IMMUNOGEN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

(UNAUDITED)

In thousands


				Additional				Total
	Common Stock			Paid-In		Accumulated		Shareholders’
	Shares	Amount		Capital		Deficit		(Deficit) Equity
Balance at December 31, 2017	132,526	$	1,325	$	1,009,362	$	(1,028,582)	$	(17,895)
Transition adjustment for ASC 606	—		—		—		14,090		14,090
Net loss	—		—		—		(38,613)		(38,613)
Issuance of common stock pursuant to the exercise of stock options	421		4		2,255		—		2,259
Stock option and restricted stock compensation expense	—		—		3,746		—		3,746
Directors' deferred share units converted	77		1		(1)		—		—
Directors’ deferred share unit compensation	—		—		102		—		102
Balance at March 31, 2018	133,024	$	1,330	$	1,015,464	$	(1,053,105)	$	(36,311)
Net loss	—		—		—		(41,624)		(41,624)
Issuance of common stock pursuant to the exercise of stock options	146		1		558		—		559
Issuance of common stock	15,755		158		162,382		—		162,540
Stock option and restricted stock compensation expense	—		—		3,971		—		3,971
Directors' deferred share units converted	96		1		—		—		1
Directors’ deferred share unit compensation	—		—		54		—		54
Balance at June 30, 2018	149,021	$	1,490	$	1,182,429	$	(1,094,729)	$	89,190
Net loss	—		—		—		(46,807)		(46,807)
Issuance of common stock pursuant to the exercise of stock options	28		—		124		—		124
Issuance of common stock	—		—		(28)		—		(28)
Stock option and restricted stock compensation expense	—		—		4,308		—		4,308
Directors’ deferred share unit compensation	—		—		102		—		102
Balance at September 30, 2018	149,049	$	1,490	$	1,186,935	$	(1,141,536)	$	46,889
Net loss	—		—		—		(41,799)		(41,799)
Issuance of common stock pursuant to the exercise of stock options and employee stock purchase plan	351		4		1,355		—		1,359
Stock option and restricted stock compensation expense	—		—		4,420		—		4,420
Directors’ deferred share unit compensation	—		—		103		—		103
Balance at December 31, 2018	149,400	$	1,494	$	1,192,813	$	(1,183,335)	$	10,972
Net loss	—		—		—		(43,751)		(43,751)
Issuance of common stock pursuant to the exercise of stock options and employee stock purchase plan	25		—		68		—		68
Stock option and restricted stock compensation expense	—		—		5,007		—		5,007
Directors’ deferred share unit compensation	—		—		100		—		100
Balance at March 31, 2019	149,425	$	1,494	$	1,197,988	$	(1,227,086)	$	(27,604)
Net loss	—		—		—		(43,446)		(43,446)
Issuance of common stock pursuant to the exercise of stock options and employee stock purchase plan	354		3		667		—		670
Restricted stock award	106		1		(1)		—		—
Stock option and restricted stock compensation expense	—		—		2,106		—		2,106
Directors’ deferred share unit compensation	—		—		100		—		100
Balance at June 30, 2019	149,885	$	1,498	$	1,200,860	$	(1,270,532)	$	(68,174)

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

~~Table of Contents~~

~~IMMUNOGEN, INC.~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS~~

~~(UNAUDITED)~~

~~In thousands, except per share amounts~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2018

2017


2018

2017











Revenues:

License and milestone fees

$
672

$
79

$
13,533

$
49,889

Non-cash royalty revenue related to the sale of future royalties

8,441

6,503

22,873

20,555

Research and development support

388

650

1,159

3,030

Clinical materials revenue

1,427

1,248

2,465

2,525

Total revenues

10,928

8,480

40,030

75,999

Operating Expenses:

Research and development

47,243

31,689

130,775

99,896

General and administrative

8,347

7,908

26,994

24,863

Restructuring charge

870

—

3,287

386

Total operating expenses

56,460

39,597

161,056

125,145

Loss from operations

(45,532)

(31,117)

(121,026)

(49,146)

Investment income, net

1,369

293

2,845

551

Non-cash interest expense on liability related to the sale of future royalties and convertible senior notes

(2,546)

(3,385)

(8,203)

(10,461)

Interest expense on convertible senior notes

(23)

(762)

(70)

(3,012)

Non-cash debt conversion expense

—

(22,191)

—

(22,191)

Other (expense) income, net

(75)

480

(590)

1,365

Net loss

$
(46,807)

$
(56,682)

$
(127,044)

$
(82,894)

Basic and diluted net loss per common share

$
(0.32)

$
(0.61)

$
(0.92)

$
(0.93)

Basic and diluted weighted average common shares outstanding

147,220

93,001

137,472

89,133

Total comprehensive loss

$
(46,807)

$
(56,682)

$
(127,044)

$
(82,894)

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~IMMUNOGEN, INC.~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)~~

~~(UNAUDITED)~~

~~In thousands~~

Additional

Total

Common Stock

Paid-In

Accumulated

Shareholders’

Shares

Amount

Capital

Deficit

Equity (Deficit)

Balance at December 31, 2016

87,301

$
873

$
778,847

$
(932,570)

$
(152,850)

Net loss

—

—

—

(96,012)

(96,012)

Stock options exercised

191

1

649

—

650

Issuance of common stock

16,675

167

101,496

—

101,663

Restricted stock award - net of forfeitures

2,146

21

(21)

—

—

Conversion of debt

26,160

262

117,067

—

117,329

Stock option and restricted stock compensation expense

—

—

11,119

—

11,119

Directors' deferred share units converted

53

1

(1)

—

—

Directors’ deferred share unit compensation

—

—

206

—

206

Balance at December 31, 2017

132,526

$
1,325

$
1,009,362

$
(1,028,582)

$
(17,895)

Transition adjustment for ASC 606

—

—

—

14,090

14,090

Net loss

—

—

—

(127,044)

(127,044)

Stock options exercised

595

6

2,937

—

2,943

Issuance of common stock

15,755

158

162,354

—

162,512

Stock option and restricted stock compensation expense

—

—

12,024

—

12,024

Directors' deferred share units converted

173

1

(1)

—

—

Directors’ deferred share unit compensation

—

—

258

—

258

Balance at September 30, 2018

149,049

$
1,490

$
1,186,934

$
(1,141,536)

$
46,888

Table of Contents

IMMUNOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

In thousands ~~except per share amounts~~

Nine Months Ended

September 30,


2018

2017


Cash flows from operating activities:

Net loss

$
(127,044)

$
(82,894)

Adjustments to reconcile net loss to net cash used for operating activities:

Non-cash royalty revenue related to sale of future royalties

(22,873)

(20,555)

Non-cash interest expense on liability related to sale of future royalties and convertible senior notes

8,203

10,461

Non-cash debt conversion expense

—

22,191

Depreciation and amortization

6,192

4,307

(Gain) loss on sale/disposal of fixed assets and impairment charges

(30)

180

Stock and deferred share unit compensation

12,282

8,458

Deferred rent

(62)

71

Change in operating assets and liabilities:

Accounts receivable

534

(495)

Unbilled revenue

2,059

4,178

Inventory

(900)

(51)

Contract asset

(500)

—

Prepaid and other current assets

(3,353)

641

Other assets

(144)

(93)

Accounts payable

1,420

(993)

Accrued compensation

(1,157)

1,579

Other accrued liabilities

7,898

2,781

Deferred revenue

(7,662)

87,288

Net cash (used) provided by operating activities

(125,137)

37,054

Cash flows from investing activities:

Purchases of property and equipment

(4,220)

(847)

Net cash used for investing activities

(4,220)

(847)

Cash flows from financing activities:

Proceeds from stock options exercised

2,943

363

Proceeds from common stock issuance, net of $395 of transaction costs

162,512

—

Fees for debt conversion

—

(1,683)

Net cash provided (used) for financing activities

165,455

(1,320)

Net change in cash and cash equivalents

36,098

34,887

Cash and cash equivalents, beginning of period

267,107

159,964

Cash and cash equivalents, end of period

$
303,205

$
194,851


	Six Months Ended
	June 30,
	2019		2018

Cash flows from operating activities:
Net loss	$	(87,197)	$	(80,237)
Adjustments to reconcile net loss to net cash used for operating activities:
Non-cash royalty revenue related to sale of future royalties		(18,900)		(14,432)
Non-cash interest expense on liability related to sale of future royalties and convertible senior notes		7,250		5,657
Depreciation and amortization		2,438		5,056
Loss (gain) on sale/disposal of fixed assets and impairment charges		2,404		(30)
Operating lease right-of-use asset impairment		559		—
Stock and deferred share unit compensation		7,313		7,872
Deferred rent		—		(59)
Change in operating assets and liabilities:
Accounts receivable		1,701		2,630
Unbilled revenue/reimbursement		(1,857)		2,058
Inventory		—		(852)
Contract asset		500		—
Prepaid and other current assets		(2,187)		(6,926)
Operating lease right-of-use assets		664		—
Other assets		1,859		(640)
Accounts payable		(3,199)		3,871
Accrued compensation		9,238		(2,949)
Other accrued liabilities		(5,346)		1,896
Deferred revenue		65,129		(8,196)
Operating lease liability		(1,179)		—
Net cash used for operating activities		(20,810)		(85,281)
Cash flows from investing activities:
Purchases of property and equipment		(2,355)		(2,127)
Net cash used for investing activities		(2,355)		(2,127)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans		738		2,819
Proceeds from common stock issuance, net of $367 of transaction costs		—		162,540
Net cash provided by financing activities		738		165,359
Net change in cash and cash equivalents		(22,427)		77,951
Cash and cash equivalents, beginning of period		262,252		267,107
Cash and cash equivalents, end of period	$	239,825	$	345,058

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

Table of Contents

IMMUNOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2018~~2019

A.	Nature of Business and Plan of Operations

~~A.Nature of Business and Plan of Operations~~

ImmunoGen, Inc. (the Company) was incorporated in Massachusetts in 1981 and is focused on the development of ~~antibody‑drug~~antibody-drug conjugates, or ADC, therapeutics. The Company has generally incurred operating losses and negative cash flows from operations since inception, incurred a net loss of ~~$127.0~~$87.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, and has an accumulated deficit of approximately ~~$1.1~~$1.3 billion as of ~~September~~June 30, ~~2018.~~2019. The Company has primarily funded these losses through payments received from its collaborations and equity and convertible debt financings. To date, the Company has no product revenue and management expects operating losses to continue for the foreseeable future.

At ~~September~~June 30, ~~2018,~~2019, the Company had ~~$303.2~~$239.8 million of cash and cash equivalents on hand. On June 26, 2019, the Board of Directors approved a plan to restructure the business to focus resources on continued development of mirvetuximab soravtansine and a select portfolio of three earlier-stage product candidates, resulting in a reduction of workforce by approximately 220 positions. The Company anticipates that its current capital resources and expense reductions resulting from these operational changes will enable it to meet its operational expenses and capital expenditures for more than twelve months after the date these financial statements are ~~issued~~.issued. The Company may raise additional funds through equity or debt financings or generate revenues from collaborators through a combination of upfront license payments, milestone payments, royalty payments, and research ~~funding, and clinical material reimbursements.~~funding. There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate revenues from collaborators on terms acceptable to the Company or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition and require the Company to defer or limit some or all of its research, development, and/or clinical projects.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, the development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, manufacturing and marketing limitations, complexities associated with managing collaboration arrangements, ~~third‑party~~third-party reimbursements, and compliance with governmental regulations.

B.	Summary of Significant Accounting Policies

~~B.Summary of Significant Accounting Policies~~

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ImmunoGen Securities Corp., ImmunoGen Europe Limited, ImmunoGen (Bermuda) Ltd., ImmunoGen BioPharma (Ireland) Limited, and Hurricane, LLC. All intercompany transactions and balances have been eliminated. The consolidated financial statements include all of the adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the Company’s financial position in accordance with accounting principles generally accepted in the U.S. for interim financial information. The December 31, ~~2017~~2018, condensed consolidated balance sheet data presented for comparative purposes ~~was~~were derived from the Company’s audited financial statements, but certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The preparation of interim financial statements requires the use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenditures during the reported periods. The results of the interim periods are not necessarily indicative of the results for the entire year. Accordingly, the interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Subsequent Events

The Company has evaluated all events or transactions that occurred after ~~September~~June 30, ~~2018,~~2019, up through the date the Company issued these financial statements. ~~In October 2018, Lilly informed the Company that it was terminating its three current development and commercialization licenses, two of which were pre-clinical stage programs~~

~~Table of Contents~~

~~and one for which the clinical program had been cancelled.~~ The Company did not have any ~~other~~ material recognizable or unrecognizable subsequent events during this period.

~~Adoption of ASC Topic 606, Revenue from Contracts with Customers~~

~~The Company adopted Accounting Standards Codification Topic or ASC, 606 –~~ ~~Revenue from Contracts with Customers~~, (ASC 606) on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, ~~Revenue Recognition~~ (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance." For discussion on the Company’s revenue recognition policy under ASC 605, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

~~Financial Statement Impact of Adopting ASC 606~~

The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of December 31, 2017, was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the condensed consolidated balance sheet as of January 1, 2018:

Table of Contents

~~IMMUNOGEN, INC.~~

~~ADJUSTED CONSOLIDATED BALANCE SHEET~~

~~(UNAUDITED)~~

~~In thousands, except per share amounts~~

Adjustments

Balance at

December 31,

Due to

January 1,

2017

ASC 606

2018

ASSETS

Cash and cash equivalents

$
267,107

$
—

$
267,107

Accounts receivable

2,649

—

2,649

Unbilled revenue

2,580

—

2,580

Non-cash royalty receivable

—

8,900

8,900

Inventory

1,038

—

1,038

Prepaid and other current assets

2,967

—

2,967

Total current assets

276,341

8,900

285,241

Property and equipment, net of accumulated depreciation

14,538

—

14,538

Other assets

3,797

—

3,797

Total assets

$
294,676

$
8,900

$
303,576

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Accounts payable

$
8,562

$
—

$
8,562

Accrued compensation

11,473

—

11,473

Other accrued liabilities

15,767

—

15,767

Current portion of deferred lease incentive

784

—

784

Current portion of liability related to the sale of future royalties, net

17,779

—

17,779

Current portion of deferred revenue

1,405

41

1,446

Total current liabilities

55,770

41

55,811

Deferred lease incentive, net of current portion

5,129

—

5,129

Deferred revenue, net of current portion

93,752

(5,231)

88,521

Convertible 4.5% senior notes, net

2,050

—

2,050

Liability related to the sale of future royalties, net

151,634

—

151,634

Other long-term liabilities

4,236

—

4,236

Total liabilities

312,571

(5,190)

307,381

Shareholders’ deficit:

Preferred stock

—

—

—

Common stock

1,325

—

1,325

Additional paid-in capital

1,009,362

—

1,009,362

Accumulated deficit

(1,028,582)

14,090

(1,014,492)

Total shareholders’ deficit

(17,895)

14,090

(3,805)

Total liabilities and shareholders’ deficit

$
294,676

$
8,900

$
303,576

Under the previous guidance, the Company deferred revenue pertaining to the transfer of certain exclusive commercialization and development licenses. Under ASC 606, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

Under the previous guidance, milestones that were considered substantive because the Company contributed significant effort to the achievement of such milestones were recognized as revenue upon achievement of the milestone. Under ASC 606, if the achievement of a milestone is considered a direct result of the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service, the associated milestone value is allocated to that distinct good or service. If a milestone is not specifically related to the Company’s effort to satisfy a performance obligation or transfer a distinct good or service, the amount is allocated to all performance obligations using the relative standalone selling price method.

~~Table of Contents~~

Under ASC 606, the Company also evaluates the milestone to determine whether the milestone is probable of being achieved and estimates the amount to be included in the transaction price. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price to be allocated, otherwise, such amounts are constrained and excluded from the transaction price. The Company determined it was probable that a future $5.0 million milestone for Takeda enrolling a patient in a Phase I trial as of the date of adoption would occur and, accordingly, recorded a reduction to accumulated deficit of $4.6 million related to this previously delivered license as approximately $400,000 was allocated to undelivered rights to future technological improvements. The $5.0 million contract asset recorded for the probable milestone was netted against contract liabilities related to the specific contract.

Prior to the adoption of ASC 606, the Company recognized royalty revenue when it could reliably estimate such amounts and collectability was reasonably assured. As such, the Company generally recognized revenue for sales royalties in the quarter the amounts were reported to the Company by its licensees, or one quarter following the quarter in which sales by the Company’s licensees occurred. Under ASC 606, if the license is deemed to be the predominant item to which the royalties relate, the Company will recognize 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). As a result of recognizing royalties for sales in the fourth quarter of fiscal year 2017, the Company recognized a reduction to accumulated deficit of $8.9 million.

~~The net impact of these changes resulted in a $14.1 million reduction to accumulated deficit, a $5.2 million reduction to deferred revenue and an $8.9 million increase in non-cash royalty receivable.~~

The adoption of ASC 606 resulted in the acceleration of revenue through December 31, 2017, which in turn reduced the related net deferred tax asset by $3.9 million. As the Company fully reserves its net deferred tax assets, the impact was offset by the valuation allowance.

~~Impact of ASC 606 Revenue Guidance on Financial Statement Line Items~~

The following tables compare the reported condensed consolidated balance sheet and statement of operations, as of and for the three and nine months ended September 30, 2018, to the pro-forma amounts had the previous guidance been in effect:

~~Table of Contents~~

~~IMMUNOGEN, INC.~~

~~PRO FORMA CONSOLIDATED BALANCE SHEET~~

~~(UNAUDITED)~~

~~In thousands, except per share amounts~~

As of September 30, 2018

Pro forma as if the

previous accounting

As reported

was in effect

ASSETS

Cash and cash equivalents

$
303,205

$
303,205

Accounts receivable

2,115

2,115

Unbilled revenue

521

521

Contract asset

500

—

Non-cash royalty receivable

8,115

—

Inventory

1,938

1,938

Prepaid and other current assets

6,320

6,320

Total current assets

322,714

314,099

Property and equipment, net of accumulated depreciation

13,209

13,209

Other assets

3,941

3,941

Total assets

$
339,864

$
331,249

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Accounts payable

$
10,352

$
10,352

Accrued compensation

10,316

10,316

Other accrued liabilities

24,117

24,117

Current portion of deferred lease incentive

832

832

Current portion of liability related to the sale of future royalties, net

23,040

23,040

Current portion of deferred revenue

1,713

1,455

Total current liabilities

70,370

70,112

Deferred lease incentive, net of current portion

4,854

4,854

Deferred revenue, net of current portion

80,592

83,834

Convertible 4.5% senior notes, net

2,060

2,060

Liability related to the sale of future royalties, net

130,907

130,907

Other long-term liabilities

4,193

4,193

Total liabilities

292,976

295,960

Shareholders’ deficit:

Preferred stock

—

—

Common stock

1,490

1,490

Additional paid-in capital

1,186,934

1,186,934

Accumulated deficit

(1,141,536)

(1,153,135)

Total shareholders’ deficit

46,888

35,289

Total liabilities and shareholders’ deficit

$
339,864

$
331,249

As a result of adoption of ASC 606, a receivable is recorded for royalties earned during the current quarter rather than one quarter in arrears under the previous guidance. Deferred revenue increased under ASC 606 due to a greater amount of the transaction prices being allocated to the future technological improvement rights under ASC 606.

