At March 31, 2002, excluding the warrants issued to BioChem Pharma, Inc. discussed below, warrants to acquire 1,817,997 shares of common stock remained outstanding at exercise prices ranging from $2.31 to $38.00.  These warrants were originally issued in connection with private placements of the Company’s Series A and Series C preferred stock and a warrant issued in connection with the Company’s November 2000 public offering in satisfaction of anti-dilution provisions of certain warrants then outstanding.

As part of the Company’s collaboration agreement with BioChem Pharma, the Company granted to BioChem Pharma warrants to purchase shares of ImmunoGen common stock equal to the amount invested in ATI during the three-year research term. Beginning July 31, 2000, these warrants became exercisable for a number of shares of ImmunoGen common stock determined by dividing $11.1 million, the amount of BioChem Pharma’s investment in ATI, by the market price of ImmunoGen common stock on the exercise date, subject to certain limitations imposed by the Nasdaq Stock Market rules, which limit the sale or issuance by an issuer of securities at a price less than the greater of book or market value of such securities. Consequently, BioChem Pharma’s ability to convert all of its ImmunoGen warrants into ImmunoGen common stock is limited to a total of 20% of the number of shares of ImmunoGen’s common stock outstanding on the date of the initial transaction if the conversion price is less than the market price of ImmunoGen common stock on that date, unless stockholder approval for such conversion is obtained, if required, or unless the Company has obtained a waiver of that requirement. The exercise price is payable in cash or shares of ATI’s preferred stock, at BioChem Pharma’s option. The warrants are expected to be exercised only in the event that the shares of ATI common stock do not become publicly traded. ImmunoGen expects that BioChem Pharma will use its shares of ATI preferred stock, in lieu of cash, to exercise the warrants.

As discussed further in Note D, in March 2002, the Company issued 189,498 shares of restricted common stock in settlement of a claim.

In September 2001, a holder of warrants originally issued in connection with the March 1996 private placement of the Company’s convertible debentures and subsequently adjusted, pursuant to the anti-dilution provisions of the warrants, in connection with the Company’s November 2000 public offering of common stock, exercised its right to acquire 1,127,374 shares of common stock at prices ranging between $3.58 and $5.37 per share. 

In October 2001, a holder of warrants originally issued in connection with a private placement of the Company’s Series B convertible preferred stock exercised its right to acquire 10,931 shares of common stock at $5.49 per share.

In January 2002, a holder of warrants originally issued in connection with a private placement of the Company’s Series B convertible preferred stock exercised its right to acquire 10,931 shares of common stock at $3.68 per share.

Proceeds from these warrant exercises will be used to fund current operations.

In November 2001, the Company’s shareholders approved an increase in the amount of the authorized common stock from 50,000,000 to 75,000,000 shares and an amendment to the Company’s Restated Stock Option Plan to increase the total number of shares reserved for the grant of options by 2,500,000 to 7,350,000 shares of common stock. 

In November 2001, the Company’s shareholders approved the establishment of the 2001 Non-Employee Director Stock Plan (the Director Plan) and 50,000 shares of common stock to be reserved for grant thereunder. The Director Plan provides for the granting of awards to Non-Employee Directors and the election of Non-Employee Directors to have all or a portion of their awards in the form of cash, stock or stock units. All stock or stock units issued pursuant to the Director Plan are immediately vested. The Director Plan is administered by the Board of Directors who is authorized to interpret the provisions of the Director Plan, determine which Non-Employee Directors will be granted awards, and determine the number of shares of stock for which a stock right will be granted.

During the nine-month period ended March 31, 2002, holders of options issued under the Company’s Restated Stock Option Plan exercised their rights to acquire an aggregate of 145,636 shares of common stock at prices ranging from $0.84 per share to $15.88 per share. The total proceeds from these option exercises was $566,302 and will be used to fund current operations.

