imgn_Current_Folio_10Q

Table of Contents

987654321`qwer

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from            to           

 

Commission file number 0-17999

 

ImmunoGen, Inc.

 

Massachusetts

 

04-2726691

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

830 Winter Street, Waltham, MA 02451

(Address of principal executive offices, including zip code)

 

(781) 895-0600

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐
(Do not check if a smaller reporting company)

 

Smaller reporting company ☐
Emerging growth company ☐

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Shares of common stock, par value $.01 per share:  149,021,323 shares outstanding as of July 31, 2018.

 

 

 

 


 

Table of Contents

IMMUNOGEN, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

Item

    

 

    

Page Number

 

 

 

 

 

 

 

 

 

Part I

 

 

 

 

 

Financial Information

 

 

 

1. 

 

Financial Statements (Unaudited)

 

2

 

 

 

 

 

 

 

1a. 

 

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

 

2

 

 

 

 

 

 

 

1b. 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

 

3

 

 

 

 

 

 

 

1c. 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

1d. 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

 

 

 

 

3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

40

 

 

 

 

 

 

 

4. 

 

Controls and Procedures

 

40

 

 

 

 

 

 

 

 

 

Part II

 

 

 

 

 

Other Information

 

 

 

1A. 

 

Risk Factors

 

41

 

 

 

 

 

 

 

5. 

 

Other Information

 

41

 

 

 

 

 

 

 

6. 

 

Exhibits

 

41

 

 

 

 

 

 

 

 

 

Signatures

 

42

 

 

 

Forward looking statements

This report includes forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts that are not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward‑looking statements are identified by their use of terms and phrases, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and other similar terms and phrases, including references to assumptions. These statements are contained in the “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, as well as other sections of this report.

These forward‑looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those contemplated by our forward‑looking statements. These known and unknown risks, uncertainties and other factors are described in detail in the “Risk Factors” section and in other sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2017. We disclaim any intention or obligation to update or revise any forward‑looking statements, whether as a result of new information, future events or otherwise.

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ITEM 1.  Financial Statements

 

IMMUNOGEN, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

 

2018

 

2017

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

345,058

 

$

267,107

 

 

Accounts receivable

 

 

19

 

 

2,649

 

 

Unbilled revenue

 

 

522

 

 

2,580

 

 

Non-cash royalty receivable

 

 

7,236

 

 

 —

 

 

Inventory

 

 

1,890

 

 

1,038

 

 

Prepaid and other current assets

 

 

9,893

 

 

2,967

 

 

Total current assets

 

 

364,618

 

 

276,341

 

 

Property and equipment, net of accumulated depreciation

 

 

12,029

 

 

14,538

 

 

Other assets

 

 

4,437

 

 

3,797

 

 

Total assets

 

$

381,084

 

$

294,676

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,881

 

$

8,562

 

 

Accrued compensation

 

 

8,524

 

 

11,473

 

 

Other accrued liabilities

 

 

17,865

 

 

15,767

 

 

Current portion of deferred lease incentive

 

 

793

 

 

784

 

 

Current portion of liability related to the sale of future royalties, net of deferred financing costs of $788 and $772, respectively

 

 

22,265

 

 

17,779

 

 

Current portion of deferred revenue

 

 

1,020

 

 

1,405

 

 

Total current liabilities

 

 

63,348

 

 

55,770

 

 

Deferred lease incentive, net of current portion

 

 

4,806

 

 

5,129

 

 

Deferred revenue, net of current portion

 

 

80,751

 

 

93,752

 

 

Convertible 4.5% senior notes, net of deferred financing costs of $43 and $50, respectively

 

 

2,057

 

 

2,050

 

 

Liability related to the sale of future royalties, net of current portion and deferred financing costs of $1,918 and $2,373, respectively

 

 

136,701

 

 

151,634

 

 

Other long-term liabilities

 

 

4,231

 

 

4,236

 

 

Total liabilities

 

 

291,894

 

 

312,571

 

 

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 149,021 and 132,526 shares as of June 30, 2018 and December 31, 2017, respectively

 

 

1,490

 

 

1,325

 

 

Additional paid-in capital

 

 

1,182,429

 

 

1,009,362

 

 

Accumulated deficit

 

 

(1,094,729)

 

 

(1,028,582)

 

 

Total shareholders’ equity (deficit)

 

 

89,190

 

 

(17,895)

 

 

Total liabilities and shareholders’ equity (deficit)

 

$

381,084

 

$

294,676

 

 

 

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

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IMMUNOGEN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

    

2018

    

2017

    

 

2018

 

2017

 

 

 

 

    

    

 

    

 

 

 

    

    

 

    

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and milestone fees

 

$

1,321

 

$

31,080

 

 