~~Table of Contents~~

~~IMMUNOGEN, INC.~~

~~PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS~~

~~(UNAUDITED)~~

~~In thousands, except per share amounts~~

Three Months Ended

Nine months ended

September 30, 2018

September 30, 2018

Pro forma as if the

Pro forma as if the

previous accounting

previous accounting

As reported

was in effect

As reported

was in effect
Revenues:

License and milestone fees

$
672

$
80

$
13,533

$
15,239
Non-cash royalty revenue related to the sale of future royalties

8,441

7,562

22,873

23,658
Research and development support

388

388

1,159

1,159
Clinical materials revenue

1,427

1,427

2,465

2,465
Total revenues

10,928

9,457

40,030

42,521
Operating Expenses:

Research and development

47,243

47,243

130,775

130,775
General and administrative

8,347

8,347

26,994

26,994
Restructuring charge

870

870

3,287

3,287
Total operating expenses

56,460

56,460

161,056

161,056
Loss from operations

(45,532)

(47,003)

(121,026)

(118,535)
Investment income, net

1,369

1,369

2,845

2,845
Non-cash interest expense on liability related to the sale of future royalties and convertible senior notes

(2,546)

(2,546)

(8,203)

(8,203)
Interest expense on convertible senior notes

(23)

(23)

(70)

(70)
Other (expense) income, net

(75)

(75)

(590)

(590)
Net loss

$
(46,807)

$
(48,278)

$
(127,044)

$
(124,553)
Basic and diluted net loss per common share

$
(0.32)

$
(0.33)

$
(0.92)

$
(0.91)

Under the previous guidance, non-cash royalty revenue would have been lower than the amount recorded for the three months ended September 30, 2018, however, higher non-cash royalty revenue would have been recorded for the nine months ended September 30, 2018 due to higher tiered royalties for Kadcyla® in the fourth quarter of 2017 (because under the previous guidance, the Company recorded the royalties one quarter in arrears as previously described). License and milestone fee revenue for the three months ended September 30, 2018 would have been lower due to a $500,000 development milestone recorded due to its probability of occurring in accordance with the new guidance. During the nine months ended September 30, 2018, under the previous guidance, a $5.0 million milestone would have been included as license and milestone fee revenue, however, due to its probability of occurring at the time of transition to ASC 606, it was recognized as part of the transition adjustment. Partially offsetting this change, less license and milestone fee revenue would have been recognized under the previous guidance related to a partner foregoing its remaining rights under a right-to-test agreement upon expiration in March 2018. A greater amount of the transaction price was allocated to the expired material rights under ASC 606 than under the previous guidance.

The adoption of ASC 606 had no aggregate impact on the Company’s cash flows from operations. The aforementioned impact resulted in offsetting shifts in cash flows through net losses and working capital accounts.

Revenue Recognition

The Company enters into licensing and development agreements with collaborators for the development of

~~ADC therapeutics.~~ADCs. The terms of these agreements contain multiple deliverables/performance obligations which may include (i) licenses, or options to obtain licenses, to the Company’s ADC technology, (ii) rights to future technological improvements, (iii) research activities to be performed on behalf of the collaborative partner, (iv) delivery of cytotoxic agents, and (v) prior to the decommission of the Company’s Norwood facility in 2018, the manufacture of preclinical or clinical materials for the collaborative partner. Payments to the Company under these agreements may include upfront fees, option fees, exercise fees, payments for research activities,

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payments for the manufacture of preclinical or clinical materials, payments based upon the achievement of certain milestones, and royalties on product sales. The Company follows the provisions of Accounting Standards Codification Topic 606 - Revenue from Contracts with Customers (ASC 606)in accounting for these agreements.

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under the agreements, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when or as the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.

As part of the accounting for the arrangement, the Company must develop assumptions that require judgment to determine the ~~stand-alone~~ selling price for each performance obligation that was identified in the contract, which is discussed in further detail below.

At ~~September~~June 30, ~~2018,~~2019, the Company had the following material types of agreements with the parties identified below:

●

Development and commercialization licenses, which provide the party with the right to use the Company’s ADC technology and/or certain other intellectual property to develop and commercialize anticancer compounds to a specified antigen target:

~~Amgen (one exclusive single-target license which has been sublicensed to Oxford BioTherapeutics Ltd.)~~

Bayer (one exclusive single-target license)

Biotest (one exclusive single-target license)

CytomX (one exclusive single-target license)

Debiopharm (one exclusive single-compound license)

Fusion Pharmaceuticals (one exclusive ~~single-target~~single-compound license)

~~Lilly (three exclusive single-target licenses – terminated in October 2018)~~

Novartis (five exclusive single-target licenses)

Oxford BioTherapeutics/Menarini (one exclusive single target license sublicensed from Amgen)

Roche, through its Genentech unit (five exclusive single-target licenses)

Sanofi (five fully-paid, exclusive single-target licenses)

Takeda, through its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. (one exclusive single-target license)

~~Debiopharm (one exclusive single-compound license)~~

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●

Collaboration and option agreement for a defined period of time to secure development and commercialization licenses to develop and commercialize specified anticancer compounds on established terms:

Jazz Pharmaceuticals

●

Collaboration and license agreement to co-develop and co-commercialize a specified anticancer compound on established terms:

MacroGenics

There are no performance, cancellation, termination, or refund provisions in any of the arrangements that contain material financial consequences to the Company.

Development and Commercialization Licenses

The obligations under a development and commercialization license agreement generally include the license to the Company’s ADC technology with respect to a specified antigen target, and may also include obligations related to rights to future technological improvements, research activities to be performed on behalf of the collaborative partner and, previously, the manufacture of preclinical or clinical materials for the collaborative partner.

Generally, development and commercialization licenses contain ~~non‑refundable~~non-refundable terms for payments and, depending on the terms of the agreement, provide that the Company will (i) prior to the Company’s restructuring of the business in June 2019, at the collaborator’s request, provide research services at negotiated prices which are generally consistent with what other third parties would charge, (ii) prior to the decommissioning of the Company’s Norwood facility in 2018, at the collaborator’s request, manufacture and provide preclinical and clinical materials or deliver cytotoxic agents at negotiated prices which are generally consistent with what other third parties would charge, (iii) earn payments upon the achievement of certain milestones, and (iv) earn royalty payments, generally until the later of the last applicable patent expiration or 10 to 12 years after product launch. ~~In the case of Kadcyla, however, the minimum royalty term is 10 years and the maximum royalty term is 12 years on a country‑by‑country basis, regardless of patent protection.~~ Royalty rates may vary over the royalty term depending on the Company’s intellectual property rights and/or the presence of comparable competing products. In the case of Sanofi, its licenses are fully-paid and no further milestones or royalties will be received. In the case of Debiopharm, no royalties will be received. The Company may provide technical assistance and share any technology improvements with its collaborators during the term of the collaboration agreements. The Company does not directly control when or whether any collaborator will request research, ~~or manufacturing services,~~ achieve milestones, or become liable for royalty payments.

In determining the performance obligations, management evaluates whether the license is distinct, and has significant standalone functionality, from the undelivered elements to the collaborative partner based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of ADC technology research expertise in the general marketplace and whether technological improvements are required for the continued functionality of the license. If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

The Company estimates the ~~stand-alone~~ selling prices of the license and all other performance obligations based on market conditions, similar arrangements entered into by third parties, and ~~entity‑specific~~entity-specific factors such as the terms of the Company’s previous collaborative agreements, recent preclinical and clinical testing results of therapeutic products that use the Company’s ADC technology, the Company’s pricing practices and pricing objectives, the likelihood that technological improvements will be made, and, if made, will be used by the Company’s collaborators, and the nature of the research services to be performed on behalf of its collaborators and market rates for similar services.

The Company recognizes revenue related to research services as the services are performed. The Company performs research activities, including developing antibody specific conjugation processes, on behalf of its collaborators and potential collaborators during the early evaluation and preclinical testing stages of drug development. The Company

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has also develops conjugation processes for materials for later stage testing and commercialization for certain collaborators. The Company is compensated at negotiated rates and may receive milestone payments for developing these processes which are also recorded as a component of research and development support revenue. The Company may also produceproduced research material for potential collaborators under material transfer agreements. The Company is compensated at negotiated rates that are consistent with what other third parties would charge. The Company records amounts received for research materials produced or services performed as a component of research and development support revenue.

~~The~~8

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Prior to 2019, the Company ~~may~~ also ~~provide~~provided cytotoxic agents to its collaborators ~~or produce~~and produced preclinical and clinical materials (drug substance) at negotiated prices ~~which are~~ generally consistent with what other third parties would charge. The Company ~~recognizes~~recognized revenue on cytotoxic agents and on preclinical and clinical materials when the materials ~~have~~ passed all quality testing required for collaborator acceptance and control ~~has~~had transferred to the collaborator. The majority of the Company’s costs to produce these preclinical and clinical materials ~~are~~were fixed and then allocated to each batch based on the number of batches produced during the period. Therefore, the Company’s costs to produce these materials are significantly affected by the number of batches produced during the period. The volume of preclinical and clinical materials the Company produces is directly related to the scale and scope of preclinical activities and the number of clinical trials the Company and its collaborators are preparing for or currently have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period such trials last. Accordingly, the volume of preclinical and clinical materials produced, and therefore the Company’s per‑batch costs to manufacture these preclinical and clinical materials, may vary significantly from period to period, which impacts the margins recognized on such product sales. The Company will no longer be producing preclinical and clinical materials for its collaborators after 2018.

The Company recognizes revenue related to the rights to future technological improvements over the estimated term of the applicable license.

The Company’s development and commercialization license agreements have milestone payments which for reporting purposes are aggregated into three categories: (i) development milestones, (ii) regulatory milestones, and (iii) sales milestones. Development milestones are typically payable when a product candidate initiates or advances into different clinical trial phases. Regulatory milestones are typically payable upon submission for marketing approval with the U.S. Food and Drug Administration, or FDA, or other countries’ regulatory authorities or on receipt of actual marketing approvals for the compound or for additional indications. Sales milestones are typically payable when annual sales reach certain levels.

At the inception of each arrangement that includes developmental and regulatory milestone payments, the Company evaluates whether the achievement of each milestone specifically relates to the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service within a performance obligation. If the achievement of a milestone is considered a direct result of the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service and the receipt of the payment is based upon the achievement of the milestone, the associated milestone value is allocated to that distinct good or service. If the milestone payment is not specifically related to the Company’s effort to satisfy a performance obligation or transfer a distinct good or service, the amount is allocated to all performance obligations using the relative standalone selling price method. In addition, the Company evaluates the milestone to determine whether the milestone is considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price to be allocated; otherwise, such amounts are considered constrained and excluded from the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development or regulatory milestones and any related constraint, and if necessary, adjusts its estimate of the transaction price. Any such adjustments to the transaction price are allocated to the performance obligations on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

For development and commercialization license agreements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company ~~will recognize~~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) in accordance with the royalty recognition constraint. Under the Company’s development and commercialization license

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agreements, except for the Sanofi and Debiopharm licenses, the Company receives royalty payments based upon its licensees’ net sales of covered products. Generally, under the development and commercialization agreements, the Company receives royalty reports and payments from its licensees approximately one quarter in arrears. The Company estimates the amount of royalty revenue to be recognized based on historical and forecasted sales and/or sales information from its licensees if available.

Collaboration and Option Agreements/Right-to-Test Agreements

The Company’s right-to-test agreements provide collaborators the right to test the Company’s ADC technology for a defined period of time through a research, or ~~right��to‑test,~~right-to-test, license. Under both right-to-test agreements and collaboration and option agreements, collaborators may (a) take options, for a defined period of time, to specified targets and (b) upon exercise of those options, secure or “take” licenses to develop and commercialize products for the specified targets on established terms. Under these agreements, fees may be due to the Company (i) at the inception of the arrangement (referred to as “upfront” fees or payments), (ii) upon the opt-in to acquire a development and commercialization license(s) (referred to as exercise fees or payments earned, if any, when the development and commercialization license is “taken”), (iii) at the collaborator’s request, after providing research services at negotiated

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prices, which are generally consistent with what other third parties would charge, or (iv) some combination of all of these fees.

The accounting for collaboration and option agreements and right-to-test agreements is dependent on the nature of the options granted to the collaborative partner. Options are considered distinct performance obligations if they provide a collaborator with a material right. Factors that are considered in evaluating whether options convey a material right include the overall objective of the arrangement, the benefit the collaborator might obtain from the agreement without exercising the options, the cost to exercise the options relative to the fair value of the licenses, and the additional financial commitments or economic penalties imposed on the collaborator as a result of exercising the options. As of ~~September~~June 30, ~~2018,~~2019, all right-to-test agreements have expired.

If the Company concludes that an option provides the customer a material right, and therefore is a separate performance obligation, the Company then determines the estimated selling prices of the option and all other units of accounting ~~based on an option pricing model~~ using the following inputs: a) estimated fair value of each program, b) the amount the partner would pay to exercise the option to obtain the license, and c) probability of exercise.

Upfront payments on development and commercialization licenses may be recognized upon delivery of the license if facts and circumstances dictate that the license has stand-alone functionality and is distinct from the undelivered elements.

The Company does not control when or if any collaborator will exercise its options for development and commercialization licenses. As a result, the Company cannot predict when or if it will recognize revenues in connection with any of the foregoing.

In determining whether a collaboration and option agreement is within the scope of ASC 808, Collaborative Arrangements, management evaluates the level of involvement of both companies in the development and commercialization of the products to determine if both parties are active participants and if both parties are exposed to risks and rewards dependent on the commercial success of the licensed products. If the agreement is determined to be within the scope of ASC 808, the Company will segregate the research and development activities and the related cost sharing arrangement. Payments made by the Company for such activities will be recorded as research and development expense and reimbursements received from its partner will be recognized as an offset to research and development expense.

Transaction Price Allocated to Future Performance Obligations

Remaining performance obligations represent the transaction price of contracts for which work has not been performed (or has been partially performed) and includes unexercised contract options that are considered material rights. As of ~~September~~June 30, ~~2018,~~2019, the aggregate amount of the transaction price allocated to remaining performance obligations comprising deferred revenue was ~~$82.3~~$145.9 million. The Company expects to recognize revenue on

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approximately ~~2%, 2%~~24% and ~~96%~~76% of the remaining performance obligations over the next ~~12 months,~~ 13 to 60 months, and 61 to 120 months, ~~respectively,~~respectively; however, it does not control when or if any collaborator will exercise its options for, or terminate existing development and commercialization licenses.

Contract Balances from Contracts with Customers

The following table presents changes in the Company’s contract assets and contract liabilities during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 (in thousands):


	Balance at						Balance at
Six months ended June 30, 2019	December 31, 2018		Additions		Deductions		End of Period
Contract asset	$	500	$	—	$	(500)	$	—
Contract liabilities	$	80,802	$	65,287	$	(158)	$	145,931


	Balance at
	January 1, 2018								Balance at
Six months ended June 30, 2018	(ASC 606 adoption)		Additions		Deductions		Impact of Netting		End of Period
Contract asset	$	—	$	—	$	(5,000)	$	5,000	$	—
Contract liabilities	$	89,967	$	—	$	(13,196)	$	5,000	$	81,771

Balance at

Balance at


January 1, 2018

End

(ASC 606 adoption)

Additions

Deductions

Impact of Netting

of Period

Nine months ended  September 30,  2018

Contract asset

$
—

$
500

$
(5,000)

$
5,000

$
500

Contract liabilities

$
89,967

$
706

$
(13,368)

$
5,000

$
82,305

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~~During the three and nine months ended September 30, 2018, the~~The Company recognized the following revenues as a result of changes in contract asset and contract liability balances in the respective periods (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	$	79	$	1,321	$	158	$	13,196
Performance obligations satisfied in previous periods	$	5,000	$	—	$	5,000	$	—

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2018
Revenue recognized in the period from:

Amounts included in contract liabilities at the beginning of the period

$
172
$
13,368
Performance obligations satisfied in previous periods

$
500
$
500

AsIn accordance with ASC 606, a contract asset of $500,000 was recorded for a probable milestone in 2018 pursuant to a license agreement with Fusion Pharmaceuticals, which was subsequently paid during the six months ended June 30, 2019. During the three and six months ended June 30, 2019, the Company received a $5 million regulatory milestone payment earned under its license agreement with Genentech, a member of the Roche Group. The full amount of the milestone was recognized as revenue in the period as the amount allocated to future rights to technological improvements was not material. Also during the six months ended June 30, 2019, $65.2 million was recorded as deferred revenue as a result of ~~adoption~~a sale of ~~ASC 606,~~the Company’s residual rights to receive royalty payments on commercial sales of Kadcyla® (ado-trastuzumab emtansine) as discussed in Note E, and $158,000 of amortization of deferred revenue was recorded related to numerous collaborators’ rights to technological improvements.

During the six months ended June 30, 2018, a contract asset of $5 million was recorded for a probable milestone under the Company’s license agreement with Takeda, which was netted against an approximate $1 million contract liability specifically related to the agreement. It was subsequently earned and paid during the ~~nine~~six months ended ~~September~~June 30, 2018. ~~During~~Also during the quarter ended September 30, 2018, a milestone from Fusion was deemed probable, and accordingly, a contract asset was created in the amount of $500,000. During the nine months ended September 30, 2018,prior year period, as a result of Takeda not executing a second license it had available, or extending or expanding its right-to-test agreement, the Company recognized $10.9 million of revenue previously deferred, with a net reduction in deferred revenue of $5.9 million due to contract asset and contract liability netting. In addition, $750,000 of the deferred revenue balance at December 31, 2017 was recognized as revenue during the ~~nine~~six months ended ~~September~~June 30, 2018 upon completion of ~~the~~certain performance obligations under license agreements with Debiopharm and ~~another collaborator’s performance obligations, $1.3~~Fusion, $1.2 million of amortization of deferred revenue was recorded related to numerous collaborators’ rights to technological improvements, and $335,000 of ~~deferred~~ revenue was recognized upon shipment of clinical materials to a ~~partner and is included in clinical material revenue.~~ partner.

The timing of revenue recognition, billings, and cash collections results in billed receivables, contract assets, and contract liabilities on the consolidated balance sheets. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

Financial Instruments and Concentration of Credit Risk

Cash and cash equivalents are primarily maintained with three financial institutions in the U.S. Deposits with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. The Company’s cash equivalents consist of money market funds with underlying investments primarily being U.S. Government issued securities and high quality, short term commercial paper. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, and marketable securities. The Company held no marketable securities as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The Company’s investment policy, approved by the Board of Directors, limits the amount it may invest in any one type of investment, thereby reducing credit risk concentrations.

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Cash and Cash Equivalents

All highly liquid financial instruments with maturities of three months or less when purchased are considered cash equivalents. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company held ~~$303.2~~$239.8 million and ~~$267.1~~$262.3 million, respectively, in cash and money market funds consisting principally of U.S. Government-issued securities and high quality, short-term commercial paper, which were classified as cash and cash equivalents.

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Non-cash Investing and Financing Activities

The Company had ~~$730,000~~$30,000 and ~~$482,000~~$715,000 of accrued capital expenditures as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, which have been treated as a non-cash investing activity and, accordingly, are not reflected in the consolidated statement of cash flows.

Fair Value of Financial Instruments

Fair value is defined under ASC Topic 820, “Fair Value Measurements and Disclosures,” as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a hierarchy to measure fair value which is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

●

Level 1 - Quoted prices in active markets for identical assets or liabilities.

●

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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As of ~~September~~June 30, ~~2018,~~2019, the Company held certain assets that are required to be measured at fair value on a recurring basis. The following table represents the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of ~~September~~June 30, ~~2018~~2019 (in thousands):

Fair Value Measurements at September 30, 2018 Using

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs


Total

(Level 1)

(Level 2)

(Level 3)

Cash equivalents

$
283,864

$
283,864

$
—

$
—

Fair Value Measurements at June 30, 2019 Using

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Cash equivalents

220,555

—

As of December 31, ~~2017,~~2018, the Company held certain assets that are required to be measured at fair value on a recurring basis. The following table represents the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of December 31, ~~2017~~2018 (in thousands):

Fair Value Measurements at December 31, 2018 Using

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Cash equivalents

242,604

—

Fair Value Measurements at December 31, 2017 Using

Quoted Prices in

Significant

Active Markets for

Significant Other

Unobservable

Identical Assets

Observable Inputs

Inputs


Total

(Level 1)

(Level 2)

(Level 3)

Cash equivalents

$
240,013

$
240,013

$
—

$
—

The fair value of the Company’s cash equivalents is based on quoted prices from active markets.

