and the Company received total gross proceeds from the offering of approximately $345.0 million. After deducting underwriting discounts and commissions of $20.7 million and offering expenses of $1.1 million, the net proceeds were $323.2 million.
Sales Agreement
In November 2020, the Company entered into a sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), under which the Company may from time to time offer and sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $300.0 million, through or to Cowen, acting as sales agent or principal. The shares will be offered and sold under the Company’s shelf registration statement on Form S-3 (the “S-3 Registration Statement”) and a related prospectus filed with the Securities and Exchange Commission on November 10, 2020. The Company will pay Cowen a commission of up to 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal fees and disbursements and provide Cowen with customary indemnification and contribution rights. As of December 31, 2020, no shares have been issued under the Sales Agreement.
Need for Additional Capital
The Company has incurred net losses since inception and expects such losses to continue over the next several years. At December 31, 2020, the Company had an accumulated deficit of $667.2 million. Management expects to incur additional losses in the future to conduct research and development and recognizes the need to raise additional capital to fully implement its business plan. The Company had, excluding restricted cash, $736.9 million of cash, cash equivalents, and short-term investments at December 31, 2020. Based on the Company’s business plans, management believes that its cash,
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
cash equivalents, and short-term investments as of December 31, 2020 will be sufficient to fund its operations for at least the next 12 months from the issuance date of these consolidated financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The consolidated financial statements include the accounts of Vir and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of foreign subsidiaries are translated into U.S. dollars at period-end exchange rates and non-monetary assets and liabilities are translated to U.S. dollars using historical exchange rates. Revenue and expenses are translated at average rates throughout the respective periods. Transaction gains and losses are included in other income (expense), net on the consolidated statements of operations and were immaterial for the years ended December 31, 2020, 2019 and 2018.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.
Segments
The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for purposes of allocating resources.
Concentration of Credit Risk, Credit Loss and Other Risks and Uncertainties
With the global spread of the current COVID-19 pandemic, the Company has implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on its business. The Company anticipates that the COVID-19 pandemic will have an impact on the clinical development timelines for some of its clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, clinical development and regulatory efforts, corporate development objectives and the value of and market for its common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease.
In addition, the Company is subject to a number of other challenges and risks similar to other biopharmaceutical companies in the early stage, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s products and protection of proprietary technology. If the Company does not successfully obtain regulatory approval, commercialize or partner any of its product candidates, it will be unable to generate revenue from product sales or achieve profitability. Also, to the extent the current COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and short and long-term investments. Cash and cash equivalents are deposited in checking and sweep accounts at a financial institution. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and investments, and issuers of the investments to the extent recorded on the consolidated balance sheets. As of December 31, 2020, the Company has no off-balance sheet concentrations of credit risk.
Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments — Credit Losses, (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets and certain other instruments. For receivables, the Company uses a new forward-looking expected loss model that generally results in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses are recognized as allowances rather than as reductions in the amortized cost of the securities.
The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status and financial condition of the entities. Specific allowance amounts are established to record the appropriate allowance for customers that have a higher probability of default. Balances are written off when determined to be uncollectible. The Company’s expected loss allowance methodology for the debt securities is developed by reviewing the extent of the unrealized loss, the size, term, geographical location, and industry of the issuer, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. The adoption of the guidance did not have a material impact on the consolidated financial statements and related disclosures and there was no allowance for losses on available-for-sale debt securities which were attributable to credit risk for the year ended December 31, 2020.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value.
Investments
Investments include available-for-sale securities and are carried at estimated fair value. The Company’s valuations of marketable securities are generally derived from independent pricing services based on quoted prices in active markets for similar securities at period end. Generally, investments with original maturities beyond three months at the date of purchase and which mature at, or less than 12 months from, the consolidated balance sheet date are considered short-term investments, with all others considered to be long-term investments. Unrealized gains and losses deemed temporary in nature are reported as a component of accumulated comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations.
The Company, through its investment in Brii Biosciences Limited, holds privately held equity securities in which the Company does not have a controlling interest or significant influence. The Company’s investment in Brii Biosciences Limited is recorded at cost and adjusted for impairments and observable price changes with the same or similar security from the same issuer. The valuation of the Company’s investment in Brii Biosciences Limited utilizes significant unobservable inputs or data in an inactive market and the valuation requires the Company’s judgment due to the absence of market prices and inherent lack of liquidity. Additionally, the determination of whether an orderly transaction is for the same or similar investment requires significant management judgment including the nature of the rights and obligations of its investments, the extent to which differences in those rights and obligations would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee. See Note 7—Collaboration and License Agreements for additional information on the Company’s investment in Brii Biosciences Limited.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents represent money market funds to secure standby letters of credit and security deposits with financial institutions, both under office and laboratory space lease agreements. Additionally, funds received from certain grants are restricted as to their use and are therefore classified as restricted cash and cash equivalents.
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of their useful lives or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in operations in the period realized. Maintenance and repairs are charged to operations as incurred.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. No material impairment losses have been incurred to date.
Acquired Intangible Assets
The Company’s intangible assets were acquired via business combinations or asset acquisitions. Indefinite-lived intangible assets represent the estimated fair value assigned to in-process research and development (“IPR&D”) acquired in a business combination. The Company reviews indefinite-lived intangible assets for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of the assets might not be recoverable. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, then it is written down to its adjusted fair value. As of December 31, 2020, there have been no such impairments. For IPR&D, if a product candidate derived from the indefinite-lived intangible asset is developed and commercialized, the useful life will be determined, and the carrying value will be amortized prospectively over that estimated useful life. Alternatively, if a product candidate is abandoned, the carrying value of the intangible asset will be charged to research and development expenses. IPR&D assets acquired as part of an asset acquisition are recorded at cost and expensed immediately if they have no alternative future uses.
Finite-lived intangible assets acquired are initially recognized at their fair value at the acquisition date. Amortization is computed using the straight-line method over the estimated useful lives of the respective finite-lived intangible assets, generally seven to 15 years. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired in a business combination. The Company tests goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired.
Revenue Recognition
Grant Revenue
Grants received, including cost reimbursement agreements, are assessed to determine if the agreement should be accounted for as an exchange transaction or a contribution. An agreement is accounted for as a contribution if the resource provider does not receive commensurate value in return for the assets transferred. Contributions are recognized as grant revenue when all donor-imposed conditions have been met.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
License and Cont.ract Revenue
In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when the Company’s customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as the Company satisfies a performance obligation.
For collaborative arrangements that fall within the scope of ASC 808, Collaborative Arrangements (“ASC 808”), the Company first determines which elements of the collaboration are deemed to be a performance obligation with a customer within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808 and are not subject to the guidance in ASC 606, the Company applies the revenue recognition model under ASC 606 or other guidance, as deemed appropriate. The Company has entered into a number of license and collaboration agreements that fall within the scope of ASC 606. The Company evaluates the promised goods or services in these agreements to determine which ones represent distinct performance obligations. These agreements may include the following types of promised goods or services: (i) grants of licenses, (ii) performance of research and development services, and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to the Company’s intellectual property.
Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period as required. These agreements may include the following types of consideration: non-refundable upfront payments, reimbursement for research services, research, development or regulatory milestone payments, and royalty and commercial sales milestone payments.
