Arcus Biosciences, Inc. [RCUS] Filings

10-Q 1 rcus-20230930.htm 10-Q rcus-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_____________________________________

FORM 10-Q

_____________________________________

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________to _______________

Commission File Number: 001-38419

_____________________________________

Arcus Biosciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

_____________________________________


Delaware			47-3898435
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3928 Point Eden Way Hayward, California 94545
(Address of principal executive offices)

Registrant’s telephone number, including area code: (510) 694-6200

_____________________________________

Securities registered pursuant to Section 12(b) of the Act:

Titles of Each Class

Trading Symbol(s)

Name of Each Exchange on which Registered

Common Stock, Par Value $0.0001 Per Share

RCUS

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 1, 2023, the registrant had 74,855,565 shares of common stock, $0.0001 par value per share, outstanding.

ARCUS BIOSCIENCES, INC.

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		Page
	RISK FACTOR SUMMARY	i
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Loss	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	58
Item 6.	Exhibits	59
SIGNATURES		60

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RISK FACTOR SUMMARY

The following is a summary of the key risks and uncertainties that make an investment in our securities speculative and risky. This does not contain all of the information that may be important to you, and you should read this summary together with the more detailed description risks related to an investment in our securities set forth in this report under "Part II. Item 1A. Risk Factors".

Risks Related to our Limited Operating History, Financial Position and Capital Requirements

•We have a history of operating losses, have never generated any revenue from product sales and anticipate that we will continue to incur significant losses for the foreseeable future.

•We may need to obtain additional funding to finance our operations and complete the development and any commercialization of our investigational products. If we do not receive substantial capital when needed, we may be forced to restrict our operations or delay, reduce or eliminate our product development programs.

Risks Related to the Discovery and Development of our Investigational Products

•Clinical drug development is a lengthy, expensive and uncertain process, if we are unable to develop, obtain regulatory approval for and commercialize our investigational products, or experience significant delays in doing so, our business will be materially harmed.

•The results of preclinical studies and early clinical trials are not always predictive of future results.

•Enrollment and retention of subjects in clinical trials is expensive and time consuming, can be made more difficult or rendered impossible by competing treatments, clinical trials of competing investigational products, geopolitical instability and public health epidemics, each of which could result in significant delays and additional costs in our product development activities, or in the failure of such activities.

•Preliminary and interim data from our clinical studies that we announce or publish from time to time could materially change due to audit and verification procedures or as more patient data become available.

•Serious adverse events, undesirable side effects or other unexpected properties of our investigational products may be identified during development or after approval, which could lead to the discontinuation of our clinical development programs, refusal by regulatory authorities to approve our investigational products or limitations on the use of our investigational products or revocation of any marketing authorizations or subsequent limitations on the use of our investigational products.

•If we are not successful in discovering, developing and commercializing investigational products that take advantage of different mechanisms of action to achieve superior outcomes relative to the use of single agents or other combination therapies, our ability to achieve our strategic objectives would be impaired.

•Development of combination therapies may present more or different challenges than other therapies.

•Failure to successfully develop, validate and obtain regulatory clearance or approval for any required companion diagnostics could prevent us from realizing the commercial potential of our investigational products.

Risks Related to Reliance on Third Parties, Manufacturing and Commercialization

•If our collaboration with Gilead is not successful, our business could be adversely affected.

•We rely on third parties to conduct our clinical trials, to manufacture and supply us with sufficient quantities of our investigational products, standard of care and comparator products used in our clinical trials, and to perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

•Even if we receive marketing approval, we may not be successful in commercializing our investigational products or obtaining coverage and reimbursement approval for a product from a government or other third-party payor, which coverage may be delayed or may not be sufficient to cover our costs.

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•Our investigational products may never be approved or commercialized outside the United States, which would limit our ability to realize their full market potential.

•Any investigational products for which we intend to seek approval as biologic products may face competition sooner than anticipated.

Risks Related to In-Licenses, Strategic Arrangements and Intellectual Property

•We are currently party to several in-license agreements under which we acquired rights to use, develop, manufacture and/or commercialize certain of our investigational products. If we breach our obligations under these agreements, we may be required to pay damages, lose our rights to these investigational products or both, which would adversely affect our business and prospects.

•If we are unable to obtain and maintain sufficient intellectual property protection for our investigational products, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products may be adversely affected.

•We may need to obtain additional licenses of third-party technology which may cause us to operate our business in a more costly or otherwise adverse manner than anticipated.

•We may become involved in lawsuits alleging that we have infringed the intellectual property rights of third parties or to protect or enforce our patents or other intellectual property, which litigation could affect our ability to develop or commercialize our investigational products.

•Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our investigational products.

•If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

Risks Related to our Business Operations and Industry

•We expect to expand our business operations and, as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

•We face substantial competition, which may result in others discovering, developing or commercializing products more quickly or marketing them more successfully than us. If their investigational products are shown to be safer or more effective than ours, then our commercial opportunity will be reduced or eliminated.

•Our internal information technology systems, and those of the third parties upon which we rely, are subject to failure, security breaches and other disruptions, which could result in a material disruption of our investigational products’ development programs, jeopardize sensitive information, or prevent us from accessing critical information or result in a loss of our assets, and potentially expose us to notification obligations, loss, liability or reputational damage and otherwise adversely affect our business.

•Failure to comply with health and data protection laws and regulations could lead to government enforcement actions (which could include civil or criminal penalties), private litigation, and/or adverse publicity and could negatively affect our operating results and business.

•Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and may have a significant adverse effect on our business and results of operations.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ARCUS BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
License and development service revenue (Includes $18, $23, $54 and $48 from a related party)	$	22	$	23	$	58	$	48
Other collaboration revenue (Includes $10, $8, $28 and $25 from a related party)	10		10		28		30
Total revenues	32		33		86		78

Operating expenses:
Research and development (Net of recoveries of $22, $27, $89 and $93 from a related party)	82		77		247		208
General and administrative	30		26		88		76
Total operating expenses	112		103		335		284

Loss from operations	(80)		(70)		(249)		(206)

Non-operating income (expense):
Interest and other income, net	12		5		30		8
Effective interest on liability for sale of future royalties	(1)		—		(2)		(1)
Total non-operating income, net	11		5		28		7

Loss before income taxes	(69)		(65)		(221)		(199)

Income tax expense	(2)		—		(5)		(1)

Net loss	$	(71)	$	(65)	$	(226)	$	(200)

Net loss per share:
Basic and diluted	$	(0.94)	$	(0.90)	$	(3.07)	$	(2.78)

Shares used to compute net loss per share:
Basic and diluted	74.6		72.2		73.6		71.8

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(71)	$	(65)	$	(226)	$	(200)

Other comprehensive income (loss)	1		(2)		4		(8)

Comprehensive loss	$	(70)	$	(67)	$	(222)	$	(208)

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(unaudited)


	September 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	184	$	206
Marketable securities	615		803
Receivable from collaboration partners ($22 and $39 from a related party)	52		39
Prepaid expenses and other current assets	31		19
Total current assets	882		1,067

Long-term marketable securities	151		129
Property and equipment, net	50		35
Other noncurrent assets ($6 and $2 from a related party)	108		114
Total assets	$	1,191	$	1,345

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	17	$	20
Deferred revenue ($96 and $97 to a related party)	103		97
Other current liabilities	80		76
Total current liabilities	200		193

Deferred revenue, noncurrent ($309 and $355 to a related party)	326		355
Other noncurrent liabilities	145		140

Commitments

Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 10.0 shares authorized; no shares issued and outstanding.	—		—
Common stock and additional paid-in capital: $0.0001 par value per share; 400.0 shares authorized; 74.8 shares in 2023 and 72.9 shares in 2022 issued and outstanding	1,291		1,206
Accumulated deficit	(768)		(542)
Accumulated other comprehensive loss	(3)		(7)
Total stockholders’ equity	520		657
Total liabilities and stockholders’ equity	$	1,191	$	1,345

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In millions)

(unaudited)


	Number of shares of common stock	Common stock and additional paid-in capital		Accumulated deficit		Accumulated other comprehensive loss		Total stockholders’ equity
Balance at December 31, 2021	70.8	$	1,118	$	(275)	$	(1)	$	842
Issuance of common stock in connection with our equity award programs	0.8	10		—		—		10
Stock-based compensation	—	17		—		—		17
Other comprehensive loss	—	—		—		(4)		(4)
Net loss	—	—		(68)		—		(68)
Balance at March 31, 2022	71.6	1,145		(343)		(5)		797
Issuance of common stock in connection with our equity award programs	0.5	4		—		—		4
Stock-based compensation	—	15		—		—		15
Other comprehensive loss	—	—		—		(2)		(2)
Net loss	—	—		(67)		—		(67)
Balance at June 30, 2022	72.1	1,164		(410)		(7)		747
Issuance of common stock in connection with our equity award programs	0.3	3		—		—		3
Stock-based compensation	—	16		—		—		16
Other comprehensive loss	—	—		—		(2)		(2)
Net loss	—	—		(65)		—		(65)
Balance at September 30, 2022	72.4	$	1,183	$	(475)	$	(9)	$	699

Balance at December 31, 2022	72.9	$	1,206	$	(542)	$	(7)	$	657
Issuance of common stock in connection with our equity award programs	0.2	1		—		—		1
Stock-based compensation	—	19		—		—		19
Other comprehensive gain	—	—		—		3		3
Net loss	—	—		(80)		—		(80)
Balance at March 31, 2023	73.1	1,226		(622)		(4)		600
Issuance of common stock (see Note 3, Related party - Gilead Sciences, Inc.)	1.0	20		—		—		20
Issuance of common stock in connection with our equity award programs	0.4	3		—		—		3
Stock-based compensation	—	18		—		—		18
Net loss	—	—		(75)		—		(75)
Balance at June 30, 2023	74.5	1,267		(697)		(4)		566
Issuance of common stock	0.2	5		—		—		5
Issuance of common stock in connection with our equity award programs	0.1	1		—		—		1
Stock-based compensation	—	18		—		—		18
Other comprehensive gain	—	—		—		1		1
Net loss	—	—		(71)		—		(71)
Balance at September 30, 2023	74.8	$	1,291	$	(768)	$	(3)	$	520

