IMMUNOGEN INC
`
`FORM 10-Q
`
`(Quarterly Report)
`
`Filed 02/05/14 for the Period Ending 12/31/13
`
`
`Address
`
`
`830 WINTER ST
`WALTHAM, MA 02451
`(781)895-0600
`Telephone
`0000855654
`CIK
`IMGN
`Symbol
`2834 - Pharmaceutical Preparations
`SIC Code
`Biotechnology & Drugs
`Industry
`Sector Healthcare
`Fiscal Year
`06/30
`
`http://www.edgar-online.com
`© Copyright 2014, EDGAR Online, Inc. All Rights Reserved.
`Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
`
`IMMUNOGEN 2272, pg. 1
`Phigenix v. Immunogen
`IPR2014-00676
`
`

`

`Table of Contents
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`
`
`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 December 31, 2013
`
`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
`(State or other jurisdiction of incorporation or
`organization)
`
`
`
`
`
`04-2726691
`(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, or a smaller reporting
`company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
`Act. (Check one):
`
`
`Large accelerated filer 
`
`Non-accelerated filer
`(Do not check if a smaller reporting company)
`
`
`
`
`
`
`Accelerated filer
`
`Smaller reporting company
`
`
`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: 85,672,716 shares outstanding as of January 27, 2014.
`
`
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`IMMUNOGEN 2272, pg. 2
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`Table of Contents
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`Item
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`
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`IMMUNOGEN, INC.
`FORM 10-Q
`FOR THE QUARTER ENDED DECEMBER 31, 2013
`TABLE OF CONTENTS
`
`
`
`
`Part I
`
`1. Financial Statements (Unaudited):
`
`
`1a. Consolidated Balance Sheets as of December 31, 2013 and June 30, 2013
`
`
`1b. Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended
`December 31, 2013 and 2012
`
`
`1c. Consolidated Statements of Cash Flows for the six months ended December 31, 2013 and 2012
`
`
`1d. Notes to Consolidated Financial Statements
`
`
`2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
`
`
`3. Quantitative and Qualitative Disclosures about Market Risk
`
`
`4. Controls and Procedures
`
`
`
`
`
`1A. Risk Factors
`
`
`6. Exhibits
`
`
`
`Signatures
`
`Part II
`
`
`2
`
`
`
` Page Number
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`3
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`4
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`5
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`6
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`21
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`31
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`31
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`32
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`32
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`33
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`IMMUNOGEN 2272, pg. 3
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`IPR2014-00676
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`IMMUNOGEN, INC.
`CONSOLIDATED BALANCE SHEETS
`(UNAUDITED)
`In thousands, except per share amounts
`
`
`ASSETS
`
`Table of Contents
`
`ITEM 1. Financial Statements
`
`
`
`
`Cash and cash equivalents
`Accounts receivable
`Unbilled revenue
`Inventory
`Restricted cash
`Prepaid and other current assets
`Total current assets
`
`
`Property and equipment, net of accumulated depreciation
`Long-term restricted cash
