Arcus Biosciences Inc

Note 1. Organization, liquidity and capital resources

Organization

Arcus Biosciences, Inc. (referred to as "Arcus," "we," "our," "us," or the "Company") is a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in multiple Phase 3 registrational studies targeting lung and gastrointestinal ("GI") cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications.

We operate and manage our business asone reportable and operating segment, which is the business of developing and commercializing highly differentiated therapies that have a meaningful impact on patients.

Liquidity and Capital Resources

As of September 30, 2024, we had cash, cash equivalents and marketable securities of $1.1 billion, which we believe will be sufficient to fund our planned operations for a period of at least twelve months following the date of filing of this report.

Note 2. Summary of significant accounting policies

Basis of Presentation

These interim financial statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 21, 2024. There have been no significant changes to our summary of significant accounting policies as disclosed in that filing.

These interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and include all normal and recurring adjustments that management believes are necessary for a fair presentation of the periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2023 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

Operating results for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any future period.

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed and updated each period to reflect current information. Actual results may differ materially from those estimates.

Recent Accounting Pronouncements

There have been no new accounting pronouncements issued or adopted during the period with a significant impact to our financial statements.

Note 3. Related party - Gilead Sciences, Inc.

In 2020, we and Gilead entered into an Option, License and Collaboration Agreement (the "Gilead Collaboration Agreement"), Common Stock Purchase Agreement (the "Stock Purchase Agreement"), and Investor Rights Agreement (the "Investor Rights Agreement").

The Gilead Collaboration Agreement was amended in 2021 (the "First Gilead Collaboration Agreement Amendment"), in 2023 (the "Second Gilead Collaboration Agreement Amendment"), in January 2024 (the "Third Gilead Collaboration Agreement Amendment") and in May 2024 (the "Fourth Gilead Collaboration Agreement Amendment").

The Stock Purchase Agreement was amended in 2021 (the "First Stock Purchase Agreement Amendment"), in 2023 (“the "Second Stock Purchase Agreement Amendment"), and was amended and restated in January 2024 (the "Third Stock Purchase Agreement Amendment").

The Investor Rights Agreement was amended in 2022 (the "First Investor Rights Agreement Amendment") and was amended and restated in January 2024 (the "Second Investor Rights Agreement Amendment").

We refer to these agreements collectively as the Gilead Agreements.

Stock Purchase and Investor Rights Agreements

In June 2023, under the Second Stock Purchase Agreement Amendment, Gilead purchased 1.0 million shares of our common stock for total gross proceeds of $20 million.

In January 2024, under the Third Stock Purchase Agreement Amendment, Gilead purchased 15.2 million shares of our common stock for total gross proceeds of $320 million, of which $87 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations under the Third Gilead Collaboration Agreement Amendment, see Note 5, Revenues.

Gilead has the right, at its option until July 2025, to purchase up to a maximum of 35% of the Company’s then-outstanding voting common stock, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price at option exercise) or the $33.54 initial purchase price. Based on the value of our common stock at each contract closing, the right to purchase additional shares had no value. Under the Investor Rights Agreement entered into in 2020 and subsequently amended, Gilead has: the right to designate three members of our board of directors; registration rights for shares that it purchases; and pro rata participation rights in certain future financings. Gilead has exercised its rights to appoint all three board members and we have registered all shares purchased to date.

As of September 30, 2024, Gilead held approximately 32.9% of our outstanding common stock arising from purchases in our May 2020 public offering and purchases under the Stock Purchase Agreement and the related amendments.

Collaboration Agreements

In 2020, we entered into the Gilead Collaboration Agreement, which gave Gilead an exclusive license to develop and commercialize zimberelimab (the anti PD-1 program) in certain markets and time-limited options to acquire exclusive licenses to develop and commercialize any of our then-current and future clinical programs arising during the 10-year collaboration term, contingent upon $100 million option continuation payments payable on each of the second, fourth, sixth and eighth anniversaries of the agreement. Upon closing of the transaction in July 2020, Gilead made an upfront payment of $175 million.

In 2021, we entered into the First Gilead Collaboration Agreement Amendment pursuant to which Gilead exercised its option tothree programs—providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets—for a total payment of $725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement. With respect to domvanalimab, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.

Gilead's option, on a program-by-program basis, will expire after a prescribed period following the achievement of a clinical development milestone in such program and our delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option and will pay Arcus an option fee of $150 million per program.

For each program that Gilead opts in to, both companies will co-develop and equally share global development costs, subject to certain opt-out rights that we have, caps on our spending and related subsequent adjustments, and certain other exceptions. For each program, provided we have not exercised our opt-out rights, we have the option to co-promote in the U.S. with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize outside of the U.S., subject to the rights of our existing partners in any territories and will pay us tiered royalties as a percentage of revenues ranging from the high teens to the low twenties.

Under the First Gilead Collaboration Agreement Amendment, Gilead also has option rights totwo oncology research programs for which we will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $60 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million.