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(226)	$	(200)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense	55		48
Depreciation and amortization	5		5
Noncash lease expense	6		6
Amortization of premiums (discounts) on marketable securities	(13)		2
Other items, net	2		3
Changes in operating assets and liabilities:
Receivable from collaboration partners ($17 and $718 from a related party)	15		716
Other assets (($4) and ($2) from a related party)	(12)		(4)
Accounts payable	(3)		—
Deferred revenue (($47) and ($73) to a related party)	(51)		(78)
Other liabilities	4		10
Net cash provided by (used in) operating activities	(218)		508

Cash flows from investing activities
Purchases of marketable securities	(673)		(1,085)
Proceeds from maturities of marketable securities	837		491
Proceeds from sales of marketable securities	20		143
Purchases of property and equipment	(18)		(6)
Purchases of in-process research and development	—		(6)
Collaboration reimbursements of in-process research and development	—		3
Net cash provided by (used in) investing activities	166		(460)

Cash flows from financing activities
Proceeds from issuance of common stock ($20 and $— from a related party)	25		—
Proceeds from issuance of common stock pursuant to equity award plans	5		17
Proceeds from sale of future royalties	—		5
Net cash provided by financing activities	30		22
Net increase (decrease) in cash, cash equivalents and restricted cash	(22)		70
Cash, cash equivalents and restricted cash at beginning of period	209		151
Cash, cash equivalents and restricted cash at end of period	$	187	$	221

Non-cash investing and financing activities:
Unpaid portion of property and equipment purchases included in Accounts payable and Other current liabilities	$	6	$	1

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization, liquidity and capital resources

Organization

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

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

Liquidity and Capital Resources

As of September 30, 2023, we had cash, cash equivalents and marketable securities of $950 million, 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, 2022 included in our Annual Report on Form 10-K filed with the SEC on February 28, 2023. There have been no significant changes to our accounting policies as described in Note 2, Summary of significant accounting policies, in the notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K.

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 adjustments consisting of normal recurring adjustments that management believes are necessary for a fair presentation of the periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2022 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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 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.

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Note 3. Related party - Gilead Sciences, Inc.

In 2020, we and Gilead Sciences, Inc. (Gilead) entered into an Option, License and Collaboration Agreement (the Gilead Collaboration Agreement), Common Stock Purchase Agreement (the Stock Purchase Agreement), and Investor Rights Agreement (Investor Rights Agreement). In 2021, we amended the Gilead Collaboration Agreement (the First Gilead Collaboration Agreement Amendment) and the Stock Purchase Agreement (the First Stock Purchase Agreement Amendment), and in 2022 we amended the Investor Rights Agreement (Amended Investor Rights Agreement). In the second quarter of 2023, we expanded our collaboration to include research-stage inflammation programs (the Second Gilead Collaboration Agreement Amendment) and further amended the Stock Purchase Agreement (the Second Stock Purchase Agreement Amendment). We refer to these agreements collectively as the Gilead Agreements.

Stock Purchase Agreement and Investor Rights Agreement

In 2020, under the Stock Purchase Agreement, Gilead purchased 6.0 million shares of our common stock for a total cost of $200 million, of which $91 million was allocated to the revenue related performance obligations created by the Gilead Collaboration Agreement (See Note 5, Revenues for more information).

In 2021, under the First Stock Purchase Agreement Amendment, Gilead purchased 5.7 million shares of our common stock for a total cost of $220 million.

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

Gilead has the right, at its option until July 2025, to purchase up to a maximum of 35% of the Company’s then-outstanding voting common stock, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price at option exercise) or the $33.54 initial purchase price. Based on the value of our common stock at each contract closing, the right to purchase additional shares had no value.

Under the Investor Rights Agreement, Gilead has the right, which they have exercised, to designate two members of our Board of Directors. This agreement also included a three-year standstill and a two-year lockup, provided Gilead with registration rights commencing at the end of the lockup period and provides Gilead with pro rata participation rights in certain future financings. In October 2022, we registered Gilead’s shares and entered into the Amended Investor Rights Agreement, primarily to extend the two-year lockup period to three-years which expired on July 13, 2023.

As of September 30, 2023, Gilead held approximately 19.8% of the Company’s outstanding common stock arising from purchases in our May 2020 public offering and purchases under the Stock Purchase Agreement and the First and Second Amended Stock Purchase Agreements.

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 to three programs—providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets—for a total payment of $725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement.

Gilead's option, on a program-by-program basis, will expire after a prescribed period following the achievement of a clinical development milestone in such program and our delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option and will pay Arcus an option fee of $150 million per program. With respect to domvanalimab, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.

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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, and caps on our spending and related subsequent adjustments. For each program, provided we have not exercised our opt-out rights, we have the option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize outside of the U.S., subject to the rights of our existing partners in any territories 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 to two immuno-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. These research programs were not determined to be performance obligations at contract inception, due to the very early stages of the programs.

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 first two 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 US for that program. We received a total upfront payment of $35 million for an initial two research programs in June 2023.

As of September 30, 2023, Gilead has licenses to domvanalimab, AB308, etrumadenant, quemliclustat and zimberelimab.

For the three months ended September 30, 2023 and 2022, we recognized revenue under the Gilead Agreements of $28 million and $31 million, respectively, and net reimbursements from Gilead recognized as reductions in research and development (R&D) expense of $22 million and $27 million, respectively. For the nine months ended September 30, 2023 and 2022, we recognized revenue under the Gilead Agreements of $82 million and $73 million, respectively, and net reimbursements from Gilead recognized as reductions in R&D expense of $89 million and $93 million, respectively.

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.

Gilead Collaboration

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

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Taiho Collaboration

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

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

During the fourth quarter of 2022, Taiho opted to participate in two global Phase 3 trials of domvanalimab and zimberelimab combinations, STAR-121 and STAR-221, and is obligated to make certain milestone payments contingent upon successfully satisfying the related clinical milestones. During the three months 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.

As of September 30, 2023, Taiho has licenses for the Taiho Territory to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti PD-1 program); and (iii) domvanalimab and AB308 (collectively, the anti-TIGIT program).

For the three months ended September 30, 2023 and 2022, we recognized revenue of $4 million and $2 million, respectively, and we recognized net reimbursements from Taiho as a reduction in R&D expense of $2 million for the three months ended September 30, 2023. For the nine months ended September 30, 2023 and 2022, we recognized revenue of $4 million and $5 million, respectively and we recognized net reimbursements from Taiho as a reduction in R&D expense of $4 million for the nine months ended September 30, 2023. For a more detailed discussion on revenues see Note 5, Revenues.

AstraZeneca Collaboration

In 2020, we entered into a collaboration with AstraZeneca to evaluate domvanalimab, our investigational anti-TIGIT antibody, in combination with AstraZeneca’s durvalumab in a registrational Phase 3 clinical trial in patients with unresectable Stage 3 non-small cell lung cancer (NSCLC), known as the PACIFIC-8 trial. Under the collaboration, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply their respective investigational product to support the trial. Under the terms of the agreement, we will reimburse AstraZeneca for its share of the trial costs upon the achievement of certain milestones or under certain circumstances if the agreement is terminated early. The portion of the costs that we consider to be unavoidable are accrued in advance of the achievement of the milestone.

For the three months ended September 30, 2023 and 2022, we recognized as R&D expense $1 million and $1 million, respectively, before expected recoveries from our cost-sharing agreement with Gilead. For the nine months ended September 30, 2023 and 2022, we recognized as R&D expense $6 million and $3 million, respectively, before expected recoveries from our cost-sharing agreement with Gilead. At September 30, 2023 and December 31, 2022, we have recognized a liability of $11 million and $5 million, respectively, related to our obligation to AstraZeneca which is recorded in Other noncurrent liabilities.

The PACIFIC-8 trial forms part of the Arcus and Gilead joint development program for domvanalimab and our portion of the trial costs are shared with Gilead. At September 30, 2023 and December 31, 2022, we have recognized a receivable due from Gilead for these shared costs of $6 million and $2 million, respectively, which is recorded in Other noncurrent assets.

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WuXi Biologics License - anti-PD-1

In 2017, we entered into an agreement with WuXi Biologics Ireland Limited (WuXi Biologics) which, as amended, provides us with exclusive rights to (i) develop, use and manufacture products that include an anti-PD-1 antibody, including zimberelimab, worldwide and (ii) commercialize any such products worldwide, except in Greater China. Under the agreement, as of September 30, 2023, we may incur (i) clinical and regulatory milestone payments, and commercialization milestone payments of up to $375 million, (ii) tiered royalties that range from the high single-digits to low teens on net sales of the licensed products and (iii) fees related to any sublicenses.

For the three and nine months ended September 30, 2023 and 2022, we did not have any transactions nor were any amounts 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 the agreement. As of September 30, 2023, 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 months ended September 30, 2023 and 2022, we incurred no development milestones nor were any amounts due under this arrangement. For the nine months ended September 30, 2023 and 2022, we incurred development milestones under this arrangement of $1 million and $2 million, respectively, which were recognized as R&D expense.

Abmuno License

In 2016, we entered into an agreement with Abmuno Therapeutics LLC (Abmuno), under which we obtained the exclusive worldwide license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. As of September 30, 2023 we may incur additional clinical, regulatory and commercialization milestone payments of up to $88 million under this agreement.

For the three and nine months ended September 30, 2023 and 2022, we did not have any transactions nor were any amounts due under this arrangement.

