ImmunoGen, Inc.
IMMUNOGEN INC (Form: 10-Q, Received: 05/05/2017 14:02:46)

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 March 31, 2017

 

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:  89,348,389 shares outstanding as of May 1, 2017.

 

 

 

 


 

Table of Contents

IMMUNOGEN, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS

 

Item

    

 

    

Page Number

 

 

 

 

 

 

 

 

 

Part I

 

 

 

1.  

 

 

 

 

 

 

 

 

 

 

1a.  

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

2

 

 

 

 

 

 

 

1b.  

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 201 6

 

3

 

 

 

 

 

 

 

1c.  

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 201 6

 

4

 

 

 

 

 

 

 

1d.  

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

2.  

 

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

 

23

 

 

 

 

 

 

 

3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

33

 

 

 

 

 

 

 

4.  

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

 

 

Part II

 

 

 

 

 

 

 

 

 

1A.  

 

Risk Factors

 

33

 

 

 

 

 

 

 

6.  

 

Exhibits

 

34

 

 

 

 

 

 

 

 

 

Signatures

 

35

 

 

 

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Table of Contents

ITEM 1.  Financial Statements

 

IMMUNOGEN, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

 

2017

 

2016

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,568

 

$

159,964

 

 

Accounts receivable

 

 

3,893

 

 

2,026

 

 

Unbilled revenue

 

 

2,051

 

 

6,778

 

 

Inventory

 

 

3,225

 

 

2,192

 

 

Prepaid and other current assets

 

 

6,394

 

 

5,386

 

 

Total current assets

 

 

142,131

 

 

176,346

 

 

Property and equipment, net of accumulated depreciation

 

 

17,997

 

 

19,498

 

 

Other assets

 

 

3,193

 

 

3,020

 

 

Total assets

 

$

163,321

 

$

198,864

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,100

 

$

7,895

 

 

Accrued compensation

 

 

4,927

 

 

6,946

 

 

Other accrued liabilities

 

 

12,078

 

 

11,150

 

 

Current portion of deferred lease incentive

 

 

784

 

 

784

 

 

Current portion of liability related to the sale of future royalties, net of deferred financing costs of $832 and $850, respectively

 

 

15,664

 

 

14,470

 

 

Current portion of deferred revenue

 

 

1,814

 

 

14,531

 

 

Total current liabilities

 

 

40,367

 

 

55,776

 

 

Deferred lease incentive, net of current portion

 

 

5,718

 

 

5,914

 

 

Deferred revenue, net of current portion

 

 

18,992

 

 

19,086

 

 

Convertible 4.5% senior notes, net of deferred financing costs of $2,869 and $3,035, respectively

 

 

97,131

 

 

96,965

 

 

Liability related to the sale of future royalties, net of current portion and deferred financing costs of $2,943 and $3,144, respectively

 

 

164,460

 

 

169,858

 

 

Other long-term liabilities

 

 

4,183

 

 

4,115

 

 

Total liabilities

 

 

330,851

 

 

351,714

 

 

Commitments and contingencies (Note H)

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value; authorized 5,000 shares; no shares issued and outstanding

 

 

 —

 

 

 —

 

 

Common stock, $0.01 par value; authorized 150,000 shares; issued and outstanding 89,348  and 87,301 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

893

 

 

873

 

 

Additional paid-in capital

 

 

781,492

 

 

778,847

 

 

Accumulated deficit

 

 

(949,915)

 

 

(932,570)

 

 

Total shareholders’ deficit

 

 

(167,530)

 

 

(152,850)

 

 

Total liabilities and shareholders’ deficit

 

$

163,321

 

$

198,864

 

 

 

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

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IMMUNOGEN, INC.

CONSOLID ATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

    

 

 

 

    

    

 

    

 

Revenues:

 

 

 

 

 

 

 

License and milestone fees

 

$

18,730

 

$

10,077

 

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

 

 

7,613

 

 

7,380

 

Research and development support

 

 

1,478

 

 

1,059

 

Clinical materials revenue

 

 

678

 

 

1,198

 

Total revenues

 

 

28,499

 

 

19,714

 

Operating Expenses:

 

 

 

 

 

 

 

Research and development

 

 

32,888

 

 

36,094

 

General and administrative

 

 

8,119

 

 

11,235

 

Restructuring charge

 

 

386

 

 

 —

 

Total operating expenses

 

 

41,393

 

 

47,329

 

Loss from operations

 

 

(12,894)

 

 

(27,615)

 

Investment income, net

 

 

115

 

 

108

 

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

 

 

(3,575)

 

 

(4,972)

 

Interest expense on convertible senior notes

 

 

(1,125)

 

 

 —

 

Other income, net

 

 

134

 

 

551

 

Net loss

 

$

(17,345)

 

$

(31,928)

 

Basic and diluted net loss per common share

 

$

(0.20)

 

$

(0.37)

 

Basic and diluted weighted average common shares outstanding

 

 

87,160

 

 

87,035

 

Total comprehensive loss

 

$

(17,345)

 

$

(31,928)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(17,345)

 

$

(31,928)

 

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

 

 

 

 

 

 

 

Non-cash royalty revenue related to sale of future royalties

 

 

(7,613)

 

 

(7,380)

 

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

 

 

3,575

 

 

4,972

 

Depreciation and amortization

 

 

1,506

 

 

1,435

 

Loss (gain) on sale/disposal of fixed assets and impairment charges

 

 

180

 

 

(3)

 

Stock and deferred share unit compensation

 

 

2,665

 

 

7,283

 

Deferred rent

 

 

25

 

 

42

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,867)

 

 

699

 

Unbilled revenue

 

 

4,727

 

 

(142)

 

Inventory

 

 

(1,033)

 

 

629

 

Prepaid and other current assets

 

 

(1,008)

 

 

(717)

 

Other assets

 

 

(173)

 

 

17

 

Accounts payable

 

 

(2,543)

 

 

(2,378)

 

Accrued compensation

 

 

(2,019)

 

 

1,134

 

Other accrued liabilities

 

 

775

 

 

1,490

 

Deferred revenue, net of non-cash upfront license payment

 

 

(12,811)

 

 

(1,232)

 

Net cash used for operating activities

 

 

(32,959)

 

 

(26,079)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(437)

 

 

(3,479)

 

Net cash used for investing activities

 

 

(437)

 

 

(3,479)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

 —

 

 

188

 

Net cash provided by financing activities

 

 

 —

 

 

188

 

Net change in cash and cash equivalents

 

 

(33,396)

 

 

(29,370)

 

Cash and cash equivalents, beginning of period

 

 

159,964

 

 

212,283

 

Cash and cash equivalents, end of period

 

$

126,568

 

$

182,913

 

 

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

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IMMUNOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

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 ADCs, for the treatment of cancer. 

 

In August 2014, the FASB issued ASU 2014‑15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. (ASU 2015-14). Under the new standard, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates  substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both   (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and   (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.    Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.   This standard was adopted by the Company at December 31, 2016.  

 

The Company has incurred operating losses and negative cash flows from operations since inception, incurred a net loss of approximately $17.3 million during the three months ended March 31, 2017, and has an accumulated deficit of approximately $949.9  million as of March 31, 2017. 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 March 31, 2017, the Company had $126.6 million of cash and cash equivalents on hand. The Company anticipates that its current capital resources and expected future collaborator payments will enable it to meet its operational expenses and capital expenditures (operating plan) into the second quarter of calendar year 2018.  Without such collaborator payments, the Company’s existing capital resources at March 31, 2017 would not be sufficient to support the current operating plan through May 5, 2018, which is twelve months after the date that the March 2017 financial statements were issued. Management expects to seek additional funds from collaboration partners through a combination of upfront license payments, milestone payments, royalty payments, research funding, and clinical material reimbursement or from equity or debt financings. Because those plans have not been finalized, receipt of additional funding is not considered probable under the new standard. If the Company does not obtain sufficient funds when needed, the Company expects it would scale back its operating plan by deferring or limiting some or all of its research, development or clinical projects, or initiate further reductions to its workforce. Because such contingency plans have not been finalized (because the specifics would depend on the situation at the time), such actions also are not considered probable for purposes of the new standard. Because, under the new standard, neither receipt of future collaboration payments, nor management’s contingency plans to mitigate the risk and extend cash resources through May 5, 2018, are considered probable, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern.

 

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, collaboration arrangements, third‑party reimbursements and compliance with governmental regulations.

 

 

 

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B. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements at March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 include the accounts of ImmunoGen, Inc., or the Company, and its wholly owned subsidiaries, ImmunoGen Securities Corp., ImmunoGen Europe Limited and Hurricane, LLC. 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, 2016 condensed consolidated balance sheet data presented for comparative purposes was derived from our 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 Transition Report on Form 10-K for the six months ended December 31, 2016.

 

Subsequent Events

 

The Company has evaluated all events or transactions that occurred after March 31, 2017  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.

 

Revenue Recognition

 

The Company enters into licensing and development agreements with collaborative partners for the development of ADC therapeutics. The terms of these agreements contain multiple deliverables which may include (i) licenses, or options to obtain licenses, to the Company’s antibody‑drug conjugate, or 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. The Company follows the provisions of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605‑25, “Revenue Recognition—Multiple‑Element Arrangements,” and ASC Topic 605‑28, “Revenue Recognition—Milestone Method,” in accounting for these agreements. In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on whether certain criteria are met, including whether the delivered element has stand‑alone value to the collaborator. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.

At March 31, 2017, the Company had the following two 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 compounds to a specified antigen target:

Amgen (two exclusive single-target licenses (1) )  

Bayer (one exclusive single-target license)

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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 and one license to two related targets: one target on an exclusive basis and the second target on a non-exclusive basis)

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

Sanofi (one exclusive single-target license and one exclusive license to multiple individual targets)

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


(1)

Amgen has sublicensed one of its exclusive single-target licenses to Oxford BioTherapeutics Ltd.

·

Research license/option agreement for a defined period of time to secure development and commercialization licenses to use the Company’s ADC technology to develop anticancer compounds to specified targets on established terms (referred to herein as right-to-test agreements):

CytomX

Takeda, through its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. 

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 deliverables 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 deliverables 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 to it 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. 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. As a result, the Company cannot predict when or if it will recognize revenues in connection with any of the foregoing.

In determining the units of accounting, management evaluates whether the license has stand‑alone value 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

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availability of ADC technology research expertise in the general marketplace. If the Company concludes that the license has stand‑alone value and therefore will be accounted for as a separate unit of accounting, the Company then determines the estimated selling prices of the license and all other units of accounting 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.

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 value from the undelivered elements, which generally include rights to future technological improvements, research services, delivery of cytotoxic agents and the manufacture of preclinical and clinical materials.

The Company recognizes revenue related to research services that represent separate units of accounting as they are performed, as long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is probable. The Company recognizes revenue related to the rights to future technological improvements over the estimated term of the applicable license.

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 title and risk of loss have transferred to the collaborator. Arrangement consideration allocated to the manufacture of preclinical and clinical materials in a multiple‑deliverable arrangement 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. During the three months ended March 31, 2017 and 2016, 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 $727,000 and $3.0 million, respectively. 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.

The Company may also produce research material for potential collaborators under material transfer agreements. Additionally, 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 records amounts received for research materials produced or services performed as a component of research and development support revenue. 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 recorded as a component of research and development support revenue.

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.

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At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.

Non‑refundable development and regulatory milestones that are expected to be achieved as a result of the Company’s efforts during the period of substantial involvement are considered substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive because we do not contribute effort to the achievement of such milestones are generally achieved after the period of substantial involvement and are recognized as revenue upon achievement of the milestone, as there are no undelivered elements remaining and no continuing performance obligations, assuming all other revenue recognition criteria are met.