In May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities. We will receive an upfront payment of $17.5 million for each initiated program and Gilead will have an option to license each program at two separate, prespecified time points. For the first two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $45 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million. If Gilead exercises its option at the earlier time point for the firsttwo programs, we would be eligible to receive up to $375 million in regulatory and commercial milestone payments as well as tiered royalties for each optioned program. For any other program option exercise by Gilead, the parties would have rights to co-develop and share global development costs and to co-commercialize and share profits in the U.S. for that program. We received a total upfront payment of $35 million for an initialtwo research programs in June 2023. Gilead’s options to the other two research programs, expires unless the programs are selected prior to May 2025, as amended under the Fourth Gilead Collaboration Agreement Amendment.

In January 2024, we entered into the Third Gilead Collaboration Agreement Amendment. The Third Gilead Collaboration Agreement Amendment, among other things, (i) requires Gilead to pay the $100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement, which was received in the third quarter 2024 (ii) provides that we will operationalize and fund a Phase 3 study we plan to initiate to evaluate quemliclustat in pancreatic cancer subject to Gilead’s right to reinstate the study as part of the parties’ joint development activities upon regulatory approval, (iii) provides that we will solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026, and (iv) provides that we will fund certain other activities. All other terms of the existing collaboration agreements, remain unchanged.

As of September 30, 2024, Gilead has licenses to domvanalimab, AB308, etrumadenant, quemliclustat and zimberelimab.

For the three months ended September 30, 2024 and 2023, we recognized revenue under the Gilead Agreements of $30 million and $28 million, respectively, and net reimbursements from Gilead recognized as reductions in Research and Development ("R&D") expense of $2 million and $22 million, respectively. For the nine months ended September 30, 2024 and 2023, we recognized revenue under the Gilead Agreements of $207 million and $82 million, respectively, and net reimbursements from Gilead recognized as reductions in R&D expense of $32 million and $89 million, respectively.

At September 30, 2024 and December 31, 2023, we had a net receivable of $2 million and $20 million, respectively, recorded in Receivable from collaboration partners on our Condensed Consolidated Balance Sheets. At December 31, 2023, we had $6 million recorded in Other noncurrent assets on our Condensed Consolidated Balance Sheets.

For a more detailed discussion on revenues recognized under the Gilead Agreements, see Note 5, Revenues.

Note 4. License and collaborations

We enter into licensing agreements, strategic collaborations and other similar arrangements with third parties for the development and commercialization of certain investigational products. These arrangements may be collaborative and involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include: non-refundable upfront payments; payments for options to acquire certain rights; potential development and regulatory milestone payments and/or sales-based milestone payments; royalty payments; revenue or profit-sharing arrangements; expense reimbursements; and cost-sharing arrangements.

Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line items in the Condensed Consolidated Statements of Operations, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay.

Our significant arrangements are discussed below. For a more detailed discussion on revenues recognized under these arrangements, see Note 5, Revenues.

Gilead Collaboration

See Note 3, Related party - Gilead Sciences, Inc.

Taiho Collaboration

In 2017, we entered into an agreement with Taiho Pharmaceutical Co., Ltd (“Taiho”) under which we granted them exclusive options to programs arising over afive-year period which ended in September 2022 for an upfront payment of $35 million. Upon an option exercise of a program, Taiho would obtain exclusive development and commercialization rights to investigational products under the program to Japan and certain other Asian countries (excluding China) (the "Taiho Territory").

For each option that Taiho exercises, they will be obligated to make a payment of $3 million to $15 million, depending on the development stage of the optioned program. Upon exercise, Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, for each optioned program we would be eligible to receive clinical and regulatory milestones of up to $130 million and commercial milestone payments of up to $145 million with the achievement of certain sales thresholds in the Taiho Territory. We will also receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable by product and country commencing on the first commercial sale and ending upon the later of: (a)10 years; and (b) expiration of the last-to-expire valid claim of our patents covering the manufacture, use or sale.

As of September 30, 2024, Taiho has licenses for the Taiho Territory to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti PD-1 program);(iii) domvanalimab and AB308 (the anti-TIGIT program); and (iv) quemliclustat (the CD73 program), for which Taiho exercised its option in July 2024 for an option payment of $15 million which was received in the third quarter 2024.

During 2022, Taiho opted to participate in two global Phase 3 trials of domvanalimab and zimberelimab combinations, STAR-121 and STAR-221, and became obligated to reimburse us for their portion of the global study costs, and to make milestone payments contingent upon successfully satisfying the related clinical milestones. During the quarter ended September 30, 2023, the clinical milestones for domvanalimab and zimberelimab for the STAR-221 study were met and Taiho became obligated to pay us $28 million which has been fully received. In January 2024, the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $26 million, of which $16 million was received in the quarter ending March 31, 2024 with the remaining $10 million due in the first quarter of 2025.