Note 5. Revenues

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


			Three Months Ended September 30,				Nine Months Ended September 30,
	Over time	Point in time	2023		2022		2023		2022
Gilead Collaboration
License and R&D services	*		$	20	$	23	$	57	$	48
Access rights	*		8		8		25		25
Taiho Collaboration
R&D services	*		4		—		4		—
Access rights	*		—		2		—		5
Total revenues			$	32	$	33	$	86	$	78

Revenues from Gilead accounted for 88% and 94% of Total revenues for the three months ended September 30, 2023 and 2022, respectively and 95% and 94% for the nine months ended September 30, 2023 and 2022, respectively.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue recognized from amounts included in deferred revenue at the beginning of the period	$	28	$	33	$	79	$	78

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Revenue for the nine months ended September 30, 2023 includes a net $1 million cumulative catch-up of revenue due to changes in the total estimated effort to be incurred in the future to satisfy the Gilead license and R&D services performance obligations, primarily related to lower estimated late-stage clinical trial costs for etrumadenant, partially offset by higher estimated late-stage clinical trial costs for quemliclustat.

We had $429 million and $452 million of deferred revenue remaining on our Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022, respectively, allocated between current and noncurrent based on the expected timing of future recognition.

Revenue from the Gilead Collaboration

Activity for performance obligations under this arrangement for the periods presented herein was as follows:

Inflammation Programs - R&D Services

Allocation to performance obligations

Distinct

Amount

Inflammation target 1

Inflammation target 2

Total allocated transaction price

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 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. 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 and $3 million for the three and nine months ended September 30, 2023, respectively, within Other collaboration revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $32 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to these performance obligations.

Etrumadenant - License and R&D Services

Under the First Gilead Collaboration Agreement Amendment, Gilead has an exclusive license and we are also obligated to perform further R&D services for Gilead related to etrumadenant. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We allocated arrangement consideration of $219 million to the combined license and R&D services performance obligation and recognize the amounts allocated as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized revenue of $21 million and $3 million for the three months ended September 30, 2023 and 2022, respectively, and $39 million and $21 million for the nine months ended September 30, 2023 and 2022, respectively, within License and development service revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $146 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to this performance obligation.

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Quemliclustat - License and R&D Services

Under the First Gilead Collaboration Agreement Amendment, Gilead has an exclusive license and we are also obligated to perform further R&D services for Gilead related to quemliclustat. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We allocated arrangement consideration of $176 million to the combined license and R&D services performance obligation and recognize the amounts allocated as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized a reversal of revenue of $4 million for the three months ended September 30, 2023 due to changes in the total estimated effort to be incurred in the future to satisfy the performance obligations, primarily related to revised clinical trial assumptions and revenue of $12 million for the three months ended September 30, 2022. We recognized revenue of $11 million and $16 million for the nine months ended September 30, 2023 and 2022, respectively, within License and development service revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $138 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to this performance obligation.

Domvanalimab - R&D Services

Under the First Gilead Collaboration Agreement Amendment, we have an obligation to perform further R&D services for Gilead related to domvanalimab. We determined that these services are distinct based on an evaluation of the delivery of the related license, noting that the program was in the later stages of development and license met the criteria for being distinct from the R&D services required. We allocated arrangement consideration of $34 million to the R&D services performance obligation and recognize the amounts allocated as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized revenue of $1 million for the three months ended September 30, 2023, and $3 million and $2 million for the nine months ended September 30, 2023 and 2022, respectively, within License and development service revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $27 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to this performance obligation.

Zimberelimab - R&D and Commercialization Services

Under the First Gilead Collaboration Agreement Amendment, we have an obligation to perform further R&D and commercialization services for Gilead related to zimberelimab, as a monotherapy and in combination with other agents. We determined that these services are distinct based on an evaluation of the delivery of the related license, noting that the program was in the later stages of development and license met the criteria for being distinct from the R&D and commercialization services required. We allocated arrangement consideration of $11 million to the R&D and commercialization services performance obligation and recognize the amounts allocated as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized no revenue for the three months ended September 30, 2023 and $8 million for the three months ended September 30, 2022. We recognized $1 million and $9 million for the nine months ended September 30, 2023 and 2022, respectively, within License and development service revenue in our Condensed Consolidated Statements of Operations. As of December 31, 2022, substantially all the revenue related to this performance obligation had been recognized.

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 of ten years, contingent upon option continuation payments totaling $300 million, consisting of a $100 million payment on each of the fourth, sixth, and eighth anniversaries of the agreement. We allocated arrangement consideration of $121 million to this performance obligation.

We use a time-elapsed input method to measure progress toward satisfying this obligation, which is the method we believe most faithfully depicts our performance in transferring the promised services during the time period in which Gilead has access to our R&D pipeline. Accordingly, the revenue allocated to this performance obligation is being recognized using this input method over the minimum four-year period. We have determined that Gilead is not obligated to pay the remaining $300 million due over the remainder of the term and excluded these payments from the transaction price. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from our R&D pipeline.

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We recognized revenue of $8 million associated with the performance of this obligation for each of the three months ended September 30, 2023 and 2022, and $25 million for each of the nine months ended September 30, 2023 and 2022, within Other collaboration revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $62 million of deferred revenue on our Condensed Consolidated Balance Sheet related to this performance obligation.

Revenue from the Taiho Collaboration

In September 2023, under the Taiho collaboration, certain clinical milestones for domvanalimab and zimberelimab were met through the STAR-221 study and Taiho became obligated to pay us $28 million, which is recorded in Receivable from collaboration partners at September 30, 2023 on our Condensed Consolidated Balance Sheet. We determined that we have a performance obligation to perform R&D services for Taiho related to the global development activities for the STAR-221 study in support of the Taiho Territory. We allocated the $28 million to this single performance obligation and recognize the amounts allocated to this service as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the programs.

We recognized revenue of $4 million for both the three and nine months ended September 30, 2023 within License and development service revenue in our Condensed Consolidated Statements of Operations. At September 30, 2023, we had $24 million of deferred revenue remaining on our Condensed Consolidated Balance Sheet related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

Capitalized Costs to Obtain Contracts

We incurred certain costs to obtain the Gilead Collaboration Agreement in 2020 and the First Gilead Collaboration Agreement Amendment in 2021, which consisted of consultant and legal fees. We allocated these costs to the various performance obligations, to be recognized as the underlying performance obligations are satisfied and revenue is recognized.

For the three months ended September 30, 2023 and 2022, the recognized expense was not significant. For each of the nine months ended September 30, 2023 and 2022, we recognized $1 million expense related to these capitalized costs in G&A expense. At September 30, 2023, we had $3 million in capitalized costs to obtain the contracts, of which $1 million was recorded as Prepaid expenses and other current assets and $2 million was recorded as Other noncurrent assets in our Condensed Consolidated Balance Sheet.

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.

The income tax expense was $2 million for the three months ended September 30, 2023, with an effective tax rate of (2.4%). We did not record a provision for income taxes for the three months ended September 30, 2022. The income tax expense was $5 million and $1 million for the nine months ended September 30, 2023 and 2022, with an effective tax rate of (2.2%) and (0.5%), respectively. The year-over-year increase in the income tax provision was due to an increase in taxable income. We have 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 research and development 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, 2023 and December 31, 2022, 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, or any state or foreign tax authority. We are subject to taxation in the United States and in Australia. Due to net operating loss and research credit carryforwards, all of our tax years, from 2015 to 2022, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2018 to 2022 are open to examination in Australia.

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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):


	September 30, 2023	September 30, 2022
Common stock options issued and outstanding	13.7	12.3
Restricted stock units issued	1.9	1.4
Employee Stock Purchase Plan shares	0.2	0.1
Total potential dilutive securities	15.8	13.8

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, 2023 or 2022.

Note 8. Stock-based compensation

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Research and development	$	8	$	8	$	26	$	24
General and administrative	10		8		29		24
Total stock-based compensation	$	18	$	16	$	55	$	48

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):


Types of securities as of September 30, 2023	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Money market funds	$	110	$	—	$	—	$	110
U.S. treasury securities	246		—		(1)		245
Corporate securities and commercial paper	493		—		(2)		491
U.S. government agency securities	96		—		—		96
Certificate of deposit	8		—		—		8
Total cash, cash equivalents and marketable securities	$	953	$	—	$	(3)	$	950


Types of securities as of December 31, 2022	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Money market funds	$	169	$	—	$	—	$	169
U.S. treasury securities	317		—		(3)		314
Corporate securities and commercial paper	635		—		(4)		631
U.S. government agency securities	20		—		—		20
Certificate of deposit	4		—		—		4
Total cash, cash equivalents and marketable securities	$	1,145	$	—	$	(7)	$	1,138

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):

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Location in Condensed Consolidated Balance Sheets	Contractual Maturity	September 30, 2023		December 31, 2022
Cash and cash equivalents	-	$	184	$	206
Marketable securities	Within one year	615		803
Long-term marketable securities	Between one and three years	151		129
Total cash, cash equivalents and marketable securities		$	950	$	1,138

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, 2023 and 2022. 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 159 and 219 positions in securities which were in unrealized loss positions as of September 30, 2023 and December 31, 2022, 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):


	September 30,
	2023		2022
Cash and cash equivalents	$	184	$	218
Restricted cash (included in Other noncurrent assets)	3		3
Total cash, cash equivalents and restricted cash	$	187	$	221

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):


	September 30, 2023		December 31, 2022
Prepaid expenses and other assets	$	27	$	15
Accrued interest receivable	4		4
Total prepaid expenses and other current assets	$	31	$	19

Other Current Liabilities

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


	September 30, 2023		December 31, 2022
Accrued research and development	$	41	$	45
Accrued personnel expenses	22		25
Current portion of lease liabilities	9		3
Income taxes payable	3		—
Other	5		3
Total other current liabilities	$	80	$	76

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Note 11. Leases

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


	Nine Months Ended September 30,
	2023		2022
Cash paid for amounts included in measurement of lease liabilities	$	12	$	8
Cash received from tenant improvement allowances	$	8	$	8
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	3
Recognition of tenant improvement allowance receivable included in Other current liabilities	$	4	$	6

As of September 30, 2023 and December 31, 2022, 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 in the Condensed Consolidated Balance Sheets.