If there are multiple distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation based on their estimated standalone selling prices. For performance obligations satisfied over time, the Company estimates the efforts needed to complete the performance obligation and recognizes revenue by measuring the progress towards complete satisfaction of the performance obligation using an input measure.
For arrangements that include sales-based royalties, including commercial milestone payments based on pre-specified level of sales, the Company recognizes 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). Achievement of these royalties and commercial milestones may solely depend upon performance of the licensee.
Research and Development Expenses
To date, research and development expenses have related primarily to discovery efforts and preclinical and clinical development of product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development expenses include expenses related to license and collaboration agreements; contingent consideration from business acquisitions; personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel contributing to research and development activities; expenses incurred under agreements with third-party contract manufacturing organizations, contract research organizations, and consultants; clinical costs, including laboratory supplies and costs related to compliance with regulatory requirements; and other allocated expenses, including expenses for rent, facilities maintenance, and depreciation and amortization.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
The Company has and may continue to acquire the rights to develop and commercialize new product candidates from third parties. Upfront payments and research and development milestone payments made in connection with acquired license or product rights are expensed as incurred, provided that they do not relate to a regulatory approval milestone or assets acquired in a business combination.
The Company’s expense accruals for clinical trials and manufacturing are based on estimates of contracted services provided by third-party vendors not yet billed. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of its outstanding obligations to those third parties as of the period end. The accrual estimates are based on a number of factors, including the Company’s knowledge of the research and development programs and clinical manufacturing activities, the status of the programs and activities, invoicing to date, and the provisions in the contracts. The Company obtains information regarding unbilled services directly from these service providers and performs procedures to support its estimates based on its internal understanding of the services provided to date. However, the Company may also be required to estimate these services based on information available to its internal clinical and manufacturing administrative staff if such information is not able to be obtained timely from its service providers.
Stock-based Compensation
The Company recognizes stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company calculates the fair value of stock options using the Black-Scholes valuation model. Stock-based compensation is recognized using the straight-line method for awards that vest only upon the employee’s or non-employee’s continued service to the Company. Forfeitures are recognized as they occur.
Acquisitions
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired, including IPR&D projects, and liabilities assumed are recorded at their respective fair values as of the acquisition date. Any excess fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with the business combination are recorded at their fair values on the acquisition date and are remeasured each subsequent reporting period until the related contingencies are resolved and are classified as contingent consideration on the consolidated balance sheets. The changes in fair values of contingent consideration related to the achievement of various milestones related to product candidates are recorded within research and development expense.
When the Company determines that entities acquired do not meet the definition of a business, the transaction is accounted for as an acquisition of assets. Therefore, the consideration paid to acquire IPR&D is expensed, and no goodwill is recorded. Any contingent consideration is generally recognized only when it becomes payable or is paid.
Embedded Derivatives
The Company evaluates its acquisitions, collaborative arrangements and other business development transactions to determine if embedded components of these contracts meet the definition of a derivative under ASC 815, Derivatives and Hedging. In general, embedded derivatives are required to be bifurcated from the host instrument if (i) the embedded feature is not clearly and closely related to the host contract and (ii) the embedded feature, if considered a freestanding instrument, meets the definition of a derivative. Embedded derivatives are reported on the consolidated balance sheets at their estimated fair values. Contingent consideration related to asset acquisitions that meet the definition of an embedded derivative is classified as contingent consideration on the consolidated balance sheets. Any change in estimated fair values, as determined at each measurement period, are recorded in the consolidated statements of operations based on the nature of the related contingencies.Changes in fair values of embedded derivatives related to the achievement of various milestones for product candidates are recorded within research and development expense. Otherwise, changes in fair values are recorded within other income (expense), net.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (“ASC 842”). ASC 842 requires lessees to recognize all leases, including operating leases, on the balance sheet as a right-of-use (“ROU”) asset
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
and a lease liability, unless the lease is a short-term lease, defined as having a term of 12 months or less. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. In issuing ASU 2018-11, the FASB decided to provide another transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.ASC 842 is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted.The Company early adopted the standard on January 1, 2020 using the optional modified retrospective transition method by recognizing a cumulative effect adjustment to the opening balance of accumulated deficit as of that date. Results for the year ended December 31, 2020 are presented under ASC 842. The prior period amounts were not adjusted and continue to be reported in accordance with previous lease guidance, ASC 840, Leases.
The Company elected the package of practical expedients allowed under ASC 842, which permits the Company to account for its existing operating leases as operating leases under the new guidance, without reassessing the Company’s prior conclusions about lease identification, lease classification and initial direct cost.
Adoption of ASC 842 resulted in the recognition of operating lease ROU assets and operating lease liabilities of $16.8 million and $17.5 million, respectively, on the Company’s consolidated balance sheet as of January 1, 2020. The difference between the ROU assets and lease liabilities is attributed to the elimination of deferred rent. The adoption of the new standard did not have an impact on the Company's beginning accumulated deficit or statement of operations.
The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. On the lease commencement date, the Company estimates and includes in its lease payments any lease incentive amounts based on future events when (1) the events are within the Company’s control and (2) the event triggering the right to receive the incentive is deemed reasonably certain to occur. If the lease incentive received is greater or less than the amount recognized at lease commencement, the Company recognizes the difference as an adjustment to right-of-use asset and/or lease liability, as applicable.
As the implicit rate in the Company's leases is generally unknown, the Company uses an incremental borrowing rate estimated based on the information available at the lease commencement date in determining the present value of future lease payments. When calculating its estimated incremental borrowing rates, the Company considers its credit risk, the lease term, the total lease payments and the impact of collateral, as necessary. The lease terms may include options to extend or terminate the lease when the Company is reasonably certain it will exercise such options. ROU assets and lease liabilities are remeasured upon certain modifications to leases using the present value of remaining lease payments and estimated incremental borrowing rate upon lease modification. Rent expense for the Company's operating leases is recognized on a straight-line basis within operating expenses over the reasonably assured lease term.
The Company elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Pension Benefits
Accounting for the defined pension benefit plan for the Company’s Swiss subsidiary requires actuarial valuations based on significant assumptions for discount rates and expected long-term rates of return on plan assets. These and other assumptions such as salary growth, retirement, and mortality rates are evaluated and selected based on expectations or actual experience during each remeasurement date. Actual results in any given year may differ from those estimated because of economic and other factors. The Company recognizes a liability for the underfunded status of its defined benefit pension plan as a component of other long-term liabilities. Actuarial gains or losses and prior service costs or credits are deferred in accumulated other comprehensive income (loss) and amortized over the remaining service attribution periods of the employees under the corridor method.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. 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 losses and credit carryforwards and are 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 management determines it is more likely than not that some or all of the tax benefits will not be realized.
The Company’s tax positions are subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on several factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as any related net interest and penalties.