Under the Company’s development and commercialization license agreements, the Company receives royalty payments based upon its licensees’ net sales of covered products. Generally, under these agreements the Company is to receive royalty reports and payments from its licensees approximately one quarter in arrears, that is, generally in the second or third month of the quarter after the licensee has sold the royalty bearing product or products. The Company recognizes royalty revenues when it can reliably estimate such amounts and collectability is reasonably assured. As such, the Company generally recognizes royalty revenues 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.

Right‑to‑Test Agreements

The Company’s right‑to‑test agreements provide collaborators the right to (a) test the Company’s ADC technology for a defined period of time through a research, or right‑to‑test, license, (b) take options, for a defined period of time, to specified targets and (c) 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 taking an option with respect to a specific target (referred to as option fees or payments earned, if any, when the option is “taken”), (iii) upon the exercise of a previously taken option 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”), or (iv) some combination of all of these fees.

The accounting for right to test agreements is dependent on the nature of the options granted to the collaborative partner. Options are considered substantive if, at the inception of a right to test agreement, the Company is at risk as to whether the collaborative partner will choose to exercise the options to secure development and commercialization licenses. Factors that are considered in evaluating whether options are substantive 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 total upfront consideration, and the additional financial commitments or economic penalties imposed on the collaborator as a result of exercising the options. None of the Company’s right to test agreements entered into subsequent to the adoption of Accounting Standards Update, or ASU, No. 2009 13, “Revenue Arrangements with Multiple Deliverables” on July 1, 2010 has been determined to contain substantive options. For right to test agreements where the options to secure development and commercialization licenses to the Company’s ADC technology are not considered substantive, the Company considers the development and commercialization licenses to be a deliverable at the inception of the agreement and applies the multiple element revenue recognition criteria to determine the appropriate revenue recognition. Subsequent to the adoption of ASU No. 2009-13, the Company determined that its research licenses lack stand-alone value and are considered for aggregation with the other elements of the arrangement and accounted for as one unit of accounting.

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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.

 

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 March 31, 2017 and December 31, 2016. 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.

 

Cash and Cash Equivalents

 

All highly liquid financial instruments with maturities of three months or less when purchased are considered cash equivalents. As of March 31, 2017 and December 31, 2016, the Company held $126.6 million and $160.0 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 Activities

 

The Company had approximately $104,000 and $356,000 of accrued capital expenditures as of March 31, 2017 and December 31, 2016, 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 fair value 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 March 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 March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 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

 

$

108,296

 

$

108,296

 

$

 —

 

$

 —

 

 

As of December 31, 2016, 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, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2016 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

 

$

144,176

 

$

144,176

    

$

 —

    

$

 —

 

 

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 was $100.0 million and $111.0 million, respectively, as of March 31, 2017 compared to $100.0 million and $79.0 million, respectively, as of December 31, 2016. The increase in estimated fair value as of March 31, 2017 compared to December 31, 2016 is due primarily to an increase in the Company’s stock price. The fair value of the Convertible Notes is influenced by interest rates, the Company’s stock price and stock price volatility and is determined by prices for the Convertible Notes observed in a market which is a Level 2 input for fair value purposes.

Unbilled Revenue

 

The majority of the Company’s unbilled revenue at March 31, 2017 represents research funding earned prior to that date based on actual resources utilized under the Company’s agreements with various collaborators.  In addition to  that type of unbilled revenue, also included in unbilled revenue at December 31, 2016 was a $5 million partner milestone achieved in December 2016 which was subsequently invoiced in January 2017 and received in March 2017.

 

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 March 31, 2017  and December 31, 2016 is summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

 

Raw materials

 

$

125

 

$

357

 

Work in process

 

 

3,100

 

 

1,835

 

Total

 

$

3,225

 

$

2,192

 

Raw materials inventory consists entirely of proprietary cell‑killing agents the Company developed as part of its ADC technology. All raw materials inventory is currently procured from two suppliers. The Company considers more

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than a twelve month supply of raw materials that is not supported by 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 three months ended March 31, 2017 as a result of inventory purchased in the current period in order to manufacture drug product to supply the Company’s mirvetuximab soravtansine studies. There were no expenses recorded for excess inventory during the three-month period ended March 31, 2016.

Work in process inventory consists of conjugate manufactured for sale to the Company’s collaborators to be used in preclinical and clinical studies.  All conjugate 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 conjugate that did not meet specification and status of current conjugate on hand or conjugate 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 March 31, 2017. As discussed above, the Company’s costs to manufacture conjugate on behalf of its partners are greater than the supply prices charged to partners, and therefore costs are capitalized into inventory at the supply prices which represents net realizable value.

 

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 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 the if-converted method for the convertible notes, are shown in the following table (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

Options outstanding to purchase common stock and unvested restricted stock

 

13,690

 

11,679

 

Common stock equivalents under treasury stock method for options

 

110

 

361

 

Shares issuable upon conversion of convertible notes

 

23,878

 

 —

 

Common stock equivalents under if-converted method for convertible notes

 

23,878

 

 —

 

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

Stock-Based Compensation

 

As of December 31, 2016, the Company is authorized to grant future awards under one employee share based compensation plan, which is the ImmunoGen, Inc. 2016 Employee, Director and Consultant Equity Incentive Plan, or the 2016 Plan. At the annual meeting of shareholders on December 9, 2016, the 2016 Plan was approved and provides for the issuance of Stock Grants, the grant of Options and the grant of Stock Based Awards for up to 5,500,000 shares of the Company’s common stock, as well as up to 14,250,000 shares of common stock which represent awards granted under the previous stock option plan, the ImmunoGen, Inc. 2006 Employee, Director and Consultant Equity Incentive Plan, or the 2006 Plan, that forfeit, expire, or cancel without delivery of shares of common stock or which resulted in the forfeiture of shares of common stock back to the Company subsequent to December 9, 2016. Option awards are granted

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with an exercise price equal to the market price of the Company’s stock at the date of grant. Options vest at various periods of up to four years and may be exercised within ten years of the date of grant.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2017

    

2016

    

Dividend

None

 

None

 

Volatility

66.89

%  

63.90

%  

Risk-free interest rate

2.03

%  

1.61

%  

Expected life (years)

6.0

 

6.3

 

 

Using the Black-Scholes option-pricing model, the weighted average grant date fair values of options granted during the three months ended March 31, 2017 and 2016 were $1.52 and $5.55 per share, respectively.

 

A summary of option activity under the 2006 and 2016 Plans as of March 31, 2017, and changes during the three month period then ended is presented below (in thousands, except weighted-average data):

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

Number

 

Average

 

 

of Stock

 

Exercise

 

 

Options

 

Price

Outstanding at December 31, 2016

 

13,679

 

$

10.70

Granted

 

1,187

 

$

2.48

Exercised

 

 —

 

 

 

Forfeited/Canceled

 

(1,176)

 

$

11.27

Outstanding at March 31, 2017

 

13,690

 

$

9.94

 

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

 

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A summary of restricted stock activity under the 2006 and 2016 Plans (inclusive of the performance awards noted above) as of March 31, 2017 and changes during the three month period ended March 31, 2017 is presented below (in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

Number of

 

Average

 

 

 

Restricted

 

Exercise

 

 

 

Stock Shares

 

Price

 

Unvested at December 31, 2016

 

199

 

$

4.41

 

Awarded

 

2,014

 

$

2.47

 

Vested

 

(6)

 

$

6.53

 

Forfeited

 

(20)

 

$

3.15

 

Unvested at March 31, 2017

 

2,187

 

$

2.63

 

 

Stock compensation expense related to stock options and restricted stock awards granted under the 2016 and 2006 Plans was $2.6 million and $7.2 million during the three months ended March 31, 2017 and 2016, respectively. During the three months ended March 31, 2016, the Company recorded $2.8 million of stock compensation cost related to the modification of certain outstanding common stock options with the former Chief Executive Officer’s succession plan. The decrease in expense is also attributable to lower fair values associated with awards vesting in the current period, level of forfeitures experienced since the prior year due to the restructuring disclosed in Note G and greater forfeitures recorded in the current period substantially resulting from the departure of certain senior-level employees. As of March 31, 2017, the estimated fair value of unvested employee awards was $20.2 million, net of estimated forfeitures. The weighted-average remaining vesting period for these awards is approximately two years. Also included in stock compensation expense for the three months ended March 31, 2017 and 2016 are $38,000 and $108,000, respectively, of expense recorded for directors’ deferred share units, the details of which are discussed in Note F.

 

Segment Information

 

During the three months ended March 31, 2017, the Company continued to operate in one operating segment which is the business of discovery of monoclonal antibody-based anticancer therapeutics.

 

The percentages of revenues recognized from significant customers of the Company in the three months ended March 31, 2017 and 2016 are included in the following table:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

 

 

March 31,

 

    

Collaborative Partner:

    

2017

    

2016

 

    

Bayer

 

 —

%  

51

%  

 

CytomX

 

48

%  

 3

%  

 

Roche

 

27

%  

37

%  

 

Sanofi

 

21

%  

 —

%  

 

 

There were no other customers of the Company with significant revenues in the three months ended March 31, 2017 and 2016.

 

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014‑9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), to clarify the principles for recognizing revenue. This update provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations , which

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clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. These standards have the same effective date and transition date of January 1, 2018. The new revenue standard allows for either full retrospective or modified retrospective application. The Company anticipates using the modified retrospective approach to implement this standard.  The Company has begun to analyze its existing revenue agreements to evaluate the impact of adoption. The Company has less than ten contracts that have remaining performance obligations that will need to be evaluated under the provisions of the new standard as of January 1, 2018. In performing this assessment, the Company noted that we will be required to recognize royalty income in the same period as the related sales occur on Kadcyla rather than one quarter in arrears, which is the point in which the amount is fixed and determinable. This will require the Company to make an estimate of the royalties as the information is not provided to the Company until 90 days after the end of the quarter. Additionally, some partner milestones, depending on the probability of occurring, may be recognized sooner and at different values than they currently would be under the current accounting standards. The Company is in the process of estimating the impact of adopting the new standard on its consolidated financial statements, however, the Company expects to record a material adjustment upon adoption, which will be recorded as a cumulative effect of initially applying the standard to opening accumulated deficit as of January 1, 2018. The Company will continue to provide disclosures under the legacy accounting for the year ended December 31, 2018.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). To simplify the principles for subsequent measurement of inventory, this new standard requires inventory measured using any method other than LIFO or the retail method shall be measured at the lower of cost and net realizable value, rather than lower of cost or market. This guidance is effective for annual reporting beginning after December 15, 2016, including interim periods within the year of adoption, and calls for prospective application, with early application permitted. Accordingly, the standard was adopted by the Company on January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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

 

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) that primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and calls for retrospective application, with early adoption permitted. Accordingly, the standard is effective for the Company on January 1, 2019. The Company is currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

 

In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting (Topic 718) that changes the accounting for certain aspects of share-based payments to employees. The guidance

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requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. Accordingly, the standard was adopted by the Company on January 1, 2017. As a result of the adoption of this guidance, the net operating losses deferred tax assets for federal and state purposes increased by $9.2 million and $1.2 million, respectively, and will be offset by corresponding increases in the valuation allowance. The adoption of the guidance has no impact on the Company’s consolidated financial statements. The Company elected not to adopt the provision that would allow actual forfeitures to be recognized in lieu of maintaining a forfeitures reserve. As such, the Company will continue to estimate forfeitures.