Note 12. Stockholders' Equity

Gilead Stock Purchase

In June 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 a total cost of $20 million.

At-the-Market Facility

In February 2023, we entered into an equity distribution agreement pursuant to which we may, from time to time, sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $200 million. 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 13. 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.

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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):


Fair value measurement as of September 30, 2023	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	110	$	—	$	—	$	110
U.S. treasury securities	—		245		—		245
Corporate securities and commercial paper	—		491		—		491
U.S. government agency obligations	—		96		—		96
Certificate of deposit	—		8		—		8
Total assets measured at fair value	$	110	$	840	$	—	$	950
Liabilities
Liability for sale of future royalties	$	—	$	—	$	19	$	19
Total liabilities measured at fair value	$	—	$	—	$	19	$	19


Fair value measurement as of December 31, 2022	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	169	$	—	$	—	$	169
U.S. treasury securities	—		314		—		314
Corporate securities and commercial paper	—		631		—		631
U.S. government agency securities	—		20		—		20
Certificate of deposit	—		4		—		4
Total assets measured at fair value	$	169	$	969	$	—	$	1,138
Liabilities
Liability for sale of future royalties	$	—	$	—	$	17	$	17
Total liabilities measured at fair value	$	—	$	—	$	17	$	17

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 research and development activities in the 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 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 BVF Agreement 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.

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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 quarter and nine months ended September 30, 2023 was not material when compared to the prior year periods. 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):


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	17	$	5
Cash received	—		5
Interest accretion	2		2
Ending balance	$	19	$	12

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited Condensed Consolidated Financial Statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on February 28, 2023. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Further, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Our actual results could differ materially from those discussed in these forward-looking and other statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk Factors.”

Overview

We are a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in four Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications. We expect our clinical-stage portfolio to continue to expand and to include molecules targeting immuno-oncology, cancer cell-intrinsic and immunological pathways. Our vision is to create, develop and commercialize highly differentiated therapies that have a meaningful impact on patients.

Our Clinical Product Portfolio

We are currently developing multiple investigational products in clinical studies, including new combination approaches that target TIGIT, PD-1, the adenosine axis (CD73 and dual A2a/A2b receptor) and HIF-2a. We have entered into an Option, License and Collaboration Agreement (as amended, the Gilead Collaboration Agreement) with Gilead Sciences, Inc. (Gilead) to strategically advance our portfolio through a collaborative relationship. The Gilead Collaboration Agreement provides Gilead with an exclusive license to our anti-PD-1 program (including zimberelimab) and time-limited exclusive option rights to our clinical programs, which they have exercised for our anti-TIGIT program (including domvanalimab), adenosine receptor antagonist program (including etrumadenant) and CD73 program (including quemliclustat). For all such optioned programs, we are co-developing investigational products with Gilead.

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The following chart summarizes our clinical pipeline:

dom: domvanalimab; etruma: etrumadenant; gem/nab-pac: gemcitabine/nab-paclitaxel; nivo: nivolumab; pembro: pembrolizumab; quemli: quemliclustat; rego: regorafenib; zim: zimberelimab

*+/- biologic, e.g. bevacizumab or biosimilar, will be included for all patients in whom it is not contraindicated

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Recent Developments

The following is a summary of the recent significant developments affecting our business:

•In November 2023, we presented preliminary data from Arm A1 of the Phase 2 EDGE-Gastric study, evaluating domvanalimab plus zimberelimab and chemotherapy in patients with previously untreated, locally advanced unresectable or metastatic upper gastrointestinal (GI) cancers. These data were from the cohort that includes a similar patient population and dosing regimen as the ongoing Phase 3 study, STAR-221.

◦Domvanalimab plus zimberelimab and chemotherapy showed encouraging objective response rates (ORR) of 80% (confirmed ORR (cORR) of 73%) in patients with PD-L1-high tumors (tumor activity positivity (TAP) ≥5%), 46% (all confirmed) in patients with PD-L1-low (TAP <5%) tumors and 59% (cORR of 56%) for patients overall.

◦Six-month landmark progression-free survival (PFS) was 93% for patients with PD-L1-high tumors (TAP ≥5%), 68% for patients with PD-L1-low tumors (TAP <5%) and 77% for patients overall. Mature PFS has not been reached and data are expected in the second half of 2024.

◦Domvanalimab plus zimberelimab and chemotherapy was well tolerated, with a similar safety profile to what has been reported for anti-PD1 plus chemotherapy in this setting.

•Pharmacokinetic and pharmacodynamic data from the dose-escalation phase of ARC-20, a Phase 1b study in cancer patients of AB521, a potential best-in-class HIF-2a inhibitor, is consistent with results seen in healthy volunteers.

Components of Operating Results

Revenues

We have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been through research, collaboration and license arrangements with strategic partners.

License and Development Services Revenue

Our license and development services revenue consists of amounts recognized from the portions of the nonrefundable upfront and milestone payments received from Gilead and Taiho and allocated to performance obligations for licenses or R&D activities performed by us as we develop our investigational products under the terms of our collaboration agreements. License and development services revenues are recognized based upon the timing of the delivery of a license or service if delivery is complete, or based on estimates of each performance obligation's percentage of completion at the period end if it is still in process. We calculate percentage of completion as a ratio of effort incurred to date on each performance obligation to the total estimated effort to be incurred to satisfy that performance obligation.

Other Collaboration Revenue

Other collaboration revenue consists primarily of amounts recognized from the portions of the nonrefundable upfront payments received from Gilead and Taiho and allocated to performance obligations relating to access to our investigational pipeline recognized over the period of access.

Operating Expenses

Research and Development Expenses

Our research and development expenses consist of expenses incurred in connection with the research and development of our pipeline programs. These expenses include preclinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees, laboratory supplies, product licenses, consulting costs, contract research, and depreciation. Shared facility expenses are allocated to functional groups proportionally based on usage. Under certain collaboration agreements we agree to share research and development expenses with our partners. Such cost sharing arrangements may result in receiving reimbursement from our partners or require that we reimburse our partners for qualified expenses. We expense both internal and external research and development costs as they are incurred. We record advance payments for services that will be used or rendered for future research and development activities as prepaid expenses and recognize them as an expense as the related services are performed. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense.

We do not allocate our costs by investigational product, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, and certain external costs that are not

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recorded at the investigational product level. In particular, with respect to internal costs, several of our departments support multiple research and development programs, and we do not allocate those costs by investigational product.

The level of our future research and development investment will depend on a number of factors and uncertainties, including the breadth of the joint development program agreed to with Gilead for the optioned programs, the outcome of our efforts, and the amount of cost reimbursements or milestone payments we receive from our collaborators. We expect our research and development expenses to increase substantially during the next few years as we pursue joint development programs with Gilead and advance these programs towards regulatory approval. We also expect to advance new programs into the clinic. All of this will require significant growth in our development capabilities and infrastructure. In addition, our joint development programs with Gilead for the optioned molecules are anticipated to include a significant number of later-stage clinical trials, which typically include a larger number of subjects, are of a longer duration and include more geographic regions. As we advance our clinical-stage programs and prepare to seek regulatory approval, we will also need to increase our late-stage manufacturing activities. As a result, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date.

In addition, under our arrangements with WuXi Biologics, Abmuno, AstraZeneca and BVF, we may incur additional clinical and regulatory milestone payments based on the development progress of our investigational products. We may also be required to pay royalties in the event of a successful product launch and our receipt of commercial revenues. Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors. Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A. Risk Factors.”

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our general and administrative expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses. We do not receive significant reimbursements of these costs through our collaboration with Gilead.

We anticipate that our general and administrative expenses will increase during the next few years as we support our growing research and development activities, including due to staff expansion, and other costs associated with increased infrastructure needs.

Non-Operating Income, net

Non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities and non-cash interest expense incurred under the effective interest method on our liability for sale of future royalties to BVF.

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Results of Operations

The following table summarizes our results of operations (in millions):


	Three Months Ended September 30,				Change		Nine Months Ended September 30,				Change
	2023		2022				2023		2022
Revenues:
License and development service revenue	$	22	$	23	(4	%)	$	58	$	48	21	%
Other collaboration revenue	10		10		0	%	28		30		(7)	%
Total revenues	32		33		(3	%)	86		78		10	%
Operating expenses:
Research and development	82		77		6	%	247		208		19	%
General and administrative	30		26		15	%	88		76		16	%
Total operating expenses	112		103		9	%	335		284		18	%
Loss from operations	(80)		(70)		14	%	(249)		(206)		21	%
Non-operating income, net	11		5		120	%	28		7		*
Loss before income taxes	(69)		(65)		6	%	(221)		(199)		11	%
Income tax expense	(2)		—		*		(5)		(1)		*
Net loss	$	(71)	$	(65)	9	%	$	(226)	$	(200)	13	%

*Not meaningful

Total Revenues

The decrease in Total revenues for the three months ended September 30, 2023 was primarily driven by decreased revenues from license and development services due to the progress in research and development activities for our programs, primarily zimberelimab, partially offset by an increase in revenue related to our Taiho collaboration.

The increase in Total revenues for the nine months ended September 30, 2023 was primarily driven by increased revenues from license and development services due to the progress in the research and development activities for our programs, primarily etrumadenant, partially offset by a decrease in revenue recognized for zimberelimab.

See Note 5, Revenues to our Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion of the amount and timing of revenues recognized from our license and collaboration agreements.