In October 2024, Taiho opted to participate in the global Phase 3 trial of quemliclustat, PRISM-1, and became obligated to reimburse us for their portion of the global study costs, and to make milestone payments totaling $19 million contingent upon successfully satisfying the related clinical milestone.

For the three months ended September 30, 2024 and 2023, we recognized revenue under this arrangement of $18 million and $4 million, and net reimbursements from Taiho of $3 million and $2 million, recognized as a reduction in R&D expense. For the nine months ended September 30, 2024 and 2023, we recognized revenue under this arrangement of $25 million and $4 million, and net reimbursements from Taiho of $10 million and $4 million, recognized as a reduction in R&D expense.

At September 30, 2024 and December 31, 2023, we had $14 million and $18 million, respectively, related to these agreements recorded in Receivable from collaboration partners on our Condensed Consolidated Balance Sheets.

AstraZeneca Collaboration

In 2020, we entered into a collaboration with AstraZeneca to evaluate domvanalimab, our investigational anti-TIGIT antibody, in combination with AstraZeneca’s durvalumab in a registrational Phase 3 clinical trial in patients with unresectable Stage 3 non-small cell lung cancer ("NSCLC"), known as the PACIFIC-8 trial. The terms of this agreement were amended in January 2024.

Under the collaboration, as amended, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply their respective investigational product to support the trial. We may incur milestones of up to $24 million upon the achievement of certain clinical trial progress milestones or under certain circumstances if the agreement is terminated early and we will reimburse AstraZeneca annually for a portion of the trial costs. The portion of the costs that we consider to be unavoidable are accrued as incurred and milestones that are deemed probable of occurring are accrued in advance of the achievement of the milestone.

Prior to January 2024, the PACIFIC-8 trial formed part of the Arcus and Gilead joint development program for domvanalimab and our portion of the trial costs were shared with Gilead. At December 31, 2023, we had recognized amounts due from Gilead for these shared costs of $6 million, recorded in Other noncurrent assets on our Condensed Consolidated Balance Sheet. Under the Third Gilead Collaboration Agreement Amendment, we agreed to solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026. For the nine months ended September 30, 2024, we incurred $6 million of R&D expense reflecting our additional share of incurred costs.

For the three months ended September 30, 2024 and 2023, we recognized as R&D expense $4 million and $1 million, respectively under this arrangement. For the nine months ended September 30, 2024 and 2023, we recognized as R&D expense $10 million and $6 million, respectively under this arrangement.

At September 30, 2024, we have recognized a total liability of $22 million related to our obligation to AstraZeneca, of which $10 million is recorded in Other current liabilities and $12 million is recorded in Other noncurrent liabilities on our Condensed Consolidated Balance Sheets. At December 31, 2023, we have recognized a liability of $11 million, which is recorded in Other noncurrent liabilities on our Condensed Consolidated Balance Sheets.

WuXi Biologics License - anti-PD-1

In 2017, we entered into an agreement with WuXi Biologics Ireland Limited ("WuXi Biologics") which, as amended, provides us with exclusive rights to (i) develop, use and manufacture products that include an anti-PD-1 antibody, including zimberelimab, worldwide and (ii) commercialize any such products worldwide, except in Greater China. Under this agreement, as of September 30, 2024, we may incur (i) regulatory milestone payments of up to $50 million, (ii) commercialization milestone payments of up to $375 million, (iii) tiered royalties that range from the high single-digits to low teens on net sales of the licensed products and (iv) fees related to any sublicenses.

For the three and nine months ended September 30, 2024 and 2023, we did not have any milestones or royalties due under this arrangement.

WuXi Biologics License - anti-CD39

In 2020, we entered into an agreement with WuXi Biologics, under which we obtained the exclusive worldwide license to develop and commercialize anti-CD39 antibodies discovered under this arrangement. Under this agreement, as of September 30, 2024, we may incur additional clinical and regulatory milestone payments of up to $14 million and royalty payments in the low single digits on net sales of the licensed products under this agreement.

For the three and nine months ended September 30, 2024, and the three months ended September 30, 2023, we didnot have any development milestones due under this arrangement. For the nine months ended September 30, 2023, we incurred development milestones under this arrangement of $1 million, which were recognized as R&D expense.

Abmuno License

In 2016, we entered into an agreement (the "Abmuno Agreement") with Abmuno Therapeutics LLC ("Abmuno"), under which we obtained the exclusive worldwide license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under this agreement, as of September 30, 2024 we may incur additional clinical, regulatory and commercialization milestone payments of up to $88 million.

For the three and nine months ended September 30, 2024 and 2023, we did not have any milestones due under this arrangement.

Exelixis Collaboration

In 2023, we entered into a clinical trial collaboration with Exelixis for STELLAR-009, a Phase 1b/2 trial to evaluate casdatifan, our investigational inhibitor of the transcription factor HIF-2⍺, in combination with Exelixis’s zanzalintinib, a next-generation tyrosine kinase inhibitor, in patients with clear cell renal cell carcinoma ("ccRCC"). Under the collaboration, each company will retain existing rights to their respective molecules and any future commercial economics. Exelixis will conduct the STELLAR-009 trial, and each company will supply their respective investigational product to support the trial. We will reimburse Exelixis for a portion of the trial costs. In August 2024, both parties agreed to terminate the agreement and wind down the STELLAR-009 trial.