 

 

C.       Agreements

Significant Collaborative Agreements

Roche

In 2000, the Company granted Genentech, now a unit of Roche, an exclusive license to use the Company’s maytansinoid ADC technology with antibodies, such as trastuzumab, or other proteins that target HER2. Under the terms of this agreement, Roche has exclusive worldwide rights to develop and commercialize maytansinoid ADC compounds targeting HER2. In 2013, the HER2‑targeting ADC compound, Kadcyla, was approved for marketing in the U.S., Japan and the European Union, or EU. Roche has also received marketing approval in various other countries around the world. Roche is responsible for the manufacturing, product development and marketing of any products resulting from the agreement. The Company received a $2 million non‑refundable upfront payment from Roche upon execution of the agreement. The Company is also entitled to receive up to a total of $44 million in milestone payments, plus royalties on the commercial sales of Kadcyla or any other resulting products. Total milestones are categorized as follows: development milestones—$13.5 million; and regulatory milestones—$30.5 million. Through March 31, 2017, the Company has received and recognized $13.5 million and $20.5 million in development and regulatory milestone payments, respectively, related to Kadcyla. The next potential milestone the Company will be entitled to receive will be a $5 million regulatory milestone for marketing approval of Kadcyla for a first extended indication as defined in the agreement. Based on an evaluation of the effort contributed towards the achievement of this future milestone, the Company determined this milestone is not substantive.

The Company receives royalty reports and payments related to sales of Kadcyla from Roche one quarter in arrears. In accordance with the Company’s revenue recognition policy, $7.6 million of non-cash royalties on net sales of Kadcyla for the three‑month period ended December 31, 2016 were recorded and included in non-cash royalty revenue for the three-month period ended March 31, 2017 and $7.4 million of non-cash royalties on net sales of Kadcyla for the three‑month period ended December 31, 2015 is included in non-cash royalty revenue for the three-month period ended March 31, 2016. Kadcyla sales occurring after January 1, 2015 are covered by a royalty purchase agreement whereby the associated cash is remitted to Immunity Royalty Holdings, L.P, or IRH, as discussed further in Note E.

Sanofi

In 2003, the Company entered into a broad collaboration agreement with Sanofi (formerly Aventis) to discover, develop and commercialize antibody‑based products. The collaboration agreement provides Sanofi with worldwide development and commercialization rights to new antibody‑based products directed to targets that are included in the collaboration, including the exclusive right to use the Company’s maytansinoid ADC technology in the creation of products developed to these targets. The product candidates (targets) as of March 31, 2017 in the collaboration include isatuximab (CD38), SAR566658 (CA6), SAR408701 (CEACAM5) and one earlier‑stage program that has yet to be disclosed.

The Company is entitled to receive milestone payments potentially totaling $21.5 million, per target, plus royalties on the commercial sales of any resulting products. The total milestones are categorized as follows: development milestones—$7.5 million; and regulatory milestones—$14 million. Through March 31, 2017, the Company has

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recognized an aggregate of $26.5 million in milestone payments for compounds covered under this agreement now or in the past. In January 2017, Sanofi enrolled its first patient in a Phase III clinical trial for isatuximab, and in March 2017, enrolled its first patient in a Phase IIb clinical trial (as defined in the agreement) for SAR566658, each of which triggered a $3 million milestone payment to the Company, which are included in license and milestone fee revenue for the three months ended March 31, 2017. The next potential milestone the Company will be entitled to receive for SAR566658 will be a development milestone for initiation of a Phase III clinical trial, which will result in a $3 million payment being due. The next potential milestone the Company will be entitled to receive with respect to isatuximab will be a regulatory milestone for submission of a new drug application to the U.S. Food and Drug Administration, which will result in a $3 million payment being due. The next potential milestone the Company will be entitled to receive for SAR408701 will be a development milestone for initiation of a Phase IIb clinical trial (as defined in the agreement), which will result in each case in a $3 million payment being due. The next potential milestone the Company will be entitled to receive for the unidentified target will be a development milestone for commencement of a Phase I clinical trial, which will result in a $1 million payment being due. At the time of execution of this agreement, there was significant uncertainty as to whether these milestones would be achieved. In consideration of this, as well as the Company’s past involvement in the research and manufacturing of these product candidates, these milestones were deemed substantive.

Bayer

In 2008, the Company granted Bayer an exclusive development and commercialization license to the Company’s maytansinoid ADC technology for use with antibodies or other proteins that target mesothelin. Bayer HealthCare is responsible for the research, development, manufacturing, and marketing of any products resulting from the license. The Company received a $4 million upfront payment upon execution of the agreement which was recognized as revenue ratably over the Company’s estimated period of substantial involvement which concluded in September 2012. For each compound developed and marketed by Bayer under this collaboration the Company is entitled to receive a total of $170.5 million in milestone payments, plus tiered royalties between 4 - 7% on the commercial sales of any resulting products. The total milestones are categorized as follows: development milestones—$16 million; regulatory milestones—$44.5 million; and sales milestones—$110 million. Through March 31, 2017, the Company has received and recognized an aggregate of $13 million in milestone payments under this agreement. In January 2016, Bayer initiated a Phase II clinical study designed to support registration of its ADC product candidate, anetumab ravtansine, triggering a $10 million development milestone payment to the Company which is included in license and milestone fee revenue for the three months ended March 31, 2016. The next potential milestone the Company will be entitled to receive will be either a development milestone for commencement of a pivotal clinical trial for a second indication for anetumab ravtansine which will result in a $2 million payment being due or a regulatory milestone for filing of regulatory approval for its first indication for anetumab ravtansine which will result in a $6 million payment being due. At the time of execution of this agreement, there was significant uncertainty as to whether these milestones would be achieved. In consideration of this, as well as the Company’s past involvement in the research and supply of cytotoxic agent for this product candidate, these milestones was deemed substantive.

CytomX

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

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In February 2016, CytomX took its development and commercialization license for a specified target.  An amendment of the agreement executed simultaneously with that license granted CytomX the right, for a specified period of time, to substitute the specified target with another as yet unspecified target.  Accordingly, the revenue associated with this license was deferred until the expiration of that substitution right in January 2017, whereupon we recognized $12.7 million of the $13 million of arrangement consideration allocated to the development and commercialization license, which is included in license and milestone fee revenue for the three months ended March 31, 2017.  With respect to the development and commercialization license taken by CytomX, the Company is entitled to receive up to a total of $160 million in milestone payments plus royalties on the commercial sales of any resulting product. The total milestones are categorized as follows: development milestones—$10 million; regulatory milestones—$50 million; and sales milestones—$100 million. In addition, CytomX may be liable to pay annual maintenance fees if the licensed product candidate covered under the development and commercialization license has not progressed to a specified stage of development within a specified time frame.  Assuming no annual maintenance fee is payable, the next payment the Company could receive would be a $1 million development milestone payment with commencement of a Phase I clinical trial. At the time of execution of the right-to-test agreement, there was significant uncertainty as to whether the milestone related to the Phase I clinical trial would be achieved. In consideration of this, as well as the Company's expected involvement in the research and manufacturing of any product candidate, this milestone was deemed substantive. CytomX is responsible for the manufacturing, product development and marketing of any product resulting from the development and commercialization license taken by CytomX under this collaboration. 

For additional information related to these agreements, as well as the Company’s other significant collaborative agreements, please read Note C, Agreements, to the consolidated financial statements included within the Company’s 2016 Transition Report on Form 10-K

 

D.       Convertible 4.5% Senior Notes

In June 2016, the Company issued Convertible 4.5% Senior Notes with an aggregate principal amount of $100 million. The Company received net proceeds of approximately $96.6 million from the sale of the Convertible Notes, after deducting fees and expenses of approximately $3.4 million.

The Convertible Notes are governed by the terms of an indenture between the Company, as issuer, and Wilmington Trust, National Association, as the trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 4.5% per year, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2017. The Company recorded approximately $1.1 million of interest expense in the three months ended March 31, 2017. The Convertible Notes will mature on July 1, 2021, unless earlier repurchased or converted. Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding the stated maturity date. Upon conversion, the Company will deliver for each $1,000 principal amount of converted notes a number of shares equally to the conversion rate, which will initially be 238.7775 shares of common stock, equivalent to an initial conversion price of approximately $4.19. The conversion rate will be subject to adjustment in some circumstances, but will not be adjusted for any accrued and unpaid interest. In addition, if a “make-whole fundamental change” (as defined in the offering memorandum) occurs prior to the stated maturity date, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such make-whole fundamental change in certain circumstances. If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date. In addition, upon an event of default, the holders may require the Company to repurchase for cash all of their notes at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest. Upon bankruptcy, this becomes an automatic repurchase obligation. Also, if the Company fails to comply with certain reporting requirements as described in the indenture it will constitute an event of default, however the Company may elect to pay additional interest at an annual rate equal to 0.5% of the principal amount for the 90 days following such event as a remedy for the default. Subsequent to the 90 days, if still in default, the principal amount of the notes and accrued interest may become immediately due and payable. If a “restricted event” occurs as described in the indenture that causes the notes not to become freely tradable by holders other than our affiliates after the first anniversary of the original issuance date of the notes, the Company would also become obligated to pay additional interest at an annual rate equal to 0.5% of the principal amount. The combined additional interest rate under these two circumstances, however, cannot exceed 0.5%.

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The Company analyzed the terms of the Convertible Notes and determined that under current accounting guidance the notes would be entirely accounted for as debt and none of the terms of the notes require separate accounting. As part of the issuance of the Convertible Notes, the Company incurred $3.4 million of transaction costs, which are netted against the Convertible Notes in the accompanying consolidated balance sheet as and are being amortized to interest expense ratably over the term of the Convertible Notes.

 

E.       Liability Related to Sale of Future Royalties

 

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

 

The following table shows the activity within the liability account during the three-month period ended March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

Period from

 

 

 

 

December 31, 2016 to

 

 

 

    

March 31,  2017

 

 

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

 

$

184,328

 

 

Non-cash Kadcyla royalty revenue

 

 

(7,613)

 

 

Non-cash interest expense recognized

 

 

3,409

 

 

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

 

$

180,124

 

 

 

As royalties are remitted to IRH, the balance of the Royalty Obligation will be effectively repaid over the life of the agreement. In order to determine the amortization of the Royalty Obligation, the Company is required to estimate the total amount of future royalty payments to be received and remitted to IRH as noted above over the life of the agreement. The sum of these amounts less the $200 million proceeds the Company received will be recorded as interest expense over the life of the Royalty Obligation. Since inception, the Company’s  estimate of this total interest expense resulted in an effective annual interest rate of approximately 7.7%. The Company periodically assesses the estimated royalty payments to IRH and to the extent such payments are greater or less than its initial estimates, or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the Royalty Obligation. There are a number of factors that could materially affect the amount and timing of royalty payments from Genentech, most of which are not within the Company’s control. Such factors include, but are not limited to, changing standards of care, the introduction of competing products, manufacturing or other delays, biosimilar competition, patent protection, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties remitted to IRH are made in U.S. dollars (USD) while significant portions of the underlying sales of Kadcyla are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from Kadcyla, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the Royalty Obligation. Conversely, if sales of Kadcyla are more than expected, the non-cash royalty revenues and the non-cash interest expense recorded by the Company would be greater over the term of the Royalty Obligation.

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

 

F.       Capital Stock

 

2001 Non-Employee Director Stock Plan

 

During the three months ended March 31, 2017, the Company recorded approximately $12,000 in expense related to stock units outstanding under the Company’s 2001 Non-Employee Director Stock Plan, or the 2001 Plan, compared to ($32,000) in expense reduction recorded during the three months ended March 31, 2016. The value of the stock units are classified as a liability and adjusted to market value at each reporting period as the redemption amount of stock units for this plan will be paid in cash.  No stock units have been issued under the 2001 Plan subsequent to June 30, 2004.

 

Compensation Policy for Non-Employee Directors

 

On December 9, 2016 the Board amended the Compensation Policy for Non-Employee Directors to create a transition period due to the change in the year-end.  Effectively, one-half of the annual compensation awards described below were awarded to the directors on December 9, 2016 and a full-year’s compensation will be awarded  at the date of the next annual meeting.

 

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

 

During the three months ended March 31, 2017, the Company recorded approximately $38,000 in compensation expense, respectively, related to deferred share units issued and outstanding under the Company’s Compensation Policy for Non-Employee Directors, compared to $108,000 in compensation expense recorded during the three months ended March 31, 2016. Pursuant to the Compensation Policy for Non-Employee Directors, in January 2017, the Company issued a retiring director 53,248 shares of common stock of the Company to settle outstanding deferred share units.