D.            Commitments and Contingencies

In December 1995, the Company entered into an agreement with a third party whereby the third party agreed to identify and introduce potential financing sources to the Company in exchange for cash and warrants upon the successful completion of a financing. During the fiscal years ended June 30, 1996 and 1998, the Company issued stock, warrants and cash to the third party relating to certain financings. On November 13, 2001, the Company received a claim asserting that, as a result of certain warrant exercises, the Company owed additional compensation to the third party. The Company settled the claim in March 2002 and issued 189,498 restricted shares of the Company’s common stock in satisfaction of any and all current and future claims against the Company. The value of the settlement, $2.1 million, was based upon the closing stock price, as reported on the Nasdaq at the date of issuance. The settlement is considered an equity financing fee and was accounted for as a reduction of the gross proceeds of the financing. Accordingly, the settlement is reflected as a reduction in Additional Paid-in Capital in the accompanying balance sheet and did not result in a charge to the Company’s statement of operations.

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

OVERVIEW

Since the Company’s inception, we have been principally engaged in the development of antibody-based cancer therapeutics. Our Tumor Activated Prodrug (TAP) product candidates consist of an antibody chemically linked, or conjugated, to a highly potent cell-killing, or cytotoxic, agent.  A TAP product is designed to bind to and be internalized by a target cancer cell, where the cytotoxic agent is released and kills the cancer cell.  The cytotoxic agent we currently use in all of our TAPs is the maytansinoid DM1, a chemical derivative of a naturally occurring substance called maytansine.

We have entered into collaborative agreements that allow companies to use our TAP technology to develop commercial products containing their antibodies. We also have licensed certain rights to our first two internally developed TAP product candidates to companies that have product development and commercialization capabilities we wish to access in exchange for our receipt of fees, milestone payments and royalties on product sales. Our collaborative partners include GlaxoSmithKline plc, Genentech, Inc., Abgenix, Inc., British Biotech plc, Millennium Pharmaceuticals, Inc. and Boehringer Ingelheim International GmbH. We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements. The terms of the collaborative agreements vary, reflecting the value we add to the development of any particular product candidate.

To date, we have not generated revenues from commercial product sales and we expect to incur significant operating losses over the foreseeable future.  As of March 31, 2002, we had approximately $144.0 million in cash and marketable securities.  We do not anticipate having a commercially-approved product within the foreseeable future.  Research and development expenses are expected to increase significantly in the near term as we continue our development efforts.  Moreover, in the next nine to 12 months we expect to pay out approximately $2.4 million to further expand our development and pilot manufacturing facility in Norwood, Massachusetts.  We anticipate that the increase in total cash expenditures will be partially offset by collaboration-derived proceeds.  Accordingly, period-to-period operational results may fluctuate dramatically.  We believe that our established collaborative agreements, while subject to specified milestone achievements, will provide funding to assist us in meeting obligations under our collaborative agreements while also allowing for the aggressive development of internal product candidates and technologies.  However, we can give no assurances that such collaborative agreement funding will, in fact, be realized. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.

Critical Accounting Policies

In December 2001, the U.S. Securities and Exchange Commission (the SEC) requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one that is both important to the portrayal of the company's financial condition and results and that requires management's most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note A to our consolidated financial statements included in this report, we believe the following accounting policies to be critical:

Revenue Recognition

We currently have four types of outlicense and development contracts:

• Shared product license: the Company retains commercial rights worldwide excluding the European Union and Japan (shared product license):

         British Biotech plc
  

• Full product license (product license):

         GlaxoSmithKline plc
  

• License to a single target antigen (single target license):
  

         Genentech, Inc.
  

         Boehringer Ingelheim International GmbH

       Millennium Pharmaceuticals, Inc.


• Broad option agreements to acquire a specific number of licenses over a specified time period (broad license):
  

         Genentech, Inc.
  

         Abgenix, Inc.
  

         Millennium Pharmaceuticals, Inc.
  