For the three months ended September 30, 2024 and 2023, we recognized R&D expense of $2 million and $1 million, respectively, under this arrangement. For the nine months ended September 30, 2024 and 2023, we recognized R&D expense of $5 million and $1 million, respectively, under this agreement.

Note 5. Revenues

The following table summarizes our revenues by collaboration, category of revenue, and the method of recognition (in millions):

Revenues from Gilead accounted for 63% and 88% of Total revenues for the three months ended September 30, 2024 and 2023, respectively and 89% and 95% of Total revenues for the nine months ended September 30, 2024 and 2023, respectively.

The following table summarizes the revenue recognized as a result of changes in the deferred revenue balance (in millions):

At September 30, 2024 and December 31, 2023, we had $394 million and $398 million of deferred revenue remaining on our Condensed Consolidated Balance Sheets, respectively, allocated between current and noncurrent based on the expected timing of future recognition.

Revenue from the Gilead Collaboration

In 2021, we entered into the First Gilead Collaboration Agreement Amendment, which we determined represented a contract modification which was accounted for as a termination of the existing contract and the creation of a new contract.

On January 29, 2024, we entered into the Third Gilead Collaboration Agreement Amendment, which we determined was a change in scope and price of the original contract and we accounted for this contract modification as both a modification of the existing contract and the creation of a new contract. Under the applicable accounting rules for such contract modifications, we did not adjust the accounting for completed performance obligations that were distinct from the modified goods or services. However, we adjusted revenue previously recognized to reflect the effect of the contract modification due to the updated estimated transaction price allocated to the partially satisfied performance obligations and the updated measure of progress as of the modification date. Accordingly, we allocated the transaction price to the remaining performance obligations (both from the existing contract and the modification) and recognized a cumulative catch-up to revenue of $107 million based on the updated transaction price and measure of progress for the partially satisfied performance obligations. This cumulative catch-up reduced net loss per share, basic and diluted, in the nine months ended September 30, 2024 by $1.19 (see Note 3, Related party - Gilead Sciences, Inc.).

The following table summarizes the transaction price (in millions):

Our assessment of the updated transaction price for the Third Gilead Collaboration Agreement Amendment included an analysis of amounts we expected to receive, which at contract amendment consisted of: the $100 million option continuation payment that Gilead committed to and paid in the third quarter of 2024 for continued access to our pipeline; $87 million allocated from the premium from the Third Stock Purchase agreement; and $335 million deferred revenue remaining from the First Gilead Collaboration Agreement Amendment effective December 2021. We determined the entire $522 million to be the allocable transaction price as of the amendment closing date, due to the history of timely payments by Gilead.

The following table summarizes the allocation of the transaction price to the performance obligations (in millions):

We accounted for each performance obligation as follows:

Etrumadenant - License and R&D Services

Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our adenosine receptor program, etrumadenant, in exchange for an option payment of $250 million, if exercised. Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to etrumadenant and we were also obligated to perform further R&D services for Gilead related to etrumadenant. We determined that the license and R&D services were combined at inception of the agreement based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. Prior to the closing of the Third Gilead Collaboration Agreement Amendment, we had $129 million of deferred revenue on our Condensed Consolidated Balance Sheet related to this performance obligation.

Effective January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, this performance obligation was partially satisfied and there were no changes to the scope of the related R&D service obligation as a result of the amendment. We allocated the updated transaction price to this performance obligation based on the standalone selling price and adjusted revenue based on an updated measure of progress, which resulted in a cumulative catch-up of revenue of $14 million.

We recognized revenue of $9 million and $21 million for the three months ended September 30, 2024 and 2023, respectively, and $36 million (including the cumulative catch-up) and $39 million for the nine months ended September 30, 2024 and 2023, respectively, within License and development services revenue in our Condensed Consolidated Statements of Operations related to this performance obligation.

At September 30, 2024 and December 31, 2023, we had $176 million and $133 million, respectively, of deferred revenue remaining on our Condensed Consolidated Balance Sheets related to this performance obligation.

Quemliclustat - License and R&D Services

Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our CD73 program, quemliclustat, in exchange for an option payment of $200 million, if exercised. Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to quemliclustat and we were also obligated to perform further R&D services for Gilead related to quemliclustat. We determined that the license and R&D services were combined at inception of the agreement based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. Prior to the closing of the Third Gilead Collaboration Agreement Amendment, we had $130 million of deferred revenue on our Condensed Consolidated Balance Sheet related to this performance obligation.