 

In addition to the deferred share units, the Non-Employee Directors are also entitled to receive a fixed number of stock options determined using the Black-Scholes option pricing model measured on the date of grant, which would be the date of the annual meeting of shareholders.  These options vest quarterly over approximately one year from the date of grant.  Any new directors will receive a pro-rated award, depending on their date of election to the Board.  The directors received a total of 80,000 stock options in November of 2015 and a total of 40,000 options in December 2016, and the related compensation expense for the three months ended March 31, 2017 and 2016 is included in the amounts discussed in the “Stock-Based Compensation” section of footnote B above.

 

G.       Restructuring Charge

On September 26, 2016, the Board of Directors approved a plan to reengineer the business, resulting in a reduction of the workforce by approximately 17%, or 65 positions, which included the separation of 60 current employees. Communication of the plan to the impacted employees was substantially completed on September 29, 2016. All of the workforce reduction was completed as of December 31, 2016. As a result of the workforce reduction, in the six months ended December 31, 2016, the Company recorded a restructuring charge totaling $4.4 million related to termination benefits and other related charges, of which $2.8 million was recorded as a one-time termination benefit, and $593,000 recorded as a benefit under an ongoing benefit plan. The related cash payments initiated in October 2016 and will be substantially paid out by June 30, 2017. Additionally, approximately 762,000 stock options forfeited in connection with the workforce reduction, and as a result, the Company recorded an approximate $837,000 credit to stock

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compensation expense in September 2016, which was included in research and development expense and general and administrative expense in that period.

In addition to the termination benefits and other related charges, the Company is seeking to sub-lease 10,281 square feet of unoccupied office space in Waltham that was leased in February 2016. As of September 30, 2016, based on an estimate of the potential time it would take to find a tenant of approximately nine months, the anticipated sub-lease terms, and consideration of the tenant allowance that was given to the Company to build out the space, the Company determined it did not need to record a loss on the sub-lease. The Company also evaluated the balance of the leasehold improvements for potential impairment as of September 30, 2016. In performing the recoverability test, the Company concluded that a substantial portion of the leasehold improvements were not recoverable. The Company recorded an impairment charge of $970,000 related to these assets after comparing the fair value (using probability weighted scenarios with discounted cash flows) to the leasehold improvements’ carrying value, leaving a $193,000 remaining cost basis.  As of March 31, 2017, based on further evaluation of the prospects for sub-leasing the space, the Company determined that additional time would be required to find a tenant.  Accordingly, the calculation for the potential sub-lease loss was updated and it was determined that the remaining balance of the leasehold improvements were impaired.  Also, due to the additional time that is expected to secure a tenant, a lease loss was recorded based on the change in estimate of the sub-lease assumption.  The total of these charges was $386,000.

A summary of activity against the restructuring charge related to the employee terminations during the three-month period ended March 31, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Period from

 

 

December 31, 2016 to

 

 

March 31,  2017

Balance December 31, 2016

 

$

1,751

Payments for the period

 

 

(1,287)

Balance March 31, 2017

 

$

464

 

In September 2016, the Compensation Committee of the Board of Directors approved cash and stock option retention incentive awards for certain remaining eligible employees who continue employment with the Company in order to execute the Company’s strategic priorities. The cash awards will be payable to these employees in either October 2017 or March 2018 based on continued employment and services performed during these periods. Stock option awards covering 847,000 shares were granted and will vest annually in equal installments over three years from the date of grant, and the related compensation expense for the three months ended March 31, 2017 is included in the amounts discussed in the “Stock-Based Compensation” section of footnote B above .  

 

H.       Commitments and Contingencies

 

Leases

 

The Company currently has a lease agreement with CRP/King 830 Winter L.L.C. for the rental of approximately 110,000 square feet of laboratory and office space at 830 Winter Street, Waltham, MA through March 2026. The Company uses this space for its corporate headquarters and other operations. The Company may extend the lease for two additional terms of five years. Pursuant to lease amendments executed in December 2013, April 2014, and December 2015, the Company received construction allowances of approximately $746,000, $1.1 million, and $186,000, respectively, to build out office and lab space to the Company’s specifications. The Company is required to pay certain operating expenses for the leased premises subject to escalation charges for certain expense increases over a base amount.

 

In February 2016, the Company entered into a lease agreement with PDM 930 Unit, LLC for the rental of 10,281 square feet of additional office space at 930 Winter Street, Waltham, MA through August 31, 2021. The Company received approximately $617,000 as a construction allowance to build out the office space to the Company’s specifications. The Company is required to pay certain operating expenses for the leased premises based on its pro-rata

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share of such expenses for the entire rentable space of the building. The Company is actively seeking to sub-lease this space.

 

The Company also leases manufacturing and office space at 333 Providence Highway, Norwood, MA under an agreement through 2018 with an option to extend the lease for an additional term of five years. The Company is required to pay certain operating expenses for the leased premises subject to escalation charges for certain expense increases over a base amount.

 

Effective April 2013, the Company entered into a lease agreement with River Ridge Limited Partnership for the rental of 7,507 square feet of additional office space at 100 River Ridge Drive, Norwood, MA. The initial term of the lease is for five years and two months commencing in July 2013 with an option for the Company to extend the lease for an additional term of five years. The Company is required to pay certain operating expenses for the leased premises subject to escalation charges for certain expense increases over a base amount. The Company entered into a sublease in December 2014 for this space, effective from January 2015 through July 2018. That sublease is in process of being terminated due to payment delinquency.  Due to the short span of time remaining on the lease and the estimated amount of time it would take to find another sub-tenant, the remainder of this lease was accrued as a charge in the quarter in the amount of $169,000.

 

The minimum rental commitments for the Company’s facilities, including real estate taxes and other expenses, for the next five fiscal years and thereafter under the non-cancelable operating lease agreements discussed above are as follows (in thousands):

 

 

 

 

 

 

2017 (nine months remaining)

    

$

5,959

 

2018

 

 

7,736

 

2019

 

 

7,235

 

2020

 

 

7,283

 

2021

 

 

7,107

 

Thereafter

 

 

30,794

 

Total minimum lease payments

 

$

66,114

 

 

There are no obligations under capital leases as of March 31, 2017, as all of the capital leases were single payment obligations which have all been made.

 

Collaborations

 

The Company is contractually obligated to make potential future success-based development, regulatory or sales milestone payments in conjunction with certain collaborative agreements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events, it is unclear when, if ever, the Company may be required to pay such amounts. Further, the timing of any future payment is not reasonably estimable. As of March 31, 2017, the maximum amount that may be payable in the future under the Company’s current collaborative agreements is $161.8 million, $1.2 million of which is reimbursable by a third party under a separate agreement.

 

The Company is party to a license agreement covering the manufacture of the antibodies used in certain of product candidates which, under certain circumstances, requires periodic payments once the product reaches a specified stage of clinical development, and royalties on commercial sales of the product. The Company believes that the license agreement, by its terms, does not obligate it to make any further payments thereunder and accordingly, has not accrued a potential payment of £300,000 for one of its product candidates that has reached this stage.

Manufacturing Commitments

As of March 31, 2017, the Company has noncancelable obligations under several agreements related to in-process and future manufacturing of antibody and cytotoxic agents required for clinical supply of the Company’s product candidates totaling $8.6 million, of which $6.8 million will be paid in 2017 and $1.8 million will be paid in 2018.

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In February 2017, the Company executed a letter agreement with one of its antibody manufacturers to reserve capacity through calendar 2021. The total commitment over the five-year term of the agreement is €46.2 million, however only €6.3 million euros is noncancelable as of March 31, 2017.

 

 

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

 

OVERVIEW

 

ImmunoGen is a clinical-stage biotechnology company that develops targeted cancer therapeutics using our proprietary antibody-drug conjugate, or ADC, technology. An ADC with our technology comprises an antibody that binds to a target found on tumor cells and is conjugated to one of our potent anti-cancer agents as a “payload” to kill the tumor cell once the ADC has bound to its target. ADCs are an expanding approach to the treatment of cancer, with two approved products and the number of agents in development more than doubling during the last five years.

We have established a leadership position in ADCs. Our proprietary portfolio is led by mirvetuximab soravtansine, a first-in-class ADC targeting folate-receptor alpha, or FRα. Following  meetings with the U.S. Food and Drug Administration, or FDA, and the European Medicines Agency, or EMA, in the third quarter of 2016 to review our protocol, we initiated a Phase 3 registration trial, FORWARD I, with mirvetuximab soravtansine for use as single-agent therapy to treat patients with platinum-resistant ovarian cancer whose tumors express high or medium levels of FRα and who have received up to three prior treatment regimens. Additionally, we are accruing patients in a companion study, FORWARD II, to evaluate mirvetuximab soravtansine in combination regimens to expand the number of patients with ovarian cancer eligible for treatment with the ADC. FORWARD II consists of cohorts assessing mirvetuximab soravtansine in combination with, in separate doublets, Avastin® (bevacizumab), pegylated liposomal doxorubicin, or PLD, and carboplatin. We have also entered into a collaboration with Merck under which Merck is providing Keytruda® (pembrolizumab) for evaluation in combination with mirvetuximab soravtansine as part of the FORWARD II study. We expect to begin reporting clinical findings from FORWARD II in the second quarter of 2017.

We have built a productive platform that continues to generate innovative and proprietary ADCs, including IMGN779, our CD33-targeting product candidate for acute myeloid leukemia, or AML. IMGN779 integrates one of our new DNA-alkylating IGN payload agents and is progressing through dose escalation in a Phase 1 trial in AML. We also are advancing IMGN632, a preclinical CD123-targeting ADC that uses an even more potent IGN payload agent with a new engineered linker and novel antibody, which we are developing for hematological malignancies including AML.  We expect to file an Investigational New Drug, or IND, application for IMGN632 in the third quarter of 2017.

In addition to fueling our organic growth, we also selectively license limited rights to use of our ADC technology to other companies. These licenses can provide us with cash through upfront and milestone payments, research and manufacturing support payments, and royalties on commercial sales, if any, as well as access to complementary technology and capabilities. The most advanced partner program is Roche’s marketed product, Kadcyla (ado-trastuzumab emtansine), the first ADC to demonstrate superiority over standard of care in a randomized pivotal trial, EMILIA, and gain FDA approval. Following Kadcyla are nine clinical-stage ADCs with our technology through our partnerships with Amgen, Bayer, Biotest, Lilly, Novartis, and Sanofi. We also have partnerships with Takeda and CytomX, which are in the preclinical stage. We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements. In addition to the discussion below for agreements with activity in the periods presented, details for all of our significant agreements can be found in our 2016 Transition Report on Form 10-K.

Roche —In May 2000, we granted Genentech, now a unit of Roche, an exclusive license to use our maytansinoid ADC technology with antibodies, such as trastuzumab, or other proteins that target HER2. Pursuant to this agreement, Roche developed and received marketing approval for its HER2-targeting ADC compound, Kadcyla, in the U.S., Europe, Japan and numerous other countries. We receive royalty reports and payments related to sales of Kadcyla from Roche one quarter in arrears. In accordance with our revenue recognition policy, $7.6 million of non-cash royalties on net sales of Kadcyla for the three-month period ended December 31, 2016 were recorded and included in non-cash royalty revenue for the three months ended March 31, 2017 and $7.4 million of non-cash royalties on net sales of

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Kadcyla for the three-month period ended December 31, 2015 were included in non-cash royalty revenue for the three months ended March 31, 2016. Kadcyla sales occurring after January 1, 2015 are covered by a royalty purchase agreement whereby the associated cash is remitted to Immunity Royalty Holdings, L.P, or IRH, as discussed further in Note E to the consolidated financial statements.

