Vir Biotechnology, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

OR

For the transition period from                      to                     

Commission File Number: 001-39083

Vir Biotechnology, Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (415) 906-4324

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

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  ☒    No  ☐

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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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. ☐

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

As of May 8, 2020, the registrant had 117,901,827 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, research and development, planned clinical trials and preclinical studies, technology platforms, the timing and likelihood of regulatory filings and approvals for our product candidates, our ability to commercialize our product candidates, the potential benefits of collaborations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Other sections of this report may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

VIR BIOTECHNOLOGY, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

VIR BIOTECHNOLOGY, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

VIR BIOTECHNOLOGY, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

VIR BIOTECHNOLOGY, INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

VIR BIOTECHNOLOGY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Vir Biotechnology, Inc. (“Vir” or the “Company”) is a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Vir has assembled four technology platforms that are designed to stimulate and enhance the immune system by exploiting critical observations of natural immune processes. Its current development pipeline consists of product candidates targeting hepatitis B virus (“HBV”), influenza A, severe acute respiratory syndrome coronavirus 2 (“SARS-CoV-2”), human immunodeficiency virus (“HIV”), and tuberculosis (“TB”).

Reverse Stock Split

On September 16, 2019, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-4.5 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock, which was effected on September 27, 2019. The par value per share and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share and per share information included in the accompanying condensed consolidated financial statements has been adjusted to reflect the Reverse Split.

Initial Public Offering

On October 10, 2019, the Company completed its initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 7,142,858 shares of its common stock at a price of $20.00 per share. As a result of the IPO, the Company received $126.4 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. At the closing of the IPO, 88,112,733 shares of outstanding convertible preferred stock were automatically converted into 88,112,733 shares of common stock and a warrant to purchase 244,444 shares of convertible preferred stock was converted into a warrant to purchase 244,444 shares of common stock.

Need for Additional Capital

The Company has incurred net losses since inception and expects such losses to continue over the next several years. At March 31, 2020, the Company had an accumulated deficit of $445.8 million. Management expects to incur additional losses in the future to conduct research and development and recognizes the need to raise additional capital to fully implement its business plan. The Company had, excluding restricted cash, $361.8 million of cash, cash equivalents, and investments at March 31, 2020. Based on the Company’s business plans, management believes that its cash, cash equivalents, and short and long-term investments as of March 31, 2020 will be sufficient to meet its obligations for at least the next 12 months from the issuance date of these condensed consolidated financial statements.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the accounts of Vir and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial information. The condensed consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other future annual or interim period.

Certain information and footnote disclosures typically included in the Company’s annual consolidated financial statements have been condensed or omitted. As such, these interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 26, 2020.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk and Other Risks and Uncertainties

With the global spread of the ongoing COVID-19 pandemic in the first quarter of 2020, the Company has implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on its business. The Company anticipates that the COVID-19 pandemic will have an impact on the clinical development timelines for some of its clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, clinical development and regulatory efforts, corporate development objectives and the value of and market for its common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the U.S., Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease.

In addition, the Company is subject to a number of other challenges and risks similar to other biopharmaceutical companies in the early stage, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s products and protection of proprietary technology. If the Company does not successfully obtain regulatory approval, commercialize or partner any of its product candidates, it will be unable to generate revenue from product sales or achieve profitability. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and short and long-term investments. Cash and cash equivalents are deposited in checking and sweep accounts at a financial institution. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and investments, and issuers of the investments to the extent recorded on the condensed consolidated balance sheets. As of March 31, 2020, the Company has no off-balance sheet concentrations of credit risk.

Investments

Investments include available-for-sale securities and are carried at estimated fair value. The Company’s valuations of marketable securities are generally derived from independent pricing services based on quoted prices in active markets for similar securities at period end. Generally, investments with original maturities beyond three months at the date of purchase and which mature at, or less than 12 months from, the condensed consolidated balance sheet date are considered short-term investments, with all others considered to be long-term investments. Unrealized gains and losses deemed temporary in nature are reported as a component of accumulated comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income, on the condensed consolidated statements of operations.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company, through its investment in Brii Biosciences Limited, holds privately held equity securities in which the Company does not have a controlling interest or significant influence. The Company’s investment in Brii Biosciences Limited is recorded at cost and adjusted for impairments and observable price changes with the same or similar security from the same issuer. The valuation of the Company’s investment in Brii Biosciences Limited utilizes significant unobservable inputs or data in an inactive market and the valuation requires the Company’s judgment due to the absence of market prices and inherent lack of liquidity. Additionally, the determination of whether an orderly transaction is for the same or similar investment requires significant management judgment including the nature of the rights and obligations of its investments, the extent to which differences in those rights and obligations would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee. See Note 5—Grant, License and Collaboration Agreements for additional information on the Company’s investment in Brii Biosciences Limited.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent money market funds to secure a standby letter of credit and a security deposit with financial institutions, both pursuant to office and laboratory space lease agreements; and a holdback retained by the Company pursuant to the acquisition of Agenovir Corporation (“Agenovir”) in 2018, which was paid to Agenovir in the second quarter of 2019. Additionally, funds received from certain grants are restricted as to their use and are therefore classified as restricted cash and cash equivalents.

Revenue Recognition

The Company’s revenue primarily consists of research funding received from grants and contract revenue related to research services provided to customers. The Company has not earned any product revenue since inception. Additionally, while the Company has entered into various collaboration arrangements, the Company has not recognized any revenue from licenses, milestones or royalties under such agreements.

Grant Revenue

Grants received, including cost reimbursement agreements, are assessed to determine if the agreement should be accounted for as an exchange transaction or a contribution. An agreement is accounted for as a contribution if the resource provider does not receive commensurate value in return for the assets transferred. Contributions are recognized as grant revenue when all donor-imposed conditions have been met.

Contract Revenue

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when the Company’s customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as the Company satisfies a performance obligation.

For collaborative arrangements that fall within the scope of ASC 808, Collaborative Arrangements (“ASC 808”), the Company applies the revenue recognition model under ASC 606 to part or all of the arrangement, as deemed appropriate. The Company has entered into a number of license and collaboration agreements that fall within the scope of ASC 606. The Company evaluates the promised goods or services in these agreements to determine which ones represent distinct performance obligations. These agreements may include the following types of promised goods or services: (i) grants of licenses, (ii) performance of research and development services, and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to the Company’s intellectual property.

Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. These agreements may include the following types of consideration: non-refundable upfront payments, reimbursement for research services, research, development or regulatory milestone payments, and royalty and commercial sales milestone payments.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

If there are multiple distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation based on their estimated standalone selling prices. For performance obligations satisfied over time, the Company estimates the efforts needed to complete the performance obligation and recognizes revenue by measuring the progress towards complete satisfaction of the performance obligation using an input measure.

For arrangements that include sales-based royalties, including commercial milestone payments based on pre-specified level of sales, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Achievement of these royalties and commercial milestones may solely depend upon performance of the licensee.

Acquisitions

Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired, including in-process research and development (“IPR&D”) projects, and liabilities assumed are recorded at their respective fair values as of the acquisition date in the Company’s condensed consolidated financial statements. Any excess fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with the business combination are recorded at their fair values on the acquisition date and are remeasured each subsequent reporting period until the related contingencies are resolved and are classified as contingent consideration on the condensed consolidated balance sheets.

When the Company determines that assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction is accounted for as an acquisition of assets. Therefore, the initial cost of acquired IPR&D is expensed, and no goodwill is recorded. Any contingent consideration that meets the definition of an embedded derivative under other applicable GAAP is accounted for at fair value on the acquisition date and are remeasured each subsequent reporting period until the related contingencies are resolved and are classified as contingent consideration on the condensed consolidated balance sheets. Otherwise, such contingent consideration is recognized only when it becomes payable or is paid.

The changes in fair values of contingent consideration related to achievement of various milestones related to product candidates are recorded within research and development expense. Otherwise, the changes in fair values are recorded within other income (expense), net.

Embedded Derivatives

The Company evaluates certain of its financial and business development transactions to determine if embedded components of these contracts meet the definition of a derivative under Topic ASC 815, Derivatives and Hedging. In general, embedded derivatives are required to be bifurcated from the host instrument if (i) the embedded feature is not clearly and closely related to the host contract and (ii) the embedded feature, if considered a freestanding instrument, meets the definition of a derivative. The embedded derivatives are reported on the condensed consolidated balance sheets at their estimated fair values. Any change in estimated fair values, as determined at each measurement period, are recorded in the condensed consolidated statements of operations. 