Effective January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, this performance obligation was partially satisfied and there was a reduction to the scope of the related R&D service obligation as a result of the amendment. Specifically, the amendment provides that we will independently initiate, operationalize and fund a Phase 3 study to evaluate quemliclustat in pancreatic cancer, which reduces our estimated obligation to perform further R&D services for Gilead related to quemliclustat under the collaboration. We allocated the updated transaction price to this performance obligation based on the standalone selling price and adjusted revenue based on an updated measure of progress which resulted in cumulative catch-up of revenue of $88 million.

We recognized revenue of $13 million for the three months ended September 30, 2024 and a reversal of revenue of $4 million for the three months ended September 30, 2023 due to the changes in the total estimated effort to be incurred in the future to satisfy the performance obligations. We recognized revenue of $132 million (including the cumulative catch-up) and $11 million for the nine months ended September 30, 2024 and 2023, respectively, within License and development services revenue in our Condensed Consolidated Statements of Operations related to this performance obligation.

At September 30, 2024 and December 31, 2023, we had $39 million and $132 million, respectively, of deferred revenue remaining on our Condensed Consolidated Balance Sheets related to this performance obligation.

Domvanalimab - R&D Services

Under the First Gilead Collaboration Agreement Amendment, we determined that we retain a separate performance obligation to perform further R&D services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. Prior to the closing of the Third Gilead Collaboration Agreement Amendment, we had $25 million of deferred revenue on our Condensed Consolidated Balance Sheet related to this performance obligation.

Effective January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, this performance obligation was partially satisfied and there were no significant changes to the scope of this obligation as a result of the amendment. We allocated the updated transaction price to this performance obligation based on the standalone selling price and adjusted revenue based on an updated measure of progress which resulted in cumulative catch-up of revenue of $5 million.

We recognized revenue of $1 million and $1 million for the three months ended September 30, 2024 and 2023, respectively, and $11 million (including the cumulative catch-up) and $3 million for the nine months ended September 30, 2024 and 2023, respectively, within License and development services revenue in our Condensed Consolidated Statements of Operations related to this performance obligation.

At September 30, 2024 and December 31, 2023, we had $23 million and $25 million, respectively, of deferred revenue remaining on our Condensed Consolidated Balance Sheets related to this performance obligation.

Access Rights and Option Continuation Periods

Under the First Gilead Collaboration Agreement Amendment, Gilead has exclusive access to our current programs as well as the future programs for a period often years, contingent upon option continuation payments totaling $300 million, consisting of a $100 million payment on each of the fourth, sixth, and eighth anniversaries of the Gilead Collaboration Agreement. Prior to the closing of the Third Gilead Collaboration Agreement Amendment, we had $51 million of deferred revenue on our Condensed Consolidated Balance Sheet related to these performance obligations.

Effective January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, Gilead agreed to pay the $100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement, which occurred and was received in the third quarter of 2024, and we included this payment in the transaction price. By exercising this right Gilead’s exclusive access to our current programs as well as any future programs is extended to 2026. We determined that as of the closing date of January 29, 2024, Gilead is not obligated to make the remaining contingent payments totaling $200 million due on the sixth and eighth anniversaries of the Gilead Collaboration Agreement and accordingly, we have excluded these payments from the transaction price. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from our R&D pipeline.

The standalone selling price of the ongoing R&D pipeline access and the option continuation material rights were determined using an expected cost-plus margin approach, with the option continuation material rights probability-adjusted for the likelihood of exercise. We use a time-elapsed input method to measure progress toward satisfying the access rights performance obligation, which is the method we believe most faithfully depicts the Company's performance in transferring the promised services during the time period in which Gilead has access to our R&D pipeline. Accordingly, the revenue allocated to the initial four-year access rights performance obligation is being recognized using this input method over the remaining period through July 2024, and for the access rights continuation, over the two-year period commencing July 2024. For the remaining access rights option continuation periods commencing on the sixth, and eighth anniversaries of the agreement, if Gilead elects to exercise their option, we will recognize the revenue allocated to that option together with the $100 million continuation payment over the new minimum access period or immediately if the option lapses.

We recognized revenue of $5 million and $8 million associated with the access rights performance obligation for each of the three months ended September 30, 2024 and 2023, respectively, and $22 million and $25 million associated with the access rights performance obligation for each of the nine months ended September 30, 2024 and 2023, respectively, within Other collaboration revenue in our Condensed Consolidated Statements of Operations related to these performance obligations.

At September 30, 2024 and December 31, 2023, we had $58 million and $54 million, respectively, of deferred revenue on our Condensed Consolidated Balance Sheets related to these performance obligations.

Rights to Certain Studies

Effective January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, we will solely fund, certain studies, but Gilead retains exclusive rights to reinstate into the collaboration each study at specified time-points for a payment. We have determined that these are material rights and we estimated the standalone selling price of these performance obligations using a discounted cash flow method probability-adjusted for the likelihood of exercise. We will recognize the amount allocated to each right if and when the related study is reinstated into the parties' co-development plans or if the option lapses.

At September 30, 2024, we had $34 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to these performance obligations.