Research and Development Expenses

The increase of 6% or $5 million in Research and development expenses for the three months ended September 30, 2023 was primarily driven by: $7 million of higher spend for Arcus programs not under a cost-sharing collaboration due to our expanding clinical and development activities; partially offset by a net decrease of $2 million in shared costs for programs optioned by our collaboration partners, primarily from the Gilead collaboration. The net decrease of $2 million was due to a decrease in shared collaboration costs of $10 million primarily from the timing of clinical manufacturing; with a corresponding decrease in reimbursements for shared expenses of $8 million. Non-cash stock-based compensation expense was $8 million for each of the third quarter 2023 and 2022. The net increase was primarily driven by: $3 million in net clinical costs due to our expanding clinical and development activities as we enrolled more patients in our existing and new studies; and $3 million increase in net employee compensation costs due to our growing headcount.

The increase of 19% or $39 million in Research and development expenses for the nine months ended September 30, 2023 was primarily driven by: $47 million in higher costs incurred to support our expanded clinical and development activities including $19 million in higher costs due to the timing of standard-of-care therapeutic purchases and $17 million in lower costs due to the timing of clinical manufacturing; partially offset by $8 million in higher reimbursements for shared expenses from our collaborations, primarily the Gilead collaboration. The net increase was primarily driven by $21 million in net clinical costs due to our expanding clinical and development activities as we enrolled more patients in our existing and new studies and $19 million increase in net employee compensation costs due to our growing headcount, including $2 million in increased non-cash stock-based compensation.

For the three months ended September 30, 2023 and 2022, we recognized reimbursements for shared expenses from our collaborations of $33 million and $41 million, respectively. For the nine months ended September 30, 2023 and

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2022, we recognized reimbursements for shared expenses from our collaborations of $119 million and $111 million, respectively. Reimbursements are driven primarily by the Gilead collaboration.

R&D expense by quarter may fluctuate due to the timing of clinical manufacturing and standard-of-care therapeutic purchases with a corresponding impact on reimbursements.

General and Administrative Expenses

The increase of 15% or $4 million in General and administrative expenses for the three months ended September 30, 2023 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. Our growing headcount and our 2023 stock awards drove a $2 million increase in employee compensation costs, primarily due to increased non-cash stock-based compensation.

The increase of 16% or $12 million in General and administrative expenses for the nine months ended September 30, 2023 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. Our growing headcount and our 2023 stock awards drove a $9 million increase in employee compensation costs, including $5 million in increased non-cash stock-based compensation.

Non-Operating Income, net

The increase of $6 million and $21 million in Non-operating income, net for the three and nine months ended September 30, 2023, respectively, was primarily due to higher interest income resulting from increased investment yields as compared to the prior year.

Income Tax Expense

The increase of $2 million and $4 million in Income tax expense for the three and nine months ended September 30, 2023, respectively was primarily due to an increase in taxable income compared to the prior year.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily from the sale of our equity securities and payments received under our research, collaboration and license agreements with our strategic partners including Gilead. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our investigational products and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs.

As of September 30, 2023, we had $950 million of cash, cash equivalents, and marketable securities, compared to $1.1 billion as of December 31, 2022. The decrease in cash from the prior year end is primarily due to the use of cash in our research and development activities. Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. government treasury obligations, investments in corporate securities and certificates of deposit.

Based on our existing business plan, we believe that our existing cash, cash equivalents, and marketable securities will be sufficient to fund our planned level of operations into 2026.

Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets. It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our investigational products. This is made more challenging by events outside of our control. Accordingly, our operating plan may change, including as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

See “Part II, Item 1A. Risk Factors” for additional risks associated with our substantial capital requirements.

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Cash Flows

The following table summarizes our cash flow activities for each of the periods presented below (in millions):


	Nine Months Ended September 30,
Net cash provided by (used in):	2023		2022
Operating activities	$	(218)	$	508
Investing activities	$	166	$	(460)
Financing activities	$	30	$	22

Operating Activities

Net cash used in operating activities was $218 million for the nine months ended September 30, 2023 as compared to net cash provided by operating activities of $508 million for the same period in the prior year. The change in operating cash flows is primarily due to $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement.

Investing Activities

Cash provided by investing activities for the nine months ended September 30, 2023 was primarily due to net proceeds from marketable securities of $184 million.

Cash used in investing activities for the nine months ended September 30, 2022 was primarily due to net purchases of short-term and long-term securities as we invested a portion of the $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement.

Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2023 was due to net proceeds of $25 million from issuance of our common stock and proceeds of $5 million for stock issued under our equity award plans.

Cash provided by financing activities for the nine months ended September 30, 2022 was due to net proceeds of $17 million for stock issued under our equity award plans and $5 million received under the BVF agreement.

Critical Accounting Judgments and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations outside the ordinary course of business during the nine months ended September 30, 2023, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from changes in interest rates and foreign currency exchange rates. Our market risks have not changed materially from those discussed in our Annual Report on Form 10-K filed with the SEC on February 28, 2023.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (Exchange Act) reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity, reputational harm and other factors.

Item 1A. Risk Factors.

You should consider carefully the following risk factors, together with all the other information in this report, including our Condensed Consolidated Financial Statements and notes thereto, and in our other public filings with the SEC, including our Annual Report on Form 10-K filed with the SEC on February 28, 2023. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business.

Risks Related to our Limited Operating History, Financial Position and Capital Requirements

We have a history of operating losses, have never generated any revenue from product sales and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a pre-commercial immuno-oncology company with a limited operating history that may make it difficult to evaluate the success of our business to date and to assess our future viability. All of our investigational products are in development, and none have been approved for commercial sale nor have we ever generated any revenue from product sales. Our revenues to date have been primarily from upfront and milestone payments, research and development support and clinical materials reimbursement from our strategic partners. For the nine months ended September 30, 2023 and the year ended December 31, 2022 we had net losses of $226 million and $267 million, respectively. As of September 30, 2023, we had an accumulated deficit of $768 million. We expect that it will be several years, if ever, before we have an investigational product ready for commercialization. While we may receive income from year to year under the Gilead Agreement and Taiho Agreement, we generally expect to incur substantial and increasing levels of operating losses over the next several years and for the foreseeable future as we advance our investigational products. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

To become and remain profitable on a sustained basis, we must develop and eventually commercialize a product with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our investigational products, obtaining marketing approval for these investigational products, manufacturing, marketing and selling those products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in these activities and, even if we succeed in commercializing one or more of our investigational products, we may never generate revenues that are significant or large enough to achieve sustained profitability. In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges. If we do achieve profitability from product sales, we may not be able to sustain or increase profitability on a quarterly or annual basis and we will continue to incur substantial research and development and other expenditures to develop and market additional investigational products. Our failure to become and remain profitable on a sustained basis would decrease the value of the company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment.

We may need to obtain additional funding to finance our operations and complete the development and any commercialization of our investigational products. If we do not receive substantial opt-in, milestone or royalty payments from our existing collaboration agreements, or are unable to raise additional capital when needed, we may be forced to restrict our operations or delay, reduce or eliminate our product development programs.

The development of biopharmaceutical investigational products is capital intensive. Since our inception, we have used substantial amounts of cash to fund our operations and expect our expenses to increase substantially during the next few years as our investigational products enter and advance into and through large late-stage or registrational clinical trials and we expand our clinical, regulatory, quality and manufacturing capabilities. In addition, if we obtain marketing approval for any of our investigational products, we expect to incur significant commercialization expenses related to marketing, sales, manufacturing and distribution.

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As of September 30, 2023, we had $950 million of cash, cash equivalents and marketable securities. While we believe that our cash position will be sufficient to fund our anticipated level of operations into 2026, our future capital requirements will depend on many factors, including:

•the number, scope, rate of progress and costs of clinical programs and investigational products as well as drug discovery, preclinical development activities, and laboratory testing;

•the scope and costs of manufacturing development and commercial manufacturing activities;

•the scope and costs of developing and supporting new non-oncology programs;

•the scope of any cost sharing arrangements with our strategic partners;

•the timing and amount of milestone payments and option fees we receive under the Gilead Collaboration Agreement and Taiho Agreement;

•the extent to which we acquire or in-license other investigational products and technologies;

•the cost, timing and outcome of regulatory review of our investigational products;

•the cost and timing of establishing sales and marketing capabilities, if any of our investigational products receive marketing approval;

•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•the costs associated with being a public company; and

•the cost associated with commercializing our investigational products, if they receive marketing approval.

We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our investigational products. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. In addition, if we are able to raise additional capital, raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or investigational products.

Risks Related to the Discovery and Development of our Investigational Products

If we are unable to obtain regulatory approval for our investigational products, or experience significant delays in doing so, our business will be materially harmed.

We have no products approved for sale and our investigational products must be approved by the Food and Drug Administration (FDA) in the United States and similar regulatory authorities outside the United States, such as the EMA, prior to commercialization. The process of obtaining marketing approvals, both in the United States and abroad, is expensive and takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the investigational product’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities, among other requirements. Our investigational products may not be effective, may be only moderately effective, may not have an acceptable durability of response, may not have an acceptable risk-benefit profile or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining marketing approval or limit their commercial use. Our investigational products may not be approved even if they achieve their primary endpoints in any Phase 3 clinical trials or registrational trials we or our collaborators conduct.

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The FDA and comparable foreign regulatory authorities have substantial discretion in the approval process and in determining when or whether marketing approval will be obtained for any of our investigational products. Regulatory authorities may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of an investigational product. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may also cause delays in or prevent the approval of an application. For example, since a key element of our strategy is the development of intra-portfolio combinations, regulatory authorities may disagree that we have sufficiently demonstrated the contribution of each investigational product or other agent in our combination trials and require further studies.

Even if we are able to obtain marketing approvals for any of our investigational products, those approvals may be for indications that are not as broad as desired or may contain other limitations that would adversely affect our ability to generate revenue from sales of those products. Moreover, if we are not able to differentiate our product against other approved products within the same class of drugs, or if any of the other circumstances described above occur, our business would be materially harmed and our ability to generate revenue from that class of drugs would be severely impaired.

If we experience delays in obtaining approval or if we fail to obtain approval of our investigational products, the commercial prospects for our investigational products may be harmed and our ability to generate revenues will be materially impaired.

Clinical drug development is a lengthy, expensive and uncertain process.