Net Loss Per Share
Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus any potential dilutive effects of common stock equivalents outstanding during the period calculated in accordance with the treasury stock method. Diluted net loss per share is the same as basic net loss per share since the effect of potentially dilutive securities is anti-dilutive.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company’s interim and annual reporting periods beginning after December 31, 2021. The Company early adopted ASU 2017-04 on January 1, 2020 and the adoption had no impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018‐13, Fair Value Measurement (Topic 820) (“ASU 2018-13”), which modifies, removes and adds certain disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and the adoption resulted in additional disclosures related to the Company’s Level 3 financial instruments. See Note 3—Fair Value Measurements.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which removes certain disclosures and added additional disclosures around weighted-average interest crediting rates for cash balance plans and explanation for significant gains and losses related to change in the benefit obligation for the period. The ASU will be effective for fiscal years ending after December 15, 2020 with a retrospective application for all periods presented. The Company adopted ASU 2018-14 at December 31, 2020 and the adoption had no material impact on its notes to consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 (“ASU 2018-18”). The amended guidance precludes presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The new guidance is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU 2018-18 as of January 1, 2020 and the adoption had no impact on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including the Company’s financial instruments. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which is known as the current expected credit loss, or CECL model, which generally results in more timely recognition of credit losses. The CECL model applies to most debt instruments (other than those measured at fair value), trade and other receivables, financial guarantee contracts, and loan commitments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). ASU 2019-04 modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis. As the Company is no longer an emerging growth company as of December 31, 2020, the Company is required to adopt Topic 326 in its consolidated financial statements, effective on January 1, 2020. The adoption of the guidance did not have a material impact on the consolidated financial statements and related disclosures and there was no allowance for losses on available-for-sale debt securities attributable to credit risk for the year ended December 31, 2020.
3.Fair Value Measurements
The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
The carrying amounts of the Company’s financial instruments, including accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.
The following tables summarize the Company’s Level 1 and Level 2 financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
(in thousands)
Assets:
(1) Includes $14.9 million of restricted cash equivalents.
(in thousands)
Assets:
(1) Includes $13.5 million of restricted cash equivalents.
(2) Includes $24.3 million classified as long-term investments
As of December 31, 2020 and 2019, there were no investments that have been in a continuous unrealized loss position for longer than 12 months. Total net unrealized gains of $0.1 million and $0.1 million were recorded in accumulated other comprehensive income (loss) at December 31, 2020 and 2019, respectively. As of December 31, 2020, no securities have contractual maturities of longer than one year.
Level 3 liabilities consist of contingent consideration and derivative liability as of December 31, 2019. As of December 31, 2020, Level 3 liabilities consist of contingent consideration.
Contingent Consideration
Contingent consideration includes potential milestone payments in connection with the acquisitions of Humabs Biomed SA (“Humabs”) and TomegaVax, Inc. (“TomegaVax”). See further discussion in Note 4—Acquisitions.
The estimated fair value of the contingent consideration related to the Humabs acquisition was determined by calculating the probability-weighted clinical, regulatory, and commercial milestone payments based on the assessment of the likelihood and estimated timing that certain milestones would be achieved. During the year ended December 31, 2020, the Company achieved two of the specified clinical milestones. As such, the Company paid a total of $20.0 million related to these milestones in 2020. As of December 31, 2020, the Company calculated the estimated fair value of the remaining clinical and regulatory milestones using the following significant unobservable inputs:
Unobservable input Value or Range (Weighted-Average)1
Discount rates 7% - 9% (8%)
Probability of achievement 14% - 32% (27%)
(1) Unobservable inputs were weighted based on the relative fair value of the underlying milestones.
For the commercial milestones, the Company used a Monte Carlo simulation because of the availability of a discrete revenue forecast and the increased likelihood that the clinical trials would commence. As of December 31, 2020, the Monte Carlo simulation assumed a commercial product launch and associated discrete revenue forecast, as well as the following significant unobservable inputs:
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Unobservable input Value or Range (Weighted-Average)1
Volatility 60%
Discount rate 11%
Probability of achievement 14% - 32% (28%)
(1) Unobservable inputs were weighted based on the relative fair value of the commercial milestone payments.
The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. As of December 31, 2020 and December 31, 2019, the estimated fair value of the contingent consideration related to the Humabs acquisition was $29.2 million and $14.9 million, respectively, with changes in the estimated fair value recorded in research and development expense in the consolidated statements of operations.
The estimated fair value of the contingent consideration related to the TomegaVax acquisition was determined by using a Monte Carlo simulation model which included estimates of both the probability and timing to achieve the required per share price of the Company’s common stock and incorporates assumptions as to expected volatility and discount rate. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. Although the TomegaVax acquisition was accounted for as an asset acquisition, such contingent consideration met the definition of an embedded derivative financial instrument. As of December 31, 2020, the fair value of the contingent consideration was estimated using the following significant unobservable inputs:
Unobservable input Range (Weighted-Average)1
Volatility 85%
Discount rates 0% - 0.1% (0.1%)
(1) Unobservable inputs were weighted based on the relative fair value of the underlying milestones.
As of December 31, 2020 and December 31, 2019, the estimated fair value of the contingent consideration related to the TomegaVax acquisition was $6.8 million and $2.7 million, respectively, with changes in the estimated fair value recorded in other income (expense), net in the consolidated statements of operations.
The estimated fair value of the contingent consideration related to the Humabs and TomegaVax acquisitions involves significant estimates and assumptions which give rise to measurement uncertainty.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Derivative Liability
The derivative liability relates to the Milestone Shares (as defined in Note 7) in connection with the collaboration and license agreement (the “Alnylam Agreement”) with Alnylam Pharmaceuticals, Inc. (“Alnylam”). See Note 7—Collaboration and License Agreements.
The estimated fair value of the derivative liability was calculated based on the estimated probabilities of the likelihood and timing to achieve the development milestone, a discount for lack of marketability, and the fair value of the Milestone Shares using the Company’s closing stock price as of December 31, 2019 and March 10, 2020, the date the Company achieved the development milestone. As of December 31, 2019, the estimated fair value of the derivative liability was $12.4 million. On March 10, 2020, the Company remeasured and reclassified the derivative liability of $29.2 million to additional paid-in capital upon achievement of the development milestone.
The following table sets forth the changes in the estimated fair value of the Company’s Level 3 financial liabilities (in thousands):
Contingent Consideration Derivative Liability Total
4.Acquisitions
Acquisition of TomegaVax
In September 2016, the Company entered into an agreement and plan of merger (“TomegaVax Merger Agreement”) to acquire all of the equity interests of TomegaVax. The primary asset purchased in the acquisition was an in-process cytomegalovirus (“CMV”) vector-based vaccine platform for use in HBV, HIV, and TB. The acquisition was accounted for as an asset purchase and the Company recorded the cash purchase price of $5.2 million in research and development expenses in 2016. The Company incurred transaction costs of $0.5 million.