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”). ASC 842 requires lessees to recognize all leases, including operating leases, on the balance sheet as a right-of-use (“ROU”) asset and lease liability, unless the lease is a short-term lease, defined as having a term of twelve-months or less. The Company early adopted the standard on January 1, 2020 using the optional modified retrospective transition method by recognizing a cumulative effect adjustment to the opening balance of accumulated deficit as of that date. Results for the three months ended March 31, 2020 are presented under ASC 842. The prior period amounts were not adjusted and continue to be reported in accordance with previous lease guidance, ASC 840, Leases.

The Company elected the package of practical expedients allowed under ASC 842, which permits the Company to account for its existing operating leases as operating leases under the new guidance, without reassessing the Company’s prior conclusions about lease identification, lease classification and initial direct cost.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Adoption of ASC 842 resulted in the recognition of operating lease ROU assets and operating lease liabilities of $16.8 million and $17.5 million, respectively, on the Company’s condensed consolidated balance sheet as of January 1, 2020. The difference between the ROU assets and lease liabilities is attributed to the elimination of deferred rent. The adoption of the new standard did not have an impact on the Company's beginning accumulated deficit or statement of operations.

The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable.

As the implicit rate in the Company's leases is generally unknown, the Company uses an incremental borrowing rate estimated based on the information available at the lease commencement date in determining the present value of future lease payments. When calculating its estimated incremental borrowing rates, the Company considers its credit risk, the lease term, the total lease payments and the impact of collateral, as necessary. The lease terms may include options to extend or terminate the lease when the Company is reasonably certain it will exercise such options. Rent expense for the Company's operating leases is recognized on a straight-line basis within operating expenses over the reasonably assured lease term.

The Company elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less.

Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company’s interim and annual reporting periods beginning after December 31, 2021. The Company early adopted ASU 2017-04 on January 1, 2020 and the adoption had no impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820) (“ASU 2018-13”), which modifies, removes and adds certain disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and the adoption resulted in additional disclosures related the Company’s Level 3 financial instruments. See Note 3 – Fair Value Measurements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including the Company’s financial instruments. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will likely result in more timely recognition of credit losses. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). ASU 2019-04 modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis. As an emerging growth company, Topic 326 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 effective January 1, 2023, and has not yet evaluated the impact of adopting this standard on the condensed consolidated financial statements and disclosures.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

3.Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

The carrying amounts of the Company’s financial instruments, including accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.

The following tables summarize the Company’s Level 1 and Level 2 financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:

(1) Includes $10.3 million of restricted cash equivalents.

(2) Includes $6.1 million classified as long-term investments.

(1) Includes $13.5 million of restricted cash equivalents.

(2) Includes $24.3 million classified as long-term investments.

As of March 31, 2020, all of the Company’s investments were in an unrealized gain position. Total unrealized gains of $1.0 million were recorded in accumulated other comprehensive income (loss) at March 31, 2020. As of March 31, 2020, all securities have contractual maturities of less than two years.

Level 3 liabilities consist of contingent consideration and derivative liability as of December 31, 2019. As of March 31, 2020, Level 3 liabilities consist of contingent consideration.

Contingent Consideration

Contingent consideration includes potential milestone payments in connection with the acquisitions of Humabs Biomed SA (“Humabs”) and TomegaVax, Inc. (“TomegaVax”). See further discussion in Note 4—Acquisitions.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The estimated fair value of the contingent consideration related to the Humabs acquisition was determined by calculating the probability-weighted clinical, regulatory and commercial milestone payments based on the assessment of the likelihood and estimated timing that certain milestones would be achieved. The Company calculated the estimated fair value of the clinical and regulatory milestones as of March 31, 2020 and December 31, 2019 using discount rates ranging from 17.0% to 19.0% and 7.7% to 11.1%, respectively. As of March 31, 2020, the weighted average discount rate was 17.3%, as calculated based on the relative fair value of the clinical and regulatory milestone payments. The probability of achievement for the clinical and regulatory milestones ranged from 5.9% to 85.0% as of March 31, 2020, with a weighted average of 56.5% calculated based on the relative fair value of the clinical and regulatory milestone payments.

For the commercial milestones, the Company used a Monte Carlo simulation upon the availability of a discrete revenue forecast and the increased likelihood that the clinical trials would commence. The Monte Carlo simulation assumed a commercial product launch and associated discrete revenue forecast, an expected revenue volatility of 60% and 55%, and a discount rate of 11% and 13% as of March 31, 2020 and December 31, 2019, respectively. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. The probability of achievement for the commercial milestones ranged from 5.9% to 6.7% as of March 31, 2020, with a weighted average of 6.3% calculated based on the relative fair value of the commercial milestone payments. As of March 31, 2020 and December 31, 2019, the estimated fair value of the contingent consideration was $15.2 million and $14.9 million, respectively, with changes in the estimated fair value recorded in research and development expense in the condensed consolidated statements of operations.

The estimated fair value of the contingent consideration related to the TomegaVax acquisition was determined by using a Monte Carlo simulation model which included estimates of both the probability and timing to achieve the required per share price of the Company’s common stock, and incorporates assumptions as to expected volatility and discount rate. Although the TomegaVax acquisition was accounted for as an asset acquisition, such contingent consideration met the definition of embedded derivative financial instruments. The fair value of the contingent consideration was estimated using expected volatility of 80% and 81% as of March 31, 2020 and December 31, 2019, respectively, and discount rates ranging from 0.1% to 0.3% as of March 31, 2020 and 1.6% to 1.7% as of December 31, 2019. As of March 31, 2020, the weighted average discount was 0.2%, as calculated based on the relative fair value of the underlying milestones. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. As of March 31, 2020 and December 31, 2019, the estimated fair value of the contingent consideration was $9.5 million and $2.7 million, respectively, with changes in the estimated fair value recorded in other income (expense), net in the condensed consolidated statements of operations.

The estimated fair value of the contingent consideration related to the Humabs and TomegaVax acquisitions involves significant estimates and assumptions which give rise to measurement uncertainty.

Derivative Liability

The derivative liability relates to the Milestone Shares (as defined in Note 5) in connection with the collaboration and license agreement (the “Alnylam Agreement”) with Alnylam Pharmaceuticals, Inc. (“Alnylam”). See Note 5 – Grant, License and Collaboration Agreements.

The estimated fair value of the derivative liability was calculated based on the estimated probabilities of the likelihood and timing to achieve the development milestone, a discount for lack of marketability, and the fair value of the Milestone Shares using the Company’s closing stock price as of December 31, 2019 and March 10, 2020, the date the Company achieved the development milestone. As of December 31, 2019, the estimated fair value of the derivative liability was $12.4 million. On March 10, 2020, the Company remeasured and reclassified the derivative liability of $29.2 million to additional paid-in capital upon achievement of the development milestone.

The following table sets forth the changes in the estimated fair value of the Company’s Level 3 financial liabilities (in thousands):

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

4.Acquisitions

Acquisition of TomegaVax

In September 2016, the Company entered into an agreement and plan of merger (“TomegaVax Merger Agreement”) to acquire all of the equity interests of TomegaVax. The primary asset purchased in the acquisition was an in-process cytomegalovirus (“CMV”) vector-based vaccine platform for use in HBV, HIV, and TB. The acquisition was accounted for as an asset purchase and the Company recorded the cash purchase price of $5.2 million in research and development expenses in 2016. The Company incurred transaction costs of $0.5 million.     

In connection with the entry into the TomegaVax Merger Agreement, the Company also entered into a letter agreement with TomegaVax (the “TomegaVax Letter Agreement”), which provides for certain payments to TomegaVax’s former stockholders prior to September 2024, in each case so long as the Company is continuing to pursue the development of the TomegaVax technology. Under the terms of the TomegaVax Letter Agreement, the Company will be required to pay to the former stockholders of TomegaVax milestone payments of up to an aggregate of $30.0 million if the per share price of the Company’s publicly traded common stock, or implied price per share of the Company’s Series A-1 convertible preferred stock (or common stock upon conversion) upon a certain asset sale, merger or stock sale, is at least $45 (as adjusted in the case of any stock dividend, stock split or other similar recapitalization), with the amount of such payments determined by the share price and the stage of the Company’s clinical development at the time of the relevant event triggering the payment. The share price of the Company’s publicly traded common stock will be determined using the average of the daily volume- weighted average trading price of the Company’s common stock for each trading day during a consecutive 90-day period. The foregoing payments are payable (i) during any date after the completion of an initial public offering by the Company or any successor or affiliate controlling the TomegaVax technology, provided that no payment will be due before the first anniversary of the initial public offering, (ii) upon the sale of all assets related to the TomegaVax technology or (iii) upon a merger or stock sale of the Company or any successor or affiliate controlling the TomegaVax technology, in each case subject to certain conditions with respect to the timing of the payments. The payments under the TomegaVax Letter Agreement can be made in cash or shares of the Company’s common stock, at the discretion of the Company’s board of directors. None of the milestones have been achieved as of March 31, 2020, therefore no amounts were recognized relating to the contingent consideration during the three months ended March 31, 2020.

