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Deferred Royalty Obligation related to the Sale of Future Royalties | 9 Months Ended
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Sep. 30, 2023
Deferred Royalty Obligation [Abstract] |
Deferred Royalty Obligation related to the Sale of Future Royalties | 9. Deferred Royalty Obligation related to the Sale of Future Royalties In June 2023, the Company entered into the Purchase Agreement with Blackstone, pursuant to which the Company sold to Blackstone its 4% royalty, or revenue interest, in the potential future net sales of Vaxcyte products, including the Purchased Interest under the 2015 License Agreement. The Company retains the right to discover and develop vaccines for the treatment or prophylaxis of any disease that is not caused by an infectious pathogen, including cancer. In June 2023, Blackstone made an upfront payment of $140.0 million to the Company and will also pay up to an additional $250.0 million upon the achievement of various return thresholds as set forth in the Purchase Agreement. Under the Purchase Agreement, and in connection with its sale of the Purchased Interest, the Company has agreed to certain covenants with respect to the exercise of its rights under the 2015 License Agreement, including with respect to the Company’s right to amend, assign and terminate the 2015 License Agreement. The Purchase Agreement contains other customary terms and conditions, including representations and warranties, covenants, and indemnification obligations in favor of each party. The Company recorded the $140.0 million upfront payment from Blackstone as a deferred royalty obligation related to the sale of future royalties on the Company's condensed Balance Sheets. Due to the Company's ongoing manufacturing obligations under the 2015 License Agreement, the Company accounted for the proceeds as imputed debt and, therefore, will recognize future non-cash royalty revenues. Non-cash interest expense will be recognized over the estimated life of the royalty term arrangement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of future royalty payments to be received from Vaxcyte. As part of the sale, the Company incurred approximately $3.8 million in transaction costs, which are being amortized over the estimated life of the royalty term arrangement using the effective interest method. As future royalties are earned from Vaxcyte by Blackstone, the balance of the deferred royalty obligation will be amortized over the estimated life of the royalty term arrangement. There are a number of factors that could materially affect the fair value of the deferred royalty obligation. Such factors include, but are not limited to, the amount and timing of potential future royalty payments to be earned and received by Blackstone from Vaxcyte under the 2015 License Agreement, changing standards of care, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of the vaccine products, and other events or circumstances that could result in reduced royalty payments from Vaxcyte to Blackstone, which are not within our control, and all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the estimated life of the royalty term arrangement. The Company will periodically assess the estimated royalty payments to be earned by Blackstone from Vaxcyte and, to the extent that the amount or timing of such payments is materially different than our original estimates, the Company will prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation. As of September 30, 2023, our effective interest rate used to amortize the liability is 17.0%. During the three and nine months ended September 30, 2023, the Company recognized approximately $5.9 million and $6.4 million, respectively, of non-cash interest expense on the deferred royalty obligation, which amount will increase such balance. As of September 30, 2023, Blackstone has not received any royalty payment from Vaxcyte and, therefore, the deferred royalty obligation has not begun to be amortized. The following table shows the activity of the deferred royalty obligation since transaction inception through September 30, 2023:
|  | September 30, |
|  | 2023 |
|  | (in thousands) |
Proceeds from the sale of future Vaxcyte royalties |  | $ | 140,000 |
Issuance costs |  |  | (3,792 | )
Non-cash interest expense associated with the sale of future Vaxcyte royalties |  |  | 6,378 |
Amortization of issuance costs |  |  | 177 |
Deferred royalty obligation related to the sale of future Vaxcyte royalties, net |  | $ | 142,763 |

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