The carrying amounts reflected in the consolidated balance sheets for accounts receivable, unbilled revenue, prepaid and other current assets, accounts payable, accrued compensation, and other accrued liabilities approximate fair value due to their ~~short‑term~~short-term nature. The ~~gross carrying amount and~~ estimated fair value of the convertible 4.5% senior notes (the “Convertible Notes”) ~~was~~approximates the gross carrying value of $2.1 million as of June 30, 2019. The estimated fair value and ~~$5.6~~gross carrying amount was $2.8 million and $2.1 million, respectively, as of ~~September 30, 2018 compared to $2.1 million and $3.8 million as of~~ December 31, ~~2017.~~ 2018. The fair value of the Convertible Notes is influenced by interest rates, the Company’s stock price and stock price volatility and ~~for December 31, 2017 was~~is determined by prices for the Convertible Notes observed in a market which is a Level 2 input for fair value purposes due to the low frequency of trades. There have been no trades since January 2018, so the ~~market~~fair value as of ~~September~~June 30, ~~2018 has been estimated based on the Company’s stock price, which is a~~2019 uses Level 3 ~~input.~~inputs.

Unbilled ~~Revenue~~Revenue/Reimbursement

~~The majority of the Company’s unbilled revenue at September 30, 2018~~Unbilled revenue/reimbursement substantially represents research funding earned ~~prior to that date~~ based on actual resources utilized and external expenses incurred under certain of the Company’s ~~agreements with various collaborators.~~

~~Inventory~~

Inventory costs relate to clinical trial materials being manufactured for sale to the Company’s collaborators. Inventory is stated at the lower of cost or net realizable value as determined on a first-in, first-out (FIFO) basis.

~~Inventory at September 30, 2018 and December 31, 2017 is summarized below (in thousands):~~

September 30,

December 31,

2018

2017

Raw materials

$
—

$
40

Work in process

1,938

998

Total

$
1,938

$
1,038

Raw materials inventory consists entirely of proprietary cell‑killing agents the Company developed as part of its ADC technology. The Company considers more than a twelve month supply of raw materials that is not supported bycollaboration agreements.

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~~firm, fixed orders and/or projections from its collaborators to be excess and establishes~~Clinical Trial Accruals

Clinical trial expenses are a ~~reserve to reduce to zero the value~~significant component of ~~any such excess raw material inventory with a corresponding charge to~~ research and development ~~expense. In accordance with this policy,~~expenses, and the Company ~~recorded $403,000~~outsources a significant portion of ~~expense related~~these costs to ~~excess inventory in the nine months ended September 30, 2017. There were no similar charges in the nine months ended September 30, 2018.~~

~~Work in process inventory consists~~third parties. Third party clinical trial expenses include investigator fees, site costs (patient costs), clinical research organization costs, and costs for central laboratory testing and data management. The accrual for site and patient costs includes inputs such as estimates of ~~drug substance manufactured for sale to the Company’s collaborators~~patient enrollment, patient cycles incurred, clinical site activations, and other pass-through costs. These inputs are required to be ~~used~~estimated due to a lag in ~~preclinical and~~receiving the actual clinical ~~studies. All drug substance is made to order at the request of the collaborators and subject to the terms and conditions of respective supply agreements. Based~~information from third parties. Payments for these activities are based on historical reprocessing or reimbursement required for drug substance that did not meet specification and the status of current drug substance on hand or shipped to collaborators but not yet released per the terms of the ~~respective supply~~individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the consolidated balance sheets as prepaid asset or accrued clinical trial cost. These third party agreements ~~no reserve~~are generally cancelable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for ~~work~~goods or services that will be used or rendered for future R&D activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related services are performed. The Company also records accruals for estimated ongoing clinical research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received, and contracted costs. Significant judgments and estimates may be made in ~~process inventory was determined~~determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical clinical accrual estimates made by the Company have not been materially different from the actual costs.

Leases

Effective January 1, 2019, the Company adopted ASU 2016-2, Leases (Topic 842), the details of which are further discussed in Note H. The Company determines if an arrangement is a lease at inception. Operating leases include right-of-use (“ROU”) assets and operating lease liabilities (current and non-current), which are recorded in the Company’s consolidated balance sheets. Single payment capital leases for equipment that are considered finance leases are included in property and equipment in the Company’s consolidated balance sheets. As these single payment obligations have all been made, there is no related liability recorded.

ROU assets represent the Company’s right to ~~be required~~use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at ~~September 30, 2018 or December 31, 2017. Arrangement consideration allocated~~commencement date based on the present value of lease payments over the lease term. The Company uses the implicit rate when readily determinable. As a number of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate applicable to the ~~manufacture~~Company based on the information available at the commencement date in determining the present value of ~~preclinical and clinical materials in~~lease payments. As the Company has no existing or proposed collateralized borrowing arrangements, ~~with multiple performance obligations is below~~to determine a reasonable incremental borrowing rate, the Company considers collateral assumptions, the lease term, the Company’s ~~full cost,~~current credit risk profile and ~~the Company’s full cost is not expected to ever be below its contract selling prices~~rates for ~~its~~ existing ~~collaborations,~~borrowing arrangements for comparable peer companies. The operating lease ROU assets are netted against any lease incentive and therefore, costs are capitalized into inventory at the supply prices which represents net realizable value. During the nine months ended September 30, 2018 and 2017, the difference between the Company’s full cost to manufacture preclinical and clinical materials on behalf of its collaborators as compared to total amounts received from collaboratorsstraight-line lease liabilities that have been recorded. The Company accounts for the ~~manufacture of preclinical~~lease and ~~clinical materials was $965,000 and $1.1 million, respectively.~~ fixed non-lease components as a single lease component. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

Computation of Net Loss per Common Share

Basic and diluted net loss per share is calculated based upon the weighted average number of common shares outstanding during the period. During periods of income, participating securities are allocated a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the “two-class method”). Shares of the Company’s restricted stock participate in any dividends that may be declared by the Company and are therefore considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods of loss, no loss is allocated to participating securities since they have no contractual obligation to share in the losses of the Company. Diluted (loss) income per share is computed after giving consideration to the dilutive effect of stock options, convertible notes and restricted stock that are outstanding during the period, except where such non-participating securities would be anti-dilutive.

Table of Contents

The Company’s common stock equivalents, as calculated in accordance with the ~~treasury‑stock~~treasury-stock method for the options and unvested restricted stock and the if-converted method for the Convertible Notes, are shown in the following table (in thousands):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
Options outstanding to purchase common stock, shares issuable under the employee stock purchase plan, and unvested restricted stock/units at end of period	20,223	17,776	20,223	17,776
Common stock equivalents under treasury stock method for options, shares issuable under the employee stock purchase plan, and unvested restricted stock	432	3,451	1,005	3,484
Shares issuable upon conversion of convertible notes at end of period	501	501	501	501
Common stock equivalents under if-converted method for convertible notes	501	501	501	501

Three Months Ended

Nine Months Ended

September 30,

September 30,


2018

2017

2018

2017
Options outstanding to purchase common stock, shares issuable under the employee stock purchase plan, and unvested restricted stock at end of period

18,153

15,360

18,153

15,360
Common stock equivalents under treasury stock method for options, shares issuable under the employee stock purchase plan, and unvested restricted stock

3,153

2,570

3,378

1,210
Shares issuable upon conversion of convertible notes at end of period

501

740

501

740
Common stock equivalents under if-converted method for convertible notes

501

18,685

501

22,128

The Company’s common stock equivalents have not been included in the net loss per share calculation because their effect is ~~anti‑dilutive~~anti-dilutive due to the Company’s net loss position.

~~Table of Contents~~

Stock-Based Compensation

As of ~~September~~June 30, ~~2018,~~2019, the Company is authorized to grant future awards under an employee ~~share~~‑~~based~~share-based compensation plan, which is the ImmunoGen, Inc. 2018 Employee, Director and Consultant Equity Incentive Plan, or the 2018 Plan. ~~At the annual meeting of shareholders on June 20,~~The 2018 ~~the 2018~~ Plan ~~was approved and~~ provides for the issuance of stock grants, the grant of options and the grant of ~~stock~~‑~~based~~stock-based Awards for up to 7,500,000 shares of the Company’s common stock, as well as up to 19,500,000 shares of common stock, which represent awards granted under the two previous stock option plans, the ImmunoGen, Inc. 2006 or 2016 Employee, Director and Consultant Equity Incentive Plans, that forfeit, expire, or cancel without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or subsequent to June 20, 2018. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Options vest at various periods of up to four years and may be exercised within ten years of the date of grant.

The stock-based awards are accounted for under ASC Topic 718, ~~“Compensation—Stock~~“Compensation-Stock Compensation.” Pursuant to Topic 718, the estimated grant date fair value of awards is charged to the statement of operations and comprehensive loss over the requisite service period, which is the vesting period. Such amounts have been reduced by an estimate of forfeitures of all unvested awards. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions noted in the following table. As the Company has not paid dividends since inception, nor does it expect to pay any dividends for the foreseeable future, the expected dividend yield assumption is zero. Expected volatility is based exclusively on historical volatility ~~data~~ of the Company’s stock. The expected term of stock options granted is based exclusively on historical data and represents the period of time that stock options granted are expected to be outstanding. The expected term is calculated for and applied to one group of stock options as the Company does not expect substantially different exercise or post-vesting termination behavior among its option recipients. The risk-free rate of the stock options is based on the U.S. Treasury rate in effect at the time of grant for the expected term of the stock options.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017

									Three Months Ended June 30,		Six Months Ended June 30,
									2019	2018	2019	2018
Dividend	None		None		None		None		None	None	None	None
Volatility	71.91	%	69.31	%	70.99	%	67.26	%	80.3%	71.6%	73.8%	70.9%
Risk-free interest rate	2.89	%	1.93	%	2.72	%	2.00	%	2.04%	2.84%	2.46%	2.71%
Expected life (years)	6.0		6.0		6.0		6.0		6.0	6.0	6.0	6.0

Using the Black-Scholes option-pricing model, the weighted average grant date fair values of options granted during the three months ended ~~September~~June 30, 2019 and 2018 were $1.63 and ~~2017 were $6.11 and $4.13~~$6.82 per share, respectively, and ~~$6.74~~$3.39 and ~~$1.91 per share~~$6.80 for options granted during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively.

Table of Contents

A summary of option activity under the Company’s equity plans as of ~~September~~June 30, ~~2018,~~2019, and changes during the ~~nine~~six month period then ended is presented below (in thousands, except weighted-average data):


		Weighted-
	Number	Average
	of Stock	Exercise
	Options	Price
Outstanding at December 31, 2018	15,564	$	10.20
Granted	5,036		5.13
Exercised	(56)		2.58
Forfeited/Canceled	(2,230)		11.85
Outstanding at June 30, 2019	18,314	$	8.63

Weighted-

Number

Average

of Stock

Exercise

Options

Price
Outstanding at December 31, 2017

11,971

$
9.92
Granted

5,431

10.43
Exercised

(595)

4.94
Forfeited/Canceled

(590)

11.40
Outstanding at September 30, 2018

16,217

$
11.47

Included in the outstanding options in the table above are approximately 3.7 million stock options that are expected to forfeit in the second half of 2019 in connection with the workforce reduction related to the restructuring event in the current period, the details of which are discussed further in Note G. Accordingly, the Company recorded an approximate $2.8 million credit to stock compensation expense in the current period as a result of the change in the forfeiture estimate.

In ~~September~~ 2018, the Company granted 295,200 performance stock options to certain employees that will vest in two equal installments upon the achievement of specified performance goals within the next five years. These options are included in the table above. The Company determined it is not currently probable that these performance goals will be achieved, and therefore, no expense has been recorded to date.

~~Table of Contents~~

During the nine months ended September 30, 2018, holders of options issued under the Company’s equity plans exercised their rights to acquire an aggregate of approximately 595,000 shares of common stock at prices ranging from $1.84 to $12.21 per share. The total proceeds to the Company from these option exercises were $2.9 million.

In August 2016, February 2017 and June 2017, the Company granted 117,800, 529,830 and 239,000 shares of restricted common stock with grant date fair values of $3.15, $2.47 and $4.71, respectively, to certain officers of the Company, however, 71,380 of these shares have subsequently been forfeited. These restrictions will lapse in three equal installments upon the achievement of specified performance goals within the next five years. The Company determined it is not currently probable that these performance goals will be achieved, and, therefore, no expense has been recorded to date.

The fair value of the performance-based options that could be expensed in future periods, net of estimated forfeitures (inclusive of the impact of the recent restructuring event), is $762,000.

A summary of restricted stock and restricted stock unit activity under the Company’s equity plans ~~(inclusive of the performance awards noted above)~~ as of ~~September~~June 30, ~~2018~~2019 and changes during the ~~nine month~~six-month period ended ~~September~~June 30, ~~2018~~2019 is presented below (in thousands):


	Number of	Weighted-
	Restricted	Average Grant
	Stock Shares	Date Fair Value
Unvested at December 31, 2018	1,816	$	2.87
Awarded	631		2.55
Vested	(504)		2.64
Forfeited	(34)		2.64
Unvested at June 30, 2019	1,909	$	2.83

Number of

Weighted-

Restricted

Average Grant

Stock Shares

Date Fair Value

Unvested at December 31, 2017

2,319

$
2.82

Awarded

—

—

Vested

(503)

2.64

Forfeited

—

—

Unvested at September 30, 2018

1,816

$
2.87

In August 2016, February 2017, June 2017, and April 2019, the Company granted 117,800, 529,830, 239,000 and 106,000 shares of performance-based restricted common stock with grant date fair values of $3.15, $2.47, $4.71 and $2.82, respectively, to certain employees of the Company, which are reflected in the table above. Of these awarded shares, 71,380 have subsequently been forfeited. These restrictions will lapse in three equal installments upon the achievement of specified performance goals by August 12, 2021. The Company determined it is not currently probable that these performance goals will be achieved, and, therefore, no expense has been recorded to date. The fair value of the performance-based shares that could be expensed in future periods, net of estimated forfeitures (inclusive of the impact of the recent restructuring event), is $1.6 million.

During the six months ended June 30, 2019, holders of options issued under the Company’s equity plans exercised their rights to acquire an aggregate of approximately 56,000 shares of common stock at prices ranging from $1.84 to $3.05 per share. The total proceeds to the Company from these option exercises were $144,000.

In June 2018, the Company's Board of Directors, with shareholder approval, adopted the Employee Stock Purchase Plan, or ESPP. An aggregate of ~~1,000,000~~2,000,000 shares of common stock have been reserved for issuance under the ESPP. ~~The ESPP is generally available~~On June 30, 2019, approximately 323,000 shares were issued to ~~all~~participating employees who have been continuously employed for three months per year, have customary employment of more than five months in a calendar year, and more than 20 hours per week. Under the ESPP, eligible participants purchase shares of the Company's common stock at a price equal to 85% of the lesser of the closing price of the Company's common stock on the first business day and the final business day of the applicable plan purchase period. Plan purchase periods are six months and begin on January 1 and July 1 of each year, with purchase dates occurring on the final business day of the given purchase period. To pay for the shares, each participant authorizes periodic payroll deductions of up to 15% of his or her eligible cash compensation. All payroll deductions collected from the participant during a purchase period are automatically applied to the purchase of common stock on that period's purchase date provided the participant remains an eligible employee and has not withdrawn from the ESPP prior to that date and are subject to certain limitations imposed by the ESPP and the Internal Revenue Code. At September 30, 2018, subscriptions were outstanding for an estimated 120,000 shares at a fair value of approximately ~~$3.55~~$1.63 per share. The fair value of each ESPP award is estimated on the first day of the offering period using the Black-Scholes option-pricing ~~model and updated on the last day if necessary.~~model. The expected volatility used in the fair value calculation was ~~70.1%~~67.3%, the expected life was .5 years, the expected dividend yield was zero, and the risk-free rate was ~~2.14%~~2.51%. The Company recognizes share-based compensation expense equal to the fair value of the ESPP awards on a straight-line basis over the offering period.

Table of Contents

Stock compensation expense related to stock options and restricted stock awards granted under the stock plans was ~~$4.3~~$2.1 million and ~~$12.0~~$7.1 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, compared to stock compensation expense of ~~$2.6~~$4.0 million and ~~$8.3~~$7.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively. The decrease in expense is primarily due to the impact of a change in the forfeiture estimate recorded in the current period as discussed above. Stock compensation expense related to the ESPP was ~~$213,000~~$292,000 for the ~~three and nine~~six months ended ~~September~~June 30, ~~2018.~~2019. As of ~~September~~June 30, ~~2018,~~2019, the estimated fair value of unvested employee awards, exclusive of performance awards, was ~~$33.4~~$17.9 million, net of estimated forfeitures. The weighted-average remaining vesting period for these awards is approximately two ~~and a half~~ years. Also included in stock and deferred stock unit compensation expense in the consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018, is expense recorded for directors’ deferred share units, the details of which are discussed in Note G.F.

~~Table of Contents~~

Segment Information

During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company continued to operate in one operating segment, which is the business of discovery of monoclonal antibody-based anticancer therapeutics.

The percentages of revenues recognized from significant customers of the Company in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 are included in the following table:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

									Three Months Ended		Six Months Ended
									June 30,		June 30,
Collaborative Partner:	2018		2017		2018		2017		2019	2018	2019	2018
CytomX	14	%	1	%	7	%	20	%
Roche	77	%	77	%	57	%	27	%	99%	78%	99%	50%
Sanofi	—	%	—	%	—	%	47	%
Takeda	2	%	13	%	29	%	4	%	-	1%	-	39%
Novartis									-	11%	-	4%

There were no other customers of the Company with significant revenues in the three or ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

~~Other~~ Recently Adopted Accounting Pronouncements

~~In January 2016, the FASB issued ASU 2016-1,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).~~ The amendments in this ASU supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. This guidance is effective for annual reporting beginning after December 15, 2017, including interim periods within the year of adoption, and calls for prospective application, with early application permitted. Accordingly, the standard is effective for the Company on January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Stock Compensation – Scope of Modification Accounting (Topic 718)~~ regarding changes to terms and conditions of share-based payment awards. The ASU provides guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

~~Recently Issued Accounting Pronouncements, not yet Adopted~~

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) ~~that primarily requires lessees~~ in order to ~~recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria~~increase transparency and the accounting for sales-type and direct financing leases. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and calls for retrospective application, with early adoption permitted. Accordingly, the standard is effective for the Company on January 1, 2019. Although the Company has not finalized its process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company expects there will be a material increase to assets and liabilities related tocomparability among organizations by requiring the recognition of ~~new right-of-use~~ROU assets and lease liabilities on the ~~Company’s~~ balance ~~sheet~~sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases ~~currently~~ classified as operating ~~leases, which substantially consists~~leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

In accordance with the transition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements, the Company adopted and initially applied the new leasing rules on January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods presented are in accordance with the previous lease guidance (ASC 840). See Note H for further discussion and impact of adoption.

The Company elected several of the ~~Company’s facility leases summarized~~available practical expedients, which are also outlined in Note I, ~~Commitments and Contingencies~~,H. The standard had a material impact to the Company’s consolidated balance sheets, but did not have an impact to the consolidated ~~financial statements.~~statement of operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for finance leases, which consist entirely of single payment obligations made for equipment, remained substantially unchanged.

~~Table of Contents~~

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ~~ASU 2018-07 is effective for annual periods beginning after December 15, 2018, with early adoption permitted. This ASU is~~The Company adopted the standard on January 1, 2019, and it did not ~~expected to~~ have a material effect on the Company’s consolidated financial statements.

Table of Contents

Recently Issued Accounting Pronouncements, not yet Adopted

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 adds unit-of-account guidance to ASC Topic 808, Collaborative Arrangements, in order to align this guidance with ASC 606 and also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that ASU 2018-18 may have on the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions, and forecasts. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is on a modified retrospective basis. The Company does not expect this guidance to have a material impact on its financial statements.