The Company determined that the future milestone payments contain net settlement provisions and therefore, they were required to be accounted for as embedded derivatives in accordance with the relevant accounting guidance. As of March 31, 2020, the estimated fair value of the embedded derivative was $9.5 million.

Acquisition of Humabs

In August 2017, the Company acquired all of the outstanding equity of Humabs, a private Swiss company which discovers and develops monoclonal antibodies derived from individuals whose immune systems have successfully responded to major diseases. The Company acquired all of Humabs’ rights, title and interest in and to substantially all of the assets of Humabs except for rights under certain license agreements with third-parties. The Company is obligated to pass-through to the former Humabs shareholders any amounts received by Humabs under such license agreements, net of any program expenses. The transaction was accounted for as an acquisition of a business. The estimated fair value of total consideration was $42.3 million at the acquisition date. The consideration paid consisted of $30.0 million in cash and 1,666,656 shares of common stock, valued at $2.5 million as of the date of the transaction, to former Humabs shareholders. The Company also agreed to pay additional amounts in cash upon the achievement of specified milestone events: (i) up to $135.0 million upon the achievement of clinical, regulatory and commercial milestones for an HBV product; and (ii) up to $105.0 million upon the achievement of clinical, regulatory and commercial milestones for another product. The estimated fair value of this contingent consideration was $6.3 million as of the date of acquisition. Payments will vary based on milestones that are reached. The final component of the consideration was acquired net working capital of $3.6 million.  

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The acquired developed technologies that have associated patents issued are classified as finite-lived intangible assets and are amortized on a straight-lined basis over their estimated remaining useful lives, generally between seven to 12 years. The Company also acquired indefinite-lived intangible assets consisting of in-process research and development. These assets will not be amortized until regulatory approval is obtained in a major market. At that time, the Company will determine the useful life of the asset and begin amortization. If the associated research and development effort is abandoned, the related in-process research and development assets will be written-off and an impairment charge recorded. As of March 31, 2020, there have been no such impairments. The estimated fair value of the intangible assets was determined using the replacement cost method. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. None of the goodwill is expected to be deductible for income tax purposes.   

Acquisition of Agenovir

In January 2018, the Company entered into an agreement and plan of merger (the “Agenovir Merger Agreement”) with Agenovir, pursuant to which the Company purchased all equity interests of Agenovir. The primary assets purchased in the acquisition were in-process research and development programs in human papillomavirus (“HPV”) and HBV using CRISPR/Cas9. The Company concluded that the assets acquired and liabilities assumed did not meet the definition of a business as a limited number of inputs were acquired but no substantive processes were acquired. As such, the acquisition was accounted for as an asset purchase.

As purchase consideration, the Company agreed to pay cash of $11.5 million and issued an aggregate of 555,537 shares of Series A-2 convertible preferred stock, valued at $1.8 million on the transaction date, to the former Agenovir stockholders. The Company also assumed certain liabilities of $1.3 million. The estimated fair value of the Company’s Series A-2 convertible preferred stock was $3.15 per share as of the date of the transaction and was determined by management with the assistance of a third-party valuation specialist. The Company retained $2.0 million of the cash consideration as holdback to satisfy claims for indemnification, of which, $1.8 million was paid to Agenovir in April 2019. In addition to the equity, the Company incurred transaction costs of $0.7 million.

The Company allocated the purchase price of $15.3 million between property and equipment of $0.8 million and in-process research and development of $14.5 million, based on the relative fair values of the assets acquired, which was expensed as research and development expenses in 2018.

During a specified period following the closing of the Agenovir acquisition, the Company will be required to pay Agenovir’s former stockholders up to $45.0 million in the aggregate for the achievement of specified development and regulatory milestones for the first HBV product, and if the Company elects to progress the HPV program, the Company will owe up to $45.0 million in the aggregate for the achievement of development and regulatory milestones for the first HPV product. In addition, during a specified period following the closing of the Agenovir acquisition, if the Company successfully commercializes one or more products arising from the HBV program or the HPV program, the Company will owe milestone payments for the achievement of specified levels of worldwide annual net sales of up to $90.0 million for products arising from each program, or up to $180.0 million in the aggregate, if the Company were to commercialize products from both the HBV program and the HPV program. The Company terminated the HPV program in February 2020 and no longer has any further obligations related to this program under the Agenovir Merger Agreement.

None of the milestones have been achieved as of March 31, 2020, therefore no amounts were recognized relating to the contingent consideration.

The Company is a party to various grant and customer contract agreements. Descriptions of the material agreements are included below.

Bill & Melinda Gates Foundation Grants

Campylo/EPEC/EAEC Grant

As part of the Company’s acquisition of Humabs in August 2017, the Company acquired a grant agreement with the Bill & Melinda Gates Foundation pursuant to which it was awarded a grant totaling up to $4.7 million (the “2017 Grant”). The 2017 Grant supported the Company’s discovery, characterization and selection of human monoclonal antibodies with pre-clinical efficacy against three enteric pathogens responsible for life-threatening diarrhea in neonates. The 2017 Grant expired on May 31, 2019.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Payments received in advance that were related to future research activities were deferred and recognized as revenue when the donor-imposed conditions were met, which was as the research and development activities were performed. The Company recognized $0.5 million for the three months ended March 31, 2019. No revenue was recognized for the three months ended March 31, 2020.

Human Immunodeficiency Virus (“HIV”) Grant

On January 26, 2018, the Company entered into a grant agreement with the Bill & Melinda Gates Foundation pursuant to which it was awarded a grant totaling up to $12.2 million for its HIV program (the “HIV Grant”). In February 2020, the parties amended the HIV Grant pursuant to which the Company was awarded with a supplemental grant of $8.6 million. Under the amendment, the HIV Grant will remain in effect until December 31, 2021, unless earlier terminated by the Bill & Melinda Gates Foundation for the Company’s breach, failure to progress the funded project, in the event of the Company’s change of control, change in the Company’s tax status, or significant changes in the Company’s leadership that the Bill & Melinda Gates Foundation reasonably believes may threaten the success of the project.

Payments received in advance that are related to future research activities are deferred and recognized as revenue when the donor-imposed conditions are met, which is as the research and development activities are performed. The Company recognized grant revenue of $4.9 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.

Tuberculosis (“TB”) Grant

On March 16, 2018, the Company entered into a grant agreement with the Bill & Melinda Gates Foundation pursuant to which it was awarded a grant totaling up to $14.9 million for its TB program (the “TB Grant”). The TB Grant will remain in effect until June 30, 2020, unless earlier terminated by the Bill & Melinda Gates Foundation for the Company’s breach, failure to progress the funded project, in the event of the Company’s change of control, change in the Company’s tax status, or significant changes in the Company’s leadership that the Bill & Melinda Gates Foundation reasonably believes may threaten the success of the project. As of March 31, 2020, the Company anticipates the TB Grant will be extended through December 2020. The Company estimates that $4.1 million of the funds received in advance and previously recorded as deferred revenue will not be earned by December 2020. Therefore, the Company has reclassified $4.1 million from deferred revenue to accrued and other liabilities as of March 31, 2020.  

Payments received in advance that are related to future research activities are deferred and recognized as revenue when the donor-imposed conditions are met, which is as the research and development activities are performed. The Company recognized grant revenue of $0.1 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively.

National Institutes of Health

As part of the Company’s acquisition of TomegaVax in September 2016, the Company acquired grant agreements related to TomegaVax’s research effort in infectious diseases and cancer that entitled them to several awards under the Small Business Innovation Research Program from the National Institutes of Health (“NIH”). Through March 31, 2020, the Company has acquired or been awarded grants from NIH totaling $5.1 million. These grants are cost plus fixed fee agreements in which the Company is reimbursed for its direct and indirect costs. Only costs that are allowable under certain government regulations and NIH’s supplemental policy and procedure manual may be claimed for reimbursement, subject to government audit.

The Company recognized grant revenue of $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Brii Biosciences

In May 2018, the Company entered into an option and license agreement (the “Brii Agreement”) with Brii Biosciences Limited (previously named BiiG Therapeutics Limited) (“Brii Bio Parent”) and Brii Biosciences Offshore Limited (“Brii Bio”), pursuant to which the Company granted to Brii Bio, with respect to up to four of the Company’s programs, an exclusive option to obtain exclusive rights to develop and commercialize compounds and products arising from such programs in China, Taiwan, Hong Kong and Macau (collectively, the “China Territory”) for the treatment, palliation, diagnosis, prevention or cure of acute and chronic diseases of infectious pathogen origin or hosted by pathogen infection (the “Field of Use”). The Company’s HBV siRNA program being developed under the Alnylam Agreement (described below) is included within the Brii Agreement as a program for which Brii Bio may exercise one of its options. In partial consideration for the options granted by the Company to Brii Bio, Brii Bio Parent and Brii Bio granted the Company, with respect to up to four of Brii Bio Parent’s or Brii Bio’s programs, an exclusive option to be granted exclusive rights to develop and commercialize compounds and products arising from such Brii Bio programs in the United States for the Field of Use. The number of options that the Company may exercise for a Brii Bio program is limited to the corresponding number of options that Brii Bio exercises for a Vir program. As of March 31, 2020, no license option had been exercised.