Inflammation Programs - R&D Services

In addition to the amendments noted above, in May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities (see Note 3, Related party - Gilead Sciences, Inc., for more information). In June 2023, we received a total upfront payment of $35 million for an initial two jointly selected research-stage programs. We determined that the Second Gilead Collaboration Agreement Amendment represented a separate contract and, at the amendment closing date, we allocated the transaction price of $35 million to the performance obligations created as of the date of this amendment.

The following table summarizes the allocation of the transaction price to the performance obligations (in millions):

We determined that we have separate performance obligations to perform R&D services for Gilead related to discovery and early development activities for each research program for which they have made an upfront payment. The standalone selling price of these obligations were determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. The options to acquire additional licenses or services did not result in additional performance obligations because they did not provide a material right at contract inception, primarily due to the very early stages of the programs.

We recognized revenue of $2 million for the three months ended September 30, 2024 and 2023, and $6 million and $3 million for the nine months ended September 30, 2024 and 2023, respectively, within Other collaboration revenue in our Condensed Consolidated Statements of Operations related to these performance obligations. At September 30, 2024 and December 31, 2023, we had $25 million and $31 million, respectively, of deferred revenue remaining on our Condensed Consolidated Balance Sheets related to these performance obligations.

Revenue from the Taiho Collaboration

Quemliclustat - License

In July 2024, Taiho exercised its option under the agreement we entered into in 2017 and obtained an exclusive licensefor quemliclustat (the CD73 program) for the Taiho Territory for an option payment of $15 million which was received in the third quarter 2024.

We determined that this license was the only performance obligation and we recognized upon delivery the full$15 million of revenue in the quarter ended September 30, 2024 within License and development services revenue in our Condensed Consolidated Statements of Operations.

Domvanalimab and Zimberelimab - R&D Services

During 2022, Taiho opted to participate in two global Phase 3 trials of domvanalimab and zimberelimab combinations, STAR-121 and STAR-221, and became obligated to make certain milestone payments contingent upon successfully satisfying the related clinical milestones. During the quarter ended September 30, 2023, the clinical milestones for domvanalimab and zimberelimab for the STAR-221 study were met and Taiho became obligated to pay us $28 million which was fully received as of September 30, 2024. In January 2024, the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $26 million of which $16 million has been received as of September 30, 2024 with the remaining $10 million due in the first quarter of 2025.

We determined that we have separate performance obligations to perform R&D services for Taiho related to the global development activities for each study in support of the Taiho Territory and that the agreement for each study represented a separate contract at standalone selling price. The standalone selling price of these obligations were determined using an expected cost-plus margin approach. We recognize the amounts for these services as each performance obligation is satisfied, calculated as an estimated percentage of completion based on the estimated total effort for the programs.

We recognized revenue of $3 million and $4 million for the three months ended September 30, 2024 and 2023, respectively, and $10 million and $4 million for the nine months ended September 30, 2024 and 2023, respectively, within License and development services revenue in our Condensed Consolidated Statements of Operations related to these performance obligations. At September 30, 2024 and December 31, 2023, we had $39 million and $23 million, respectively, of deferred revenue remaining on our Condensed Consolidated Balance Sheets related to these performance obligations, allocated between current and noncurrent based on the expected timing of future recognition.

Capitalized Costs to Obtain Contracts

We incurred $8 million of costs on January 29, 2024 to obtain the Third Gilead Collaboration Agreement Amendment, Third Stock Purchase Agreement Amendment and the Second Investor Rights Agreement Amendment, which consisted of consultant fees that were payable upon the successful completion of the agreements. We determined that $5 million of these costs were related to the Third Stock Purchase Agreement Amendment which were recognized as offering costs in additional paid-in capital. The remaining costs were combined with $3 million in capitalized costs that remained from the initial Gilead Collaboration Agreement and subsequent amendments, and the total was allocated to the various remaining performance obligations, to be recognized as the underlying performance obligations are satisfied and revenue is recognized.

For each of the three months ended September 30, 2024 and 2023, expense related to these capitalized costs in was recognized in General and administrative ("G&A") expense was not significant. For the nine months ended September 30, 2024 and 2023, we recognized expense of $3 million and $1 million, respectively, related to these capitalized costs in G&A expense. At September 30, 2024 and December 31, 2023, we had $3 million in capitalized costs to obtain the contracts, allocated between Prepaid expenses and other current assets and Other noncurrent assets in our Condensed Consolidated Balance Sheets based on the expected timing of future recognition.

Note 6. Income taxes

The income tax provision or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into consideration in the relevant period. Each quarter, we update the estimate of the annual effective tax rate, and if the estimated tax rate changes, we record a cumulative adjustment to the provision or benefit.