 

Sanofi —  In July 2003, we entered into a broad collaboration agreement with Sanofi (formerly Aventis) to discover, develop and commercialize antibody‑based products. The collaboration agreement provided Sanofi with worldwide development and commercialization rights to new antibody‑based products directed to targets that were included in the collaboration, including the exclusive right to use our maytansinoid ADC technology in the creation of products developed to these targets. No further targets may be added to this agreement and the product candidates (targets) as of March 31, 2017 in the collaboration include isatuximab (CD38), SAR566658 (CA6), SAR408701 (CEACAM5) and one undisclosed target without an associated clinical-stage product candidate.

We are entitled to receive milestone payments potentially totaling $21.5 million, per target, plus royalties on the commercial sales of any resulting products. The total milestones are categorized as follows: development milestones—$7.5 million; and regulatory milestones—$14 million. Through March 31, 2017, we have recognized an aggregate of $26.5 million in milestone payments for compounds covered under this agreement now or in the past, including a $3 million development milestone related to initiation of a Phase III clinical trial for isatuximab and a $3 million development milestone related to initiation of a Phase IIb clinical trial (as defined in the agreement) for SAR566658 which are included in license and milestone fee revenue for the three months ended March 31, 2017.

 

Bayer —In October 2008, we granted Bayer an exclusive development and commercialization license to our ADC technology for use with antibodies or other proteins that target mesothelin. We received a $4 million upfront payment upon execution of the agreement, and—for each compound developed and marketed by Bayer under this collaboration—we are entitled to receive a total of $170.5 million in milestone payments, plus royalties on the commercial sales of any resulting products. The total milestones are categorized as follows: development milestones—$16 million; regulatory milestones—$44.5 million; and sales milestones—$110 million. Through March 31, 2017, we have recognized an aggregate of $13 million in milestone payments under this agreement, including a $10 million development milestone related to initiation of a Phase II clinical study designed to support registration of its ADC product candidate, anetumab ravtansine, which is included in license and milestone fee revenue for the three months ended March 31, 2016.

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

In February 2016, CytomX took its development and commercialization license for a specified target. An amendment of the agreement executed simultaneously with that license granted CytomX the right, for a specified period of time, to substitute the specified target with another as yet unspecified target. Accordingly, the revenue associated with this license was deferred until the expiration of that substitution right in January 2017, whereupon we recognized $12.7 million of the $13 million of arrangement consideration allocated to the development and commercialization license, which is included in license and milestone fee revenue for the three months ended March 31, 2017. With respect to the development and commercialization license taken by CytomX, we are entitled to receive up to a total of $160 million in milestone payments plus royalties on the commercial sales of any resulting product. The total milestones are categorized

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as follows: development milestones—$10 million; regulatory milestones—$50 million; and sales milestones—$100 million.

To date, we have not generated revenues from commercial sales of internal products and we expect to incur significant operating losses for the foreseeable future. As of March 31, 2017, we had approximately $126.6 million in cash and cash equivalents compared to $160.0 million in cash and cash equivalents as of December 31, 2016.

 

We anticipate that future cash expenditures will be partially offset by collaboration-derived proceeds, including milestone payments and upfront fees. Accordingly, period-to-period operational results may fluctuate dramatically based upon the timing of receipt of the proceeds. 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 assisting in providing funding for the development of internal product candidates and technologies. However, we can give no assurances that such collaborative agreement funding will, in fact, be realized in the time frames we expect, or at all. 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 secure alternative financing arrangements, find additional partners and/or defer or limit some or all of our research, development and/or clinical projects. However, we cannot provide assurance that any such opportunities presented by additional partners or alternative financing arrangements will be entirely available to us, if at all.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our collaborative agreements, clinical trial accruals, inventory and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

 

There were no significant changes to our critical accounting policies from those disclosed in our Transition Report on Form 10-K for the six months ended December 31, 2016.

 

 

RESULTS OF OPERATIONS

 

Comparison of Three Months ended March 31, 2017 and 2016

 

Revenues

 

Our total revenues for the three months ended March 31, 2017 and 2016 were $28.5 million and $19.7 million, respectively. The $8.8 million increase in revenues in the three months ended March 31, 2017 from the same period in the prior year is attributable to increases in license and milestone fees, non-cash royalty revenue and research and development support revenue, partially offset by a decrease in clinical materials revenue, all of which are discussed below.

 

License and milestone fees

 

The amount of license and milestone fees we earn is directly related to the number of our collaborators, the collaborators’ advancement of the product candidates, and the overall success in the clinical trials of the product candidates. As such, the amount of license and milestone fees may vary significantly from quarter to quarter and year to

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year.  Total revenue from license and milestone fees recognized from each of our collaborative partners in the three-month periods ended March 31, 2017 and 2016 is included in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

License and Milestone Fees

    

2017

    

2016

 

Collaborative Partner:

 

 

 

    

 

 

    

Amgen

 

$

 4

 

$

 4

 

Bayer

 

 

 

 

10,000

 

CytomX

 

 

12,654

 

 

 

Lilly

 

 

 6

 

 

 6

 

Novartis

 

 

45

 

 

45

 

Sanofi

 

 

6,000

 

 

 1

 

Takeda

 

 

21

 

 

21

 

Total

 

$

18,730

 

$

10,077

 

 

Revenues from license and milestone fees for the three months ended March 31, 2017 increased $8.6 million to $18.7 million from $10.1 million in the same period ended March 31, 2016. Included in license and milestone fees for the three months ended March 31, 2017 is $12.7 million of non-cash license revenue earned upon the expiration of the right to replace the target specified under the development and commercialization license with CytomX and $6 million of development milestones achieved under a collaboration and license agreement with Sanofi. Included in license and milestone fees for the three months ended March 31, 2016 is a $10 million development milestone achieved under a license agreement with Bayer. 

 

Deferred revenue of $20.8 million as of March 31, 2017 primarily represents consideration received from our collaborators pursuant to our license agreements, which we have yet to earn pursuant to our revenue recognition policy.

 

Royalty revenue

 

Kadcyla is an ADC marketed product resulting from one of our development and commercialization licenses with Roche, through its Genentech unit. We receive royalty reports and payments related to sales of Kadcyla from Roche one quarter in arrears. In accordance with our revenue recognition policy, $7.6 million of non-cash royalties on net sales of Kadcyla for the three-month period ended December 31, 2016 were recorded and included in revenue for the three months ended March 31, 2017 and $7.4 million of royalties on net sales of Kadcyla for the three-month period ended December 31, 2015 is included in revenue for the three months ended March 31, 2016.  In April 2015, we consummated a royalty purchase transaction relating to the royalty payments on commercial sales of Kadcyla — see Liquidity and Capital Resources below for further details.

 

Research and development support revenue

 

The amount of research and development support revenue we earn is directly related to the number of our collaborators and potential collaborators, the stage of development of our collaborators’ product candidates 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 year to year. Research and development support revenue was $1.5 million for the three months ended March 31, 2017 compared with $1.1 million for the three months ended March 31, 2016. Total revenue recognized from research and development support from each of our collaborative partners in the three-month periods ended March 31, 2017 and 2016 is included in the following table (in thousands):

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Three Months Ended March 31,

 

Research and Development Support

    

2017

    

2016

 

Collaborative Partner:

 

 

    

    

 

    

    

Biotest

 

$

25

 

$

77

 

CytomX

 

 

398

 

 

565

 

Lilly

 

 

42

 

 

127

 

Novartis

 

 

52

 

 

31

 

Takeda

 

 

952

 

 

185

 

Other

 

 

 9

 

 

74

 

Total

 

$

1,478

 

$

1,059

 

 

Clinical materials revenue

 

The amount of clinical materials revenue we earn, and the related cost of clinical materials charged to research and development expense, is directly related to the number of clinical trials our collaborators who use us to manufacture clinical materials are preparing or have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period, if any, during which patients in the trial receive clinical benefit from the clinical materials, and the demand our collaborators have for clinical‑grade material for process development and analytical purposes. As such, the amount of clinical materials revenue and the related cost of clinical materials charged to research and development expense may vary significantly from quarter to quarter and year to year. Clinical materials revenue decreased by $520,000 during the three months ended March 31, 2017 to $678,000 compared to $1.2 million during the three months ended March 31, 2016. During the periods presented, we shipped clinical materials in support of certain collaborators’ clinical trials. We are compensated at negotiated prices which are generally consistent with what other third‑parties would charge.

 

Research and Development Expenses

 

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

 

Research and development expense for the three months ended March 31, 2017 decreased $3.2 million to $32.9 million from $36.1 million for the three months ended March 31, 2016. We do not track our research and development costs by project. Since we use our research and development resources across multiple research and development projects, we manage our research and development expenses within each of the categories listed in the following table and described in more detail below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Research and Development Expense

    

2017

    

2016

 

Research

 

$

5,634

    

$

6,285

 

Preclinical and Clinical Testing

 

 

16,850

 

 

16,390

 

Process and Product Development

 

 

2,943

 

 

3,437

 

Manufacturing Operations

 

 

7,461

 

 

9,982

 

Total Research and Development Expense

 

$

32,888

 

$

36,094

 

 

Research    

 

Research includes expenses primarily associated with activities to identify and evaluate new targets and to develop and evaluate new antibodies, linkers and cytotoxic agents for our products and in support of our collaborators. Such expenses primarily include personnel, contract services, research licensing fees, facilities and lab supplies.

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Research expenses for the three months ended March 31, 2017 decreased $651,000 compared to the three months ended March 31, 2016. This decrease is principally due to a decrease in salaries and related expenses driven primarily by a decrease in personnel and lower stock compensation expense, as well as a decrease in lab supplies.  

 

Preclinical and Clinical Testing

 

 Preclinical and clinical testing includes expenses related to preclinical testing of our own and, in certain instances, our collaborators’ product candidates, regulatory activities, and the cost of our own clinical trials. Such expenses include personnel, patient enrollment at our clinical testing sites, consultant fees, contract services, and facility expenses. Preclinical and clinical testing expenses for the three months ended March 31, 2017 increased $460,000 to $16.9 million compared to $16.4 million for the three months ended March 31, 2016. This increase is primarily the result of an increase in clinical trial costs, particularly related to the Phase 3 and companion mirvetuximab soravtansine studies, partially offset by a decrease in salaries and related expenses driven substantially by lower stock compensation expense, as well as a decrease in contract services and consulting fees due to timing of certain activities.

 

Process and Product Development  

 

Process and product development expenses include costs for development of clinical and commercial manufacturing processes for our own and collaborator compounds. Such expenses include the costs of personnel, contract services and facility expenses. For the three months ended March 31, 2017, total development expenses decreased $494,000 compared to the three months ended March 31, 2016. This decrease is principally due to a decrease in contract services driven by decreased development activities related to our IGN cytotoxic agents in the current period, and to a lesser extent, a decrease in lab supplies.

 

Manufacturing Operations

 

Manufacturing operations expense includes costs to manufacture preclinical and clinical materials for our own and our collaborator’s product candidates, and quality control and quality assurance activities and costs to support the operation and maintenance of our conjugate manufacturing facility. Such expenses include personnel, raw materials for our and our collaborators’ preclinical studies and clinical trials, development costs with contract manufacturing organizations, manufacturing supplies, and facilities expense. For the three months ended March 31, 2017, manufacturing operations expense decreased $2.5 million to $7.5 million compared to $10.0 million in the same period last year. This decrease is principally the result of: (i) a decrease in salaries and related expenses driven by a decrease in personnel and lower stock compensation expense; (ii) a decrease in cost of clinical materials revenue charged to research and development expense due to timing of orders of such clinical materials from our partners; (iii) an increase in costs capitalized into inventory due to a greater number of manufactured batches of conjugated materials on behalf of our collaborators in the period; (iv) a decrease in mirvetuximab soravtansine third-party conjugation costs driven by timing; and (v) a decrease in contract services due primarily to DMx development activities conducted in the prior year period. Partially offsetting these decreases, antibody costs increased driven primarily by timing of antibody supply requirements to support the mirvetuximab soravtansine studies.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended March 31, 2017 decreased $3.1 million compared to the same period last year. This  decrease is primarily due to a $2.8 million non-cash stock compensation charge in the prior quarter resulting from the CEO transition, as well as decreased personnel expenses and patent fees in the current period.  