As partial consideration for the Company’s entry into the Brii Agreement, upon closing of Brii Bio Parent’s Series A preferred stock financing, the Company received ordinary shares equal to 9.9% of the outstanding shares in Brii Bio Parent. As a result of Brii Bio’s right to exercise one of its options for the Company’s HBV siRNA program, under the terms of the Alnylam Agreement, as amended, the Company will transfer to Alnylam a specified percentage of such equity consideration allocable to such program. The Company also received an option to purchase additional ordinary shares of Brii Bio Parent at a purchase price of $0.0001 per share in connection with additional Series A preferred stock issuances by Brii Bio Parent and an option to acquire shares of Brii Bio Parent’s Series B preferred stock (“Series B Closing Option”) upon the occurrence of a Series B financing at the same purchase price paid by the other Series B investors. In December 2019, Brii Bio Parent completed its initial Series B preferred stock financing. However, the Company did not exercise its additional Series A option or its Series B Closing Option and the options expired.

With respect to programs for which Brii Bio exercises its options, Brii Bio will be required to pay the Company an option exercise fee for each such Vir program ranging from the mid-single-digit millions up to $20.0 million, determined based on the commercial potential of the licensed program. Brii Bio will also be required to pay regulatory milestone payments on a licensed product-by-licensed product basis ranging from the mid-single-digit millions up to $30.0 million, also determined based on the commercial potential of such program. Following commercialization, Brii Bio will be required to make sales milestone payments based on certain specified levels of aggregate annual net sales of products arising from each licensed program in the China Territory, up to an aggregate of $175.0 million per licensed program. Brii Bio also will pay royalties to the Company that range from the mid-teens to the high-twenties, as described below.

Upon exercise of each option for a Brii Bio program, the Company will be required to pay to Brii Bio an option exercise fee ranging from the low tens of millions to up to $50.0 million, determined based on the commercial potential of the licensed program. The Company will be required to make regulatory milestone payments to Brii Bio on a licensed product-by-licensed product basis ranging from the low tens of millions up to $100.0 million, also determined based on the commercial potential of such program. The Company will also be required to make sales milestone payments based on certain specified levels of aggregate annual net sales of products in the United States arising from each licensed program, up to an aggregate of $175.0 million per licensed program.

In addition, the Company is obligated under the Brii Agreement to pay Brii Bio tiered royalties based on net sales of products arising from the licensed programs in the United States, and Brii Bio is obligated to pay the Company tiered royalties based on net sales of products arising from the licensed programs in the China Territory. The rates of royalties payable by the Company to Brii Bio, and by Brii Bio to the Company, on net sales range from mid-teens to high-twenties. Each party’s obligations to pay royalties expires, on a product-by-product and territory-by-territory basis, on the latest of 10 years after the first commercial sale of such licensed product in the United States or China Territory, as applicable; the expiration or abandonment of licensed patent rights that cover such product in the United States or China Territory, as applicable; and the expiration of regulatory exclusivity in the United States or the China Territory, as applicable. Royalty rates are subject to specified reductions and offsets.

The Brii Agreement will remain in force until expiration of all options or, if any option is exercised, expiration of all royalty payment obligations for all licensed products within such licensed program, unless terminated in its entirety or on a program-by-program basis by either party. Each party may terminate for convenience all rights and obligations with respect to any program for which it has an option, with 30 days’ written notice (if the terminating party has not exercised an option for such program) or 180 days’ notice (following the exercise of an option for such program). The Brii Agreement may also be terminated by either party for insolvency of the other party, and either party may terminate the Brii Agreement in its entirety or on a program-by-program basis for the other party’s uncured material breach on 60 days’ written notice (or 30 days’ notice following failure to make payment).

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company has determined that Brii Bio Parent and its wholly owned subsidiary Brii Bio are variable interest entities due to their reliance on future financing and having insufficient equity at risk. However, the Company does not have the power to direct activities which most significantly impact the economic success of these entities and is not considered the primary beneficiary of these entities. Therefore, the Company does not consolidate Brii Bio Parent or Brii Bio. The Company also determined that it does not exercise significant influence over Brii Bio Parent or Brii Bio. The investment in Brii Bio Parent was recorded at its initial estimated fair value of $6.6 million. The Company also recorded a contract liability of $6.6 million within deferred revenue which represents deferred consideration for the four options that the Company granted to Brii Bio. The deferred consideration will be recognized when Brii Bio exercises its options or the options expire. The Company accounts for its investment in Brii Bio Parent’s ordinary shares at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment in Brii Bio Parent.

In February 2020, the Company, Alnylam and Brii Bio Parent executed a share transfer agreement pursuant to the terms of the Alnylam Agreement (see Alnylam section below). Under the share transfer agreement, the Company transferred a portion of its ordinary shares held in Brii Bio Parent to Alnylam in connection with the execution of the Brii Agreement. As of March 31, 2020 and December 31, 2019, the carrying value of the investment in Brii Bio was $5.7 million and $6.6 million, respectively, which is included in other assets on the condensed consolidated balance sheets.  

The Company’s maximum exposure to loss under the Brii Agreement is represented by options to acquire licenses to develop and commercialize potential products and future milestone payments. The ultimate expense that the Company incurs under the Brii Agreement cannot be quantified at this time as the amount will vary based on the timing and outcome of research activities.

Alnylam

In October 2017, the Company entered into the Alnylam Agreement for the development of siRNA products for the treatment of HBV and following the exercise of certain program options, the development and commercialization of siRNA therapeutic products directed to up to four other infectious disease targets selected by the Company. The technology licensed under the Alnylam Agreement forms the basis of the Company’s siRNA technology platform.

Pursuant to the Alnylam Agreement, the Company obtained a worldwide, exclusive license to develop, manufacture and commercialize the HBV siRNA product candidates, including VIR-2218, for all uses and purposes other than agricultural, horticultural, forestry, aquaculture and other residential applications, such excluded fields, the Excluded Fields. In addition, Alnylam granted us an exclusive option, for each of the infectious disease siRNA programs directed to the Company’s selected targets, to obtain a worldwide, exclusive license to develop, manufacture and commercialize siRNA products directed to the target of each such program for all uses and purposes other than the Excluded Fields. On a product-by-product basis for each product arising from the HBV and, following the Company’s option exercise, the infectious disease programs, Alnylam has an exclusive option, exercisable during a specified period prior to the initiation of a Phase 3 clinical trial for each such product, to negotiate and enter into a profit-sharing agreement for such product.

The Company and Alnylam are jointly responsible for funding the initial research and development activities for VIR-2218 through completion of proof of concept studies. Prior to the exercise of the Company’s option for each siRNA program directed to one of the Company’s selected infectious disease targets, Alnylam is responsible for conducting all development activities, at the Company’s expense, in accordance with an agreed upon development plan. Following the Company’s exercise of an option for a program and payment of the program option exercise fee and any outstanding program costs due to Alnylam, the Company is solely responsible, at the Company’s expense (subject to Alnylam’s exercise of a profit-sharing option), for conducting all development, manufacture and commercialization activities for products arising from each such program. If Alnylam exercises a profit-sharing option for a product, the Company will negotiate the terms of such profit-sharing agreement, which will include sharing equally with Alnylam all subsequent costs associated with the development of such product, as well as the profits and losses in connection with such product, subject to reimbursement by Alnylam of a portion of specified development costs in certain circumstances.

Pursuant to the Alnylam Agreement, the Company paid Alnylam an upfront fee of $10.0 million and issued to Alnylam 1,111,111 shares of the Company’s common stock. Both the upfront fee and the estimated fair value of the common stock were recognized as research and development expenses in 2017. Additionally, the receipt of consideration from Brii Bio as discussed above triggered a requirement under the Alnylam Agreement to transfer a portion of the consideration, consisting of equity in Brii Bio, to Alnylam. Accordingly, the Company recognized a liability of $0.8 million which remained outstanding as of December 31, 2019. In February 2020, the Company settled this liability by transferring to Alnylam a specified percentage of its equity consideration received from Brii Bio Parent.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Upon the achievement of a certain development milestone, as further discussed below, the Company was obligated to issue shares of the Company’s common stock equal to the lesser of (i) 1,111,111 shares or (ii) a certain number of shares based on the Company’s stock price at the time such milestone is achieved (the “Milestone Shares”). The Company will be required to pay Alnylam up to $190.0 million in the aggregate for the achievement of specified development and regulatory milestones by the first siRNA product directed to HBV, and up to $115.0 million for the achievement of specified development and regulatory milestones by the first product directed to the target of each infectious disease siRNA program for which the Company exercised its option. Following commercialization, the Company will be required to pay to Alnylam up to $250.0 million in the aggregate for the achievement of specified levels of net sales by siRNA products directed to HBV and up to $100.0 million for the achievement of specified levels of net sales by products directed to the target of each infectious disease siRNA program for which the Company exercised its option. The Company may also be required to pay Alnylam tiered royalties at percentages ranging from the low double-digits to mid-teens on annual net sales of HBV products, and tiered royalties at percentages ranging from the high single-digits to the sub-teen double-digits on annual net sales of licensed infectious disease products, in each case subject to specified reductions and offsets. The royalties are payable on a product-by-product and country-by-country basis until the later of the expiration of all valid claims of specified patents covering such product in such country and 10 years after the first commercial sale of such product in such country.