No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

C.Agreements

~~C. Agreements~~

Significant Collaborative Agreements

Roche

In May 2000, the Company granted Genentech, now a ~~unit~~member of the Roche Group, an exclusive license to use the Company’s maytansinoid ADC technology. Pursuant to this agreement, Roche developed and received marketing approval for its HER2-targeting ADC compound, Kadcyla, in the U.S., Europe, Japan and numerous other countries. The Company receives royalty reports and payments related to sales of Kadcyla from Roche one quarter in arrears. In accordance with the Company’s revenue recognition policy, ~~under ASC 606, $22.9~~$18.9 million and $14.4 million of non-cash royalties on net sales of Kadcyla ~~for the nine‑month period ended September 30, 2018~~ were recorded and included in non-cash royalty revenue for the ~~nine-month period ended September 30, 2018. Under the previous revenue recognition policy using ASC 605, $23.7 million of non-cash royalties would have been recorded in the nine~~six months ~~ended September 30, 2018. Under the previous guidance, $20.6 million of non-cash royalties on net sales of Kadcyla for the nine‑month period~~ ended June 30, ~~2017 were included in non-cash royalty revenue for the nine-month period ended September 30, 2017.~~2019 and 2018. Kadcyla sales occurring after January 1, 2015 ~~are~~were covered by a royalty purchase agreement whereby the associated cash, isexcept for a residual tail, was remitted to Immunity Royalty Holdings, L.P, or ~~IRH,~~IRH. In January 2019, the Company sold its residual tail to OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada, for a net payment of $65.2 million, as discussed further in Note E.

~~Amgen~~

~~The Company granted Amgen exclusive development and commercialization licenses~~ Simultaneously, OMERS purchased IRH’s right to ~~our maytansinoid ADC technology for use with antibodies to specified targets under a now‑expired right‑to‑test agreement established in 2000. With respect to each license,~~the royalties the Company ~~is entitled~~previously sold as described above, therefore obtaining the rights to ~~receive up to a total~~100% of ~~$34 million in milestone payments, plus~~the royalties ~~on the commercial sales of any resulting products. In August 2018, Amgen terminated one of its two remaining development and commercialization licenses. As a result,~~received from that date on.

On May 3, 2019, Roche notified the Company ~~recorded~~that the ~~remaining $84,000 balance~~U.S. Food and Drug Administration approved Kadcyla for adjuvant (after surgery) treatment of people with HER2-positive early breast cancer who have residual invasive disease after neoadjuvant (before surgery) taxane and Herceptin® (trastuzumab)-based treatment, resulting in a $5 million regulatory milestone payment to the ~~upfront payment that had been allocated to future performance obligations under this license as revenue,~~Company for a first extended indication, which is included in license and milestone fees for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~

~~Sanofi~~

~~On May 30, 2017,~~2019. The next potential milestone the Company ~~and an affiliate~~will be entitled to receive will be a $5 million regulatory milestone for marketing approval of Sanofi amended the license agreements covering all compounds in development by Sanofi using the Company’s technology. Under the terms of the amended 2003 collaboration and license agreement, the Company granted SanofiKadcyla for a fully-paid, exclusive license to develop, manufacture, and commercialize four experimental compounds in development. The Company and Sanofi also amended a separate 2013 exclusive license to grant Sanofi a fully-paid, exclusive license to develop, manufacture and commercialize another experimental compound being studied for the treatment of solid tumors. As consideration for these amendments, the Company received a $30 million payment and agreed to forego a limited co-promotion optionsecond extended indication as defined in the U.S. with respect to the compounds covered by the 2003 agreement, as well as future milestones or royalties under both license agreements. Under the previous guidance of ASC 605, the $30 million payment was recognized as revenue

~~Table of Contents~~

and is included in license and milestone fees for the nine months ended September 30, 2017. In addition, $6 million of milestone payments related to the license agreements above, prior to the agreement executed in May 2017, are included in license and milestone fee revenue for the nine months ended September 30, 2017. license.

Novartis

The Company granted Novartis exclusive development and commercialization licenses to the Company’s maytansinoid and IGN ADC technology for use with antibodies to six specified targets under a now-expired right-to-test agreement established in 2010. The Company received a $45 million upfront payment in connection with the execution of the ~~right‑to‑test~~right-to-test agreement in 2010, and for each development and commercialization license taken for a specific target, the Company received an exercise fee of $1 million and is entitled to receive up to a total of $199.5 million in milestone payments, plus royalties on the commercial sales of any resulting products. In May 2018, Novartis terminated one of its six development and commercialization licenses. As a result, the Company recorded the remaining $978,000 balance of the upfront payment that had been allocated to future performance obligations under this license as revenue, which is included in license and milestone fees for the ~~nine~~three and six months ended ~~September~~June 30, 2018.

~~CytomX~~17

In January 2014, the Company entered into a reciprocal right‑to‑test agreement with CytomX. The agreement provides CytomX with the right to test the Company’s payload agents and linkers with CytomX antibodies that utilize their proprietary antibody-masking technology, termed ProbodiesTM ~~for a specified number~~Table of targets and to subsequently take an exclusive, worldwide license to use the Company’s technology to develop and commercialize Probody-drug conjugates directed to the specified targets on terms agreed upon at the inception of the right‑to‑test agreement. The Company received no upfront cash payment in connection with the execution of the right‑to‑test agreement. Instead, the Company received reciprocal rights to test its payload agents and linkers with ImmunoGen antibodies masked using CytomX technology to create Probody-drug conjugates directed to a specified number of targets and to subsequently take exclusive, worldwide licenses to develop and commercialize such conjugates directed to the specified targets on terms agreed upon at the inception of the right‑to‑test agreement. The terms of the right‑to‑test agreement require the Company and CytomX to each take its respective development and commercialization licenses by the end of the term of the research license. In addition, both the Company and CytomX are required to perform specific research activities under the right‑to‑test agreement on behalf of the other party for no monetary consideration.Contents

In February 2016, CytomX took its development and commercialization license for a specified target. An amendment of the agreement executed simultaneously with that license granted CytomX the right, for a specified period of time, to substitute the specified target with another as yet unspecified target. Accordingly, under the previous guidance of ASC 605, the revenue associated with this license was deferred until the expiration of that substitution right in January 2017, whereupon the Company recognized $12.7 million of the $13 million of arrangement consideration allocated to the development and commercialization license, which is included in license and milestone fee revenue for the nine months ended September 30, 2017. With respect to the development and commercialization license taken by CytomX, the Company is entitled to receive up to a total of $160 million in milestone payments plus royalties on the commercial sales of any resulting product. The total milestones are categorized as follows: development milestones—$10 million; regulatory milestones—$50 million; and sales milestones—$100 million. In June 2017, CytomX enrolled its first patient in a Phase 1 clinical trial for its product candidate, CX-2009, triggering a $1 million development milestone payment which is included in license and milestone fee revenue for the nine months ended September 30, 2017. The next payment the Company could receive would be a $3 million development milestone payment with commencement of a Phase 2 clinical trial. CytomX is responsible for the manufacturing, product development and marketing of any product resulting from the development and commercialization license taken by CytomX under this collaboration.

Takeda

In March 2015, the Company entered into a three-year right-to-test agreement with Takeda through its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. The agreement provided Takeda with the right to (a) take exclusive options, with certain restrictions, to individual targets selected by Takeda for specified option periods, (b) test the Company’s ADC technology with Takeda’s antibodies directed to the targets optioned under a right-to-test, or research,

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license, and (c) take exclusive licenses to use the Company’s ADC technology to develop and commercialize products to targets optioned for up to two individual targets on terms specified in the right-to-test agreement. The two additional license options were considered material rights as the exercise price for each option was priced at a discount to the fair value of the underlying licenses. Therefore, the non-refundable, upfront arrangement consideration was allocated to the first license, technological improvements and two additional options based on the relative standalone selling price method. The first license was granted to Takeda in December 2015. In March 2018, the right-to-test agreement expired without Takeda exercising ~~their~~its option to a second license or extending ~~the agreement~~ or expanding the agreement as it had the right to do for a third license. Accordingly, the remaining $10.9 million of revenue that had been deferred for such performance obligations was recognized as revenue and is included in license and milestone fees for the ~~nine~~six months ended ~~September~~June 30, 2018. In May 2018, Takeda enrolled its first patient in a Phase I clinical trial, triggering a $5 million milestone payment to the Company. Due to the likelihood of this milestone being attained, this milestone was recognized as a contract asset as part of the cumulative adjustment to transition to ASC 606. It had been previously allocated to the delivered license and the right to technological improvements. The next potential milestone payment the Company will be entitled to receive will be a $10 million development milestone payment with the initiation of a Phase II clinical trial. Takeda is responsible for the manufacturing, product development, and marketing of any products resulting from the remaining license.

~~Fusion~~Debiopharm

In December 2016, the Company entered into an exclusive license agreement to a specified target with Fusion Pharmaceuticals Inc. The Company is entitled to receive up to a total of $50 million in milestone payments, plus royalties on the commercial sales of any resulting products. The total milestones are categorized as follows: development milestones—$15 million; and sales milestones—$35 million. During the three months ended September 30, 2018, a development milestone related to dosing of a first patient in a Phase I clinical trial became probable of being attained, which resulted in a $500,000 contract asset and the related license and milestone fee revenue being recorded in the current period. The next potential milestone payment the Company will be entitled to receive will be a $1.5 million development milestone payment with the initiation of a Phase II clinical trial. Fusion is responsible for the manufacturing, product development, and marketing of any products resulting from the license.

~~Debiopharm~~

In May 2017, Debiopharm acquired the Company’s IMGN529 program, a clinical-stage anti-CD37 ADC for the treatment of patients with B-cell malignancies. Under the terms of the Exclusive License and Asset Purchase agreement, the Company received a ~~$25~~$25 million upfront payment for specified assets related to IMGN529 and a paid-up license to the Company’s ADC technology. Upon substantial completion of the transfer of the Company’s technologies related to the program (technology transfer) in the fourth quarter of 2017, the Company achieved a $5 million milestone, $4.5 million of which was received in December 2017 and the balance in January 2018 upon delivery of the final materials related to the transfer. Accordingly, $500,000 was recorded as license and milestone fee revenue in the six months ended June 30, 2018. In addition, the Company is eligible for a second success-based milestone payment of $25 million upon IMGN529 entering a Phase 3 clinical trial. The milestone payment will be significantly reduced if a Phase 3 trial using the Company’s technology but not the IMGN529 antibody commences prior to IMGN529 entering a Phase 3 trial. The Company does not believe this scenario is likely to occur.

The total arrangement consideration of $30 million (which comprises the $25 million upfront payment and the transfer fee of $5 million) was allocated to the units of accounting based on the relative selling price method as follows: $29.7 million to the license/technology transfer and $300,000 to the physical materials. The Company recorded $29.5 million of revenue as outlined above when the technology transfer work was substantially completed in the fourth quarter of 2017. The $500,000 balance of the milestone was recorded as revenue in January 2018, coinciding with the delivery of the physical materials, which is included in license and milestone fees for the nine months ended September 30, 2018.

~~Jazz Pharmaceuticals~~

In August 2017, the Company entered into a collaboration and option agreement granting Jazz exclusive, worldwide rights to opt into development and commercialization of two early-stage, hematology-related ADC programs,

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as well as an additional program to be designated during the term of the agreement (“License Options”). The programs covered under the agreement include IMGN779, a CD33-targeted ADC for the treatment of acute myeloid leukemia (AML) in Phase 1 testing, and IMGN632, a CD123-targeted ADC for hematological malignancies also in Phase I testing, and an early-stage program to be determined at a later date. Under the terms of the agreement, the Company will be responsible for the development of the three ADC programs prior to any potential opt-in by Jazz. Following any opt-in, and subject to the Company’s co-commercialization rights, Jazz would assume overall responsibility for further development as well as for potential regulatory submissions and commercialization.

As part of the agreement, Jazz made an upfront payment of $75 million to the Company. Additionally, Jazz will pay the Company up to $100 million in development funding over seven years to support the three ADC programs. For each program, Jazz may exercise its License Options at any time prior to a pivotal study or at any time prior to the filing of a biologics license application (BLA) upon payment of an option exercise fee of mid-double digit millions or low triple digit millions, respectively. For each program to which Jazz elects to opt-in, the Company would be eligible to receive milestone payments based on receiving regulatory approvals of the applicable product aggregating $100 million plus tiered royalties as a percentage of commercial sales by Jazz, which will vary depending upon sales levels and the stage of development at the time of opt-in. Per the applicable accounting standards, at the time of execution of this agreement, significant uncertainty is deemed to exist as to whether the milestones would be achieved. In consideration of this, as well as the Company’s expected involvement in the research and manufacturing of these product candidates, these milestones were deemed substantive. After opt-in, Jazz and the Company would share costs associated with developing and obtaining regulatory approvals of the applicable product in the U.S. and EU. The Company has the right to co-commercialize in the U.S. at least one product with U.S. profit sharing in lieu of Jazz's payment of the U.S. milestone and royalties to the Company.

Due to the involvement the Company and Jazz both have in the development and commercialization of the products, as well as both parties being part of the cost share agreement and exposed to significant risks and rewards dependent on the commercial success of the products, the arrangement has been determined to be a collaborative arrangement within the scope of ASC 808. Accordingly, the Company carved out the research and development activities and the related cost sharing arrangement with Jazz. Payments for such activities will be recorded as research and development expense and reimbursements received from Jazz will be recognized as an offset to research and development expense in the accompanying statement of operations during the development period. Included in research and development expense for the three and nine months ended September 30, 2018, are $3.3 million and $7.1 million of credits, respectively, related to reimbursements from Jazz, and $1.3 million included in research and development expense for the three and nine months ended September 30, 2017.

The three License Options are considered material rights as the exercise price for each option is priced at a discount to the fair value of the underlying licenses. Therefore, the non-refundable, upfront arrangement consideration of $75 million was allocated to the three License Options based on the relative standalone selling price method. The amounts allocated to the License Options will be recognized as revenue when exercised by Jazz or upon expiration. The Company does not control when Jazz will exercise its options for development and commercialization licenses. As a result, the Company cannot predict when it will recognize revenue related to the delivery of the licenses, and accordingly, the upfront payment of $75 million is included in long-term deferred revenue as of September 30, 2018.

For additional information related to ~~certain of~~ these agreements, as well as the Company’s other significant collaborative agreements, please read Note C, Agreements, to the consolidated financial statements included within the Company’s ~~2017~~2018 Annual Report on Form 10-K.

D.Convertible 4.5% Senior Notes

In 2016, the Company issued Convertible Notes with an aggregate principal amount of $100 million. The Company received net proceeds of $96.6 million from the sale of the Convertible Notes, after deducting fees and expenses of $3.4 million.

During the second half of calendar 2017, the Company entered into privately negotiated exchange agreements with a number of holders of the Company’s outstanding Convertible Notes, pursuant to which the Company agreed to

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exchange, in a private placement, $97.9 million in aggregate principal amount of Convertible Notes held by the holders for 26,160,187 newly issued shares of common stock, equivalent to the number of shares based on the original conversion terms, plus an additional number of newly issued shares of common stock determined based on the volume-weighted average trading price of the common stock over certain trading days. As a result of the agreements, 2,784,870 additional shares were issued.

In accordance with ASC, Topic 470-20, “Debt – Debt with Conversion and Other Options,” the Company accounted for the conversion of the debt as an inducement by expensing the fair value of the shares that were issued in excess of the original terms of the Convertible Notes. As a result, the Company recorded a non-cash debt conversion expense in the amount of $22.2 million in the quarter ended September 30, 2017. In addition, accrued interest on the bonds of $727,000 which the noteholders forfeited, $2.5 million of deferred financing costs and $1.7 million in transaction costs were charged to paid-in capital as a result of the issuance of common stock upon conversion.

The remaining $2.1 million of Convertible Notes are governed by the terms of an indenture between the Company, as issuer, and Wilmington Trust, National Association, as the trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 4.5% per year, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2017. The Company recorded ~~$70,000 and $3.0 million~~$47,000 of interest expense in each of the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Convertible Notes will mature on July 1, 2021, unless earlier repurchased or converted. Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding the stated maturity date. Upon conversion, the Company will deliver for each $1,000

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principal amount of converted notes a number of shares equal to the conversion rate, which will initially be 238.7775 shares of common stock, equivalent to an initial conversion price of approximately $4.19. The conversion rate will be subject to adjustment in some circumstances, but will not be adjusted for any accrued and unpaid interest.

~~E. Liability Related to Sale of Future Royalties~~

E.
Liability Related to Sale of Future Royalties

In ~~April~~ 2015, IRH purchased the right to receive 100% of the royalty payments on commercial sales of Kadcyla subsequent to December 31, 2014, arising under the Company’s development and commercialization license with Genentech, ~~(a unit of Roche),~~ until IRH ~~has~~had received aggregate royalties equal to $235 million or $260 million, depending on when the aggregate royalties received by IRH reach a specified milestone. Once the applicable threshold iswas met, if ever, the Company ~~will~~would thereafter ~~receive~~have received 85% and IRH ~~will receive~~would have received 15% of the Kadcyla royalties for the remaining royalty term. At consummation of the transaction, ~~in April 2015,~~ the Company received cash proceeds of $200 million. As part of this sale, the Company incurred $5.9 million of transaction costs, which are presented net of the liability in the accompanying consolidated balance sheet and will be amortized to interest expense over the estimated life of the royalty purchase agreement. Although the Company sold its rights to receive royalties from the sales of Kadcyla, as a result of its then ongoing involvement in the cash flows related to these royalties at the time, the Company will continue to account for these royalties as revenue and recorded the $200 million in proceeds from this transaction as a liability related to sale of future royalties (Royalty Obligation) that will be amortized using the interest method over the estimated life of the royalty purchase agreement.

In January 2019, the Company sold its residual rights to receive royalty payments on commercial sales of Kadcyla to OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada, for a net payment of $65.2 million (amount is net of $1.5 million in contingent broker fees). Simultaneously, OMERS purchased IRH’s right to the royalties the Company previously sold as described above, therefore obtaining the rights to 100% of the royalties received from that date on. Because the Company will not be involved with the cash flows related to the residual royalties, the $65.2 million of net proceeds received from the sale of its residual rights to receive royalty payments was recorded as long-term deferred revenue and will be amortized as the cash related to the residual rights is received using the units of revenue approach. During the six months ended June 30, 2019, the Company did not receive any royalties related to the residual rights, therefore, no revenue was recognized. Additionally, the purchase of IRH’s interest by OMERS did not result in an extinguishment or modification of the original instrument and, accordingly, the Company will continue to account for the remaining obligation as a liability as outlined above.

The following table shows the activity within the liability account during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2018~~2019 (in thousands):



	Six Months Ended
	June 30, 2019
Liability related to sale of future royalties, net — beginning balance	$	148,225
Kadcyla royalty payments received and paid		(17,718)
Non-cash interest expense recognized		7,242
Liability related to sale of future royalties, net — ending balance	$	137,749

Period from

December 31, 2017 to


September 30,  2018
Liability related to sale of future royalties, net — beginning balance

$
169,413
Kadcyla royalty payments received and paid

(23,658)
Non-cash interest expense recognized

8,192
Liability related to sale of future royalties, net  — ending balance

$
153,947

As royalties are remitted to ~~IRH,~~OMERS, the balance of the Royalty Obligation will be effectively repaid over the life of the agreement. In order to determine the amortization of the Royalty Obligation, the Company is required to estimate the

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total amount of future royalty payments to be received and remitted ~~to IRH~~ as noted above over the life of the ~~agreement.~~underlying license agreement with Genentech covering Kadcyla. The sum of these amounts less the $200 million proceeds the Company received will be recorded as interest expense over the life of the Royalty Obligation. Since inception, the Company’s estimate of this total interest expense results in an effective annual interest rate of ~~7.3%~~8.6%, ~~however, currently the prospective~~and a current effective interest rate ~~is estimated to be 5.8%.~~of 10.0% as of June 30, 2019. The Company periodically assesses the estimated royalty payments to ~~IRH~~OMERS and to the extent such payments are greater or less than its initial estimates, or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the Royalty Obligation. There are a number of factors that could materially affect the amount and timing of royalty payments from Genentech, most of which are not within the Company’s control. Such factors include, but are not limited to, changing standards of care, the introduction of competing products, manufacturing or other delays, biosimilar competition, patent protection, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties ~~remitted to IRH~~ are ~~made~~paid in U.S. dollars (USD) while significant portions of the underlying sales of Kadcyla are made in currencies other than USD, and other events or circumstances that

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could result in reduced royalty payments from Kadcyla, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the Royalty Obligation. Conversely, if sales of Kadcyla are more than expected, the non-cash royalty revenues and the non-cash interest expense recorded by the Company would be greater over the term of the Royalty Obligation.