The research and development of drugs and biological products is an extremely risky industry. Only a small percentage of investigational products that enter the development process ever receive marketing approval. Before obtaining marketing approval from regulatory authorities for the sale of any investigational product, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our investigational products in humans. Clinical testing is expensive, can take many years to complete and its outcome is uncertain.

The results of preclinical studies and early clinical trials are not always predictive of future results.

The results of preclinical and early clinical trials of our investigational products and other products with the same mechanism of action may not be predictive of the results of later-stage clinical trials. Clinical trial failure may result from a multitude of factors including flaws in study design, dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits. As such, failure in clinical trials can occur at any stage of testing. A number of companies in the biopharmaceutical industry have suffered setbacks in the advancement of clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from clinical trials are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may further delay, limit or prevent marketing approval. In particular, results from uncontrolled trials, meaning trials in which there is no control group such as a placebo group, are inherently difficult to interpret. This difficulty is compounded in clinical trials such as ours, in which two or more investigational products that have not yet been approved are being evaluated. Accordingly, the preliminary data from clinical trials of certain of our investigational products may not be predictive of future clinical trial results for these or other investigational products when studied in a randomized environment or larger patient populations.

Most of our clinical trials are open-label studies and may be susceptible to bias.

Most of our clinical trials, including our Phase 3 trials, are open-label studies in which both the patient and investigator know whether the patient is receiving the investigational products or either an existing approved drug or placebo. Open-label clinical trials are susceptible to bias that may exaggerate any therapeutic effect or overestimate the risk associated with the investigational product. Patients may perceive their symptoms to have improved merely due to their awareness of receiving an experimental treatment. Investigators may interpret the information of the treated group more favorably given their awareness of the treatment regimen or may attribute safety risks to the investigational product.

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Enrollment and retention of subjects in clinical trials is expensive and time consuming, can be made more difficult or rendered impossible by competing treatments, clinical trials of competing investigational products, geopolitical instability and public health epidemics, each of which could result in significant delays and additional costs in our product development activities, or in the failure of such activities.

We may encounter delays in enrolling, or be unable to enroll and maintain, a sufficient number of subjects to complete any of our clinical trials. Patient enrollment and retention in clinical trials is a significant factor in the timing and cost of clinical trials and depends on many factors, including the size of the patient population required for analysis of the trial’s primary endpoints, the nature of the trial protocol, our ability to recruit clinical trial investigators with the appropriate competencies and experience, the existing body of safety and efficacy data with respect to the investigational product, the number and nature of competing products or investigational products and ongoing clinical trials of competing investigational products for the same indication, the proximity of subjects to clinical trial sites, the eligibility criteria for the clinical trial and our ability to obtain and maintain subject consents.

For example, enrollment of oncology subjects in our clinical trials evaluating zimberelimab may be hampered by nivolumab from Bristol-Myers Squibb and pembrolizumab from Merck, both of which are approved and on the market. Subjects may opt to be treated with an approved product rather than our anti-PD-1 antibody investigational product. In addition, Roche/Genentech, Merck and Beigene have initiated numerous Phase 3 trials with their respective anti-TIGIT antibodies, which could reduce the number of clinical sites and subjects available for our registrational program for domvanalimab (our anti-TIGIT antibody), including ARC-10 and STAR-121, each Phase 3 trials in lung cancer, and STAR-221, our Phase 3 trial in upper gastrointestinal tract cancer.

Geopolitical instability and public health outbreaks may have an adverse impact our clinical trial operations. For example, we suspended clinical trial activities, including the enrollment of subjects, following the outbreak of war in Israel. If there are other geopolitical conflicts, a resurgence of the COVID-19 pandemic or additional public health outbreaks, we may further suspend or redirect our clinical trial activities, regulatory authorities and ethics committees may choose to divert resources and the time for review of new studies and any protocol or other amendments for ongoing studies may be prolonged. Our investigational sites may intermittently divert resources in order to respond to an ongoing health or humanitarian crisis, which could cause delays and limit their ability to initiate new studies. The limited resources at investigational sites in these situations would further hinder their ability to screen and enroll subjects, conduct and report all patient assessments and collect all patients' samples, thereby impacting our ability to assess the activity of our investigational products in a timely manner.

In addition, recruiting and retaining subjects in our clinical trials may be adversely impacted by negative results that we report in our other clinical trials using the same investigational products or by negative results reported by others using investigational products with the same mechanism of action as our investigational products. Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our investigational products. Failures in planned subject enrollment or retention may result in increased costs or program delays and could render further development impossible.

If we do not achieve our product development goals in the time frames we announce and expect, the commercialization of our investigational products may be delayed, our share price may decline and our commercial prospects may be adversely affected.

Drug development is inherently risky and uncertain. The actual timing of our development milestones can vary significantly compared to our estimates, in some cases for reasons beyond our control, for any number of reasons, including:

•delays in completing IND-enabling preclinical studies or developing manufacturing processes and associated analytical methods that meet good manufacturing practice (cGMP) requirements;

•the FDA placing a clinical trial on hold;

•the FDA requesting additional information, which could necessitate generating additional information at significant cost in terms of both time and expenses;

•our prioritization of other of our investigational products for advancement or the emergence of competing investigational products developed by others;

•challenges and delays in trial execution associated with our testing of multiple investigational products in the same indication in different clinical trials;

•subjects failing to enroll or remain in our trial at the rate we expect;

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•subjects choosing an alternative treatment or other investigational products, or participating in competing clinical trials;

•lack of adequate funding to continue our clinical trials;

•subjects experiencing severe or unexpected drug-related adverse effects;

•any interruptions or delays in the supply of our investigational products for our clinical trials;

•a facility manufacturing any of our investigational products or any of their components being ordered by the FDA or comparable foreign regulatory authorities to temporarily or permanently shut down due to violations of cGMP regulations or other applicable requirements, or infections or cross-contaminations of investigational products in the manufacturing process;

•any changes to our manufacturing process or product specifications that may be necessary or desired;

•any failure or delay in reaching an agreement with contract research organizations (CROs) and clinical trial sites;

•third-party clinical investigators losing the licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices (GCP) or regulatory requirements or other third parties not performing data collection or analysis in a timely or accurate manner;

•third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other comparable foreign regulatory authorities for violations of applicable regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications;

•one or more Institutional Review Boards (IRBs) refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial;

•changes in regulatory requirements and policies which may require us to amend clinical trial protocols to comply with these changes and resubmit our clinical trial protocols to IRBs for reexamination;

•delays due to new regulatory requirements which may take time for us and the third-parties we engage to incorporate into our operations to ensure compliance; or

•health crises, such as COVID-19, which may restrict the ability of trial sites to initiate new trials, screen patients for enrollment or treat enrolled patients, and divert clinical trial site resources away from the conduct of our clinical trials.

These and other factors may also lead to the suspension or termination of clinical trials, and ultimately the denial of regulatory approval of an investigational product. Any delays in achieving our development goals may allow our competitors to bring products to market before we do and adversely affect our commercial prospects and cause our stock price to decline.

Preliminary and interim data from our clinical studies that we announce or publish from time to time are subject to audit and verification procedures that could result in material changes in the final data and may change as more patient data become available.

From time to time, we publish preliminary or interim data from our clinical studies. Preliminary data remain subject to audit confirmation and verification procedures that may result in the final data being materially different from the preliminary data we previously published. Interim data are also subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. As a result, topline results that we report may differ from future results of the same studies and interim data should be viewed with caution until the final data are available. Material adverse changes in the final data could significantly harm our business prospects.

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Serious adverse events, undesirable side effects or other unexpected properties of our investigational products may be identified during development or after approval, which could lead to the discontinuation of our clinical development programs, refusal by regulatory authorities to approve our investigational products or limitations on the use of our investigational products or, if discovered following marketing approval, revocation of marketing authorizations or subsequent limitations on the use of our investigational products.

As we continue to develop our investigational products and initiate clinical trials of additional investigational products, serious adverse events, undesirable side effects or unexpected characteristics may emerge causing us to abandon these investigational products or limit their development to more narrow uses or subpopulations in which the serious adverse events, undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Even if our investigational products initially show promise in early clinical trials, the side effects of drugs are frequently only detectable after they are tested in large, Phase 3 clinical trials or, in some cases, after they are made available to patients on a commercial scale after approval. Sometimes, it can be difficult to determine if the serious adverse or unexpected side effects were caused by the investigational product or another factor, especially in oncology subjects who may suffer from other medical conditions and be taking other medications. If serious adverse or unexpected side effects are identified during development and are determined to be attributed to our investigational product, we may be required to develop a Risk Evaluation and Mitigation Strategy (REMS) to mitigate those serious safety risks, which could impose significant distribution and use restrictions on our products.

Drug-related side effects could also affect subject recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business prospects significantly.

In addition, if one or more of our investigational products receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

•regulatory authorities may withdraw approvals of such product;

•regulatory authorities may require additional warnings on the label;

•we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

•regulatory authorities may impose subsequent limitations on the use of the product;

•we could be sued and held liable for harm caused to patients; and

•our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular investigational product, if approved, and could significantly harm our business, results of operations and prospects.

Adverse findings from clinical trials conducted by third parties investigating the same investigational products as us in different territories or different investigational products directed to the same target as one of our programs could adversely affect our development program.

Lack of efficacy, adverse events, undesirable side effects or other adverse findings may emerge in clinical trials conducted by third parties investigating the same investigational products as us in different territories or different investigational products directed to the same target as one of our programs. For example, we and Gloria Biosciences, each licensed our rights to the same anti-PD-1 antibody (which we refer to as zimberelimab) from WuXi Biologics (Cayman) Inc. (WuXi Biologics). Gloria Biosciences refers to this antibody as GLS-010 and is conducting clinical trials with GLS-010 in China. We have no control over their clinical trials or development program, and adverse findings from the results or their conduct of clinical trials could adversely affect our development of zimberelimab or even the viability of zimberelimab as an investigational product. We may be required to report Gloria Biosciences' adverse events or unexpected side effects to the FDA or comparable foreign regulatory authorities, which could, among other things, order us to cease further development of zimberelimab. We may face similar risks from any independent development conducted with our investigational products by Gilead and Taiho, following any exercise of their respective options to our programs.