In connection with the entry into the TomegaVax Merger Agreement, the Company also entered into a letter agreement with TomegaVax (the “TomegaVax Letter Agreement”), which provides for certain payments to TomegaVax’s former stockholders before September 2024, in each case so long as the Company is continuing to pursue the development of the TomegaVax technology. Under the terms of the TomegaVax Letter Agreement, the Company will be required to pay to the former stockholders of TomegaVax milestone payments of up to an aggregate of $30.0 million if the per-share price of the Company’s publicly traded common stock, or implied price per-share of the Company’s Series A-1 convertible preferred stock (or common stock upon conversion) upon a certain asset sale, merger or stock sale, is at least $45 (as adjusted in the case of any stock dividend, stock split or other similar recapitalization), with the amount of such payments determined by the share price and the stage of the Company’s clinical development at the time of the relevant event triggering the payment. The share price of the Company’s publicly traded common stock will be determined using the average of the daily volume-weighted average trading price of the Company’s common stock for each trading day during a consecutive 90-day period. The foregoing payments are payable (i) during any date after the completion of an initial public offering by the Company or any successor or affiliate controlling the TomegaVax technology, provided that no payment will be due before the first anniversary of the initial public offering, (ii) upon the sale of all assets related to the TomegaVax technology or (iii) upon a merger or stock sale of the Company or any successor or affiliate controlling the TomegaVax technology, in each case subject to certain conditions with respect to the timing of the payments. The payments under the TomegaVax Letter Agreement can be made in cash or shares of the Company’s common stock, at the discretion of the Company’s board of directors.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
The Company determined that the future milestone payments contain net settlement provisions and therefore, they were required to be accounted for as embedded derivatives under the relevant accounting guidance. As of December 31, 2020, the fair value of the embedded derivative was $6.8 million and is included in the contingent consideration liability on the consolidated balance sheet. In February 2021, the Company achieved the specified share price resulting in a $10.0 million payable to TomegaVax’s former stockholders within 90 business days.
Acquisition of Humabs
In August 2017, the Company acquired all of the outstanding equity of Humabs, a private Swiss company which discovers and develops monoclonal antibodies (“mAbs”) derived from individuals whose immune systems have successfully responded to major diseases. The Company acquired all of Humabs’ rights, title and interest in and to substantially all of the assets of Humabs except for rights under certain license agreements with third-parties. The Company is obligated to pass-through to the former Humabs shareholders any amounts received by Humabs under such license agreements, net of any program expenses. The transaction was accounted for as an acquisition of a business. The consideration paid consisted of $30.0 million in cash and 1,666,656 shares of common stock, valued at $2.5 million as of the date of the transaction, to former Humabs shareholders. In addition to the cash payment and issuance of common stock to the former Humabs shareholders at the acquisition date, the Company also agreed to pay additional amounts in cash upon the achievement of specified milestone events: (i) up to $135.0 million upon the achievement of clinical, regulatory and commercial milestones for an HBV product; and (ii) up to $105.0 million upon the achievement of clinical, regulatory and commercial milestones for another product, which the Company elected as a severe acute respiratory syndrome coronavirus 2 (“SARS-CoV-2”) product.
In May 2020, the Company achieved one of the specified clinical milestones for the HBV product. As such, the Company paid $10.0 million related to this milestone event in June 2020. In October 2020, the Company achieved another specified clinical milestone for the SARS-CoV-2 product and paid $10.0 million related to this milestone event. The estimated fair value of the remaining contingent consideration was $29.2 million as of December 31, 2020.
The acquired developed technologies that have associated patents issued are classified as finite-lived intangible assets and are amortized on a straight-lined basis over their estimated remaining useful lives, generally between seven to 12 years. The Company also acquired indefinite-lived intangible assets consisting of IPR&D. These assets will not be amortized until regulatory approval is obtained in a major market. At that time, the Company will determine the useful life of the asset and begin amortization. If the associated research and development effort is abandoned or otherwise impaired, the related IPR&D assets will be written-off and an impairment charge recorded. As of December 31, 2020, there have been no such impairments related to the IPR&D assets. The estimated fair value of the intangible assets was determined using the replacement cost method. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. None of the goodwill is expected to be deductible for income tax purposes.
Acquisition of Agenovir
In January 2018, the Company entered into an agreement and plan of merger (the “Agenovir Merger Agreement”) with Agenovir Corporation (“Agenovir”), under which the Company purchased all equity interests of Agenovir. The primary assets purchased in the acquisition were IPR&D programs in human papillomavirus (“HPV”) and HBV using CRISPR/Cas9. The Company concluded that the assets acquired and liabilities assumed did not meet the definition of a business as a limited number of inputs were acquired but no substantive processes were acquired. As such, the acquisition was accounted for as an asset purchase.
As purchase consideration, the Company paid cash of $11.5 million, issued an aggregate of 555,537 shares of Series A-2 convertible preferred stock valued at $1.8 million on the transaction date, assumed certain liabilities of $1.3 million, and incurred transaction costs of $0.7 million.
The Company allocated the purchase price of $15.3 million between property and equipment of $0.8 million and in-process research and development of $14.5 million, based on the relative fair values of the assets acquired, which was expensed as research and development expenses in the accompanying consolidated statement of operations for the year ended December 31, 2018.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
During a specified period following the closing of the Agenovir acquisition, the Company will be required to pay Agenovir’s former stockholders additional consideration up to $135.0 million in the aggregate for the achievement of specified development, regulatory and commercial milestones for the first HBV product.
None of the milestones have been achieved as of December 31, 2020, therefore no amounts were recognized relating to the contingent consideration.
5. Goodwill and Intangible Assets
Goodwill
Goodwill of $16.9 million represents the excess of the purchase price over the estimated fair value of the net assets acquired from Humabs. The Company tests goodwill for impairment on an annual basis or sooner, if deemed necessary. There was no impairment for the year ended December 31, 2020.
Intangible Assets
The following table summarizes the carrying amount of the Company’s finite-lived intangible assets (in thousands):
December 31, Weighted- Average Remaining Useful
Contract-based intangible asset 502 — 14.9
Finite-lived intangible assets, gross 7,502 7,000
Less accumulated amortization (3,581 ) (2,539 )
Less impairment of intangible assets (832 ) —
Finite-lived intangible assets, net $ 3,089 $ 4,461
Finite-lived intangible assets are carried at cost less accumulated amortization. The contract-based intangible asset resulted from the product approval of a sublicensed intellectual property right. The intellectual property right was previously accounted for as IPR&D. Amortization expense related to finite-lived intangible assets, included in research and development expenses on the consolidated statements of operations, totaled $1.0 million, $1.2 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Management reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, like that of property and equipment. During the third quarter of 2020, as a result of the availability of other research and analytics platforms, the Company abandoned certain of its acquired developed technologies and concluded that the full remaining book values of the assets were impaired. Therefore, $0.8 million was written off as an impairment charge which was classified as research and development expenses.
Based on the finite-lived intangible assets recorded as of December 31, 2020, the estimated future amortization expense for the next five years is as follows (in thousands):
Year Ending December 31:
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Indefinite-Lived Intangible Assets
As of December 31, 2020 and 2019, the Company had indefinite-lived intangible assets of $30.7 million and $31.2 million, respectively, related to the purchased IPR&D from the Humabs acquisition. In December 2020, $0.5 million was reclassed as a finite-lived intangible asset due to the product approval of a sublicensed intellectual property right. No impairment losses have been recorded for the years ended December 31, 2020 and 2019.
6. Grant Agreements
Bill & Melinda Gates Foundation Grants
Campylo/EPEC/EAEC Grant
As part of the Company’s acquisition of Humabs in August 2017, the Company acquired a grant agreement with the Bill & Melinda Gates Foundation under which it was awarded a grant totaling up to $4.7 million (the “2017 Grant”). The 2017 Grant supported the Company’s discovery, characterization and selection of human monoclonal antibodies with pre-clinical efficacy against three enteric pathogens responsible for life-threatening diarrhea in neonates. The 2017 Grant expired on May 31, 2019.