In addition, the royalty purchase agreement grants ~~IRH~~OMERS the right to receive certain reports and other information relating to the royalties and contains other representations and warranties, covenants, and indemnification obligations that are customary for a transaction of this nature.

F.	Capital Stock

~~F. Income Taxes~~

In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $97.5 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance during the year ended December 31, 2017. As a result, there was no impact to the Company’s income statement as a result of the reduction in tax rates. The Company’s preliminary estimate of the TCJA and the remeasurement of the Company’s deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of its tax returns, including potential changes related to the impact of the TCJA provisions on executive compensation. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in the Company’s estimates. The final determination of the TCJA and the remeasurement of the Company’s deferred assets and liabilities will be completed as additional information becomes available. At September 30, 2018, there has been no change in the provisional amount and the Company will continue to analyze and refine its calculations related to the measurement of these balances, which is to be completed no later than one year after the enactment of the TCJA.

~~G. Capital Stock~~

2001 Non-Employee Director Stock Plan

During the ~~nine~~three and six months ended ~~September~~June 30, 2018, the Company recorded ~~approximately~~$4,000 and $31,000 in expense related to stock units outstanding under the Company’s 2001 Non-Employee Director Stock Plan, or the 2001 ~~Plan, compared to $3,000 and $36,000 recorded during the three and nine months ended September 30, 2017.~~ Plan. A market value of $72,000 for the stock units was paid to a retiring director in June 2018, effectively ~~closing out~~terminating the plan.

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Compensation Policy for Non-Employee Directors

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company recorded ~~$101,000~~$100,000 and ~~$258,000~~$200,000 in compensation expense, respectively, related to deferred share units issued and outstanding under the Company’s Compensation Policy for Non-Employee Directors, compared to ~~$61,000~~$54,000 and ~~$146,000~~$156,000 in compensation expense recorded during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively. Pursuant to the Compensation Policy for Non-Employee Directors, in June~~ 2018, ~~February 2018 and January 2017, the Company issued retiring directors 95,497, 77,012 and 53,248 shares of common stock of the Company to settle outstanding deferred share units.~~

respectively.

Pursuant to the Compensation Policy for Non-Employee Directors, the redemption amount of deferred share units issued will be paid in shares of common stock of the Company on the date a director ceases to be a member of the Board. In February 2018 and June 2018, the Company issued retiring directors 77,012 and 95,497 shares of common stock of the Company to settle outstanding deferred share units. Annual retainers vest quarterly over approximately one year from the date of grant, contingent upon the individual remaining a director of ImmunoGen as of each vesting date. The number of deferred share units awarded is fixed per the plan on the date of the award. All unvested deferred stock awards will automatically vest immediately prior to the occurrence of a change of control.

In addition to the deferred share units, the Non-Employee Directors are also entitled to receive a fixed number of stock options on the date of the annual meeting of shareholders. These options vest quarterly over approximately one year from the date of grant. Any new directors will receive a pro-rated award, depending on their date of election to the Board. The directors received a total of ~~40,000 options in December 2016, 80,000 options in June 2017,~~108,000 and 128,000 options in June 2019 and 2018, respectively, and the related compensation expense for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 is included in the amounts discussed in the “Stock-Based Compensation” section of ~~footnote~~Note B above.

H. G.Restructuring Charges

2019 Corporate Restructuring

On June 26, 2019, the Board of Directors approved a plan to restructure the business to focus resources on continued development of mirvetuximab soravtansine and a select portfolio of three earlier-stage product candidates, resulting in a reduction of our workforce by approximately 220 positions, with a majority of these employees separating from the business by mid-July 2019 and the remaining affected employees transitioning over varying periods of time of up to 12 months. Communication of the plan to the affected employees was substantially completed on June 27, 2019.

As a result of the workforce reduction, during the three months ended June 30, 2019, the Company recorded a $16.0 million charge for severance related to a pre-existing plan in accordance with ASC 712, Compensation-Nonretirement Postemployment Benefits, as such amounts are probable and reasonably estimable. The related cash payments will be substantially paid out by June 30, 2020. In addition, an anticipated charge of $3.7 million is expected to be incurred for incremental retention benefits over the same time period, of which approximately $400,000 was recorded during the three and six months ended June 30, 2019. No payments were made during the three and six months ended June 30, 2019 with respect to this action.

In addition to the termination benefits and other related charges, the Company will seek to sub-lease the majority of the laboratory and office space at 830 Winter Street in Waltham, Massachusetts. The financial impact of these efforts is dependent on the length of time it takes to find a tenant and the terms of the sub-lease. The decision to vacate part of its

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corporate office resulted in a change in asset groupings and also represented an impairment indicator. The Company determined that the right-of-use asset and leasehold improvements were recoverable based on expected sub-lease income, and therefore, no impairment was recorded.

In addition, the Company also decided to liquidate excess laboratory equipment and expects the proceeds to be less than the carrying value. As a result, the Company recorded an impairment charge of $2.5 million to write down the equipment to fair value based on current market re-sale estimates obtained.

2018 Manufacturing Restructuring

In February 2018, following an in-depth review of manufacturing and quality operations, the Board of Directors authorized management to implement a new operating model that will rely on external manufacturing and quality testing for drug substance and drug product for the Company’s development programs. The implementation of this new operating model ~~will lead~~led to the ramp-down of manufacturing and quality activities at the Norwood, Massachusetts facility by the end of 2018, ~~with~~and a full decommissioning of the facility ~~expected by early~~in February 2019. Implementation of the new operating model ~~will result~~resulted in the separation of ~~approximately 30 employees, with a net reduction of approximately 20 positions, by the end of 2018.~~22 employees. Communication of the plan to the affected employees was substantially completed on February 8, 2018.

In connection with the implementation of the new operating model, the Company recorded a one-time charge of $1.2 million for severance related to a pre-existing plan in the first quarter ~~related to a pre-existing plan.~~of 2018 in accordance with ASC 712, Compensation-Nonretirement Postemployment Benefits, as such amounts were probable and reasonably estimable. Additional expense iswas recorded for incremental retention benefits over the remaining service period of the related employees, which totaled ~~$1.9~~$1.1 million infor the ~~nine~~six months ended ~~September~~June 30, 2018, all of which was paid out by the end of 2018. Additionally, certain options held by the employees to be separated were modified to extend the exercise period, resulting in a stock compensation charge of $157,000 in the first ~~quarter.~~quarter of 2018. Cash payments related to severance ~~will be~~were substantially paid out by June 30, 2019.

A summary of activity against the ~~end of~~manufacturing restructuring charge related to the ~~second quarter of 2019. The retention benefits are expected to be paid out~~employee terminations in ~~the fourth quarter of 2018.~~2018 is as follows:


	Employee
	Termination
	Benefits Costs
Balance at December 31, 2018	$	841
Payments during the period		(816)
Balance at June 30, 2019	$	25

2016 Corporate Restructuring

As a result of a workforce reduction in September 2016, the Company began seeking to sub-lease 10,281 square feet of unoccupied office space in Waltham that was leased in 2016. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company recorded ~~$386,000 of~~a $559,000 impairment ~~charges~~charge related to this ~~lease.~~lease, which represents the remaining balance of the right to use asset as the likelihood of finding a sub-lessor has diminished significantly as the lease approaches termination. No such charges ~~have been~~were recorded in the ~~current~~prior year period.

~~I. Commitments and Contingencies~~

~~Leases~~

H.
Leases

The Company currently has ~~a lease~~the following two real estate leases: (i) an agreement with CRP/King 830 Winter L.L.C. for the rental of approximately ~~110,000~~120,000 square feet of laboratory and office space at 830 Winter Street, Waltham, MA through

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March 2026. The Company uses this space for its corporate headquarters and other operations. The Company may extend the lease for two additional terms of five years. Pursuant to lease amendments executed through December 2015, the Company received construction allowances totaling approximately $2 million to build out office and lab space to the Company’s specifications. The Company executed a fourth amendment to this lease in April 2018, leasing an additional 10,000 square feet of office space in order to accommodate employees being retained from the future Norwood closure previously discussed. The Company is entitled to a construction allowance of $400,000 to build normal tenant improvements in this space to its specifications. The Company began recording rent expense for this space during the quarter ending September 30, 2018, when it took control of the space for construction. The Company is required to pay certain operating expenses for the leased premises subject to escalation charges for certain expense increases over a base ~~amount.~~

~~In February 2016, the Company entered into a lease~~amount; and (ii) an agreement with PDM 930 Unit, LLC for the rental of 10,281 square feet of additional office space at 930 Winter Street, Waltham, MA through August 31, 2021. ~~The Company received $617,000 as a construction allowance to build out the office space to the Company’s specifications.~~ The Company is required to pay certain operating expenses for the leased premises based on its pro-rata share of such expenses for the entire rentable space of the building. The Company is actively seeking to sub-lease ~~this space.~~

the 930 Winter Street space, and as a result of the 2019 corporate restructuring plan announced in June 2019, will begin to seek to sublease a significant portion of the space at 830 Winter Street. The Company ~~amended~~ended its lease ~~for~~and vacated its manufacturing and office space at 333 Providence Highway, Norwood, MA in ~~June 2018 to extend the lease through March 31,~~February 2019 ~~at which time it plans to have vacated the premises~~ pursuant to the manufacturing restructuring plan described previously.

~~Effective April 2013,~~Table of Contents

In addition to the two real estate leases noted above, the Company ~~entered into~~currently has a lease agreement ~~with River Ridge Limited Partnership~~through November 2023 for the rental of 7,507 square feet of additional office space at 100 River Ridge Drive, Norwood, MA. The initial term of the lease was for five years and two months commencing in July 2013 with an option for the Company to extend the lease for an additional term of five years. The Company was required to pay certain operating expenses for the leased premises subject to escalation charges for certain expense increases over a base amount. The Company entered into a sublease in December 2014 for this space, effective from January 2015 through July 2018. Due to past payment delinquency, the short span of time remaining on the lease and the estimated amount of time it would take to find another sub-tenant, the remainder of this lease was accrued as a charge in the amount of $169,000 incopier equipment.

During the first quarter of ~~2017. This lease has now expired without~~2019, the Company ~~extending~~adopted the ~~term.~~new lease standard by recognizing and measuring leases existing at, or entered into after, January 1, 2019. In accordance with the transition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements, the Company adopted and initially applied the new leasing rules on January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Therefore, prior periods presented are in accordance with the previous lease guidance (ASC 840). As permitted by the new lease standard, the Company elected to apply the following practical expedients to the entire lease portfolio: (i) not to reassess whether any expired or existing contracts are or contain leases or the classification of any expired or existing leases; (ii) not to apply the recognition requirements to short-term leases; and, (iii) not to separate fixed nonlease components from associated lease components for the underlying assets.

Upon adoption, a ROU asset of $17.6 million and a lease liability of $27.3 million were recorded and are identified separately in the Company’s consolidated balance sheets for the existing operating leases. There was no impact to the consolidated statements of operations. Upon adoption, the amount of the ROU assets recorded was offset by the applicable unamortized lease incentive and straight-line lease liability balances of $9.7 million, therefore, there was no impact to accumulated deficit. There were no initial direct costs related to the leases to consider. The Company’s operating lease liabilities related to its real estate lease agreements were calculated using a collateralized incremental borrowing rate. The Company’s operating lease liability related to its equipment lease was calculated using an implicit rate provided in the lease. The weighted average discount rate for the operating lease liability is approximately 11%. A 100 basis point change in the incremental borrowing rate would result in less than a $1 million impact to the ROU assets and liabilities recorded. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term, which for the six months ended June 30, 2019 and 2018 was $2.3 million and $2.8 million, respectively, and is included in operating expenses in the consolidated income statements. Cash paid against operating lease liabilities during the six months ended June 30, 2019 was $2.6 million. As of June 30, 2019, the Company’s ROU assets and lease liabilities for operating leases totaled $16.4 million and $26.1 million, respectively, and the weighted average remaining term of the operating leases is approximately seven years.

The ~~minimum rental commitments~~Company’s finance leases consist entirely of single payment obligations that have been made for equipment. The related asset balances, net of accumulated amortization, of $1.4 million and $595,000 as of June 30, 2019 and December 31, 2018, respectively, are included in property and equipment in the consolidated balance sheets. Amortization expense of $159,000 and $93,000 for the ~~Company’s facilities, including real estate taxes~~six months ended June 30, 2019 and ~~other~~2018, respectively, is included in operating expenses ~~for~~in the ~~next five fiscal years and thereafter under the non-cancelable operating lease agreements discussed above are as follows (in thousands):~~

2018 (three months remaining)

$
2,183

2019

7,995

2020

7,877

2021

7,716

2022

7,782

Thereafter

25,778

Total minimum lease payments

$
59,331

consolidated income statements. There are no obligations under ~~capital~~finance leases as of ~~September~~June 30, ~~2018,~~2019, as all of the ~~capital~~finance leases were single payment obligations which have all been made.

The maturities of operating lease liabilities discussed above are as follows (in thousands):


2019 (six months remaining)	$	2,698
2020		5,485
2021		5,324
2022		5,389
2023		5,510
Thereafter		12,336
Total lease payments		36,742
Less imputed interest		(10,647)
Total lease liabilities	$	26,095

In addition to the amounts in the table above, the Company is also responsible for variable operating costs and real estate taxes approximating $3.0 million per year through March 2026.

I.Commitments and Contingencies

Collaborations

The Company is contractually obligated to make potential future success-based development, regulatory, or sales milestone payments in conjunction with certain collaborative agreements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events, it is unclear when, if ever, the Company may be

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required to pay such amounts. Further, the timing of any future payment is not reasonably estimable. As of ~~September~~June 30, ~~2018,~~2019, the maximum amount that may be payable in the future under the Company’s current collaborative agreements is $80.0 million.

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Manufacturing Commitments

As of ~~September~~June 30, ~~2018,~~2019, the Company has noncancelable obligations under ~~several~~ agreements related to in-process and future manufacturing of ~~antibody and~~ cytotoxic agents required for clinical supply of the Company’s product candidates totaling ~~$2.2~~$1.5 million, all of which ~~approximately $0.9 million and $1.3 million~~ will be paid in ~~2018 and 2019, respectively.~~2019.

~~In February 2017,~~Additionally, in 2018, the Company executed a ~~letter~~commercial agreement with one of its ~~antibody~~ manufacturers ~~to reserve capacity~~for future production of antibody through calendar ~~2021. The total~~2025. In May 2019, the agreement was amended to reduce the number of committed antibody batches for an agreed-upon exit fee, which was recorded as research and development expense in the first quarter of 2019. As of June 30, 2019, the Company’s noncancelable commitment ~~over the five-year term~~ranges from €2.3 to €15.1 million pursuant to contingent terms of the agreement, ~~is €46.2 million,~~including the manufacturer’s ability to fill the Company’s unused capacity with production for other customers.

Table of ~~which €14.1 million euros is noncancelable as of September 30, 2018 and €6.3 million has been expensed for materials delivered through September 30, 2018.~~ Contents

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

OVERVIEW

We are a clinical-stage biotechnology company focused on developing the next generation of antibody-drug ~~conjugate,~~conjugates, or ~~ADC, therapies~~ADCs, to improve outcomes for cancer patients. By generating targeted therapies with enhanced anti-tumor activity and favorable tolerability profiles, we aim to disrupt the progression of cancer and offer patients more good days. We call this our commitment to “target a better now.”

An ADC with our proprietary technology comprises an antibody that binds to a target found on tumor cells and is conjugated to one of our potent anti-cancer agents as a “payload” to kill the tumor cell once the ADC has bound to its target. ADCs are an expanding approach to the treatment of cancer, with ~~four~~five approved products and the number of agents in development growing significantly in recent years.

We have established a leadership position in ADCs with a ~~robust~~ portfolio of differentiated product candidates addressing both solid tumors and ~~a productive platform that has generated differentiated candidates for cancer treatment.~~hematological malignancies. Our ~~proprietary portfolio~~lead program is ~~led by~~ mirvetuximab soravtansine, a first-in-class ADC targeting folate-receptor alpha, or FRα. ~~We have developed a comprehensive strategy for~~In March of 2019, we announced that FORWARD I, our Phase 3 clinical trial evaluating mirvetuximab ~~soravtansine with the goals of displacing single-agent~~compared to chemotherapy in ~~the treatment of ovarian cancer, and to be the preferred agent for combination treatment of the disease.~~

~~In June 2017, we reported data on 113 ovarian cancer patients treated~~women with mirvetuximab soravtansine from three Phase 1 expansion cohorts. From this pooled analysis, in the subset of 36 patients meeting the key eligibility criteria for our registration trial, the confirmed overall response rate, or ORR, was 47 percent (95% CI 30, 65) and median progression-free survival, or mPFS, was 6.7 months (95% CI 4.1, 8.3). The safety profile of this pooled population was consistent with data previously reported (American Society of Clinical Oncology (ASCO) 2016), consisting of low grade, manageable adverse events.

~~We are conducting a Phase 3 registration trial, FORWARD I, with mirvetuximab soravtansine for use as single-agent therapy to treat patients with~~FRα-positive, platinum-resistant ovarian cancer, ~~whose tumors express medium or high levels of FRα and who have received up to three prior treatment regimens. The Phase 3~~did not meet the primary endpoint. Data from FORWARD I ~~trial has completed enrollment with sites~~did, however, demonstrate a consistent efficacy signal across a range of parameters in the ~~U.S., Canada and Europe,~~pre-specified subset of patients with ~~top-line results expected in the first half of 2019. In June 2018 mirvetuximab soravtansine was granted Fast Track designation by~~high FRα expression. Following consultation with the U.S. Food and Drug Administration (FDA).

~~Additionally,~~, we ~~are accruing~~will pursue a new Phase 3 study in this patient population and, pending regulatory review, plan to begin enrolling patients in this study by the end of the year.

In light of these developments, we have undertaken a ~~companion study, FORWARD II, to evaluate mirvetuximab soravtansine in combination regimens to expand the number~~review of ~~patients with ovarian cancer eligible for treatment~~our operations with the ~~ADC, including those~~goals of prioritizing our portfolio and reducing our cost base to ensure that our cash resources will be sufficient to advance these programs through the next stages of development. Based on the outcomes of this operational review, we have established three strategic priorities for the business: secure initial approval and pursue label expansion for mirvetuximab in ovarian cancer; advance a select portfolio of three earlier-stage product candidates; and further strengthen our balance sheet through partnering. Consistent with ~~platinum-sensitive disease. We reported~~these priorities, we have focused our operations on the ~~first clinical~~following activities:

●

Initiate the registration study for mirvetuximab as a monotherapy for women with FRα-high, platinum-resistant ovarian cancer by the end of this year;

●

Complete enrollment and continue follow up in the ongoing FORWARD II mirvetuximab combination cohorts;

●

Continue IMGN632 development in patients with relapsed acute myeloid leukemia (AML), blastic plasmacytoid dendritic cell neoplasm (BPDCN), and other CD123-positive hematologic malignancies in collaboration with Jazz Pharmaceuticals (Jazz);

●

Advance two additional assets that demonstrate our continued innovation in ADCs: IMGC936, which is in co-development for solid tumors with MacroGenics, Inc. (MacroGenics); and our next generation anti-FRα ADC, which is expected to enter development in mid-2020; and

●

Monetize our remaining portfolio and platform technologies through out-licensing transactions or asset sales.

Correspondingly, we have reduced ongoing expenses through the following portfolio prioritization and restructuring initiatives:

●

Discontinuation of the development of IMGN779 in adults with relapsed/refractory CD33-positive AML;

●

Suspension of all other research activities; and

●

Reduction of our workforce.