Our outlicense collaborations consist of one shared product license, one full product license, three single target licenses and three broad licenses.  Excluding the shared product license agreement, all of these collaboration agreements provide that we will (i) manufacture preclinical and clinical materials for our collaborators, at their request and cost, (ii) receive payments upon our collaborators’ achievements of certain milestones and (iii) receive royalty payments, generally until the later of the last applicable patent expiration or 12 years after product launch.  We are required to provide technical training and any process improvements and know-how to our collaborators during the term of the collaboration agreements.  Practically, once a collaborator receives Food and Drug Administration (FDA) approval for any drug and the manufacturing process used to produce the drug, our collaborator will not be able to incorporate any process improvements or know-how into their manufacturing process without additional testing and review by the FDA.  Accordingly, we believe that it is very unlikely that our collaborators will require our services subsequent to FDA approval.

Generally, upfront payments on product and single target licenses are deferred over the period of our substantial involvement. We are available to assist our collaborators during the development of their products.  We estimate this development phase to begin at the inception of the contract and conclude when the product receives FDA approval.  We believe this time period is, on average, six years.  At each reporting period we look at individual product facts and circumstances and review the estimated period of our substantial involvement.  Significant changes in our estimates could result in changes to the deferral period.

We defer upfront payments we receive from our broad option agreements over the period during which the collaborator may elect to receive a license.  These periods are specific to each collaboration agreement, but are between seven and 12 years.  If a collaborator selects an option to acquire a license under these agreements, any option fee is deferred and recorded over the life of the option, generally 12 to 18 months.  If our collaborator exercises an option and we grant a single target license to the collaborator, we defer the license fee and account for it as we would an upfront payment on a single target collaboration agreement, as discussed above.

Our shared product license collaboration provides for an upfront payment from our collaborator to us paid at the start of the agreement and, upon FDA approval, we will pay the collaborator a milestone payment, which we expect will exceed the upfront payment we have received.  We have deferred the upfront payment and anticipate recognizing such revenue concurrent with the milestone payment that is required from us when and if the product receives FDA approval.

Effective July 1, 2000, we changed our method of accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). Under the new accounting method, adopted retroactively to July 1, 2000, we recognize revenue from non-refundable, upfront license payments, not specifically tied to a separate earnings process, ratably over the term of our period of involvement during development. The cumulative effect of the change in accounting principle on prior years resulted in a non-cash charge to income of $5.7 million, which is included in our net loss for the nine months ended March 31, 2001. Results for the three months ended March 31, 2001 have been restated for the retroactive adoption of SAB 101.

When milestone payments are specifically tied to a separate earnings process, revenue is recognized when the milestone is achieved. In addition, when appropriate, we recognize revenue from certain research payments based upon the level of research services performed during the period of the research contract. Deferred revenue represents amounts received under collaborative agreements and not yet earned pursuant to these policies. Where we have no continuing involvement, we will record non-refundable license fees as revenue upon receipt and will record milestone revenue upon achievement of the milestone by the collaborative partner.

Inventory

Inventory costs primarily relate to clinical trial materials being manufactured for our collaborators. Inventory is stated at the lower of cost or market.  We evaluate the estimated net realizable value of inventory at each reporting period.  If necessary, we establish a valuation allowance to record inventory at its estimated net realizable value.

At March 31, 2002, inventory valuation allowances of $1.9 million represent the cost of on-hand conjugate produced for GlaxoSmithKline and British Biotech that we may not realize.  GlaxoSmithKline currently has two phase I clinical trials of huC242-DM1 in process.  In one of the trials GlaxoSmithKline reimburses our cost of clinical material.  This trial has reached its primary endpoints. We believe this trial will achieve its additional objectives earlier than anticipated.  The trial, therefore, will use less clinical material than originally projected.  GlaxoSmithKline reimburses our cost of clinical material used in this trial. As a result of the expected early conclusion of the one trial, we believe that we have more huC242-DM1 inventory on-hand than GlaxoSmithKline will reimburse.  As a result, we have written down the value of the inventory to its estimated net realizable value.  In the other on-going phase I trial, we do not receive reimbursement for clinical material. We believe that all of the remaining clinical material can be used in the other on-going phase I clinical trial of huC242-DM1.