`Other assets
`
`
`Total assets
`
`LIABILITIES AND SHAREHOLDERS’ EQUITY
`
`Accounts payable
`Accrued compensation
`Other accrued liabilities
`Current portion of deferred lease incentive
`Current portion of deferred revenue
`Total current liabilities
`
`
`Deferred lease incentive, net of current portion
`Deferred revenue, net of current portion
`Other long-term liabilities
`Total liabilities
`Commitments and contingencies (Note E)
`Shareholders’ equity:
`Preferred stock, $0.01 par value; authorized 5,000 shares; no shares issued and outstanding
`Common stock, $0.01 par value; authorized 150,000 shares; issued and outstanding 85,629 and 84,725
`shares as of December 31, 2013 and June 30, 2013, respectively
`Additional paid-in capital
`Accumulated deficit
`Total shareholders’ equity
`Total liabilities and shareholders’ equity
`
`December 31,
`2013
`
`
`
`178,088 $
`3,818
`1,904
`3,008
`319
`2,321
`189,458
`
`10,753
`1,912
`400
`
`
`
`202,523 $
`
`3,812 $
`4,162
`6,158
`979
`2,522
`17,633
`
`5,137
`46,487
`3,230
`
`72,487
`
`
`—
`
`June 30,
`2013
`
`
`
`194,960
`—
`2,121
`703
`319
`2,581
`200,684
`
`10,783
`1,912
`217
`
`
`213,596
`
`
`4,498
`6,153
`6,049
`979
`1,494
`19,173
`
`5,626
`63,384
`3,566
`
`91,749
`
`
`—
`
`856
`713,361
`(584,181 )
`130,036
`
`202,523 $
`
`847
`697,767
`(576,767 )
`121,847
`213,596
`
`
`
`
` $
`
`
`
`
`
`
`
`
`
`
`
` $
`
` $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
` $
`
`
`
`
`
`The accompanying notes are an integral part of the consolidated financial statements.
`
`3
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`IMMUNOGEN 2272, pg. 4
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`IPR2014-00676
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`Table of Contents
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`
`IMMUNOGEN, INC.
`CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
`(UNAUDITED)
`In thousands, except per share amounts
`
`
`
`
`
`
`
`
`Revenues:
`License and milestone fees
`Royalty revenue
`Research and development support
`Clinical materials revenue
`
`Total revenues
`
`
`Operating Expenses:
`Research and development
`General and administrative
`
`Total operating expenses
`
`
`Income (loss) from operations
`
`Other income, net
`
`Net income (loss)
`
`Basic and diluted net income (loss) per common share
`
`Basic weighted average common shares outstanding
`Dilutive impact of potential common shares
`Diluted weighted average common shares outstanding
`Total comprehensive income (loss)
`
`
`
`
`
` $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
` $
`
` $
`
`
`
`
` $
`
`Three Months Ended
`December 31,
`2013
`2012
`
`
`
`25,678 $
`2,335
`1,922
`125
`
`
`30,060
`
`
`20,862
`5,447
`
`26,309
`
`3,751
`
`62
`
`
`3,813 $
`
`
`0.04 $
`
`85,431
`1,845
`87,276
`
`
`3,813 $
`
`
`
`
`
`429 $
`—
`2,036
`147
`
`
`2,612
`
`
`21,656
`5,464
`
`27,120
`
`(24,508 )
`
`115
`
`(24,393 ) $
`
`(0.29 ) $
`
`84,147
`—
`84,147
`
`(24,393 ) $
`
`Six Months Ended
`December 31,
`2013
`2012
`
`
`
`38,845 $
`4,388
`3,912
`133
`
`
`47,278
`
`
`42,891
`11,973
`
`54,864
`
`(7,586 )
`
`172
`
`(7,414 ) $
`
`(0.09 ) $
`
`85,221
`—
`85,221
`
`(7,414 ) $
`
`
`
`
`
`1,362
`—
`3,413
`1,928
`
`
`6,703
`
`
`45,356
`11,103
`
`56,459
`
`(49,756 )
`
`171
`
`(49,585 )
`
`(0.59 )
`
`83,748
`—
`83,748
`
`(49,585 )
`
`
`
`
`
`
`The accompanying notes are an integral part of the consolidated financial statements.
`
`4
`
`IMMUNOGEN 2272, pg. 5
`Phigenix v. Immunogen
`IPR2014-00676
`
`