Mirvetuximab. For mirvetuximab monotherapy, we will present full data from FORWARD III in ~~June 2017, demonstrating that mirvetuximab soravtansine combined in doublets with full doses of Avastin (bevacizumab), Keytruda (pembrolizumab), and carboplatin, yielded a favorable safety profile.~~

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~~In May 2018, we reported data from~~ an expansion cohort of over 50 patients evaluating mirvetuximab in combination with Avastin. We observed encouraging activity and safety for the combination and the results were reported in a poster presentation at the ASCO Annual Meeting in June 2018. The overall population received a median of three and up to eight prior lines of therapy, with 58% of patients having received prior Avastin. For the 54 patients evaluable for response, the confirmed overall response rate, or ORR, was 43%, with a median PFS of 7.8 months. Importantly, in the FORWARD I matched subset of 23 patients with medium or high FRαexpression levels and 1-to-3 prior lines of therapy, the confirmed ORR was 48%, with a median PFS of 9.9 months and a median duration of response of 10.6 months. In addition, we provided an update from the carboplatin dose-escalation cohort. For all 17 evaluable patients in this cohort, the confirmed ORR was 71 percent, with a median PFS of 15 months; in the subset of 10 patients with medium or high FRα expression levels, the confirmed ORR was 80 percent, with a median PFS of 15 months. Based on the encouraging profile of the Avastin and carboplatin combinations, we have advanced a triplet combination evaluating mirvetuximab plus carboplatin and Avastin in patients with recurrent platinum-sensitive ovarian cancer.

~~In October 2018, we reported initial data from an expansion cohort of over 50 patients evaluating mirvetuximab in combination with Keytruda. The findings were reported in a poster~~oral presentation at the European Society for Medical Oncology (ESMO) ~~2018 Congress. The data presented at ESMO were~~Congress in late September. In parallel, we will meet with the FDA and European Medicines Agency (EMA) in the second half of this year to review the design of the next Phase 3 study to support registration of mirvetuximab as a monotherapy for ~~56 patients~~women with FRα-high, platinum-resistant ovarian ~~cancer,~~cancer. Pending the outcome of ~~whom 40~~these regulatory discussions, we expect to initiate this study by the end of this year.

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Mirvetuximab is also being assessed in multiple combinations in FORWARD II, a Phase 1b/2 study, designed to expand the market opportunity into earlier lines of ovarian cancer. To date, we have presented combination data from more than 100 patients in cohorts combining mirvetuximab with Keytruda^® (pembrolizumab), Avastin^® (bevacizumab), and carboplatin. Most recently, we presented mature data from the doublet cohort of mirvetuximab in combination with bevacizumab at the American Society of Clinical Oncology (ASCO) 2019 annual meeting, which demonstrated significant anti-tumor activity with durable responses and a favorable tolerability profile, particularly among the subset of patients who have received up to two prior lines of therapy and have medium or high levels of FRα expression. Patients had received a median of 3 prior therapies (range 2-7). The combination demonstrated favorable tolerability consistent with the known safety profiles of each agent. For all patients evaluable for response, initial antitumor activity included tumor shrinkage of target lesions in 83% of patients and a confirmed ORR of 30 percent,Based upon these data as well as previously reported outcomes with a ~~median duration~~carboplatin doublet, we have moved forward with a cohort assessing a triplet combination of ~~response, or DOR, of 6.9 months, suggesting a trend towards improvement over~~ mirvetuximab ~~soravtansine monotherapy. In the subset of~~plus carboplatin and bevacizumab in patients with ~~medium or high FRα expression levels,~~recurrent platinum-sensitive ovarian cancer. We completed enrollment of the ~~confirmed ORR was 31 percent, with a median DOR of 8.1 months, with more robust reductions observed~~triplet in ~~these patients. At the time of analysis, the data were immature with 16 patients still on study (all with medium or high FRα expression)~~late 2018 and ~~a median follow-up of 8.3 months.~~

We have built a productive platform that continues to generate innovative and proprietary ADCs, including IMGN779, our CD33-targeting product candidate for acute myeloid leukemia, or AML. IMGN779 combines a high-affinity, humanized anti-CD33 antibody with one of our novel indolino-benzodiazepine payloads, called IGNs, which alkylate DNA without crosslinking, resulting in potent anti-leukemia activity with relative sparing of normal hematopoietic progenitor cells. We reported clinicalwill report initial data from this ~~trial~~cohort at ESMO in ~~December 2017 demonstrating IMGN779 is well tolerated~~September. Finally, to address evolving market conditions, we are enrolling a second mirvetuximab plus bevacizumab cohort in patients with ~~no dose limiting toxicities and that IMGN779 has favorable pharmacokinetic/pharmacodynamic properties and anti-leukemia activity. IMGN779 is progressing through dose escalation~~recurrent ovarian cancer, regardless of platinum status, which we expect to complete in ~~a Phase 1 trial~~the third quarter of this year.

IMGN632. We have made significant progress with IMGN632, our CD123-targeting product candidate in clinical trials for patients with AML and ~~we plan to report additional~~BPDCN. Initial data from the Phase 1 ~~trial~~study of IMGN632 in patients with relapsed or refractory adult AML and BPDCN were presented at the ~~2018~~ American Society of Hematology (ASH) Annual Meeting in ~~December.~~December 2018. These data showed that IMGN632 demonstrated anti-leukemic activity across all dose levels tested and a tolerable safety profile at doses up to 0.3 mg/kg.

In the second quarter of this year, we determined the recommended Phase 2 dose and schedule for IMGN632 and have filed a new protocol to move forward with combination studies in relapsed refractory AML as well as monotherapy in front-line patients with minimal residual disease following induction therapy. In addition, we continue to enroll relapsed refractory BPDCN patients under our existing protocol. We ~~also are advancing IMGN632,~~will share data for both AML and BPDCN patients at ASH in December.

Preclinical Programs. We continue to advance select preclinical programs, led by IMGC936. IMGC936 is a ~~CD123-targeting~~first-in-class ADC ~~that uses~~targeting ADAM9, an ~~even more potent IGN payload agent~~enzyme overexpressed in a range of solid tumors and implicated in tumor progression and metastasis. This ADC incorporates a number of innovations, including antibody engineering to extend half-life, site-specific conjugation with a ~~new engineered~~fixed drug-antibody ratio to enable higher dosing, and a next-generation linker for improved stability and ~~novel antibody, which we are developing~~bystander activity. We reported encouraging preclinical safety and activity data from this program at the American Association of Cancer Research (AACR) meeting and expect the IND for ~~hematological malignancies, including AML and blastic plasmacytoid dendritic cell neoplasm (BPDCN). In January 2018, we announced that~~IMGC936 to be filed in the first ~~patient had been dosed in the Phase 1 trial~~half of ~~IMGN632. We~~2020. Finally, we expect our next generation anti-folate receptor alpha candidate to ~~report the first clinical data from dose escalation for IMGN632 at the 2018 ASH Annual Meeting.~~move into preclinical development next year.

In August 2017, we announced a strategic collaboration and option agreement with Jazz, to develop and co-commercialize ADCs. Jazz has exclusive worldwide rights to opt into development and commercialization of IMGN779, IMGN632, and a third program to be named later from our early-stage pipeline.

Over the last 37 years, ImmunoGen has assembled the most comprehensive “tool box” in the ADC field. Our platform technology combines advanced chemistry and biochemistry with innovative approaches to antibody optimization, with a on increasing the diversity and potency of our payload agents, advancing antibody-payload linkage and release technologies, and integration of novel approaches to antibody engineering. Combined with the accumulated experience of our research team, these capabilities have enabled us to generate a pipeline of novel candidates optimized for individual tumor types with potent anti-tumor activity and tolerable safety profiles that we can develop as monotherapies and in combination with existing and novel therapies.

Collaborating on ADC development with other companies allows us to generate revenue, mitigate expenses, enhance our capabilities, and extend the reach of our proprietary platform. The most advanced partner program is

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Roche’s marketed product, Kadcyla^® (ado-trastuzumab emtansine), the first ADC to demonstrate superiority over standard of care in a randomized pivotal trial, EMILIA, and gain FDA approval. Our ADC ~~platform~~technology is also used in candidates in clinical development with a number of partners. We have evolved our partnering approach to pursue relationships where we can gain access to technology and complementary capabilities, such as our technology swap with CytomX, as well as co-development and co-commercialization opportunities, such as our relationships with Jazz and MacroGenics. We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements. For more information concerning these relationships, including their ongoing financial and accounting impact on our business, please read Note C, “Significant Collaborative Agreements,” to our consolidated financial statements included in this report.

To date, we have not generated revenues from commercial sales of internal products and we expect to incur significant operating losses for the foreseeable future. As of ~~September~~June 30, ~~2018,~~2019, we had ~~$303.2~~$239.8 million in cash and cash equivalents compared to ~~$267.1~~$262.3 million as of December 31, ~~2017.~~2018.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported

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amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our collaborative agreements, clinical trial accruals, ~~inventory~~ and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

We adopted ASC ~~606~~842 using the transition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we initially applied the new leasing rules on January 1, ~~2018, using~~2019, rather than at the ~~modified retrospective method for all contracts not completed as of~~earliest comparative period presented in the ~~date of adoption. The reported results for 2018 reflect the application of~~financial statements. Prior periods presented will be in accordance with previous guidance issued under ASC ~~606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, “Revenue Recognition”, which is also referred to herein as "legacy GAAP" or the "previous guidance."~~840. The adoption of ASC ~~606~~842 represents a change in accounting principle that will ~~more closely align revenue recognition with~~increase transparency and comparability among organizations by recognizing lease assets and liabilities on the ~~delivery of our services~~balance sheet, including those previously classified as operating leases under ASC 840, and ~~will provide financial statement readers with enhanced disclosures.~~disclosing key information about leasing arrangements. Refer to Note B to the consolidated financial statements for further discussion on this change. There were no other significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

RESULTS OF OPERATIONS

Comparison of Three Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

Revenues

Our total revenues for the three months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ were ~~$10.9~~$15.5 million and ~~$8.5~~$9.3 million, respectively. The ~~$2.4~~$6.2 million increase in revenues in the three months ended ~~September~~June 30, ~~2018~~2019 from the same period in the prior year is primarily attributable to ~~an increase~~increases in ~~non-cash~~license and milestone fees and royalty revenue, ~~due to increased sales of Kadcyla.~~which is discussed further below.

License and milestone fees

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three months ended June 30, 2018.

Deferred revenue of ~~$82.3~~$145.9 million as of ~~September~~June 30, ~~2018~~2019 includes a $75 million upfront payment related to the license options granted to Jazz in August 2017 and $65.2 million related to the sale of our residual rights to receive royalty payments on commercial sales of Kadcyla, with the remainder of the balance primarily representing consideration received from our collaborators pursuant to our license agreements which we have yet to ~~earn.~~earn pursuant to our revenue recognition policy.

Royalty revenue

Kadcyla is an ADC marketed product resulting from one of our development and commercialization licenses with Roche, through its Genentech unit. We receive royalty reports and payments related to sales of Kadcyla from Roche one quarter in arrears. In accordance with ~~current revenue guidance,~~ ASC 606, ~~$8.4~~however, we record an estimate of the amount of royalties earned on Kadcyla sales within the period. Consistent with this policy, we recorded $10.4 million and $7.2 million of non-cash royalties on net sales of Kadcyla for the three‑month period ended September 30, 2018 were recorded and included in non-cash royalty revenue in the current quarter. Under the previous revenue guidance, ASC 605, $7.6 million of non-cash royalties would have been recorded in the current quarter. Under ASC 605, $6.5 million of non-cash royalties on net sales of Kadcyla for the three‑month periodthree-month periods ended June 30, ~~2017 were included in non-cash royalty revenue for the three-month period ended September 30, 2017. In April~~2019 and 2018, respectively. Kadcyla sales occurring after January 1, 2015 ~~we consummated~~are covered by a royalty purchase ~~transaction relating~~agreement whereby the associated cash was remitted to ~~the~~Immunity Royalty Holdings, L.P., subject to a residual cap. In January 2019, we sold our residual rights to receive royalty payments on commercial sales of Kadcyla ~~— see~~to OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada, for a net payment of $65.2 million (amount is net of $1.5 million of contingent broker fees). Simultaneously, OMERS purchased IRH’s right to the royalties the Company previously sold as described above, thereby obtaining the rights to 100% of the royalties received from that date on. See further details regarding the royalty obligation in Note E ~~to our~~of the Consolidated Financial ~~Statements for further details.~~Statements.

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Research and development support revenue

The amount of research and development support revenue we earn is directly related to ~~the number of~~requests we receive from collaborators for research and development work under our ~~collaborators and potential collaborators, the stage of development of our collaborators’ product candidates and the resources our collaborators allocate to the development effort.~~agreements with them. As such, the amount of these fees may vary widely from quarter to quarter and year to year. Research and development support revenue was $51,000 for the three months ended June 30, 2019 compared with $388,000 for the three months ended ~~September~~June 30, ~~2018 compared with $650,000~~2018.

Clinical materials revenue

Clinical materials revenue was $336,000 for the three months ended ~~September~~June 30, ~~2017.~~

~~Clinical materials revenue~~

~~During the periods presented, we shipped clinical materials~~2018. We decommissioned our manufacturing facility in support of certain collaborators’ clinical trials. We are compensated at negotiated prices which are generally consistent with what other third‑parties would charge. The amount of clinical materials revenue we earn,2018 and the related cost of clinical materials charged to research and development expense, is directly related to the number of clinical trials our collaborators who use us to manufacture clinical materials are preparing or have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period, if any, during which patients in the trial receive the clinical materials, and the demand our collaborators have for clinical‑grade material for process development and analytical purposes. As such, the amount of clinical materials revenue and the related cost of clinical materials charged to research and development expense may vary significantly from quarter to quarter and year to year. Clinical materials revenue was $1.4 million for the three months ended September 30, 2018 compared to $1.2 million for the three months ended September 31, 2017. We will no longer ~~be producing~~produce preclinical and clinical materials on behalf of our ~~collaborators after 2018.~~collaborators.

Research and Development Expenses

Our research and development expenses relate to (i) research to evaluate new targets and to develop and evaluate new antibodies, linkers, and cytotoxic agents, (ii) preclinical testing of our own and, in certain instances, our collaborators’ product candidates, and the cost of our own clinical trials, (iii) development related to clinical and commercial manufacturing processes, and (iv) ~~both~~external manufacturing operations, and prior to 2019, internal ~~and external~~ manufacturing operations, which also ~~include~~included raw materials.

Research and development expense for the three months ended ~~September~~June 30, ~~2018 increased $15.5~~2019 decreased $10.1 million to ~~$47.2~~$28.6 million from ~~$31.7~~$38.7 million for the three months ended ~~September~~June 30, ~~2017,~~2018, due primarily to ~~higher antibody~~decreased personnel expenses driven by adjustments made in the current period to bonus and ~~cytotoxic costs in support~~stock compensation expense as a result of ~~commercial validation~~the restructuring of ~~mirvetuximab soravtansine, increased~~the business, decreased clinical trial costs primarily related ~~substantially~~ to the FORWARD III Phase 3 study, and ~~to a lesser extent, increased salaries and related expenses driven primarily by increases in headcount and stock-based compensation.~~lower external manufacturing costs. We do not track our research and development costs by project. Since we use our research and development resources across multiple research and development projects, we

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manage our research and development expenses within each of the categories listed in the following table and described in more detail below (in thousands):


	Three Months Ended June 30,
Research and Development Expense	2019		2018
Research	$	4,162	$	5,814
Preclinical and Clinical Testing		18,391		22,065
Process and Product Development		2,386		2,906
Manufacturing Operations		3,620		7,916
Total Research and Development Expense	$	28,559	$	38,701

Three Months Ended September 30,
Research and Development Expense

2018

2017
Research

$
5,761

$
5,053
Preclinical and Clinical Testing

21,229

16,795
Process and Product Development

3,050

2,301
Manufacturing Operations

17,203

7,540
Total Research and Development Expense

$
47,243

$
31,689

Research

Research includes expenses primarily associated with activities to identify and evaluate new targets and to develop and evaluate new antibodies, linkers, and cytotoxic agents for our products and in support of our collaborators. Such expenses primarily include personnel, contract services, ~~research licensing fees, facilities~~facility expenses, and lab supplies. Research expenses for the three months ended ~~September~~June 30, ~~2018 increased $708,000~~2019 decreased $1.7 million compared to the three months ended ~~September~~June 30, ~~2017. This increase is~~2018, principally due to ~~increases~~a decrease in ~~salaries~~personnel expenses driven by adjustments made in the current period to bonus and ~~related expenses and lab supply costs.~~stock compensation expense as a result of the restructuring of the business.

Preclinical and Clinical Testing

Preclinical and clinical testing includes expenses related to preclinical testing of our own and, in certain instances, our collaborators’ product candidates, regulatory activities, and the cost of our own clinical trials. Such expenses include personnel, patient enrollment at our clinical testing sites, consultant fees, contract services, and facility expenses. Preclinical and clinical testing expenses for the three months ended ~~September~~June 30, ~~2018 increased $4.4~~2019 decreased $3.7 million to ~~$21.2~~$18.4 million compared to ~~$16.8~~$22.1 million for the three months ended ~~September~~June 30, ~~2017.~~2018. This ~~increase~~decrease is primarily the result of ~~an increase in contract services related to clinical, regulatory and commercial-readiness efforts to advance mirvetuximab soravtansine, greater~~lower clinical trial costs principally ~~related to increased activity~~ driven by greater FORWARD I activity in the ~~FORWARD II combination assessments,~~prior period and ~~an increase in salaries and related expenses. Partially offsetting these increases, a higher credit was recorded against IMGN779 and IMGN632 development costs~~lower personnel expenses driven by adjustments made in the current period ~~compared~~ to bonus and stock compensation expense as a result of the ~~prior period, resulting from cost-sharing with Jazz pursuant~~restructuring of the business. Partially offsetting these decreases, contract services increased due to greater activity related to our mirvetuximab soravtansine program in the ~~collaboration agreement executed in August 2017.~~ current period.

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Process and Product Development

Process and product development expenses include costs for development of clinical and commercial manufacturing processes for our own and collaborator compounds. Such expenses include the costs of personnel, contract services, and facility expenses. For the three months ended ~~September~~June 30, ~~2018,~~2019, total process and product development expenses ~~increased $749,000~~decreased $520,000 compared to the three months ended ~~September~~June 30, ~~2017.~~2018. This ~~increase~~decrease is principally due to ~~increases in contract services, salaries and related expenses, and facility costs allocated to these departments, partially offset by~~ a higher credit recorded against IMGN779 and IMGN632 FTE development costs in the current period compared to the prior period resulting from cost-sharing with ~~Jazz.~~Jazz and lower facility expenses.

Manufacturing Operations

Manufacturing operations expense includes costs to manufacture or have manufactured preclinical and clinical materials for our own and our collaborator’s product candidates, quality control and quality assurance activities, and costs to support the operation and maintenance of our drug substance manufacturing ~~facility.~~facility, which we ramped-down in 2018 and decommissioned in February 2019. Such expenses include personnel, raw materials for our and our collaborators’ preclinical studies and clinical trials, development costs with contract manufacturing organizations, manufacturing supplies, and facilities expense. For the three months ended ~~September~~June 30, ~~2018,~~2019, manufacturing operations expense ~~increased $9.7~~decreased $4.3 million to ~~$17.2~~$3.6 million compared to ~~$7.5~~$7.9 million in the same period last year. This ~~increase~~decrease is principally the result of ~~higher antibody~~lower personnel and ~~cytotoxic costs in support~~facility-related expenses, including amortization of ~~commercial validation of mirvetuximab soravtansine, partially offset by a higher credit recorded against IMGN779 and IMGN632~~

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~~development costs in the current period~~leasehold improvements, resulting from ~~cost-sharing with Jazz and an increase in costs capitalized into inventory due to a greater number of manufactured batches of conjugated materials on behalf~~the shut-down of our ~~collaborators~~manufacturing facility in ~~the current period.~~ late 2018.

General and Administrative Expenses

General and administrative expenses for the three months ended ~~September~~June 30, ~~2018~~2019 increased ~~$439,000~~$48,000 compared to the same period last year. ~~This increase~~

Restructuring Charges

As a result of the workforce reduction, we recorded a charge of $16.0 million for severance related to a pre-existing plan in the three months ended June 30, 2019. The related cash payments will be substantially paid out by June 30, 2020. In addition, a charge of $3.7 million is ~~primarily due~~expected to ~~inflation on wages and~~be recorded for incremental retention benefits in the same time period, of which approximately $400,000 was recorded during the three months ended June 30, 2019.

In addition to the termination benefits and ~~an increase~~other related charges, we will seek to sub-lease the majority of the laboratory and office space at 830 Winter Street in ~~stock-based compensation.~~

~~Restructuring Charge~~

Waltham, Massachusetts and dispose of excess equipment. In performing the impairment test, we recorded a charge of $2.5 million to write down the equipment to fair value, however, we determined the right-to-use asset related to the lease was recoverable, therefore no impairment was recorded.