Our actual cost to manufacture huN901 antibody has exceeded our original estimates.  We are in negotiations with British Biotech to determine the portion of the antibody cost that exceeds the original estimates for which we will be reimbursed by British Biotech. We do not believe that we will be reimbursed for the full amount of the cost of the conjugate, and, based upon preliminary discussions with British Biotech, have established a reserve of $157,000, to reduce the value of work in process inventory to the Company’s estimate of the net realizable value at March 31, 2002.

The actual value of the huC242-DM1 and huN901-DM1 inventory that we realize may differ from our estimates based upon the final results of the huC242-DM1 clinical trials and our negotiations with British Biotech.  Significant changes in our estimates could result in changes to the valuation allowance.

RESULTS OF OPERATIONS

Comparison of Three Months ended March 31, 2002 and 2001

Revenues

Our total revenues for the three months ended March 31, 2002 were $1.2 million compared with $1.0 million for the three months ended March 31, 2001.  The 18% increase in revenues in the quarter ended March 31, 2002 compared to the same period in the prior year is primarily attributable to pre-clinical and clinical materials we manufactured and delivered to our collaborative partners. 

During the three months ended March 31, 2002 we recognized collaboration revenue of $42,000 from GlaxoSmithKline, $177,000 from Genentech, $117,000 from Abgenix, $83,000 from Millennium and $42,000 from Boehringer Ingelheim.  During the same period in 2001, we recognized collaboration revenue of $153,000 from GlaxoSmithKline, $177,000 from Genentech and $100,000 from Abgenix. Deferred revenue of $13.8 million as of March 31, 2002 represents accumulated progress payments received from collaborators pursuant to contract revenues not yet earned.

Clinical materials reimbursement of $602,000 in the three months ended March 31, 2002, represents reimbursement for our manufacture of preclinical and clinical materials for our collaborators. In the same period in 2001, clinical materials reimbursement was $562,000. The cost of clinical materials reimbursed for the quarters ending March 31, 2002 and 2001 were $557,000 and 562,000, respectively. Under certain collaboration agreements, we are reimbursed our fully burdened cost to produce clinical materials plus a profit margin.  During the quarter ended March 31, 2002, we first earned clinical materials reimbursement on which we were entitled to a profit margin of $45,000, resulting in an increase in clinical materials reimbursement compared to the same period a year earlier.  The amount of clinical materials reimbursement we earn, and the related cost of clinical materials reimbursed, is directly related to (i) the number of on-going clinical trials for which we are producing clinical material for our collaborators, the speed of enrollment in those trials and the dosage schedule of each clinical trial, and (ii) our production of clinical grade material on behalf of our collaborators, either in anticipation of clinical trials, or for process development and analysis purposes. As such, the amount of clinical materials reimbursement and the related cost of clinical materials reimbursed may vary widely from quarter to quarter and annually.

Development fees increased 323% in the three months ended March 31, 2002 to $149,000 compared to $35,000 for the same period in 2001. Development fees represent the fully burdened reimbursement of costs incurred in producing research-grade materials and developing antibody-specific conjugation processes on behalf of our collaborators and potential collaborators during the early evaluation and preclinical testing stages of drug development. During the quarter ended March 31, 2002, we provided development services to more collaborators and potential collaborators than we had during the same quarter of 2001.  The amount of development fees we earn is directly related to the number of our collaborators or potential collaborators, the stage of development of our collaborators’ products and the resources our collaborators allocate to the development effort.  As such, the amount of development fees may vary widely from quarter to quarter and annually.