Payments received in advance that were related to future research activities were deferred and recognized as revenue when the donor-imposed conditions were met, which was as the research and development activities were performed. The Company recognized grant revenue of zero, $0.9 million and $2.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Human Immunodeficiency Virus (“HIV”) Grant
On January 26, 2018, the Company entered into a grant agreement with the Bill & Melinda Gates Foundation under which it was awarded a grant totaling up to $12.2 million for its HIV program (the “HIV Grant”). In February 2020, the parties amended the HIV Grant under which the Company was awarded a supplemental grant of $8.6 million. Under the amendment, the HIV Grant will remain in effect until December 31, 2021, unless earlier terminated by the Bill & Melinda Gates Foundation for the Company’s breach, failure to progress the funded project, in the event of the Company’s change of control, change in the Company’s tax status, or significant changes in the Company’s leadership that the Bill & Melinda Gates Foundation reasonably believes may threaten the success of the project.
In December 2020, the Company achieved a specified milestone under the HIV Grant which triggered a $1.9 million payment due to the Company from the Bill & Melinda Gates Foundation. As of December 31, 2020, the Company recorded a receivable, which is included within prepaid expenses and other current assets, and current portion of deferred revenue for the $1.9 million, which was subsequently received in January 2021.
Payments received in advance that are related to future research activities are deferred and recognized as revenue when the donor-imposed conditions are met, which is as the research and development activities are performed. The Company recognized grant revenue of $6.4 million, $3.7 million and $4.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Tuberculosis (“TB”) Grant
On March 16, 2018, the Company entered into a grant agreement with the Bill & Melinda Gates Foundation under which it was awarded a grant totaling up to $14.9 million for its TB program (the “TB Grant”). The parties amended the agreement in May 2020 under which the grant term was extended to February 28, 2021, unless earlier terminated by the Bill & Melinda Gates Foundation for the Company’s breach, failure to progress the funded project, in the event of the Company’s change of control, change in the Company’s tax status, or significant changes in the Company’s leadership that the Bill & Melinda Gates Foundation reasonably believes may threaten the success of the project. The Company estimates that $3.5 million of the funds received in advance and previously recorded as deferred revenue would not be earned by February 2021 and is therefore included within accrued and other liabilities as of December 31, 2020.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Payments received in advance that are related to future research activities are deferred and recognized as revenue when the donor-imposed conditions are met, which is as the research and development activities are performed. The Company recognized grant revenue of $2.2 million, $1.9 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
National Institutes of Health
As part of the Company’s acquisition of TomegaVax in September 2016, the Company acquired grant agreements related to TomegaVax’s research effort in infectious diseases and cancer that entitled them to several awards under the Small Business Innovation Research Program from the National Institutes of Health (“NIH”). Through December 31, 2020, the Company has acquired or been awarded grants from NIH totaling $5.1 million. These grants are cost plus fixed fee agreements in which the Company is reimbursed for its direct and indirect costs. Only costs that are allowable under certain government regulations and NIH’s supplemental policy and procedure manual may be claimed for reimbursement, subject to government audit.
The Company recognized grant revenue of $0.6 million, $0.9 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
7. Collaboration and License Agreements
GSK
On June 9, 2020, the Company, Glaxo Wellcome UK Limited and Beecham S.A. (referred to individually and together, as “GSK”) entered into a definitive collaboration agreement under the terms set forth in the preliminary collaboration agreement entered into by the Company and certain GSK entities in April 2020 (the “Preliminary Agreement”) (such definitive collaboration agreement, the “GSK Agreement”). Concurrently with the execution of the Preliminary Agreement, the Company entered into a stock purchase agreement (the “2020 Stock Purchase Agreement”) with Glaxo Group Limited (“GGL”), an affiliate of GSK, under which GGL purchased 6,626,027 shares of the Company’s common stock on April 29, 2020, at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million. After receipt of antitrust clearance on April 22, 2020, the Preliminary Agreement became effective as of April 29, 2020, which was also the closing date for the associated 2020 Stock Purchase Agreement between the parties (“Effective Date”). Under the terms of the GSK Agreement, the Company and GSK agreed to collaborate to research, develop and commercialize products for the prevention, treatment and prophylaxis of diseases caused by SARS-CoV-2, the virus that causes COVID-19, and potentially other coronaviruses. The collaboration is focused on the development and commercialization of three types of collaboration products under three programs: (1) antibodies targeting SARS-CoV-2, and potentially other coronaviruses (the “Antibody Program”); (2) vaccines targeting SARS-CoV-2, and potentially other coronaviruses (the “Vaccine Program”), and (3) products based on genome-wide CRISPR screening of host targets expressed in connection with exposure to SARS-CoV-2, and potentially other coronaviruses (the “Functional Genomics Program”).
For four years following the Effective Date, the parties will conduct certain research and development activities under mutually agreed development plans and associated budgets for each of the three programs, and under the oversight of a joint steering committee (“JSC”). The Company will be primarily responsible for the development and clinical manufacturing activities for the Antibody Program, and for conducting the initial development activities directed to a vaccine in the Vaccine Program. GSK will be primarily responsible for the commercialization activities for the Antibody Program (except in connection with sales of antibody products licensed to WuXi Biologics (Hong Kong) Limited in greater China), the later-stage development, manufacturing and commercialization activities for the Vaccine Program and the development, manufacturing and commercialization activities for the Functional Genomics Program. Subject to an opt-out mechanism, the parties will share all development costs, manufacturing costs and costs and expenses for the commercialization of the collaboration products, with the Company bearing 72.5% of such costs for the antibody products, 27.5% of such costs for the vaccine products, and equal sharing of such costs for the functional genomics products.
On a collaboration product-by-collaboration product basis, each party will have the one-time right, at specified points in development, to opt-out of its co-funding obligations, and the other party may, at its election, either pursue such program unilaterally, or also cease research and development activities and funding of such collaboration product. If the opt-out provisions are not exercised by either party subject to the terms of the GSK Agreement, the parties would share all profits and losses arising from any collaboration product in the same ratios in which the parties bore development costs for such collaboration program. For each collaboration product as to which a party exercises its opt-out right, the commercializing
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
party will pay to the opt-out party royalties on net sales of the applicable collaboration product at rates based on factors such as the stage of development of such collaboration product at the time the opt-out party exercises such right, and whether the opt-out party is the lead party, or a portion of the sublicense revenue if the commercializing party chooses to sublicense or otherwise divest rights to such collaboration product. On an antibody product-by-antibody product basis, the Company has a co-promotion right for such antibody product in the United States, under which the Company will have the right to perform up to 20% of details in connection with such antibody product.
The GSK Agreement will remain in effect with respect to each collaboration program for as long as there is a collaboration product being developed or commercialized by the lead party, or the non-opt-out party, in such program. Either party has the right to terminate the GSK Agreement in the case of the insolvency of the other party, an uncured material breach of the other party with respect to a collaboration program or collaboration product, or as mutually agreed by the parties. The GSK Agreement superseded and replaced the Preliminary Agreement between the parties.