`

`Table of Contents
`
`
`IMMUNOGEN, INC.
`CONSOLIDATED STATEMENTS OF CASH FLOWS
`(UNAUDITED)
`In thousands, except per share amounts
`
`
`
`
`
`Cash flows from operating activities:
`Net loss
`Adjustments to reconcile net loss to net cash used for operating activities:
`Depreciation and amortization
`Loss (gain) on sale/disposal of fixed assets
`Gain on forward contracts
`Stock and deferred share unit compensation
`Deferred rent
`Changes in operating assets and liabilities:
`Accounts receivable
`Unbilled revenue
`Inventory
`Prepaid and other current assets
`Other assets
`Accounts payable
`Accrued compensation
`Other accrued liabilities
`Deferred revenue
`Net cash used for operating activities
`
`
`Cash flows from investing activities:
`Purchases of property and equipment, net
`Payments from settlement of forward contracts
`Net cash used for investing activities
`
`
`Cash flows from financing activities:
`Proceeds from common stock issuance, net
`Proceeds from stock options exercised
`Net cash provided by financing activities
`
`
`Net change in cash and cash equivalents
`
`Cash and cash equivalents, beginning balance
`
`Cash and cash equivalents, ending balance
`
`
`
`
`
`
` $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
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`
`
`
`
`
`
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` $
`
`Six Months ended December 31,
`2013
`2012
`
`
`
`(7,414 ) $
`
`2,307
`20
`(2 )
`8,548
`(37 )
`
`(3,818 )
`217
`(2,305 )
`260
`(183 )
`(686 )
`(1,991 )
`(676 )
`(15,869 )
`(21,629 )
`
`
`(2,297 )
`(1 )
`(2,298 )
`
`
`—
`7,055
`7,055
`
`(16,872 )
`
`194,960
`
`
`
`178,088 $
`
`
`
`
`
`(49,585 )
`
`2,336
`(17 )
`(163 )
`6,848
`(54 )
`
`(1,157 )
`(810 )
`838
`480
`(22 )
`1,311
`(1,769 )
`(503 )
`(442 )
`(42,709 )
`
`
`(2,038 )
`(12 )
`(2,050 )
`
`
`93,991
`851
`94,842
`
`50,083
`
`160,938
`
`
`211,021
`
`
`The accompanying notes are an integral part of the consolidated financial statements.
`
`5
`
`
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`IMMUNOGEN 2272, pg. 6
`Phigenix v. Immunogen
`IPR2014-00676
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`