In February 2018, following an in-depth review of manufacturing and quality operations, the Board of Directors authorized management to implement a new operating model that will rely on external manufacturing and quality testing for drug substance and drug product for our development programs. The implementation of this new operating model ~~will lead~~led to the ramp-down of manufacturing and quality activities at the Norwood, Massachusetts facility by the end of 2018, with a full decommissioning of the facility ~~expected by early~~in February 2019. Implementation of the new operating model ~~will result~~resulted in the separation of ~~approximately 30 employees, with a net reduction of 20 positions, by the end of 2018.~~22 employees. Communication of the plan to the affected employees was substantially completed on February 8, 2018.

In connection with the implementation of the new operating model, we recorded a ~~one-time~~ charge of $1.2 million for severance related to a pre-existing plan in the first ~~quarter.~~quarter of 2018. Additional expense was recorded for incremental retention ~~expense is recorded~~benefits over the remaining service period of the related employees, which totaled ~~$846,000 in~~$686,000 for the ~~current quarter.~~three months ended June 30, 2018, all of which was paid out by the end of 2018. Cash payments related to severance ~~will be~~were substantially paid out by the end of the second quarter of 2019. ~~The retention benefits are expected to be paid out in the fourth quarter~~

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Investment Income, net

Investment income for the three months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ was ~~$1.4~~$1.3 million and ~~$293,000,~~$814,000, respectively. The increase in the current period is due to a greater average cash balance driven largely by ~~$101.7 million of net proceeds generated from a public offering of common stock in October 2017 and~~ $162.5 million of net proceeds generated from a public offering of common stock in June ~~2018.~~2018 and $65.2 million of net proceeds generated from the sale of our residual rights to Kadcyla royalty payments in January 2019.

Non-Cash Interest Expense on Liability Related to Sale of Future Royalty

In ~~April~~ 2015, ~~Immunity Royalty Holdings, L.P. (IRH)~~IRH purchased our right to receive 100% of the royalty payments on commercial sales of Kadcyla ~~subsequent to March 31, 2014,~~ arising under our development and commercialization license with Genentech, until IRH has received aggregate royalties equal to $235 million or $260 million, depending on when the aggregate royalties received by IRH reach a specified milestone. Once the applicable threshold was met, if ever, the Company would thereafter have received 85% and IRH would have received 15% of the Kadcyla royalties for the remaining royalty term. In January 2019, OMERS purchased IRH’s right to the royalties the Company previously sold as described above. As described in Note E to our Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period as Kadcyla royalties are remitted directly to the purchaser. During the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded ~~$2.5~~$3.8 million and ~~$3.3~~$2.6 million, respectively, of non-cash interest expense which includes amortization of deferred financing costs. We impute interest on the transaction and record interest expense at the effective interest rate, which we currently estimate to be ~~5.8%~~10.0%. There are a number of factors that could materially affect the estimated interest rate, in particular, the amount and timing of royalty payments from future net sales of Kadcyla, and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively.

~~Interest Expense on Convertible Senior Notes~~

In June 2016, we issued Convertible 4.5% Senior Notes with an aggregate principal amount of $100 million. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 4.5% per year, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2017. We recorded $23,000 and $762,000 of interest expense in the three months ended September 30, 2018 and 2017, respectively. The decrease in

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~~interest expense is a result of $97.9 million of the notes converting to shares of common stock during the second half of 2017.~~

~~Non-cash Debt Conversion Expense~~

During the quarter ended September 30, 2017, we entered into privately negotiated exchange agreements with a number of holders of our outstanding Convertible Notes, pursuant to which we agreed to exchange, in a private placement, $96.9 million in aggregate principal amount of Convertible Notes held by the holders for 25,882,421 newly issued shares of our common stock, equivalent to the number of shares based on the original conversion terms, plus an additional number of newly issued shares of common stock to be determined based on the volume-weighted average trading price of the common stock over certain trading days. As a result of the agreements, 2,744,881 additional shares, were issued.

~~In accordance with ASC, Topic 470-20, “Debt – Debt with Conversion and~~ Other Options,” we accounted for the conversion of the debt as an inducement by expensing the fair value of the shares that were issued in excess of the original terms of the Convertible Notes. As a result, we recorded a non-cash debt conversion expense in the amount of $22.2 million in the prior-year quarter. In addition, accrued interest on the bonds of $727,000 which the noteholders forfeited, $2.5 million of deferred financing costs and $1.7 million of costs incurred to execute the conversion were charged to paid-in capital as a result of the issuance of common stock.

Income (Expense), net

Other ~~(Expense) Income, net~~

~~Other~~income (expense) ~~income,~~, net for the three months ended ~~September~~June 30, 2019 and 2018 was $167,000 and ~~2017 was~~ ($~~75,000) and $480,000,~~1.1) million, respectively. These amounts were foreign currency exchange gains and losses related to obligations with non-U.S. dollar-based suppliers and Euro cash balances maintained to fulfill those obligations during the ~~three months ended September 30, 2018 and 2017, respectively.~~ respective periods.

Comparison of ~~Nine months~~Six Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

Revenues

Our total revenues for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ were ~~$40.0~~$24.1 million and ~~$76.0~~$29.1 million, respectively. The ~~$36.0~~$5.0 million decrease in revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from the same period in the prior year is attributable to ~~decreases~~a decrease in license and milestone fees, ~~most significantly related to a $30 million paid up license fee received from Sanofi,~~research and ~~$7 million of other milestones recognized~~development support revenue and clinical materials revenue, partially offset by an increase in ~~the prior year,~~royalty revenue, which ~~are~~is discussed further below.

License and milestone fees

The amount of license and milestone fees we earn is directly related to the number of our collaborators, the ~~collaborators’~~ advancement of ~~the~~ product candidates covered by the agreements with our collaborators, and the overall success in the clinical trials of ~~the~~these product candidates. As such, the amount of license and milestone fees may vary significantly from quarter to quarter and year to year. License and milestone fee revenue was ~~$13.5~~$5.2 million and ~~$49.9~~$12.9 million for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively. Under previous guidance, license and milestone fees would have been $15.2 million in the current period which would have included a $5 million Takeda milestone which would have been recognized in revenue. Included in license and milestone fees for the ~~current~~six months ended June 30, 2019 is a $5 million regulatory milestone achieved under our license agreement with Genentech, a member of the Roche Group. Included in license and milestone fees for the prior period is $10.9 million of previously deferred license revenue earned upon the expiration of the right to execute a license or extend the research term specified under the right-to-test agreement with Takeda and a $500,000 payment received in January 2018 related to the ~~delivery~~completed technology transfer of IMGN529 ~~clinical materials~~ to ~~Debiopharm and a $500,000 development milestone that was determined to be probable of occurring under our license agreement with Fusion.~~Debiopharm. In May 2018, Novartis terminated one of its six development and commercialization licenses. As a result, we recorded the remaining $978,000 balance of the upfront payment that had been allocated to future performance obligations under this license as revenue, which is included in license and milestone fees for the ~~current period.~~ ~~Included in license and milestone fees for the nine~~six months ended ~~September~~June 30, ~~2017 is a $30 million paid-up license fee related to an amendment to our collaboration and license agreement with Sanofi, $6 million of development milestones achieved under the collaboration and license agreement with Sanofi prior to amendment, $12.7~~

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million of non-cash license revenue earned upon the expiration of the right to replace the target specified under the development and commercialization license with CytomX and a $1 million development milestone achieved under said license agreement with CytomX2018.

Royalty revenue

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Kadcyla sales within the period. Consistent with this policy, we recorded $18.9 million and $14.4 million of non-cash royalties on net sales of Kadcyla for the nine‑month period ended September 30, 2018 were recorded and included in non-cash royalty revenue in the current period. Under the previous revenue guidance, ASC 605, $23.7 million of non-cash royalties would have been recorded in this period. Under ASC 605, $20.6 million of non-cash royalties on net sales of Kadcyla for the nine‑month periodsix-month periods ended June 30, ~~2017 were included in non-cash royalty revenue for the nine-month period ended September 30, 2017. In April~~2019 and 2018, respectively. Kadcyla sales occurring after January 1, 2015 ~~we consummated~~are covered by a royalty purchase ~~transaction relating~~agreement whereby the associated cash was remitted to ~~the~~Immunity Royalty Holdings, L.P., subject to a residual cap. In January 2019, we sold our residual rights to receive royalty payments on commercial sales of Kadcyla ~~— see~~to OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada, for a net payment of $65.2 million (amount is net of $1.5 million of contingent broker fees). Simultaneously, OMERS purchased IRH’s right to the royalties the Company previously sold as described above, thereby obtaining the rights to 100% of the royalties received from that date on. See further details regarding the royalty obligation in Note E ~~to our~~of the Consolidated Financial ~~Statements for further details.~~Statements.

Research and development support revenue

The amount of research and development support revenue we earn is directly related to ~~the number of~~requests we receive from collaborators for research and development work under our ~~collaborators and potential collaborators, the stage of development of our collaborators’ product candidates and the resources our collaborators allocate to the development effort.~~agreements with them. As such, the amount of these fees may vary widely from quarter to quarter and year to year. Research and development support revenue was ~~$1.2 million~~$68,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared with ~~$3.0 million~~$771,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

Clinical materials revenue

During the periods presented, we shipped clinical materials in support of certain collaborators’ clinical trials. We are compensated at negotiated prices which are generally consistent with what other third‑parties would charge. The amount of clinical materials revenue we earn, and the related cost of clinical materials charged to research and development expense, is directly related to the number of clinical trials our collaborators who use us to manufacture clinical materials are preparing or have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period, if any, during which patients in the trial receive the clinical materials, and the demand our collaborators have for clinical‑grade material for process development and analytical purposes. As such, the amount of clinical materials revenue and the related cost of clinical materials charged to research and development expense may vary significantly from quarter to quarter and year to year. Clinical materials revenue was ~~$2.5~~$1.0 million for ~~each of~~ the ~~nine~~six months ended ~~September~~June 30, 2018. We decommissioned our manufacturing facility in 2018 and ~~2017. We will~~ no longer ~~be producing~~produce preclinical and clinical materials on behalf of our ~~collaborators after 2018.~~collaborators.

Research and Development Expenses

Our research and development expenses relate to (i) research to evaluate new targets and to develop and evaluate new antibodies, linkers, and cytotoxic agents, (ii) preclinical testing of our own and, in certain instances, our collaborators’ product candidates, and the cost of our own clinical trials, (iii) development related to clinical and commercial manufacturing processes, and (iv) external manufacturing operations, and prior to 2019, internal manufacturing operations, which also ~~includes~~included raw materials.

Research and development expense for the ~~nine~~six months ended ~~September~~June 30, ~~2018 increased $30.9~~2019 decreased $16.0 million to ~~$130.8~~$67.5 million from ~~$99.9~~$83.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, due primarily ~~to higher~~to: (i) decreased clinical trial costs ~~driven largely by completion of patient enrollment in FORWARD I, increased costs~~primarily related to the FORWARD ~~II trial,~~I Phase 3 study; (ii) lower facility-related costs, including depreciation expense, and personnel expenses related to the shut-down of our Norwood facility in 2018; (iii) decreased bonus and stock compensation expense as a result of the recent restructuring of the business; and (iv) a higher ~~antibody~~credit recorded against IMGN779, IMGN632, and ~~cytotoxic~~IMGC936 development costs in ~~support of commercial validation of mirvetuximab soravtansine. Contract service expense also increased due~~the current period compared to ~~increased clinical, regulatory~~the prior period resulting from cost-sharing with Jazz and ~~commercial-readiness efforts~~MacroGenics pursuant to support advancement of mirvetuximab soravtansine, as well as, salaries and related expenses driven primarily by increases in headcount and stock-based compensation. These increases were partially offset by an increase in the credit for co-development spending in the period.our respective collaboration agreements. We do not track our research and development costs by project. Since we use our research and development resources across multiple research and development projects, we manage our research and

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development expenses within each of the categories listed in the following table and described in more detail below (in thousands):


	Six Months Ended June 30,
Research and Development Expense	2019		2018
Research	$	10,500	$	11,877
Preclinical and Clinical Testing		39,490		46,865
Process and Product Development		5,312		5,665
Manufacturing Operations		12,150		19,125
Total Research and Development Expense	$	67,452	$	83,532

Nine Months Ended September 30,
Research and Development Expense

2018

2017
Research

$
17,638

$
16,355
Preclinical and Clinical Testing

68,094

47,966
Process and Product Development

8,715

7,879
Manufacturing Operations

36,328

27,696
Total Research and Development Expense

$
130,775

$
99,896

Research

Research includes expenses primarily associated with activities to identify and evaluate new targets and to develop and evaluate new antibodies, linkers, and cytotoxic agents for our products and in support of our collaborators. Such expenses primarily include personnel, contract services, ~~research licensing fees, facilities~~facility expenses, and lab supplies. Research expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2018 increased $1.3~~2019 decreased $1.4 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This ~~increase~~decrease is principally due to ~~increases~~a decrease in ~~salaries~~personnel expenses driven by adjustments made in the current period to bonus and ~~related expenses, lab supply costs, and facility costs allocated to these departments.~~ stock compensation expense as a result of the restructuring of the business in June 2019.

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Preclinical and Clinical Testing

Preclinical and clinical testing includes expenses related to preclinical testing of our own and, in certain instances, our collaborators’ product candidates, regulatory activities, and the cost of our own clinical trials. Such expenses include personnel, patient enrollment at our clinical testing sites, consultant fees, contract services, and facility expenses. Preclinical and clinical testing expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2018 increased $20.1~~2019 decreased $7.4 million to ~~$68.1~~$39.5 million compared to ~~$48.0~~$46.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This ~~increase~~decrease is primarily the result of ~~an increase in~~lower clinical trial costs principally driven by ~~advancement of the~~greater FORWARD I ~~and FORWARD II studies, an increase~~activity in ~~salaries~~the prior period, and ~~related expenses, and an increase in contract services to support advancement of mirvetuximab soravtansine. Partially offsetting these increases,~~ a higher credit ~~was~~ recorded against IMGN779, IMGN632, and ~~IMGN632~~IMGC936 development costs in the current period compared to the prior period resulting from cost-sharing with Jazz ~~pursuant~~and MacroGenics. Partially offsetting these decreases, contract services increased due to substantially greater activity related to our mirvetuximab soravtansine and IMGC936 programs in the ~~collaboration agreement executed in August 2017.~~ current period.

Process and Product Development

Process and product development expenses include costs for development of clinical and commercial manufacturing processes for our own and collaborator compounds. Such expenses include the costs of personnel, contract services, and facility expenses. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, total process and product development expenses ~~increased $836,000~~decreased $353,000 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. This ~~increase~~decrease is principally due to ~~increases in salaries and related expenses, lab supply costs and allocated facility costs, partially offset by~~ a higher credit recorded against IMGN779, IMGN632, and ~~IMGN632~~IMGC936 development costs in the current period compared to the prior period resulting from cost-sharing with ~~Jazz.~~Jazz and MacroGenics.

Manufacturing Operations

Manufacturing operations expense includes costs to manufacture preclinical and clinical materials for our own and our collaborator’s product candidates, quality control and quality assurance activities, and costs to support the operation and maintenance of our drug substance manufacturing ~~facility.~~facility, which we ramped-down in 2018 and decommissioned in February 2019. Such expenses include personnel, raw materials for our and our collaborators’ preclinical studies and clinical trials, development costs with contract manufacturing organizations, manufacturing supplies, and facilities expense. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, manufacturing operations expense ~~increased $8.6~~decreased $7.0 million to ~~$36.3~~$12.1 million compared to ~~$27.7~~$19.1 million in the same period last year. This ~~increase~~decrease is principally the result of ~~higher antibody~~lower personnel and ~~cytotoxic costs in support of commercial validation of mirvetuximab soravtansine and increased depreciation expense related to accelerated~~facility-related expenses, including amortization of

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~~Norwood~~ leasehold improvements, ~~partially offset by a higher credit recorded against IMGN779 and IMGN632 development costs in the current period~~ resulting from ~~cost-sharing with Jazz.~~ the shut-down of our manufacturing facility in late 2018.

General and Administrative Expenses

General and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 increased ~~$2.1 million~~$831,000 compared to the same period last year. This increase is ~~primarily~~principally due to an increase in ~~third-party service fees~~personnel expenses driven by increased headcount and greater stock compensation expense, partially offset by lower bonus expense resulting from adjustments made related to the restructuring of the business.

Restructuring Charges

As a result of the workforce reduction, we recorded a charge of $16.0 million for severance related to a pre-existing plan in the ~~current period.~~six months ended June 30, 2019. The related cash payments will be substantially paid out by June 30, 2020. In addition, a charge of $3.7 million is expected to be recorded for incremental retention benefits in the same time period, of which approximately $400,000 was recorded during the six months ended June 30, 2019.

In addition to the termination benefits and other related charges, we will seek to sub-lease the majority of the laboratory and office space at 830 Winter Street in Waltham, Massachusetts and dispose of excess equipment. In performing the impairment test, we recorded a charge of $2.5 million to write down the equipment to fair value, however, we determined the right-to-use asset related to the lease was recoverable, therefore, no impairment was recorded.

~~Restructuring Charge~~31

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As a result of a workforce reduction in September 2016, the Company began seeking to sub-lease 10,281 square feet of unoccupied office space at 930 Winter Street in Waltham, Massachusetts that was leased in 2016. During the six months ended June 30, 2019, the Company recorded $559,000 of impairment charges related to this lease, which represents the remaining balance of the right to use asset as the likelihood of finding a sub-lessor has diminished significantly as the lease approaches termination.

In February 2018, following an in-depth review of manufacturing and quality operations, the Board of Directors authorized management to implement a new operating model that will rely on external manufacturing and quality testing for drug substance and drug product for our development programs. The implementation of this new operating model ~~will lead~~led to the ramp-down of manufacturing and quality activities at the Norwood, Massachusetts facility by the end of 2018, with a full decommissioning of the facility ~~expected by early~~in February 2019. Implementation of the new operating model ~~will result~~resulted in the separation of ~~approximately 30 employees, with a net reduction of 20 positions, by the end of 2018.~~22 employees. Communication of the plan to the affected employees was substantially completed on February 8, 2018.

In connection with the implementation of the new operating model, we recorded a ~~one-time~~ charge of $1.2 million for severance related to a pre-existing plan in the first ~~quarter.~~quarter of 2018. Additional expense was recorded for incremental retention ~~expense will be recorded~~benefits over the remaining service period of the related employees, which totaled ~~$1.9~~$1.1 million infor the ~~nine~~six months ended ~~September~~June 30, 2018, all of which was paid out by the end of 2018. Additionally, certain options held by the employees to be separated were modified to extend the exercise period, resulting in a stock compensation charge of $157,000 in the first ~~quarter.~~quarter of 2018. Cash payments related to severance ~~will be~~were substantially paid out by the end of the second quarter of 2019. ~~The retention benefits are expected to be paid out in the fourth quarter of 2018.~~

Investment Income, net

Investment income for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ was ~~$2.8~~$2.7 million and ~~$551,000,~~$1.5 million, respectively. The increase in the current period is due to a greater average cash balance driven largely by ~~$101.7 million of net proceeds generated from a public offering of common stock in October 2017 and~~ $162.5 million of net proceeds generated from a public offering of common stock in June ~~2018.~~2018 and $65.2 million of net proceeds generated from the sale of our residual rights to Kadcyla royalty payments in January 2019.