$

12,861

 

$

49,810

 

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

 

 

7,242

 

 

6,439

 

 

 

14,432

 

 

14,052

 

Research and development support

 

 

388

 

 

902

 

 

 

771

 

 

2,380

 

Clinical materials revenue

 

 

336

 

 

599

 

 

 

1,038

 

 

1,277

 

Total revenues

 

 

9,287

 

 

39,020

 

 

 

29,102

 

 

67,519

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

38,701

 

 

35,319

 

 

 

83,532

 

 

68,207

 

General and administrative

 

 

8,652

 

 

8,836

 

 

 

18,647

 

 

16,955

 

Restructuring charge

 

 

686

 

 

 —

 

 

 

2,417

 

 

386

 

Total operating expenses

 

 

48,039

 

 

44,155

 

 

 

104,596

 

 

85,548

 

Loss from operations

 

 

(38,752)

 

 

(5,135)

 

 

 

(75,494)

 

 

(18,029)

 

Investment income, net

 

 

814

 

 

143

 

 

 

1,476

 

 

258

 

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

 

 

(2,611)

 

 

(3,501)

 

 

 

(5,657)

 

 

(7,076)

 

Interest expense on convertible senior notes

 

 

(23)

 

 

(1,125)

 

 

 

(47)

 

 

(2,250)

 

Other (expense) income, net

 

 

(1,052)

 

 

751

 

 

 

(515)

 

 

885

 

Net loss

 

$

(41,624)

 

$

(8,867)

 

 

$

(80,237)

 

$

(26,212)

 

Basic and diluted net loss per common share

 

$

(0.31)

 

$

(0.10)

 

 

$

(0.61)

 

$

(0.30)

 

Basic and diluted weighted average common shares outstanding

 

 

134,384

 

 

87,174

 

 

 

132,512

 

 

87,167

 

Total comprehensive loss

 

$

(41,624)

 

$

(8,867)

 

 

$

(80,237)

 

$

(26,212)

 

 

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

 

 

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IMMUNOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(80,237)

 

$

(26,212)

 

 

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

 

 

 

 

 

 

 

 

Non-cash royalty revenue related to sale of future royalties

 

 

(14,432)

 

 

(14,052)

 

 

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

 

 

5,657

 

 

7,076

 

 

Depreciation and amortization

 

 

5,056

 

 

2,934

 

 

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

 

 

(30)

 

 

180

 

 

Stock and deferred share unit compensation

 

 

7,872

 

 

5,801

 

 

Deferred rent

 

 

(59)

 

 

49

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,630

 

 

1,002

 

 

Unbilled revenue

 

 

2,058

 

 

4,971

 

 

Inventory

 

 

(852)

 

 

(1,290)

 

 

Prepaid and other current assets

 

 

(6,926)

 

 

628

 

 

Other assets

 

 

(640)

 

 

(128)

 

 

Accounts payable

 

 

3,871

 

 

(2,394)

 

 

Accrued compensation

 

 

(2,949)

 

 

266

 

 

Other accrued liabilities

 

 

1,896

 

 

802

 

 

Deferred revenue

 

 

(8,196)

 

 

11,487

 

 

Net cash used for operating activities

 

 

(85,281)

 

 

(8,880)

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,127)

 

 

(779)

 

 

Net cash used for investing activities

 

 

(2,127)

 

 

(779)

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

2,819

 

 

32

 

 

Proceeds from common stock issuance, net of $367 of transaction costs

 

 

162,540

 

 

 —

 

 

Net cash provided by financing activities

 

 

165,359

 

 

32

 

 

Net change in cash and cash equivalents

 

 

77,951

 

 

(9,627)

 

 

Cash and cash equivalents, beginning of period

 

 

267,107

 

 

159,964

 

 

Cash and cash equivalents, end of period

 

$

345,058

 

$

150,337

 

 

 

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

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IMMUNOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

 

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 conjugates, or ADC, therapeutics. The Company has generally incurred operating losses and negative cash flows from operations since inception, incurred a net loss of approximately $80.2 million during the six months ended June 30, 2018, and has an accumulated deficit of approximately $1.1  billion as of June 30, 2018. 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 June 30, 2018, the Company had $345.1 million of cash and cash equivalents on hand. The Company anticipates that its current capital resources will enable it to meet its operational expenses and capital expenditures for more than twelve months after the date these financial statements are 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, research funding, and clinical material reimbursements. 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 reimbursements and compliance with governmental regulations.

 

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., 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 condensed consolidated balance sheet data presented for comparative purposes was 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.

 

Subsequent Events

 

The Company has evaluated all events or transactions that occurred after June 30, 2018 up through the date the Company issued these financial statements. The Company did not have any material recognizable or unrecognizable subsequent events during this period.