Further, we have no control over the clinical trials or development program of third parties developing investigational products directed to the same target as one of our programs. Adverse findings or results from any of their clinical trials could adversely affect the commercial prospects of our investigational products and cause our stock price to fluctuate or decline.

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A key element of our strategy is the development of intra-portfolio combinations. If we are not successful in discovering, developing and commercializing investigational products that take advantage of different mechanisms of action to achieve superior outcomes relative to the use of single agents or other combination therapies, our ability to achieve our strategic objectives would be impaired.

A key element of our strategy is to build a broad portfolio of investigational products that will allow for the development of intra-portfolio combinations. We believe that by developing or licensing these investigational products, we can control the combinations we pursue and, if and when approved, maximize the commercial potential of these combinations. However, these combinations have not been tested before and may fail to demonstrate synergistic activity against immunological targets, may fail to achieve superior outcomes relative to the use of single agents or other combination therapies, may exacerbate adverse events associated with one of the investigational products when used as monotherapy, or may fail to demonstrate sufficient safety or efficacy traits in clinical trials to enable us to complete those clinical trials or obtain marketing approval for the combination therapy. In addition, our early clinical trials may test more than one investigational product in uncontrolled studies, and it may be difficult to interpret the results of those uncontrolled trials or evaluate the contribution of each investigational agent in such combination.

Even if we are successful in developing combination therapies, competition from other investigational products in the same class which are either already approved or further along in development than ours may prevent us from realizing the commercial potential of our combination therapies and prevent us from achieving our strategic objectives.

Development of combination therapies may present more or different challenges than development of single agent therapies.

Many of our investigational products are being pursued in combination with one or more additional products or investigational products. The development of combination therapies may be more complex than the development of single agent therapies and generally requires that sponsors demonstrate the contribution of each investigational product to the claimed effect and the safety and efficacy of the combination as a whole. This requirement may make the design and conduct of clinical trials more complex, requiring more clinical trial subjects. We also may not be able to meet the FDA’s current or future approval standards required for combination therapies or combination products, if we decided to administer or package a combination therapy as a single drug product. For example, under the "combination rule", the FDA may not file or approve a fixed-dose combination product unless each component of a proposed drug product is shown to make a contribution to the claimed effects and the dosage of each component (amount, frequency, duration) is safe and effective for the intended population. To satisfy these requirements, the FDA typically requires a clinical factorial study, designed to assess the effects attributable to each drug in the combination product. This is particularly true when the ingredients are directed at the same sign or symptom of the disease or condition. The FDA has accepted a variety of approaches to satisfy the combination rule but the FDA has stated that factorial studies may be unethical (e.g., omitting a drug known to improve survival) or impractical (there may be too many components to conduct a factorial study, meaning the trial cannot be conducted). The FDA has also stated that it may be possible to use other types of clinical and nonclinical data and mechanistic information available to demonstrate the contributions of the individual active ingredients to the effect of the combination. Moreover, the applicable requirements for approval of a combination therapy may differ from country to country.

In the event that one of our investigational products were to fail to demonstrate sufficient safety and efficacy or establish its contribution to the claimed effects of a combination therapies, we would need to identify alternatives. For example, we expect that our anti-PD-1 antibody, zimberelimab, will form the backbone of many of the combination therapies we are pursuing. If we are unable to demonstrate the contribution of zimberelimab to the claimed effects of a combination therapy, we would need to identify an anti-PD-1 antibody for use in such combination therapy. In the event we are unable to do so or are unable to do so on commercially reasonable terms, our business and prospects would be materially harmed.

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Certain of our investigational products may require companion diagnostics in certain indications. Failure to successfully develop, validate and obtain regulatory clearance or approval for such tests could harm our product development strategy or prevent us from realizing the full commercial potential of our investigational products.

Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as a medical device and may require separate regulatory authorization prior to commercialization. Certain clinical trials that we are conducting, such as our Phase 2 ARC-7 trial and our Phase 3 ARC-10 trial, which are each being conducted in patients with PD-L1≥50% NSCLC, include the use of a diagnostic test to help identify eligible patients. Our future trials may also use a diagnostic test to help identify eligible patients. In addition, we have significant efforts directed to identifying changes in various cells and proteins to understand their relationship, if any, to the clinical activity observed in our clinical trials and to assess if such cells and/or proteins could be used as predictive biomarkers to select for patients more likely to respond to our investigational products. However, we cannot be certain that we will be able to identify any such biomarkers, that such biomarkers will result in us identifying the appropriate patients for our investigational products or that we or any third-party collaborators will be able to validate any diagnostic tests incorporating any predictive biomarkers we may identify.

We currently do not have any plans to develop diagnostic tests internally. We are therefore dependent on the sustained cooperation and effort of third-party collaborators in developing and, if our investigational products are approved for use only with an approved companion diagnostic test, obtaining approval and commercializing these tests. If these parties are unable to successfully develop companion diagnostics for these investigational products, or experience delays in doing so, the development of our investigational products may be adversely affected and we may not be able to obtain marketing authorization for these investigational products. Furthermore, our ability to market and sell, as well as the commercial success, of any of our investigational products that require a companion diagnostic will be tied to, and dependent upon, the receipt of required regulatory authorization and the continued ability of such third parties to make the companion diagnostic commercially available on reasonable terms in the relevant geographies. Any failure to develop, validate, obtain and maintain marketing authorization and supply for a companion diagnostic we need will harm our business prospects.

The design or our execution of our ongoing and future clinical trials may not support marketing approval.

The design or execution of a clinical trial can determine whether its results will support marketing approval, and flaws in the design or execution of a clinical trial may not become apparent until the clinical trial is well advanced. In some instances, there can be significant variability in safety or efficacy results between different trials with the same investigational product due to numerous factors, including differences in trial protocols, size and type of the patient populations, variable adherence to the dosing regimen or other protocol requirements and the rate of dropout among clinical trial participants. The FDA or comparable foreign regulatory authorities may disagree with our trial designs and our interpretation of data from preclinical studies or clinical trials. Even if we adhere to guidance or advice given by the FDA or comparable foreign regulatory authorities, such adherence does not guarantee that the FDA will agree with our trial designs or data interpretations or prevent the FDA from changing the requirements for the approval of any investigational product.

We have conducted, and continue to conduct, portions of our clinical trials outside the United States, and the FDA may not accept data from trials conducted in foreign locations.

We have conducted, and we expect to continue to conduct, portions of our clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In general, the patient population for any clinical trials conducted outside the United States must be representative of the population for which we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. We cannot assure you that the FDA will accept data from trials conducted outside the United States. If the FDA does not accept the data from such clinical trials, we would likely need to conduct additional trials, which would be costly and time-consuming and delay or permanently halt our development of our investigational products.

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Risks Related to Reliance on Third Parties, Manufacturing and Commercialization

We expect to depend on our collaboration with Gilead for the research, development, manufacture and commercialization of our investigational products. If this collaboration is not successful, our business could be adversely affected.

Our strategy for fully developing and commercializing our investigational products is dependent upon maintaining our current arrangements with Gilead and our other strategic partners. Our ability to leverage these arrangements to produce commercial success will depend, among other things, on our collaborators' cooperation and ability to successfully meet their responsibilities with regards to a clinical program. We cannot predict the success of any collaboration that we enter into. Our partnership with Gilead poses a number of risks including, but not limited to, the following:

•conflicts may arise between us and Gilead, such as conflicts regarding the combinations or indications to pursue or concerning the interpretation of clinical data, the commercial potential of any optioned investigational products, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. Any such conflicts could slow or prevent the development or commercialization of our investigational products;

•if our joint development program does not result in the successful development and commercialization of products or if Gilead terminates the collaboration agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of our investigational products could be delayed and we may need additional resources to develop our investigational products;

•we will be heavily dependent on Gilead for its further development and commercialization of the investigational products from the programs that it opts in to;

•we may not be successful in this collaboration due to various other factors, including our ability to demonstrate proof of concept in one or more clinical studies so that Gilead will exercise its option to these programs;

•we have appointed two individuals designated by Gilead to our board of directors pursuant to the terms of the investor rights agreement, and Gilead owns approximately 19.9% of our outstanding common stock and has the right (but not the obligation) to acquire additional shares from us up to an amount resulting in Gilead owning a total of 35% of our outstanding common stock and, as a result, may be able to exert significant influence over our company;

•Gilead could independently develop, or develop with third parties, products that compete directly or indirectly with our investigational products if Gilead believes that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours; and

•because Gilead has an option to all of our programs, it will be difficult for us to enter into new collaborations.

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We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. As a result, we are and expect to remain dependent on third parties to conduct our ongoing clinical trials and any future clinical trials of our investigational products. The timing of the initiation and completion of these trials will therefore be partially controlled by such third parties and may result in delays to our development programs. Specifically, we expect CROs, clinical investigators, and consultants to play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines controlling how clinical trials should be conducted and are applicable to all of our investigational products in clinical development. The FDA and comparable foreign regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs or clinical trial sites fail to comply with applicable GCP requirements, the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.

There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development activities or perform as contractually required. Many of these third parties have and continue to suffer from personnel constraints resulting from COVID-19 and other economic factors which may impact their ability to perform their contractual obligations. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. In addition, clinical trial investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or comparable foreign regulatory authorities concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit by the FDA or any comparable foreign regulatory authority. Any such delay or rejection could prevent us from commercializing our investigational products.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our investigational products and will not be able to, or may be delayed in our efforts to, successfully commercialize our products.

Supply by third parties of the investigational products, standard-of-care drugs or comparator agents used in our clinical trials may become limited or interrupted which could delay, prevent or impair our development efforts.