The Company considered the ASC 606 criteria for combining contracts and determined that the GSK Agreement and 2020 Stock Purchase Agreement should be combined into a single contract because they were negotiated and entered into in contemplation of one another. The fair market value of the common stock issued to GGL was $206.7 million, based on the closing stock price of $36.70 on the date of execution of the Preliminary Agreement and 2020 Stock Purchase Agreement and taking into account a discount for the lack of marketability due to the restrictions in place on the underlying shares, resulting in a $43.3 million premium received by the Company.The Company accounted for the common stock issued to GGL based on its fair market value on the transaction date and determined that the premium paid by GSK should be attributed to the transaction price of the GSK Agreement.
The Company concluded that the GSK Agreement contained four units of account: (i) the license granted to GSK under the Antibody Program (the “Antibody License”); (ii) the research and development activities (including clinical manufacturing) under the Antibody Program; (iii) the research and development activities under the Vaccine Program; and (iv) the research and development activities under the Functional Genomics Program. The Company considered the guidance in ASC 606 to determine which of these elements of the GSK Agreement are performance obligations with a customer. The Company determined that the Antibody License is within the scope of ASC 606 and accordingly, accounted for the Antibody License as a distinct performance obligation under ASC 606. The Antibody License is a functional intellectual property and is distinct from the associated research and development activities to be performed under the program due to its significant standalone functionality. All other elements of the GSK Agreement including the research and development activities and participation in the JSC and subcommittees for each collaboration program were not determined to be distinct performance obligations with a customer.
The transaction price for the Antibody License at inception was determined to be $43.3 million, representing the premium on the sale of common stock to GSK. The Company determined that GSK can benefit from the Antibody License at the time of grant and therefore, the related performance obligation is satisfied at a point in time. As such, the Company recognized the $43.3 million as contract revenue during the second quarter of 2020. Additionally, the Company is entitled to consideration from GSK related to profit and loss sharing arrangements (including royalties) contingent upon future sales of collaboration products under the Antibody Program. Under ASC 606, the Company will recognize the revenue when the related sales occur as these amounts have been determined to relate predominantly to the Antibody License granted to GSK. The Company will re-evaluate the transaction price in each reporting period.
The remaining units of account of the GSK Agreement were determined to be within the scope of ASC 808 as the Company and GSK are both active participants in the development, manufacturing and commercialization activities and are exposed to significant risks and rewards that are dependent on the commercial success of the activities of the arrangement. Furthermore, the Company and GSK participate in the commercial profit and loss sharing arrangement for each program commensurate with each party’s cost-sharing responsibilities during research and development. Because ASC 808 does not provide recognition and measurement guidance, the Company determined that the guidance in ASC 730, Research and Development, was appropriate to analogize to based on the nature of the cost-sharing provisions of the agreement. The Company has concluded that payments to or reimbursements from GSK related to these services will be accounted for as an increase to or reduction of research and development expenses, respectively. The Company also concluded that any payments from GSK related to the profit and loss sharing arrangement (including royalties) contingent upon the commercialization of the products under the Vaccine and Functional Genomics Programs will be analogized to ASC 606 and therefore, will be recognized when the related sales occur.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Costs associated with co-development activities performed under the agreement are included in research and development expenses on the consolidated statements of operations, with any reimbursement of costs by GSK reflected as a reduction of such expenses. During the year ended December 31, 2020, the Company recognized $25.4 million as research and development expense under the GSK Agreement. The Company has a payable to GSK of $28.0 million included in accrued liabilities and other liabilities as of December 31, 2020.
Brii Biosciences
In May 2018, the Company entered into a collaboration, option and license agreement (the “Brii Agreement”) with Brii Biosciences Limited (previously named BiiG Therapeutics Limited) (“Brii Bio Parent”) and Brii Biosciences Offshore Limited (“Brii Bio”), pursuant to which the Company granted to Brii Bio, with respect to up to four of the Company’s programs, an exclusive option to obtain exclusive rights to develop and commercialize compounds and products arising from such programs in China, Taiwan, Hong Kong and Macau (collectively, the “China Territory”) for the treatment, palliation, diagnosis, prevention or cure of acute and chronic diseases of infectious pathogen origin or hosted by pathogen infection (the “Field of Use”). The Company’s HBV siRNA program being developed under the Alnylam Agreement (described below) is included within the Brii Agreement as a program for which Brii Bio may exercise one of its options. In partial consideration for the options granted by the Company to Brii Bio, Brii Bio Parent and Brii Bio granted the Company, with respect to up to four of Brii Bio Parent’s or Brii Bio’s programs, an exclusive option to be granted exclusive rights to develop and commercialize compounds and products arising from such Brii Bio programs in the United States for the Field of Use. The number of options that the Company may exercise for a Brii Bio program is limited to the corresponding number of options that Brii Bio exercises for a Vir program.
As partial consideration for the Company’s entry into the Brii Agreement, upon closing of Brii Bio Parent’s Series A preferred stock financing, the Company received ordinary shares equal to 9.9% of the outstanding shares in Brii Bio Parent. As a result of Brii Bio’s right to exercise one of its options for the Company’s HBV siRNA program, under the terms of the Alnylam Agreement, as amended, the Company transferred to Alnylam a specified percentage of such equity consideration allocable to such program as discussed below.
With respect to programs for which Brii Bio exercises its options, Brii Bio will be required to pay the Company an option exercise fee for each such Vir program ranging from the mid-single-digit millions up to $20.0 million, determined based on the commercial potential of the licensed program. Brii Bio will also be required to pay regulatory milestone payments on a licensed product-by-licensed product basis ranging from the mid-single-digit millions up to $30.0 million, also determined based on the commercial potential of such program. Following commercialization, Brii Bio will be required to make sales milestone payments based on certain specified levels of aggregate annual net sales of products arising from each licensed program in the China Territory, up to an aggregate of $175.0 million per licensed program. Brii Bio also will pay royalties to the Company that range from the mid-teens to the high-twenties, as described below.
Upon exercise of each option for a Brii Bio program, the Company will be required to pay to Brii Bio an option exercise fee ranging from the low tens of millions to up to $50.0 million, determined based on the commercial potential of the licensed program. The Company will be required to make regulatory milestone payments to Brii Bio on a licensed product-by-licensed product basis ranging from the low tens of millions up to $100.0 million, also determined based on the commercial potential of such program. The Company will also be required to make sales milestone payments based on certain specified levels of aggregate annual net sales of products in the United States arising from each licensed program, up to an aggregate of $175.0 million per licensed program.