 

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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:

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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.

 

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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 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. The $5 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 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 six months ended June 30, 2018, to the pro-forma amounts had the previous guidance been in effect:

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IMMUNOGEN, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

 

 

 

Pro forma as if the

 

 

 

 

 

previous accounting

 

 

 

As reported

 

was in effect

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

345,058

 

$

345,058

 

Accounts receivable

 

 

19

 

 

19

 

Unbilled revenue

 

 

522

 

 

522

 

Contract asset

 

 

 —

 

 

 —

 

Non-cash royalty receivable

 

 

7,236

 

 

 —

 

Inventory

 

 

1,890

 

 

1,890

 

Prepaid and other current assets

 

 

9,893

 

 

9,893

 

Total current assets

 

 

364,618

 

 

357,382

 

Property and equipment, net of accumulated depreciation

 

 

12,029

 

 

12,029

 

Other assets

 

 

4,437

 

 

4,437

 

Total assets

 

$

381,084

 

$

373,848

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Accounts payable

 

$

12,881

 

$

12,881

 

Accrued compensation

 

 

8,524

 

 

8,524

 

Other accrued liabilities

 

 

17,865

 

 

17,865

 

Current portion of deferred lease incentive

 

 

793

 

 

793

 

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

 

 

22,265

 

 

22,265

 

Current portion of deferred revenue

 

 

1,020

 

 

755

 

Total current liabilities

 

 

63,348

 

 

63,083

 

Deferred lease incentive, net of current portion

 

 

4,806

 

 

4,806

 

Deferred revenue, net of current portion

 

 

80,751

 

 

83,908

 

Convertible 4.5% senior notes, net

 

 

2,057

 

 

2,057

 

Liability related to the sale of future royalties, net

 

 

136,701

 

 

136,701

 

Other long-term liabilities

 

 

4,231

 

 

4,231

 

Total liabilities

 

 

291,894

 

 

294,786

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

Common stock

 

 

1,490

 

 

1,490

 

Additional paid-in capital

 

 

1,182,429

 

 

1,182,429

 

Accumulated deficit

 

 

(1,094,729)

 

 

(1,104,857)

 

Total shareholders’ deficit

 

 

89,190

 

 

79,062

 

Total liabilities and shareholders’ deficit

 

$

381,084

 

$

373,848

 

 

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.

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IMMUNOGEN, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

 

Six months ended June 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

 

$

1,321

 

$

5,330

 

 

$

12,861

 

$

15,159

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

 

 

7,242

 

 

7,222

 

 

 

14,432

 

 

16,096

Research and development support

 

 

388

 

 

388

 

 

 

771

 

 

771

Clinical materials revenue

 

 

336

 

 

336

 

 

 

1,038

 

 

1,038

Total revenues

 

 

9,287

 

 

13,276

 

 

 

29,102

 

 

33,064

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

38,701

 

 

38,701

 

 

 

83,532

 

 

83,532

General and administrative

 

 

8,652

 

 

8,652

 

 

 

18,647

 

 

18,647

Restructuring charge

 

 

686

 

 

686

 

 

 

2,417

 

 

2,417

Total operating expenses

 

 

48,039

 

 

48,039

 

 

 

104,596

 

 

104,596

Loss from operations

 

 

(38,752)

 

 

(34,763)

 

 

 

(75,494)

 

 

(71,532)

Investment income, net

 

 

814

 

 

814

 

 

 

1,476

 

 

1,476

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

 

 

(2,611)

 

 

(2,611)

 

 

 

(5,657)

 

 

(5,657)

Interest expense on convertible senior notes

 

 

(23)

 

 

(23)

 

 

 

(47)

 

 

(47)

Other income (expense), net

 

 

(1,052)

 

 

(1,052)

 

 

 

(515)

 

 

(515)

Net loss

 

$

(41,624)

 

$

(37,635)

 

 

$

(80,237)

 

$

(76,275)

Basic and diluted net loss per common share

 

$

(0.31)

 

$

(0.28)

 

 

$

(0.61)

 

$

(0.58)

 

Under the previous guidance, non-cash royalty revenue would have been similar to the amount recorded for the three months ended June 30, 2018, however, higher non-cash royalty revenue would have been recorded for the six months ended June 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). During the three and six months ended June 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 these changes in the three and six-month periods, 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. The terms of these agreements contain multiple 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) 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, payments for the manufacture of preclinical or clinical materials, payments based upon the achievement of certain milestones, and royalties on product sales. 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

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appropriate amount of revenue to be recognized as it fulfills its obligations under the agreements, the Company performs the following 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 identified in the contract.  The Company uses key assumptions to determine the stand-alone selling price, which is discussed in further detail below.