The term of the Alnylam Agreement will continue, on a product-by-product and country-by-country basis, until expiration of all royalty payment obligations under the Alnylam Agreement. If the Company does not exercise its option for an infectious disease program directed to one of its selected targets, the Alnylam Agreement will expire upon the expiration of the applicable option period with respect to such program. However, if Alnylam exercises its profit-sharing option for any product, the term of the Alnylam Agreement will continue until the expiration of the profit-sharing arrangement for such product. The Company may terminate the Alnylam Agreement on a program-by-program basis or in its entirety for any reason on 90 days’ written notice. Either party may terminate the agreement for cause for the other party’s uncured material breach on 60 days’ written notice (or 30 days’ notice for payment breach), or if the other party challenges the validity or enforceability of any patent licensed to it under the Alnylam Agreement on 30 days’ notice.

At inception of the Alnylam Agreement, the Milestone Shares did not meet the net settlement criteria to be accounted for as an embedded derivative. Therefore, there was no liability recorded from the inception of the Alnylam Agreement through September 30, 2019. Upon completion of the Company’s IPO in October 2019, the net settlement criteria of the definition of an embedded derivative had been met for the Milestone Shares. The initial fair value of the embedded derivative was estimated to be $13.6 million and was charged to research and development expense in the fourth quarter of 2019. The estimated fair value of the derivative liability was $12.4 million as of December 31, 2019. On March 10, 2020, the Company achieved the specified development milestone relating to the Milestone Shares and was obligated to issue the Milestone Shares within 60 days of such milestone event. Consequently, the Company remeasured and reclassified the derivative liability to additional paid-in capital. The estimated fair value of the derivative liability was $29.2 million as of March 10, 2020. In May 2020, the Company issued Alnylam 1,111,111 shares of the Company’s common stock. In addition to these Milestone Shares, the Company was also obligated to pay Alnylam $15.0 million as of March 31, 2020 in connection with the achievement of the specified development milestone. The $15.0 million milestone was paid in April 2020.

In March 2020, the Company and Alnylam entered into a second amendment to the Alnylam Agreement (as amended, the “Amended Alnylam Agreement”) to expand the parties’ existing collaboration to include the development and commercialization of RNAi therapeutics targeting SARS-CoV-2, the virus that causes the disease COVID-19, and potentially other related coronaviruses, utilizing Alnylam’s recent advances in lung delivery of novel conjugates of siRNA – the molecules that mediate RNAi (the “COV Products”).

Pursuant to the Amended Alnylam Agreement, the parties will each be responsible for pre-clinical development costs incurred by such party in performing its allocated responsibilities under an agreed-upon initial pre-clinical development plan for COV Products. The parties will equally share costs incurred in connection with the manufacture of non-GMP drug product required for pre-clinical development prior to filing of an investigational new drug application for the first COV Product in the coronavirus program. Following the completion of initial pre-clinical development activities, if the Company exercises its option to progress one or more candidates from the coronavirus program into further development, the Company will be responsible for conducting all development, manufacturing and commercialization activities for COV Products, at its sole expense, subject to Alnylam’s right to opt-in, during a specified period, to share equally with the Company the profits and losses in connection with development and commercialization of COV Products.

If the Company exercises its option for the coronavirus program, and successfully develops one or more COV Products arising from such program, then unless Alnylam exercises its profit-sharing option, the Company will be required to pay Alnylam up to $15.0 million in the aggregate for the achievement of specified development milestones for the COV Products. Following commercialization, the Company will also be required to pay Alnylam specified sales milestones on the achievement of specified levels of annual net sales, and a tiered royalty at specified rates on annual net sales of the applicable COV Products.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

In addition to the Milestone Shares and $15.0 million milestone payable to Alnylam in the first quarter of 2020, the Company incurred $2.3 million and $1.5 million of expenses under the Alnylam Agreement during the three months ended March 31, 2020 and 2019, respectively.

Rockefeller University

In July 2018, the Company entered into an exclusive license agreement with The Rockefeller University (“Rockefeller”), which was amended in May 2019 (the “Rockefeller Agreement”). Pursuant to the Rockefeller Agreement, Rockefeller granted the Company a worldwide exclusive license under certain patent rights, and a worldwide non-exclusive license under certain materials and know-how covering certain antibody variants relating to a specified mutation leading to enhanced antibody function and utility, to develop, manufacture and commercialize infectious disease products covered by the licensed patents, or that involve the use or incorporation of the licensed materials and know-how, in each case for all uses and purposes for infectious diseases. The Company uses technology licensed under the Rockefeller Agreement in the Company’s antibody platform and in the Company’s product candidate VIR-3434.

The Company paid Rockefeller an upfront fee of $0.3 million for entry into the Rockefeller Agreement, and is required to pay annual license maintenance fees of $1.0 million, which will be creditable against royalties following commercialization. In addition, for achievement of specified development and regulatory milestone events, the Company will be required to pay up to $8.5 million with respect to the first infectious disease product for the HIV indication, up to $7.0 million with respect to each of the first four other infectious disease products with specified projected peak worldwide annual net sales, and up to $3.6 million with respect to any other infectious disease product. Following regulatory approval, the Company will be required to pay commercial success milestones of up to $40.0 million in the aggregate for the achievement of specified aggregate worldwide annual net sales of the first infectious disease product for the HIV indication and the first four infectious disease products with specified projected peak worldwide annual net sales. The Company will also be required to pay to Rockefeller a royalty at a low single-digit percentage rate on net sales of licensed products, subject to certain adjustments. The Company’s obligation to pay royalties to Rockefeller will terminate, on a product-by-product and jurisdiction-by-jurisdiction basis, upon the latest of the expiration of the last valid claim of a licensed patent in such jurisdiction, the expiration of all regulatory exclusivity in such jurisdiction or 12 years following the first commercial sale of the applicable licensed product in such jurisdiction. No license maintenance fees were recognized as research and development expense for the three months ended March 31, 2020 and 2019.

The Rockefeller Agreement will remain in force, absent earlier termination, until the expiration of all of the Company’s obligations to pay royalties to Rockefeller in all jurisdictions. The Company has the right to terminate the Rockefeller Agreement in its entirety, or in part, for any reason on 60 days’ written notice to Rockefeller. Rockefeller may terminate the Rockefeller Agreement on 90 days’ written notice for the Company’s uncured material breach, or if the Company challenges the validity or enforceability of any of the licensed patents, or immediately in the event of the Company’s insolvency. Rockefeller may also terminate the Rockefeller Agreement if the Company ceases to carry on business with respect to the rights granted to the Company under the agreement.

MedImmune

In September 2018, the Company entered into a license agreement (“2018 MedImmune Agreement”) with MedImmune, LLC (“MedImmune”), pursuant to which the Company obtained a worldwide, exclusive license to develop and commercialize half-life extended versions of two specified antibodies under development by MedImmune that target influenza A and influenza B, respectively, for all uses in humans and animals. The Company is developing VIR-2482 using technology licensed under the 2018 MedImmune Agreement.

In consideration for the grant of the licenses under the 2018 MedImmune Agreement, the Company made an upfront payment to MedImmune of $10.0 million. The upfront fee was recognized as research and development expenses in the third quarter of 2018.

The Company will be obligated to make development, regulatory, and commercial milestone payments of up to $343.3 million in the aggregate relating to influenza A and influenza B products. MedImmune will also be entitled to receive tiered royalties based on net sales of products containing half-life extended versions of antibodies directed to influenza A and/or influenza B at percentages ranging from the mid-single-digits to sub-teen double-digits.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The 2018 MedImmune Agreement will remain in force until the expiration on a country-by-country and product-by-product basis of all of the Company’s obligations to pay royalties to MedImmune. The Company may terminate the 2018 MedImmune Agreement in its entirety or on a product-by-product basis, for convenience, upon 120 days’ notice. Either party may terminate the 2018 MedImmune Agreement for cause for the other party’s uncured material breach on 60 days’ notice or immediately in the event of bankruptcy of the other party. Additionally, MedImmune may terminate the 2018 MedImmune Agreement for cause on 30 days’ written notice if the Company challenges the validity or enforceability of the patents to which the Company has obtained a license under the 2018 MedImmune Agreement.