In addition, the Company is obligated under the Brii Agreement to pay Brii Bio tiered royalties based on net sales of products arising from the licensed programs in the United States, and Brii Bio is obligated to pay the Company tiered royalties based on net sales of products arising from the licensed programs in the China Territory. The rates of royalties payable by the Company to Brii Bio, and by Brii Bio to the Company, on net sales range from mid-teens to high-twenties. Each party’s obligations to pay royalties expires, on a product-by-product and territory-by-territory basis, on the latest of 10 years after the first commercial sale of such licensed product in the United States or China Territory, as applicable; the expiration or abandonment of licensed patent rights that cover such product in the United States or China Territory, as applicable; and the expiration of regulatory exclusivity in the United States or the China Territory, as applicable. Royalty rates are subject to specified reductions and offsets.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
The Brii Agreement will remain in force until the expiration of all options or, if any option is exercised, expiration of all royalty payment obligations for all licensed products within such licensed program, unless terminated in its entirety or on a program-by-program basis by either party. Each party may terminate for convenience all rights and obligations with respect to any program for which it has an option, with 30 days’ written notice (if the terminating party has not exercised an option for such program) or 180 days’ notice (following the exercise of an option for such program). The Brii Agreement may also be terminated by either party for insolvency of the other party, and either party may terminate the Brii Agreement in its entirety or on a program-by-program basis for the other party’s uncured material breach on 60 days’ written notice (or 30 days’ notice following failure to make payment).
The Company has determined that Brii Bio Parent and its wholly-owned subsidiary Brii Bio are variable interest entities due to their reliance on future financing and having insufficient equity at risk. However, the Company does not have the power to direct activities that most significantly impact the economic success of these entities and is not considered the primary beneficiary of these entities. Therefore, the Company does not consolidate Brii Bio Parent or Brii Bio. The Company also determined that it does not exercise significant influence over Brii Bio Parent or Brii Bio. The investment in Brii Bio Parent was recorded at its initial estimated fair value of $6.6 million. The Company also recorded a contract liability of $6.6 million within deferred revenue which represents deferred consideration for the four options that the Company granted to Brii Bio. The deferred consideration will be recognized when Brii Bio exercises its options or the options expire. The Company accounts for its investment in Brii Bio Parent’s ordinary shares at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment in Brii Bio Parent.
In February 2020, the Company, Alnylam and Brii Bio Parent executed a share transfer agreement under the terms of the Alnylam Agreement (see Alnylam section below). Under the share transfer agreement, the Company transferred a portion of its ordinary shares held in Brii Bio Parent to Alnylam in connection with the execution of the Brii Agreement. As of December 31, 2020 and 2019, the carrying value of the investment in Brii Bio was $5.7 million and $6.6 million, respectively, which is included in other assets on the consolidated balance sheets.
The Company’s maximum exposure to loss under the Brii Agreement is represented by options to acquire licenses to develop and commercialize potential products and future milestone payments. The ultimate expense that the Company incurs under the Brii Agreement cannot be quantified at this time as the amount will vary based on the timing and outcome of research activities.
Option Exercise by Brii Bio
In June 2020, Brii Bio exercised its option to obtain exclusive rights to develop and commercialize compounds and products arising from VIR-2218 in the China Territory. In consideration of the Company’s grant to Brii Bio of an exclusive license related to VIR-2218 in the China Territory, the Company received a $20.0 million option exercise fee in connection with the option exercise. Also, the Company is eligible to receive the following payments related to VIR-2218 in the China Territory: a $30.0 million regulatory milestone payment, up to $175.0 million in sales-based milestone payments, and royalties on net sales ranging from high-teens to high-twenties.
The Company evaluated the transaction under ASC 606 and identified one performance obligation consisting of the license granted to Brii Bio. Under the Brii Agreement, Brii Bio is responsible for performing all research and development activities and the Company does not have any other performance obligations within the context of ASC 606 under the arrangement after the option exercise. The transaction price is determined to be $22.7 million which consists of the $20.0 million option exercise fee and $2.7 million of the deferred revenue allocated to the VIR-2218 option at the inception of the Brii Agreement. The Company determined that the license is considered a functional intellectual property that is a distinct performance obligation. Specifically, the Company believes the license is capable of being distinct, as Brii Bio has the capabilities to develop the license either on its own or by contracting other third-parties. Brii Bio can benefit from the license at the time of grant and therefore, the related performance obligation is satisfied at a point in time. Additionally, all potential future milestones and other payments are constrained because the Company cannot conclude it is probable that a significant reversal in the amount recognized would not occur. The Company will re-evaluate the transaction price in each reporting period.
During the second quarter of 2020, the Company recognized the $22.7 million as license revenue from a related party. The Company separately paid $10.0 million, half of the option exercise proceeds, to Alnylam in connection with the Alnylam Agreement that was recognized as research and development expense during the same period.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Alnylam
October 2017 Agreement
In October 2017, the Company entered into the Alnylam Agreement for the development of siRNA products for the treatment of HBV and following the exercise of certain program options, the development and commercialization of siRNA therapeutic products directed to up to four other infectious disease targets selected by the Company. The technology licensed under the Alnylam Agreement forms the basis of the Company’s siRNA technology platform.
Under the Alnylam Agreement, the Company obtained a worldwide, exclusive license to develop, manufacture and commercialize the HBV siRNA product candidates, including VIR-2218, for all uses and purposes other than agricultural, horticultural, forestry, aquaculture and other residential applications, such excluded fields, the Excluded Fields. In addition, Alnylam granted the Company an exclusive option, for each of the infectious disease siRNA programs directed to the Company’s selected targets, to obtain a worldwide, exclusive license to develop, manufacture and commercialize siRNA products directed to the target of each such program for all uses and purposes other than the Excluded Fields. On a product-by-product basis for each product arising from the HBV and, following the Company’s option exercise, the infectious disease programs, Alnylam has an exclusive option, exercisable during a specified period prior to the initiation of a Phase 3 clinical trial for each such product, to negotiate and enter into a profit-sharing agreement for such product.
The Company and Alnylam are jointly responsible for funding the initial research and development activities for VIR-2218 through the completion of proof of concept trials. Prior to the exercise of the Company’s option for each siRNA program directed to one of the Company’s selected infectious disease targets, Alnylam is responsible for conducting all development activities, at the Company’s expense, in accordance with an agreed upon development plan. Following the Company’s exercise of an option for a program and payment of the program option exercise fee and any outstanding program costs due to Alnylam, the Company is solely responsible, at the Company’s expense (subject to Alnylam’s exercise of a profit-sharing option), for conducting all development, manufacture and commercialization activities for products arising from each such program. If Alnylam exercises a profit-sharing option for a product, the Company will negotiate the terms of such profit-sharing agreement, which will include sharing equally with Alnylam all subsequent costs associated with the development of such product, as well as the profits and losses in connection with such product, subject to reimbursement by Alnylam of a portion of specified development costs in certain circumstances.
Under the Alnylam Agreement, the Company paid Alnylam an upfront fee of $10.0 million and issued to Alnylam 1,111,111 shares of the Company’s common stock. Additionally, the receipt of consideration from Brii Bio as discussed above triggered a requirement under the Alnylam Agreement to transfer a portion of the consideration, consisting of equity in Brii Bio Parent, to Alnylam. Accordingly, the Company recognized a liability of $0.8 million which remained outstanding as of December 31, 2019. In February 2020, the Company settled this liability by transferring to Alnylam a specified percentage of its equity consideration received from Brii Bio Parent.