 

Restructuring Charge

 

As of March 31, 2017, based on further evaluation of the prospects for sub-leasing our unoccupied office space in Waltham due to the restructuring activities highlighted in Note G, “Restructuring Charge” of the consolidated financial statements, we determined that additional time would be required to find a tenant.  Accordingly, the calculation for the potential sub-lease loss was updated and it was determined that the remaining balance of the leasehold

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improvements was impaired.  Also, due to the additional time it is expected to take to secure a tenant, a lease loss was recorded based on the change in estimate of the sub-lease assumption.  The total of these charges was $386,000.

 

In September 2016, the Compensation Committee of the Board of Directors approved cash and stock option retention incentive awards for certain remaining eligible employees who continue employment with the Company in order to execute the Company’s strategic priorities. The cash awards will be payable to these employees in either October 2017 or March 2018 based on continued employment and services performed during these periods. Stock option awards covering 847,000 shares were granted and will vest annually in equal installments over three years from the date of grant and the related compensation expense for the three months ended March 31, 2017 is included in the amounts discussed in Note B, “Stock-Based Compensation” of the consolidated financial statements .

 

Investment Income, net

 

Investment income for the three months ended March 31, 2017 and 2016 was $115,000 and $108,000, respectively.

 

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

 

In April 2015, Immunity Royalty Holdings, L.P. (IRH) purchased our right to receive 100% of the royalty payments on commercial sales of Kadcyla subsequent to March 31, 2014, arising under our development and commercialization license with Genentech, until IRH has received aggregate royalties equal to $235 million or $260 million, depending on when the aggregate royalties received by IRH reach a specified milestone.  As described in Note E to our Consolidated Financial Statements, this royalty sale transaction has been recorded as a liability that amortizes over the estimated royalty payment period as Kadcyla royalties are remitted directly to the purchaser. During the three months ended March 31, 2017, we recorded $3.4 million of non-cash interest expense which includes amortization of deferred financing costs.  We impute interest on the transaction and record interest expense at the effective interest rate, which we currently estimate to be 6.8%. There are a number of factors that could materially affect the estimated interest rate, in particular, the amount and timing of royalty payments from future net sales of Kadcyla, and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively.

 

Interest Expense on Convertible Senior Notes

 

In June 2016, the Company issued Convertible 4.5% Senior Notes with an aggregate principal amount of $100 million. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 4.5% per year, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2017. The Company recorded approximately $1.1 million of interest expense in the three months ended March 31, 2017.

 

Other Income, net

 

Other income, net for the three months ended March 31, 2017 and 2016 was $134,000 and $551,000, respectively. We incurred $136,000 and $548,000 in foreign currency exchange gains related to obligations with non-U.S. dollar-based suppliers and Euro cash balances maintained to fulfill them during the three months ended March 31, 2017 and 2016, respectively.

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

 

 

 

 

 

 

 

As of 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

 

Cash and cash equivalents

    

$

126,568

    

$

159,964

    

Working capital

 

 

101,764

 

 

120,570

 

Shareholders’ deficit

 

 

(167,530)

 

 

(152,850)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

 

(In thousand)

 

Cash used for operating activities

    

$

(32,959)

    

$

(26,079)

 

Cash used for investing activities

 

 

(437)

 

 

(3,479)

 

Cash provided by financing activities

 

 

 —

 

 

188

 

 

Cash Flows

 

We require cash to fund our operating expenses, including the advancement of our own clinical programs, and to make capital expenditures. Historically, we have funded our cash requirements primarily through equity financings in public markets, payments from our collaborators, including license fees, milestones, research funding, and royalties, and more recently, convertible debt.  We have also sold our rights to receive royalties on Kadcyla for up-front consideration.  As of March 31, 2017, we had approximately $126.6 million in cash and cash equivalents. Net cash used for operations was $33.0 million and $26.1 million for the three months ended March 31, 2017 and 2016, respectively. The principal use of cash for operating activities for both periods presented was to fund our net loss.

 

Net cash used for investing activities was $437,000 and $3.5 million for the three months ended March 31, 2017 and 2016, respectively, and represents cash outflows for capital expenditures, primarily for the purchase of new equipment and leasehold improvements.

 

Net cash provided by financing activities was $188,000 for the three months ended March 31, 2016, which represents proceeds from the exercise of approximately 37,000 stock options.  There were no stock option exercises in the three months ended March 31, 2017 due to a decline in the Company’s stock price.

 

As discussed above, in April 2015, Immunity Royalty Holdings, L.P. purchased our right to receive 100% of the royalty payments on commercial sales of Kadcyla. At consummation of the transaction in April 2015, we received gross cash proceeds of $200 million. We recorded these cash proceeds as a deferred royalty obligation liability which is being amortized over the expected royalty recovery period. As part of this transaction, the Company incurred approximately $5.9 million in transaction costs.

We anticipate that our current capital resources and expected future collaborator payments will enable us to meet our operational expenses and capital expenditures into the second quarter of 2018. However, we cannot provide assurance that such collaborative agreement funding will, in fact, be received. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements or if we are not successful in securing future collaboration agreements, we may be required to secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.  See Note A of the financial statements for further discussion.

 

Contractual Obligations

 

There have been no material changes to our contractual obligations during the current period from those disclosed in our Transition Report on Form 10-K for the six months ended December 31, 2016.

 

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Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014‑9, Revenue from Contracts with Customers (Topic 606), to clarify the principles for recognizing revenue. This update provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations , which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. These standards have the same effective date and transition date of January 1, 2018. The new revenue standard allows for either full retrospective or modified retrospective application. We anticipate using the modified retrospective approach to implement this standard.  We have begun to analyze our existing revenue agreements to evaluate the impact of adoption. We have less than ten contracts that have remaining performance obligations that will need to be evaluated under the provisions of the new standard as of January 1, 2018. In performing this assessment, we noted that we will be required to recognize royalty income in the same period as the related sales occur on Kadcyla rather than one quarter in arrears, which is the point in which the amount is fixed and determinable. This will require us to make an estimate of the royalties as the information is not provided to us until 90 days after the end of the quarter. Additionally, some partner milestones, depending on the probability of occurring, may be recognized sooner and at different values than they currently would be under the current accounting standards. We are in the process of estimating the impact of adopting the new standard on our consolidated financial statements, however, we expect to record a material adjustment upon adoption, which will be recorded as a cumulative effect of initially applying the standard to opening accumulated deficit as of January 1, 2018. We will continue to provide disclosures under the legacy accounting for the year ended December 31, 2018.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). To simplify the principles for subsequent measurement of inventory, this new standard requires inventory measured using any method other than LIFO or the retail method shall be measured at the lower of cost and net realizable value, rather than lower of cost or market. This guidance is effective for annual reporting beginning after December 15, 2016, including interim periods within the year of adoption, and calls for prospective application, with early application permitted. Accordingly, we adopted the standard on January 1, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

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

 

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In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) that primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and calls for retrospective application, with early adoption permitted. Accordingly, the standard is effective for us on January 1, 2019. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

 

In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting (Topic 718) that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. Accordingly, we adopted the standard on January 1, 2017. As a result of the adoption of this guidance, the net operating losses deferred tax assets for federal and state purposes increased by $9.2 million and $1.2 million, respectively, and will be offset by corresponding increases in the valuation allowance. The adoption of the guidance has no impact on our consolidated financial statements. We elected not to adopt the provision that would allow actual forfeitures to be recognized in lieu of maintaining a forfeitures reserve. As such, we will continue to estimate forfeitures.

 

Forward-Looking Statements

 

This quarterly 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 can be 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. They may also use words such as “will,” “would,” “should,” “could” or “may”. 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 our Transition Report on Form 10-K for the six months ended December 31, 2016. 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.

 

 

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

Probody™ is a trademark of CytomX Therapeutics, Inc.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

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ITEM 3.       Quantitative and Qualitative Disclosure about Market Risk

 

Our market risks, and the ways we manage them, are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Transition Report on Form 10-K for the six months ended December 31, 2016. Since then there have been no material changes to our market risks or to our management of such risks.

 

ITEM 4.       Controls and Procedures

 

(a) Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Controls

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1A.     Risk Factors

 

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Item 1A. (Risk Factors) in our Transition Report on Form 10-K for the six months ended December 31, 2016. There have been no material changes from the factors disclosed in our 2016 Transition Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission (the “Commission”).

 

 

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ITEM 6.        Exhibits

 

Exhibit No.

    

Description

 

 

 

10.1

 

Sales Agreement dated as of March 3, 2017 between the Registrant and Cowen and Company, LLC (incorporated herein by reference to Exhibit 1.2 of the Registrant’s registration statement on Form S-3, filed with the Commission on March 3, 2017 (File No. 333-216438)).

10.2

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Craig Barrows

10.3

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Anna Berkenblit

10.4

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Mark Enyedy

10.5

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Richard Gregory

10.6

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and David Johnston

10.7

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Thomas Ryll

10.8

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Peter Williams

10.9

 

Change in Control Severance Agreement dated as of March 31, 2017 between the Registrant and Theresa Wingrove

31.1

 

Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32†

 

Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase


Furnished, not filed.

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SIGNATURES

 

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

 

 

 

ImmunoGen, Inc.

 

 

 

Date: May 5, 2017

 

By:

/s/Mark J. Enyedy

 

 

 

Mark J. Enyedy

 

 

 

President, Chief Executive Officer (Principal Executive Officer)

 

 

 

 

Date: May 5, 2017

 

By:

/s/ David B. Johnston

 

 

 

David B. Johnston

 

 

 

Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

 

 

35


Exhibit 10.2

CHANGE IN CONTROL SEVERANCE AGREEMENT

This Agreement is entered into as of the 31 st day of March, 2017 (the “ Effective Date ”) by and between ImmunoGen, Inc., a Massachusetts corporation (the “ Company ”), and Craig Barrows (the “ Executive ”).

WHEREAS, the Company recognizes that the Executive’s service to the Company is very important to the future success of the Company;

WHEREAS, the Executive desires to enter into this Agreement to provide the Executive with certain financial protection in the event that his employment terminates under certain conditions following a change in control of the Company; and

WHEREAS the Board of Directors of the Company (the “ Board ”) has determined that it is in the best interests of the Company to enter into this Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree as follows:

1. Definitions .

(a) Cause .  For purposes of this Agreement, “ Cause ” shall mean that the Executive has (i)   willfully committed an act or omission that materially harms the Company; (ii)   been grossly negligent in the performance of the Executive’s duties to the Company; (iii)   willfully failed or refused to follow the lawful and proper directives of the Board; (iv)   been convicted of, or pleaded guilty or nolo contendere , to a felony; (v)   committed an act involving moral turpitude that is or is reasonably expected to be injurious to the Company or its reputation; (vi)   committed an act relating to the Executive’s employment or the Company involving, in the good faith judgment of the Board, material fraud or theft; (vii)   breached any material provision of this Agreement or any nondisclosure or non-competition agreement between the Executive and the Company, as all of the foregoing may be amended prospectively from time to time; or (viii) breached a material provision of any code of conduct or ethics policy in effect at the Company, as all of the foregoing may be amended prospectively from time to time.