We did not record a provision for income taxes for the three and nine months ended September 30, 2024 because of a forecasted full year net operating loss ("NOL"). The income tax expense was $2 million and $5 million for the three and nine months ended September 30, 2023, with an effective tax rate of (2.4%) and (2.2%), respectively. The year-over-year decrease in the income tax provision was due to a decrease in taxable income. For the year ended December 31, 2023, we had taxable income compared to book losses before income taxes due to the timing of recognition of deferred revenue for tax purposes and the effects of the mandatory capitalization and amortization of R&D expenses starting in 2022, as required by the 2017 Tax Cuts and Jobs Act. The effective tax rate differs from the U.S. statutory tax rate primarily due to the valuation allowances on our deferred tax assets and state income taxes.

As of September 30, 2024 and December 31, 2023, we have provided a valuation allowance against U.S. federal and state deferred tax assets. We continue to evaluate the realizability of deferred tax assets and the related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which we make the determination.

We recognize interest and penalties associated with uncertain tax benefits as part of the income tax provision. To date, we have not recognized any interest and penalties, nor have we accrued for or made payments for interest and penalties.

We have not been audited by the Internal Revenue Service, any state or foreign tax authority. We are subject to taxation in the U.S. and in Australia. Due to NOL and research credit carryforwards, all of our tax years, from 2015 to 2023, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2019 to 2023 are open to examination in Australia.

Note 7. Net loss per share

The following table summarizes potentially dilutive securities excluded from the computation of diluted net loss per share calculations because they would have been antidilutive (in millions):

We have also excluded the effect of Gilead’s right to purchase additional shares of our common stock from the calculation as these rights had no intrinsic value at either September 30, 2024 or 2023.

Note 8. Stock-based compensation

Stock-based compensation expense

The following table reflects the components of stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations (in millions):

Note 9. Cash, cash equivalents and marketable securities

The following table summarizes the amortized cost, gross unrealized gains and losses and the fair value of our cash, cash equivalents and marketable securities, all of which are considered available for sale, by type of securities (in millions):

The following table summarizes the fair values of our cash, cash equivalents and marketable securities by location in the Condensed Consolidated Balance Sheets and contractual maturity (in millions):

Realized gains or losses recognized on the sale of available-for-sale marketable securities were not material for the three and nine months ended September 30, 2024 and 2023. Realized gains and losses are included in Interest and other income, net, in the Condensed Consolidated Statements of Operations. The cost of a security sold is determined using the specific-identification method.

We limit the credit risk associated with our investments by placing them with banks and institutions we believe are highly credit worthy and investing in highly rated investments. We held a total of 21 and 105 positions in securities which were in unrealized loss positions as of September 30, 2024 and December 31, 2023, respectively. We do not intend to sell our securities with unrealized loss positions and have concluded we will not be required to sell the securities before recovery of the amortized cost for the investment at maturity. No credit related losses have been recognized for any of the periods presented.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets to the total shown in the Condensed Consolidated Statements of Cash Flows (in millions):

Restricted cash at September 30, 2024 and 2023 represents cash balances held as security in connection with our facility lease agreements.

Note 10. Condensed consolidated balance sheet components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in millions):

Other Current Liabilities

Other current liabilities consisted of the following (in millions):

Note 11. Long-term debt

The following table summarizes our borrowings (in millions):

On August 27, 2024, we and Hercules Capital, Inc. (“Hercules”) entered into a loan and security agreement (the "Hercules Agreement"), under which Hercules agreed to lend us up to $250 million in term loans in various tranches subject to minimum draw requirements for each tranche. Under the terms of this agreement, $50 million was drawn at closing and an additional $100 million is committed and fully available at our sole option in minimum increments of $25 million. A second tranche of $100 million will be available subject to future approval by Hercules.

The Hercules Agreement has an initial maturity date of September 1, 2029 which is extendable by 12 months, at our discretion subject to the achievement of certain regulatory milestones related to our product candidates. Repayment of the principal amount will be in 13 monthly installments commencing September 1, 2028, if not extended. The term loans have an interest only period for the first 48 months from the agreement date and bear interest at a rate equal to the greater of (i)10.45% or (ii) theprime rate plus 1.95%. We may prepay all or any portion of the outstanding term loans at any time, subject to a prepayment fee of: (i)3.00% of the principal amount prepaid if the prepayment occurs prior to the first anniversary of the funding date; (ii)2.00% of the principal amount prepaid if the prepayment occurs on or after the first anniversary of the funding date and prior to the second anniversary of the funding date; or (iii)1.00% of the principal amount prepaid thereafter. The agreement also has an upfront facility fee of $1 million and an end of term charge of 7.75% of the total amount borrowed.

The Hercules Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, pay dividends, merge or consolidate, dispose of assets, and enter into transactions with affiliates, subject to customary exceptions. We are also required to maintain a minimum cash balance of 50% of the funded amount if our market capitalization were to fall below a certain threshold which will be reduced in the event of certain regulatory approvals of our product candidates. We do not have covenant requirements associated with this agreement until October 1, 2026.