Upon the achievement of a certain development milestone, as further discussed below, the Company was obligated to issue shares of the Company’s common stock equal to the lesser of (i) 1,111,111 shares or (ii) a certain number of shares based on the Company’s stock price at the time such milestone is achieved (the “Milestone Shares”). The Company will be required to pay Alnylam up to $190.0 million in the aggregate for the achievement of specified development and regulatory milestones by the first siRNA product directed to HBV, and up to $115.0 million for the achievement of specified development and regulatory milestones by the first product directed to the target of each infectious disease siRNA program for which the Company exercised its option. Following commercialization, the Company will be required to pay to Alnylam up to $250.0 million in the aggregate for the achievement of specified levels of net sales by siRNA products directed to HBV and up to $100.0 million for the achievement of specified levels of net sales by products directed to the target of each infectious disease siRNA program for which the Company exercised its option. The Company may also be required to pay Alnylam tiered royalties at percentages ranging from the low double-digits to mid-teens on annual net sales of HBV products, and tiered royalties at percentages ranging from the high single-digits to the sub-teen double-digits on annual net sales of licensed infectious disease products, in each case subject to specified reductions and offsets. The royalties are payable on a product-by-product and country-by-country basis until the later of the expiration of all valid claims of specified patents covering such product in such country and 10 years after the first commercial sale of such product in such country.
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VIR BIOTECHNOLOGY, INC.
Notes to Consolidated Financial Statements
The term of the Alnylam Agreement will continue, on a product-by-product and country-by-country basis, until the expiration of all royalty payment obligations under the Alnylam Agreement. If the Company does not exercise its option for an infectious disease program directed to one of its selected targets, the Alnylam Agreement will expire upon the expiration of the applicable option period with respect to such program. However, if Alnylam exercises its profit-sharing option for any product, the term of the Alnylam Agreement will continue until the expiration of the profit-sharing arrangement for such product. The Company may terminate the Alnylam Agreement on a program-by-program basis or in its entirety for any reason on 90 days’ written notice. Either party may terminate the agreement for cause for the other party’s uncured material breach on 60 days’ written notice (or 30 days’ notice for payment breach), or if the other party challenges the validity or enforceability of any patent licensed to it under the Alnylam Agreement on 30 days’ notice.
At the inception of the Alnylam Agreement, the Milestone Shares did not meet the net settlement criteria to be accounted for as an embedded derivative. Therefore, there was no liability recorded from the inception of the Alnylam Agreement through September 30, 2019. Upon completion of the Company’s IPO in October 2019, the net settlement criteria of the definition of an embedded derivative had been met for the Milestone Shares. The initial fair value of the embedded derivative was estimated to be $13.6 million and was charged to research and development expense in the fourth quarter of 2019. The estimated fair value of the derivative liability was $12.4 million as of December 31, 2019. On March 10, 2020, the Company achieved the specified development milestone relating to the Milestone Shares. Consequently, the Company remeasured and reclassified the derivative liability to additional paid-in capital. The estimated fair value of the derivative liability was $29.2 million as of March 10, 2020. In addition to these Milestone Shares, the Company paid Alnylam $15.0 million in April 2020 in connection with the achievement of the specified development milestone.
Second and Third Amendments
In March and April 2020, the Company and Alnylam entered into a second and third amendments to the Alnylam Agreement (as amended, the “Amended Alnylam Agreement”) to expand the parties’ existing collaboration to include the development and commercialization of siRNA products targeting SARS-CoV-2, and potentially other related coronaviruses, and up to three targeting human host factors for SARS-CoV-2 (collectively, the “COVID Collaboration Targets”).
Under both amendments, the parties agreed to be each responsible for the pre-clinical development costs incurred by each party in performing its allocated responsibilities under an agreed-upon initial pre-clinical development plan for COV Products. Following the completion of initial pre-clinical development activities, the Company had a pre-agreed program option to progress one or more candidates from the COVID Collaboration Targets into further development, subject to Alnylam’s right to opt-in, during a specified period, to share equally with the Company the profits and losses in connection with development and commercialization of a coronavirus product.
In December 2020, the Company and Alnylam entered into a letter amendment (the “Letter Agreement”), amending the Amended Alnylam Agreement, to modify certain funding and governance provisions in connection with the siRNA products directed to the COVID Collaboration Targets, including VIR-2703 (the “COV Target”), and to modify certain rights of each party with respect to products arising from such programs.
Pursuant to the Letter Agreement, Alnylam will be responsible for conducting pre-clinical research activities set forth in the existing workplan for the COV Target (the “COV Workplan”) at its discretion and sole expense, and the Company will no longer have the obligation to reimburse Alnylam for any share of costs incurred by Alnylam in conducting activities under the COV Workplan after July 1, 2020.
In connection with the Letter Agreement, the Company will no longer have a pre-agreed program option, but, if Alnylam selects a development candidate arising from the COV Workplan, the Company and Alnylam have agreed to negotiate in good faith an agreement with respect to the COV Target and siRNA products directed thereto. If Alnylam terminates the COV Workplan, does not select a development candidate, or the Company is unable to agree upon the terms of a definitive agreement, then the COV Target and related siRNA program will no longer be included within the Amended Alnylam Agreement and all rights to the siRNA program directed to VIR-2703 will revert to Alnylam.
Research and Development Expenses Recognized for the Period
In addition to the Milestone Shares, $15.0 million milestone payment to Alnylam, and the $10.0 million payment resulting from Brii Bio’s option exercise in the first half of 2020, the Company incurred expenses under the Alnylam Agreement of
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Notes to Consolidated Financial Statements
$11.5 million for the year ended December 31, 2020. For the years endedDecember 31, 2019 and 2018, the Company incurred expenses under the Alnylam Agreement of $18.1million and $8.3 million, respectively.
WuXi Biologics
In February 2020, the Company entered into a development and manufacturing collaboration agreement with WuXi Biologics (Hong Kong) Limited (“WuXi Biologics”) (the “WuXi Biologics Collaboration Agreement”), for the clinical development, manufacturing, and commercialization of the Company’s proprietary antibodies developed for SARS-CoV-2. Under the WuXi Biologics Collaboration Agreement, WuXi Biologics will conduct cell-line development, process and formulation development, and initial manufacturing for clinical development. WuXi Biologics will have the right to commercialize products incorporating such antibodies in greater China under an exclusive license granted for the selected antibodies that have been developed. The Company will have the right to commercialize such products in all other markets worldwide.
WuXi Biologics will perform mutually agreed development and manufacturing activities, under individual statements of work. In addition, the parties agreed that WuXi Biologics will pay the Company tiered royalties at percentages ranging from the high single-digits to mid-teens on annual net sales of all products sold by WuXi Biologics in greater China. The royalties are payable for a specified, standard royalty term. In addition, if WuXi Biologics sublicenses its commercialization rights to a third party, WuXi Biologics will pay the Company a percentage of the sublicense revenue received from such third party. The WuXi Biologics Collaboration Agreement will continue until the expiration of WuXi Biologics’ payment obligations to the Company, unless terminated earlier. If terminated earlier, the WuXi Biologics Collaboration Agreement may be terminated by (i) the written agreement of both parties, (ii) WuXi Biologics following the one year anniversary of the WuXi Biologics Collaboration Agreement effective date with respect to the entire agreement or on a product by product basis with 90 days’ prior written notice or (iii) by either party if the other party materially breaches the WuXi Biologics Collaboration Agreement and fails to cure such breach within sixty days.
Rockefeller University