At June 30, 2018, 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 (two exclusive single-target licenses – one of 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)

Fusion Pharmaceuticals (one exclusive single-target license)

Lilly (three exclusive single-target licenses)

Novartis (five exclusive single-target licenses)

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)

 

·

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

 

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·

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 the manufacture of preclinical or clinical materials for the collaborative partner.

 

Generally, development and commercialization licenses contain non‑refundable terms for payments and, depending on the terms of the agreement, provide that the Company will (i) at the collaborator’s request, provide research services at negotiated prices which are generally consistent with what other third parties would charge, (ii) 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 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 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 produce research material for potential collaborators under material transfer agreements. The Company records amounts received for research materials produced or services performed as a component of research and development support revenue.

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The Company may also provide cytotoxic agents to its collaborators or produce preclinical and clinical materials at negotiated prices which are generally consistent with what other third parties would charge. The Company recognizes 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 transferred to the collaborator. The majority of the Company’s costs to produce these preclinical and clinical materials are 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 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 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 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.

 

 

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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, 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 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 June 30, 2018, 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 June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations comprising deferred revenue was $81.8 million. The Company expects to recognize revenue on approximately 1%, 2% and 97% of the remaining performance obligations over the next 12 months, 13 to 60 months, and 61 to 120 months, respectively, however it does not control when or if any collaborator will exercise its options for, or terminate existing development and commercialization licenses.

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Contract Balances from Contracts with Customers

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at

 

 

 

 

 

Balance at

    

 

 

January 1, 2018

 

 

 

 

 

 

 

End

 

 

 

(ASC 606 adoption)

 

Additions

 

Deductions

 

of Period

 

Six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract asset

 

$

 —

 

$

4,041

 

$

(4,041)

 

$

 —

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

    Deferred revenue

 

$

89,967

 

$

 —

 

$

(8,196)

 

$

81,771

 

 

During the three and six months ended June 30, 2018, 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, 2018

 

June 30, 2018

Revenue recognized in the period from:

 

 

 

 

 

Amounts included in contract liabilities at the beginning of the period

 

$

1,321

$

13,196

Performance obligations satisfied in previous periods

 

$

 -

$

 -

As a result of adoption of ASC 606, a contract asset of $5 million was recorded for a probable milestone which was netted against an approximate $1 million contract liability related to the specific contract as of March 31, 2018. During the six months ended June 30, 2018, 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 quarter upon completion of the Debiopharm and another collaborator’s performance obligations, $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.

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 June 30, 2018 and December 31, 2017. 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 June 30, 2018 and December 31, 2017, the Company held $345.1 million and $267.1 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.

 

Non-cash Investing and Financing Activities

 

The Company had $795,000 and $482,000 of accrued capital expenditures as of June 30, 2018 and December 31, 2017, 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 June 30, 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 June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 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

 

$

323,388

 

$

323,388

 

$

 —

 

$

 —

 

 

As of December 31, 2017, 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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 nature. The gross carrying amount and estimated fair value of the convertible 4.5% senior notes (the “Convertible Notes”) was $2.1 million and $5.7 million, respectively, as of June 30, 2018 compared to $2.1 million and $3.8 million as of December 31, 2017. 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 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 value as of June 30, 2018 has been estimated based on the Company’s stock price, which is a Level 3 input.

Unbilled Revenue

 

The majority of the Company’s unbilled revenue at June 30, 2018 represents research funding earned prior to that date based on actual resources utilized under 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 June 30, 2018 and December 31, 2017 is summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2018

    

2017

 

Raw materials

 

$

 —

 

$

40

 

Work in process

 

 

1,890

 

 

998

 

Total

 

$

1,890

 

$

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 by

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Table of Contents

firm, fixed orders and/or projections from its collaborators to be excess and establishes a reserve to reduce to zero the value of any such excess raw material inventory with a corresponding charge to research and development expense. In accordance with this policy, the Company recorded $403,000 of expense related to excess inventory in the six months ended June 30, 2017. There were no similar charges in the six months ended June 30, 2018.

Work in process inventory consists of drug substance manufactured for sale to the Company’s collaborators to be used in preclinical and 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 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 agreements, no reserve for work in process inventory was determined to be required at June 30, 2018 or December 31, 2017. Arrangement consideration allocated to the manufacture of preclinical and clinical materials in arrangements with multiple performance obligations is below the Company’s full cost, and the Company’s full cost is not expected to ever be below its contract selling prices for its existing collaborations, and therefore, costs are capitalized into inventory at the supply prices which represents net realizable value. During the six months ended June 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 collaborators for the manufacture of preclinical and clinical materials was $471,000 and $929,000, respectively.

 

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 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.

The Company’s common stock equivalents, as calculated in accordance with the 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