SUTRO BIOPHARMA INC
For the period ended Dec 31, 2023. Filed Mar 25, 2024.
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FY2023 · Filed Mar 25, 2024
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Item 8. Report of Independent Registered Public Accounting Firm
Report of Independent Regis tered Public Accounting Firm
To the Stockholders and the Board of Directors of Sutro Biopharma, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Sutro Biopharma, Inc. (the Company) as of December 31, 2023, and 2022, the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| Royalty agreement with Blackstone Life Sciences | |
| Description of the Matter | As discussed in Note 2 and Note 10 to the financial statements, on June 21, 2023, the Company closed a purchase and sale agreement (the “Agreement”) with Blackstone Life Sciences (“Blackstone”), pursuant to which the Company sold to Blackstone its 4% royalty in potential net sales of Vaxcyte Inc.’s products and received an upfront payment of $140 million. The Company concluded the Agreement represented a sale of future royalties and accounted for the transaction under Accounting Standards Codification (ASC) 470 as debt. The Company estimated the amount of future royalty payments and expected interest expense using the effective interest rate method over the life of the agreement. The carrying |
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| value of the liability related to the sale of future royalties at December 31, 2023 was $149.1 million and the interest expense for the year ended December 31, 2023 was $12.6 million. The auditing of the Agreement was complex due to the significant judgment and estimation used by management related to the sale of future royalties and due to the nature and extent of audit effort required to address these matters. The accounting involves significant judgment and inherent uncertainties as it relates to the Company's estimate of future sales for which royalties will be paid, which in turn significantly impacts the calculation of interest expense recognized. | |
| How We Addressed the Matter in Our Audit | To test the carrying value of the liability related to the sale of future royalties and the amount of interest expense recognized, our audit procedures included, among others, assessing the methodology used, evaluating the reasonableness of the significant estimates discussed above, and testing the completeness and accuracy of the underlying data used by the Company. Specifically, we tested the calculation of the liability balance including the classification of the balance as non-current. In addition, we evaluated the Company’s estimate of future sales, by comparing the estimates to available peer data and market research. We also recalculated the current year interest expense using the effective interest method based on the Company’s estimate of future royalties to be paid. We involved professionals outside of the core audit team to assist in the assessment of the estimation methodology and significant assumptions used in determining the future sales for which royalties will be paid. |
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/s/Ernst & Young LLP
We have served as the Company’s auditor since 2007.
San Mateo, California
March 25, 2024
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