In August 2019, the Company achieved one of the specified development milestones relating to influenza A pursuant to the 2018 MedImmune Agreement. As such, the Company paid $5.0 million related to this milestone event in September 2019. The milestone payment was expensed to research and development.

Xencor

In August 2019, the Company entered into a patent license agreement (the “Xencor Agreement”) with Xencor, Inc., (“Xencor”). Pursuant to the Xencor Agreement, the Company obtained a non-exclusive, sublicensable (only to its affiliates and subcontractors) license to incorporate Xencor’s half-life extension Fc region-related technologies into, and to evaluate, antibodies that target influenza A and HBV, and a worldwide, non-exclusive, sublicensable license to develop and commercialize products containing such antibodies incorporating such technologies for all uses, including the treatment, palliation, diagnosis and prevention of human or animal diseases, disorders or conditions. The Company is obligated to use commercially reasonable efforts to develop and commercialize an antibody product that incorporates Xencor’s half-life extension Fc-related technologies, for each of the influenza A and HBV research programs. These technologies are used in the Company’s VIR-2482 and VIR-3434 product candidates.

In consideration for the grant of the license, the Company paid Xencor an upfront fee. The upfront fee was recognized as research and development expenses in the third quarter of 2019. For each of the influenza A and HBV research programs, the Company will be required to pay Xencor development and regulatory milestone payments of up to $17.8 million in the aggregate, and commercial sales milestone payments of up to $60.0 million in the aggregate, for a total of up to $77.8 million in aggregate milestones for each program and $155.5 million in aggregate milestones for both programs. On a product-by-product basis, the Company will also be obligated to pay tiered royalties based on net sales of licensed products in the low single-digits. The royalties are payable, on a product-by-product and country-by-country basis, until the expiration of the last to expire valid claim in the licensed patents covering such product in such country.

The Xencor Agreement will remain in force, on a product-by-product and country-by-country basis, until expiration of all royalty payment obligations under the Xencor Agreement. The Company may terminate the Xencor Agreement in its entirety, or on a target-by-target basis, for convenience upon 60 days’ written notice. Either party may terminate the Xencor Agreement for the other party’s uncured material breach upon 60 days’ written notice (or 30 days in the case of non-payment) or in the event of bankruptcy of the other party immediately upon written notice. Xencor may terminate the Xencor Agreement immediately upon written notice if the Company challenges, or upon 30 days’ written notice if any of the Company’s sublicensees challenge, the validity or enforceability of any patent licensed to the Company under the Xencor Agreement.

In August 2019, the Company achieved one of the specified development milestones pursuant to the Xencor Agreement. As such, the Company paid $0.8 million related to the upfront fee and this milestone event in September 2019. The total payment was expensed to research and development.

In March 2020, the Company entered into another patent license agreement with Xencor pursuant to which the Company obtained a non-exclusive license to Xencor’s Fc-region related technologies to extend the half-life of novel antibodies that the Company is investigating as potential treatments for patients with COVID-19. Under the terms of the agreement, the Company will be solely responsible for the activities and costs related to research, development, regulatory and commercial activities for the antibodies. The Company will be obligated to pay royalties based on net sales of licensed products in the low single-digits.

22

VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Property and Equipment, net

Property and equipment, net consists of the following:

Depreciation and amortization expenses was $1.0 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively.

Sale-Leaseback Transaction

In August 2019, the Company entered into a lease agreement whereby the Company sold various laboratory instruments, furniture, and other equipment for gross proceeds of $1.2 million to a bank and leased them back for a five-year term, collateralized by the underlying equipment. The Company determined it did not relinquish control of the assets to the buyer-lessor. Therefore, the Company accounted for the transaction as a failed sale-leaseback whereby the Company continues to depreciate the assets and recorded a financing obligation for the consideration received from the buyer-lessor. As of March 31, 2020, the current and long-term portions of the financing obligation were $0.2 million and $0.8 million, respectively.   

Accrued and Other Liabilities

Accrued and other liabilities consist of the following:

Lease Agreements

The Company has various lease arrangements for office and laboratory space located in California, Oregon, Missouri and Switzerland with contractual lease periods expiring between 2020 and 2028. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain lease agreements also provide the Company with the option to renew for additional periods ranging from one to five years. These renewal options are not considered in the remaining lease term unless it is reasonably certain that the Company will exercise such options. In addition, the Company entered into a sale-leaseback transaction in August 2019. See further discussion in Note 6—Balance Sheet Components.

23

VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Throughout the term of the lease agreements, the Company is responsible for paying certain operating costs, in addition to rent, such as common area maintenance, taxes, utilities and insurance. These additional charges are considered variable lease cost and are recognized in the period in which the costs are incurred.

The following table contains a summary of the lease costs recognized under Topic 842 and additional information related to operating leases for the three months ended March 31, 2020:

Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2020 was $1.1 million and was included in net cash used in operating activities in the Company's condensed consolidated statement of cash flows.

The maturity of the Company’s operating lease liabilities as of March 31, 2020 was as follows (in thousands):

The following amounts were recorded in the condensed consolidated balance sheet as of March 31, 2020 (in thousands):

Rent expense under ASC 840 was $1.0 million for the three months ended March 31, 2019.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The following are the aggregate non-cancelable future minimum lease payments under operating and financing leases as of December 31, 2019 (in thousands):

Indemnification

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. In addition, the Company has entered into indemnification agreements with its directors and certain officers that may require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no demands have been made upon the Company to provide indemnification under these agreements, and thus, there are no indemnification claims that the Company is aware of that could have a material effect on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations, or condensed consolidated statements of cash flows.

As a result of the Brii Agreement in May 2018, the Company holds a minority equity interest in Brii Bio through its parent company, Brii Bio Parent. Additionally, the Company’s Chief Executive Officer and member of the board of directors as well as another member of the Company’s board of directors serve on Brii Bio Parent’s board of directors.

In January 2019, the Company issued 18,202,213 shares of Series B convertible preferred stock to existing Series A-1 preferred stockholders. See further discussion in Note 9—Convertible Preferred Stock.

Prior to the IPO, under the Company’s amended and restated certificate of incorporation, the Company was authorized to issue two classes of shares: preferred stock and common stock. The preferred stock was issued in a series.  

In January 2019, pursuant to the Amended A&R Series A-1 and B Purchase Agreement, the Company sold an aggregate of 18,202,213 shares of Series B convertible preferred stock at $18.00 per share for gross proceeds of $327.5 million in two closings. The Company was authorized to sell up to 4,020,009 additional shares of Series B convertible preferred stock in one or more additional closings.

Upon closing of the IPO, all of the outstanding convertible preferred stock automatically converted into 88,112,733 shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

In September 2016, the Company issued a warrant to purchase an aggregate of 244,444 shares of the Company’s Series A-1 convertible preferred stock with an exercise price of $4.50 per share in connection with the termination of a sponsor research agreement. The warrant was fully vested upon the issuance date and has an expiration date of September 11, 2026. The warrant was initially accounted for as a liability and was subject to remeasurement at each reporting period, with changes in estimated fair value recognized as a component of other income (expense), net. Upon completion of the IPO in October 2019, the warrant automatically converted into a warrant to purchase 244,444 shares of common stock. Therefore, the convertible preferred stock warrant liability was reclassified to additional paid-in capital.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Stock Option Activity

Activity under the Company’s stock option plans is set forth below:

As of March 31, 2020, the Company expects to recognize the remaining unamortized stock-based compensation expense of $37.6 million related to stock options, over an estimated weighted average period of 2.7 years.

Stock Options Granted to Employees

The fair value of stock options granted to employees was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:

The valuation assumptions were determined as follows:

Expected Term— The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term.

Expected Volatility— The expected volatility was determined by examining the historical volatilities for industry peers and using an average of historical volatilities of Company’s industry peers as the Company does not have a sufficient historical trading history for its own stock. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate— The Company based the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant.

Expected Dividend Rate— The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its profit interest units in the foreseeable future.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Restricted Stock Activity

The following table summarizes restricted stock activity:

The shares of restricted stock have not been included in the shares issued and outstanding.