Research and Development 

We report research and development expense net of reimbursements we receive from our collaborators.  Our net research and development expenses consist of (i) research to identify and evaluate new targets, antibodies and cytotoxic drugs, (ii) preclinical testing and clinical trials of our own, and in certain instances, our collaborators’ product candidates, and (iii) development related to improving clinical and commercial manufacturing processes.  Our research efforts are primarily focused in the following areas:

• Our contributions to the clinical development of huC242-DM1 and huN901-DM1
• Process improvements related to clinical and commercial production of the huN901 antibody
• Preclinical development of our own potential products
• Process improvement related to the production of DM1 and strain development of its precursor, ansamitocin P-3
• Process development related to the commercial manufacture of huN901-DM1
• Operation, maintenance and expansion of our pilot manufacturing plant
• Identification and evaluation of potential antigen targets
• Evaluation of internally developed and inlicensed antibodies
• Development and evaluation of additional cytotoxic agents

GlaxoSmithKline is currently conducting phase I clinical trials of huC242-DM1.  The length of these trials is dependent upon the preliminary results of the trials, maximum tolerated dosage, and the number of patients dosed.  The actual length of these trials may vary from our estimates.  Additionally, GlaxoSmithKline is the sponsor of these trials, and as such, has control over the clinical trial schedule and progress.  We are funding a portion of the cost of one of the on-going phase I clinical trials.  GlaxoSmithKline is responsible for supporting the other on-going phase I clinical trial and all future clinical trials under the collaboration agreement.

British Biotech is currently conducting a phase I/II clinical trial of huN901-DM1 in the United States. We anticipate that this phase I/II trial of huN901-DM1 will be completed in calendar year 2003.  The actual length of this trial may vary from our estimates.  Additionally, British Biotech is the sponsor of this trial, and as such, has control over the clinical trial schedule and progress.  In addition to retaining commercial rights to huN901-DM1 worldwide excluding the European Union and Japan, we retain worldwide manufacturing rights.  Under the terms of the contract, we are responsible for all clinical and commercial manufacturing process development.  We continue process development efforts to improve clinical huN901 antibody production.  Under an arrangement with Genzyme Transgenics Corporation, we are investigating the viability of commercial production of huN901 using transgenic goats. We also continue to develop various other processes related to the commercial manufacture of the huN901-DM1 conjugate.  We anticipate that we will continue to devote significant financial and human resources to these efforts over the next five years.

Our three internally developed product candidates that are most advanced at March 31, 2002 are huMy9-6-DM1, an anti-IGF1-R antibody and a third product.  huMy9-6-DM1 is a humanized monoclonal antibody conjugated to DM1 and is directed against acute myeloid leukemia.  huMy9-6-DM1 is in early preclinical development.  We intend to continue to conduct preclinical safety and efficacy studies on huMy9-6-DM1.  Pending the successful preclinical development of huMy9-6-DM1 and favorable outcome of preclinical safety and efficacy studies, and any other studies, we expect to be prepared to file an Investigational New Drug Application (IND) for huMy9-6-DM1 in the next 18 to 24 months.  The actual filing of this IND is dependent upon the development of huMy9-6-DM1 and the results of any and all preclinical studies and the financial and human resources that we are able to direct to the development of the product and completion of the IND application.  As a result, the timing of the filing of this IND, if it occurs at all, may vary from our estimates. 

Anti-IGF1-R antibody is a naked antibody directed against breast, lung and prostate cancers.  We are performing preclinical experiments to evaluate candidate antibodies and, pending the results of these studies, expect to move one antibody into preclinical development in calendar year 2003.  Our third, undisclosed, potential product is directed at a specific cancer and is in the early stages of preclinical development. 

The cost to develop new products and advance those products to the IND stage can be significant.  Worldwide antibody manufacturing capacity is currently constrained, and generally, manufacturing capacity must be reserved months in advance of production.  We anticipate that we will incur substantial costs to reserve and manufacture humanized antibody.  We expect to devote substantial financial and human resources to the development of our three most advanced products for the foreseeable future. We review the results of all preclinical studies and tests to evaluate the viability of products under development.  We evaluate the value of each potential product at each stage of development to determine when, if ever, we should consider out-licensing the product.