(b) Change in Control .  For purposes of this Agreement, a “ Change in Control ” shall mean the occurrence of any of the following events:

 

(i) Ownership.  Any “Person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the “Beneficial Owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities (excluding for this purpose any such voting securities held by the Company or its Affiliates (as defined in the Company’s 2016 Employee, Director and Consultant Equity Incentive Plan) or by any employee benefit plan of the Company) pursuant to a transaction or a series of related transactions which the Board does not approve; or

 

Executive Severance Agreement rev2017 (18)


 

 

(ii) Merger/Sale of Assets.  (A) A merger or consolidation of the Company whether or not approved by the Board, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or the parent of such corporation) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity or parent of such corporation, as the case may be, outstanding immediately after such merger or consolidation; or (B) the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or

 

(iii) Change in Board Composition.  A change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors.  “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of December 10, 2016, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

 

(c) Disability For purposes of this Agreement, “ Disability ” shall mean that the Executive (i)   is unable to engage in any substantial gainful activity because of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of at least twelve   (12) months, or (ii)   is receiving income replacement benefits for a period of at least three  (3) months under a Company-sponsored disability plan because of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of at least twelve   (12) months.  Whether the Executive has a Disability will be determined by a majority of the Board based on evidence provided by one or more physicians selected by the Board and approved by the Executive, which approval shall not be unreasonably withheld.  In any case, if a disability is determined to trigger the payment of any “deferred compensation” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), disability shall be determined in accordance with Section 409A of the Code.

(d) Good Reason .  For purposes of this Agreement, “ Good Reason ” shall mean the occurrence of one or more of the following without the Executive’s consent: (i) a change in the principal location at which the Executive performs his duties for the Company to a new location that is at least a  forty (40) mile longer commute for the Executive from the prior work location; (ii) a material change in the Executive's authority, functions, duties or responsibilities as an executive of the Company, which would cause his position with the Company to become of less responsibility, importance or scope than his highest position with the Company at any time from the date of this Agreement to immediately prior to the Change in Control, provided ,   however , that such material change is not in connection with the termination of the Executive's employment by the Company for Cause or death or Disability and further provided   that it shall not be considered a material change if the Company becomes a subsidiary of another entity and the Executive continues to hold a position in the subsidiary that is at least as high (in both title and scope of responsibilities) as the highest position he held with the Company at any time from

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the date of this Agreement to immediately prior to the Change in Control; (iii) a material reduction in the Executive’s annual base salary; or (iv) a material reduction in the Executive’s target annual bonus as compared to the target annual bonus set for the previous fiscal year.

For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes by clear and convincing evidence that Good Reason does not exist.

2. Term of Agreement The term of this Agreement (the " Term ") shall commence on the Effective Date and shall continue in effect for two (2) years; provided ,   however , that commencing on the second anniversary of the Effective Date and continuing each anniversary thereafter, the Term shall automatically be extended for one (1) additional year unless, not later than nine (9) months before the conclusion of the Term, the Company or the Executive shall have given notice not to extend the Term; and further   provided ,   however , that if a Change in Control shall have occurred during the Term, the Term shall expire on the last day of the twelfth (12 th ) month following the month in which such Change in Control occurred.  Notice of termination or termination of this Agreement shall not constitute Cause or Good Reason (both terms as defined above).

3. Termination; Notice; Severance Compensation .

(a) In the event that within a period of two (2) months before or twelve (12) months following the consummation of a Change in Control (such period, the “ Change in Control Period ”) the Company elects to terminate the Executive’s employment other than for Cause (but not including termination due to the Executive’s Disability), then the Company shall give the Executive no less than sixty (60) days advance notice of such termination (the “ Company’s Notice Period ”); provided   that the Company may elect to require the Executive to cease performing work for the Company so long as the Company continues the Executive’s full salary and benefits during the Company’s Notice Period.

(b) In the event that during the Change in Control Period, the Executive elects to terminate his employment for Good Reason, then the Executive shall give the Company no less than thirty (30) days and no more than sixty (60) days advance notice of such termination (the “ Executive’s Notice Period ”) by indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail any facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated (the “ Executive’s Termination Notice ”); provided   that the Company may elect to require the Executive to cease performing work for the Company so long as the Company continues the Executive’s full salary and benefits during the Executive’s Notice Period.  In order to effect a termination for Good Reason pursuant to this Agreement, the Executive must give the Executive’s Termination Notice not later than ninety (90) days following the occurrence of the Good Reason.  The Company shall have the opportunity to cure the Good Reason condition within thirty (30) days following receipt of the Executive’s Termination Notice, provided that if the Company has not notified the Executive in writing of its intention to cure the Good Reason Condition within ten (10) days following receipt of the Executive’s Termination Notice, the Company shall be deemed to have irrevocably elected not to cure the Good Reason condition.  If the Company elects not to cure the Good Reason condition, or has failed to cure the Good

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Reason condition within the applicable thirty (30)-day period, the Executive must separate from service no later than nine (9) months following initial occurrence of the Good Reason condition.  I f, within ten   (10) days following the earlier of (i)  the Company’s election not to cure the Good Reason condition, or (ii) expiration of the thirty (30)-day cure period , either (A)   the Company notifies the Executive in writing that it disputes whether the Executive has given the Executive’s Termination Notice in good faith and established Good Reason to quit, or (B)  the Executive notifies the Company in writing that the Company has failed to cure the Good Reason condition, then   the Executive’s termination date (the “ Termination Date ”) shall be extended until the sooner of (x)   the resolution of the dispute by mutual agreement of the parties, or (y)   final order, decree or judgment of an arbitrator (which the parties agree is not appealable), during which time (1)  the Executive shall not be required to perform work for the Company, and (2)  the Company shall continue to pay the Executive’s full salary in effect immediately prior to the Executive giving the Executive’s Termination Notice (or, if higher, immediately prior to the change in control), and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the Executive’s Termination Notice was given; provided   that the amounts paid under this Section are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement .

(c) In the event that during the Change in Control Period the Executive’s employment with the Company is terminated by the Company other than for Cause (but not including termination due to the Executive’s death or Disability), or by the Executive for Good Reason, then, contingent upon the Executive’s execution of a release of claims against the Company in substantially the form attached hereto as Exhibit A (the “ Release ”) the Executive shall be entitled to, in addition to any amounts due to the Executive for services rendered prior to the termination date:

(i)  a lump sum payment from the Company in an amount equal to one and one-half (1.5) times the sum of the Executive's Annual Salary and the Executive’s target annual bonus for the fiscal year in which the termination occurs (without giving effect to any event or circumstance constituting Good Reason) at one hundred percent (100%) of such target annual bonus, which shall be paid on the sixtieth (60 th ) day following the Executive’s Termination Date,   provided   that the Release is executed and effective by then or the Executive shall forfeit the payment of such amount;

(ii)  all outstanding options, restricted stock and other similar rights held by the Executive, which shall become one hundred percent (100%) vested on the sixtieth (60 th ) day following the Executive’s Termination Date, provided that the Release is executed and effective by then or the Executive shall forfeit the vesting;

(iii)  provided Executive elects continuation of medical insurance coverage for the Executive and/or the Executive’s family subject to and in accordance with the Consolidated Omnibus Budget Reconciliation Act (“ COBRA ”), the Company will subsidize the Executive’s COBRA premium at the same percentage as it subsidized health insurance premiums for the Executive immediately prior to the Executive’s Termination Date (or, if more favorable to the Executive,  

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immediately prior to the consummation of the Change in Control) (the “ COBRA Premium Subsidy ”) for a period of up to eighteen (18) months from the Executive’s Termination Date;   provided   that the Company shall have no obligation to provide the COBRA Premium Subsidy after the date the Executive becomes eligible for medical coverage with another employer or becomes entitled to Medicare, notice of which the Executive shall provide to the Company within five (5) business days of the eligibility event.  If the Company determines that the COBRA Premium Subsidy is taxable income to the Executive, the income will be reported on Form W-2 as imputed income; and

(iv)  the Company shall pay the cost of providing the Executive with outplacement services up to a maximum of $40,000, provided   that (A) the Executive begins to use such services within six (6) months following the Executive’s Termination Date, and (B) such services are provided by an outplacement services provider approved by the Company (which approval shall not be unreasonably withheld, conditioned or delayed).  Such payment shall be made by the Company directly to the service provider promptly following the presentation to the Company of documentation of the enrollment by the Executive with the provider of outplacement services and the service provider’s invoice for such services.  In no event will the Executive be entitled to receive the cash value of the outplacement services in lieu of the outplacement services.

For purposes of this Agreement, “ Annual Salary ” shall mean the Executive’s annual base salary then in effect or, if higher, in effect at the time of the Change in Control, excluding reimbursements and amounts attributable to stock options and other non-cash compensation; and the “ Severance Compensation ” shall mean the compensation set forth in (i), (ii), (iii), and (iv) above.

(d) If any of the benefits set forth in this Agreement are deferred compensation as defined in Section 409A of the Code, any termination of employment triggering payment of such benefits must constitute a “separation from service” under Section 409A of the Code before, subject to subsection (e) below, a distribution of such benefits can commence.  For purposes of clarification, this Section shall not cause any forfeiture of benefits on the part of the Executive, but shall only act as a delay until such time as a “separation from service” occurs. In addition, the Company Notice Period and the Executive Notice Period shall be interpreted and administered in accordance with Section 409A of the Code and the “separation from service” rules thereunder.  In particular, if a waiver of the Company Notice Period or the Executive Notice Period triggers a “separation from service,” such waiver shall constitute a termination and any amounts due to the Executive over the remaining portion of the applicable notice period shall be deemed additional severance under Section 3(c)(ii) of this Agreement and paid accordingly.  In addition, any applicable notice or release periods and dates of payment shall be adjusted accordingly.

(e) Notwithstanding any other provision with respect to the timing of payments, if, at the time of the Executive’s termination, the Executive is deemed to be a “specified employee” (within the meaning of Code Section   409A, and any successor statute, regulation and guidance thereto ) of the Company, then solely to the extent necessary to comply with the requirements of Code Section   409A, any payments to which the Executive may become entitled under this

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Agreement which are subject to Code Section   409A (and not otherwise exempt from its application) will be withheld until the first   (1 st ) business day of the seventh   (7 th ) month following the termination of the Executive’s employment, at which time the Executive shall be paid an aggregate amount equal to the accumulated, but unpaid, payments otherwise due to the Executive under the terms of this Agreement.

(f) Notwithstanding any other provision of this Agreement to the contrary, to the extent any payment contemplated hereunder is subject to the Executive’s execution of the Release, the Release must be executed no later than ninety (90) days following the Termination Date.  If this 90-day period starts in one tax year and ends in the next, then the payments may not commence until the later of the end of the Release revocation period or the first day of that next tax year.

(g) I f any payment or benefit the Executive would receive under this Agreement, when combined with any other payment or benefit the Executive receives pursuant to a Change in Control (“ Payment ”) would (i)   constitute a “parachute payment” within the meaning of Code Section   280G, and (ii)   but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “ Excise Tax ”), then such Payment shall be either (x)   the full amount of such Payment or (y)   such less amount as would result in no portion of the Payment being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state, and local employments taxes, income taxes, and the Excise Tax results in the Executive’s receipt, on an after-tax basis, of the greater amount of the Payment, notwithstanding that all or some portion of the Payment may be subject to the Excise Tax.  The Company shall, in a manner compliant with Code Section 409A, determine in good faith which payment(s) or benefit(s) to reduce based on what provides the best economic result for the Executive.  The Company shall provide the Executive with sufficient information to support its determination and to allow the Executive to file and pay any required taxes.

4. No Duplication of Compensation .  The Severance Compensation shall replace, and be provided in lieu of, any severance or similar compensation, excepting payment during the resolution of a dispute regarding Good Reason as provided in Section 3(b), that may be provided to the Executive under any other agreement or arrangement in relation to termination of employment; provided ,   however , that this prohibition against duplication shall not be construed to otherwise limit the Executive’s rights to payments or benefits provided under any pension plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended), deferred compensation, stock, stock option or similar plan sponsored by the Company.  This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which may have been made by either party, including, without limitation, the Change in Control Severance Agreement dated as of November 30, 2012 between the Company and the Executive.