The Hercules Agreement is secured by a first priority security interest in substantially all of our assets, excluding intellectual property. The Hercules Agreement also contains customary events of default terms, including payment defaults, breaches of covenants, bankruptcy and insolvency events, cross-defaults to other indebtedness, material adverse events, and the occurrence of a change of control. Upon the occurrence of an event of default, Hercules may declare all outstanding obligations under the Hercules Agreement to be immediately due and payable and exercise any or all of its rights and remedies, including foreclosure on the collateral securing the term loans.

The aggregate future minimum payments including principal payments and the end of term charge, due under the Hercules Agreement, are as follows (in millions):

During the three and nine months ended September 30, 2024, we recognized $1 million of interest expense, including amortization of the debt discount and issuance costs which was at an effective interest rate of 13.39%. As of September 30, 2024, we had borrowed $50 million under the Hercules Agreement and had $200 million of additional borrowing capacity, of which $100 million is subject to additional approval by Hercules.

Note 12. Leases

The following table summarizes our cash and non-cash information related to our operating leases (in millions):

In the first quarter of 2024, we evaluated our plans for a portion of our office space that we expected to sublease, and identified indicators of impairment to certain right-of-use assets associated with the leased space where the asset value was determined to be non-recoverable based upon a discounted cash flow analysis, resulting in an impairment charge of $20 million for the three months ended March 31, 2024 and the nine months ended September 30, 2024. In the second quarter of 2024, we entered into a sublease for a portion of our office space which is expected to commence by the end of 2024 or early 2025, and extends through 2031.

As of September 30, 2024 and December 31, 2023, we have provided deposits for letters of credit totaling $3 million to secure our obligations under our leases, which are included in Other noncurrent assets on the Condensed Consolidated Balance Sheets.

Note 13. Stockholders' equity

Common Stock

Gilead Stock Purchase Agreement

On June 27, 2023, under the Second Stock Purchase Agreement, Gilead purchased 1.0 million shares of our common stock at the closing day purchase price of $19.26 per share for total gross proceeds of $20 million.

On January 29, 2024, under the Third Stock Purchase Agreement Amendment, Gilead purchased 15.2 million shares of our common stock at a price of $21.00 per share for total gross proceeds of $320 million. Of the $320 million equity investment, $87 million was determined to be a premium on the purchase of common stock and allocated to the performance obligations created by the Third Gilead Collaboration Agreement Amendment, see Note 5, Revenues. Net proceeds from Gilead's equity investment were $228 million after allocating the premium and deducting direct offering expenses of $5 million.

At-the-Market Facility

In August 2023, we issued and sold 0.2 million shares of our common stock under this agreement for total net proceeds of $5 million.

Note 14. Fair value measurements

We determine 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:

•Level 1 inputs include unadjusted quoted prices in active markets for identical assets or liabilities;

•Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

•Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following tables summarize the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):

Liability for sale of future royalties

In 2021, we entered into an agreement with BVF Partners L.P. ("BVF"), under which BVF funded the discovery and development of compounds for the treatment of inflammatory diseases (the "BVF Program") for $15 million in non-refundable payments which were paid in 2021 and 2022. In return, we are obligated to: perform R&D activities in the BVF Program; make contingent payments upon the achievement of certain clinical and regulatory milestones of up to $73 million or $160 million depending on whether the BVF Program is solely developed by us or with Gilead if they opt-in under the Gilead Collaboration Agreement; and pay mid- to high-single digit royalties on any net product sales generated by the BVF Program.

We account for the agreement with BVF as a liability primarily because we have significant continuing involvement in generating the cash flows due to BVF. The liability is recorded at fair value by using probability-adjusted discounted cash flows and is revalued each reporting period until the related contingencies have been resolved. The fair value measurement is based on significant unobservable inputs that are reviewed quarterly by management and include, as applicable, estimated probabilities and the timing of achieving specified development, regulatory and commercial milestones as well as estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related development, regulatory and commercial events or that shorten or lengthen the time required to achieve such events or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. Changes in the fair value of this liability related to interest accretion are recognized in Non-operating income (expense) in the Condensed Consolidated Statements of Operations.

During the second quarter of 2023, new preclinical information from our BVF Program led to revised assumptions which decreased the estimated probabilities of success and delayed the projected timing of achieving specified development, regulatory and commercial milestones and commercial sales. These changes in estimates are accounted for prospectively and resulted in a decrease in the imputed effective interest rate on the unamortized portion of the liability to 10.1% commencing with the quarter ended June 30, 2023, compared to 20.6% for the quarters ended March 31, 2023 and prior. The impact of this change on the non-cash interest expense for the nine months ended September 30, 2024 was not material when compared to the prior period. The liability for sale of future royalties is reported in Other noncurrent liabilities in the Condensed Consolidated Balance Sheets and changes were as follows (in millions):

Long-term debt

As of September 30, 2024, the estimated fair value of our long-term debt approximated the carrying amount. The fair value of the long-term debt was estimated for disclosure purposes only and was determined based on other inputs that are observable, and thus categorized as Level 2 in the fair value hierarchy.