DM1 is the cytotoxic agent that we currently use in the manufacture of all of our collaborators’ and our own conjugates.  In order to make commercial manufacture of the conjugates viable, we have devoted substantial resources to improve the strain of the microorganism that produces ansamitocin P-3, the precursor to DM1, to enhance manufacturing yields.  We also continue to devote considerable resources to improve other DM1 manufacturing processes.  In connection with these efforts, we anticipate that we will continue to incur significant expense over the next twelve months.

Expenses

Research and Development Expenses

We generally do not track our historical research and development costs by project, rather, we track such costs by department and expense category.  For this reason, we cannot accurately estimate with any degree of certainty what our historical costs have been for any particular research and development project.

Research and development expenses for the three months ended March 31, 2002 increased 92% to $7.2 million from $3.7 million for the three months ended March 31, 2001. Included in research and development expense for the three months ended March 31, 2002 is a charge of $1.5 million to record huC242-DM1 inventory at its estimated realizable value.  GlaxoSmithKline currently has two clinical trials of huC242-DM1 in process.  In one of the trials GlaxoSmithKline reimburses our cost of clinical material.  This trial has reached its primary endpoints. We expect the trial will achieve its additional objectives earlier than anticipated. The trial, therefore, will use less clinical material than originally projected.  As a result of the expected early conclusion of one trial, we believe that we have more huC242-DM1 inventory on-hand than GlaxoSmithKline will reimburse.  As a result, we have written down the value of the inventory to its estimated net realizable value. The actual value of the inventory that we realize may differ from this estimate based upon the final results of the clinical trials. The inventory valuation allowance was charged to research and development expense in the three-month period ended March 31, 2002. In the other on-going trial, we provide clinical material at our cost. We believe that all of the remaining clinical material can be used in the other on-going phase I clinical trial of huC242-DM1.

Under the terms of our shared product license collaboration with British Biotech, we are responsible for certain manufacturing and process development costs.  To date, the actual cost to manufacture antibody has exceeded our original estimates.  We are currently negotiating with British Biotech to determine the portion of antibody cost that exceeds the original estimates and that British Biotech will reimburse.  We do not believe that we will be reimbursed for the full cost of the antibody, and, based upon preliminary discussions with British Biotech, we have established a reserve of $561,000, to reduce the value of the prepaid material to our estimate of the realizable value at March 31, 2002. This reserve was recorded as a charge to research and development expense for the three months ended March 31, 2002.  The actual realized value of the prepaid asset may differ from our estimate based upon actual manufacturing yields and the result of our negotiations with British Biotech.

In September 2000, November 2000, February 2001, and March 2001, we entered into process development collaborations with MorphoSys AG, Genzyme Transgenics Corporation, Raven Biotechnologies, Inc. and Avalon, Inc. respectively, related to three of our internal research and development efforts and our collaboration with British Biotech. In September 2001, we entered into an agreement with another party related to DM1 process development.  During the three months ended March 31, 2002, we entered into several other agreements with other parties related to DM1 process development and production of antibody and DM1. Included in the three-month periods ended March 31, 2002 and 2001 were $2.2 million and $1.1 million, respectively, of expenses related to these agreements.

The number of research and development personnel increased to 71 at March 31, 2002 compared to 49 at March 31, 2001.  Research and development salaries and wages, including estimated fiscal 2002 bonuses that have been accrued, have decreased $158,000 in the three months ended March 31, 2002 compared to the three months ended March 31, 2001. Included in research and development salaries and wages in the three-month period ended March 31, 2001 is $608,000 related to bonuses awarded and expensed during the quarter. We expect future research and development expenses to increase as we continue development of our product candidates and technologies.

General and Administrative Expenses