`

`Table of Contents
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`IMMUNOGEN, INC.
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
`December 31, 2013
`
`
`A. Summary of Significant Accounting Policies
`
`
`Basis of Presentation
`
`The accompanying unaudited consolidated financial statements at December 31, 2013 and June 30, 2013 and for the three and six
`months ended December 31, 2013 and 2012 include the accounts of ImmunoGen, Inc., or the Company, and its wholly owned
`subsidiaries, ImmunoGen Securities Corp. and ImmunoGen Europe Limited. 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. Certain information
`and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The preparation of
`interim financial statements requires the use of management’s estimates and assumptions that affect the reported amounts of assets and
`liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues
`and expenditures during the reported periods. The results of the interim periods are not necessarily indicative of the results for the entire year.
`Accordingly, the interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in
`the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.
`
`Subsequent Events
`
`The Company has evaluated all events or transactions that occurred after December 31, 2013 up through the date the Company issued
`these financial statements. In January 2014, the Company entered into a collaboration agreement with CytomX Therapeutics, Inc. (CytomX).
`Under the terms of the agreement, the companies will collaborate to each develop Probody™-drug conjugate (PDC) therapies against a defined
`number of targets using CytomX Probody™ technology and ImmunoGen’s antibody-drug conjugate, or ADC, technology. Each company
`retains full development control of PDC compounds resulting from its target selection and is responsible for preclinical and clinical testing,
`manufacturing, and commercialization of its own compounds. Under the terms of the agreement, there were no upfront payments made by the
`Company or CytomX. Each company is entitled to potentially receive from the other company clinical and post-approval milestone payments
`as well as royalties on the sales of any marketed products developed by the other company resulting from this collaboration. The Company did
`not have any other 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 monoclonal
`antibody-based anticancer therapeutics. The terms of these agreements contain multiple deliverables which may include (i) licenses, or options
`to obtain licenses, to the Company’s ADC technology, (ii) rights to future technological improvements, (iii) research activities to be performed
`on behalf of the collaborative partner, (iv) delivery of cytotoxic agents and (v) the manufacture of preclinical or clinical materials for the
`collaborative partner. Payments to the Company under these agreements may include upfront fees, option fees, exercise fees, payments for
`research activities, payments for the manufacture of preclinical or clinical materials, payments based upon the achievement of certain
`milestones and royalties on product sales. The Company follows the provisions of the Financial Accounting Standards Board (FASB)
`Accounting Standards Codification (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 December 31, 2013, the Company had the following two types of agreements with the parties identified below:
`
`• • • • Development and commercialization licenses to use the Company’s ADC technology and/or certain other intellectual property to
`develop compounds to a specified target antigen (referred to as development and commercialization licenses, as distinguished
`from the Company’s right-to-test agreements described elsewhere):
`
`
`
`Amgen (four exclusive single-target licenses)
`
`
`Bayer HealthCare (one exclusive single-target license)
`
`6
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`IMMUNOGEN 2272, pg. 7
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`Biotest (one exclusive single-target license)
`
`Lilly (one exclusive single-target license)
`
`
`Novartis (two 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)
`
`• • • • Option/research 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):
`
`
`
`Sanofi
`
`
`Novartis
`
`Lilly
`
`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. Royalty rates may vary over the royalty term depending on the Company’s
`intellectual property rights. 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 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, the likelihood that
`technological improvements 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 are deferred if facts and circumstances dictate that the license does
`not have stand-alone value. Prior to the adoption of Accounting Standards Update (ASU) No. 2009-13, “Revenue Arrangements with Multiple
`Deliverables” on July 1, 2010, the Company determined that its licenses lacked stand-alone value and
`
`7
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`IMMUNOGEN 2272, pg. 8
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`were combined with other elements of the arrangement and any amounts associated with the license were deferred and amortized over a certain
`period, which the Company refers to as the Company’s period of substantial involvement. The determination of the length of the period over
`which to defer revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period.
`Historically the Company’s involvement with the development of a collaborator’s product candidate has been significant at the early stages of
`development, and lessens as it progresses into clinical trials. Also, as a drug candidate gets closer to commencing pivotal testing the Company’s
`collaborators have sought an alternative site to manufacture their products, as the Company’s facility does not produce pivotal or commercial
`drug product. Accordingly, the Company generally estimates this period of substantial involvement to begin at the inception of the
`collaboration agreement and conclude at the end of non-pivotal Phase II testing. The Company believes this period of substantial involvement
`is, depending on the nature of the license, on average six and one-half years. Quarterly, the Company reassesses its periods of substantial
`involvement over which the Company amortizes its upfront license fees and makes adjustments as appropriate. In the event a collaborator
`elects to discontinue development of a specific product candidate under a development and commercialization license, but retains its right to
`use the Company’s technology to develop an alternative product candidate to the same target or a target substitute, the Company would cease
`amortization of any remaining portion of the upfront fee until there is substantial preclinical activity on another product candidate and its
`remaining period of substantial involvement can be estimated. In the event that a development and commercialization license were to be
`terminated, the Company would recognize as revenue any portion of the upfront fee that had not previously been recorded as revenue, but was
`classified as deferred revenue, at the date of such termination.
`
`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.
`
`
`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 be below its contract selling
`prices for its existing collaborations for the foreseeable future. During the six months ended December 31, 2012, 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 $755,000. There were no sales of manufactured preclinical or clinical
`materials during the six months ended December 31, 2013. 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 impacted by the number of batches produced during the period. The volume of preclinical and
`clinical materials the Company produces is directly related to the number of clinical trials for which the Company and its collaborators are
`preparing 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 first moves into clinical testing or advances into different
`
`8
`
`
`
`IMMUNOGEN 2272, pg. 9
`Phigenix v. Immunogen
`IPR2014-00676
`
`

`

`Table of Contents
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`
`clinical trial phases. Regulatory milestones are typically payable upon submission for marketing approval with the U.S. Food and Drug
`Administration, or FDA, or other countries’ regulatory authorities or on receipt of actual marketing approvals for the compound or for
`additional indications. Sales milestones are typically payable when annual sales reach certain levels.
`
`
`At the inception of each 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 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.
`
`For right-to-test agreements where the options to secure development and commercialization licenses to the Company’s ADC
`technology are considered substantive, the Company does not consider the development and commercialization licenses