5. No Mitigation .  If the Executive's employment with the Company terminates following a Change in Control, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 3 or Section 14.  Except as set forth in Section 4, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer (with the exception of the COBRA Premium Subsidy,

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Executive Severance Agreement rev2017 (18)


 

 

which shall terminate when the Executive becomes eligible for medical insurance through another employer or the Executive becomes entitled to Medicare), by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

6. Confidentiality, Non-Competition, and Assignment of Inventions.  The Company’s obligations under this Agreement are contingent upon the Executive’s execution of the Company’s Proprietary Information, Inventions, and Competition Agreement (the “ Proprietary Information Agreement ”).  The parties agree that the obligations set forth in the Proprietary Information Agreement shall survive termination of this Agreement and termination of the Executive’s employment, regardless of the reason for such termination.

7. Enforceability .  If any provision of this Agreement shall be deemed invalid or unenforceable as written, this Agreement shall be construed, to the greatest extent possible, or modified, to the extent allowable by law, in a manner which shall render it valid and enforceable.  No invalidity or unenforceability of any provision contained herein shall affect any other portion of this Agreement.

8. Notices .  Except as otherwise specifically provided herein, any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (i)  by personal delivery when delivered personally; (ii) by overnight courier upon written verification of receipt; (iii) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (iv) by certified or registered mail, return receipt requested, upon verification of receipt.  Notices to the Executive shall be sent to the last known address in the Company's records or such other address as the Executive may specify in writing.  Notices to the Company shall be sent to the Company's Chairman of the Board (or if the Chairman of the Board is also the CEO, to the Company’s Lead Director), or to such other Company representative as the Company may specify in writing.

9. Claims for Benefits.  All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing.  Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon.  The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied.  In no event shall the Board’s claims or appeals determination be given any deference or weight in any subsequent legal proceeding.

Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, paid for by the Company, in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect; provided ,   however , that the evidentiary standards set forth in this Agreement shall apply; and further provided   that the parties agree that the binding arbitration protocol shall be structured such that a decision will issue not later than ninety (90) days following notice in the event of a dispute concerning Good Reason pursuant to Section 3(b).  Judgment may be entered on the arbitrator’s award in any court having jurisdiction.  Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive’s right to

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be paid until the Termination Date during the pendency of any dispute or controversy arising under of in connection with this Agreement.

10. Modifications and Amendments .  The terms and provisions of this Agreement may be modified or amended only by written agreement executed by the Company and the Executive.  The Company and the Executive agree that they will jointly execute an amendment to modify this Agreement to the extent necessary to comply with or be exempt from the requirements of Code Section 409A, or any successor statute, regulation and guidance thereto; provided   that no such amendment shall increase the total financial obligation of the Company under this Agreement.

11. Waivers and Consents .  The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions.  No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar.  Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

12. Binding Effect; Assignment .  The Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of the Executive upon the Executive’s death and (b) any successor of the Company.  Any such successor of the Company will be deemed substituted for the Company under the terms of the Agreement for all purposes.  For this purpose, “successor” means any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company.  None of the rights of the Executive to receive any form of compensation payable pursuant to the Agreement may be assigned or transferred except by will or the laws of descent and distribution.  Any other attempted assignment, transfer, conveyance or other disposition of the Executive’s right to compensation or other benefits will be null and void.

13. Governing Law .  This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the Commonwealth of Massachusetts, without giving effect to the conflict of law principles thereof.

14. Attorneys’ Fees .  The Company shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement.  Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require.

15. Withholding .  The Company is authorized to withhold, or to cause to be withheld, from any payment or benefit under the Agreement the full amount of any applicable withholding taxes.

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16. Tax Consequences .  The Company does not guarantee the tax treatment or tax consequences associated with any payment or benefit arising under this Agreement.

17. Acknowledgment .  The Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of the Agreement, and is knowingly and voluntarily entering into the Agreement.

18. Counterparts .  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19. Section 409A .  The parties hereto intend that the payments and benefits provided by this Agreement shall be exempt to the maximum extent from the requirements of Code Section 409A and related regulations and Treasury pronouncements, and this Agreement shall be interpreted accordingly.  To the extent subject to Code Section 409A, the Agreement shall be interpreted to comply with such requirements.  Each separately identified payment or benefit hereunder shall be deemed to be a separately determinable payment for purposes of Code Section 409A, and each payment to be made in installments shall be deemed a series of separate payments.  If any provision provided herein could result in the imposition of an additional tax under the provisions of Code Section 409A, the Executive and the Company agree that such provision will be reformed to avoid imposition of any such additional tax in the manner that the Executive and the Company mutually agree is appropriate to comply with or be exempt from Code Section 409A.

20. Reimbursements .  To the extent there are any reimbursements of expenses under this Agreement including, without limitation, under Section 14 hereof, payments with respect to such reimbursements shall be made no later than on or before the last day of the calendar year following the calendar year in which the relevant expense is incurred.  The amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year and any such reimbursements may not be exchanged or liquidated for any other benefit or payment.

[Signature Page follows]

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IN WITNESS WHEREOF, the parties have executed and delivered this Change in Control Severance Agreement as of the day and year first above written.

COMPANY:

IMMUNOGEN, INC.

 

/s/ Mark J. Enyedy

Name: Mark J. Enyedy

Title: President and Chief Executive Officer

 

 

EXECUTIVE:

 

/s/ Craig Barrows

Name:  Craig Barrows

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Exhibit A

 

GENERAL RELEASE

 

1. General Release .  In consideration of the payments and benefits to be made under that certain Change in Control Severance Agreement, dated March 31, 2017 (the “ Agreement ”), Craig Barrows (the “ Executive ”), with the intention of binding the Executive and the Executive's heirs, executors, administrators and assigns, does hereby release, remise, acquit and forever discharge ImmunoGen, Inc. (the “ Company ”) and each of its subsidiaries and affiliates (collectively, the “ Company Affiliated Group ”), their present and former officers, directors, executives, agents, insurers, attorneys, employees, and employee benefits plans (and the fiduciaries thereof), and the successors, predecessors, and assigns of each of the foregoing (collectively with the Company Affiliated Group, the “ Company Released Parties ”), of and from any and all claims, actions, causes of action, complaints, charges, demands, rights, damages, debts, sums of money, accounts, financial obligations, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity or otherwise, whether accrued, absolute, contingent, unliquidated or otherwise and whether now known or unknown, suspected or unsuspected which the Executive, individually or as a member of a class, now has, owns or holds, or has at any time heretofore had, owned or held, against any Company Released Party in any capacity, including, without limitation, any and all claims (i) arising out of or in any way connected with the Executive's service to any member of the Company Affiliated Group (or the predecessors thereof) in any capacity, or the termination of such service in any such capacity, (ii) for severance or vacation benefits, unpaid wages, rights in or for equity based awards, salary or incentive payments, (iii) for breach of contract, wrongful discharge, impairment of economic opportunity, defamation, intentional infliction of emotional harm or other tort and (iv) for any violation of applicable state and local labor and employment laws (including, without limitation, all laws concerning unlawful and unfair labor and employment practices), any and all claims based on the Employee Retirement Income Security Act of 1974 (“ ERISA ”), any and all claims arising under the civil rights laws of any federal, state or local jurisdiction, including, without limitation, Title VII of the Civil Rights Act of 1964 (“ Title VII ”), the Age Discrimination in Employment Act (“ ADEA ”), the Americans with Disabilities Act (“ ADA ”), Sections 503 and 504 of the Rehabilitation Act the Family and Medical Leave Act, the Massachusetts Fair Employment Practices Act, the Massachusetts Payment of Wages Law, An Act Relative to Domestic Violence, and any and all claims under any whistleblower laws or whistleblower provisions of other laws.

 

2. No Admissions .  The Executive acknowledges and agrees that this General Release is not to be construed in any way as an admission of any liability whatsoever by any Company Released Party, any such liability being expressly denied.

 

3. Application to all Forms of Relief .  This General Release applies to any relief no matter how called, including, without limitation, wages, back pay, front pay, compensatory damages, liquidated damages, punitive damages for pain or suffering, costs and attorney's fees and expenses.

 

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4. Specific Waiver .  The Executive specifically acknowledges that his acceptance of the terms of this General Release is, among other things, a specific waiver of his rights, claims and causes of action under Title VII, ADEA, ADA, the Massachusetts Fair Employment Practices Act and any state or local law or regulation in respect of discrimination of any kind; provided, however, that nothing herein shall be deemed, nor does anything herein purport, to be a waiver of any right or claim or cause of action which by law the Executive is not permitted to waive.

 

The Executive expressly agrees and understands that the release of claims contained herein is a General Release and that any references to specific claims arising out of or in connection with the Executive’s employment or termination are not intended to limit the release of claims.  The Executive expressly agrees and understands that this General Release means that the Executive is releasing, remising and discharging the Released Parties from and with respect to all claims, whether known or unknown, asserted or unasserted, and whether or not the claims arise out of or in connection with the Executive’s employment or termination, or otherwise, to the extent permitted by law.

 

5. No Complaints or Other Claims .  The Executive acknowledges and agrees that he has not, with respect to any transaction or state of facts existing prior to the date hereof, filed any complaints, charges or lawsuits against any Company Released Party with any governmental agency, court or tribunal.  This General Release does not: (i) prohibit or restrict Executive from communicating, providing relevant information to or otherwise cooperating with the U.S. Equal Employment Opportunity Commission or any other governmental authority with responsibility for the administration of fair employment practices laws regarding a possible violation of such laws or responding to any inquiry from such authority, including an inquiry about the  existence of this General Release or its underlying facts, or (ii) require Executive to notify the Company of such communications or inquiry.

 

6. Conditions of General Release .

 

(a)   Terms and Conditions .  From and after the date of termination of employment, the Executive shall abide by all the terms and conditions of this General Release and the terms and any conditions set forth in any employment or confidentiality agreements signed by the Executive, which is incorporated herein by reference.

 

(b)   Confidentiality .  The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against any member of the Company Affiliated Group (in which case the Executive shall cooperate with the Company in obtaining a protective order at the Company's expense against disclosure by a court of competent jurisdiction), communicate, to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business, any trade secrets, confidential information, knowledge or data relating to any member of the Company Affiliated Group, obtained by the Executive during the Executive's employment by the Company that is not generally available public knowledge (other than acts by the Executive in violation of this General Release).  This confidentiality obligation is in addition to, and not in lieu of, any other

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Executive Severance Agreement rev2017 (18)


 

 

contractual, statutory and common law confidentiality obligation of the Executive to the Company.

 

(c)   Return of Company Material .  The Executive represents that he has returned to the Company all Company Material (as defined below).  For purposes of this Section 6(c), " Company Material " means any documents, files and other property and information of any kind belonging or relating to (i) any member of the Company Affiliated Group, (ii) the current and former suppliers, creditors, directors, officers, employees, agents and customers of any of them or (iii) the businesses, products, services and operations (including without limitation, business, financial and accounting practices) of any of them, in each case whether tangible or intangible (including, without limitation, credit cards, building and office access cards, keys, computer equipment, cellular telephones, pagers, electronic devices, hardware, manuals, files, documents, records, software, customer data, research, financial data and information, memoranda, surveys, correspondence, statistics and payroll and other employee data, and any copies, compilations, extracts, excerpts, summaries and other notes thereof or relating thereto), excluding only information (x) that is generally available public knowledge or (y) that relates to the Executive's compensation or Executive benefits.

 

(d)   Cooperation .  Following the date of termination of employment, the Executive shall reasonably cooperate with the Company upon reasonable request of the Board of Directors and be reasonably available to the Company with respect to matters arising out of the Executive's services to the Company Affiliated Group.

 

(e)   Nondisparagement .  The Executive acknowledges and agrees that, following execution of this General Release, he shall not make any statements that are professionally or personally disparaging about or adverse to the interests of any Company Released Party, including, but not limited to, any statements that disparage in any way whatsoever the Company’s products, services, businesses, finances, financial condition, capabilities or other characteristics.