We do not have any manufacturing facilities. We produce in our laboratory relatively small quantities of compounds for evaluation in our research programs. We rely, and expect to continue to rely, on third parties for the manufacture and supply of our investigational products for preclinical and clinical testing, as well as for commercial manufacture if any of our investigational products are approved. If any of these third-parties fail to perform these activities for us, nonclinical or clinical development of our investigational products could be delayed, which could have an adverse effect on our business, financial condition, results of operations, and/or growth prospects. Further, we currently have limited manufacturing arrangements for our investigational products and expect that each of our investigational products will only be covered by single source suppliers for the foreseeable future. In particular, we have an exclusive relationship with WuXi Biologics, located in China, for the manufacture of zimberelimab drug substance. Our reliance on limited manufacturing arrangements increases the risk that we will not have and may not be able to obtain sufficient quantities of our investigational products for use in our clinical trials, which could delay, prevent or impair our development efforts.

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Any supply chain challenges may affect our ability to supply clinical sites with our investigational products and any standard-of-care drugs and comparator agents that we use in our clinical trials. These supply chain challenges can include longer lead times for the manufacturers of our investigational products to obtain raw materials, longer timeframes to procure or lack of supply for standard-of-care drugs or comparator agents used in our clinical trials, and transit delays at each point in the manufacturing, supply or distribution chain. For example, carboplatin and 5-flourouracil are used in certain of our clinical trials as the standard-of-care chemotherapy agent. However, certain of the countries where we conduct these clinical trials are experiencing a shortage in the supply of carboplatin. These supply chain challenges may delay, prevent or impair our development efforts, or result in increased costs for our clinical trials.

Our manufacturing partners are subject to extensive regulation. In the event any of our manufacturers fail to comply with such regulations or perform its obligations, our business may be adversely affected could negatively and we may need to delay or halt the development of our investigational products.

All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturers for our investigational products, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in accordance with cGMP requirements. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants, or to inadvertent changes in the properties or stability of our investigational products that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of an NDA or Biologics License Application (BLA) on a timely basis and must adhere to the FDA’s Good Laboratory Practice regulations and cGMP regulations enforced by the FDA through its facilities inspection program. Comparable foreign regulatory authorities may require compliance with similar requirements. The facilities and quality systems of our third-party contractor manufacturers must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our investigational products. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with cGMP regulations.

In the event that any of our manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on commercially reasonable terms, if at all. In particular, any replacement of our manufacturers could require significant effort and expertise because there may be a limited number of qualified replacements. In some cases, the technical skills or technology required to manufacture our investigational products may be unique or proprietary to the original manufacturer and we may have difficulty transferring such skills or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our investigational products. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop investigational products in a timely manner or within budget. Our or a third party’s failure to execute on our manufacturing requirements, to do so on commercially reasonable terms and comply with cGMP could adversely affect our business in a number of ways, including:

•an inability to initiate or continue clinical trials of our investigational products under development;

•delay in submitting regulatory applications, or receiving marketing approvals, for our investigational products;

•loss of the cooperation of an existing or future collaborator, including option exercises by Gilead or Taiho under the Gilead Collaboration Agreement or Taiho Agreement, respectively;

•subjecting third-party manufacturing facilities or our manufacturing facilities to additional inspections by regulatory authorities;

•requirements to cease development or to recall batches of our investigational products; and

•in the event of approval to market and commercialize our investigational products, an inability to meet commercial demands for our product or any other future investigational products.

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Changes in methods of investigational product manufacturing or formulation may result in additional costs or delay.

As investigational products progress through preclinical to late-stage clinical trials to marketing approval and commercialization, it is common that various aspects of the development program, such as the investigational product’s specifications, manufacturing methods and formulation, are altered along the way in an effort to optimize yield and manufacturing batch size, minimize costs and achieve consistent quality and results. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our investigational products to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our investigational products and jeopardize our ability to commercialize our investigational products and generate revenue.

Our employees, clinical trial investigators, CROs, consultants, vendors, collaboration partners and any potential commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, clinical trial investigators, CROs, consultants, vendors, collaboration partners and any potential commercial partners. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) FDA laws and regulations or those of comparable foreign regulatory authorities, including those laws that require the reporting of true, complete and accurate information, (ii) manufacturing standards, (iii) federal and state health and data privacy, security, fraud and abuse, government price reporting, transparency reporting requirements, and other healthcare laws and regulations in the United States and abroad, or (iv) laws that require the true, complete and accurate reporting of financial information or data. Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, as well as a disclosure program and other applicable policies and procedures, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Even if we receive marketing approval, we may not be successful in commercializing our investigational products.

We have no sales, marketing or distribution capabilities or experience. If any of our investigational products ultimately obtains regulatory approval, we, whether alone or in collaboration with Gilead for programs that we commercialize together, may not be able to effectively or successfully market the product due to a number of factors, including:

•the imposition by regulatory authorities of significant restrictions on a product’s indicated uses, marketing or distribution;

•the imposition by regulatory authorities of costly and time-consuming post-approval studies, post-market surveillance or additional clinical trials;

•our failure to establish sales and marketing capabilities;

•the failure of our products to achieve the degree of market acceptance by physicians, patients, hospitals, cancer treatment centers, healthcare payors and others in the medical community necessary for commercial success;

•unfavorable pricing regulations or third-party coverage and reimbursement policies; and

•inaccuracies in our estimates of the addressable patient population resulting in a smaller market opportunity than we believed.

If any of our investigational products for which we have or retain sales and marketing responsibilities are approved, we must either develop a sales and marketing organization, which would be expensive and time consuming, or outsource these functions to other third parties. We may be unable to recruit and retain adequate numbers of effective sales and marketing personnel, and if we enter into arrangements with third parties to perform sales, marketing and distribution services our product revenue or the profitability of these product revenue to us are likely to be lower than if we were to market and sell any medicines that we develop ourselves.

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Our or our collaborators’ inability to successfully market and sell any of our investigational products, if approved, could have a material adverse effect on our business and our overall financial condition.

Even if we receive marketing approval for one or more of our investigational products, our commercial success is dependent on obtaining coverage and reimbursement approval for a product from a government or other third-party payor, which coverage may be delayed or may not be sufficient to cover our costs.

Our commercial success is dependent on obtaining coverage and reimbursement approval for a product from a government or other third-party payor, which is a time-consuming and costly process that could require us and any collaborators to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Interim reimbursement levels for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with branded therapeutics and therapeutics administered under the supervision of a physician. Additionally, our collaborators will be required to obtain coverage and reimbursement for any related companion diagnostics tests they develop separate and apart from the coverage and reimbursement we seek for our investigational products, once approved.

Reimbursement may also impact the demand for, and the price of, any product for which we obtain marketing approval. Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of our products. Therefore, coverage and adequate reimbursement is critical to new product acceptance and we expect to experience pricing pressures in connection with the sale of any of our investigational products due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, and additional legislative changes.

Our ability to obtain coverage and reimbursement approval for any of our investigational products, if approved, could have a material adverse effect on the demand for that investigational product, and on our business and our overall financial condition.

Even if our investigational products are approved by the FDA, they may never be approved or commercialized outside the United States, which would limit our ability to realize their full market potential.

In order to market any products outside the United States, we or our collaborators must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. For example, the approval of zimberelimab for the treatment of recurrent or refractory classical Hodgkin’s Lymphoma in China by Gloria Biosciences does not improve the chances of FDA approval for any BLA that we may submit for zimberelimab in the United States in any indication. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us or our collaborators and may require additional preclinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our or our collaborators’ failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any investigational products approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we or our collaborators fail to comply with regulatory requirements in international markets or fail to obtain and maintain required approvals, our ability to realize the full market potential of our products will be harmed.

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Any investigational products for which we intend to seek approval as biologic products may face competition sooner than anticipated.

The Biologics Price Competition and Innovation Act of 2009 (BPCIA) created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until twelve years from the date on which the reference product was first licensed. During this twelve-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of its product. The law is complex and is still being interpreted and implemented by the FDA. As a result, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

Zimberelimab and domvanalimab are biological products and we may develop additional biological products in the future. We believe that any of our current and future investigational products approved as a biological product under a BLA should qualify for the twelve-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to Congressional action or otherwise, or that the FDA will not consider our investigational products to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, could be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products will depend on a number of marketplace and regulatory factors that are still developing.

Risks Related to our In-Licenses and Other Strategic Agreements

We are currently party to several in-license agreements under which we acquired rights to use, develop, manufacture and/or commercialize certain of our investigational products. If we breach our obligations under these agreements, we may be required to pay damages, lose our rights to these investigational products or both, which would adversely affect our business and prospects.

We rely, in part, on license and other strategic agreements, which subject us to various obligations, including diligence obligations with respect to development and commercialization activities, reporting and notification obligations, payment obligations for achievement of certain milestones and royalties on product sales, negative covenants and other material obligations. We may need to devote substantial time and attention to ensuring that we are compliant with our obligations under these agreements. If we fail to comply with the obligations under our license agreements or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and our licensors may have the right to terminate the license. If our license agreements are terminated, we may not be able to develop, manufac

Arcus Biosciences, Inc. [RCUS] Filings
10-Q	[2023-11-07]
10-Q	[2023-08-07]
10-Q	[2023-05-09]
10-K	[2023-02-28]
10-Q	[2022-11-02]
10-Q	[2022-08-03]
10-Q	[2022-05-09]
10-K	[2022-02-23]
10-Q	[2021-11-08]
10-Q	[2021-08-05]
10-Q	[2021-05-05]
10-K	[2021-02-25]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-Q	[2020-05-05]
10-K	[2020-03-05]
10-Q	[2019-11-05]
10-Q	[2019-08-06]
10-Q	[2019-05-02]
10-K	[2019-03-05]
10-Q	[2018-11-08]
10-Q	[2018-08-06]
10-Q	[2018-05-09]
S-1	[2018-02-16]