Non-Cash Interest Expense on Liability Related to Sale of Future Royalty

In ~~April~~ 2015, ~~Immunity Royalty Holdings, L.P. (IRH)~~IRH purchased our right to receive 100% of the royalty payments on commercial sales of Kadcyla ~~subsequent to March 31, 2014,~~ arising under our development and commercialization license with Genentech, until IRH has received aggregate royalties equal to $235 million or $260 million, depending on when the aggregate royalties received by IRH reach a specified milestone. Once the applicable threshold was met, if ever, the Company would thereafter have received 85% and IRH would have received 15% of the Kadcyla royalties for the remaining royalty term. In January 2019, OMERS purchased IRH’s right to the royalties the Company previously sold as described above. As described in Note E to our Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period as Kadcyla royalties are remitted directly to the purchaser. During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded ~~$8.2~~$7.2 million and ~~$10.0~~$5.7 million, respectively, of non-cash interest expense which includes amortization of deferred financing costs. We impute interest on the transaction and record interest expense at the effective interest rate, which we currently estimate to be ~~5.8%~~10.0%. There are a number of factors that could materially affect the estimated interest rate, in particular, the amount and timing of royalty payments from future net sales of Kadcyla, and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively.

~~Interest Expense on Convertible Senior Notes~~

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$3.0 million of interest expense in the nine months ended September 30, 2018 and 2017, respectively. The decrease in interest expense is a result of $97.9 million of the notes converting to shares of common stock during the second half of last year.

~~Non-cash Debt Conversion Expense~~

~~In accordance with ASC, Topic 470-20, “Debt – Debt with Conversion and~~ Other Options,” we accounted for the conversion of the debt as an inducement by expensing the fair value of the shares that were issued in excess of the original terms of the Convertible Notes. As a result, we recorded a non-cash debt conversion expense in the amount of $22.2 million in the prior-year period. In addition, accrued interest on the bonds of $727,000 which the noteholders forfeited, $2.5 million of deferred financing costs and $1.7 million of costs incurred to execute the conversion were charged to paid-in capital as a result of the issuance of common stock.

Income (Expense), net

Other ~~(Expense) Income, net~~

~~Other~~income (expense) ~~income,~~, net for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 was $96,000 and ~~2017 was~~ ($~~590,000) and $1.4 million,~~515,000), respectively. These amounts ~~were~~ primarily consisted of gains on sale of assets and foreign currency exchange gains and losses related to obligations with non-U.S. dollar-based suppliers and Euro cash balances maintained to fulfill those obligations during the ~~nine months ended September 30, 2018 and 2017, respectively.~~ respective periods.

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LIQUIDITY AND CAPITAL RESOURCES

(amounts in tables in thousands)


	September 30,		December 31,
	2018		2017

					As of
					June 30,		December 31,
					2019		2018
Cash and cash equivalents	$	303,205	$	267,107	$	239,825	$	262,252
Working capital		252,344		220,571		184,762		208,121
Shareholders’ equity (deficit)		46,888		(17,895)
Shareholders’ (deficit) equity						(68,174)		10,972



	Six Months Ended June 30,
	2019		2018
Cash used for operating activities	$	(20,810)	$	(85,281)
Cash used for investing activities		(2,355)		(2,127)
Cash provided by financing activities		738		165,359

Nine Months Ended September 30,


2018

2017

(In thousands)
Cash (used) provided by operating activities

$
(125,137)

$
37,054
Cash used for investing activities

(4,220)

(847)
Cash provided (used) for financing activities

165,455

(1,320)

Cash Flows

We require cash to fund our operating expenses, including the advancement of our own clinical programs, and to make capital expenditures. Historically, we have funded our cash requirements primarily through equity and convertible debt financings in public markets and payments from our collaborators, including license fees, milestones, research funding, and ~~royalties, and more recently, convertible debt.~~royalties. We have also ~~sold~~monetized our rights to receive royalties on Kadcyla for up-front consideration. As of ~~September~~June 30, ~~2018,~~2019, we had ~~$303.2~~$239.8 million in cash and cash equivalents. Net cash used for operations was ~~$125.1~~$20.8 million and ~~$37.1~~$85.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The principal use of cash for operating activities for both periods presented was to fund our net loss, with the ~~prior~~current period benefiting from ~~a $30~~$65.2 million ~~paid-up license fee received~~of net proceeds from ~~Sanofi pursuant~~the sale of our residual rights to ~~amending its collaboration and license agreements with us, a $25 million upfront payment received from Debiopharm pursuant to the execution~~royalty payments on net sales of ~~an exclusive license and asset~~

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~~purchase agreement,~~ ~~and a $75 million upfront payment received from Jazz pursuant to the execution of a collaboration and development agreement.~~

Kadcyla.

Net cash used for investing activities was ~~$4.2~~$2.4 million and ~~$847,000~~$2.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and represents cash outflows for capital expenditures, primarily for the purchase of new ~~equipment, as well as leasehold improvements in the current period related to building out the new space at our corporate headquarters.~~

equipment.

Net cash provided ~~(used)~~ by financing activities was ~~$165.5 million~~$738,000 and ~~$(1.3)~~$165.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. In June 2018, pursuant to a public offering, we issued and sold 15.8 million shares of our common stock resulting in net proceeds of $162.5 million. InAlso included in the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 is $738,000 and ~~2017,~~$2.8 million, respectively, of proceeds generated from the exercise of approximately ~~595,000~~379,000 and ~~94,000~~568,000 stock options, ~~respectively, are also included. During~~respectively.

On June 26, 2019, the ~~prior period, we induced conversion~~Board of ~~$96.9 million~~Directors approved a plan to restructure the business to focus resources on continued development of ~~the Convertible Notes to common stock~~mirvetuximab soravtansine and ~~incurred $1.7 million~~a select portfolio of three earlier-stage product candidates, resulting in ~~related fees.~~

a reduction of workforce by approximately 220 positions. We anticipate that our current capital resources and expense reductions resulting from these operational changes will enable us to meet our operational expenses and capital expenditures for more than twelve months after the date of this ~~report~~. ~~However, we~~report. We may raise additional funds through equity and debt financings or generate revenues from collaborators through a combination of upfront license payments, milestone payments, royalty payments, and research funding. We cannot provide assurance that such collaborative agreement funding will, in fact, be received. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements or if we are not successful in securing future collaboration agreements, we may elect or be required to secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.

Contractual Obligations

In 2018, the Company executed a commercial agreement with one of its manufacturers for future production of antibody through calendar 2025. In May 2019, the agreement was amended to reduce the number of committed antibody batches for an agreed-upon exit fee, which was determined probable and recorded as research and development expense in the first quarter of 2019. As of June 30, 2019, the Company’s noncancelable commitment ranges from €2.3 to €15.1 million pursuant to contingent terms of the agreement, including the manufacturer’s ability to fill the Company’s unused capacity with production for other customers.

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There have been no other material changes to our contractual obligations during the current period from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Recent Accounting Pronouncements

The information set forth under Note B to the consolidated financial statements under the caption “Summary of Significant Accounting Policies” is incorporated herein by reference.

Third-Party Trademarks

Avastin, Herceptin, Kadcyla, and Keytruda are registered trademarks of their respective owners.

OFF-BALANCE SHEET ARRANGEMENTS

None.

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ITEM 3.Quantitative and Qualitative Disclosure about Market Risk

Our market risks, and the ways we manage them, are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Since then there have been no material changes to our market risks or to our management of such risks.

ITEM 4.Controls and Procedures

(a)~~Disclosure Controls and Procedures~~

Disclosure Controls and Procedures

Our management, with the participation of our principal executive ~~officer~~ and ~~principal~~ financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive ~~officer~~ and ~~principal~~ financial officer ~~have~~has concluded that, as of the end of such period, our disclosure controls and procedures were adequate and effective.

(b)	Changes in Internal Controls

~~(b)Changes in Internal Controls~~

During the nine months ended September 30, 2018, we implemented certain internal controls in connection with the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. There were no ~~other~~ changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, other than an upgrade to our enterprise resource planning system.

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1A.Risk Factors

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition, or future results set forth under Item 1A. (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. There have been no material changes from the factors disclosed in our ~~2017~~2018 Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange ~~Commission (the “Commission”).~~Commission.

ITEM 5. Other Information

None

Table of Contents

ITEM 6.Exhibits

Exhibit No.			Description
~~31.1~~ 10.1			Severance Pay Plan for Vice Presidents and Higher, as amended through June 20, 2019
31.1			Certification of ~~Principal Executive Officer under~~the principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~31.2~~	32	~~Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002~~
32	†		~~Certifications~~Certification of ~~Principal Executive Officer~~the principal executive officer and ~~Principal Financial Officer under~~principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
~~101.INS~~101			Financial statements from the quarterly report on Form 10-Q of ImmunoGen, Inc. for the quarter ended June 30, 2019 formatted in inline XBRL ~~Instance Document~~(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Loss; (iii) the Consolidated Statements of Shareholder’s (Deficit) Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements
~~101.SCH~~104			Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema~~and contained in Exhibit 101)
~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase~~
~~101.DEF~~

†	~~XBRL Taxonomy Extension Definition Linkbase~~
~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase~~
~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase~~Furnished, not filed.

†~~Furnished, not filed.~~

4435

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ImmunoGen, Inc.

Date: ~~November 2, 2018~~August 7, 2019	By:	/s/ Mark J. Enyedy
		Mark J. Enyedy
		President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)

~~Date: November 2, 2018~~	~~By:~~	~~/s/ David B. Johnston~~
		~~David B. Johnston~~
		~~Executive Vice President, Chief Financial Officer (Principal Financial Officer)~~

4536

Massachusetts		04-2726691
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
	Common Stock, $.01 par value		IMGN		NASDAQ Global Select Market

Large accelerated filer ☐⌧		Accelerated filer ☒◻
Non-accelerated filer ◻		Smaller reporting company ☐
~~Non-accelerated filer ☐~~		~~Smaller reporting company ☐~~ Emerging growth company ☐


	June 30,		December 31,
	2019		2018
ASSETS
Cash and cash equivalents	$	239,825	$	262,252
Accounts receivable		—		1,701
Unbilled revenue/reimbursement		2,474		617
Contract asset		—		500
Non-cash royalty receivable		10,430		9,249
Prepaid and other current assets		6,649		4,462
Total current assets		259,378		278,781
Property and equipment, net of accumulated depreciation		10,052		12,891
Operating lease right-of-use assets		16,389		—
Other assets		1,850		3,709
Total assets	$	287,669	$	295,381
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Accounts payable	$	7,809	$	11,365
Accrued compensation		19,564		11,796
Other accrued liabilities		14,681		20,465
Current portion of deferred lease incentive		—		837
Current portion of liability related to the sale of future royalties, net of deferred financing costs of $715 and $753, respectively		29,484		25,880
Current portion of operating lease liability		2,761		—
Current portion of deferred revenue		317		317
Total current liabilities		74,616		70,660
Deferred lease incentive, net of current portion		—		4,675
Deferred revenue, net of current portion		145,614		80,485
Operating lease liability - net of current portion		23,334		—
Convertible 4.5% senior notes, net of deferred financing costs of $29 and $36, respectively		2,071		2,064
Liability related to the sale of future royalties, net of current portion and deferred financing costs of $1,175 and $1,536, respectively		108,265		122,345
Other long-term liabilities		1,943		4,180
Total liabilities		355,843		284,409
Commitments and contingencies (Note I)
Shareholders’ deficit:
Preferred stock, $.01 par value; authorized 5,000 shares; no shares issued and outstanding		—		—
Common stock, $0.01 par value; authorized 200,000 shares; issued and outstanding 149,885 and 149,400 shares as of June 30, 2019 and December 31, 2018, respectively		1,498		1,494
Additional paid-in capital		1,200,860		1,192,813
Accumulated deficit		(1,270,532)		(1,183,335)
Total shareholders’ (deficit) equity		(68,174)		10,972
Total liabilities and shareholders’ (deficit) equity	$	287,669	$	295,381


Item		Page Number
	Part I
	Financial Information
1.	Financial Statements (Unaudited)	2

1a.	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	2

1b.	Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018	3

1c.	Consolidated Statements of Shareholders’ (Deficit) Equity for the three months ended March 31 and June 30, 2019 and three months ended March 31, June 30, September 30 and December 31, 2018	4

1d.	Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	5

1e.	Notes to Consolidated Financial Statements	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

3.	Quantitative and Qualitative Disclosures about Market Risk	34

4.	Controls and Procedures	34

	Part II
	Other Information
1A.	Risk Factors	34

5.	Other Information	34

6.	Exhibits	35

	Signatures	36


Item		Page Number
	Part I
	Financial Information
1.	Financial Statements (Unaudited)	2

1a.	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	2

1b.	Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017	3

1c.	Consolidated Statements of Shareholder’s Equity (Deficit) for the nine months ended September 30, 2018	4

1d.	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	5

1e.	Notes to Consolidated Financial Statements	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

3.	Quantitative and Qualitative Disclosures about Market Risk	43

4.	Controls and Procedures	43

	Part II
	Other Information
1A.	Risk Factors	44

5.	Other Information	44

6.	Exhibits	44

	Signatures	45


				Additional				Total
	Common Stock			Paid-In		Accumulated		Shareholders’
	Shares	Amount		Capital		Deficit		Equity (Deficit)
Balance at December 31, 2016	87,301	$	873	$	778,847	$	(932,570)	$	(152,850)
Net loss	—		—		—		(96,012)		(96,012)
Stock options exercised	191		1		649		—		650
Issuance of common stock	16,675		167		101,496		—		101,663
Restricted stock award - net of forfeitures	2,146		21		(21)		—		—
Conversion of debt	26,160		262		117,067		—		117,329
Stock option and restricted stock compensation expense	—		—		11,119		—		11,119
Directors' deferred share units converted	53		1		(1)		—		—
Directors’ deferred share unit compensation	—		—		206		—		206
Balance at December 31, 2017	132,526	$	1,325	$	1,009,362	$	(1,028,582)	$	(17,895)
Transition adjustment for ASC 606	—		—		—		14,090		14,090
Net loss	—		—		—		(127,044)		(127,044)
Stock options exercised	595		6		2,937		—		2,943
Issuance of common stock	15,755		158		162,354		—		162,512
Stock option and restricted stock compensation expense	—		—		12,024		—		12,024
Directors' deferred share units converted	173		1		(1)		—		—
Directors’ deferred share unit compensation	—		—		258		—		258
Balance at September 30, 2018	149,049	$	1,490	$	1,186,934	$	(1,141,536)	$	46,888


			Adjustments		Balance at
	December 31,		Due to		January 1,
	2017		ASC 606		2018
ASSETS
Cash and cash equivalents	$	267,107	$	—	$	267,107
Accounts receivable		2,649		—		2,649
Unbilled revenue		2,580		—		2,580
Non-cash royalty receivable		—		8,900		8,900
Inventory		1,038		—		1,038
Prepaid and other current assets		2,967		—		2,967
Total current assets		276,341		8,900		285,241
Property and equipment, net of accumulated depreciation		14,538		—		14,538
Other assets		3,797		—		3,797
Total assets	$	294,676	$	8,900	$	303,576
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	8,562	$	—	$	8,562
Accrued compensation		11,473		—		11,473
Other accrued liabilities		15,767		—		15,767
Current portion of deferred lease incentive		784		—		784
Current portion of liability related to the sale of future royalties, net		17,779		—		17,779
Current portion of deferred revenue		1,405		41		1,446
Total current liabilities		55,770		41		55,811
Deferred lease incentive, net of current portion		5,129		—		5,129
Deferred revenue, net of current portion		93,752		(5,231)		88,521
Convertible 4.5% senior notes, net		2,050		—		2,050
Liability related to the sale of future royalties, net		151,634		—		151,634
Other long-term liabilities		4,236		—		4,236
Total liabilities		312,571		(5,190)		307,381
Shareholders’ deficit:
Preferred stock		—		—		—
Common stock		1,325		—		1,325
Additional paid-in capital		1,009,362		—		1,009,362
Accumulated deficit		(1,028,582)		14,090		(1,014,492)
Total shareholders’ deficit		(17,895)		14,090		(3,805)
Total liabilities and shareholders’ deficit	$	294,676	$	8,900	$	303,576


	As of September 30, 2018
			Pro forma as if the
			previous accounting
	As reported		was in effect
ASSETS
Cash and cash equivalents	$	303,205	$	303,205
Accounts receivable		2,115		2,115
Unbilled revenue		521		521
Contract asset		500		—
Non-cash royalty receivable		8,115		—
Inventory		1,938		1,938
Prepaid and other current assets		6,320		6,320
Total current assets		322,714		314,099
Property and equipment, net of accumulated depreciation		13,209		13,209
Other assets		3,941		3,941
Total assets	$	339,864	$	331,249
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	10,352	$	10,352
Accrued compensation		10,316		10,316
Other accrued liabilities		24,117		24,117
Current portion of deferred lease incentive		832		832
Current portion of liability related to the sale of future royalties, net		23,040		23,040
Current portion of deferred revenue		1,713		1,455
Total current liabilities		70,370		70,112
Deferred lease incentive, net of current portion		4,854		4,854
Deferred revenue, net of current portion		80,592		83,834
Convertible 4.5% senior notes, net		2,060		2,060
Liability related to the sale of future royalties, net		130,907		130,907
Other long-term liabilities		4,193		4,193
Total liabilities		292,976		295,960
Shareholders’ deficit:
Preferred stock		—		—
Common stock		1,490		1,490
Additional paid-in capital		1,186,934		1,186,934
Accumulated deficit		(1,141,536)		(1,153,135)
Total shareholders’ deficit		46,888		35,289
Total liabilities and shareholders’ deficit	$	339,864	$	331,249


	Three Months Ended				Nine months ended
	September 30, 2018				September 30, 2018
			Pro forma as if the				Pro forma as if the
			previous accounting				previous accounting
	As reported		was in effect		As reported		was in effect
Revenues:
License and milestone fees	$	672	$	80	$	13,533	$	15,239
Non-cash royalty revenue related to the sale of future royalties		8,441		7,562		22,873		23,658
Research and development support		388		388		1,159		1,159
Clinical materials revenue		1,427		1,427		2,465		2,465
Total revenues		10,928		9,457		40,030		42,521
Operating Expenses:
Research and development		47,243		47,243		130,775		130,775
General and administrative		8,347		8,347		26,994		26,994
Restructuring charge		870		870		3,287		3,287
Total operating expenses		56,460		56,460		161,056		161,056
Loss from operations		(45,532)		(47,003)		(121,026)		(118,535)
Investment income, net		1,369		1,369		2,845		2,845
Non-cash interest expense on liability related to the sale of future royalties and convertible senior notes		(2,546)		(2,546)		(8,203)		(8,203)
Interest expense on convertible senior notes		(23)		(23)		(70)		(70)
Other (expense) income, net		(75)		(75)		(590)		(590)
Net loss	$	(46,807)	$	(48,278)	$	(127,044)	$	(124,553)
Basic and diluted net loss per common share	$	(0.32)	$	(0.33)	$	(0.92)	$	(0.91)


	Balance at								Balance at
	January 1, 2018								End
	(ASC 606 adoption)		Additions		Deductions		Impact of Netting		of Period
Nine months ended September 30, 2018
Contract asset	$	—	$	500	$	(5,000)	$	5,000	$	500

Contract liabilities	$	89,967	$	706	$	(13,368)	$	5,000	$	82,305


		Weighted-
	Number	Average
	of Stock	Exercise
	Options	Price
Outstanding at December 31, 2017	11,971	$	9.92
Granted	5,431		10.43
Exercised	(595)		4.94
Forfeited/Canceled	(590)		11.40
Outstanding at September 30, 2018	16,217	$	11.47



	Number of	Weighted-
	Restricted	Average Grant
	Stock Shares	Date Fair Value
Unvested at December 31, 2017	2,319	$	2.82
Awarded	—		—
Vested	(503)		2.64
Forfeited	—		—
Unvested at September 30, 2018	1,816	$	2.87



	Period from
	December 31, 2017 to
	September 30, 2018
Liability related to sale of future royalties, net — beginning balance	$	169,413
Kadcyla royalty payments received and paid		(23,658)
Non-cash interest expense recognized		8,192
Liability related to sale of future royalties, net — ending balance	$	153,947


2018 (three months remaining)	$	2,183
2019		7,995
2020		7,877
2021		7,716
2022		7,782
Thereafter		25,778
Total minimum lease payments	$	59,331


	Three Months Ended September 30,
Research and Development Expense	2018		2017
Research	$	5,761	$	5,053
Preclinical and Clinical Testing		21,229		16,795
Process and Product Development		3,050		2,301
Manufacturing Operations		17,203		7,540
Total Research and Development Expense	$	47,243	$	31,689