In January 2017, the Company entered into a restricted stock purchase agreement with an executive officer and a restricted stock purchase agreement with a director whereby the executive officer and the director purchased an aggregate of 3,624,355 shares of restricted stock. The consideration for the restricted stock was the issuance of promissory notes which are non-recourse in nature and are accounted for as in-substance stock options. The Company measured compensation cost for these in-substance options based on their estimated fair value on the grant date using the Black-Scholes pricing model. The Company is recognizing compensation cost over the requisite service period with an offsetting credit to additional paid-in capital. In August 2019, in accordance with the terms of the notes, the Company received $3.3 million as repayment of the outstanding promissory notes and accrued interest. The Company has a liability of $1.0 million for the portion of the promissory note repayment which relates to restricted common stock subject to future vesting as of March 31, 2020. The Company will reduce the restricted stock liability as the common stock vests.

As of March 31, 2020, there was $0.8 million of total unrecognized compensation cost related to unvested restricted stock, all of which is expected to be recognized over a remaining weighted-average period of 0.6 years.

Stock-Based Compensation Expense

The following table sets forth the total stock-based compensation expense for all awards granted to employees and non-employees, including shares sold through the issuance of non-recourse promissory notes of which all the shares are considered to be options for accounting purposes in the Company’s consolidated statements of operations:

As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common securities outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Amendment No. 3 to the Alnylam Agreement

On April 1, 2020, the Company and Alnylam entered into a third amendment to the Alnylam Agreement to expand the parties’ existing collaboration to include the development and commercialization of RNAi therapeutics targeting up to three human host factor targets relating to susceptibility to coronaviruses, for use in connection with the treatment, palliation, diagnosis or prevention of COVID-19, and other diseases caused by coronaviruses. The products arising from the activities directed to the host factor targets may utilize Alnylam’s recent advances in lung delivery of novel conjugates of siRNA – the molecules that mediate RNAi (the “Host Factor Products”).

Pursuant to this amendment, the parties will each be responsible for pre-clinical development costs incurred by such party in performing its allocated responsibilities under an agreed-upon initial pre-clinical development plan for Host Factor Products. The parties will equally share costs incurred in connection with the manufacture of non-GMP drug product required for pre-clinical development prior to filing of an investigational new drug application for the first Host Factor Product in the coronavirus program. Following the completion of initial pre-clinical development activities, if the Company exercises its option to progress one or more candidates arising from the coronavirus program into further development, the Company will be responsible for conducting all development, manufacturing and commercialization activities for Host Factor Products, at its sole expense, subject to Alnylam’s right to opt-in, during a specified period, to share equally with the Company the profits and losses in connection with development and commercialization of Host Factor Products.

If the Company exercises its program option for the coronavirus program, and successfully develops one or more Host Factor Products arising from such program, then unless Alnylam exercises its profit-sharing option, the Company will be required to pay Alnylam up to $15.0 million in the aggregate for the achievement of specified development milestones for the Host Factor Products. Following commercialization, the Company will also be required to make specified milestone payments to Alnylam on achievement of specified levels of annual net sales, and a tiered royalty at specified rates on annual net sales of the applicable Host Factor Products. However, with respect to sales to governmental authorities or sales for the purposes of biodefense, management of public health or other public policy reasons, such royalty will be payable at a percentage in the low single-digits, plus a pass-through amount of any royalties Alnylam is required to pay to third parties under any third party in-license agreements related to the Host Factor Products.

GSK Agreements

Preliminary Collaboration Agreement

On April 5, 2020, the Company and GlaxoSmithKline Intellectual Property Development Limited and GlaxoSmithKline Biologicals SA (together, “GSK”) entered into a binding preliminary collaboration agreement (the “Preliminary Collaboration Agreement”), pursuant to which the parties agreed to collaborate to research, develop and commercialize products for the prevention, treatment and prophylaxis of diseases caused by SARS-CoV-2, and potentially other coronaviruses. The collaboration will be directed to the development and commercialization of three types of collaboration products under three separate programs: (1) antibodies targeting SARS-CoV-2, and potentially other coronaviruses (the “Antibody Program”); (2) vaccines targeting SARS-CoV-2, and potentially other coronaviruses (the “Vaccine Program”), and (3) products based on genome-wide CRISPR screening of host targets expressed in connection with exposure to SARS-CoV-2 (the “Functional Genomics Program”). For a period of four years following the closing of the Stock Purchase Agreement (as defined below), the parties will conduct certain research and development activities under mutually agreed development plans and associated budgets for each of the three programs.

The Company will be primarily responsible for the development and clinical manufacturing activities for the Antibody Program, and for conducting the initial development activities directed to a vaccine for the Vaccine Program. GSK will be primarily responsible for the commercialization activities for the Antibody Program (except in connection with sales of antibody products licensed to WuXi Biologics (Hong Kong) Limited in People’s Republic of China, Hong Kong, Macau and Taiwan), the later-stage development, manufacturing and commercialization activities for the Vaccine Program and the development, manufacturing and commercialization activities for the Functional Genomics Program. Subject to an opt-out mechanism, the parties will share all development costs in accordance with the budget for each of the collaboration programs, with the Company bearing 72.5% of the development costs for the Antibody Program, 27.5% of the development costs for the Vaccine Program, and the parties sharing equally the development costs for the Functional Genomics Program.

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VIR BIOTECHNOLOGY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

On a collaboration product-by-collaboration product basis, either party will have the right, at specified points in development, to opt out of its co-funding obligations, and the other party may, at its election, either pursue such program unilaterally, or also cease the conduct and funding of such collaboration product. Unless a party has opted out prior to such time, the parties would share all profits and losses arising from any collaboration product in the same ratios in which the parties bore development costs for such collaboration program.

The parties will continue to negotiate a more detailed set of terms of a definitive collaboration agreement (the “Definitive Collaboration Agreement”), including more detailed financial terms, as well as operational provisions and consequences of any ongoing collaboration program as a result of a change of control of the Company. If the parties cannot reach agreement and enter into the Definitive Collaboration Agreement within 45 days following the execution of the Preliminary Collaboration Agreement, the terms of the Definitive Collaboration Agreement will be determined through mediation and binding arbitration. The Preliminary Collaboration Agreement will terminate upon the execution of the Definitive Collaboration Agreement, which will supersede the Preliminary Collaboration Agreement, and will remain in effect unless terminated by either party.

Stock Purchase Agreement

Concurrently with the execution of the Preliminary Collaboration Agreement, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Glaxo Group Limited (“GGL”), an affiliate of GSK, pursuant to which GGL purchased 6,626,027 shares of the Company’s common stock on April 29, 2020, at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million.

The consummation of the transactions under each of the Preliminary Collaboration Agreement and the Stock Purchase Agreement were subject to the satisfaction of customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The applicable waiting period was terminated early on April 22, 2020.

Letter Agreement with Samsung

On April 9, 2020, the Company and Samsung Biologics Co., Ltd. (“Samsung”) entered into a binding letter agreement (the “Letter Agreement”), pursuant to which Samsung will perform development and manufacturing services for the Company’s SARS-CoV-2 antibody program. Under the terms of the Letter Agreement, the Company has committed to purchase a firm and binding capacity reservation for a specified number of manufacturing slots in 2021 and 2022. The Company is obligated to pay a total of approximately $362 million for such capacity reservation on a take-or-pay basis regardless of whether such manufacturing slots are utilized by the Company, subject to annual adjustment based on the Korean Consumer Price Index, which also includes certain fees relating to project management and technology transfer. The amounts will be payable during 2021 and 2022 and invoiced on a per-batch basis, with shortfalls invoiced at the end of the year in which such shortfall occurs. The parties will continue to negotiate additional terms in a definitive agreement (the “Definitive Agreement”) and will use best efforts to execute the Definitive Agreement before July 31, 2020. The Letter Agreement will terminate upon the execution of the Definitive Agreement or mutual written agreement by the parties.

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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 in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the year ended December 31, 2019. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company”, “Vir,” “we,” “us” and “our” refer to Vir Biotechnology, Inc. and its consolidated subsidiaries.

Overview

We are a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Infectious diseases are among the leading causes of death worldwide and cause hundreds of billions of dollars of economic burden each year. We believe that now is the time to apply the recent and remarkable advances in immunology to combat infectious diseases. Our approach begins with identifying the limitations of the immune system in combating a particular pathogen, the vulnerabilities of that pathogen and the reasons why previous approaches have failed. We then bring to bear powerful technologies that we believe, individually or in combination, will lead to effective therapies.

We have assembled four technology platforms, focused on antibodies, T cells, innate immunity and small interfering ribonucleic acid, or siRNA, through internal development, collaborations and acquisitions. Our current development pipeline consists of product candidates targeting hepatitis B virus, or HBV, influenza A, severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2, human immunodeficiency virus, or HIV, and tuberculosis, or TB.

Our lead SARS-CoV-2 monoclonal antibody, or mAb, development candidates, VIR-7831 and VIR-7832, have demonstrated high affinity for the SARS-CoV-2 spike protein and are highly potent in neutralizing SARS-CoV-2 in live-virus cellular assays. We plan to proceed directly into a Phase 2 clinical trial this summer pending regulatory review. In February 2020, we entered into a development and clinical and commercial manufacturing collaboration with WuXi Biologics; in March and April 2020, we expanded our collaboration with Alnylam Pharmaceuticals, Inc., or Alnylam, to include the development and commercialization of up to four additional RNA interference therapeutics including one targeting SARS-CoV-2 and three targets focused on host factors for SARS-CoV-2, including ACE2 and TMPRSS2, both of which are considered critical for viral entry. In May 2020, we and Alnylam announced the selection of a development candidate VIR-2703, an investigational RNAi therapeutic targeting the SARS-CoV-2 genome; in April 2020, we entered into a binding preliminary collaboration agreement with GlaxoSmithKline Intellectual Property Development Limited and GlaxoSmithKline Biologicals SA (together, “GSK”), pursuant to which we agreed to collaborate to research, develop and commercialize products for the prevention, treatment and prophylaxis of diseases caused by SARS-CoV-2; and we entered into a binding letter agreement with Samsung Biologics Co., Ltd., or Samsung, pursuant to which Samsung will perform development and manufacturing services for our SARS-CoV-2 antibody program.

In addition, VIR-2218, an HBV-targeting siRNA, has completed enrollment in an ongoing Phase 1/2 clinical trial. Data to date have demonstrated substantial reduction of hepatitis B virus surface antigen, or HBsAg, and VIR-2218 has been generally well tolerated. Additionally, we have initiated a Phase 1/2 clinical trial for VIR-2482, a mAb designed for the prevention of influenza A. We have built an industry-leading team that has deep experience in immunology, infectious diseases and product development. Given the global impact of infectious diseases, we are committed to developing cost-effective treatments that can be delivered at scale.

We were incorporated in April 2016 and commenced principal operations later that year. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials.

Prior to our initial public offering, or IPO, we funded our operations primarily from the issuance and sale of convertible preferred stock, and to a lesser extent from revenue from grant agreements with government-sponsored and private organizations, as well as research and development services. In October 2019, we completed our IPO pursuant to which we received net proceeds of $126.4 million, after deducting underwriting discounts, commissions and offering expenses. As of March 31, 2020, excluding restricted cash, we had $361.8 million in cash, cash equivalents and investments. Based upon our current operating plan, we believe that our existing cash, cash equivalents and investments as of March 31, 2020 will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months from the issuance date of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. In April 2020, we issued 6,626,027 shares of our common stock to Glaxo Group Limited, or GGL, (an affiliate of GSK) at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million.  For additional information on the stock issuance to GGL, see Note 13—Subsequent Events to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our net losses were $77.2 million and $28.7 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we had an accumulated deficit of $445.8 million. Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years. In particular, we expect our expenses and losses to increase as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, seek regulatory approval, prepare for commercialization, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.

We are currently manufacturing product candidates from three different platforms: antibodies, T cells and siRNAs. We have established our own internal chemistry, manufacturing and control, or CMC, capabilities and are working with contract development and manufacturing organizations, or CDMOs to supply our early stage product candidates in the near-term. We have completed our internal capacity build in process development, analytical development, quality, manufacturing and supply chain. Specifically, our San Francisco, California and Portland, Oregon facilities include laboratories that support process development, production of human cytomegalovirus, or HCMV research viral seed stock and selected quality control testing for our product candidates. We have established relationships with multiple CDMOs and have produced material to support preclinical studies and Phase 1 and Phase 2 clinical trials. Material for Phase 3 clinical trials and commercial supply will require large-volume, low-cost-of-goods production, and we are in discussions with additional large-scale CDMOs to plan for future scale-up and capacity.

COVID-19 Business Update

With the global spread of the ongoing COVID-19 pandemic in the first quarter of 2020, we have implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business. We continue to closely monitor the COVID-19 situation and will evolve our plans and policies as needed going forward. In March 2020, some of our workforce transitioned to working remotely. We are currently preparing plans to reopen our offices to allow employees to return when appropriate. These plans will be based on a phased approach consistent with local government requirements, and focused on employee safety. We are working closely with our CDMOs to manage our supply chain activities and mitigate any potential disruptions to our clinical trial supplies as a result of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and begins to impact essential distribution systems, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing of clinical trial supply. For some of our clinical development programs, we are experiencing, and may continue to experience, a disruption or delay in our ability to initiate trial sites and enroll and assess patients. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic.  

Our License, Collaboration and Grant Agreements

We have entered into grant, license and collaboration arrangements with various third parties. For details regarding these and other agreements, see Note 5—Grant, License and Collaboration Agreements and Note 13—Subsequent Events to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Our Acquisitions

We have completed various acquisitions. For details regarding our acquisitions, see Note 4—Acquisitions to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Components of Operating Results

Revenue

We do not have any products approved for sale, we have not generated any revenue from the sale of our products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever.

Our revenue consists of: (i) grant revenue; and (ii) contract revenue. Grant revenue is comprised of revenue derived from grant agreements with government-sponsored and private organizations. Contract revenue is comprised of revenue generated from research and development services.

Operating Expenses

Research and Development

To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We do not track research and development expenses by product candidate.

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, our ongoing assessments as to each product candidate’s commercial potential and the impact of public health epidemics, such as the COVID-19 pandemic. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Our clinical development costs may vary significantly based on factors such as:

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General and Administrative

Our general and administrative expenses consist primarily of personnel-related expenses for personnel in executive, finance and other administrative functions, facilities and other allocated expenses, transaction costs associated related to acquisitions and other expenses for outside professional services, including legal, audit and accounting services, and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation.

We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we continue to support our continued research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and investments.

Other Income (Expense), Net

Other income (expense), net consists of gains and losses from foreign currency transactions and from remeasurement of contingent consideration.

Provision for Income Taxes

Provision for income taxes consisted of immaterial international income tax.

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Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes our results of operations for the periods presented:

Revenue

Total revenue was $5.7 million and $3.7 million for the three months ended March 31, 2020 and 2019, respectively. The increase in total revenue was primarily due to an increase in revenue recognized under the HIV grant with the Bill & Melinda Gates Foundation due to supplemental award received in the first quarter of 2020 for reimbursement, in part, of prior period costs, and timing of research activities under this grant.

Research and Development Expenses

The following table shows the primary components of our research and development expenses for the periods presented:

Research and development expenses were $65.0 million and $25.9 million for the three months ended March 31, 2020 and 2019, respectively. This increase was primarily due to the following factors:

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The increase was partially offset by a decrease of $4.8 million in contract manufacturing expense, which was primarily attributable to the manufacturing for HBV and influenza A drug products initiated in the first half of 2018 and completed in the second quarter of 2019.  

General and Administrative Expenses

General and administrative expenses were $12.6 million and $8.6 million for the three months ended March 31, 2020 and 2019, respectively. The increase was primarily due to increases in personnel-related expenses related to additional headcount, other facility expenses due to additional office space, and other expenses due to costs associated with operating as a public company.

Interest Income

Interest income was $1.8 million and $2.2 million for the three months ended March 31, 2020 and 2019, respectively. The decrease was due to lower investment balances in the three months ended March 31, 2020 compared to the same period in 2019.

Other Income (Expense), Net

Other expense, net was $7.1 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. The increase in expense was primarily related to the change in fair value of the contingent consideration related to our acquisition of TomegaVax, Inc.

Liquidity, Capital Resources and Capital Requirements

Sources of Liquidity

As of March 31, 2020, excluding restricted cash, we had $361.8 million in cash, cash equivalents and investments, and an accumulated deficit of $445.8 million. We have financed our operations primarily through sales of our common stock in conjunction with the IPO, convertible preferred securities and payments received under our collaboration agreements.

On October 10, 2019, our registration statement on Form S-1 was declared effective by the SEC and our shares began trading on The Nasdaq Global Select Market on October 11, 2019. We sold an aggregate of 7,142,858 shares of our common stock at an initial offering price of $20.00 per share. As a result of the IPO, we received $126.4 million in net proceeds, after deducting underwriting discounts and commissions of approximately $10.0 million and offering expenses of approximately $6.4 million. In April 2020, we issued 6,626,027 shares of our common stock to GGL (an affiliate of GSK) at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million. For additional information on the stock issuance to GGL, see Note 13—Subsequent Events to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures.

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Future Funding Requirements

Based upon our current operating plan, we believe that our existing cash, cash equivalents and investments as of March 31, 2020, will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months from the issuance date of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, we will still need to raise substantial additional capital to fund the development of our product candidates. We anticipate raising additional capital through the sale of our equity securities, incurring debt, entering into collaboration, licensing or similar arrangements with third parties, or receiving research contributions, grants or other sources of financing to fund our operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. There can be no assurance that sufficient funds will be available to us on attractive terms or at all. If we are unable to obtain additional funding from these or other sources, it may be necessary to significantly reduce our rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. In addition, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of biotechnology products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: