CytomX Therapeutics
Annual Report 2015

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One)xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015ORooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 001-37587 CytomX Therapeutics, Inc.(Exact Name of Registrant as Specified in Its Charter) Delaware 27-3521219(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 343 Oyster Point Boulevard, Suite 100South San Francisco, California 94080(Address of principal executive offices) (Zip Code)(650) 515-3185(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.00001 par value The NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the issuer (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 x No oIndicate 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 postedpursuant 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 suchfiles). Yes o No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate 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 “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one) Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x (Do not check if a smaller reporting company) 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 o No xThe registrant completed the initial public offering of its common stock, par value $0.00001 per share, on October 14, 2015. There was no public market for the registrant’s commonstock as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter. As of March 2, 2016, 36,077,873 shares of the registrant’s commonstock were outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement to be filed for its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. Such proxy statementwill be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. CYTOMX THERAPEUTICS, INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS Page PART I ITEM 1. Business 3 ITEM 1A. Risk Factors 38 ITEM 1B. Unresolved Staff Comments 67 ITEM 2. Properties 67 ITEM 3. Legal Proceedings 67 ITEM 4. Mine Safety Disclosures 67 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 68 ITEM 6. Selected Financial Data 71 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 72 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 81 ITEM 8. Financial Statements and Supplementary Data 82 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 109 ITEM 9A. Controls and Procedures 109 ITEM 9B. Other Information 109 PART III ITEM 10. Directors, Executive Officers of the Registrant and Corporate Governance Matters 110 ITEM 11. Executive Compensation 110 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 110 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 110 ITEM 14. Principal Accounting Fees and Services 110 PART IV ITEM 15. Exhibits and Financial Statement Schedules 110 Signatures 113  Forward-Looking StatementsThis Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. These forward-looking statementsreflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, madethrough the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,”“seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words orphrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates andprojections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertainand beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject torisks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-lookingstatements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-lookingstatements.A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, includingthose factors identified in “Risk Factors” or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or the following: ·the initiation, timing, progress and results of our research and development programs, preclinical studies, any clinical trials and InvestigationalNew Drug application (“IND”), Clinical Trial Application, New Drug Application (“NDA”), Biologics License Application (“BLA”) and otherregulatory submissions; ·our receipt and timing of any milestone payments or royalties under any existing or future research collaboration and license agreements orarrangements; ·our expectations regarding the activity of our product candidates once administered in a human subject; ·our expectations and beliefs regarding the evolution of the market for cancer therapies and development of the immuno-oncology industry; ·our ability to identify and develop products for novel cancer targets; ·our dependence on existing and future collaborators for developing, obtaining regulatory approval for and commercializing productcandidates in the collaboration; ·our ability to identify and develop product candidates for treatment of additional disease indications; ·our or an existing or future collaborator’s ability to obtain and maintain regulatory approval of any of our product candidates; ·the rate and degree of market acceptance of any approved products candidates; ·the commercialization of any approved product candidates; ·our ability to establish and maintain collaborations and retain commercial rights for our product candidates in the collaborations; ·the implementation of our business model and strategic plans for our business, technologies and product candidates; ·our estimates of our expenses, ongoing losses, future revenue and capital requirements; ·our ability to obtain additional funds for our operations; ·our or any existing or future collaborator’s ability to obtain and maintain intellectual property protection for our technologies and productcandidates and our ability to operate our business without infringing the intellectual property rights of others; ·our reliance on third parties to conduct our preclinical studies or any future clinical trials; ·our reliance on third-party supply and manufacturing partners to supply the materials and components for, and manufacture, our research anddevelopment, preclinical and clinical trial product supplies; ·our ability to attract and retain qualified key management and technical personnel; ·our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of2012;1 ·our financial performance; and ·developments relating to our competitors or our industry.Any forward-looking statements in this Annual Report on Form 10-K reflect our current views with respect to future events or to our future financialperformance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may causeactual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and discussedelsewhere in this Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Exceptas required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes availablein the future.This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business and the markets forcertain drugs and therapeutic biologics, including data regarding the estimated size of those markets, their projected growth rates and the incidence of certainmedical conditions. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actualevents or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtainedthese industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and generalpublications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.Except where the context otherwise requires, in this Annual Report on Form 10-K, “we,” “us,” “our” and the “Company” refer to CytomXTherapeutics, Inc.TrademarksThis Annual Report on Form 10-K includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marksand trade names included in this Annual Report on Form 10-K are the property of their respective owners. 2 PART IItem 1.BusinessWe are an oncology-focused biopharmaceutical company pioneering a novel class of antibody therapeutics based on our Probody technologyplatform. We are using our platform to create proprietary cancer immunotherapies against clinically-validated targets as well as to develop first-in-classcancer therapeutics against novel targets. We believe that our Probody platform will allow us to improve the combined efficacy and safety profile, ortherapeutic window, of monoclonal antibody modalities including cancer immunotherapies, antibody drug conjugates (“ADCs”) and T-cell-recruitingbispecific antibodies. Our Probody therapeutics are designed to take advantage of unique conditions in the tumor microenvironment to enhance the tumor-targeting features of an antibody and reduce drug activity in healthy tissues. We are currently developing Probody therapeutics that address clinically-validated cancer targets in immuno-oncology, such as PD-L1, as well as novel targets, such as CD-166, that are difficult to drug and lead to concerns aboutdamage to healthy tissues, or toxicities. In addition to our proprietary programs, we are collaborating with strategic partners including Bristol- Myers SquibbCompany (“BMS”), Pfizer Inc. (“Pfizer”), ImmunoGen, Inc. (“ImmunoGen”) and The University of Texas M. D. Anderson Cancer Center (“MD Anderson”) todevelop selected Probody therapeutics. Our broad technology platform and lead product candidates are supported by a decade of thorough scientific researchand strong intellectual property, and we are advancing these candidates toward clinical trials. Our vision is to transform lives with safer, more effectivetherapies. To realize this vision we are executing on our mission of changing the treatment of cancer by urgently advancing our Probody pipeline.The premise of our Probody platform is to apply the prodrug concept to create a therapeutic antibody that remains inactive until it reaches the tumor.Probody therapeutics therefore have the potential to produce additional tumor specificity and enhanced safety profiles because they are designed to havelimited interaction with their molecular targets in healthy tissue. This approach of dosing drugs in a form such that they are only activated after reachingcertain tissues is called the prodrug approach, and has been used with many small molecule drugs, but has never before been effectively pursued usingtherapeutic antibodies.Cancer is the second leading cause of mortality in the United States and accounts for nearly one in every four deaths. Early cancer research andtreatment relied on relatively non-specific and highly toxic small molecule chemotherapies. Over the last twenty years, a new paradigm of cancer researchand treatment has emerged that is focused on more targeted therapies, including monoclonal antibody modalities, which represent some of the most effectiveand top-selling therapies on the market today. The leading three monoclonal antibodies for cancer generated more than $20 billion in global sales in 2014.More recently, immuno-oncology has emerged as a promising new field of cancer therapy that aims to enhance anti-tumor immune responses by, for example,overcoming the suppressive mechanisms that cancer cells have developed to evade the immune system. These therapies have shown the potential to providedramatic efficacy and to extend survival, even in cancers in which conventional therapies, such as surgery, chemotherapy and radiotherapy, have failed. Inaddition, new classes of monoclonal antibody modalities have also reached the market. These new classes include ADCs and bispecific antibodies, whichhave more potency than first-generation antibodies.Despite these advancements, many therapeutic antibodies are limited by a suboptimal therapeutic window. For example, the targets of antibodytherapies are often found not only on tumors but also on healthy tissue, leading to toxicities. Consequently, there remains a significant need for therapeuticsthat are more efficacious, safe and tolerable. We believe our technology has the potential to address this need and represents the next evolution of targetedcancer therapies.3 A Probody therapeutic consists of three components produced as a single protein by standard antibody production methodology: an active anti-cancerantibody, a mask for the antibody and a protease-cleavable linker. In preclinical testing, we have demonstrated the function of each of these components. Themask is a peptide designed to disguise the active binding site of the antibody to prevent the therapeutic from binding to healthy tissues. The followinggraphic depicts the three components of a Probody therapeutic, interacting with a protease: When a Probody therapeutic enters a tumor, it encounters proteases, which are enzymes that cleave proteins and are active primarily in the tumormicroenvironment. The proteases in the tumor cleave the linker, releasing the mask and allowing the antibody to attack the tumor. The following graphicdepicts the activation of a Probody therapeutic by proteases: 4 The activity of proteases is a hallmark of virtually every type of solid tumor that has been studied, with thousands of scientific papers documentingthis phenomenon. Our Probody technology is designed to take advantage of the fact that while proteases are active in cancerous tissues, they remain undertight physiological control in healthy tissues. Probody technology uses tumor-associated proteases to selectively cleave and activate Probody therapeutics inthe immediate vicinity of tumors. Our Probody therapeutics are therefore designed to be activated by proteases predominantly in the tumormicroenvironment while remaining largely in an inactive state in healthy tissues. Key Advantages of Our Probody PlatformWe believe that our Probody platform provides the following key advantages: ·A novel therapeutic antibody class enabled by our proprietary platform. We believe we have a differentiated technology platform that givesus a substantial competitive advantage supported by more than a decade of research and strong intellectual property. ·Potential to improve the therapeutic window of antibody-based therapeutics. By engineering our therapeutics to selectively activate in thetumor microenvironment, our Probody product candidates have the potential to improve safety and tolerability while simultaneouslyachieving better outcomes. ·Ability to combine more effectively with other therapies. We believe the therapeutic window and tumor specificity of our candidates willreduce the dose-limiting toxicities observed in combination therapies and thus enable new combinations with other cancer therapies that aredifficult or impossible to use. ·Applicability across many molecular targets. We believe that our technology addresses many different molecular targets expressed by manydifferent kinds of tumors—including targets that are difficult to address because they are also expressed on healthy tissue—because Probodytherapeutics are designed to have limited interaction with non-cancerous tissues. ·Versatility across antibody modalities. We believe that our technology can be applied to any antibody-based therapy, including novel potentmodalities like ADCs, T-cell-recruiting bispecific antibodies and CARs, which are cell-based therapies that contain chimeric antigen receptors.Pipeline StrategiesWe have three pipeline strategies that we are pursuing with our Probody platform: ·Develop a novel class of cancer immunotherapies directed against clinically-validated targets. Through our technology platform, we believethat we can expand the therapeutic window where current antibody therapies have encountered challenges with respect to safety or efficacy.For example, combination therapies in immuno-oncology have shown great promise in terms of efficacy but have been restricted by dose-limiting toxicities. Recent preclinical research has shown that localizing cancer immunotherapies to cancerous tissue has the potential toimprove the therapeutic window in patients treated with the immunotherapies. We therefore see an opportunity to develop cancerimmunotherapies using Probody therapeutics as the backbone for combination therapies. Our lead proprietary program for this pipelinestrategy is CX-072, a Probody therapeutic candidate directed against PD-L1, a clinically-validated target in multiple tumor types includingnon-small cell lung cancer, bladder cancer and melanoma.5 ·Develop novel first-in-class therapeutics directed against difficult-to-drug targets. We believe we can create a therapeutic window in patientsfor targets where none exists because current approaches have not been viable as a result of toxicity concerns. Our Probody technology has thepotential to address targets that are expressed in both tumor tissues and healthy tissues, which otherwise makes development of safe drugs andtherapeutic biologics difficult. Given the novelty of these treatments and their potential to address unmet medical needs, we expect to pursueexpedited review or accelerated approval paths, such as breakthrough therapy and fast-track designations, for these compounds. Furthermore,our Probody technology potentially enables us to take better advantage of the most potent modalities of monoclonal antibody therapeutics,such as ADCs and bispecific antibodies. Our lead proprietary candidate for this pipeline strategy is CX-2009, a Probody drug conjugate (a“PDC”) directed against the target CD-166, which is expressed in multiple tumor types including breast, lung, colorectal and prostate cancer. ·Collaborate with leading biopharmaceutical companies to discover and develop Probody therapeutics against selected targets. Since 2013,we have entered into product-focused collaborations with BMS, Pfizer, ImmunoGen and MD Anderson to develop certain Probodytherapeutics. For example, we have collaborated with a leader in the field of immuno-oncology, BMS, to develop a novel Probody therapeuticdirected against cytotoxic T-lymphocyte-associated antigen 4 (“CTLA-4”), the target for Yervoy. Yervoy is a top-selling cancer therapeuticwith $1.3 billion in sales in 2014. We foresee the opportunity to improve the therapeutic window of a CTLA-4 antibody with a Probodytherapeutic. Given the breadth of opportunities for our Probody platform, collaborations continue to be an important part of our pipelinestrategy.Our PipelineThe following chart provides an overview of the status of each of our programs: In addition to the INDs we anticipate filing for CX-072 and CX-2009, we believe that the programs in our pipeline have the potential to generateproduct candidates that could enable us to file INDs on such products in 2017 or 2018.Our Company Origins, Team and InvestorsOur Probody platform technology has its origins in work performed at the University of California, Santa Barbara (“UCSB”), by our scientific founderProfessor Patrick Daugherty. Since our inception, we have continued developing and adding to this technology and aspire to design a pipeline of Probodytherapeutics that will better the lives of cancer patients. We have assembled an experienced and talented group of individuals dedicated to the advancementof cancer care. Our chief executive officer, Dr. Sean McCarthy, leads a team that draws on robust experience in all phases of product discovery, clinicaldevelopment and commercialization. Our research and preclinical development team is led by Dr. Michael Kavanaugh, chief scientific officer, and includesrenowned and established researchers, and our clinical development team is led by Dr. Rachel Humphrey, chief medical officer. Our management teammembers have proven track records in oncology with previous experience at Amgen, Chiron, Five Prime, Genentech, Maxygen, Medarex, Millennium,Novartis, Onyx, SGX and others.6 Our Business StrategyWe are utilizing our innovative Probody platform to build a long-term, multiproduct company focused on the development of new cancer treatments.Our vision is to transform lives with safer, more effective therapies. To realize this vision we are executing on our mission of changing the treatment of cancerby urgently advancing our Probody pipeline.Our strategy encompasses the following key elements: ·Develop and advance our pipeline of Probody cancer immunotherapies directed against clinically-validated targets. We are developingProbody therapeutics against clinically-validated immuno-oncology targets with the goal of expanding the therapeutic window of antibodytherapeutics in this important, emerging area of cancer therapy. The potentially improved safety profile offered by our Probody platform couldunlock the promise of novel combinations with immunotherapies, an effective anti-cancer approach currently limited by unfavorable toxicities.Our lead wholly-owned program utilizing this approach is CX-072, our PD-L1 Probody therapeutic. ·Develop and advance our pipeline of first-in-class Probody cancer therapies directed against novel targets. We are developing Probodytherapeutics against difficult-to-drug targets. Currently, many compelling cancer targets cannot be effectively targeted due to potential toxicityconcerns, as these targets are expressed both in healthy tissue and in tumor tissue. Our Probody platform has the potential to generate a pipelineof products that remain largely inactive until they reach the tumor, activating specifically in the tumor microenvironment and potentiallyavoiding toxicity associated with binding to cells in healthy tissue. Our lead wholly owned program utilizing this approach is CX-2009, a first-in-class PDC targeting CD-166. ·Establish collaborations on selected programs with leading biopharmaceutical companies while retaining significant ownership of ourpipeline. We believe that establishing strategic collaborations with leading biopharmaceutical companies will build value for our shareholders.To date we have entered into collaborations with BMS, Pfizer and ImmunoGen. These alliances are multi-target, product-focusedcollaborations with the objective of broadening the reach of our Probody platform. For example, we are collaborating with BMS, a leader inimmuno-oncology, on the discovery and development of a Probody version of Yervoy, an approved antibody targeting CTLA-4. Our currentstrategy is to retain full ownership of key products in our pipeline and partner selected programs. We intend to retain certain development andcommercial rights for products in these future collaborations. ·Maximize value creation by advancing our lead products to commercialization, by ourselves or with partners. We currently have globaldevelopment, marketing and commercialization rights for our lead product candidates, which target PD-L1 and CD-166, as well as additionalpipeline candidates. Should we obtain regulatory approval for any of our products, we plan to build a commercial infrastructure to market ourproducts. We may choose to opportunistically partner with biopharmaceutical companies on large and complex oncology indications.Furthermore, we may choose to partner in geographical areas outside the United States, as comprehensive capabilities of a leading industrypartner may offer a faster path to key non-U.S. markets. ·Maintain our competitive advantage by continuing to invest in our Probody platform for the long term. Our platform is based on innovativescience developed over the previous decade. We believe our technology has the potential to produce multiple product candidates in the futureacross a wide range of oncology indications, creating a robust pipeline of anti-cancer agents. We plan to continue exploring and investingfurther in our Probody technology to fully realize the potential of our platform. ·Nurture and reinforce our company’s culture and core values to drive the highest levels of performance and continue to attract the besttalent. Our core values of integrity, commitment, creativity, teamwork, accountability and fun are central to our success as a company. Thesevalues, along with our mission and vision statements, align our team with our corporate goals and serve to attract top talent that seeks to havean impact on cancer treatment.Cancer Remains a Major Unmet Medical NeedCancer is the second leading cause of mortality in the United States, accounting for nearly one in every four deaths. Approximately 40% of Americanswill develop cancer according to the American Cancer Society.Cancer treatment has traditionally included chemotherapy, radiation, surgery or a combination of these approaches. Small molecule chemotherapyagents can be effective in certain types of cancer, but they can also cause toxicities that may lead to life-threatening consequences, lower quality of life oruntimely termination of treatment. Furthermore, these agents offer limited efficacy in many types of cancer.7 Over the last twenty years, a new paradigm of cancer research and treatment has emerged that involves more targeted therapies, including monoclonalantibodies. Monoclonal antibodies are proteins derived from living organisms that bind to targets, called antigens, on tumor cells and then inhibit tumorgrowth. As a drug class, monoclonal antibodies have transformed oncology treatment and represent some of the most effective and top selling therapies onthe market. For example, Herceptin, Avastin and Rituxan have dominated the market with over $20 billion in annual sales. The success of conventionalmonoclonal antibodies has been hindered by limited efficacy and by safety and tolerability concerns. Administration of antibodies may cause systemic sideeffects, as well as localized, organ-specific damage. Much of this toxicity is a direct consequence of the fact that healthy tissues express the same antigensthat antibodies target on cancerous cells.More recently, immuno-oncology has emerged as a promising new field of cancer therapy that aims to enhance anti-tumor immune responses by, forexample, overcoming mechanisms that cancer cells have developed to evade the immune system. Some cancer cells overly express proteins, called immunecheckpoints, that apply brakes to the immune system, and enable the tumor cells to evade destruction. Immune checkpoint inhibitors nivolumab,pembrolizumab and ipilimumab—antibodies targeting these immune inhibitory proteins— release these brakes and allow the immune system to destroy thetumor. These drugs have shown promising efficacy in clinical trials, including long-term remission in certain patients, and have been approved for thetreatment of melanoma and non-small cell lung cancer. They are currently being explored for multiple other solid tumor indications. Although these drugshave demonstrated promising results, only a minority of patients receive durable benefit from treatment with these agents alone. Most recently, combinationregimens of immunotherapy agents have demonstrated signs of improved efficacy in larger numbers of patients. We believe that combination therapy willplay a critical role in future cancer immunotherapy regimens. However, many of these combinations have significant toxicity and tolerability issues, due inpart to the activation of the immune system in both healthy and cancerous environments. We believe these issues will likely impact further clinical andcommercial advancements of combination cancer immunotherapies.In the past decade, a new modality of highly potent monoclonal antibody-based therapies has emerged.ADCs represent one such modality. These agents are comprised of two functional units chemically fused or conjugated to each other: a cytotoxic drugpayload and a monoclonal antibody. ADCs combine the targeting abilities of the antibody with the cancer killing ability of cytotoxic drugs, leading to betterspecificity in targeting tumor cells compared to traditional chemotherapy. Ado-trastuzumab emtansine and brentuximab vedotin are ADCs that have beenapproved for the treatment of specific subsets of breast cancer and lymphoma, respectively. Bispecific antibodies, another class of second-generationbiologics, have the ability to simultaneously bind a cancer cell and a T-cell, leading to the destruction of the cancerous cell by the T-cell. This abilityimproves the potency of bispecific antibodies compared to first-generation monoclonal antibodies.Blinatumomab is an example of a T-cell-recruiting bispecific antibody that has recently been approved for the treatment of relapsed or refractory acutelymphoblastic leukemia (“ALL”). While all of these potent new therapies have shown promise, none addresses a key limitation of antibody-basedtherapeutics—expression of targets in healthy tissue, which leads to toxicity and limits clinical use.Exploiting Protease Biology for our Proprietary Probody PlatformProteases play an essential role in many aspects of normal physiology, such as digestion of food in the gastrointestinal tract, wound healing andmetabolic function. However, uncontrolled protease activity can lead to destruction of essential proteins and tissues. Therefore, proteases are normally verytightly regulated by redundant mechanisms, with very little extracellular protease activity detectable in healthy tissues. In contrast, it has been welldocumented that proteases are not only present, but also activated, in virtually all types of tumors, allowing for tumor growth, invasion and metastasis. Wehave been studying the role proteases play in cancer for over a decade, and how to use the proteases in tumors to our advantage. Probody therapeutics aredesigned to be activated in this protease-rich tumor microenvironment but not in healthy tissue where proteases are under tight control.Our Probody PlatformOur Probody platform utilizes active proteases in tumor tissue to allow monoclonal antibody-based therapies to be delivered in an inactive state andthen to be activated at the tumor site. This approach is designed to limit toxicity that typically arises from the binding of an antibody to a target in healthytissues while preserving biological activity in the tumor where it is desired. We have demonstrated the applicability of the Probody platform to multiplemonoclonal antibody modalities, including ADCs and T-cell-recruiting bispecifics. We are also investigating the application of Probody technology toCARs, which are cell-based therapies that contain chimeric antigen receptors.8 Our Probody therapeutic consists of three components: an active anti-cancer antibody, a mask for the antibody and a protease-cleavable linker. Inpreclinical testing, we have demonstrated the function of each of these components. The mask is a peptide that limits the binding of a Probody therapeutic toits target in healthy tissues when introduced into the circulation. The mask can be released from the Probody therapeutic by specific tumor-associatedproteases. When a Probody therapeutic encounters an activated protease, an enzyme that is active primarily in the tumor microenvironment, the proteasecleaves the linker and releases the mask, freeing the antibody component to attack the tumor. We believe that this approach will localize therapeutic effectsto the tumor and minimize toxicities in healthy tissue, as shown in the figure below: Each Probody therapeutic is recombinant; that is, it is created using molecular biology techniques so that both the binding function and the cleavablelinker function are encoded in the nucleic acid sequence and expressed as a single protein, like other monoclonal antibody therapeutics.The design of the mask peptide and protease-cleavable linker is technically challenging. Together with experts in the field, we spent the last decadeconducting research to characterize protease activity and to engineer proteins to take advantage of specific proteases. In addition, we devised criteria foridentifying proteases that would work best in the context of our platform. Among these criteria, we targeted proteases that were: ·highly expressed in active form across multiple tumor types; ·either located on the outer cell surface or secreted by the cell; ·able to remove a mask from a Probody therapeutic; and ·significantly less active in normal, healthy tissues or in blood.We have chosen and optimized protease-cleavable linkers so that any one of a number of activated proteases can cleave them. For example, our linkerscan be cleaved by proteases such as matriptase and matrix metalloproteases, which have been shown to be active in numerous cancers such as colon, breastand pancreatic. Using this approach, we believe our Probody therapeutics can be cleaved and activated by at least one protease in the majority of tumors. Wealso developed a proprietary process to identify and optimize the mask peptides.Mask peptides must be potent enough to block the normal target binding activity of the antibody, but weak enough that they are readily displacedupon protease cleavage. We believe our expertise in fine-tuning our platform technology is a competitive advantage.Our Pipeline Strategies For Our Probody PlatformOur First Pipeline StrategyA novel class of cancer immunotherapies directed against clinically-validated targets. Through our technology platform, we believe that we canexpand the therapeutic window for clinically-validated targets where current therapies have encountered challenges with respect to safety or efficacy. Wehave validated this approach preclinically with multiple targets, and plan to develop multiple novel Probody therapeutics in the field of immuno-oncologyto address just such issues. Our first Probody product candidate in this area, CX-072, is directed against PD-L1 and is described later in this section.9 Opportunity for safer and more effective therapies in immuno-oncology. We believe we have multiple opportunities to enter the immuno-oncologyfield given the potentially enhanced safety and efficacy profiles of our Probody product candidates. In particular, therapeutic approaches already validatedby current drugs offer us attractive entry points. The approaches we are targeting initially are checkpoint inhibitors, where severe dose- limiting toxicitieshave been observed, especially in combination therapies.The immune system is capable of recognizing and eliminating tumor cells; however tumors are sometimes able to block the immune response throughalteration of regulatory checkpoint pathways. Tumors express proteins, called checkpoint proteins, which can apply the brakes to the immune system,preventing it from attacking the tumor. By creating a monoclonal antibody that inhibits these proteins, the brakes can be released, and the immune systemcan eliminate the tumor. Novel cancer therapies that target these proteins are being tested in clinical trials by others, and three antibody products,ipilimumab, pembrolizumab and nivolumab, have recently been approved by the United States Food and Drug Administration (the “FDA”).While this approach has resulted in remarkable clinical results, including long-term remissions in patients who previously would have died, there aresignificant toxicities associated with these therapies. Because tumors use the same mechanisms to inhibit the immune system that the body uses to ensure thatthe immune system does not attack normal tissues, these therapies release the brakes not only in the tumor, but also elsewhere in the body. This can result inthe immune system attacking normal tissues and a number of toxicities, including, for example, severe lung inflammation.Combination therapy is the next frontier in immuno-oncology. While single-agent therapy has proven to be effective in certain patients (inducingeffective, durable remissions), the oncology community is currently exploring new, more potent combinations to create longer-term and more durableresponses in a larger percentage of patients. This new potency addresses the lack of response seen in the majority of patients, but it brings with it additionaltoxicity. Data emerging from clinical studies has suggested that some combinations may provide promising enhanced anti-tumor efficacy, but at the expenseof greater toxicities that may limit their clinical utility. In a recent clinical trial, 58% of patients treated with the combination of nivolumab and ipilimumabhad an objective response, but 36% had adverse events severe enough that they had to withdraw from the trial and discontinue combination therapy. Thatwithdrawal rate compared to 8% of patients receiving nivolumab alone and 15% of patients receiving ipilimumab alone. In another recent study, high gradedrug- related toxicities persisted in approximately 29% of patients, even when the doses of the drugs were reduced and they were given less often.Our Probody therapeutic solution for immuno-oncology. Recent research results have suggested that immunotherapy that is specifically directed tothe tumor microenvironment while sparing the rest of the body may allow efficacy without the toxicities seen with systemic delivery of these drugs. In amouse model investigators have shown efficacy of antibodies targeting CTLA-4 at much lower doses when the antibody was injected directly into a tumorrather than infused into the blood stream and delivered systemically. This result suggests that there are sufficient tumor-reactive immune cells, called T-cells,activated by the antibodies targeting CTLA-4 within the tumor to elicit an anti-tumor response, and that activation of T-cells outside of the tumor is notrequired to get the desired therapeutic effect. Therefore, local activation of immuno-oncology agents, such as checkpoint inhibitors, in the tumormicroenvironment may yield efficacy while minimizing systemic exposure that may lead to toxicity.Based on these results and our own research, we believe that inhibiting the checkpoints on T-cells locally, rather than systemically, using the Probodytechnology will significantly reduce toxicities and increase the tolerability of these types of cancer immunotherapies, especially in combination with othertherapies. We believe that the challenges faced by combinations, including combinations with PD-L1 checkpoint inhibitors, will be observed across manyclasses of immuno-oncology therapeutics and other cancer therapeutics. We believe that Probody therapeutics represent an attractive way to limit or avoidthe toxicities that are observed in these approaches, leading to better efficacy and safety. We believe that CX-072, our PD-L1 Probody therapeutic andfollow-on product candidates against other immuno-oncology targets, for example, PD-1, have the potential to become a new backbone of the combinationtherapy in immuno-oncology.10 The following graphic illustrates the central role in immuno-oncology that we believe CX-072 could play as a combination therapy partner for avariety of existing therapeutics: Our Second Pipeline StrategyNovel first-in-class therapeutics directed against difficult-to-drug targets. We believe we can create a therapeutic window in patients for targets wherenone exists in cases where current approaches have not been viable or are not expected to be viable because of toxicity concerns. Furthermore, our Probodytechnology potentially enables us to take better advantage of the most potent modalities of monoclonal antibody therapeutics such as ADCs and bispecificantibodies, which can be too toxic to use in some settings. We have validated this approach with multiple preclinical Probody therapeutics. Our first Probodyproduct candidate in this area is CX-2009, a PDC directed against CD-166, described later in this section.Opportunity for therapies against difficult-to-drug targets. We are addressing targets that are difficult to drug, in a way that we believe will makethese targets useful for cancer therapies for the first time. The development of oncology therapeutics has traditionally been hindered by the need to find“druggable” targets, that is, proteins that not only can be biologically affected by therapeutics, but also are found in abundance on tumor cells and not soabundantly on normal cells. Based on the conventional paradigm, a druggable target must be expressed at very low levels, or be absent, on healthy cells orthere will likely be indiscriminate cell killing and toxicities as a result. Further, the target should be expressed at high levels in tumors to allow delivery ofhigh levels of cytotoxic drug to the tumor. As a consequence, only a small number of targets have an expression profile that is suitable for developingeffective oncology drugs and avoiding toxicity in normal tissues. This is especially the case for the new generation of highly potent antibody-basedtherapies, such as ADCs, T-cell- recruiting bispecific antibodies, and others, whose extreme potency typically demands even more stringent target selection.Accordingly, targets that are difficult to drug due to their wide expression represent a very attractive new space for cancer drug development that othercompanies have largely not been able to pursue. Given our Probody technology, we believe we are in a position to address many new targets in previouslyuntapped areas and open up a greater portion of tumor biology to therapeutic intervention.Our Probody solution to difficult-to-drug targets. To be effective therapeutics, ADCs must bind to highly expressed tumor targets to enable thedelivery of enough Cytotoxic payload to kill tumor cells, yet bind at low levels to normal tissues. We have systemically surveyed the human genome toidentify targets for PDCs that are highly expressed in tumor tissue but that have not been pursued by others because of the concern of toxicity due to healthytissue expression. Our Probody therapeutics have the potential to deliver more payload to tumor tissue but not significantly bind normal tissues, therebycreating products with viable therapeutic windows in patients. We have identified and are pursuing a number of such targets, such as CD-166. CD-166 isexpressed at high levels in tumor cells, which may allow delivery of high levels of cytotoxin and therefore enable efficient tumor killing. Further, unlikeconventional ADC targets, which are found in only a small number of tumor types because of their requirements for low normal tissue expression, PDC targetscan be found in many different tumor types, suggesting that these product candidates could address very large markets.11 PDC targets are expressed in many more cancers than validated ADC targets. Shown below is the prevalence of high level expression of certainclinically-validated targets: Breast Prostate Pancreas Ovarian NHL Lung Bladder CD-166 70% 80% 20% 50% — 70% 15% PDC TargetsCD-71 50% 30% 50% 60% >90% 70% 50% ITGA3 15% 10% >90% 75% — 15% >95% Typical ADC TargetsHER2 25% <5% <5% <5% — <5% <5% CD-30 — — — — ~50% — — Our Third Pipeline StrategyCollaborations with leading biopharmaceutical companies to advance Probody product candidates. We believe that the Probody platform has broadapplicability across a number of targets and antibody formats. We have leveraged strategic partnering to extend the reach of our therapeutic opportunity.Since the beginning of 2013, we have entered into product-focused collaborations with Pfizer, ImmunoGen, and BMS to enable development of certainProbody therapeutics. In constructing each of these collaborations, our primary objectives were to collaborate with leading biopharmaceutical players tovalidate the potential of Probody therapeutics, to gain meaningful near-term funding and/or technology access to enable advancement of CytomX’s whollyowned Probody therapeutics pipeline, and to retain significant milestones and royalties for long term upside. The details of our three existing collaborationsare as follows: ·BMS Probody therapeutic collaboration. In May 2014, we entered into a collaboration with BMS for up to four targets. The initial focus ofthis collaboration is to develop Probody therapeutics against certain immunotherapy targets. We chose to form a collaboration with BMSbecause we believe that they have industry leading capabilities in immunotherapy, including approved products such as Yervoy, targetingCTLA-4, and Opdivo, targeting PD-1. The BMS collaboration provides us with a $50 million upfront payment, up to $25 million in additionaltarget nomination fees, research funding, up to $1,192 million in development, regulatory, and commercial milestones and mid-single digit tolow-teen royalties on net sales of products arising from this collaboration. Our collaboration is structured such that we are responsible forgenerating Probody therapeutics against selected BMS targets. BMS is responsible for development and commercialization for each of the fourproduct candidates and bears all such costs in the collaboration. BMS has selected three of the targets in this collaboration and has an option tonominate one additional target. The most advanced product candidate in this collaboration is our CTLA-4 Probody product candidate, which iscurrently in lead optimization stage. In preclinical models, our CTLA-4 Probody candidate has demonstrated in vivo efficacy with reducedsystemic T-cell activation as compared to the underlying CTLA-4 antibody. Given their success with Yervoy, an antibody that targets CTLA-4,we believe that BMS is the optimal partner to advance a Probody therapeutic against this clinically-validated target. The second target thatBMS has selected is also a cancer immunotherapy target. In preclinical models, Probody candidates against this target have demonstrated invivo efficacy with reduced toxicity as compared to the underlying antibody. ·Pfizer PDC collaboration. In May 2013, we entered into a collaboration with Pfizer for up to four targets. We chose to form a collaborationwith Pfizer because we believe that they have industry leading capabilities in ADCs, including access to proprietary drug conjugate linkers andtoxins. The Pfizer collaboration provides us with up to $25 million in upfront payments, research funding, and near term milestones, up to $610million in development, regulatory, and commercial milestones, and mid-single digit to low-teen royalties. Our collaboration is structured suchthat we are responsible for generating Probody therapeutics against Pfizer-selected targets and Pfizer is responsible for conjugating the Probodytherapeutics with their proprietary toxins and related linkers to create PDCs. If Pfizer exercises its option for a commercial license, it would beresponsible for development and commercialization for each of the four product candidates and would bear all costs in the collaboration. Pfizerhas selected three of the targets in this collaboration and has an option to nominate one additional target. The most advanced program in thecollaboration is in the lead optimization stage.12 ·ImmunoGen PDC collaboration. In January 2014, we entered into a collaboration with ImmunoGen in which we gained limited access toImmunoGen’s drug conjugate technology in exchange for ImmunoGen gaining limited access to our Probody platform. We chose to form acollaboration with ImmunoGen because they have drug conjugate technology that has been clinically-validated for multiple antibodyproducts targeting solid tumor indications, including Kadcyla and mirvetuximab soravtansine. Our collaboration is structured so that we haveaccess to ImmunoGen’s toxins and related linkers for one of our PDC targets. We have elected to utilize this license to enable our CD-166 PDCprogram. ImmunoGen is responsible for conjugating our Probody product candidate with their proprietary toxins and related linkers to createthe PDC for our research and preclinical development. We have selected CX-2009 as the proprietary candidate for our CD-166 PDC program. InFebruary 2016, we exercised our option under the collaboration agreement with ImmunoGen and obtained a development and commerciallicense for this product. Under the license agreement, we will pay ImmunoGen up to $60 million in development and regulatory milestones, upto $100 million in sales milestones, and tiered mid to high single digit royalties. ImmunoGen gains access to our Probody platform for twotargets, and have already nominated both of these targets. We are responsible for generating Probody therapeutics against these ImmunoGentargets and ImmunoGen is responsible for conjugating these using their proprietary toxins and related linkers to create the PDCs. ImmunoGen retains full development and commercial rights for these products, and ImmunoGen owes us up to $30 million in development andregulatory milestones, $50 million in sales milestones, and mid-single digit royalties per program. The most advanced ImmunoGen product iscurrently at discovery stage.Our Product CandidatesThe following chart provides an overview of the status of each of the programs in our pipeline: PD-L1 OverviewThe immune system is capable of recognizing and eliminating tumor cells; however, tumors are sometimes able to evade the immune response throughalteration of regulatory checkpoint pathways. One of these pathways is driven by PD-L1 which is overexpressed by some tumors. PD-L1 binds to its receptor,PD-1, on immune T-cells and can suppress immune activation. Between 35% and 100% of certain types of cancer, such as melanoma, hepatocellularcarcinoma, colorectal cancer, and non-small cell lung cancer, overexpress PD-L1. Novel cancer therapies that target PD-L1 or PD-1 are being tested in clinicaltrials by others.13 Limitations to Current PD-L1-Targeted TherapeuticsThe normal role of the PD-L1/PD-1 pathway is to prevent autoimmune attacks against healthy tissue in the body. Due to the systemic inhibition of thispathway by current cancer immunotherapies, patients face the risk of a number of adverse events associated with inappropriate activation of the immunesystem beyond the tumor site, including severe lung inflammation. Thus, although PD-L1/PD-1 pathway inhibitors are highly promising in multiple cancers,their toxicity presents a challenge that has not been effectively addressed by existing therapies, particularly when used in combination with otherimmunotherapies.Our Product Candidate, CX-072, PD-L1 Probody TherapeuticOur PD-L1 Probody therapeutic, CX-072, is based on a monoclonal antibody targeting PD-L1 that we developed. We anticipate filing an IND, orsimilar regulatory filing, for CX-072 with the FDA or a foreign regulatory authority in the second half of 2016.Our preclinical results have shown that CX-072 binds more weakly to PD-L1 than its underlying antibody in the absence of protease activationbecause of the presence of the mask. Once the mask is removed, the released antibody component of CX-072 binds to human, mouse, and non-human primatePD-L1 tightly. CX- 072 has shown in vivo efficacy comparable to well-published reference PD-L1-targeting antibodies in various animal models. We expectthe tolerability of CX-072 to be higher than other PD-L1-targeting antibodies due to the fact that CX-072’s activity has been shown to be attenuated by themask such that it does not significantly inhibit the PD-L1/PD-1 checkpoint pathway outside of the tumor.PD-L1 presents, we believe, an ideal case for the development of a Probody product candidate because it is a clinically validated immuno-oncologytarget. Further, the fact that PD-L1 is expressed on the surface of tumor cells, physically near to where proteases are found, potentially may favor the efficientcleavage and activation of the PD-L1 Probody therapeutic close to its site of action and ensure the Probody therapeutic will be maximally efficacious.Preclinical DataThe efficacy of our PD-L1 Probody product candidate in a mouse MC38 xenograft model of colon adenocarcinoma is equivalent to that observed withthe PD-L1 monoclonal antibody it was derived from and to published studies of other PD-L1 antibodies, signifying that the Probody therapeutic is activatedin tumors in this animal model. Multiple studies have demonstrated that inhibition of PD-L1 by monoclonal antibodies induces autoimmunity in a mouseautoimmune diabetes induction model. The lack of significant systemic activation of this Probody therapeutic was evidenced by its reduced ability to induceautoimmune diabetes compared to the parental antibody. Systemic dosing of a PD-L1 Probody therapeutic in this mouse model did not lead to diabetes inany of the mice while the majority of mice who received the same dose of the parental PD-L1 antibody developed diabetes within one week.The following graphs demonstrate the comparable efficacy of a PD-L1 Probody therapeutic and a PD-L1-seeking antibody in a mouse colon cancerxenograft model (left panel), as compared to the greater relative safety of the PD-L1 Probody therapeutic (right panel): 14 To investigate further, we examined how much antibody or Probody therapeutic was present in blood and bound to T-cells in these mice. As shownbelow in the left panel, the PD-L1 Probody therapeutic and antibody were present at equal levels in the blood. However, as shown below in the right panel, asignificant amount of antibody targeting PD-L1 was found attached to T-cells in the blood while very little of the Probody therapeutic was found attached tothese cells: These observations are consistent with our prediction that Probody therapeutic CX-072 should minimally interact with its target, PD-L1, outside of thetumor, should not bind significantly to immune cells in the blood or in the pancreas, and therefore should not induce autoimmunity to the extent that aconventional antibody targeting PD-L1 does. We believe our findings demonstrate for the first time that a PD-L1 blockade limited to the vicinity of thetumor microenvironment is sufficient to drive anti-tumor responses.Clinical Plan Including Potential CombinationsWe intend to initially investigate the clinical potential of our PD-L1 Probody therapeutic in a Phase 1 trial in indications where preliminary efficacyhas already been demonstrated with other PD-L1 antibody products used as monotherapy, such as in melanoma, non-small cell lung cancer or bladder cancer.We intend to assess the utility of selecting patients using biomarkers, such as the expression of PD-L1 in the tumor, to increase the probability of patients inour trials responding to our product candidate. We also intend to examine whether the PD-L1 Probody therapeutic is activated in tumors but not systemically.While the primary goal of our Phase 1 trial is safety, we will also assess preliminary evidence of efficacy. We intend to advance our PD-L1 Probodytherapeutic into combination trials where our aim is to demonstrate reduced toxicity with similar efficacy versus other combination therapies. Because a largeproportion of patients in early trials of combination immunotherapies, such as the combination of ipilimumab and nivolumab, had to withdraw due totoxicity, we believe that a PD-L1 Probody therapeutic has the potential to treat a larger proportion of patients for a longer period of time, allowing morepatients to benefit from therapy. We believe that our PD-L1 Probody therapeutic has the potential to become a centerpiece of combination cancer therapy.Our Product Candidate, CX-2009, CD-166 Probody TherapeuticCD-166 OverviewCD-166, also referred to as activated leukocyte cell adhesion molecule (“ALCAM”) is involved with cell adhesion and migration. It is expressed atvery high levels in many tumors including 70% or more of prostate, breast, and lung cancers and 50% of ovarian cancers. Its expression has been linked tocancer stem cells and overall poor prognosis in cancers such as colorectal cancer. Preliminary experiments conducted at the University of Oslo in a mousecolorectal xenograft model using a CD-166 single-chain antibody delivered directly to the tumor confirmed the potential efficacy of targeting CD-166.However, we believe that CD-166 is a poor candidate for standard antibody-based therapies, including ADCs, because it is widely expressed in many normaltissues.Our Solution, CD-166 PDCOur CD-166 PDC, CX-2009, composed of a Probody therapeutic targeting the CD-166 protein antigen coupled to a highly potent cytotoxic drug,DM4. We anticipate filing an IND for CX-2009 in the first half of 2017.15 CD-166 is a cell surface protein that is highly expressed in a wide variety of tumors. While its broad and high expression in tumors makes it a veryattractive target for antibody-based therapeutics, CD-166 is also expressed in normal tissues, which would normally raise toxicity concerns. We believe thatthe wide expression of CD-166 would rule out the development of a standard ADC against this target. By contrast, based on preclinical findings, our Probodyplatform enables us to generate a CD-166 antibody product that remains largely inactive until it reaches the tumor, thus reducing unwanted toxicityassociated with binding to cells in normal tissue. As a result, we believe we can create a therapeutic window in patients for our CD-166 PDC where noneexisted before. In preclinical animal models, we have shown that our CD-166 PDC has antitumor activity similar to a CD-166 monoclonal ADC and is well-tolerated.We chose to conjugate the antibody component of our CD-166 Probody candidate with a highly potent cytotoxic drug, DM4, developed by andlicensed from our partner ImmunoGen. DM4 has an established regulatory and clinical trial history including in ImmunoGen’s IMGN 853, or mirvetuximabsoravtansine, a potential new treatment for patients with folate receptor alpha-positive cancer including ovarian cancer. Our goal is to increase the efficacy ofour CD-166 Probody therapeutic by including this cytotoxic drug conjugate and we believe that our technology will limit potential systemic toxicityassociated with expression of CD-166 in healthy tissue.Preclinical DataThe tumor-selective activation of our CD-166 Probody product candidate has been demonstrated in the comparison of Probody therapeutic andantibody binding to CD-166 in healthy and cancerous colorectal tissue sections. The parental antibody targeting CD-166 bound to CD-166 on both normaland cancer samples. The Probody product candidate requires activation by proteases before it can effectively bind to CD-166, and because these proteases arepresent primarily in the cancer sample, the Probody product candidate specifically bound to the tumor and not to the healthy colon tissue. This is illustratedin the figure below: 16 We have also shown that the CD-166 PDC is as efficacious as a CD-166 ADC in a mouse H292 lung cancer xenograft model, as well as in othermodels. These findings confirm that sufficient local activation of our CD-166 Probody therapeutic occurs within the tumor microenvironment, resulting in anequivalent anti-tumor response to the CD-166 ADC. As shown in the following graphic, both product candidates not only prevented tumor growth but alsoled to tumor shrinkage over a one-month time span. We also investigated the safety of the CD-166 PDC in a three-week, single dose study in non-human primates. There was no evidence of on or off-target toxicity, including clinical signs, weight loss, or abnormal laboratory findings from this study, despite the expression of CD-166 in multiple non-human primate healthy tissues. The measurement of the blood level of liver-derived proteins call AST and ALT are typical indicators of liver toxicity.Notably AST and ALT did not change following treatment with the CD-166 PDC despite high- level expression of CD-166 in non-human primate liver tissue,as shown in the figure below. We are planning to conduct additional dosing toxicity experiments. Clinical PlanWe anticipate filing an IND for CX-2009, our CD-166 PDC, in the first half of 2017. We intend to test the CX-2009 in patients with tumors thatexpress high levels of CD-166, including cancers that have no existing effective therapies, which may enable accelerated development and registrationstrategies, such as breakthrough therapy and fast-track designations. We will investigate whether a companion diagnostic is useful in identifying patientsmore likely to respond to our drug, such as a test that examines the level of expression of CD-166 in the tumor. We expect that any Phase 1 trial will primarilyassess safety and will also look for preliminary evidence of efficacy. We also expect to examine whether the Probody therapeutic against CD-166 is activatedin patient tumors, but not systemically.17 Other Product Candidates in Preclinical DevelopmentWe are actively pursuing the application of our Probody technology to multiple other product candidates. These include other product candidatesdirected against checkpoint pathways, and other first-in-class PDC product candidates. We have applied our technology and are advancing productcandidates based on T-cell- recruiting bispecific antibodies. We also recognize that new immunocellular therapies such as CAR-T therapies rely onrecognition of tumor antigens using molecular components that may be synthesized as Probody constructs. We believe that our technology has the potentialto enhance the therapeutic window of CAR-T therapies enabling them to translate their remarkable clinical responses in hematological tumors to solidtumors.Bispecific Probody TherapeuticsA bispecific antibody is a product that is engineered to simultaneously recognize two distinct antigens. In oncology, bispecific antibodies are oftendesigned to bind both a tumor antigen and a T-cell antigen such as CD3, directly activating the T-cell in the vicinity of the tumor, thereby killing thecancerous cells. Blinatumomab is an example of a bispecific product that has recently been approved for the treatment of relapsed or refractory ALL.Blinatumomab recognizes the CD19 target on tumor cells as well as CD3 on T-cells, resulting in activation of the T-cells and generation of an effectiveimmune response against the tumor. The challenge facing the development of bispecific antibodies is the same as that faced by other tumor-antigen basedtherapies—high potency directed against tumor antigens that are also expressed on healthy cells, leading to toxicity. T-cell- recruiting bispecific antibodieshave been successfully developed for hematologic cancers like leukemia in part because the targets for those cancers are also present on dispensable healthycells and the toxicity is therefore manageable. In contrast, T-cell-recruiting bispecific antibodies have been particularly difficult to develop against solidtumors in part because those targets are frequently also present on important healthy cells and the toxicity can be difficult to manage.We believe that our Probody platform has the potential to take advantage of the potency of T-cell- recruiting bispecific antibodies to kill solid tumorsbut largely avoid the toxicity caused by interaction with essential healthy tissues. To demonstrate this, we have applied our know-how to the design of abispecific Probody therapeutic that binds to CD3 on T-cells and EGFR on solid tumor cells. We demonstrated that this bispecific Probody therapeutic wasefficacious in a mouse model of colorectal cancer at doses that were similar to the bispecific antibody from which it was derived.The following graph demonstrates the comparable efficacy of our bispecific Probody therapeutic and a the bispecific antibody from which it wasderived, in a mouse model of colorectal cancer: 18 In addition, our preclinical studies support that the bispecific Probody therapeutic was more than tenfold safer than the bispecific antibody in non-human primates as measured by blood tests of vital organ function and for release into the bloodstream of toxic molecules called cytokines: Based on this proof of concept data, we intend to generate and optimize T-cell-recruiting bispecific Probody therapeutic candidates against a varietyof targets.CTLA-4 Probody Product Candidate in Collaboration with BMSWe are developing a CTLA-4 Probody therapeutic with BMS. Published data in mouse models have demonstrated the potential value of localizedintratumoral delivery of CTLA-4 antibodies to maintain efficacy while limiting toxicity. We believe that our CTLA-4 Probody therapeutic can effectivelylocalize CTLA-4 antibody activity to the tumor while allowing systemic dosing, thereby limiting systemic toxicities normally seen with Yervoy. We believethat BMS is the optimal strategic partner for our CTLA-4 Probody therapeutic given their expertise in cancer immunotherapy and their success with Yervoy.CTLA-4 Overview. CTLA-4 is an immune checkpoint involved in regulating T-cell activation. BMS is currently marketing a CTLA-4 monoclonalantibody, Yervoy, that has been approved for unresectable or metastatic melanoma. CTLA-4 antibodies lead to T-cell activation for a wide range of antigens,including tumor antigens, which is the basis for its anti-tumor effect, and self-antigens, which may be the basis for the autoimmune toxicities associated withCTLA-4 antibodies therapies. In partnership with BMS, we are developing a CTLA-4 Probody therapeutic. The FDA approval for ipilimumab comes with ablack box warning about potential severe and fatal immune-related adverse events. While the toxicities associated with ipilimumab can be successfullymanaged in many patients, up to 27% of patients in a phase 2 trial discontinued treatment due to adverse events. The use of ipilimumab in combinationtherapy with nivolumab, a PD-1 checkpoint inhibitor, led to increased rates of serious adverse events with 55% of patients with a severity of grade 3 or 4events in patients treated with both drugs compared to 27% in the ipilimumab- treated patients and 16% in the nivolumab treated-patients.We believe the systemic toxicity associated with CTLA-4 directed therapy might be reduced by local delivery of CTLA-4 antibodies to the tumor. Inprevious experiments with a MC-38 xenograft mouse model, investigators have shown local infusion of small doses of the antibody directly into the tumorresulted in an anti- tumor response and increased survival while lowering the systemic levels of the CTLA-4 antibody by approximately 1,000 fold. In MC-38xenograft preclinical models, our CTLA-4 Probody candidate has demonstrated in vivo efficacy with reduced activity on peripheral T-cells as compared toCTLA-4 antibody. We believe that our CTLA-4 Probody therapeutic can be dosed systemically, achieve localized tumor-specific activation, and thusachieve a clinically important improvement in safety.PD-1 Probody TherapeuticPD-1 is the receptor for the PD-L1 ligand responsible for inhibiting T-cell activation. It is the target for various immuno-oncology products includingnivolumab and pembrolizumab, which have been approved for melanoma. Because, like PD-L1, inhibiting PD-1 is associated with immune attack on normalcells, PD-1 therapy has been associated with significant toxicities, especially when used in combination with ipilimumab, another immunotherapy. We aredeveloping a PD-1 Probody therapeutic as an additional approach to block the PD-L1/PD-1 pathway.19 CD-71 PDC ProgramTransferrin receptor 1, also known as CD-71, is a protein that is essential for iron uptake in dividing cells, is expressed at low levels in most normaltissues and is overexpressed in tumor cells. The combination of high expression in tumors and ubiquitous expression in normal tissue makes CD-71 adifficult target for conventional ADCs and an ideal candidate for development of a PDC. Our CD-71 PDC has demonstrated efficacy in lung and breastxenograft models and is well-tolerated preclinically.Integrin alpha-3 PDC ProgramIntegrins are cell surface proteins that are responsible for cell-cell and cell-extracellular matrix interactions. Integrin alpha-3 or ITGA3 is highlyexpressed and highly prevalent in cancers such as pancreatic, ovarian, and breast and it has been associated with tumorigenesis and metastasis. Our ITGA3PDC has demonstrated efficacy in multiple xenograft models and is well-tolerated preclinically.ManufacturingOur Probody candidates are designed to be produced as fully recombinant antibody prodrugs. Our Probody candidates are also designed to maintainthe manufacturability benefits of antibodies and leverage well established technologies used for antibody production. We have significant expertise in theproduction of therapeutic biologics. We conduct cell line development and process development both in-house and in collaboration with contractmanufacturing organizations (“CMOs”). CMOs are responsible for actual production of clinical drug product and drug substance materials.Our process development and manufacturing strategies are tailored to rapidly advance our two lead programs and we employ multiple complementaryapproaches to ensure successful execution. Our lead Chinese hamster ovary cell line has been successfully used for manufacturing several antibodies andrequires minimal process optimization to establish a process to support early phase manufacturing. We utilize well established production steps typically partof a platform manufacturing process for antibodies. The CMO we have selected has a strong track record in manufacturing therapeutic biologics, includingantibodies. All activities from cell line development to formulated drug product are performed at one location to maintain aggressive timelines and minimizedelays that can result from engaging multiple parties for manufacturing. Similarly, for our PDC projects we have selected CMOs with strong expertise inclinical/commercial drug conjugate manufacturing and with capabilities for toxin conjugation and fill-finish. Furthermore, our lead PDC programincorporates a toxin payload that has an established clinical and regulatory history.CompetitionThe biotechnology and biopharmaceutical industries, and the immuno-oncology subsector, are characterized by rapid evolution of technologies,fierce competition and strong defense of intellectual property. Any product candidates that we successfully develop and commercialize will have to competewith existing therapies and new therapies that may become available in the future. While we believe that our proprietary Probody platform and scientificexpertise in the field of biologics and immuno-oncology provide us with competitive advantages, a wide variety of institutions, including largebiopharmaceutical companies, specialty biotechnology companies, academic research departments and public and private research institutions, are activelydeveloping potentially competitive products and technologies. We face substantial competition from biotechnology and biopharmaceutical companiesdeveloping products in immuno-oncology. These competitors generally fall within the following categories:Cancer immunotherapies: AdaptImmune LLC, AstraZeneca PLC, BMS, GlaxoSmithKline plc, Idera Pharmaceuticals, Inc., Immune Design Corp,Merck & Co., Inc., NewLink Genetics Corporation, Novartis AG, Pfizer, Roche Holding Ltd and Sanofi SA.Antibody drug conjugates: ImmunoGen and Seattle Genetics, Inc.Immune-based treatments for cancer, such as CAR-T, TCR therapies, and Dendritic cell based therapies: Argos Therapeutics, Inc., BellicumPharmaceuticals, Inc., Biovest International, Inc., Bluebird bio, Inc., Celgene Corporation, Cellectis SA, ImmunoCellular Therapeutics, Ltd., InovioPharmaceuticals, Inc., Intrexon Corporation, Juno Therapeutics, Inc., Kite Pharma, Inc., NantKwest, Inc., Northwest Biotherapeutics, Inc., Novartis AG, Pfizerand Valeant Pharmaceuticals.20 Many of our competitors, either alone or with strategic partners, have substantially greater financial, technical and human resources than we do.Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance, renderingour treatments obsolete or non-competitive. Accelerated merger and acquisition activity in the biotechnology and biopharmaceutical industries may result ineven more resources being concentrated among a smaller number of our competitors. These companies also compete with us in recruiting and retainingqualified scientific and management personnel, establishing clinical study sites and patient registration for clinical studies and acquiring technologiescomplementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly throughcollaborative arrangements with large and established companies. Our commercial opportunity could be substantially limited in the event that ourcompetitors develop and commercialize products that are more effective, safer, less toxic, more convenient or less expensive than our comparable products. Ingeographies that are critical to our commercial success, competitors may also obtain regulatory approvals before us, resulting in our competitors building astrong market position in advance of our products’ entry. We believe the factors determining the success of our programs will be the efficacy, safety andconvenience of our product candidates.Intellectual PropertyWe strive to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to our business,including seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. Our policy is to seek to protect ourproprietary position by, among other methods, pursuing and obtaining patent protection in the United States and in jurisdictions outside of the United Statesrelated to our proprietary technology, inventions, improvements, platforms and product candidates that are important to the development andimplementation of our business. Our patent portfolio is intended to cover, but is not limited to, our technology platforms, our product candidates andcomponents thereof, their methods of use and processes for their manufacture, our proprietary reagents and assays, and any other inventions that arecommercially important to our business. We also rely on trade secret protection of our confidential information and know-how relating to our proprietarytechnology, platforms and product candidates, continuing innovation, and in-licensing opportunities to develop, strengthen, and maintain our proprietaryposition in our Probody platform and product candidates. We expect to rely on data exclusivity, market exclusivity, patent term adjustment and patent termextensions when available. Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for ourtechnology, inventions, and improvements; to preserve the confidentiality of our trade secrets; to maintain our licenses to use intellectual property owned orcontrolled by third parties; to defend and enforce our proprietary rights, including our patents; to defend against and challenge the assertion by third partiesof their purported intellectual property rights; and to operate without the unauthorized infringement on the valid and enforceable patents and otherproprietary rights of third parties.We believe that we have a strong global intellectual property position and substantial know-how and trade secrets relating to our Probody technology,platform and product candidates. Our patent portfolio as of March 1, 2016 contains six United States (“U.S.”) issued patents and one non-U.S. issued patentowned solely by CytomX and four U.S. issued patents that we co-own with the University of Santa Barbara (“UCSB”). We also have 33 U.S. pendingapplications as well as 91 non-U.S. pending applications owned solely by CytomX, as well as one U.S. pending application and six non-U.S. pendingapplications that we co-own with UCSB. We have exclusively licensed UCSB’s rights in the co-owned issued and pending patents. We also co-own one U.S.issued patent and one U.S. pending application with the University of California, San Francisco (“UCSF”). These patents and patent applications includeclaims directed to: ·Probody platform and PDC platform; ·Other pro-protein platforms; ·Probody conjugates and conjugation methods to produce PDCs; ·Bispecific and other multispecific Probody therapeutics, including T-cell-recruiting bispecific Probody therapeutics; ·Protease-cleavable linkers, e.g., serine protease- or MMP-cleavable linkers; ·Improved display systems for peptide display, e.g., to identify masks, substrates, and other proteins; ·Cancer immunotherapy Probody therapeutics, e.g., PD-L1, PD-1, and CTLA-4 Probody therapeutics, as well as related novel antibodies andcombination therapies; ·PDCs, e.g., CD-166, CD-71 (transferrin receptor), and CD49c (integrin alpha 3) PDCs, as well as related Probody therapeutics, novel antibodiesand ADCs; ·Probody therapeutics to other targets, e.g., EGFR, Jagged, and IL6R Probody therapeutics, as well as related PDCs, novel antibodies and ADCs;21 ·Antibodies that bind Probody therapeutics, e.g., anti-mask and anti-Probody antibodies; and ·Antibodies that bind the active site of uPA protease.In addition, we have exclusively licensed the following patent portfolio from UCSB: nine U.S. issued patents; five non-U.S. issued patents; three U.S.pending applications; and four non-U.S. pending applications. This patent portfolio covers compositions and methods related to screening and identificationof masks and protease-cleavable linkers that we incorporate into our Probody therapeutics.As for the Probody platform, product candidates and processes we develop and commercialize, in the normal course of business, we intend to pursue,where appropriate, patent protection or trade secret protection relating to compositions, methods of manufacture, assay methods, methods of use, treatment ofindications, dosing and formulations. We may also pursue patent protection with respect to product development processes and technology.We continually assess and refine our intellectual property strategy as we develop new platform technologies and product candidates. To that end, weare prepared to file additional patent applications if our intellectual property strategy requires such filings, or where we seek to adapt to competition or seizebusiness opportunities. Further, we are prepared to file patent applications, as we consider appropriate under the circumstances, relating to the newtechnologies that we develop. In addition to filing and prosecuting patent applications in the United States, we often file counterpart patent applications inthe European Union and in additional countries where we believe such foreign filing is likely to be beneficial, including but not limited to any or all ofAustralia, Brazil, Canada, China, Hong Kong, India, Israel, Japan, Mexico, New Zealand, Russia, South Africa and South Korea.The term of individual patents depends upon the laws of the countries in which they are obtained. In most countries in which we file, the patent term is20 years from the earliest date of filing of a non-provisional patent application. However, the term of United States patents may be extended due to delaysincurred due to compliance with FDA or by delays encountered during prosecution that are caused by the United States Patent and Trademark Office (the“USPTO”). For example, the Hatch-Waxman Act permits a patent term extension for FDA-approved drugs of up to five years beyond the expiration of thepatent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend theremaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended.Similar provisions are available in Europe and other jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when ourbiopharmaceutical product candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those product candidates.We intend to seek patent term extensions to any of our issued patents in any jurisdiction where these are available; however there is no guarantee that theapplicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and even ifgranted, the length of such extensions. Our currently issued patents will likely expire on dates ranging from 2028 to 2033, unless we receive patent termextension or adjustment. If patents are issued on our pending patent applications, the resulting patents are projected to expire on dates ranging from 2028 to2037, unless we receive patent term extension or adjustment. However, the actual protection afforded by a patent varies on a product-by-product basis, fromcountry-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions,the availability of legal remedies in a particular country, and the validity and enforceability of the patent.22 The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. No consistent policy regardingthe scope of claims allowable in patents in the field of immunotherapy has emerged in the U.S. The patent situation outside of the United States is even moreuncertain. Changes in the patent laws and rules, either by legislation, judicial decisions, or regulatory interpretation in the U.S. and other countries maydiminish our ability to protect our inventions and enforce our intellectual property rights, and more generally could affect the value of our intellectualproperty. In particular, our ability to stop third parties from making, using, selling, offering to sell, or importing any of our patented inventions, either directlyor indirectly, will depend in part on our success in obtaining, defending, and enforcing patent claims that cover our technology, inventions, andimprovements. With respect to both licensed and company-owned intellectual property, we cannot be sure that patents will be granted with respect to any ofour pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or anypatents that may be granted to us in the future will be commercially useful in protecting our platforms and product candidates and the methods used tomanufacture those platforms and product candidates. Moreover, even our issued patents do not guarantee us the right to practice our technology in relation tothe commercialization of our platforms product candidates. However, the area of patent and other intellectual property rights in biotechnology is an evolvingone with many risks and uncertainties, and third parties may have blocking patents that could be used to prevent us from commercializing our patentedProbody technology, platforms and product candidates and practicing our proprietary technology. Our issued patents and those that may issue in the futuremay be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related platforms or product candidates orlimit the length of the term of patent protection that we may have for our Probody technology, platforms, and product candidates. In addition, the rightsgranted under any issued patents may not provide us with protection or competitive advantages against competitors with similar technology. Furthermore,our competitors may independently develop similar technologies. For these reasons, we may have competition for our Probody technology, platforms andproduct candidates. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possiblethat, before any particular product candidate can be commercialized, any related patent may expire or remain in force for only a short period followingcommercialization, thereby reducing any advantage of the patent. For this and more comprehensive risks related to our proprietary technology, inventions,improvements, platforms and product candidates, please see the section entitled “Risk Factors—Risks Related to Intellectual Property.”We intend to file applications for trademark registrations in connection with our product candidates in various jurisdictions, including the U.S. TheUSPTO previously accepted the PROBODY mark under an intent-to-use trademark application. Because we were unable to show use for that mark withinthree years of acceptance, the mark became abandoned. We have re-filed for trademark protection of the PROBODY mark with the USPTO. We also have filedfor trademark protection of the IHZ mark with the USPTO.We also rely on trade secret protection for our confidential and proprietary information. Although we take steps to protect our confidential andproprietary information as trade secrets, including through contractual means with our employees and consultants, third parties may independently developsubstantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. Thus, we may not beable to meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchersand other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreementsprovide that all confidential information concerning our business or financial affairs developed or made known to the individual during the course of theindividual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, theagreements provide that all inventions conceived by the individual, and which are related to our current or planned business or research and development ormade during normal working hours, on our premises or using our equipment or proprietary information, are our exclusive property. In many cases ourconfidentiality and other agreements with consultants, outside scientific collaborators, sponsored researchers and other advisors require them to assign orgrant us licenses to inventions they invent as a result of the work or services they render under such agreements or grant us an option to negotiate a license touse such inventions.We also seek to preserve the integrity and confidentiality of our proprietary technology and processes by maintaining physical security of ourpremises and physical and electronic security of our information technology systems. Although we have confidence in these individuals, organizations, andsystems, agreements or security measures may be breached and we may not have adequate remedies for any breach. To the extent that our employees,contractors, consultants, collaborators, and advisors use intellectual property owned by others in their work for us, disputes may arise as to the rights inrelated or resulting know-how and inventions.23 In-LicensesLicense from UCSBIn August 2010, we entered into an agreement with Regents of the University of California (“UC”), acting through its Santa Barbara Campus, thatgrants us an exclusive license, with the right to sublicense, under the patent rights owned by UC covering mask and screening technologies in the field ofidentification and discovery of pro-protein biologics, including masks and substrates, for the identification of pro-proteins. The agreement also grants us anexclusive license, with the right to sublicense, under the patent rights co-owned by UC with us covering Probody antibodies and other pro- proteins in thefields of therapeutics, diagnostics, in vivo imaging and prophylactics.We had no upfront payment obligations under the agreement. We are required to make milestone payments to UC on the accomplishment of certainregulatory milestones, including a $300,000 payment due upon the first patient enrollment in the first Phase 3 clinical trial and a $500,000 payment dueupon approval of the first NDA by the FDA for each of the first two indications for each licensed product consisting of a molecule or compound covered bythe licensed patent rights. We have paid minimum annual royalties in increasing amounts to UC since 2011 in the aggregate amount of $405,000, and willpay annual minimum royalties of $150,000 beginning in 2016 and continuing for the term of the agreement. In addition, the agreement provides that we arerequired to pay to UC running royalties on net sales in the low single-digits. The agreement with UC requires us to meet specified due diligence productdevelopment milestones. We did not meet the milestones in 2013, 2014 and 2015, and we paid an extension fee of $25,000 for 2013 and $50,000 for each of2014 and 2015 to maintain the license. License from ImmunoGen In February 2016, we exercised our option to obtain a worldwide, exclusive, sublicensable license from ImmunoGen for development andcommercialization of products directed against the target selected by us under our research collaboration agreement with ImmunoGen. See the description ofthe license agreement set forth under the caption “Collaborations—ImmunoGen” in this Item 1 of this Annual Report on Form 10-K.Government Regulation and Product ApprovalGovernmental authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research,development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such asthose we are developing. Our therapeutic candidates must be approved by the FDA through the NDA or BLA process before they may be legally marketed inthe U.S. and will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals andthe subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financialresources.U.S. Government RegulationIn the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and, in the case of therapeutic biologics, the PublicHealth Services Act (“PHSA”), and implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the productdevelopment or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a materialadverse effect on us. These sanctions could include: ·refusal to approve pending applications; ·withdrawal of an approval; ·imposition of a clinical hold; ·warning or untitled letters; ·seizures or administrative detention of product; ·total or partial suspension of production or distribution; or ·injunctions, fines, disgorgement, or civil or criminal penalties.24 NDA and BLA approval processesThe process required by the FDA before a therapeutic may be marketed in the U.S. generally involves the following: ·completion of nonclinical laboratory tests, animal studies and formulation studies conducted according to good laboratory practices (“GLPs”),and other applicable regulations; ·submission to the FDA of an IND, which must become effective before human clinical trials may begin; ·performance of adequate and well-controlled human clinical trials according to good clinical practices (“GCPs”), to establish the safety andefficacy of the product candidate for its intended use; ·submission to the FDA of an NDA or BLA; ·satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product candidate is produced to assessreadiness for commercial manufacturing and conformance to the manufacturing-related elements of the application, to conduct a data integrityaudit, and to assess compliance with current good manufacturing practices (“cGMPs”) to assure that the facilities, methods and controls areadequate to preserve the product candidate’s identity, strength, quality and purity; and ·FDA review and approval of the NDA or BLA.Once a biopharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests includelaboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the nonclinicaltests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue even after the IND issubmitted. In addition to including the results of the nonclinical studies, the IND will also include a protocol detailing, among other things, the objectives ofthe clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacydetermination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND onclinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occurat any time during the life of an IND and may affect one or more specific studies or all studies conducted under the IND.All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCPs. They must be conductedunder protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectivenesscriteria to be evaluated. Each protocol, and any subsequent material amendment to the protocol, must be submitted to the FDA as part of the IND, andprogress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must report to the FDA serious and unexpectedadverse reactions in a timely manner, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol orinvestigation brochure or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the productcandidate. An institutional review board (“IRB”) at each institution participating in the clinical trial must review and approve the protocol before a clinicaltrial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each researchsubject or the subject’s legal representative, monitor the study until completed and otherwise comply with IRB regulations. There are also requirementsgoverning the reporting of ongoing clinical trials and completed clinical trial results to public registries.Human clinical trials are typically conducted in three sequential phases that may overlap or be combined. ·Phase 1—The product candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption,metabolism, distribution and elimination. In the case of some therapeutic candidates for severe or life-threatening diseases, such as cancer,especially when the product candidate may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing isoften conducted in patients. ·Phase 2—Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, topreliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. ·Phase 3—Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population atgeographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide anadequate basis for product labeling.25 A pivotal study is a clinical study that adequately meets regulatory agency requirements for the evaluation of a product candidate’s efficacy andsafety such that it can be used to justify the approval of the product. Generally, pivotal studies are also Phase 3 studies but may be Phase 2 studies if the trialdesign provides a reliable assessment of clinical benefit, particularly in situations where there is an unmet medical need. Human clinical trials are inherentlyuncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for avariety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspendor terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the productcandidate has been associated with unexpected serious harm to patients.During the development of a new product candidate, sponsors are given opportunities to meet with the FDA at certain points; specifically, prior to thesubmission of an IND, at the end of Phase 2 and before a BLA or NDA is submitted. Meetings at other times may be requested. These meetings can provide anopportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development.Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trialthat they believe will support the approval of the new therapeutic. If a Phase 3 clinical trial is the subject of discussion at the end of Phase 2 meeting with theFDA, a sponsor may be able to request a Special Protocol Assessment (“SPA”), the purpose of which is to reach agreement with the FDA on the Phase 3clinical trial protocol design and analysis that will form the primary basis of an efficacy claim.Post-approval trials, sometimes referred to as “Phase 4” clinical trials, may be conducted after initial marketing approval. These trials are used to gainadditional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate the performance of such“Phase 4” clinical trials.According to published guidance on the SPA process, a sponsor that meets the prerequisites may make a specific request for a SPA and provideinformation regarding the design and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the request to assesswhether the proposed trial is adequate, which evaluation may result in discussions and a request for additional information. A SPA request must be madebefore the proposed trial begins, and all open issues must be resolved before the trial begins. Although the FDA will assess protocols that have already begun,these assessments will not be subject to the 45-day review applicable to SPAs. If a written agreement is reached, it will be documented and made part of therecord. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreementof the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the product candidatewas identified after the testing began.Concurrent with clinical trials, sponsors usually complete additional animal safety studies, develop additional information about the chemistry andphysical characteristics of the product candidate and finalize a process for manufacturing commercial quantities of the product candidate in accordance withcGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and the manufacturermust develop methods for testing the quality, purity and potency of the product candidate. To help reduce the risk of the introduction of adventitious agentswith use of biological products, the PHSA emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined.The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other criteria, the sponsor mustdevelop methods for testing the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must beselected and tested, and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptabledeterioration over its shelf life. Additionally, for both NDA and BLA products, appropriate packaging must be selected and tested and stability studies mustbe conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its proposed shelf-life.The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests andother control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval tomarket the product.Under the Prescription Drug User Fee Act (“PDUFA”) as amended, each BLA or NDA must be accompanied by a significant user fee. The FDA adjuststhe PDUFA user fees on an annual basis. PDUFA also imposes an annual product fee for products and an annual establishment fee on facilities used tomanufacture prescription biological or drug products. Fee waivers or reductions are available in certain circumstances, such as where a waiver is necessary toprotect the public health, where the fee would present a significant barrier to innovation, or where the applicant is a small business submitting its first humantherapeutic application for review.26 Within 60 days following submission of the application, the FDA reviews a BLA or NDA submitted to determine if it is substantially complete beforethe agency accepts it for filing. The FDA may refuse to file any BLA or NDA that it deems incomplete or not properly reviewable at the time of submission,and may request additional information. In this event, the BLA or NDA must be resubmitted with the additional information. The resubmitted applicationalso is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review of theBLA or NDA. The FDA reviews the BLA to determine, among other things, whether the proposed product is safe, potent, and/or effective for its intended use,and has an acceptable purity profile, and in the case of an NDA, whether the product is safe and effective for its intended use, and in each case, whether theproduct is being manufactured in accordance with cGMP. The FDA may refer applications for novel products or products that present difficult questions ofsafety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as towhether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but itconsiders such recommendations carefully when making decisions.During the product approval process, the FDA also will determine whether a risk evaluation and mitigation strategies (“REMS”) plan is necessary toassure the safe use of the product. If the FDA concludes a REMS plan is needed, the sponsor of the BLA or NDA must submit a proposed REMS plan. TheFDA will not approve a BLA or NDA without a REMS plan, if required. The FDA has authority to require a REMS plan under the Food and DrugAdministration Amendments Act of 2007 (the “FDAAA”) when necessary to ensure that the benefits of a drug or therapeutic biologic outweigh the risks. Indetermining whether a REMS plan is necessary, the FDA must consider the size of the population likely to use the drug or therapeutic biologic, theseriousness of the disease or condition to be treated, the expected benefit of the drug or therapeutic biologic, the duration of treatment, the seriousness ofknown or potential adverse events, and whether the drug or therapeutic biologic is a new molecular entity. A REMS plan may be required to include variouselements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the risks, limitations on who mayprescribe or dispense the drug or therapeutic biologic, or other measures that the FDA deems necessary to assure the safe use of the drug or therapeuticbiologic. In addition, the REMS plan must include a timetable to assess the strategy at 18 months, three years, and seven years after the strategy’s approval.The FDA may also require a REMS plan for a drug or therapeutic biologic that is already on the market if it determines, based on new safetyinformation, that a REMS plan is necessary to ensure that the product’s benefits outweigh its risks.Before approving a BLA or NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the productunless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent productionof the product within required specifications. Additionally, before approving a BLA or NDA, the FDA will typically inspect one or more clinical sites toassure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. To assure cGMP and GCP compliance, anapplicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production and quality control.Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the BLA or NDA does not satisfy its regulatorycriteria for approval and deny approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than weinterpret the same data. If the agency decides not to approve the BLA or NDA in its present form, the FDA will issue a complete response letter that describesall of the specific deficiencies in the BLA or NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes,or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicantmight take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the BLA or NDA,addressing all of the deficiencies identified in the letter, or withdraw the application.Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages or the indications for usemay otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings orprecautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in theform of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimesreferred to as “Phase 4” clinical trials, designed to further assess a biological product’s safety and effectiveness, and testing and surveillance programs tomonitor the safety of approved products that have been commercialized.27 Companion DiagnosticsThe FDA issued a final guidance document in July 2014 addressing agency policy in relation to in vitro companion diagnostic tests. The guidanceexplains that for some drugs and therapeutic biologics, the use of a companion diagnostic test is essential for the safe and effective use of the product, such aswhen the use of a product is limited to a specific patient subpopulation that can be identified by using the test. According to the guidance, the FDA generallywill not approve such a product if the companion diagnostic is not also approved or cleared for the appropriate indication, and accordingly the therapeuticproduct and the companion diagnostic should be developed and approved or cleared contemporaneously. However, the FDA may decide that it is appropriateto approve such a product without an approved or cleared in vitro companion diagnostic device when the drug or therapeutic biologic is intended to treat aserious or life-threatening condition for which no satisfactory alternative treatment exists and the FDA determines that the benefits from the use of productwith an unapproved or uncleared in vitro companion diagnostic device are so pronounced as to outweigh the risks from the lack of an approved or cleared invitro companion diagnostic device. The FDA encourages sponsors considering developing a therapeutic product that requires a companion diagnostic torequest a meeting with both relevant device and therapeutic product review divisions to ensure that the product development plan will product sufficientdata to establish the safety and effectiveness of both the therapeutic product and the companion diagnostic. Because the FDA’s policy on companiondiagnostics is set forth only in guidance, this policy is subject to change and is not legally binding.Expedited Review and ApprovalThe FDA has various programs, including Fast Track, priority review, accelerated approval and breakthrough therapy designation, which are intendedto expedite or simplify the process for reviewing therapeutic candidates, or provide for the approval of a product candidate on the basis of a surrogateendpoint. Even if a product candidate qualifies for one or more of these programs, the FDA may later decide that the product candidate no longer meets theconditions for qualification or that the time period for FDA review or approval will be lengthened. Generally, therapeutic candidates that are eligible for theseprograms are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefitsover existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of therapeutic candidates totreat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give therapeutic candidates that offer majoradvances in treatment or provide a treatment where no adequate therapy exists an initial review within eight months as compared to a standard review time oftwelve months.Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with asponsor of a Fast Track designated product candidate and expedite review of the application for a product candidate designated for priority review.Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new product candidate that is (1) intended totreat a serious or life-threatening disease or condition; (2) generally provides a meaningful advantage over available therapies; and (3) demonstrates an effecton either a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversiblemorbidity or mortality (“IMM”) and is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity orprevalence of the condition and the availability or lack of alternative treatments. A surrogate endpoint is a laboratory measurement or physical sign used asan indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of aproduct candidate receiving accelerated approval perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity ormortality or other clinical endpoint, and the product may be subject to accelerated withdrawal procedures.In the Food and Drug Administration Safety and Innovation Act (the “FDASIA”), which was signed into law in July 2012, the U.S. Congressencouraged the FDA to utilize innovative and flexible approaches to the assessment of therapeutic candidates under accelerated approval. The law requiredthe FDA to issue related guidance and also promulgate confirming regulatory changes. In May 2014, the FDA published a final Guidance for Industry titled“Expedited Programs for Serious Conditions—Drugs and Biologics,” which provides guidance on FDA programs that are intended to facilitate and expeditedevelopment and review of new therapeutic candidates as well as threshold criteria generally applicable to concluding that a product candidate is a candidatefor these expedited development and review programs.28 In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA’s “Expedited Programs” guidance alsodescribes the Breakthrough Therapy designation. The FDA defines a Breakthrough Therapy as a therapeutic that is intended, alone or in combination withone or more other therapeutics, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the therapeutic maydemonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observedearly in clinical development. A therapeutic designated as a Breakthrough Therapy is eligible for accelerated approval. The FDA must take certain actions,such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a BreakthroughTherapy. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions forqualification or decide that the time period for FDA review or approval will not be shortened. A request for Breakthrough Therapy designation should besubmitted concurrently with, or as an amendment to, an IND, but ideally no later than the end of Phase 2 meeting.Patent Term Restoration and Marketing ExclusivityDepending upon the timing, duration and specifics of FDA approval of the use of our therapeutic candidates, some of our U.S. patents may be eligiblefor limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. TheHatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDAregulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the productcandidate’s approval date. The patent term restoration period is generally one half of the time between the effective date of an IND and the submission date ofan NDA, plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any timeduring which the applicant failed to exercise due diligence. Only one patent applicable to an approved product candidate is eligible for the extension and theapplication for extension must be made prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application forany patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents toadd patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of therelevant NDA.Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-yearperiod of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A product candidate isa new chemical entity if the FDA has not previously approved any other new product candidate containing the same active moiety, which is the molecule orion responsible for the action of the product candidate substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drugapplication (an “ANDA”), or a 505(b)(2) NDA submitted by another company for another version of such product candidate where the applicant does not ownor have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certificationof patent invalidity or non-infringement of one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years ofmarketing exclusivity for an NDA, or supplement to an existing NDA, if new clinical investigations, other than bioavailability studies, that were conductedor sponsored by the applicant are deemed by the FDA to be essential to the approval of the application. Examples of such new clinical investigations includethose with respect to new indications, dosages or strengths of an existing product candidate. This three-year exclusivity covers only the modification forwhich the product received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for productcandidates containing the active agent for the original indication or condition of use. Five-year exclusivity will not delay the submission or approval ofanother company’s full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinicalstudies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.The Biologics Price Competition and Innovation Act (the “BPCIA”) amended the PHSA to authorize the FDA to approve similar versions ofinnovative biologics, commonly known as biosimilars. A competitor seeking approval of a biosimilar must file an application to establish its molecule ashighly similar to an approved innovator biologic, among other requirements. The BPCIA, however, bars the FDA from approving biosimilar applications for12 years after an innovator biological product receives initial marketing approval.29 Orphan Drug DesignationUnder the Orphan Drug Act, the FDA may grant Orphan Drug Designation to therapeutic candidates intended to treat a rare disease or condition, whichis generally a disease or condition that affects either (1) fewer than 200,000 individuals in the U.S., or (2) or more than 200,000 individuals in the U.S. and forwhich there is no reasonable expectation that the cost of developing and making available in the U.S. a product candidate for this type of disease orcondition will be recovered from sales in the U.S. for that product candidate. Orphan Drug Designation must be requested before submitting an NDA. Afterthe FDA grants Orphan Drug Designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan DrugDesignation does not convey any advantage in or shorten the duration of the regulatory review and approval process.If a product candidate that has Orphan Drug Designation subsequently receives the first FDA approval for the disease for which it has suchdesignation, the product candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market thesame product candidate for the same indication, except under limited circumstances, for seven years. Orphan drug exclusivity, however, could also block theapproval of one of our therapeutic candidates for seven years if a competitor obtains approval of the same product candidate as defined by the FDA or if ourproduct candidate is determined to be contained within the competitor’s product candidate for the same indication or disease.Pediatric Exclusivity and Pediatric UseUnder the Best Pharmaceuticals for Children Act (the “BPCA”), certain therapeutic candidates may obtain an additional six months of exclusivity ifthe sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of the active moiety of the productcandidate in children. Although the FDA may issue a Written Request for studies on either approved or unapproved indications, it may only do so where itdetermines that information relating to that use of a product candidate in a pediatric population, or part of the pediatric population, may produce healthbenefits in that population.In addition, the Pediatric Research Equity Act (“PREA”), requires a sponsor to conduct pediatric studies for most therapeutic candidates and biologics,for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs, BLAs andsupplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safetyand effectiveness of the product candidate for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for eachpediatric subpopulation for which the product candidate is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all ofthe pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the product candidate or biologic is ready for approvalfor use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric studies begin.The law requires the FDA to send a PREA Non-Compliance letter to sponsors who have failed to submit their pediatric assessments required under PREA,have failed to seek or obtain a deferral or deferral extension or have failed to request approval for a required pediatric formulation. It further requires the FDAto post the PREA Non- Compliance letter and sponsor’s response.As part of the FDASIA, the U.S. Congress made a few revisions to the BPCA and PREA, which were slated to expire on September 30, 2012, and madeboth laws permanent.Post-Approval RequirementsOnce an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occurafter the product candidate reaches the market. Later discovery of previously unknown problems with a product candidate may result in restrictions on theproduct candidate or even complete withdrawal of the product candidate from the market. After approval, some types of changes to the approved productcandidate, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Inaddition, the FDA may under some circumstances require testing and surveillance programs to monitor the effect of approved therapeutic candidates thathave been commercialized, and the FDA under some circumstances has the power to prevent or limit further marketing of a product candidate based on theresults of these post-marketing programs.Any therapeutic candidates manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including,among other things: ·record-keeping requirements; ·reporting of adverse experiences with the product candidate; ·providing the FDA with updated safety and efficacy information;30 ·product sampling and distribution requirements; ·notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and ·complying with FDA promotion and advertising requirements, which include, among other things, standards for direct-to-consumeradvertising, restrictions on promoting products for uses or in patient populations that are not described in the product’s approved labeling,limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet.Therapeutic manufacturers and other entities involved in the manufacture and distribution of approved therapeutic products are required to registertheir establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and some state agencies forcompliance with cGMPs and other laws. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensiveprocedural, substantive and record-keeping requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on thesignificance of the change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of anydeviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use if ourproduct candidates are approved. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality controlto maintain compliance with cGMP and other aspects of regulatory compliance.New Legislation and RegulationsFrom time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing thetesting, approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are oftenrevised or interpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislativechanges will be enacted or whether FDA regulations, guidance, policies or interpretations changed or what the effect of such changes, if any, may be.Regulation Outside of the U.S.In addition to regulations in the U.S., we will be subject to regulations of other jurisdictions governing any clinical trials and commercial sales anddistribution of our therapeutic candidates. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatoryauthorities of countries outside of the U.S. before we can commence clinical trials in such countries and approval of the regulators of such countries oreconomic areas, such as the European Union, before we may market products in those countries or areas. The approval process and requirements governingthe conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than thatrequired for FDA approval.Under European Union regulatory systems, a company can consider applying for marketing authorization in several European Union member states bysubmitting its marketing authorization application(s) under a centralized, decentralized or mutual recognition procedure. The centralized procedure providesfor the grant of a single marketing authorization that is valid for all European Union member states. The centralized procedure is compulsory for medicinesderived from biotechnology, orphan medicinal products, or those medicines with an active substance not authorized in the European Union on or before May20, 2004 intended to treat acquired immune deficiency syndrome (“AIDS”), cancer, neurodegenerative disorders or diabetes and optional for those medicinescontaining a new active substance not authorized in the European Union on or before May 20, 2004, medicines which are highly innovative, or medicines towhich the granting of a marketing authorization under the centralized procedure would be in the interest of patients at the European Union-level.. Thedecentralized procedure provides for recognition by European Union national authorities of a first assessment performed by one member state. Under thisprocedure, an identical application for marketing authorization is submitted simultaneously to the national authorities of several European Union memberstates, one of them being chosen as the “Reference Member State”, and the remaining being the “Concerned Member States”. The Reference Member Statemust prepare and send drafts of an assessment report, summary of product characteristics and the labelling and package leaflet within 120 days after receipt ofa valid marketing authorization application to the Concerned Member States, which must decide within 90 days whether to recognize approval. If anyConcerned Member State does not recognize the marketing authorization on the grounds of potential serious risk to public health, the disputed points areeventually referred to the European Commission, whose decision is binding on all member states. The mutual recognition procedure is similar to thedecentralized procedure except that a medicine must have already received a marketing authorization in at least one member state, and that member state actsas the Reference Member State.As in the U.S., we may apply for designation of a product candidate as an orphan drug for the treatment of a specific indication in the European Unionbefore the application for marketing authorization is made.31 Orphan drugs in the European Union enjoy economic and marketing benefits, including up to ten years of market exclusivity for the approvedindication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan-designated product, themarketing authorization holder is unable to supply sufficient quantity of the medicinal product or the marketing authorization holder has given its consent.Coverage and ReimbursementSales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government healthprograms, commercial insurance and managed healthcare organizations. These third-party payors are increasingly reducing reimbursements for medicalproducts and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of therapeuticshave been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of pricecontrols and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit ournet revenue and results. If these third- party payors do not consider our products to be cost-effective compared to other therapies, they may not cover ourproducts after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitablebasis.In the United States, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “MMA”) expanded Medicare coverage ofoutpatient drug purchases by individuals who are covered by Medicare Part D and introduced a new reimbursement methodology based on average salesprices for Medicare Part B physician-administered drugs, including drugs currently on the market used by physicians to treat the anticipated clinicalindications for our product candidates, if approved. More recently, under the terms of the Budget Control Act of 2011, an automatic 2% reduction ofMedicare program payments for all healthcare providers became generally effective for services provided on or after April 1, 2013. This automatic reductionis known as “sequestration.” Medicare generally reimburses physicians for Part B drugs at the rate of average sales price (“ASP”) plus 6%. Theimplementation of sequestration pursuant to the Budget Control Act of 2011 has effectively reduced reimbursement below the ASP plus 6% level for theduration of sequestration (which lasts through fiscal 2024 in the absence of additional legislation). Additionally, concerns held by federal policymakersabout the federal deficit and national debt levels could result in enactment of further federal spending reductions, further entitlement reform legislationaffecting the Medicare program, or both. We cannot predict what alternative or additional deficit reduction initiatives or Medicare payment reductions, ifany, will ultimately be enacted into law, or the timing or effect any such initiatives or reductions will have on us. Moreover, while the MMA applies only todrug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursementrates. These cost reduction initiatives and other provisions could decrease the coverage and reimbursement that we receive for any approved products.The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of differenttreatments for the same illness. The plan for the research was published in 2012 by the Department of Health and Human Services, the Agency for HealthcareResearch and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to theU.S. Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it isnot clear what effect, if any, the research will have on the sales of our product candidates, if any such product or the condition that it is intended to treat is thesubject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the salesof our product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not coverour products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on aprofitable basis.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (together, the “ACA”) has had asignificant impact on the health care industry. The ACA expanded coverage for the uninsured while at the same time containing overall healthcare costs.With regard to biopharmaceutical products, the ACA, among other things, addressed a new methodology by which rebates owed by manufacturers under theMedicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebatesowed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed careorganizations, established annual fees and taxes on manufacturers of certain branded prescription drugs, and a new Medicare Part D coverage gap discountprogram, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiariesduring their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.32 In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, theBudget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction,tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, therebytriggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of upto 2% per fiscal year, started in April 2013, and, due to subsequent legislative amendments, will stay in effect through 2024 unless additional Congressionalaction is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “ATRA”) which among other things,also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute oflimitations period for the government to recover overpayments to providers from three to five years. We expect that additional federal healthcare reformmeasures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare drugs and services,and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.Finally, in some foreign countries, the proposed pricing for a product candidate must be approved before it may be lawfully marketed. Therequirements governing therapeutic pricing vary widely from country to country. For example, the European Union provides options for its member states torestrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinalproducts for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controlson the profitability of the Company placing the medicinal product on the market. There can be no assurance that any country that has price controls orreimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our product candidates.Historically, therapeutic candidates launched in the European Union do not follow price structures of the U.S. and generally tend to be significantly lower.Other Healthcare LawsWe may also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments where we maymarket our product candidates, if approved. These laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy andsecurity and physician sunshine laws and regulations.The federal Anti-Kickback Statute prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providingremuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, forwhich payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. The Anti-Kickback Statute is subject toevolving interpretations. In the past, the government has enforced the Anti- Kickback Statute to reach large settlements with healthcare companies based onsham consulting and other financial arrangements with physicians. A person or entity does not need to have actual knowledge of the statute or specific intentto violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violationof the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. The majority of states also have anti-kickback laws, which establish similar prohibitions and in some cases may apply to items or services reimbursed by any third-party payor, includingcommercial insurers.Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim forpayment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual inthe name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal governmentis using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and biotechnologycompanies throughout the U.S., for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices. Thegovernment has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions underapplicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devotesubstantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.The U.S. federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), also created new federal criminal statutes that prohibitamong other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including privatethird-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of ahealthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulentstatement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti- Kickback Statute, a person orentity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.33 There has also been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The ACA,among other things, imposes new reporting requirements on drug manufacturers for payments made by them to physicians and teaching hospitals, as well asownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civilmonetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfersof value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Certain states also mandateimplementation of compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts,compensation and other remuneration to physicians.We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.HIPAA, as amended by the Health Information Technology and Clinical Health Act (“HITECH”) and their respective implementing regulations, includingthe final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individuallyidentifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,”defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection withproviding a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities,business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courtsto enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacyand security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts.EnvironmentOur third-party manufacturers are subject to inspections by the FDA for compliance with cGMP and other U.S. regulatory requirements, including U.S.federal, state and local regulations regarding environmental protection and hazardous and controlled substance controls, among others. Environmental lawsand regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may continue to incur,significant expenditures to ensure we are in compliance with these laws and regulations. We would be subject to significant penalties for failure to complywith these laws and regulations.CollaborationsPfizerIn May 2013, we entered into a research collaboration, option and license agreement with Pfizer pursuant to which we granted Pfizer an option toselect four targets on which to collaborate with us on the preclinical research of PDCs using our Probody technology and Pfizer’s ADC technology. Pfizer willprovide a specified amount of research funding to us to perform the research by funding certain full-time employee expenses. Pfizer has selected its first threetargets, the first of which is EGFR. The selection of the third target triggered a payment of $1.5 million to us, and, if Pfizer selects a fourth target to include inthe collaboration, Pfizer will pay us an additional $1.5 million. Pfizer can exercise the option to obtain a commercial license for each target within three tofive years after the target is selected upon making a payment of $2 million to $5 million to us, depending on the target. Pfizer has the responsibility for andcontrol of all development, manufacture and commercialization of any product candidates resulting from the research collaboration.The commercial license will be a worldwide, exclusive, sublicensable license for development and commercialization of product candidates directedagainst the selected target. The terms of the license include a total for all targets of approximately $80 million in regulatory milestone payments and $530million in sales milestone payments as well as tiered royalties ranging from mid-single digits to low-teens on potential future sales. Pfizer’s royalty obligationcontinues on a licensed product-by-licensed product basis until the later of (i) the expiration of the last claim of the licensed patents covering the licensedproducts in the country or (ii) the tenth anniversary of the first commercial sale of a licensed product in a country, but, in the case of (ii), in no event later thanthe twentieth anniversary of the earlier of the date of the first commercial sale of the licensed product. If Pfizer obtains a commercial license for a target, itmust use commercially reasonable efforts to develop a product in one major market country for that target, including seeking regulatory approval, and tocommercialize one licensed product candidate in one major market country where Pfizer has obtained regulatory approval for that target. In addition to theother rights granted to Pfizer, we agreed not to engage in, license or collaborate on any Probody therapeutics or PDCs targeting a target for which Pfizerexercised its option for the term of the agreement, except that, for the first target, the exclusivity applies only to the PDC.34 The agreement with Pfizer will continue in effect until the expiration of the royalty obligation on a licensed product-by-licensed product and country-by-country basis until the expiration of Pfizer’s royalty obligations. Pfizer may terminate the agreement as a whole or on a target-by-target basis by providing60 days’ advance written notice to us for any reason or no reason at any time. Pfizer may also terminate the agreement in the event of our insolvency. Eitherparty may terminate the agreement upon the other party’s uncured material breach that is not cured within 90 days after the breaching party receives notice ofsuch breach.ImmunoGenIn January 2014, we entered into a research collaboration agreement with ImmunoGen pursuant to which we agreed to collaborate with ImmunoGen touse our Probody technology and ImmunoGen’s ADC cell- killing agents and linkers to produce PDCs for testing. We amended the agreement in April 2015.ImmunoGen was granted the right to select two targets and has selected two targets. We were granted the right to select one target and have selected ourtarget. Each party provides its own antibodies for the collaboration. We use the antibodies to produce Probody therapeutics at our expense, then we providethem to ImmunoGen to conjugate them to ImmunoGen’s linkers and cytotoxic compounds at ImmunoGen’s expense. Each party does its own animal testingand IND-enabling studies for the Probody therapeutics directed at its chosen target(s). Each party has the option to obtain an exclusive development andcommercialization license from the other for its selected target(s). The option can be exercised by a party at any time during the term of the researchcollaboration except that it generally must be exercised no later than six months after the first dosing of an animal with the party’s PDC. No payment isrequired to exercise the option. Each company retains full development control of PDCs resulting from its target selection and is responsible for preclinicaland clinical development, manufacturing and commercialization. The research collaboration will last until January 2018 unless it is terminated by one of theparties earlier due to the material breach or insolvency of the other party. The collaboration will end with respect to a particular target if the option to obtain acommercial license is exercised with respect to that target. We have agreed that, during the term of the collaboration, we will not research, develop orcommercialize any PDC directed toward one of ImmunoGen’s targets. ImmunoGen has agreed that, during the term of the collaboration, it will not research,develop or commercialize any ADC directed toward our target.If a party exercises its right to obtain a commercial license, it will receive a worldwide, exclusive, sublicensable license for development andcommercialization of products directed against the selected target under the terms of a separate license agreement, which have already been negotiated. Eachparty has development diligence obligations for its commercial license. We exercised our option in February 2016 to obtain the development andcommercialization license with respect to the target selected by us under the research collaboration and entered into the license agreement in the pre-negotiated form attached to the research collaboration agreement. Under the license agreement, we will pay up to $60 million in development and regulatorymilestones and up to $100 million in sales milestones to ImmunoGen, as well as tiered mid- to high-single-digit royalties. Our commercial license prohibitsImmunoGen from developing or commercializing or licensing any third party to develop or commercialize any PDC that is directed toward our licensedtarget. If ImmunoGen exercises its option(s) to obtain a commercial license, ImmunoGen will pay up to $30 million in development and regulatorymilestones and up to $50 million in sales milestones for each target to us, as well as tiered mid-single digit royalties. ImmunoGen’s commercial licenseprohibits us from developing or commercializing or licensing any third party to develop or commercialize any PDC that uses the cytotoxic compounds alsoused by ImmunoGen and is directed toward ImmunoGen’s licensed target.Each party’s royalty obligations under its commercial license continue on a licensed product-by-licensed product basis until the later of (i) theexpiration of the last claim of the licensed patents covering the licensed products in the country or (ii) the twelfth anniversary of the first commercial sale of alicensed product in a country, but, in the case of (ii), in no event later than the twentieth anniversary of the earlier of the date of the first commercial sale ofthe licensed product. Each license agreement continues in effect until the expiration of the royalty obligation on a licensed product-by-licensed product andcountry-by-country basis until the expiration of the royalty obligations. The licensee may terminate the agreement at any time prior to obtaining the firstregulatory marketing approval in any country by providing not less than 90 days’ prior written notice to the licensor. Either party may terminate a licenseagreement upon the other party’s uncured material breach that is not cured within 90 days after the breaching party receives notice of such breach or in theevent of the insolvency of the other party. A licensor may terminate a commercial license if the licensor has terminated the research collaboration due tothe material breach of the research collaboration agreement by the licensee.35 BMSIn May 2014, we entered into a research collaboration and license agreement with BMS pursuant to which we agreed to collaborate to discover andconduct preclinical development of Probody therapeutics directed against four immune-oncology targets. BMS selected the first two targets upon the signingof the agreement, one of which is CTLA-4, and made a $50 million signing payment to us. BMS selected a third target in January 2016 and triggered a $10million selection payment to us pursuant to the collaboration and license agreement. BMS may select the fourth target prior to May 23, 2019 by writtennotification so long as the target is not an excluded target as defined in the agreement and by paying $15 million to us. BMS will provide a specified amountof research funding to us to perform the research by funding certain full-time employee expenses. BMS has the responsibility for and control of alldevelopment, manufacture and commercialization of any products resulting from the research collaboration. BMS agreed to use commercially reasonableefforts to develop and obtain regulatory approval for and commercialize at least one product for each target.We granted BMS exclusive worldwide rights to develop and commercialize the Probody therapeutics we discover. The terms of the agreement providethat BMS will make a total of up to $2 million in preclinical milestone payments for each target, a total of up to $112 million in development and regulatorymilestone payments for up to three indications for each target, a total of up to $124 million in milestone payments for the first commercial sale in variousterritories for up to three indications, and sales milestone payments of up to $60 million for each product. We will also be eligible to receive tiered mid-singledigit royalties rising to low double-digit royalties on net sales of each product commercialized by BMS. BMS’ royalty obligation continues on a licensedproduct-by-licensed product basis until the later of (i) the expiration of the last claim of the licensed patents covering the licensed products in the country,(ii) the twelfth anniversary of the first commercial sale of a licensed product in a country, or (iii) the expiration of any applicable regulatory, pediatric, orphandrug or data exclusivity with respect to such product. Pursuant to the agreement, BMS also purchased 833,333 shares of our common stock in our initialpublic offering of common stock closed on October 14, 2015 (the “IPO”) at the IPO price and on the same terms as the other purchasers in the IPO.Under the collaboration and license agreement, we also granted BMS certain exclusivity rights. We agreed that we will not, ourselves or with a thirdparty, research, develop or commercialize any product developed from the research collaboration or on any of the four targets chosen by BMS.The agreement with BMS will continue in effect on a licensed product-by-licensed product and country- by-country basis until neither party has anyobligation to the other under the agreement in such country with respect to such product. BMS may terminate the agreement at will as a whole or on acountry-by-country basis at any time after May 23, 2016 or at any time on a target-by-target basis by providing two months’ advance written notice to us ifno regulatory approval for any product has yet been obtained or otherwise upon four months’ advance written notice to us. BMS may also terminate theagreement on a target-by-target basis in the event it determines that the medical benefit to risk ratio of a product is so unfavorable as to be incompatible withthe welfare of patients. Either party may terminate the agreement upon the other party’s uncured material breach that is not cured within 90 days after thebreaching party receives notice of such breach and for the insolvency of the other party.MD AndersonIn November 2015, we entered into a research collaboration agreement with MD Anderson to research Probody-enabled chimeric antigen receptorkiller (CAR-NK) cell therapies, known as ProCAR-NK cell therapies. Under this collaboration, MD Anderson will use our Probody technology to conductresearch of ProCAR-NK cell therapies against certain targets selected by us in cancer immunotherapy. MD Anderson and we will collaborate to developProCAR-NK cells, which are designed for more precise binding to tumors and reduced binding to healthy tissue, against the selected targets for which safetyand toxicity are expected to be limiting factors for CAR cell therapies. Under the research collaboration agreement, we have the right to exercise an option,during the option period expiring on November 2, 2019 and upon payment of an option exercise fee, to negotiate and acquire a worldwide, exclusive,sublicensable license from MD Anderson for development and commercialization of products directed against any of the selected targets. The researchcollaboration agreement will continue in effect until the earlier of (i) the date that we exercise the option to acquire the license from MD Anderson and (ii) theexpiration of the option period. EmployeesAs of December 31, 2015, we had 65 total employees, all of whom were full-time employees (including two temporary employees) and 47 of whomwere primarily engaged in research and development activities.36 FacilitiesWe currently lease a total of approximately 29,500 square feet (of which we lease approximately 24,500 square feet directly and 5,000 square feetpursuant to a sublease) of office and research and development facilities in South San Francisco, California. Our lease expires in January 2019. In March2016, we entered into an agreement to terminate the current lease with our landlord effective on November 30, 2016. We will not be required to pay ourlandlord a termination payment in connection with the early termination of the lease. In December 2015, we entered into a lease for a new facility ofapproximately 76,000 square feet in South San Francisco, California. We plan to move into this new facility in November 2016.Legal ProceedingsWe are not currently a party to any material legal proceedings.Corporate InformationOur operations commenced in February 2008 when our predecessor entity was formed. We were incorporated in Delaware in September 2010. Wemaintain our executive offices at 343 Oyster Point Blvd., Suite 100, South San Francisco, California 94080, and our main telephone number is (650) 515-3185.We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth companyuntil the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the IPO, (b) in which we have total annual grossrevenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is heldby non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debtduring the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerginggrowth company” shall have the meaning associated with it in the JOBS Act.We maintain a website at www.cytomx.com, which contains information about us. The information in, or that can be accessed through, our website isnot part of this Annual Report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K andamendments to those reports are available, free of charge, on or through our website as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street,NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330. The SEC maintainsan Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. 37 Item 1A.Risk Factors You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K. Ifany of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. Therisks described below are not the only risks facing the Company. Risks and uncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financial condition, results of operations and/or prospects.Risks Related to Our BusinessWe are a preclinical stage biopharmaceutical company with a history of losses, expect to continue to incur significant losses for the foreseeable future andmay never achieve or maintain profitability, which could result in a decline in the market value of our common stock.We are a preclinical stage biopharmaceutical company with a limited operating history, developing a novel class of therapeutic antibody product candidates,based on our proprietary biologic Probody technology platform. Since our inception, we have devoted our resources to the development of Probodytherapeutics. We have had significant operating losses since our inception. As of December 31, 2015, we had an accumulated deficit of $117.5 million. Forthe year ended December 31, 2015, our net loss was $35.4 million. Substantially all of our losses have resulted from expenses incurred in connection with ourresearch and development programs and from general and administrative costs associated with our operations. Though we have developed our Probodyplatform, our technologies and product candidates are in early stages of development, and we are subject to the risks of failure inherent in the development ofproduct candidates based on novel technologies. We have never generated any revenue from product sales, and have not obtained regulatory approval forany of our product candidates.Furthermore, we do not expect to generate any revenue from product sales for the foreseeable future, and we expect to continue to incur significant operatinglosses for the foreseeable future due to the cost of research and development, preclinical studies and clinical trials and the regulatory approval process for ourproduct candidates. We expect our net losses to increase substantially as we enter into clinical development of our lead programs. However, the amount ofour future losses is uncertain. Our ability to achieve profitability, if ever, will depend on, among other things, our, or our existing or future collaborators,successfully developing product candidates, obtaining regulatory approvals to market and commercialize product candidates, manufacturing any approvedproducts on commercially reasonable terms, establishing a sales and marketing organization or suitable third-party alternatives for any approved product andraising sufficient funds to finance business activities. If we, or our existing or future collaborators, are unable to develop our technologies and commercializeone or more of our product candidates or if sales revenue from any product candidate that receives approval is insufficient, we will not achieve profitability,which could have a material and adverse effect on our business, financial condition, results of operations and prospects.We expect that we will need to raise substantial additional funds to advance development of our product candidates and we cannot guarantee that thisadditional funding will be available on acceptable terms or at all. Failure to obtain this necessary capital when needed may force us to delay, limit orterminate our product development and commercialize our current or future product candidates.The development of biopharmaceutical product candidates is capital-intensive. If our product candidates enter and advance through preclinical studies andclinical trials, we will need substantial additional funds to expand our development, regulatory, manufacturing, marketing and sales capabilities. We haveused substantial funds to develop our technology and product candidates and will require significant funds to conduct further research and development andpreclinical testing and clinical trials of our product candidates, to seek regulatory approvals for our product candidates and to manufacture and marketproducts, if any, that are approved for commercial sale. In addition, we are incurring and will continue to incur additional costs associated with operating as apublic company after the consummation of the IPO.As of December 31, 2015, we had $186.7 million in cash, cash equivalents and short-term investments. Based on our current operating plan, we believe thatour available cash, cash equivalents and short-term investments, will be sufficient to fund our anticipated level of operations through the end of 2018. Ourfuture capital requirements and the period for which we expect our existing resources to support our operations may vary significantly from what we expect.Our monthly spending levels vary based on new and ongoing research and development and other corporate activities. Because the length of time andactivities associated with successful research and development of our product candidates is highly uncertain, we are unable to estimate the actual funds wewill require for development and any approved marketing and commercialization activities.38 The timing and amount of our operating expenditures will depend largely on: ·the timing and progress of preclinical and clinical development activities; ·the number and scope of preclinical and clinical programs we decide to pursue; ·the progress of the development efforts of parties with whom we have entered or may in the future enter into collaborations and research anddevelopment agreements; ·the timing and amount of milestone payments we may receive under our collaborations agreements; ·our ability to maintain our current licenses and research and development programs and to establish new collaboration arrangements; ·the costs involved in prosecuting and enforcing patent and other intellectual property claims; ·the cost and timing of regulatory approvals; and ·our efforts to enhance operational systems and hire additional personnel, including personnel to support development of our productcandidates and satisfy our obligations as a public company.If we are unable to obtain funding on a timely basis or on acceptable terms, we may have to delay, reduce or terminate our research and developmentprograms and preclinical studies or clinical trials, if any, limit strategic opportunities or undergo reductions in our workforce or other corporate restructuringactivities. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of ourtechnologies or product candidates that we would otherwise pursue on our own. We do not expect to realize revenue from sales of products or royalties fromlicensed products in the foreseeable future, if at all, and unless and until our product candidates are clinically tested, approved for commercialization andsuccessfully marketed. To date, we have primarily financed our operations through the sale of equity securities and payments received under ourcollaboration agreements. We will be required to seek additional funding in the future and currently intend to do so through additional collaborations, publicor private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. Our ability to raise additionalfunds will depend on financial, economic and other factors, many of which are beyond our control. Additional funds may not be available to us on acceptableterms or at all. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adverselyaffect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rightssuperior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting futurebusiness activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of ourcorporate assets.Our product candidates are in early stages of development and have never been tested in a human subject. Our product candidates may fail in developmentor suffer delays that materially and adversely affect their commercial viability.We have no products on the market and all of our product candidates, including cancer immunotherapies, PDCs and bispecific antibodies, are in early stagesof development. In particular, none of our product candidates has ever been tested in a human subject. Our ability to achieve and sustain profitabilitydepends on obtaining regulatory approvals for and successfully commercializing our product candidates, either alone or with third parties. Before obtainingregulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinicaltests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates.We may not have the financial resources to continue development of, or to modify existing or enter into new collaborations for, a product candidate if weexperience any issues that delay or prevent regulatory approval of, or our ability to commercialize, product candidates, including: ·negative or inconclusive results from our clinical trials or the clinical trials of others for product candidates similar to ours, leading to adecision or requirement to conduct additional preclinical testing or clinical trials or abandon a program; ·product-related side effects experienced by participants in our clinical trials or by individuals using drugs or therapeutic biologics similar toour product candidates; ·delays in submitting INDs or comparable foreign applications or delays or failure in obtaining the necessary approvals from regulators tocommence a clinical trial, or a suspension or termination of a clinical trial once commenced; ·conditions imposed by the FDA or comparable foreign authorities regarding the scope or design of our clinical trials; ·delays in enrolling research subjects in clinical trials;39 ·high drop-out rates of research subjects; ·inadequate supply or quality of product candidate components or materials or other supplies necessary for the conduct of our clinical trials; ·greater than anticipated clinical trial costs; ·poor effectiveness of our product candidates during clinical trials; ·unfavorable FDA or other regulatory agency inspection and review of a clinical trial site; ·failure of our third-party contractors or investigators to comply with regulatory requirements or otherwise meet their contractual obligations ina timely manner, or at all; ·delays and changes in regulatory requirements, policy and guidelines, including the imposition of additional regulatory oversight aroundclinical testing generally or with respect to our technology in particular; or ·varying interpretations of data by the FDA and similar foreign regulatory agencies.Our approach to the discovery and development of our therapeutic treatments is based on novel technologies that are unproven and may not result inmarketable products.We plan to develop a pipeline of product candidates using our proprietary Probody platform. We believe that product candidates (including cancerimmunotherapies, PDCs and bispecific antibodies) identified with our product discovery platform may offer an improved therapeutic approach by takingadvantage of unique conditions in the tumor microenvironment, thereby reducing the dose-limiting toxic effects associated with existing products, whichalso attack healthy tissue. However, the scientific research that forms the basis of our efforts to develop product candidates based on our Probody platform isongoing. Further, the scientific evidence to support the feasibility of developing therapeutic treatments based on our Probody platform is both preliminaryand limited.No product candidates based on our Probody platform have been tested in humans. We may ultimately discover that our Probody platform and any productcandidates resulting therefrom do not possess certain properties required for therapeutic effectiveness. For example, when administered in a human, thepeptide mask may not be cleaved, which would limit the potential efficacy of the antibody and reduce the potential to limit the toxicity of the anti-canceragent. Probody product candidates may also be unable to remain stable in the human body for the period of time required for the drug to reach the targettissue or they may trigger immune responses that inhibit the ability of the product candidate to reach the target tissue or that cause adverse side effects inhumans. We currently have only limited data, and no conclusive evidence, to suggest that we can introduce these necessary properties into our Probodyplatform and any product candidates. We may spend substantial funds attempting to introduce these properties and may never succeed in doing so. Inaddition, product candidates based on our Probody platform may demonstrate different chemical and pharmacological properties in patients than they do inlaboratory studies. Although our Probody platform and certain product candidates have successful results in animal studies, they may not demonstrate thesame chemical and pharmacological properties in humans and may interact with human biological systems in unforeseen, ineffective or harmful ways. As aresult, we may never succeed in developing a marketable product, we may not become profitable and the value of our common stock will decline.Further, we are not aware of any company currently developing a therapeutic using a prodrug approach to antibody drug development and no regulatoryauthority has granted approval for such therapeutic. As such, we believe the FDA has limited early experience with Probody-based therapeutics in oncologyor other disease areas, which may increase the complexity, uncertainty and length of the regulatory approval process for our product candidates. For example,our Probody product candidates contain a linker that is cleaved by proteases in the tumor microenvironment, which releases the peptide mask. This mayresult in unforeseen events when administered in a human. We and our existing or future collaborators may never receive approval to market andcommercialize any product candidate. Even if we or an existing or future collaborator obtains regulatory approval, the approval may be for targets, diseaseindications or patient populations that are not as broad as we intended or desired or may require labeling that includes significant use or distributionrestrictions or safety warnings. We or an existing or future collaborator may be required to perform additional or unanticipated clinical trials to obtainapproval or be subject to post-marketing testing requirements to maintain regulatory approval. If our Probody technologies prove to be ineffective, unsafe orcommercially unviable, our entire platform and pipeline would have little, if any, value, which would have a material and adverse effect on our business,financial condition, results of operations and prospects.40 The market may not be receptive to our product candidates based on a novel therapeutic modality, and we may not generate any future revenue from thesale or licensing of product candidates.Even if regulatory approval is obtained for a product candidate, we may not generate or sustain revenue from sales of the product due to factors such aswhether the product can be sold at a competitive cost and otherwise accepted in the market. The product candidates that we are developing are based on ourProbody platform, which is a new technology and therapeutic approach. Market participants with significant influence over acceptance of new treatments,such as physicians and third-party payors, may not adopt a product or treatment based on our Probody platform and technologies, and we may not be able toconvince the medical community and third-party payors to accept and use, or to provide favorable reimbursement for, any product candidates developed byus or our existing or future collaborators. Market acceptance of our product candidates will depend on, among other factors: ·the timing of our receipt of any marketing and commercialization approvals; ·the terms of any approvals and the countries in which approvals are obtained; ·the safety and efficacy of our product candidates; ·the prevalence and severity of any adverse side effects associated with our product candidates; ·limitations or warnings contained in any labeling approved by the FDA or other regulatory authority; ·relative convenience and ease of administration of our product candidates; ·the willingness of patients to accept any new methods of administration; ·the success of our physician education programs; ·the availability of adequate government and third-party payor reimbursement; ·the pricing of our products, particularly as compared to alternative treatments; and ·availability of alternative effective treatments for the disease indications our product candidates are intended to treat and the relative risks,benefits and costs of those treatments.If any product candidate we commercialize fails to achieve market acceptance, it could have a material and adverse effect on our business, financialcondition, results of operations and prospects.We have entered, and may in the future seek to enter, into collaborations with third parties for the development and commercialization of our productcandidates using our Probody platform. If we fail to enter into such collaborations, or such collaborations are not successful, we may not be able tocapitalize on the market potential of our Probody platform and resulting product candidates.Since 2013, we have entered into collaborations with Pfizer, BMS and ImmunoGen to develop certain Probody therapeutics. In addition, we may in the futureseek third-party collaborators for development and commercialization of other therapeutic technologies or product candidates. Biopharmaceutical companiesare our prior and likely future collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements. With respect toour existing collaboration agreements, and what we expect will be the case with any future collaboration agreements, we have and would expect to havelimited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates.Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them inthese arrangements. In addition, in November 2015, we entered into a research collaboration agreement with MD Anderson to research Probody-enabledchimeric antigen receptor killer (CAR-NK) cell therapies, known as ProCAR-NK cell therapies.Collaborations involving our product candidates currently pose, and will continue to pose, the following risks to us: ·collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; ·collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renewdevelopment or commercialization programs based on preclinical or clinical trial results, changes in the collaborators’ strategic focus oravailable funding, or external factors such as an acquisition that diverts resources or creates competing priorities;41 ·collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; ·collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our productcandidate if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized underterms that are more economically attractive than ours; ·collaborators with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing anddistribution of such product or products; ·collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as toinvite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to litigation or potentialliability; ·collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; ·disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization ofour product candidate or that result in costly litigation or arbitration that diverts management attention and resources; and ·collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development orcommercialization of the applicable product candidates.Collaboration agreements may not lead to development or commercialization of our product candidates in the most efficient manner or at all. If a collaboratorof ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program couldbe delayed, diminished or terminated.If our collaborators cease development efforts under our existing or future collaboration agreements, or if any of those agreements are terminated, thesecollaborations may fail to lead to commercial products and we may never receive milestone payments or future royalties under these agreements.Substantially all of our revenue to date has been derived from our existing collaboration agreements, and a significant portion of our future revenue and cashresources is expected to be derived from these agreements or other similar agreements we may enter into in the future. Revenue from research anddevelopment collaborations depend upon continuation of the collaborations, reimbursement of development costs, the achievement of milestones androyalties, if any, derived from future products developed from our research. If we are unable to successfully advance the development of our productcandidates or achieve milestones, revenue and cash resources from milestone payments under our collaboration agreements will be substantially less thanexpected.In addition, to the extent that any of our existing or future collaborators were to terminate a collaboration agreement, we may be forced , in some cases, toindependently develop these product candidates, including funding preclinical or clinical trials, assuming marketing and distribution costs and defendingintellectual property rights, or, in certain instances, abandon product candidates altogether, any of which could result in a change to our business plan and amaterial and adverse effect on our business, financial condition, results of operations and prospects.42 We may not successfully engage in strategic transactions, including any additional collaborations we seek, which could adversely affect our ability todevelop and commercialize product candidates, impact our cash position, increase our expense and present significant distractions to our management.From time to time, we may consider strategic transactions, such as additional collaborations, acquisitions of companies, asset purchases and out- or in-licensing of product candidates or technologies. In particular, we will evaluate and, if strategically attractive, seek to enter into additional collaborations,including with major biotechnology or biopharmaceutical companies. The competition for collaborators is intense, and the negotiation process is time-consuming and complex. Any new collaboration may be on terms that are not optimal for us, and we may not be able to maintain any new collaboration if, forexample, development or approval of a product candidate is delayed, sales of an approved product candidate do not meet expectations or the collaboratorterminates the collaboration. Any such collaboration, or other strategic transaction, may require us to incur non-recurring or other charges, increase our near-and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business. These transactions wouldentail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business and diversion of our management’stime and attention in order to manage a collaboration or develop acquired products, product candidates or technologies, incurrence of substantial debt ordilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the collaboration or combining theoperations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business dueto changes in management and ownership and the inability to retain key employees of any acquired business. Accordingly, although there can be noassurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete may besubject to the foregoing or other risks and have a material and adverse effect on our business, financial condition, results of operations and prospects.Conversely, any failure to enter any additional collaboration or other strategic transaction that would be beneficial to us could delay the development andpotential commercialization of our product candidates and have a negative impact on the competitiveness of any product candidate that reaches market.If third parties on which we intend to rely to conduct our preclinical studies, or any future clinical trials, do not perform as contractually required, fail tosatisfy regulatory or legal requirements or miss expected deadlines, our development program could be delayed with material and adverse effects on ourbusiness, financial condition, results of operations and prospects.We intend to rely on third-party clinical investigators, contract research organizations (“CROs”), clinical data management organizations and consultants todesign, conduct, supervise and monitor preclinical studies of our product candidates and will do the same for any clinical trials. Because we intend to rely onthese third parties, we will have less control over the timing, quality and other aspects of preclinical studies and clinical trials than we would have had weconducted them on our own. These investigators, CROs and consultants will not be our employees and we will have limited control over the amount of timeand resources that they dedicate to our programs. These third parties may have contractual relationships with other entities, some of which may be ourcompetitors, which may draw time and resources from our programs. The third parties with which we may contract might not be diligent, careful or timely inconducting our preclinical studies or clinical trials, resulting in the preclinical studies or clinical trials being delayed or unsuccessful.If we cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not carry out their contractual duties,satisfy legal and regulatory requirements for the conduct of preclinical studies or clinical trials or meet expected deadlines, our clinical developmentprograms could be delayed and otherwise adversely affected. In all events, we will be responsible for ensuring that each of our preclinical studies and clinicaltrials are conducted in accordance with the general investigational plan and protocols for the trial. The FDA requires preclinical studies to be conducted inaccordance with GLPs and clinical trials to be conducted in accordance with GCPs, including for designing, conducting, recording and reporting the resultsof preclinical studies and clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality ofclinical trial participants are protected. Our reliance on third parties that we do not control will not relieve us of these responsibilities and requirements. Anyadverse development or delay in our clinical trials could have a material and adverse effect on our business, financial condition, results of operations andprospects.Because we rely on third-party manufacturing and supply partners, our supply of research and development, preclinical and clinical developmentmaterials may become limited or interrupted or may not be of satisfactory quantity or quality.We rely on third-party contract manufacturers to manufacture our preclinical and clinical trial product supplies. We do not own manufacturing facilities forproducing such supplies. There can be no assurance that our preclinical and clinical development product supplies will not be limited, interrupted, or ofsatisfactory quality or continue to be available at acceptable prices. In particular, any replacement of our manufacturer could require significant effort andexpertise because there may be a limited number of qualified replacements.43 The manufacturing process for a product candidate is subject to FDA and foreign regulatory authority review. Suppliers and manufacturers must meetapplicable manufacturing requirements and undergo rigorous facility and process validation tests required by regulatory authorities in order to comply withregulatory standards, such as cGMPs. In the event that any of our manufacturers fails to comply with such requirements or to perform its obligations to us inrelation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may be forcedto manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party,which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our product candidatesmay be unique or proprietary to the original manufacturer and we may have difficulty transferring such skills or technology to another third party and afeasible alternative may not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer inorder to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason, we will be required to verifythat the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. Thedelays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or withinbudget.We expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent that we have existing,or enter into future, manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely mannerconsistent with contractual and regulatory requirements, including those related to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize our productcandidates successfully. Our or a third party’s failure to execute on our manufacturing requirements and comply with cGMPs could adversely affect ourbusiness in a number of ways, including: ·an inability to initiate or continue clinical trials of product candidates under development; ·delay in submitting regulatory applications, or receiving regulatory approvals, for product candidates; ·loss of the cooperation of an existing or future collaborator; ·subjecting third-party manufacturing facilities or our manufacturing facilities to additional inspections by regulatory authorities; ·requirements to cease distribution or to recall batches of our product candidates; and ·in the event of approval to market and commercialize a product candidate, an inability to meet commercial demands for our products.We, or third-party manufacturers, may be unable to successfully scale-up manufacturing of our product candidates in sufficient quality and quantity,which would delay or prevent us from developing our product candidates and commercializing approved products, if any.In order to conduct clinical trials of our product candidates, we will need to manufacture them in large quantities. We, or any manufacturing partners, may beunable to successfully increase the manufacturing capacity for any of our product candidates in a timely or cost-effective manner, or at all. In addition,quality issues may arise during scale-up activities. If we, or any manufacturing partners, are unable to successfully scale up the manufacture of our productcandidates in sufficient quality and quantity, the development, testing, and clinical trials of that product candidate may be delayed or infeasible, andregulatory approval or commercial launch of any resulting product may be delayed or not obtained, which could significantly harm our business.We may acquire assets or form strategic alliances in the future, and we may not realize the benefits of such acquisitions.We may acquire additional technologies and assets, form strategic alliances or create joint ventures with third parties that we believe will complement oraugment our existing business. If we acquire assets with promising markets or technologies, we may not be able to realize the benefit of acquiring such assetsif we are unable to successfully integrate them with our existing technologies.We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition thatdelay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we willachieve the expected synergies to justify the transaction.44 We may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable orfor which there is a greater likelihood of success.Because we have limited financial and managerial resources, we focus on specific product candidates. As a result, we may forgo or delay pursuit ofopportunities with other product candidates that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail tocapitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs andproduct candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercialpotential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing orother royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to suchproduct candidate.We face competition from entities that have developed or may develop product candidates for cancer, including companies developing novel treatmentsand technology platforms. If these companies develop technologies or product candidates more rapidly than we do or their technologies are more effective,our ability to develop and successfully commercialize product candidates may be adversely affected.The development and commercialization of drugs and therapeutic biologics is highly competitive. We compete with a variety of multinationalbiopharmaceutical companies and specialized biotechnology companies, as well as technology being developed at universities and other researchinstitutions. Our competitors have developed, are developing or will develop product candidates and processes competitive with our product candidates.Competitive therapeutic treatments include those that have already been approved and accepted by the medical community and any new treatments thatenter the market. We believe that a significant number of products are currently under development, and may become commercially available in the future,for the treatment of conditions for which we may try to develop product candidates. There is intense and rapidly evolving competition in the biotechnology,biopharmaceutical and antibody and immunoregulatory therapeutics fields. We believe that while our Probody platform, its associated intellectual propertyand our scientific and technical know-how give us a competitive advantage in this space, competition from many sources remains. Our competitors includelarger and better funded biopharmaceutical, biotechnological and therapeutics companies. Moreover, we also compete with current and future therapeuticsdeveloped at universities and other research institutions.We are aware of several companies that are developing cancer immunotherapies and ADCs. Many of these companies are well-capitalized and, in contrast tous, have significant clinical experience, and may include our existing or future collaborators. In addition, these companies compete with us in recruitingscientific and managerial talent.Our success will partially depend on our ability to develop and protect therapeutics that are safer and more effective than competing products. Ourcommercial opportunity and success will be reduced or eliminated if competing products that are safer, more effective, or less expensive than the therapeuticswe develop.If our lead product candidates are approved, they will compete with a range of therapeutic treatments that are either in development or currently marketed.Indeed, a variety of oncology drugs and therapeutic biologics are on the market or in clinical development. Such marketed therapies range from ADCs suchas Genentech, Inc.’s Kadcyla, immune checkpoint inhibitors such as BMS’s Opdivo and T-cell engager immunotherapies such as Amgen, Inc.’s BLINCYTO.In addition, numerous compounds are in clinical development for cancer treatment. With respect to immunogenic cancers such as melanoma, the mostcommon treatments are chemotherapeutic compounds, radiation therapy and now immunotherapeutic antibodies such as ipilimumab and pembrolizumab.The clinical development pipeline for cancer includes small molecules, antibodies and immunotherapies from a variety of groups.Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and supply resources or experience than we do. If wesuccessfully obtain approval for any product candidate, we will face competition based on many different factors, including the safety and effectiveness ofour products, the ease with which our products can be administered and the extent to which patients accept relatively new routes of administration, the timingand scope of regulatory approvals for these products, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursementcoverage and patent position. Competing products could present superior treatment alternatives, including by being more effective, safer, less expensive ormarketed and sold more effectively than any products we may develop. Competitive products may make any products we develop obsolete ornoncompetitive before we recover the expense of developing and commercializing our product candidates. Such competitors could also recruit ouremployees, which could negatively impact our level of expertise and our ability to execute our business plan.45 Any inability to attract and retain qualified key management and technical personnel would impair our ability to implement our business plan.Our success largely depends on the continued service of key management, advisors and other specialized personnel, including Sean A. McCarthy, D.Phil., ourpresident and chief executive officer, W. Michael Kavanaugh, M.D., our chief scientific officer and Rachel W. Humphrey, M.D., our chief medical officer. Theloss of one or more members of our management team or other key employees or advisors could delay our research and development programs and have amaterial and adverse effect on our business, financial condition, results of operations and prospects. The relationships that our key managers have cultivatedwithin our industry make us particularly dependent upon their continued employment with us. We are dependent on the continued service of our technicalpersonnel because of the highly technical nature of our product candidates and technologies and the specialized nature of the regulatory approval process.Because our management team and key employees are not obligated to provide us with continued service, they could terminate their employment with us atany time without penalty. Our future success will depend in large part on our continued ability to attract and retain other highly qualified scientific, technicaland management personnel, as well as personnel with expertise in clinical testing, manufacturing, governmental regulation and commercialization. We facecompetition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.If our product candidates advance into clinical trials, we may experience difficulties in managing our growth and expanding our operations.We have limited experience in product development and have not begun clinical trials for any of our product candidates. As our product candidates enter andadvance through preclinical studies and any clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contractwith other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators orpartners, suppliers and other organizations. Our ability to manage our operations and future growth will require us to continue to improve our operational,financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information andcontrol systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.If any of our product candidates are approved for marketing and commercialization and we are unable to develop sales, marketing and distributioncapabilities on our own or enter into agreements with third parties to perform these functions on acceptable terms, we will be unable to commercializesuccessfully any such future products.We currently have no sales, marketing or distribution capabilities or experience. If any of our product candidates is approved, we will need to developinternal sales, marketing and distribution capabilities to commercialize such products, which would be expensive and time-consuming, or enter intocollaborations with third parties to perform these services. If we decide to market our products directly, we will need to commit significant financial andmanagerial resources to develop a marketing and sales force with technical expertise and supporting distribution, administration and compliance capabilities.If we rely on third parties with such capabilities to market our products or decide to co-promote products with collaborators, we will need to establish andmaintain marketing and distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements onacceptable terms or at all. In entering into third-party marketing or distribution arrangements, any revenue we receive will depend upon the efforts of the thirdparties and there can be no assurance that such third parties will establish adequate sales and distribution capabilities or be successful in gaining marketacceptance of any approved product. If we are not successful in commercializing any product approved in the future, either on our own or through thirdparties, our business, financial condition, results of operations and prospects could be materially and adversely affected.Our future growth may depend, in part, on our ability to operate in foreign markets, where we would be subject to additional regulatory burdens and otherrisks and uncertainties.Our future growth may depend, in part, on our ability to develop and commercialize our product candidates in foreign markets for which we may rely oncollaboration with third parties. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from theapplicable regulatory authority in that foreign market, and we may never receive such regulatory approval for any of our product candidates. To obtainseparate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements of such countries regarding safetyand efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannotpredict success in these jurisdictions. If we obtain approval of our product candidates and ultimately commercialize our product candidates in foreignmarkets, we would be subject to the risks and uncertainties, including the burden of complying with complex and changing foreign regulatory, tax,accounting and legal requirements and the reduced protection of intellectual property rights in some foreign countries.46 Price controls imposed in foreign markets may adversely affect our future profitability.In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries,pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can beconsiderable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political,economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has beenobtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-pricedmember states, can further reduce prices. In some countries, we or future collaborators may be required to conduct a clinical trial or other studies that comparethe cost-effectiveness of our Probody therapeutic candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval.Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country ofpublication and other countries. If reimbursement of any product candidate approved for marketing is unavailable or limited in scope or amount, or if pricingis set at unsatisfactory levels, our business, financial condition, results of operations or prospects could be materially and adversely affected.Our business entails a significant risk of product liability and our ability to obtain sufficient insurance coverage could have a material and adverse effecton our business, financial condition, results of operations and prospects.As we move into conducting clinical trials of our product candidates we will be exposed to significant product liability risks inherent in the development,testing, manufacturing and marketing of therapeutic treatments. Product liability claims could delay or prevent completion of our development programs. Ifwe succeed in marketing products, such claims could result in an FDA investigation of the safety and effectiveness of our products, our manufacturingprocesses and facilities or our marketing programs and potentially a recall of our products or more serious enforcement action, limitations on the approvedindications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may alsoresult in decreased demand for our products, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and ourresources, substantial monetary awards to trial participants or patients and a decline in our stock price. We currently have insurance that we believe isappropriate for our stage of development and may need to obtain higher levels of insurance as well as product liability insurance prior to marketing any ofour product candidates. Any insurance we have or may obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial andproduct liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect usagainst losses caused by product liability claims that could have a material and adverse effect on our business, financial condition, results of operations andprospects.Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDAregulations, provide accurate information to the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraudand abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing andbusiness arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and otherabusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in thecourse of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employeemisconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or inprotecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If anysuch actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a material and adverseeffect on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.Our internal computer systems, or those of our CROs or other contractors or consultants we may utilize, may fail or suffer security breaches, which couldresult in a material disruption of our product development programs.Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractorsand consultants we may utilize, may be vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war andtelecommunication and electrical failures. Such events could cause interruptions of our operations. For instance, the loss of preclinical data or data from anyfuture clinical trial involving our product candidates could result in delays in our development and regulatory filing efforts and significantly increase ourcosts. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential orproprietary information, we could incur liability and the development of our product candidates could be delayed.47 If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.Our research, development and manufacturing involve the use of hazardous materials and various chemicals. We maintain quantities of various flammableand toxic chemicals in our facilities in South San Francisco, California that are required for our research, development and manufacturing activities. We aresubject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Webelieve our procedures for storing, handling and disposing these materials in our South San Francisco facilities comply with the relevant guidelines of SouthSan Francisco, the state of California and the Occupational Safety and Health Administration of the U.S. Department of Labor. Although we believe that oursafety procedures for handling and disposing of these materials comply with the standards mandated by applicable regulations, the risk of accidentalcontamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could besubstantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratoryprocedures, exposure to blood-borne pathogens and the handling of animals and biohazardous materials. Although we maintain workers’ compensationinsurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may notprovide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be assertedagainst us in connection with our storage or disposal of biological or hazardous materials. Additional federal, state and local laws and regulations affectingour operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these lawsor regulations.Our information technology systems could face serious disruptions that could adversely affect our business.Our information technology and other internal infrastructure systems, including corporate firewalls, servers, leased lines and connection to the Internet, facethe risk of systemic failure that could disrupt our operations. A significant disruption in the availability of our information technology and other internalinfrastructure systems could cause interruptions and delays in our research and development work.Our current operations are concentrated in one location, and we or the third parties upon whom we depend may be adversely affected by earthquakes orother natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.Our current operations are located in our facilities in South San Francisco, California. Any unplanned event, such as flood, fire, explosion, earthquake,extreme weather condition, medical epidemics, power shortage, telecommunication failure or other natural or manmade accidents or incidents that result in usbeing unable to fully utilize our facilities, or the manufacturing facilities of our third-party contract manufacturers, may have a material and adverse effect onour ability to operate our business, particularly on a daily basis, and have significant negative consequences on our financial and operating conditions. Lossof access to these facilities may result in increased costs, delays in the development of our product candidates or interruption of our business operations.Earthquakes or other natural disasters could further disrupt our operations, and have a material and adverse effect on our business, financial condition, resultsof operations and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of ourheadquarters, that damaged critical infrastructure, such as our research facilities or the manufacturing facilities of our third-party contract manufacturers, orthat otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. Thedisaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incursubstantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, could have a material adverse effect on ourbusiness. As part of our risk management policy, we maintain insurance coverage at levels that we believe are appropriate for our business. However, in theevent of an accident or incident at these facilities, we cannot assure you that the amounts of insurance will be sufficient to satisfy any damages and losses. Ifour facilities, or the manufacturing facilities of our third-party contract manufacturers, are unable to operate because of an accident or incident or for anyother reason, even for a short period of time, any or all of our research and development programs may be harmed. Any business interruption may have amaterial and adverse effect on our business, financial condition, results of operations and prospects.48 Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”), if a corporation undergoes an “ownership change” (generallydefined as a greater than 50 percentage points change (by value) in the ownership of its equity over a rolling three year period), the corporation’s ability touse its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income and taxes may be limited.California has similar rules. We have performed an IRC Section 382 analysis and determined there was an ownership change in 2015. As a result, the federaland state carryforwards associated with the net operating loss and credit deferred tax assets were reduced by the amount of tax attributes estimated to expireduring their respective carryforward periods. We may experience ownership changes in the future as a result of shifts in our stock ownership, some of whichare outside our control. As of December 31, 2015, we had federal net operating loss carryforwards of approximately $14.3 million, and our ability to utilizethose net operating loss carryforwards could be limited by an “ownership change” as described above, which could result in increased tax liability to ourcompany.Risks Related to Intellectual PropertyIf we are not able to obtain and enforce patent protection for our technologies or product candidates, development and commercialization of our productcandidates may be adversely affected.Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectualproperty rights of others, for our product candidates, methods used to manufacture our product candidates and methods for treating patients using our productcandidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate withoutinfringing upon the proprietary rights of others. As of March 1, 2016, we solely own seven patents and 124 pending patent applications; we co-own fourpatents and seven pending patent applications with UC, acting through its Santa Barbara Campus and one patent and one pending patent application withUC, acting through its San Francisco Campus; and, under an exclusive, worldwide license agreement with UC, acting through its Santa Barbara Campus (the“UC Agreement”), we licensed fourteen patents and seven pending patent applications that cover compositions and methods related to the screening andidentification of masks and protease-cleavable linkers that we incorporate into our Probody candidates. We also licensed UCSB’s rights in the co-ownedpatent family. We may not be able to apply for patents on certain aspects of our product candidates in a timely fashion or at all. Our existing issued andgranted patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technology or from developing competingproducts and technology. There is no guarantee that any of our pending patent applications will result in issued or granted patents, that any of our issued orgranted patents will not later be found to be invalid or unenforceable or that any issued or granted patents will include claims that are sufficiently broad tocover our product candidates or to provide meaningful protection from our competitors. Moreover, the patent position of biotechnology andbiopharmaceutical companies can be highly uncertain because it involves complex legal and factual questions. We will be able to protect our proprietaryrights from unauthorized use by third parties only to the extent that our current and future proprietary technology and product candidates are covered byvalid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or misappropriate our proprietary rights, it may materiallyand adversely affect our position in the market.The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and otherprovisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application,resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier thanwould otherwise have been the case. The standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly orpredictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology andbiopharmaceutical patents. As such, we do not know the degree of future protection that we will have on our proprietary products and technology. While wewill endeavor to try to protect our product candidates with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive and sometimes unpredictable.49 In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO that may have a significant impact on ourability to protect our technology and enforce our intellectual property rights. For example, the America Invents Act (“AIA”) enacted within the last severalyears involves significant changes in patent legislation. The Supreme Court has ruled on several patent cases in recent years, some of which cases eithernarrow the scope of patent protection available in certain circumstances or weaken the rights of patent owners in certain situations. The recent decision by theSupreme Court in Association for Molecular Pathology v. Myriad Genetics, Inc. precludes a claim to a nucleic acid having a stated nucleotide sequence thatis identical to a sequence found in nature and unmodified. We currently are not aware of an immediate impact of this decision on our patents or patentapplications because we are developing product candidates that contain modifications, such as our Probody substrates and masks, that we believe are notfound in nature. However, this decision has yet to be clearly interpreted by courts and by the USPTO. We cannot assure you that the interpretations of thisdecision or subsequent rulings will not adversely impact our patents or patent applications. In addition to increasing uncertainty with regard to our ability toobtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisionsby the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weakenour ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action incourt or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections againstsuch initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit thescope of the allowed or granted claims thus attacked, or may lose the allowed or granted claims altogether. In addition, there can be no assurance that: ·Others will not or may not be able to make, use or sell compounds that are the same as or similar to our product candidates but that are notcovered by the claims of the patents that we own or license. ·We or our licensors, or our existing or future collaborators are the first to make the inventions covered by each of our issued patents andpending patent applications that we own or license. ·We or our licensors, or our existing or future collaborators are the first to file patent applications covering certain aspects of our inventions. ·Others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing ourintellectual property rights. ·A third party may not challenge our patents and, if challenged, a court would hold that our patents are valid, enforceable and infringed. ·Any issued patents that we own or have licensed will provide us with any competitive advantages, or will not be challenged by third parties. ·We may develop additional proprietary technologies that are patentable. ·The patents of others will not have a material or adverse effect on our business, financial condition, results of operations and prospects. ·Our competitors do not conduct research and development activities in countries where we do not have enforceable patent rights and then usethe information learned from such activities to develop competitive products for sale in our major commercial markets.Other companies or organizations may challenge our or our licensors’ patent rights or may assert patent rights that prevent us from developing andcommercializing our products.Probody therapeutics are a relatively new scientific field. We have obtained grants and issuances of Probody therapeutic patents and have licensed several ofthese patents from a third party on an exclusive basis for therapeutics applications. The issued patents and pending patent applications in the U.S. and in keymarkets around the world that we own or license claim many different methods, compositions and processes relating to the discovery, development,manufacture and commercialization of antibody and immunoregulatory therapeutics. Specifically, we own and have licensed a portfolio of patents, patentapplications and other intellectual property covering Probody compositions of matter as well as their methods of use.50 As the field of antibody and immunoregulatory therapeutics matures, patent applications are being processed by national patent offices around the world.There is uncertainty about which patents will issue, and, if they do, as to when, to whom, and with what claims. In addition, third parties may attempt toinvalidate our intellectual property rights. Even if our rights are not directly challenged, disputes could lead to the weakening of our intellectual propertyrights. Our defense against any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to us, could requiresignificant time and attention of our management and could have a material and adverse effect on our business, financial condition, results of operations andprospects or our ability to successfully compete.There are many issued and pending patents that claim aspects of our product candidates and modifications that we may need to apply to our productcandidates. There are also many issued patents that claim antibodies or portions of antibodies that may be relevant for Probody products we wish to develop.Thus, it is possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license tosuch patent rights on reasonable terms, we may not be able to market products or perform research and development or other activities covered by thesepatents.We may not be able to protect our intellectual property rights throughout the world.Obtaining a valid and enforceable issued or granted patent covering our technology in the U.S. and worldwide can be extremely costly. In jurisdictions wherewe have not obtained patent protection, competitors may use our technology to develop their own products and further, may export otherwise infringingproducts to territories where we have patent protection, but where it is more difficult to enforce a patent as compared to the U.S. Competitor products maycompete with our future products in jurisdictions where we do not have issued or granted patents or where our issued or granted patent claims or otherintellectual property rights are not sufficient to prevent competitor activities in these jurisdictions. The legal systems of certain countries, particularly certaindeveloping countries, make it difficult to enforce patents and such countries may not recognize other types of intellectual property protection, particularlythat relating to biopharmaceuticals. This could make it difficult for us to prevent the infringement of our patents or marketing of competing products inviolation of our proprietary rights generally in certain jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result insubstantial cost and divert our efforts and attention from other aspects of our business.We generally file a provisional patent application first (a priority filing) at the USPTO. An international application under the Patent Cooperation Treaty(“PCT”) is usually filed within twelve months after the priority filing. Based on the PCT filing, national and regional patent applications may be filed in theUnited States, European Union, Japan, Australia and Canada and, depending on the individual case, also in any or all of, inter alia, Brazil, China, HongKong, India, Israel, Mexico, New Zealand, Russia, South Africa, South Korea and other jurisdictions. We have so far not filed for patent protection in allnational and regional jurisdictions where such protection may be available. In addition, we may decide to abandon national and regional patent applicationsbefore grant. Finally, the grant proceeding of each national or regional patent is an independent proceeding which may lead to situations in whichapplications might in some jurisdictions be refused by the relevant registration authorities, while granted by others. It is also quite common that dependingon the country, various scopes of patent protection may be granted on the same product candidate or technology.The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws in the U.S., and many companies have encounteredsignificant difficulties in protecting and defending such rights in such jurisdictions. If we or our licensors encounter difficulties in protecting, or are otherwiseprecluded from effectively protecting, the intellectual property rights important for our business in such jurisdictions, the value of these rights may bediminished and we may face additional competition from others in those jurisdictions. Many countries have compulsory licensing laws under which a patentowner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies orgovernment contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we orany of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position in the relevantjurisdiction may be impaired and our business and results of operations may be adversely affected.51 We or our licensors, or any future strategic partners may become subject to third party claims or litigation alleging infringement of patents or otherproprietary rights or seeking to invalidate patents or other proprietary rights, and we may need to resort to litigation to protect or enforce our patents orother proprietary rights, all of which could be costly, time consuming, delay or prevent the development and commercialization of our product candidates,or put our patents and other proprietary rights at risk.We or our licensors, or any future strategic partners may be subject to third-party claims for infringement or misappropriation of patent or other proprietaryrights. We are generally obligated under our license or collaboration agreements to indemnify and hold harmless our licensors or collaborators for damagesarising from intellectual property infringement by us. If we or our licensors, or any future strategic partners are found to infringe a third-party patent or otherintellectual property rights, we could be required to pay damages, potentially including treble damages, if we are found to have willfully infringed. Inaddition, we or our licensors, or any future strategic partners may choose to seek, or be required to seek, a license from a third party, which may not beavailable on acceptable terms, if at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give ourcompetitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we or our existing or futurecollaborators may be unable to effectively market product candidates based on our technology, which could limit our ability to generate revenue or achieveprofitability and possibly prevent us from generating revenue sufficient to sustain our operations. In addition, we may find it necessary to pursue claims orinitiate lawsuits to protect or enforce our patent or other intellectual property rights. The cost to us in defending or initiating any litigation or otherproceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’sattention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantiallygreater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research anddevelopment efforts and limit our ability to continue our operations.If we were to initiate legal proceedings against a third party to enforce a patent covering one of our products or our technology, the defendant couldcounterclaim that our patent is invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability arecommonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty,obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patentwithheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidityand unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is noinvalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidityor unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platformtechnology. Such a loss of patent protection could have a material and adverse effect on our business, financial condition, results of operations and prospects.Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legallyinfringing our patents or other intellectual property rights.Intellectual property rights of third parties could adversely affect our ability to commercialize our product candidates, and we might be required to litigateor obtain licenses from third parties in order to develop or market our product candidates. Such litigation or licenses could be costly or not available oncommercially reasonable terms.Because the antibody landscape is still evolving, it is difficult to conclusively assess our freedom to operate without infringing on third-party rights. Thereare numerous companies that have pending patent applications and issued patents broadly covering antibodies generally or covering antibodies directedagainst the same targets as, or targets similar to, those we are pursuing. Our competitive position may suffer if patents issued to third parties or other third-party intellectual property rights cover our products or product candidates or elements thereof, or our manufacture or uses relevant to our development plans.In such cases, we may not be in a position to develop or commercialize products or product candidates unless we successfully pursue litigation to nullify orinvalidate the third-party intellectual property right concerned, or enter into a license agreement with the intellectual property right holder, if available oncommercially reasonable terms. There may be issued patents of which we are not aware, held by third parties that, if found to be valid and enforceable, couldbe alleged to be infringed by our Probody technologies. There also may be pending patent applications of which we are not aware that may result in issuedpatents, which could be alleged to be infringed by our Probody technologies. If such an infringement claim should be brought and be successful, we may berequired to pay substantial damages, be forced to abandon our product candidates or seek a license from any patent holders. No assurances can be given that alicense will be available on commercially reasonable terms, if at all.52 It is also possible that we have failed to identify relevant third-party patents or applications. For example, U.S. applications filed before November 29, 2000and certain U.S. applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Patent applications in the U.S.and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonlyreferred to as the priority date. Therefore, patent applications covering our products or platform technology could have been filed by others without ourknowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that couldcover our platform technologies, our products or the use of our products. Third-party intellectual property right holders may also actively bring infringementclaims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable tosuccessfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming litigationand may be prevented from or experience substantial delays in marketing our products. If we fail in any such dispute, in addition to being forced to paydamages, we may be temporarily or permanently prohibited from commercializing any of our product candidates that are held to be infringing. We might, ifpossible, also be forced to redesign product candidates so that we no longer infringe the third-party intellectual property rights. Any of these events, even ifwe were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to ourbusiness.Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is unpredictable and generally expensive and timeconsuming and is likely to divert significant resources from our core business, including distracting our technical and management personnel from theirnormal responsibilities. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is arisk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be publicannouncements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these resultsto be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase ouroperating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustainthe costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developedintellectual property portfolios. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating or fromsuccessfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedingscould have a material adverse effect on our ability to compete in the marketplace.If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could loseintellectual property rights that are necessary for developing and protecting our product candidates or we could lose certain rights to grant sublicenses.Our current license imposes, and any future licenses we enter into are likely to impose, various development, commercialization, funding, milestone, royalty,diligence, sublicensing, insurance, patent prosecution and enforcement and/or other obligations on us. If we breach any of these obligations, or use theintellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate thelicense, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitorto gain access to the licensed technology. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result,we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while we cannot currentlydetermine the amount of the royalty obligations we would be required to pay on sales of future products, if any, the amounts may be significant. The amountof our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize,if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.In addition to seeking patent protection for certain aspects of our product candidates, we also consider trade secrets, including confidential and unpatentedknow-how important to the maintenance of our competitive position. We protect trade secrets and confidential and unpatented know-how, in part, byentering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, corporate collaborators,outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and inventionor patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us.53 Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not beable to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensiveand time-consuming, and the outcome is unpredictable. In addition, some courts in the U.S. and certain foreign jurisdictions are less willing or unwilling toprotect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to preventthem from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by acompetitor, our competitive position would be harmed.We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ orconsultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to paymonetary damages and may lose valuable intellectual property rights or personnel.Many of our employees were previously employed at universities or biotechnology or biopharmaceutical companies, including our competitors or potentialcompetitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwiseused or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If wefail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key researchpersonnel or their work product could hamper our ability to commercialize, or prevent us from commercializing, our product candidates, which couldseverely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction tomanagement.If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and ourbusiness may be adversely affected.Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not beable to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name recognition by potentialpartners or customers in our markets of interest. If we are unable to establish name recognition based on our trademarks and trade names, we may not be ableto compete effectively and our business may be adversely affected.Risks Related to Government RegulationClinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive offuture trial results.All of our product candidates are in preclinical development and their risk of failure is high. It is impossible to predict when or if any of our productcandidates will prove effective and safe in humans or will receive regulatory approval. Before obtaining marketing approval from regulatory authorities forthe sale of any product candidate, we must complete preclinical studies and then conduct extensive clinical trials to demonstrate the safety and efficacy ofour product candidates in humans. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure canoccur at any time during the development process. The results of preclinical studies and early clinical trials of our product candidates may not be predictiveof the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despitehaving progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significantsetbacks in advanced clinical trials due to lack of efficacy or safety profiles, notwithstanding promising results in earlier trials.We plan to commence a Phase 1 clinical trial of CX-072 for cancer in 2016, and a Phase 1 clinical trial of CX-2009, our PDC candidate directed against CD-166, for cancer in 2017. Commencing these clinical trials is subject to finalizing the trial design and filing an IND or similar filing with the FDA or similarforeign regulatory authority. Even after we file our IND or comparable submissions in other jurisdictions, the FDA or other regulatory authorities coulddisagree that we have satisfied their requirements to commence our clinical trials or disagree with our study design, which may require us to completeadditional preclinical studies or amend our protocols or impose stricter conditions on the commencement of clinical trials.54 We may experience delays in completing our preclinical studies and initiating or completing clinical trials of our product candidates. We do not knowwhether planned preclinical studies and clinical trials will be completed on schedule or at all, or whether planned clinical trials will begin on time, need to beredesigned, enroll patients on time or be completed on schedule, if at all. Our development programs may be delayed for a variety of reasons, includingdelays related to: ·the FDA or other regulatory authorities requiring us to submit additional data or imposing other requirements before permitting us to initiate aclinical trial; ·obtaining regulatory approval to commence a clinical trial; ·reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensivenegotiation and may vary significantly among different CROs and clinical trial sites; ·obtaining IRB approval at each clinical trial site; ·recruiting suitable patients to participate in a clinical trial; ·developing and validating the companion diagnostic to be used in a clinical trial; ·having patients complete a clinical trial or return for post-treatment follow-up; ·clinical trial sites deviating from trial protocol or dropping out of a trial; ·adding new clinical trial sites; or ·manufacturing sufficient quantities of our product candidates for use in clinical trials.Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, theproximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs ortherapeutic biologics that may be approved for the indications we are investigating. Furthermore, we expect to rely on our collaborators, CROs and clinicaltrial sites to ensure the proper and timely conduct of our clinical trials and while we expect to enter into agreements governing their committed activities, wehave limited influence over their actual performance.We could encounter delays if prescribing physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our productcandidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminatedby us, our collaborators, the IRBs of the institutions in which such trials are being conducted, the Data Safety Monitoring Board for such trial or by the FDAor other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinicalhold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug or therapeutic biologic, changes in governmentalregulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of,any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenuesfrom any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our productdevelopment and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may materiallyand adversely affect our business, financial condition, results of operations and prospects. In addition, many of the factors that cause, or lead to, a delay in thecommencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.We may be unable to obtain U.S. or foreign regulatory approval and, as a result, unable to commercialize our product candidates.Our product candidates are subject to extensive governmental regulations relating to, among other things, research, testing, development, manufacturing,safety, efficacy, approval, recordkeeping, reporting, labeling, storage, packaging, advertising and promotion, pricing, marketing and distribution of drugs andtherapeutic biologics. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required to be successfully completedin the U.S. and in many foreign jurisdictions before a new drug or therapeutic biologic can be marketed. Satisfaction of these and other regulatoryrequirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we may develop willobtain the regulatory approvals necessary for us or our existing or future collaborators to begin selling them.55 We have very limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA.The time required to obtain FDA and other approvals is unpredictable but typically takes many years following the commencement of clinical trials,depending upon the type, complexity and novelty of the product candidate. The standards that the FDA and its foreign counterparts use when regulating usrequire judgment and can change, which makes it difficult to predict with certainty how they will be applied. Any analysis we perform of data frompreclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatoryapproval. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation oradministrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. It is impossible topredict whether legislative changes will be enacted, or whether FDA or foreign regulations, guidance or interpretations will be changed, or what the impact ofsuch changes, if any, may be.Because the product candidates we are developing may represent a new class of therapeutic biologics, the FDA and its foreign counterparts have not yetestablished any definitive policies, practices or guidelines in relation to these product candidates. While we believe the product candidates that we arecurrently developing are regulated as therapeutic biologics that are subject to requirements for review and approval of a BLA by the FDA’s Center for DrugEvaluation and Research (“CDER”), the FDA could decide to regulate them as drugs that are subject to requirements for review and approval of an NDA byCDER or as biological products that are subject to requirements for review and approval of a BLA by the FDA’s Center for Biologics Evaluation andResearch (“CBER”). The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit.Moreover, the FDA may respond to these submissions by defining requirements we may not have anticipated. Such responses could lead to significant delaysin the clinical development of our product candidates. In addition, because there may be approved treatments for some of the diseases for which we may seekapproval, in order to receive regulatory approval, we may need to demonstrate through clinical trials that the product candidates we develop to treat thesediseases, if any, are not only safe and effective, but safer or more effective than existing products. Furthermore, in recent years, there has been increased publicand political pressure on the FDA with respect to the approval process for new drugs and therapeutic biologics, and the FDA’s standards, especially regardingproduct safety, appear to have become more stringent.Any delay or failure in obtaining required approvals could have a material and adverse effect on our ability to generate revenues from the particular productcandidate for which we are seeking approval. Furthermore, any regulatory approval to market a product may be subject to limitations on the approved usesfor which we may market the product or the labeling or other restrictions. In addition, the FDA has the authority to require a REMS plan as part of an NDA orBLA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug or biologic, such as limitingprescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteriaand requiring treated patients to enroll in a registry. These limitations and restrictions may limit the size of the market for the product and affectreimbursement by third-party payors.We are also subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing and marketingauthorization, pricing and third-party reimbursement. The foreign regulatory approval process varies among countries and may include all of the risksassociated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Moreover, the timerequired to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authoritiesoutside the U.S. and vice versa.56 Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing regulatory obligations and continued regulatoryreview, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and otherrestrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipatedproblems with our products.Any regulatory approvals that we or our existing or future collaborators obtain for our product candidates may also be subject to limitations on the approvedindicated uses for which a product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing,including “Phase 4” clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA or a comparableforeign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting,storage, import, export, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. Theserequirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs andgood clinical practices for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, includingadverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatoryrequirements, may result in, among other things: ·restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory productrecalls; ·fines, warning letters or holds on clinical trials; ·refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners; ·suspension or revocation of product license approvals; ·product seizure or detention or refusal to permit the import or export of products; and ·injunctions or the imposition of civil or criminal penalties.The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our productcandidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, eitherin the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if weare not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustainprofitability, which would adversely affect our business.Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the ACA,was passed, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S.pharmaceutical industry. The ACA, among other things, subjects therapeutic biologics to potential competition by lower-cost biosimilars, addresses a newmethodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs and therapeutic biologics that areinhaled, infused, instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Programand extends the rebate program to individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers ofcertain branded prescription drugs and therapeutic biologics, and a new Medicare Part D coverage gap discount program, in which manufacturers must agreeto offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs and therapeutic biologics to eligible beneficiaries during their coveragegap period, as a condition for the manufacturer’s outpatient drugs and therapeutic biologics to be covered under Medicare Part D.In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the BudgetControl Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering thelegislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscalyear. These reductions went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2024unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among otherthings, further reduced Medicare payments to several types of providers.57 Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, the Middle Class Tax Reliefand Job Creation Act of 2012 required that the Centers for Medicare & Medicaid Services (“CMS”), the agency responsible for administering the Medicareprogram, reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which served as a base for 2014 and subsequent years. In addition, effectiveJanuary 1, 2014, CMS also began bundling the Medicare payments for certain laboratory tests ordered while a patient received services in a hospitaloutpatient setting. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amountsthat federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates orcompanion diagnostics or additional pricing pressures.If we or existing or future collaborators, manufacturers or service providers fail to comply with healthcare laws and regulations, we or they could besubject to enforcement actions, which could affect our ability to develop, market and sell our products and may harm our reputation.Although we do not currently have any products on the market, once we begin commercializing our product candidates, we will be subject to additionalhealthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct ourbusiness. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates forwhich we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuseand other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell anddistribute our product candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations,include the following: ·the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind to induce or reward either the referral of an individual for, or thepurchase, or order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programssuch as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in orderto have committed a violation; ·the U.S. federal False Claims Act, which imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, againstindividuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false orfraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, thegovernment may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes afalse or fraudulent claim for purposes of the False Claims Act; ·HIPPA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program, or knowingly andwillfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of orpayment for healthcare benefits, items or services; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actualknowledge of the statute or specific intent to violate it in order to have committed a violation; ·HIPAA, as amended by HITECH, which impose obligations on certain covered entity healthcare providers, health plans, and healthcareclearinghouse as well as their business associates that perform certain services involving the use or disclosure of individually identifiablehealth information, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individuallyidentifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security ofindividually identifiable health information; ·the federal Open Payments regulations under the National Physician Payment Transparency Program have been issued under the ACA, whichrequire that manufacturers of drugs and therapeutic biologics reimbursable under Medicare, Medicaid, and Children’s Health InsurancePrograms to report to the Department of Health and Human Services certain consulting fees, travel reimbursements, research grants, and otherpayments or gifts with values over $10 made to physicians and teaching hospitals; and ·analogous state laws and regulations, such as state anti-kickback and false claims laws that may apply to sales or marketing arrangements andclaims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; and some statelaws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevantcompliance guidance promulgated by the federal government in addition to requiring drug and therapeutic biologics manufacturers to reportinformation related to payments to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacyand security of health information in certain circumstances, many of which differ from each other in significant ways and often are notpreempted by HIPAA, thus complicating compliance efforts.58 Ensuring that our future business arrangements with third-parties comply with applicable healthcare laws and regulations could involve substantial costs. Ifour operations are found to be in violation of any such requirements, we may be subject to penalties, including civil or criminal penalties, monetarydamages, the curtailment or restructuring of our operations, loss of eligibility to obtain approvals from the FDA, or exclusion from participation ingovernment contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which could adversely ourfinancial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these riskscannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divertour management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance withapplicable laws and regulations may be costly to us in terms of money, time and resources.If we or future collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could besubject to enforcement actions, which could affect our ability to develop, market and sell our products successfully and could harm our reputation and lead toreduced acceptance of our products by the market. These enforcement actions include, among others: ·adverse regulatory inspection findings; ·warning letters; ·voluntary or mandatory product recalls or public notification or medical product safety alerts to healthcare professionals; ·restrictions on, or prohibitions against, marketing our products; ·restrictions on, or prohibitions against, importation or exportation of our products; ·suspension of review or refusal to approve pending applications or supplements to approved applications; ·exclusion from participation in government-funded healthcare programs; ·exclusion from eligibility for the award of government contracts for our products; ·suspension or withdrawal of product approvals; ·seizures or administrative detention of products; ·injunctions; and ·civil and criminal penalties and fines.If we fail to comply with U.S. and foreign regulatory requirements, regulatory authorities could limit or withdraw any marketing or commercializationapprovals we may receive and subject us to other penalties that could materially harm our business.Even if we receive marketing and commercialization approval of a product candidate, we will be subject to continuing regulatory requirements, including inrelation to adverse patient experiences with the product and clinical results that are reported after a product is made commercially available, both in the U.S.and any foreign jurisdiction in which we seek regulatory approval. The FDA has significant post-market authority, including the authority to require labelingchanges based on new safety information and to require post-market studies or clinical trials to evaluate safety risks related to the use of a product or torequire withdrawal of the product from the market. The FDA also has the authority to require a REMS plan after approval, which may impose furtherrequirements or restrictions on the distribution or use of an approved drug or therapeutic biologic. The manufacturer and manufacturing facilities we use tomake a future product, if any, will also be subject to periodic review and inspection by the FDA and other regulatory agencies, including for continuedcompliance with cGMP requirements. The discovery of any new or previously unknown problems with our third-party manufacturers, manufacturingprocesses or facilities may result in restrictions on the product, manufacturer or facility, including withdrawal of the product from the market. If we rely onthird-party manufacturers, we will not have control over compliance with applicable rules and regulations by such manufacturers. Any product promotionand advertising will also be subject to regulatory requirements and continuing regulatory review. If we or our existing or future collaborators, manufacturersor service providers fail to comply with applicable continuing regulatory requirements in the U.S. or foreign jurisdictions in which we seek to market ourproducts, we or they may be subject to, among other things, fines, warning letters, holds on clinical trials, delay of approval or refusal by the FDA to approvepending applications or supplements to approved applications, suspension or withdrawal of regulatory approval, product recalls and seizures, administrativedetention of products, refusal to permit the import or export of products, operating restrictions, injunction, civil penalties and criminal prosecution.59 Even if we are able to commercialize any product candidate, such product candidate may become subject to unfavorable pricing regulations or third-partycoverage and reimbursement policies, which would harm our business.The regulations that govern regulatory approvals, pricing and reimbursement for new drugs and therapeutic biologics vary widely from country to country.Some countries require approval of the sale price of a drug or therapeutic biologic before it can be marketed. In many countries, the pricing review periodbegins after marketing approval is granted. In some foreign markets, prescription biopharmaceutical pricing remains subject to continuing governmentalcontrol even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject toprice regulations that delay our commercial launch of the product, possibly for lengthy time periods and negatively impact the revenues we are able togenerate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more productcandidates, even if our product candidates obtain regulatory approval.Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and relatedtreatments will be available from government authorities, private health insurers and other organizations. Even if we succeed in bringing one or moreproducts to the market, these products may not be considered cost-effective, and the amount reimbursed for any products may be insufficient to allow us tosell our products on a competitive basis. Because our programs are in the early stages of development, we are unable at this time to determine their costeffectiveness or the likely level or method of reimbursement. Increasingly, the third-party payors who reimburse patients or healthcare providers, such asgovernment and private insurance plans, are requiring that drug companies provide them with predetermined discounts from list prices, and are seeking toreduce the prices charged or the amounts reimbursed for biopharmaceutical products. If the price we are able to charge for any products we develop, or thereimbursement provided for such products, is inadequate in light of our development and other costs, our return on investment could be adversely affected.There may be significant delays in obtaining reimbursement for newly-approved drugs or therapeutic biologics, and coverage may be more limited than thepurposes for which the drug or therapeutic biologic is approved by the FDA or similar regulatory authorities outside of the United States. Moreover,eligibility for reimbursement does not imply that any drug or therapeutic biologic will be reimbursed in all cases or at a rate that covers our costs, includingresearch, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs or therapeutic biologics, if applicable, may also not besufficient to cover our costs and may not be made permanent. Reimbursement rates may be based on payments allowed for lower-cost drugs or therapeuticbiologics that are already reimbursed, may be incorporated into existing payments for other services and may reflect budgetary constraints or imperfections inMedicare data. Net prices for drugs or therapeutic biologics may be reduced by mandatory discounts or rebates required by government healthcare programsor private payors and by any future relaxation of laws that presently restrict imports of drugs or therapeutic biologics from countries where they may be soldat lower prices than in the U.S. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursementrates. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for new drugs ortherapeutic biologics that we develop and for which we obtain regulatory approval could have a material and adverse effect on our operating results, ourability to raise capital needed to commercialize products and our financial condition.Our ability to obtain services, reimbursement or funding from the federal government may be impacted by possible reductions in federal spending.U.S. federal government agencies currently face potentially significant spending reductions. Under the Budget Control Act of 2011, the failure of Congress toenact deficit reduction measures of at least $1.2 trillion for the years 2013 through 2021 triggered automatic cuts to most federal programs. These cutsinclude aggregate reductions to Medicare payments to providers of up to two percent per fiscal year, which started in April 2013, and, due to subsequentlegislative amendments, will stay in effect through 2024 unless additional legislative action is taken. The American Taxpayer Relief Act of 2012, which wasenacted on January 1, 2013, also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, andincreased the statute of limitations period for the government to recover overpayments to providers from three to five years. The full impact on our business,financial condition, results of operations and prospects of these cuts is uncertain. If federal spending is further reduced, anticipated budgetary shortfalls mayalso impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocatedto federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approveresearch and development, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop.60 If any of our product candidates receives marketing approval and we or others later identify undesirable side effects caused by the product candidate, ourability to market and derive revenue from the product candidates could be compromised.Undesirable side effects caused by our product candidates could cause regulatory authorities to interrupt, delay or halt clinical trials and could result in amore restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. While we have not yet initiated clinical trialsfor any of our product candidates, it is likely that there may be side effects associated with their use. Results of our trials could reveal a high and unacceptableseverity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreignregulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Such sideeffects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of theseoccurrences may materially and adversely affect our business, financial condition, results of operations and prospects. Further, clinical trials by their natureutilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, rare and severe side effects of ourproduct candidates may only be uncovered with a significantly larger number of patients exposed to the product candidate.In the event that any of our product candidates receives regulatory approval and we or others identify undesirable side effects caused by one of our products,any of the following adverse events could occur, which could result in the loss of significant revenue to us and materially and adversely affect our results ofoperations and business: ·regulatory authorities may withdraw their approval of the product or seize the product; ·we may be required to recall the product or change the way the product is administered to patients; ·additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or anycomponent thereof; ·we may be subject to fines, injunctions or the imposition of civil or criminal penalties; ·regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication; ·we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients; ·we could be sued and held liable for harm caused to patients; ·the product may become less competitive; and ·our reputation may suffer.A Breakthrough Therapy Designation by the FDA for our product candidates may not lead to a faster development or regulatory review or approvalprocess, and it does not increase the likelihood that our product candidates will receive marketing approval.We may seek a Breakthrough Therapy Designation for some of our product candidates. A breakthrough therapy is defined as a product that is intended, aloneor in combination with one or more other products, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates thatthe product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatmenteffects observed early in clinical development. For products that have been designated as breakthrough therapies, interaction and communication betweenthe FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed inineffective control regimens. Products designated as breakthrough therapies by the FDA can also be eligible for accelerated approval.Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteriafor designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of aBreakthrough Therapy Designation for a product candidate may not result in a faster development process, review or approval compared to productsconsidered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of ourproduct candidates qualify as breakthrough therapies, the FDA may later decide that the products no longer meet the conditions for qualification and rescindthe breakthrough designation.61 A Fast Track Designation by the FDA may not actually lead to a faster development or regulatory review or approval process.We may seek Fast Track Designation for some of our product candidates. If a product is intended for the treatment of a serious or life-threatening conditionand the product demonstrates the potential to address unmet medical needs for this condition, the product sponsor may apply for Fast Track Designation. TheFDA has broad discretion whether or not to grant this designation, so even if we believe a particular product candidate is eligible for this designation, wecannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process,review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no longersupported by data from our clinical development program.We may seek Orphan Drug Designation for some of our product candidates, and we may be unsuccessful or may be unable to maintain the benefitsassociated with Orphan Drug Designation, including the potential for market exclusivity.As part of our business strategy, we may seek Orphan Drug Designation for our product candidates, and we may be unsuccessful. Regulatory authorities insome jurisdictions, including the United States and Europe, may designate drugs and therapeutic biologics for relatively small patient populations as orphandrugs. Under the Orphan Drug Act, the FDA may designate a drug or therapeutic biologic as an orphan drug if it is a drug or therapeutic biologic intended totreat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or apatient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug or therapeuticbiologic will be recovered from sales in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such asopportunities for grant funding toward clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has Orphan Drug Designationsubsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, whichmeans that the FDA may not approve any other applications, including a full NDA or BLA, to market the same product for the same indication for sevenyears, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer isunable to assure sufficient product quantity.Even if we obtain Orphan Drug Designation for our product candidates in specific indications, we may not be the first to obtain marketing approval of theseproduct candidates for the orphan-designated indication due to the uncertainties associated with developing pharmaceutical products. In addition, exclusivemarketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if theFDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product tomeet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may noteffectively protect the product from competition because different drugs or therapeutic biologics with different active moieties can be approved for the samecondition. Even after an orphan product is approved, the FDA can subsequently approve the same drug or therapeutic biologic with the same active moietyfor the same condition if the FDA concludes that the later drug or therapeutic biologic is safer, more effective or makes a major contribution to patient care.Orphan Drug Designation neither shortens the development time or regulatory review time of a drug or therapeutic biologic nor gives the drug or therapeuticbiologic any advantage in the regulatory review or approval process. In addition, while we may seek Orphan Drug Designation for our productcandidates, we may never receive such designations.Risks Related to Ownership of Our Common StockOur quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may causeour stock price to fluctuate or decline.We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors,including: ·variations in the level of expense related to the ongoing development of our Probody platform, our product candidates or future developmentprograms; ·results of clinical trials, or the addition or termination of clinical trials or funding support by us, or existing or future collaborators or licensingpartners; ·our execution of any additional collaboration, licensing or similar arrangements, and the timing of payments we may make or receive underexisting or future arrangements or the termination or modification of any such existing or future arrangements; ·any intellectual property infringement lawsuit or opposition, interference or cancellation proceeding in which we may become involved;62 ·additions and departures of key personnel; ·strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes inbusiness strategy; ·if any of our product candidates receives regulatory approval, the terms of such approval and market acceptance and demand for such productcandidates; ·regulatory developments affecting our product candidates or those of our competitors; and ·changes in general market and economic conditions.If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterlycomparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.Our stock price may be volatile and purchasers of our common stock could incur substantial losses.Our stock price is volatile. From October 8, 2015, the first day of trading our common stock, through March 2, 2016, our stock had high and low closing salesprices in the range of $24.68 and $9.01 per share. The market price for our common stock may be influenced by many factors, including the other risksdescribed in this section titled “Risk Factors” and the following: ·results of preclinical and clinical studies of our product candidates, or those of our competitors or our existing or future collaborators; ·regulatory or legal developments in the U.S. and other countries, especially changes in laws or regulations applicable to our products; ·the success of competitive products or technologies; ·introductions and announcements of new products by us, our future commercialization partners, or our competitors, and the timing of theseintroductions or announcements; ·actions taken by regulatory agencies with respect to our products, clinical studies, manufacturing process or sales and marketing terms; ·actual or anticipated variations in our financial results or those of companies that are perceived to be similar to us; ·the success of our efforts to acquire or in-license additional technologies, products or product candidates; ·developments concerning any future collaborations, including but not limited to those with our sources of manufacturing supply and ourcommercialization partners; ·market conditions in the pharmaceutical and biotechnology sectors; ·announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments; ·developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain patentprotection for our products; ·our ability or inability to raise additional capital and the terms on which we raise it; ·the recruitment or departure of key personnel; ·changes in the structure of healthcare payment systems; ·actual or anticipated changes in earnings estimates or changes in stock market analyst recommendations regarding our common stock, othercomparable companies or our industry generally; ·our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market; ·fluctuations in the valuation of companies perceived by investors to be comparable to us; ·announcement and expectation of additional financing efforts; ·speculation in the press or investment community;63 ·trading volume of our common stock; ·sales of our common stock by us or our stockholders; ·the concentrated ownership of our common stock; ·changes in accounting principles; ·terrorist acts, acts of war or periods of widespread civil unrest; ·natural disasters and other calamities; and ·general economic, industry and market conditions.In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experiencedextreme volatility that has been often unrelated to the operating performance of the issuer. These broad market and industry factors may seriously harm themarket price of our common stock, regardless of our operating performance.The future issuance of equity or of debt securities that are convertible into equity will dilute our share capital.We may choose to raise additional capital in the future, depending on market conditions, strategic considerations and operational requirements. To the extentthat additional capital is raised through the issuance of shares or other securities convertible into shares, our stockholders will be diluted. Future issuances ofour common stock or other equity securities, or the perception that such sales may occur, could adversely affect the trading price of our common stock andimpair our ability to raise capital through future offerings of shares or equity securities. No prediction can be made as to the effect, if any, that future sales ofcommon stock or the availability of common stock for future sales will have on the trading price of our common stock.The employment agreements with our executive officers may require us to pay severance benefits to officers in connection with termination of employmentor upon a change of control of us, which could harm our financial condition.Each of our executive officers, is entitled to receive a lump sum payment equal to six months or one year of his or her base salary as well as continuedmedical and dental coverage for a period of six months or one year following his or her termination of employment due to good reason or without cause. Inthe event of a change in control and a termination of employment without cause or due to good reason, each of our executive officers would similarly receivenine months or one year of his or her base salary as well as continued medical and dental coverage for a period of nine months or one year, as well as anadditional lump sum payment equal to three-fourths or 100% of his or her target annual bonus for the calendar year in which his or her employment isterminated and full vesting of his or her outstanding option awards. The accelerated vesting of options could result in dilution to our existing stockholdersand harm the market price of our common stock. Furthermore, the payment of these severance benefits could harm our financial condition. In addition, thesepotential severance payments may discourage or prevent third parties from seeking a business combination with us.If securities or industry analysts do not publish research or reports about our business, or if they issue adverse or misleading opinions regarding our stock,our stock price and trading volume could decline.The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Ifany of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance,or if our target studies and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analystscease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price ortrading volume to decline.64 We are an “emerging growth company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies willmake our common stock less attractive to investors.We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage ofexemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) notbeing required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), (2) reduceddisclosure obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding anonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be anemerging growth company for up to five years following the consummation of the IPO, although circumstances could cause us to lose that status earlier,including if we are deemed to be a “large accelerated filer,” which occurs when the market value of our common stock that is held by non-affiliates exceeds$700 million as of the prior June 30, or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases wewould no longer be an emerging growth company as of the following December 31, or if we issue more than $1.0 billion in non-convertible debt during anythree-year period before that time, in which case we would no longer be an emerging growth company immediately. Even after we no longer qualify as anemerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptionsfrom disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act andreduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find ourcommon stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a lessactive trading market for our common stock and our share price may be more volatile.Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply toprivate companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will besubject to the same new or revised accounting standards as other public companies that are not emerging growth companies.Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,more difficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may delay or prevent an acquisition of us or achange in our management. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our currentmanagement by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible forappointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of ourmanagement team. These provisions include: ·a prohibition on actions by our stockholders by written consent; ·a requirement that special meetings of stockholders, which our company is not obligated to call more than once per calendar year, be calledonly by the chairman of our board of directors, our chief executive officer, our board of directors pursuant to a resolution adopted by a majorityof the total number of authorized directors, or, subject to certain conditions, by our secretary at the request of the stockholders holding ofrecord, in the aggregate, shares entitled to cast not less than ten percent of the votes at a meeting of the stockholders (assuming all sharesentitled to vote at such meeting were present and voted); ·advance notice requirements for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings; ·division of our board of directors into three classes, serving staggered terms of three years each; and ·the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, as amended,which prohibits a person who owns in excess of 15 percent of our outstanding voting stock from merging or combining with us for a period of three yearsafter the date of the transaction in which the person acquired in excess of 15 percent of our outstanding voting stock, unless the merger or combination isapproved in a prescribed manner. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by somestockholders.65 We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new complianceinitiatives and corporate governance practices.As a public company, and particularly after we are no longer an emerging growth company, we incur significant legal, accounting and other expenses that wedid not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements ofThe NASDAQ Global Select Market and other applicable securities rules and regulations impose various requirements on public companies, includingestablishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel needto devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliancecosts and make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and moreexpensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members ofour board of directors. However, these rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, asa result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuinguncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.We are not currently required to comply with the rules of the SEC that implement Section 404, and are therefore not required to make a formal assessment ofthe effectiveness of our internal control over financial reporting for that purpose. Pursuant to Section 404, we will be required to furnish a report by ourmanagement on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include anattestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance withSection 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which isboth costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt adetailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes asappropriate, validate -through testing that controls are functioning as documented and implement a continuous reporting and improvement process forinternal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, thatour internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in anadverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, if we are not able to continue tomeet these requirements, we may not be able to remain listed on The NASDAQ Global Select Market.Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole sourceof gain.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth anddevelopment of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.We may incur significant costs from class action litigation due to our expected stock volatility.Our stock price may fluctuate for many reasons, including as a result of public announcements regarding the progress of our development efforts or thedevelopment efforts of future collaborators or competitors, the addition or departure of our key personnel, variations in our quarterly operating results andchanges in market valuations of biopharmaceutical and biotechnology companies.This risk is especially relevant to us because biopharmaceutical and biotechnology companies have experienced significant stock price volatility in recentyears. When the market price of a stock has been volatile as our stock price may be, holders of that stock have occasionally brought securities class actionlitigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is withoutmerit, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.66 Our amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions andproceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with usor our directors, officers or employees.Our amended and restated bylaws provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusiveforum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors,officers or other employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provision of the Delaware GeneralCorporation Law, as amended, our amended and restated certificate of incorporation or our amended and restated bylaws, any action to interpret, apply,enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws or any other action asserting aclaim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capitalstock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above.This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or ourdirectors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court wereto find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specifiedtypes of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect ourbusiness and financial condition.Item 1B.Unresolved Staff CommentsNoneItem 2.PropertiesOur headquarters are located in South San Francisco, California, where we occupy office space under a lease that will expire in January 2019. We entered intoa new lease in December 2015 under a long-term operating lease which expires in 2026. We plan to move into the new facility in November 2016. In March2016, we entered into an agreement to terminate the current lease (“Lease Termination”) with our current landlord. The Lease Termination provides for earlytermination of the current lease effective on November 30, 2016. We are not required to pay the landlord a termination payment in connection with the earlytermination of the lease.Item 3.Legal ProceedingsWe are not currently a party to any material litigation or legal proceedings.Item 4.Mine Safety DisclosuresNot applicable. 67 PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity SecuritiesMarket Information for Common StockOur common stock has been listed on The NASDAQ Global Select Market under the symbol “CTMX” since October 8, 2015. Prior to that there was no publictrading market for our common stock. As a result, we have not set forth information with respect to the high and low prices of our common stock for any fullfiscal quarter within the two most recent fiscal years. The high and low closing sales price of our common stock for the period from October 8, 2015 toDecember 31, 2015 was $24.68 and $9.01, respectively.On March 2, 2016, the closing sale price of our common stock was $14.27.Holders of RecordAs of March 2, 2016, there were approximately 75 stockholders of record of our common stock. The actual number of stockholders is greater than this numberof record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This numberof holders of record also does not include stockholders whose shares may be held in trust by other entities.Dividend PolicyWe currently intend to retain future earnings, if any, for use in operation of our business and to fund future growth. We have never declared or paid any cashdividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future willbe at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractualrestrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. 68 Stock Performance GraphThe following graph shows the total stockholder’s return on an investment of $100 in cash at market close on October 8, 2015 (the first day of trading of ourcommon stock), through December 31, 2015 for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the NASDAQ Biotechnology Index.Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however, no dividendshave been declared on our common stock to date. The stockholder return shown on the graph below is not necessarily indicative of future performance, andwe do not make or endorse any predictions as to future stockholder return. This graph shall not be deemed “soliciting material” or be deemed “filed” forpurposes of Section 18 of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section,and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the “Securities Act”), whethermade before or after the date hereof and irrespective of any general incorporation language in any such filing. $100 investment in stock or index October 8, 2015 October 30, 2015 December 31, 2015 CytomX (CTMX) $100.00 $80.62 $161.78 NASDAQ Composite Index (IXIC) $100.00 $105.05 $104.09 NASDAQ Biotech Index (^NBI) $100.00 $106.19 $110.25 Securities Authorized for Issuance Under Equity Compensation PlansThe information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in PART III Item 12 ofthis Annual Report on Form 10-K.Use of Proceeds from Registered SecuritiesOn October 14, 2015, we consummated our IPO and sold 7,666,667 shares of common stock, including the sale of 1,000,000 shares of common stock to theunderwriters upon full exercise of their over-allotment option at an initial offering price of $12.00 per share for aggregate proceeds of $92.0 million beforededucting underwriting discounts and commissions and offering expenses paid by us. The offer and sale of all of the shares in the IPO were registered underthe Securities Act pursuant to a registration statement on Form S-1 (File No. 333-206658), which was declared effective by the SEC on October 7, 2015. Noadditional shares were registered. The joint book-running managers for the IPO were Merrill Lynch, Pierce, Fenner and Smith Incorporated, Jefferies LLC andCowen and Company, LLC. Oppenheimer & Co. Inc. served as manager for the IPO. Shares of our common stock began trading on The NASDAQ GlobalSelect Market on October 8, 2015. On October 14, 2015, following the sale of 7,666,667 shares of our common stock, our initial public offering ended.We received net proceeds from the IPO of approximately $81.8 million, after deducting underwriting discounts and commissions of $6.4 million and offeringexpenses of approximately $3.8 million. None of the expenses associated with the IPO were paid to directors, officers, persons owning 10% or more of anyclass of equity securities, or to their associates, or to our affiliates.There has been no material change in the planned use of proceeds from our IPO as described in the final Prospectus dated as of October 7, 2015 and filed withthe SEC pursuant to Rule 424(b) under the Securities Act on October 8, 2015.69 Recent Sales of Unregistered Equity SecuritiesThe following sets forth information regarding all securities sold or granted by us during the fiscal year ended December 31, 2015, which were not registeredunder the Securities Act and the consideration, if any, received by us for such securities.We effected a one-for-62.997 reverse stock split upon the filing of an amended and restated certificate of incorporation with the Secretary of State of the Stateof Delaware on October 2, 2015. The numbers of securities and the purchase price or exercise price per share set forth below have been adjusted for the effectof the reverse stock split.Immediately prior to the consummation of the IPO on October 14, 2015, all of then-outstanding 27,135,453 shares of our preferred stock were converted intoshares of our common stock on a one-for-one basis and all of the then-outstanding warrants to purchase our preferred stock became exercisable to purchaseshares of our common stock. (a)On February 11, 2015, we issued and sold to one accredited investor 282,633 shares of our Series C redeemable convertible preferred stock at apurchase price of $5.309387 per share for a total consideration of $1,500,607.98 in cash. (b)On May 20, 2015, we issued and sold to one accredited investor 659,209 shares of our Series C redeemable convertible preferred stock at apurchase price of $5.309387 per share for a total consideration of $3,499,995.69 in cash. (c)On June 12, 2015, we issued and sold to 32 accredited investors an aggregate of 6,741,485 shares of our Series D redeemable convertible preferredstock at a purchase price of $9.345101 per share for an aggregate consideration of $62,999,858.21 in cash. (d)On June 22, 2015, we issued and sold to one accredited investor 749,055 shares of our Series D redeemable convertible preferred stock at apurchase price of $9.345101 per share for a total consideration of $6,999,994.63 in cash. (e)During 2015, we granted stock options to purchase an aggregate of 3,293,274 shares of our common stock with exercise prices of $1.5749,$4.4728, $6.6147 and $12.00 per share to our employees, directors and consultants pursuant to our 2011 Stock Incentive Plan, as amended, andour 2015 Equity Incentive Plan. During 2015, we issued an aggregate of 165,012 shares of our common stock upon exercise of stock options foraggregate cash consideration of $203,144.16.We deemed the offers, sales and issuances of the securities described in paragraphs (a) through (d) above to be exempt from registration under the SecuritiesAct, in reliance on Section 4(a)(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, relative to transactions by an issuernot involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they wereaccredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distributionthereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received writtendisclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or anavailable exemption from such registration.We deemed the grants of stock options and issuances of common stock described in paragraph (e) above, except to the extent described above as exemptpursuant to Section 4(a)(2) of the Securities Act, to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offersand sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients ofsecurities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, toinformation about us.All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. The certificates representing the securities issued in thetransactions described above included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statementand describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions setforth above.Issuer Purchases of Equity SecuritiesWe did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2015.70 Item 6.Selected Financial Data You should read the following selected financial data together with the information under “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our financial statements and related notes included in this Form 10-K. The statement of operations data for each ofthe years ended December 31, 2015, 2014 and 2013 and the balance sheet data as of December 31, 2015 and 2014 are derived from our audited financialstatements included elsewhere in this Form 10-K. The selected balance sheet data as of December 31, 2013 are derived from our audited financial statementswhich are not included in this Annual Report on Form 10-K. Our historical results of any prior periods are not necessary indicative of results to be expected inany future period.Statement of Operations Data: Year Ended December 31, 2015 2014 2013 Revenues: $7,712 $5,077 $888 Operating expenses: Research and development 28,357 28,302 10,890 General and administrative 12,558 6,540 4,954 Total operating expenses 40,915 34,842 15,844 Loss from operations (33,203) (29,765) (14,956)Interest income 1,315 7 6 Interest expense (1,732) (487) (254)Other income (expense), net (1,744) (55) 71 Loss before provision for income taxes (35,364) (30,300) (15,133)Provision for income taxes 10 10 10 Net loss (35,374) (30,310) (15,143)Accretion to redemption value and cumulative dividends on preferred stock (6,705) (4,566) (3,751)Net loss attributable to common stockholders $(42,079) $(34,876) $(18,894)Net loss per share attributable to common stockholders, basic and diluted $(4.90) $(35.25) $(24.46)Shares used to compute net loss per share attributable to common stockholders, basic and diluted 8,595,247 989,453 772,320 Other comprehensive loss: Changes in unrealized losses on short-term investments (76) — — Total other comprehensive loss (76) — — Comprehensive loss $(35,450) $(30,310) $(15,143) Balance Sheet Data: As of December 31, 2015 2014 2013 Balance Sheet Data: Cash, cash equivalents and marketable securities $186,711 $64,396 $8,703 Working capital 174,015 55,690 5,094 Total assets 197,215 73,062 14,183 Total long-term debt, current and non-current — 2,987 4,203 Redeemable convertible preferred stock — 76,236 44,244 Convertible preferred stock — 474 474 Accumulated deficit (117,466) (78,138) (43,881)Total stockholder' equity (deficit) 126,068 (78,541) (44,279) 71 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached financial statements and notes thereto. This Annual Report on Form 10-K,including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject torisks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements.For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K. We caution thereader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. Weundertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.OverviewWe are an oncology-focused biopharmaceutical company pioneering a novel class of antibody therapeutics based on our Probody technology platform. Weare using our platform to create proprietary cancer immunotherapies against clinically-validated targets as well as to develop first-in-class cancer therapeuticsagainst novel targets. We believe that our Probody platform will allow us to improve the combined efficacy and safety profile, or therapeutic window, ofmonoclonal antibody modalities including cancer immunotherapies, antibody drug conjugates (“ADCs”) and T-cell-recruiting bispecific antibodies. OurProbody therapeutics are designed to take advantage of unique conditions in the tumor microenvironment to enhance the tumor-targeting features of anantibody and reduce drug activity in healthy tissues. We are currently developing Probody therapeutics that address clinically- validated cancer targets inimmuno-oncology, such as PD-L1, as well as novel targets, such as CD-166, that are difficult to drug and lead to concerns about damage to healthy tissues, ortoxicities. In addition to our proprietary programs, we are collaborating with strategic partners including Bristol-Myers Squibb Company (“BMS”), Pfizer Inc.(“Pfizer”) and ImmunoGen, Inc. (“ImmunoGen”) to develop selected Probody therapeutics. Our broad technology platform and lead product candidates aresupported by a decade of thorough scientific research and strong intellectual property, and we are advancing these candidates toward clinical trials. Ourvision is to transform lives with safer, more effective therapies. To realize this vision we are executing on our mission of changing the treatment of cancer byurgently advancing our Probody pipeline.We do not currently have any product candidates in clinical trials or approved for sale, and we continue to incur significant research and development andgeneral administrative expenses related to our operations. We are not profitable and have incurred losses in each year since our founding in 2008. Our netloss for the year ended December 31, 2015 was $35.4 million. As of December 31, 2015, we had an accumulated deficit of $117.5 million. We expect tocontinue to incur significant losses for the foreseeable future.We have three pipeline strategies that we are pursuing with our Probody platform: (i) developing a novel class of immuno- oncology therapies directedagainst clinically-validated targets, (ii) developing first-in-class therapeutics directed against difficult-to- drug targets and (iii) collaborating with leadingpharmaceutical companies to discover and develop Probody therapeutics against selected targets.Regulatory agencies, including the FDA, regulate many aspects of a product candidate’s life cycle, including research and development and preclinical andclinical testing. We have product candidates that are still in research and preclinical development, which means that they have not yet been tested onhumans. We will need to commit significant time and resources to develop these and additional product candidates. Many product candidates in humanclinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing, and estimated costs of the effortsnecessary to complete the development of our product candidates because, among other reasons, we cannot predict with any certainty the pace of enrollmentof our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition.We currently have no manufacturing capabilities and do not intend to establish any such capabilities. We have no commercial manufacturing facilities forour product candidates. As such, we are dependent on third parties to supply our product candidates according to our specifications, in sufficient quantities,on time, in compliance with appropriate regulatory standards and at competitive prices.72 Components of Results of OperationsRevenueOur revenue to date has been primarily derived from non-refundable license payments and reimbursements for research and development expenses under ourresearch, collaboration, and license agreements. We recognize revenue from upfront payments ratably over the term of our estimated period of performanceunder the agreement. In addition to receiving upfront payments, we may also be entitled to milestone and other contingent payments upon achievingpredefined objectives. Revenue from milestones, if they are nonrefundable and deemed substantive, is recognized upon successful accomplishment of themilestones. To the extent that non substantive milestones are achieved and we have remaining performance obligations, milestones are deferred andrecognized as revenue over the estimated remaining period of performance. Reimbursements from Pfizer and BMS for research and development costsincurred under our research, collaboration and license agreements with them are classified as revenue.For the foreseeable future, we do not expect to generate any revenue from the sale of products unless and until such time as our product candidates haveadvanced through clinical development and obtained regulatory approval. We expect that any revenue we do generate in the foreseeable future will fluctuatefrom year to year as a result of the timing and amount of milestones and other payments from our collaborations with BMS, Pfizer and ImmunoGen, and anyfuture collaboration partners, and as a result of the fluctuations in the research and development expenses we incur in the performance of assigned activitiesunder these agreements.Research and Development ExpensesOur research and development expenses consist primarily of costs incurred to conduct research, such as the discovery and development of our productcandidates as well as the development of product candidates pursuant to our research, collaboration and license agreements. Research and developmentexpenses include personnel costs, including stock-based compensation expense, contractor services, laboratory materials and supplies, depreciation andmaintenance of research equipment, and an allocation of related facilities costs. We expense research and development costs as they are incurred.We expect our research and development expenses to increase substantially in absolute dollars in the future as we advance our product candidates into andthrough clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtainregulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factorsincluding: the safety and efficacy of our product candidates, early clinical data, investment in our clinical program, the ability of collaborators tosuccessfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achievingregulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration andcompletion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of ourproduct candidates.General and Administrative ExpensesGeneral and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consistof salaries, bonuses, benefits and stock-based compensation. Outside professional services consist of legal, accounting and audit services and otherconsulting fees. Allocated expenses consist of rent expense related to our office and research and development facility. We expect to incur additionalexpenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities andExchange Commission, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relationsactivities and other administrative and professional services. We also expect to increase our administrative headcount significantly to operate as publiccompany and as we advance our product candidates through clinical development, which will also increase our general and administrative expenses.Interest IncomeInterest income primarily consists of interest income from our cash equivalents and short-term investments.Interest ExpenseInterest expense primarily consists of interest costs related to our outstanding borrowings under our loan agreements and amortization of premiums on ourshort-term investments.73 Other Income (Expense), NetOther income (expense), net consists primarily of changes to the estimated fair value of the convertible preferred stock warrant liability and the convertiblepreferred stock liability.Comparison of Years Ended December 31, 2015 and 2014Revenue Year Ended December 31, 2015 2014 Change (in thousands) Revenue: $7,712 $5,077 $2,635 Revenue increased $2.6 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase in revenue wasprimarily due to revenue recognized in 2015 related to the BMS agreement effective as of July 2014.Operating Costs and ExpensesResearch and Development Expenses Year Ended December 31, 2015 2014 Change (in thousands) Research and development $28,357 $28,302 $55 Research and development expense remained relatively flat during the year ended December 31, 2015 compared to the corresponding period in 2014. Thedecrease of $12.8 million attributable to the ImmunoGen collaboration agreement was largely offset by an increase of $7.6 million in lab services andsupplies related to advancement of our product pipeline, an increase of $4.1 million in personnel-related expenses due to an increase in headcount, and anincrease of $0.7 million in allocated facility costs partly due to a lease we entered into in September 2014.General and Administrative Expenses Year Ended December 31, 2015 2014 Change (in thousands) General and administrative $12,558 $6,540 $6,018 General and administrative expense increased $6.0 million during the year ended December 31, 2015 compared to the corresponding period in 2014. Theincrease was attributable to an additional $4.3 million of personnel-related expenses due to an increase in headcount and an additional $1.6 million inconsulting and professional services expenses due primarily to preparations for our initial public offering.Interest Income, Interest Expense and Other Income (Expense), net Year Ended December 31, 2015 2014 Change (in thousands) Interest income $1,315 $7 $1,308 Interest expense (1,732) (487) (1,245)Other income (expense), net (1,744) (55) (1,689)Total interest and other income (expense) $(2,161) $(535) $(1,626) Interest IncomeInterest income increased $1.3 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase wasattributable to interest income earned on cash equivalents and short-term investments as a result of the proceeds received from our preferred stock financingsin December 2014, May 2015 and June 2015 and from our initial public offering in October 2015.74 Interest ExpenseInterest expense increased $1.2 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was primarilyattributable to amortization of premiums on our short-term investments.Other Income (Expense), NetOther income (expense) increased $1.7 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase wasprimarily attributable to a loss of $1.1 million related to the remeasurement of the convertible preferred stock liability and an increase in the fair value of theconvertible preferred stock warrant liability of $0.6 million.Comparison of Years Ended December 31, 2014 and 2013Revenue Year Ended December 31, 2014 2013 Change (in thousands) Revenue: $5,077 $888 $4,189 Revenue increased $4.2 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase in revenue wasprimarily attributable to an increase of $1.4 million of revenue recognized related to the Pfizer agreement entered into in May 2013 and $2.8 million ofrevenue recognized in 2014 related to the BMS agreement effective as of July 2014.Operating Costs and ExpensesResearch and Development Expenses Year Ended December 31, 2014 2013 Change (in thousands) Research and development $28,302 $10,890 $17,412 Research and development expense increased $17.4 million during the year ended December 31, 2014 compared to the corresponding period in 2013. Theincrease was primarily attributable to $12.8 million expensed in 2014 related to the ImmunoGen collaboration agreement, a $1.7 million increase inpersonnel-related expenses due to headcount, increased consulting costs, and increased recruiting expenses primarily related to recruiting key personnel, anincrease of $2.7 million in lab services and supplies arising from the research and collaboration agreements entered into in 2014 with BMS, and an increaseof $0.4 million in rent and occupancy costs due to new leases entered into in August 2013 and September 2014.General and Administrative Expenses Year Ended December 31, 2014 2013 Change (in thousands) General and administrative $6,540 $4,954 $1,586 General and administrative expense increased $1.6 million during the year ended December 31, 2014 compared to the corresponding period in 2013. Theincrease was attributable to a $0.8 million increase in personnel-related expenses as a result of increased headcount and an increase in recruiting costsprimarily related to recruiting of key personnel, $0.6 million increase in legal costs due to the new research and collaboration agreements entered into and a$0.4 million increase in consulting costs. The increase was partially offset by a decrease of $0.2 million in allocated facility costs.75 Interest Income, Interest Expense and Other Income (Expense), net Year Ended December 31, 2014 2013 Change (in thousands) Interest income $7 $6 $1 Interest expense (487) (254) (233)Other income (expense), net (55) 71 (126)Total interest and other income (expense) (535) (177) $(358) Interest IncomeInterest income was relatively flat between the two periods.Interest ExpenseInterest expense increased $0.2 million during the year ended December 31, 2014 compared to the corresponding period in 2013. The increase was primarilyattributable to amortization of premiums on our short-term investments.Other Income (Expense), NetOther income (expense), net changed by ($0.1) million to an expense of $55,000 during the year ended December 31, 2014 compared to the correspondingperiod in 2013. The change was primarily due to the fair value remeasurement of the convertible preferred stock warrant liability.Summary Statement of Cash FlowsThe following table summarizes our cash flows for the periods presented: Year Ended December 31, 2015 2014 2013 (in thousands) Net cash (used in) provided by operating activities $(27,415) $31,802 $(8,008)Net cash used in investing activities (130,562) (1,663) (732)Net cash provided by financing activities 153,403 25,554 2,697 Net increase (decrease) in cash and cash equivalents $(4,574) $55,693 $(6,043) Cash Flows from Operating ActivitiesDuring the year ended December 31, 2015, cash used in operating activities was $27.4 million, which consisted of a net loss of $35.4 million, adjusted bynon-cash charges of $8.2 million and a net decrease of $0.2 million in our net operating assets. The non-cash charges primarily consist of $4.0 million instock-based compensation, $1.2 million in depreciation and amortization, $1.2 million in amortization premiums on our short-term investments, $1.1 millionin revaluation of the convertible preferred stock liability and $0.6 million in remeasurement of the convertible preferred stock warrant liability. The changein our net operating assets and liabilities was primarily due to a decrease of $6.1 million in deferred revenue due to the recognition of upfront fees received,partially offset by an increase of $3.2 million in accrued liabilities and $2.9 million in accounts payable.During the year ended December 31, 2014, cash provided by operating activities was $31.8 million, which consisted of a net loss of $30.3 million adjustedby non-cash charges of $1.4 million, adjusted by a net change of $60.8 million in our net operating assets. The non-cash charges primarily consist of$0.8 million from depreciation and amortization and $0.6 million from stock-based compensation. The change in our net operating assets and liabilities wasprimarily due to an increase of $61.5 million in deferred revenue resulting from the upfront payments of $50.0 million received from BMS and of$1.5 million received from Pfizer and $13.3 million related to the ImmunoGen collaboration agreement, partially offset by recognition of upfront fees of$3.3 million, and a $1.5 million increase in accounts payable and accrued liabilities due to our increased research and development activities as a result ofour agreements with BMS and ImmunoGen. The increase is partially offset by an increase of $1.6 million in accounts receivable primarily due to the$1.5 million upfront payment due from Pfizer and a $0.6 million increase in prepaid expenses and other assets due to deferred costs related to the ImmunoGencollaboration agreement.76 During the year ended December 31, 2013, cash used in operating activities was $8.0 million, which consisted of a net loss of $15.1 million, adjusted by non-cash charges of $1.2 million and a net decrease of $6.0 million in our net operating assets. The non-cash charges primarily consist of depreciation andamortization of $0.7 million, stock-based compensation of $0.3 million, a charge of $0.2 million related to common stock issued in connection with a licenseagreement partially offset by a $0.1 million gain from the revaluation of the convertible preferred stock liability. The change in our net operating assets andliabilities was primarily due to an increase of $5.5 million in deferred revenue due to the receipt of an upfront fee from Pfizer and a $0.9 million increase inaccounts payable and accrued liabilities due to an increase in our research and development activities as a result of our agreement with Pfizer, primarily offsetby an increase of $0.3 million in accounts receivable and prepaid expenses and other current assets resulted from our increased business activities.Cash Flows from Investing ActivitiesCash used in investing activities during the year ended December 31, 2015 was $130.6 million, which consisted of $250.9 million of purchases of short-terminvestments, $1.6 million of capital expenditures to purchase property and equipment and $0.8 million in increase in restricted cash relating to a standbyletter of credit issued in connection with the lease we entered into in December 2015, partially offset by $122.8 million in proceeds from the maturity ofmarketable securities.Cash used in investing activities during the year ended December 31, 2014 was $1.7 million, which consisted of capital expenditures to purchase propertyand equipment.Cash used in investing activities during the year ended December 31, 2013 was $0.7 million, which consisted of capital expenditures to purchase propertyand equipment. Cash Flows from Financing ActivitiesDuring the year ended December 31, 2015, cash provided by financing activities was $153.4 million consisting primarily of $81.8 million in net proceedsfrom the consummation of our initial public offering in October 2015, $74.4 million in net proceeds from the issuance of redeemable convertible preferredstock, partially offset by repayment on our borrowing of $3.1 million.During the year ended December 31, 2014, cash provided by financing activities was $25.6 million primarily consisting of net proceeds of $26.8 millionfrom the issuance of preferred stock, offset by $1.3 million in payments on our borrowings.During the year ended December 31, 2013, cash provided by financing activities was $2.7 million consisting of proceeds of $3.4 million from the issuance oflong-term debt and proceeds of $0.1 million from the exercise of stock options, offset by $0.7 million in payments on our borrowings.Liquidity and Capital ResourcesSources of LiquidityAs of December 31, 2015, we had cash, cash equivalents and short-term investments of $186.7 million and an accumulated deficit of $117.5 million,compared to cash and cash equivalents of $64.4 million and an accumulated deficit of $78.1 million as of December 31, 2014. We have financed ouroperations primarily through sales of our common stock in conjunction with the IPO, convertible preferred securities and payments received under ourcollaboration agreements. In May and June 2015, respectively, an investor exercised its option to purchase 659,209 shares of Series C redeemableconvertible preferred stock for net proceeds of $3.5 million and we issued 7,490,540 shares of Series D redeemable convertible preferred stock for netproceeds of $69.7 million.On October 14, 2015, we consummated our IPO and sold 7,666,667 shares of our common stock at a price of $12.00 per share, which included the exercise ofthe underwriters’ option to purchase 1,000,000 additional shares of common stock. We received net proceeds of approximately $81.8 million, after deductingunderwriting discounts, commissions and estimated offering expenses. Immediately prior to the consummated IPO, all outstanding shares of the convertiblepreferred stock and redeemable convertible preferred stock converted into common stock on a one-for-one basis.77 We believe our current cash and cash equivalents and short-term investments will be sufficient to fund our planned expenditures and meet our obligationsthrough the end of 2018. However, if the anticipated operating results are not achieved in future periods, the planned expenditures may need to be reduced inorder to extend the time period over which the then-available resources would be able to fund the operations. The amounts and timing of our actualexpenditures depend on numerous factors, including the progress of our preclinical development efforts, the results of any clinical trials and other studies, ouroperating costs and expenditures and other factors describe under the caption “Risk Factors” in this Annual Report on Form 10-K. The cost and timing ofdeveloping our CX-2009 and CX-072 product candidates are highly uncertain, are subject to substantial risks and many changes. As such, we may alter ourexpenditures as a result of contingencies such as the failure of one of these product candidates in clinical development, the identification of a more promisingproduct candidate in our research efforts or unexpected operating costs and expenditures. We will need to raise additional funds in the future. There can be noassurance, however, that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will befavorable to us.Off-Balance Sheet ArrangementsWe have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.Contractual ObligationsThe following table summarizes our contractual obligations as of December 31, 2015 (in thousands): Payments Due by Period(3) 2016 2017 2018 2019 2020 + Total Operating leases(1) $1,369 $4,251 $5,268 $4,582 $34,144 $49,614 Royalty obligations(2) 150 150 — — — 300 Total contractual obligations $1,519 $4,401 $5,268 $4,582 $34,144 $49,914 (1)We lease our current facility under a long-term operating lease, which expires in 2019. In March 2016, we entered into an agreement with our currentlandlord to terminate the lease effective November 30, 2016. We entered into in a new lease in December 2015 under a long-term operating lease,which expires in 2026.(2)We have royalty obligations under the terms of certain exclusive licensed patent rights. See Note 9 of our financial statements.(3)This table does not include any milestone payments or royalty payments to third parties as the amounts, timing and likelihood of such payments arenot known.(4)This table excludes unrecognized tax benefits of $666,000 as of December 31, 2015 because these uncertain tax positions, if recognized, would be anadjustment to our deferred tax assets. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been preparedin accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires ourmanagement to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are basedon our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from thesejudgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policiesdiscussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involvingmanagement’s judgments and estimates.Revenue Recognition We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; transfer of technology has been completed orservices have been rendered; the price to the customer is fixed or determinable and collectability is reasonably assured. 78 Our revenues are primarily derived through its license, research, development and commercialization agreements. The terms of these types of agreements mayinclude (i) licenses to our technology, (ii) research and development services, and (ii) services or obligations in connection with participation in research orsteering committees. Payments to us under these arrangements typically include one or more of the following: nonrefundable upfront and license fees,research funding, milestone and other contingent payments for the achievement of defined collaboration objectives and certain preclinical, clinical,regulatory and sales-based events, as well as royalties on sales of any commercialized products. In arrangements involving the delivery of more than one element, each required deliverable is evaluated to determine whether it qualifies as a separate unit ofaccounting. The determination is based on whether the deliverable has “standalone value” to the customer. If a deliverable does not qualify as a separate unitof accounting, it is combined with the other applicable undelivered item(s) within the arrangement and these combined deliverables are treated as a singleunit of accounting. The arrangement’s consideration that is fixed or determinable is allocated to each separate unit of accounting based on the relative selling price methodologyin accordance with the selling price hierarchy, which includes vendor-specific objective evidence (“VSOE”) of selling price, if available, or third-partyevidence of selling price if VSOE is not available, or the best estimate of selling price, if neither VSOE nor third-party evidence is available. Payments or reimbursements for our research and development efforts for the arrangements where such efforts are considered as deliverables are recognized asthe services are performed and are presented on a gross basis. When upfront payments are received and if there is no discernible pattern of performance and/orobjectively measurable performance measures do not exist, we recognize revenue ratably over the associated period of performance. Our collaboration and license agreements may include contingent payments related to specified research, development and regulatory milestones and sales-based milestones. Such payments are typically payable under the collaborations when the collaboration partner claims or selects a target, or initiates oradvances a covered product candidate in preclinical or clinical development, upon submission for marketing approval of a covered product with regulatoryauthorities, upon receipt of actual marketing approvals of a covered product or for additional indications, or upon the first commercial sale of a coveredproduct. Sales-based milestones are typically payable when annual sales of a covered product reach specified levels. Each contingent and milestone paymentis evaluated to determine whether it is substantive and at risk to both parties. We recognize any payment that is contingent upon the achievement of asubstantive milestone entirely in the period in which the milestone is achieved. Any payments that are contingent upon achievement of a non-substantivemilestone are recognized as revenue prospectively, when such payments become due and collectible, over the remaining expected performance period underthe arrangement, which is generally the remaining period over which the research and development services are expected to be provided. Stock-based Compensation We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net ofestimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricingmodel. The grant date fair value of stock-based awards is expensed on a straight-line basis over the period during which the employee is required to provideservice in exchange for the award (generally the vesting period). We estimate the fair value of our stock-based awards using the Black-Scholes option-pricing model, which requires the input of highly subjectiveassumptions. Our assumptions are as follows: ·Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplifiedmethod to determine the expected term, which is calculated as the average of the time to vesting and the contractual life of the options. ·Expected volatility. The expected volatility was determined by examining the historical volatilities for comparable publicly traded companieswithin the biotechnology and pharmaceutical industry using an average of historical volatilities of Company’s industry peers. ·Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield with a maturity equal to the expected term of the option ineffect at the time of grant. ·Dividend yield. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividendson our common stock. 79 In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensationfor our equity awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-basedcompensation calculations on a prospective basis. Stock-based compensation expense for options granted to non-employees as consideration for services received is measured on the date of performance at thefair value of the consideration received or the fair value of the equity instruments issued, using the Black-Scholes option-pricing model, whichever can bemore reliably measured. Stock-based compensation expense for options granted to non-employees is periodically remeasured as the underlying options vest.Historically, for all periods prior to the IPO, the fair values of the shares of common stock underlying our share-based awards were estimated on each grantdate by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, amongother things, contemporaneous valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidanceprovided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued asCompensation.Convertible Preferred Stock Warrant LiabilityFreestanding warrants for shares that are contingently redeemable are classified as liabilities on the balance sheet at their estimated fair value because theshares underlying the warrants may obligate us to transfer assets to the holders at a future date under certain circumstances such as a deemed liquidationevent. The warrants are subject to re-measurement at each balance sheet date and the change in fair value, if any, is included in other income (expense), net.We adjusted the liability for changes in fair value until immediately prior to the consummation of our IPO in October 2015, at which time all convertiblepreferred stock warrants were net exercised into shares of common stock and the related convertible preferred stock warrant liability was reclassified toadditional paid-in capital.Convertible Preferred Stock Liability We have determined that our obligation to issue additional shares of Series B-1 and Series C redeemable convertible preferred stock represents a freestandingfinancial instrument, which we accounted for as a liability. The freestanding convertible preferred stock liability was initially recorded at fair value, withchanges in fair value recognized in other income (expense), net. We remeasured the liability, with the change in fair value recognized as a component ofother income (expense), net and then reclassified the fair value associated with the convertible preferred stock liability to the applicable series of redeemableconvertible preferred stock.Goodwill and Intangible AssetsGoodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in businesscombinations. Goodwill and other intangible assets with indefinite lives are not amortized, but are assigned to reporting units and tested for impairmentannually, or whenever there is an impairment indicator. We assess goodwill impairment indicators annually or more frequently, if a change in circumstancesor the occurrence of events suggests the remaining value may not be recoverable. Intangible assets that are not deemed to have an indefinite life areamortized over their estimated useful lives.JOBS Act Accounting ElectionWe are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerginggrowth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as thosestandards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and,therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We also intendto rely on other exemptions provided by the JOBS Act, including without limitation, providing an auditor’s attestation report on our system of internalcontrols over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company until the earlier of(1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of atleast $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt duringthe prior three-year period.80 Item 7A.Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rate risks.Interest Rate RiskWe are exposed to limited market risk related to fluctuations in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity,which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve our capital to fund ouroperations.We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cashequivalents and investments in a variety of securities of high credit quality. As of December 31, 2015, we had cash and cash equivalents of $59.8 millionconsisting of cash, money market funds and U.S. government bonds with maturities of three months or less and investments of $126.9 million consisting ofU.S. government bonds. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However,because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impacton our financial condition or our results of operations. We do not enter into investments for trading or speculative purposes and have not used any derivativefinancial instruments to manage our interest rate risk exposure.We do not have any foreign currency or other derivative financial instruments. 81 Item 8.Financial Statements and Supplementary Data CYTOMX THERAPEUTICS, INC.ANNUAL REPORT ON FORM 10-KINDEX TO AUDITED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm 83Financial Statements Balance Sheets 84Statements of Operations and Comprehensive Loss 85Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’ Deficit 86Statements of Cash Flows 87Notes to Financial Statements 88 82 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of CytomX Therapeutics, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive loss, of convertible preferred stock, redeemableconvertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of CytomXTherapeutics, Inc. (the “Company”) at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in theperiod ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 7, 2016 83 CYTOMX THERAPEUTICS, INC.BALANCE SHEETS(in thousands, except share and per share data) December 31, December 31, 2015 2014 Assets Current assets: Cash and cash equivalents $59,822 $64,396 Restricted cash — 100 Short-term investments 126,889 — Accounts receivable 744 1,875 Prepaid expenses and other current assets 2,299 482 Total current assets 189,754 66,853 Property and equipment, net 3,481 3,018 Intangible assets 1,750 1,750 Goodwill 949 949 Restricted cash 917 — Other assets 364 492 Total assets $197,215 $73,062 Liabilities, Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $4,697 $1,919 Accrued liabilities 4,912 1,695 Deferred revenues, current portion 6,130 6,130 Long-term debt, current portion — 1,419 Total current liabilities 15,739 11,163 Long-term debt, net of current portion — 1,568 Deferred revenue, net of current portion 54,703 60,833 Convertible preferred stock warrant liability — 186 Convertible preferred stock liability — 395 Deferred tax liability 507 499 Other long-term liabilities 198 249 Total liabilities 71,147 74,893 Commitments and contingencies (Note 11) Redeemable convertible preferred stock, $0.00001 par value – 0 and 21,759,654 shares authorized at December 31, 2015 and 2014, respectively; 0 and 18,458,289 shares issued and outstanding at December 31, 2015 and 2014 — 76,236 Convertible preferred stock, $0.00001 par value – 0 and 244,782 authorized at December 31, 2015 and 2014, respectively; 0 and 244,782 shares issued and outstanding at December 31, 2015 and 2014, respectively — 474 Stockholders' equity (deficit) Preferred stock, $0.00001 par value; 10,000,000 shares authorized at December 31, 2015; no shares issued and outstanding at December 31, 2015 and 2014, respectively — — Common stock, $0.00001 par value; 75,000,000 and 28,572,789 shares authorized at December 31, 2015 and 2014, respectively; 36,033,209 and 996,520 shares issued and outstanding at December 31, 2015 and 2014, respectively 1 1 Stockholders notes receivable (78) (404)Additional paid-in capital 243,687 — Accumulated other comprehensive loss (76) — Accumulated deficit (117,466) (78,138)Total stockholders' equity (deficit) 126,068 (78,541)Total liabilities, redeemable convertible preferred stock, convertible preferred stock and stockholders' equity (deficit) $197,215 $73,062 See accompanying notes to financial statements. 84 CYTOMX THERAPEUTICS, INC.STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share and per share data) Year Ended December 31, 2015 2014 2013 Revenues: $7,712 $5,077 $888 Operating expenses: Research and development 28,357 28,302 10,890 General and administrative 12,558 6,540 4,954 Total operating expenses 40,915 34,842 15,844 Loss from operations (33,203) (29,765) (14,956)Interest income 1,315 7 6 Interest expense (1,732) (487) (254)Other income (expense), net (1,744) (55) 71 Loss before provision for income taxes (35,364) (30,300) (15,133)Provision for income taxes 10 10 10 Net loss (35,374) (30,310) (15,143)Accretion to redemption value and cumulative dividends on preferred stock (6,705) (4,566) (3,751)Net loss attributable to common stockholders $(42,079) $(34,876) $(18,894)Net loss per share attributable to common stockholders, basic and diluted $(4.90) $(35.25) $(24.46)Shares used to compute net loss per share attributable to common stockholders, basic and diluted 8,595,247 989,453 772,320 Other comprehensive loss: Changes in unrealized losses on short-term investments (76) — — Total other comprehensive loss (76) — — Comprehensive loss $(35,450) $(30,310) $(15,143) See accompanying notes to financial statements. 85 CYTOMX THERAPEUTIC, INC.Statements of Redeemable Convertible Preferred Stock,Convertible Preferred Stock and Stockholders’ Equity (Deficit)(in thousands, except share and per share data) Accumulated Total Redeemable Convertible Convertible Additional Other Stockholders' Preferred Stock Preferred Stock Common Stock Stockholder Paid-in Comprehensive Accumulated Equity Shares Amount Shares Amount Shares Amount Notes Capital Income/(Loss) Deficit (Deficit) Balance at December 31, 2012 11,995,481 $40,493 244,782 $474 779,989 $— $(393) $— $— $(25,652) $(26,045)Common stock issued in connection with alicense agreement 157,332 1 — 198 199 Exercise of stock options 53,193 60 60 Interest on stockholder notes (6) (6)Vesting of early exercise stock option 64 64 Stock-based compensation 343 343 Accretion to redemption value andcumulative dividends on preferred stock 3,751 (665) (3,086) (3,751)Net loss (15,143) (15,143)Balance at December 31, 2013 11,995,481 44,244 244,782 474 990,514 1 (399) — — (43,881) (44,279)Issuance of Series B-1 redeemableconvertible preferred stock for cash and value of convertible preferred stockliability of $1,303, net of issuance costs of $33 3,355,107 11,618 Issuance of Series C redeemable convertiblepreferred stock, net of issuance costs of $298 and preferred stock liabilityof $395 3,107,701 15,808 Exercise of stock options 6,006 8 8 Interest on stockholder notes (5) (5)Vesting of early exercise stock option 58 58 Stock-based compensation 553 553 Accretion to redemption value andcumulative dividends on preferred stock 4,566 (619) (3,947) (4,566)Net loss (30,310) (30,310)Balance at December 31, 2014 18,458,289 76,236 244,782 474 996,520 1 (404) — — (78,138) (78,541)Issuance of Series C preferred stock, net ofissuance costs of $30 941,842 4,969 — — — — — — — — — Issuance of Series B-1 preferred stock uponnet exercise of warrants 60,640 — Issuance of Series D preferred stock, net ofissuance costs of $255 7,490,540 69,744 — — — — — — — — — Conversion of redeemable convertiblepreferred stock to common stock in connection with initial public offering (26,951,311) (159,163) — — 26,951,311 159,163 159,163 Conversion of convertible preferred stock tocommon stock in connection with initial public offering (244,782) (474) 244,782 474 474 Issuance of common stock in connectionwith initial public offering, net of underwriting discount of $6,440 andoffering costs of $3,796 7,666,667 81,764 81,764 Extinguishment of preferred stock liability — 1,509 — — — — — — — — — Extinguishment of preferred stock warrantliability — — — — — — — 788 — — 788 Exercise of stock options — — — — 173,929 — — 263 — — 263 Interest on stockholder notes — — — — — — (4) — — — (4)Repayment on stockholders note — — — — — — 330 — — — 330 Stock-based compensation — — — — — — — 3,986 — — 3,986 Accretion to redemption value andcumulative dividends on preferred stock — 6,705 — — — — — (2,751) — (3,954) (6,705)Other comprehensive loss — — — — — — — — (76) — (76)Net loss — — — — — — — — — (35,374) (35,374)Balance at December 31, 2015 — $— — $— 36,033,209 $1 $(78) $243,687 $(76) $(117,466) $126,068 86 CYTOMX THERAPEUTICS, INC.STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2015 2014 2013 Cash flows from operating activities: Net loss $(35,374) $(30,310) $(15,143)Adjustments to reconcile net loss to net cash (used) provided by operating activities: Loss on disposal of property and equipment 25 — 26 Depreciation and amortization 1,206 783 655 Amortization of debt discount 80 40 12 Accretion of discount on short-term investments 1,186 — — Issuance of common stock in connection with a license agreement — — 198 Stock-based compensation expense 3,986 553 343 Change in fair value of convertible preferred stock liability 1,114 13 (110)Change in fair value of convertible preferred stock warrant liability 602 42 43 Deferred income taxes 8 8 10 Changes in operating assets and liabilities Accounts receivable 1,131 (1,638) (237)Prepaid expenses and other current assets (1,491) (261) (88)Other assets 128 (344) (78)Accounts payable 2,944 660 366 Accrued liabilities 3,170 793 495 Deferred revenue (6,130) 61,463 5,500 Net cash (used in)/provided by operating activities (27,415) 31,802 (8,008)Cash flows from investing activities: Purchases of property and equipment (1,594) (1,663) (732)Purchases of short-term investments (250,901) — — Maturities of short-term investments 122,750 — — Increase in restricted cash (817) — — Net cash used in investing activities (130,562) (1,663) (732)Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 74,430 26,802 — Proceeds from exercise of stock options 263 8 62 Proceeds from initial public offering, net of issuance costs 81,777 — — Proceeds from issuance of notes payable — — 3,359 Repayment of notes payable (3,067) (1,256) (724)Net cash provided by financing activities 153,403 25,554 2,697 Net increase/(decrease) in cash and cash equivalents (4,574) 55,693 (6,043)Cash and cash equivalents, beginning of year 64,396 8,703 14,746 Cash and cash equivalents, end of year $59,822 $64,396 $8,703 Supplemental disclosures of noncash investing and financing items: Purchases of property and equipment in accounts payable and accrued liabilities $100 $68 $— Accretion to redemption value and cumulative dividends on preferred stock 6,705 4,566 3,751 Convertible preferred stock liability recorded in connection with redeemable convertible preferred stock 1,509 908 — Stock issuance costs in accounts payable and accrued liabilities 13 284 — Convertible preferred stock warrants issued in connection with debt — — 82 Issuance costs in accounts payable and accrued liabilities — — 198 See accompanying notes to financial statements. 87 CytomX Therapeutics, Inc.Notes to Financial Statements 1. Description of the BusinessCytomX Therapeutics, Inc. (the “Company”) is an oncology-focused biopharmaceutical company focused on developing Probody therapeutics for thetreatment of cancer. Probody therapeutics are masked antibodies that remain inert in healthy tissue but are activated specifically in the diseasemicroenvironment. The Company is located in South San Francisco, California and was incorporated in the state of Delaware in September 2010.Initial Public OfferingOn October 7, 2015, the Company’s registration statement on Form S-1 relating to its initial public offering (“IPO”) of its common stock was declaredeffective by the Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on The NASDAQ Global Select Market onOctober 8, 2015. The public offering price of the shares sold in the IPO was $12.00 per share. The IPO closed on October 14, 2015, pursuant to which theCompany sold 7,666,667 shares of common stock, including the sale of 1,000,000 shares of common stock to the underwriters upon their exercise of theiroption to purchase additional shares. The Company received net proceeds of approximately $81.8 million, after underwriting discounts, commissions andestimated offering expenses. Immediately prior to the consummation of the IPO, all outstanding shares of convertible preferred stock and redeemableconvertible preferred stock converted into common stock.Reverse Stock SplitOn October 2, 2015, the Company effected a one-for-62.997 reverse stock split of the Company’s issued and outstanding shares of common stock,redeemable convertible preferred stock and convertible preferred stock. The par values of the common stock, redeemable convertible preferred stock andconvertible preferred stock were not adjusted as a result of the reverse stock split. All authorized and issued and outstanding shares of common stock,redeemable convertible preferred stock and convertible preferred stock and per share amounts contained in the accompanying financial statements have beenretroactively adjusted to reflect this reverse stock split for all periods presented. 2. LiquiditySince inception, the Company has incurred recurring net operating losses. As December 31, 2015 and 2014, the Company had an accumulated deficit of$117.5 million and $78.1 million, respectively, and expects to incur losses for the next several years. Since its inception, the Company has funded itsoperations primarily through sales of its common stock in conjunction with the IPO, convertible preferred securities and payments received under itscollaboration agreements. As of December 31, 2015, the Company had cash, cash equivalents and short-term investments of $186.7 million. In May and June2015, the Company received aggregate net proceeds of $73.2 million from the issuance of its Series C and Series D redeemable convertible preferred stock. InOctober 2015, the Company consummated its IPO and raised net proceeds of approximately $81.8 million, after deducting underwriting discounts andcommissions and offering expenses. 88CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) 3. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America(“U.S. GAAP”). The Company’s functional and reporting currency is the U.S. dollar.Use of EstimatesThe preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues andexpenses during the reporting periods. Actual results could differ from those estimates.Concentration of Credit Risk and Other Risks and UncertaintiesThe Company is subject to a number of risks similar to other biopharmaceutical companies in the early stage, including, but not limited to, the need to obtainadequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates,competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s products, andprotection of proprietary technology. If the Company does not successfully obtain regulatory approval, commercialize or partner any of its productcandidates, it will be unable to generate revenue from product sales or achieve profitability.Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short term investments andaccounts receivable. Substantially all the Company’s cash is held by one financial institution that management believes is of high credit quality. Suchdeposits may, at times, exceed federally insured limits. The Company invests its cash equivalents in highly rated money market funds and its short-terminvestments in U.S. Government Bonds.Customers who represent 10% or more of the Company’s total revenue during each period presented or net accounts receivable balance at each respectivebalance sheet date are as follows: Revenue Accounts Receivable, net For the Year Ended December 31, December 31, 2015 2014 2013 2015 2014 Customer A 77% 54% * 50% * Customer B 23% 46% 100% 50% 92% *Less than 10%.All of the Company’s customers are located in the United States of America.Deferred Offering CostsDeferred offering costs, which consisted primarily of direct incremental costs related to the Company’s initial public offering of its common stock, werecapitalized in other assets until the consummation of the initial public offering. These offering costs were reclassified to additional paid-in capital upon theclosing of the initial public offering in October 2015. There were no deferred offering costs capitalized as of December 31, 2014.SegmentsManagement has determined that it has one business activity and operates as one operating segment as it only reports financial information on an aggregatebasis to its chief executive officer, who is the Company’s chief operating decision maker. All long-lived assets are maintained in the United States ofAmerica.Cash and Cash EquivalentsThe Company considers all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cashequivalents.89CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) Restricted CashRestricted cash represents a standby letter of credit issued pursuant to an office lease entered in December 2015. Restricted cash in 2014 represents amountsrelated to the security deposit for the Company’s credit card accounts.Short-term InvestmentsAll investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models forsimilar securities at period end. Generally, those investments with contractual maturities greater than 12 months at the date of purchase are considered long-term investments. Unrealized gains and losses, deemed temporary in nature, are reported as a component of accumulated other comprehensive income (loss),net of tax.A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishmentof a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the related security as an adjustment to yield using thestraight-line interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derivedusing the specific identification method for determining the cost of securities sold.Property and Equipment, netProperty and equipment are recorded at cost net of accumulated depreciation and amortization. Depreciation is provided using the straight-line method overthe estimated useful lives of the respective assets. The useful lives of property and equipment are as follows: Machinery and equipment 5 yearsComputer equipment and software 3 yearsFurniture and fixtures 3 yearsLeasehold improvements Shorter of remaining lease term orestimated life of the assets Maintenance and repairs that do not extend the life or improve the asset are expensed when incurred.Goodwill and Intangible AssetsGoodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible assets acquired in business combinations.Goodwill and other intangible assets with indefinite lives are not amortized, but are assigned to reporting units and tested for impairment annually, orwhenever there is an impairment indicator. Intangible assets are comprised of in-process research and development (“IPR&D”). The Company assessesimpairment indicators annually or more frequently, if a change in circumstances or the occurrence of events suggests the remaining value may not berecoverable. Intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives. There was no impairment ofgoodwill or intangible assets identified during the years ended December 31, 2015 and 2014.Impairment of Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) maynot be recoverable and prior to any goodwill impairment test. An impairment loss is recognized when the total of estimated undiscounted future cash flowsexpected to result from the use of the asset (or asset group) and its eventual disposition is less than its carrying amount. Impairment, if any, would be assessedusing discounted cash flows or other appropriate measures of fair value. There was no impairment of long-lived assets during the periods presented in thesefinancial statements.Convertible Preferred Stock Warrant LiabilityFreestanding warrants for shares that are contingently redeemable are classified as liabilities on the balance sheet at their estimated fair value because theshares underlying the warrants may obligate the Company to transfer assets to the holders at a future date under certain circumstances such as a deemedliquidation event. The warrants are subject to re-measurement at each balance sheet date and the change in fair value, if any, is included in other income(expense), net. The Company adjusted the liability for changes in fair value until the consummation of its IPO in October 2015, at which time all convertiblepreferred stock warrants were net exercised into shares of common stock and the related convertible preferred stock warrant liability was reclassified toadditional paid-in capital.90CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) Convertible Preferred Stock LiabilityThe obligation to issue additional shares of Series B-1 and Series C redeemable convertible preferred stock at a future date was determined to be afreestanding instrument that should be accounted for as a liability. At initial recognition, the Company recorded the convertible preferred stock liability onthe balance sheets at its estimated fair value. The liability is subject to remeasurement at each balance sheet date, with changes in fair value recognized as acomponent of other income (expense), net. At the time of each funding, the Company remeasured the liability, with the change in fair value recognized as acomponent of other income (expense), net and then reclassified the fair value associated with the convertible preferred stock liability to the applicable seriesof redeemable convertible preferred stock. Immediately prior to the consummation of the Company’s IPO in October 2015, the convertible preferred stockconverted to 27,135,453 shares of common stock.Comprehensive LossComprehensive loss represents all changes in stockholders’ equity (deficit) except those resulting from distributions to stockholders. The Company’sunrealized losses on short-term investments represent the only component of other comprehensive loss that is excluded from the reported net loss.Revenue RecognitionThe Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; transfer of technology has beencompleted or services have been rendered; the price to the customer is fixed or determinable and collectability is reasonably assured.The Company’s revenues are primarily derived through its license, research, development and commercialization agreements. The terms of these types ofagreements may include (i) licenses to the Company’s technology, (ii) research and development services, and (ii) services or obligations in connection withparticipation in research or steering committees. Payments to the Company under these arrangements typically include one or more of the following:nonrefundable upfront and license fees, research funding, milestone and other contingent payments to the Company for the achievement of definedcollaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products.In arrangements involving the delivery of more than one element, each required deliverable is evaluated to determine whether it qualifies as a separate unit ofaccounting. The determination is based on whether the deliverable has “standalone value” to the customer. If a deliverable does not qualify as a separate unitof accounting, it is combined with the other applicable undelivered item(s) within the arrangement and these combined deliverables are treated as a singleunit of accounting.The arrangement’s consideration that is fixed or determinable is allocated to each separate unit of accounting based on the relative selling price methodologyin accordance with the selling price hierarchy, which includes vendor-specific objective evidence (“VSOE”) of selling price, if available, or third-partyevidence of selling price if VSOE is not available, or the best estimate of selling price, if neither VSOE nor third-party evidence is available.Payments or reimbursements for the Company’s research and development efforts for the arrangements where such efforts are considered as deliverables arerecognized as the services are performed and are presented on a gross basis. When upfront payments are received and if there is no discernible pattern ofperformance and/or objectively measurable performance measures do not exist, the Company recognizes revenue ratably over the associated period ofperformance.The Company’s collaboration and license agreements may include contingent payments related to specified research, development and regulatory milestonesand sales-based milestones. Such payments are typically payable under the collaborations when the collaboration partner claims or selects a target, orinitiates or advances a covered product candidate in preclinical or clinical development, upon submission for marketing approval of a covered product withregulatory authorities, upon receipt of actual marketing approvals of a covered product or for additional indications, or upon the first commercial sale of acovered product. Sales-based milestones are typically payable when annual sales of a covered product reach specified levels. Each contingent and milestonepayment is evaluated to determine whether it is substantive and at risk to both parties. The Company recognizes any payment that is contingent upon theachievement of a substantive milestone entirely in the period in which the milestone is achieved. Any payments that are contingent upon achievement of anon-substantive milestone are recognized as revenue prospectively, when such payments become due and collectible, over the remaining expectedperformance period under the arrangement, which is generally the remaining period over which the research and development services are expected to beprovided.91CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) Research and Development ExpensesResearch and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries,payroll taxes, employee benefits, materials, supplies, depreciation on and maintenance of research equipment, the cost of services provided by outsidecontractors, and the allocated portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation, and general support services.All costs associated with research and development are expensed as incurred.Stock-Based CompensationThe Company measures its stock-based awards made to employees based on the fair values of the awards as of the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value ofthe portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimatedforfeitures at the date of grant and revised in subsequent periods if actual forfeitures differ from those estimates.Stock-based compensation expense for options granted to non-employees as consideration for services received is measured on the date of performance at thefair value of the consideration received or the fair value of the equity instruments issued, using the Black-Scholes option-pricing model, whichever can bemore reliably measured. Compensation expense for options granted to non- employees is periodically remeasured as the underlying options vest.Income TaxesThe Company accounts for income taxes under the liability method which requires, among other things, that deferred income taxes be provided for temporarydifferences between the tax basis of the Company’s assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets arerecorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided againstdeferred tax assets unless it is more likely than not that they will be realized.The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solelyon their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is torecognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been nointerest or penalties charged in relation to the unrecognized tax benefits.Net Loss per Share Attributable to Common StockholdersBasic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per shareattributable to common stockholders is the same as basic net loss per share attributable to common stockholders since the effect of potentially dilutivesecurities is anti-dilutive.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity torecognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace mostexisting revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018,which is the effective date for public companies. Early application is permitted as of January 1, 2017. The standard permits the use of either the retrospectiveor cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures.The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a GoingConcern. This standard update provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s abilityto continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending afterDecember 15, 2016. The Company does not believe that adopting ASU 2014-15 will have a material impact on its financial statements.92CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) In 2015, the FASB issued new guidance related to balance sheet classification of deferred taxes. The new guidance requires that deferred tax assets andliabilities be classified as noncurrent in a classified statement of financial position. The new standard is effective for fiscal years, and interim periods withinthose fiscal years, beginning after December 15, 2016. Early adoption is permitted. As the Company’s deferred tax balance is already classified as noncurrent,this new guidance had no financial statement impact during the three months ended December 31, 2015.In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-2, an entity will be required to recognizeright-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accountingguidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information aboutleasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For publiccompanies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period,and requires a modified retrospective adoption, with early adoption permitted. The Company plans to adopt this guidance beginning with its first quarterending March 31, 2019. The Company is in the process of evaluating the future impact of ASU 2016-02 on its financial position, results of operations andcash flows. 4. Fair Value Measurements and Short-Term InvestmentsThe Company records its financial assets and liabilities at fair value. The accounting guidance for fair value provides a framework for measuring fair value,clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received tosell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidanceestablishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: ·Level I: Inputs which include quoted prices in active markets for identical assets and liabilities. ·Level II: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially thefull term of the assets or liabilities. ·Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets orliabilities.The carrying amounts of the Company’s financial instruments, including restricted cash, accounts receivable, accounts payable and accrued liabilitiesapproximate fair value due to their relatively short maturities. Based on the borrowing rates available to the Company for debt with similar terms andconsideration of default and credit risk using Level II inputs, the carrying value of the Company’s long-term debt as of December 31, 2014 approximates itsfair value. The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Level I assets consist primarily of highly liquidmoney market funds that are included in restricted cash. The Company’s Level II assets consist of U.S. government bonds that are included in short-terminvestments. The Company’s Level III liabilities include the convertible preferred stock warrant liability and the convertible preferred stock liability. Thedetermination of the fair value of the convertible preferred stock warrant liability is discussed in Note 10. The determination of the fair value of theconvertible preferred stock liability is discussed in Note 12.The following tables set forth the fair value of the Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and thelevel of inputs used in such measurements (in thousands): December 31, 2015 Level I Level II Level III Total Assets Money market funds $44,714 $— $— $44,714 Restricted cash (money market funds) 917 — — 917 U.S. Government bonds — 140,392 — 140,392 $45,631 $140,392 $— $186,023 93CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) December 31, 2014 Level I Level II Level III Total Assets Restricted cash (money market funds) $100 $— $— $100 $100 $— $— $100 Liabilities Convertible preferred stock warrant liability $— $— $186 $186 Convertible preferred stock liability — — 395 395 $— $— $581 $581 The following table sets forth the changes in the fair value of Level III liabilities (in thousands): ConvertiblePreferred StockWarrant Liability ConvertiblePreferred StockLiability Fair value at December 31, 2014 $186 $395 Change in fair value 602 1,114 Recognition of fair value upon issuance of redeemable convertible preferred stock (788) (1,509)Fair value at December 31, 2015 $— $— The following is a summary of the gross unrealized gains on the Company’s short-term investments (in thousands): December 31, 2015 Amortized Cost GrossUnrealizedHolding Gains GrossUnrealizedHolding Losses AggregateFair Value Investment Securities U.S. Government bonds $126,965 $— $(76) $126,889 Total securities $126,965 $— $(76) $126,889 The contractual maturities of securities classified as available-for-sale as of December 31, 2015 were as follows (in thousands): December 31, 2015 Due within one year $126,889 Total $126,889 5. Property and EquipmentProperty and equipment, net consisted of the following (in thousands): December 31 2015 2014 Machinery and equipment $4,910 $4,059 Computer equipment and software 452 315 Furniture and fixtures 51 54 Leasehold improvements 720 183 Construction in progress 169 399 6,302 5,010 Less: accumulated depreciation and amortization (2,821) (1,992) $3,481 $3,018 Depreciation and amortization expense was $1.2 million, $783,000 and $655,000 for the years ended December 31, 2015, 2014 and 2013, respectively. 94CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) 6. Goodwill and Intangible AssetsGoodwill and in-process research and development assets result from a series of integrated financing transactions in 2010 that was accounted for as a businesscombination. The in-process research and development relates to the Company’s proprietary Probody technology platform and is accounted for as anindefinite-lived intangible asset until the underlying project is completed or abandoned.Goodwill and intangible assets consisted of the following (in thousands): December 31, 2015 2014 Goodwill $949 $949 In-process research and development 1,750 1,750 7. Accrued LiabilitiesAccrued liabilities consisted of the following (in thousands): December 31, 2015 2014 Payroll and related expenses $2,839 $859 Research and clinical expenses 1,562 276 Legal and professional expenses 296 418 Other accrued expenses 215 142 Total $4,912 $1,695 8. Research and Collaboration AgreementsPfizer Inc.In May 2013, the Company and Pfizer Inc. (“Pfizer”) entered into a Research Collaboration, Option and License Agreement (the “Pfizer Agreement”) tocollaborate on the discovery and preclinical research activities related to Probody therapeutics, and Probody drug conjugates (“PDCs”) for research projecttargets nominated by Pfizer. Pfizer nominated two research targets in 2013 and had the option of nominating two additional research targets. In December2014, Pfizer selected an additional research target.The Pfizer Agreement provides Pfizer with an option to acquire an exclusive development and commercialization license for each research project target.Upon exercise of the option, Pfizer (1) will receive an exclusive development and commercialization license for use of the Probody therapeutic during thedevelopment, manufacturing and commercialization of the potential product, and (2) will be responsible for the development, manufacturing andcommercialization of such potential products.Pursuant to the Pfizer Agreement, the Company received an upfront payment of $6 million and is entitled to contingent payments of up to an aggregate of$626.5 million as follows: (i) $1.5 million for each of the two additional targets; (ii) up to $12.0 million upon exercise of the license options, (iii) up to $25.0million from the achievement of development milestones for each research target program, or up to $82.0 million if the maximum of four research targets areselected by Pfizer; and (iv) up to $98.0 million in milestone payments for the first commercial sale in various territories for up to three indications perresearch target program or up to $249.5 million if the maximum of four research targets are selected and (v) up to $100.0 million in sales milestones paymentsper research target program, or up to $280.0 million if the maximum of four research targets are selected by Pfizer. The Company is entitled to receiveroyalties in the mid-single digits to low teens on initial targets and mid-single digit royalties on additional targets from potential future sales of productcandidates. The Company will also receive research and development service fees based on a prescribed full-time employee (“FTE”) rate per year that iscapped.95CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) In accordance with ASC 605-25, the Company identified the following deliverables at the inception of the Pfizer Agreement: (1) the research license, (2) theresearch services and (3) the obligation to participate in the joint research committee. The Company determined that the research license does not have stand-alone value to Pfizer due to specialized nature of the research services to be provided by the Company, and accordingly, this deliverable was combined withthe research services and participation in the joint research committee as a single unit of accounting. The Company concluded that, at the inception of theagreement, Pfizer’s options to obtain an exclusive development and commercialization license for each research project target do not represent deliverablesof the agreement because they are substantive options and do not contain a significant or incremental discount.The upfront payment of $6.0 million was recorded as deferred revenue and is being recognized on a ratable basis over the estimated performance period ofseven years. In December 2014, Pfizer selected an additional target and paid $1.5 million, which was recorded as deferred revenue and will be recognizedover the remaining performance period.During the years ended December 31, 2015, 2014 and 2013, the Company recognized revenue of $1.8 million, $2.3 million and $0.9 million, respectively.As of December 31, 2015 and 2014, deferred revenue relating to the Pfizer Agreement was $4.9 million and $6.1 million, respectively. The amount due fromPfizer under the Agreement was $0.4 million and $1.7 million as of December 31, 2015 and 2014, respectively.ImmunoGen, Inc.In January 2014, the Company and ImmunoGen, Inc. (“ImmunoGen”) entered into the Research Collaboration Agreement (the “ImmunoGen Agreement”).The ImmunoGen Agreement provides the Company with the right to use ImmunoGen’s Antibody Drug Conjugate (“ADC”) technology in combination withthe Company’s Probody technology to create Probody Drug Conjugates (“PDC”) directed at one specified target under a research license, and tosubsequently obtain an exclusive, worldwide development and commercialization license to use ImmunoGen’s ADC technology to develop andcommercialize such PDCs. The Company made no upfront cash payment in connection with the execution of the agreement. Instead, the Company providedImmunoGen with the rights to CytomX’s Probody technology to create PDCs directed at two targets under the research license and to subsequently obtainexclusive, worldwide development and commercialization licenses to develop and commercialize such PDCs. Under the research licenses, the parties haveone replacement right for each target, which needs to be made before the third anniversary of the agreement execution.Under the terms of the agreement, both the Company and ImmunoGen are required to perform research activities on behalf of the other party for no monetaryconsideration. The research activities for a particular target will last until January 2018 unless they are terminated by one of the parties or when adevelopment and commercialization license is obtained with respect to that target. Each party is solely responsible for the development, manufacturing andcommercialization of any products resulting from the exclusive development and commercialization license obtained by such party under the agreement.Each party may be liable to pay annual maintenance fees to the other party if the licensed product candidate covered under each development andcommercialization license has not progressed to the clinical stage of development within six years of the exercise of the development and commercializationlicense.In consideration for the exclusive development and commercialization license that may be obtained by ImmunoGen, the Company is entitled to receive up to$30.0 million in development and regulatory milestone payments per the research program target, up to $50.0 million in sales milestone payments per targetand royalties in the mid-single digits on the commercial sales of any resulting product. For the development and commercialization license that may beobtained by the Company, ImmunoGen is entitled to receive up to $60.0 million in development and regulatory milestone payments, up to $100.0 million insales milestone payments and royalties in the mid to high single digits on the commercial sales of any resulting product.The Company accounted for the ImmunoGen Agreement based on the fair value of the assets and services exchanged. The Company identified the followingsignificant deliverables at the inception of the ImmunoGen Agreement: (1) the research license, (2) the research services, (3) the obligation to participate inthe joint research committee, (4) the exclusive research, development and commercialization license and (5) the obligation to provide future technologyimprovements, when available. The Company determined that the research license, participation in the joint steering committee and the research services donot have stand-alone value from the development and commercialization license and therefore those deliverables were combined into one unit of accounting.The Company considered factors such the limited economic benefits to ImmunoGen if development and commercialization license is not obtained and thelack of sublicensing rights in the research license.96CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) The estimated total fair value of the consideration of $13.2 million was recorded as deferred revenue, of which $13.0 million was allocated to the unit ofaccounting comprised of the research license, research services, participation in the joint research committee and the development and commercializationlicense, and $0.2 million was allocated to the future technological improvements. The Company will recognize $13.0 million upon delivery of developmentand commercialization licenses and will recognize amount allocated to the future technology improvements over the term of the license.The estimated fair value of assets and services received was also $13.2 million, of which $12.7 million was allocated to the licenses received and was chargedto research and development expense, with the remaining amount of $0.5 million was allocated to the research services, joint research committeeparticipation and technology improvements, which will be expensed over the period of services to be provided.Bristol-Myers Squibb CompanyOn May 23, 2014, the Company and Bristol-Myers Squibb Company (“BMS”) entered into a Collaboration and License Agreement (the “BMS Agreement”)to discover and develop compounds for use in human therapeutics aimed at multiple immuno- oncology targets using the Company’s Probody technology.The effective date of the BMS Agreement was July 7, 2014.Under the terms of the BMS Agreement, the Company granted BMS exclusive worldwide rights to develop and commercialize Probody therapeutics for up tofour oncology targets. BMS will have additional rights to substitute up to two collaboration targets. Each collaboration target has a two year research termand the two additional targets must be nominated by BMS within five years of the effective date of the BMS Agreement. The research term for eachcollaboration target can be extended in one year increments up to three times.Pursuant to the BMS Agreement, the financial consideration from BMS was comprised of an upfront payment of $50.0 million and contingent payments ofup to an aggregate of $1,217.0 million as follows: (i) up to $25.0 million for additional targets; (ii) up to $114.0 million in development milestone paymentsper research target program or up to $456.0 million if the maximum of four research targets are selected; (iii) up to $124.0 million in milestone payments forthe first commercial sale in various territories for up to three indications per research target program or up to $496.0 million if the maximum of four researchtargets are selected, and (iv) up to $60.0 million in sales milestones payments per research target program or up to $240.0 million if maximum of four researchtargets are selected. The Company is entitled to royalty payments in the mid to high single digits to low teens from potential future sales. The Company willalso receive research and development service fees based on a prescribed FTE rate that is capped.The BMS Agreement also provided the Company to sell to BMS the Company’s common stock upon an IPO. In connection with the IPO in October 2015,BMS purchased 833,333 shares of the Company’s common stock at the initial public offering price and on the same terms as other purchasers in the offering.The Company identified the following deliverables at the inception of the BMS Agreement: (1) the exclusive research, development and commercializationlicense (“license”), (2) the research and development services and (3) the obligation to participate in the joint research committee. The Company determinedthat the license does not have stand-alone value to BMS without the Company’s research services and expertise related to the development of the productcandidates, and accordingly, it was combined with the research services and participation in the joint research committee as a single unit of accounting.The Company received an upfront payment of $50.0 million from BMS in July 2014. The upfront payment was recorded as deferred revenue and beingrecognized on a ratable basis over the estimated performance period of ten years. The Company determined that the remaining contingent payments underthe Agreement do not constitute substantive milestones and will not be accounted for under the milestone method of revenue recognition. The events leadingto these payments do not meet the definition of a substantive milestone because the achievement of these events solely depends on BMS’s performance.Accordingly, any revenue from these contingent payments would be subject to an allocation of arrangement consideration and would be recognized over anyremaining period of performance obligations, if any, relating to this arrangement. If there are no remaining performance obligations under the arrangement atthe time the contingent payment is triggered, the contingent payment will be recognized as revenue in full upon triggering the event.During the years ended December 31, 2015 and 2014, the Company recognized revenue of $5.9 million and $2.8 million, respectively, under the BMSAgreement. As of December 31, 2015 and 2014, deferred revenue relating to the BMS Agreement was $42.6 million and $47.6 million, respectively. Theamount due from BMS under the BMS Agreement was $0.4 million and $0.1 million as of December 31, 2015 and 2014, respectively.97CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) MD AndersonIn November 2015, the Company entered into a research collaboration agreement with MD Anderson to research Probody-enabled chimeric antigen receptorkiller (CAR-NK) cell therapies, known as ProCAR-NK cell therapies. Under this collaboration, MD Anderson will use the Company’s Probody technology toconduct research of ProCAR-NK cell therapies against certain targets selected by the Company in cancer immunotherapy. Under the research collaborationagreement, the Company has the right to exercise an option, during the option period expiring on November 2, 2019 and upon payment of an option exercisefee, to negotiate and acquire a worldwide, exclusive, sublicensable license from MD Anderson for development and commercialization of products directedagainst any of the selected targets. The research collaboration agreement will continue in effect until the earlier of (i) the date that the Company exercises theoption to acquire the license from MD Anderson and (ii) the expiration of the option period. The impact of this agreement was not material for the financialstatements for the year ended December 31, 2015. 9. License AgreementThe Company has an exclusive, worldwide license agreement (the “UC Agreement”) with the Regents of the University of California (the “UC Regents”),acting through its Santa Barbara Campus, relating to the use of certain patents and technology relating to its core technology, including its therapeuticantibodies. Pursuant to the UC Agreement, the Company is obligated to (i) make royalty payments to the UC Regents on net sales of its products coveredunder the agreement, subject to annual minimum amounts,(ii) make milestone payments to the UC Regents upon the occurrence of certain events, (iii) make amilestone payment to the UC Regents upon occurrence of an IPO or change of control, and (iv) reimburse the UC Regents for prosecution and maintenance ofthe licensed patents. If the Company sublicenses its rights under the UC Agreement, it is obligated to pay the UC Regents a percentage of the total grossproceeds received in consideration of the grant of the sublicense, which total amount would be first reduced by the aggregate amount of certain research anddevelopment related expenses incurred by the Company.In 2013, the Company amended the UC Agreement to reduce the amounts due the UC Regents upon receipt by the Company of upfront payments, milestonepayments and royalties from sublicensees. In exchange for this amendment, the Company issued to the UC Regents 157,332 shares of common stock. The UCAgreement, as amended, will remain in effect until the expiration or abandonment of the last to expire of the licensed patents.In the years ended December 31, 2015, 2014 and 2013, the Company incurred expenses of $347,000, $657,000 and $714,000 respectively, to the UCRegents under the provisions of the agreement.Royalty obligationsThe Company has future minimum royalty obligations due under the terms of certain exclusive licensed patent rights. These minimum future obligations areas follows (in thousands): Year ended December 31, 2016 $150 2017 150 Total minimum royalty obligations $300 10. Long-term DebtIn May 2012, the Company entered into a Master Loan and Security Agreement (the “Debt Facility”). Under the terms of the agreement, an aggregate of $2.0million could be drawn down during the initial basic loan term of 42 months. In January and December 2013, the Company amended the Debt Facility toborrow an additional $0.3 million and $3.0 million, respectively, with similar terms. Borrowings under the debt facility bear interest at 11.74% per annum.The Company’s obligations under the Debt Facility are collateralized by a security interest in substantially all of its assets, excluding its intellectual propertyand certain other assets. The Debt Facility also contains customary conditions related to borrowing, events of default, and covenants, including covenantslimiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends orother distributions to holders of its capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The agreement alsoallows the lender to call the debt in the event there is a material adverse change in the Company’s business or financial condition.98CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) In connection with the execution and the amendment of the Debt Facility, the Company issued warrants to the lender to purchase an aggregate of 81,620shares of the Company’s Series B-1 redeemable convertible preferred stock. The warrants expire at the earlier of (i) the tenth anniversary of issuance, (ii) uponthe consummation of an IPO of the Company’s common stock, or (iii) the consummation of certain change of control events. The warrants are exercisable incash at an exercise price of $3.084396 per share or through a cashless exercise provision. Under the cashless exercise provision, the holder may, in lieu ofpayment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s Series B-1redeemable convertible preferred stock at the time of exercise of the warrant after deducting the aggregate exercise price. If the warrant has not beenpreviously exercised, the cashless exercise provision is automatically triggered upon expiration if the fair value of the Series B-1 redeemable convertiblepreferred stock is higher than the exercise price of the warrants. In the event that all of the Company’s Series B-1 redeemable convertible preferred stock havebeen converted into common stock, the warrants will be exercisable for the same number of shares of common stock at the same exercise price.In connection with the consummation of the IPO in October 2015, all of the warrants were net exercised, resulting in issuance of an aggregate of 60,640shares of our common stock.Upon issuance of the warrants, the Company recorded a preferred stock warrant liability based on its initial fair value estimated using the Black-Scholesmodel with an offset to debt discount. The debt discount is amortized to interest expense using the effective interest method over the term of the DebtFacility. The warrant liability is subject to remeasurement to fair value at each balance sheet date until the earliest of the exercise or expiration of theconvertible preferred stock warrant, and any change in fair value is recognized in other income (expense), net.The Company repaid and terminated the Debt Facility in September 2015. 11. Commitments and ContingenciesOperating LeaseNew Lease AgreementOn December 10, 2015, the Company entered into a lease (the “New Lease”) with HCP Oyster Point III LLC (the “Landlord”) to lease approximately 76,173rentable square feet of office and laboratory space located in South San Francisco, California for the Company’s new corporate headquarters. The Companycurrently leases office and laboratory space located in South San Francisco, California, pursuant to a lease agreement which expires in 2019. On March 1,2016, the Company entered into an agreement to terminate the current lease, which provides for early termination effective November 30, 2016 – see Note 21for more information.The term of the New Lease commences on the later of (i) the date that the Landlord’s construction and tenant improvements have been completed pursuant tothe New Lease and (ii) October 1, 2016. The New Lease has an initial term of ten years from the commencement date, and the Company has an option toextend the initial term for an additional five years at the then fair rental value as determined pursuant to the New Lease.The New Lease provides for annual base rent of approximately $3.1 million in the first year of the lease term, which will increase on an annual basisbeginning from the 25th month to approximately $5.5 million for the tenth year of the lease. The Company will be entitled to a one-time improvementallowance of up to $12.6 million.In addition, the Company obtained a standby letter of credit (the “Letter of Credit”) in an amount of approximately $0.9 million, which may be drawn by theLandlord to be applied for certain purposes upon the Company’s breach of any provisions under the New Lease. The Company has recorded the $0.9 millionLetter of Credit in restricted cash, non-current within its balance sheet at December 31, 2015.Rent expense is recognized on a straight-line basis over the term of the lease and accordingly the Company records the difference between cash rentpayments and the recognition of rent expense as a deferred rent liability.99CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) The future minimum lease payments for all of the Company’s facility leases are as follows (in thousands): Year Ending December 31: 2016 $1,369 2017 4,251 2018 5,268 2019 4,582 2020 and beyond 34,144 Total $49,614 Rent expense during the years ended December 31, 2015, 2014 and 2013 was $940,000, $836,000 and $529,000, respectively.Legal ProceedingsThe Company is subject to claims and assessments from time to time in the ordinary course of business but do not believe that any such matters, individuallyor in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.IndemnificationsIn the ordinary course of business, the Company enters into agreements that may include indemnification provisions.Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnifiedparty. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the terminationof the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable.The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also enteredinto indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities thatmay arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently hasdirectors’ and officers’ insurance. 12. Convertible Preferred StockIn December 2014, the Company granted a second tranche option (“Second Tranche Option”) to one of its investors to purchase 659,209 shares of its Series Credeemable convertible preferred stock upon the achievement of certain milestones. At initial recognition, the Company recorded the Second Tranche Optionas a derivative liability on the balance sheet at its estimated fair value of $395,000. In May 2015, the Company achieved the relevant milestones and theinvestor exercised their right to purchase 659,209 shares of Series C convertible redeemable preferred stock for net proceeds of $3.5 million. Immediatelyprior to the closing of this tranche, the Company remeasured the preferred stock liability to its then fair value and recorded a loss from remeasurement of $1.1million in other income (expense), net. The fair value of the preferred stock liability in the amount of $1.5 million was reclassified to redeemable convertiblepreferred stock. As of December 31, 2014, the outstanding convertible preferred stock was as follows (in thousands, except share amounts): December 31, 2014 SharesAuthorized SharesIssued andOutstanding NetCarryingValue Series A-1 33,101 33,101 $49 Series A-2 211,681 211,681 425 Series B-1 14,944,578 14,488,176 57,695 Series B-2 862,412 862,412 2,698 Series C 5,952,664 3,107,701 15,843 Total 22,004,436 18,703,071 $76,710 100CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) In connection with the consummation of the IPO in October 2015, all outstanding shares of Series A-1, Series A-2, Series B-1, Series B-2, Series C and SeriesD were converted into 27,135,453 shares of common stock on a one-for-one basis. As such, no convertible preferred stock shares were outstanding as ofDecember 31, 2015. 13. Common StockIn October 2015, the Company’s board of directors and stockholders approved the amended and restatement of the Company’s certificate of incorporation.The Amended and Restated Certificate of Incorporation was effective as of October 14, 2015, which provides for 75,000,000 authorized shares of commonstock with par value of $0.00001 per share and 10,000,000 shares of preferred stock with a par value of $0.00001 per share.Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the prior rights of the preferred stockholders. As ofDecember 31, 2015 and 2014, no dividends on common stock had been declared by the Board of Directors.The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows: December 31, 2015 2014 Convertible preferred stock outstanding — 18,703,071 Options issued and outstanding 5,270,751 2,147,872 Convertible preferred stock warrants — 81,620 Shares available for future stock option grants 2,401,406 1,896,617 7,672,157 22,829,180 14. Stock Option PlansIn 2010, the Company adopted its 2010 Stock Incentive Plan (the “2010 Plan”) which provided for the granting of stock options to employees, directors andconsultants of the Company. Options granted under the 2010 Plan were either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”).In February 2012, the Company adopted its 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan is divided into two separate equity programs, anoption and stock appreciation rights grant program and a stock award program. In conjunction with adopting the 2011 Plan, the Company discontinued the2010 Plan and released the shares reserved and still available under that plan.In connection with the consummation of the IPO in October 2015, the board of directors adopted the Company’s 2015 Equity Incentive Plan (the “2015Plan” and collectively with the 2010 Plan and 2011 Plan, the “Plans”). In conjunction with adopting the 2015 Plan, the Company discontinued the 2011Plan with respect to new equity awards.Options under the 2015 Plan may be granted for periods of up to ten years. All options issued to date have had a 10-year life. Under the terms of the 2015Plan, options may be granted at an exercise price not less than the estimated fair value of the shares on the date of grant, as determined by the Company’sboard of directors. For employees holding more than 10% of the voting rights of all classes of stock, the exercise price of ISOs and NSOs may not be less than110% of the estimated fair value of the shares on the date of grant, as determined by the board of directors. To date, options granted generally vest over fouryears and vest at a rate of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter.101CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) Activity under the Company’s stock option plans is set forth below: Options Outstanding OptionsAvailablefor Grant Number ofOptions Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractualLife (years) AggregateIntrinsicValue (in thousands) Balances at December 31, 2012 1,579,860 940,262 $1.197 Options granted (810,390) 810,390 1.008 Options exercised — (53,193) 1.134 Options forfeited 7,158 (7,158) — Retirement of shares under the 2010 Plan — (3,811) 1.071 Balances at December 31, 2013 776,628 1,686,490 1.071 8.5 $291 Options authorized 1,587,377 — — Options granted (697,557) 697,557 1.449 Options exercised — (6,006) 1.260 Options forfeited 230,169 (230,169) 0.945 Balances at December 31, 2014 1,896,617 2,147,872 1.197 8.1 $767 Options authorized 3,801,597 — — Options granted (3,309,708) 3,309,708 5.174 Options exercised — (173,929) 1.507 Options forfeited 12,900 (12,900) 1.405 Balances at December 31, 2015 2,401,406 5,270,751 3.694 8.6 $90,542 Options Exercisable—December 31, 2015 1,908,638 1.789 7.2 $36,418 Options vested and expected to vest—December 31, 2015 5,206,151 3.685 8.6 $89,476 The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price ofthe options and the estimated fair value of the underlying common stock as of December 31, 2015, 2014 and 2013, respectively.The aggregate intrinsic value of stock options exercised in the years ended December 31, 2015, 2014 and 2013 was $2.3 million, $1,500 and $600,respectively.The total fair value of options that vested in the years ended December 31, 2015, 2014 and 2013 were $2.8 million, $410,000 and $268,000, respectively.102CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) The following table summarizes information about stock options outstanding and exercisable by exercise price at December 31, 2015: Outstanding Exercisable ExercisePrice NumberOutstanding Weighted-AverageRemainingContractual Life(Years) NumberExercisable $0.945 411,576 7.16 278,861 $1.134 572,079 5.61 572,079 $1.260 342,793 7.05 306,083 $1.386 164,844 8.05 148,970 $1.449 249,886 8.32 183,100 $1.512 240,058 8.78 81,281 $1.575 815,030 9.13 160,073 $4.473 464,799 9.35 24,629 $6.615 1,966,357 9.63 126,667 $12.00 26,895 9.77 26,895 $21.51 16,434 9.95 — 5,270,751 1,908,638 The following table summarizes information about stock options outstanding and vested by exercise price at December 31, 2014: Outstanding Exercisable ExercisePrice NumberOutstanding Weighted-AverageRemainingContractual Life(Years) NumberExercisable $0.945 427,329 8.16 214,899 $1.134 661,891 6.59 564,812 $1.260 361,384 8.18 299,106 $1.386 178,072 9.05 81,099 $1.449 269,647 9.34 70,711 $1.512 249,549 9.78 10,582 2,147,872 1,241,209 The options granted in the years ended December 31, 2015, 2014 and 2013 had a weighted average per share grant-date fair value of $7.169, $0.945, and$0.504, respectively. At December 31, 2015, the unrecognized compensation expense with respect to options granted to employees was $20.6 million, and isexpected to be recognized over 3.5 years, respectively.Early Exercise of Employee OptionsCertain stock options granted under the Plans provide option holders the right to elect to exercise unvested options in exchange for restricted common stock.Such unvested restricted shares are subject to a repurchase right held by the Company at the original issuance price in the event the optionee’s service to theCompany is terminated either voluntarily or involuntarily. The right usually lapses 25% on the first anniversary of the vesting start date and in 36 equalmonthly amounts thereafter. These repurchase terms are considered to be a forfeiture provision. The cash or full recourse notes received from employees forexercise of unvested options is treated as a refundable deposit and is classified as a liability on the balance sheets. 103CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) 15. Stock Based CompensationTotal stock-based compensation recorded related to option granted to employees and nonemployees was as follows (in thousands): Year Ended December 31, 2015 2014 2013 Research and development $1,972 $195 $121 General and administrative 2,014 358 222 Total stock-based compensation expense $3,986 $553 $343 Stock based compensation expense for employees was $3.2 million, $459,000 and $317,000 for the years ended December 31, 2015, 2014 and 2013,respectively.Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The Companydetermined that the estimated fair value of the stock options is more readily measurable than the fair value of the services received. The fair value of stockoptions granted to non-employees is calculated at each grant date and re-measured at each reporting date using the Black-Scholes option pricing model. Thestock-based compensation expense related to a grant will fluctuate as the estimated fair value of the common stock fluctuates over the period from the grantdate to the vesting date.Stock based compensation expense for non-employees was $773,000, $94,000 and $26,000 for the years ended December 31, 2015, 2014 and 2013,respectively.The Company estimated the fair value of employee stock options using the Black-Scholes valuation model. The fair value of employee stock options isbeing amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using thefollowing assumptions for the year ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 2014 2013Expected volatility 62.9% – 68.9% 66.4% – 71.2% 70.8% – 71.7%Risk-free interest rate 1.4% – 1.9% 1.6% – 2.0% 0.9% – 1.9%Dividend yield — % — % — %Expected term (in years) 5.2 – 7.2 5.3 – 6.1 5.5 – 6.1 Expected Term. The expected term of stock options represents the period that the stock options are expected to remain outstanding and is based on industrypeers, as the Company did not have sufficient historical performance to develop reasonable expectations about future exercise patterns and post-vestingemployment information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.Expected Volatility. The expected stock price volatility for the Company’s stock options was determined by examining the historical volatilities forcomparable publicly traded companies within the biotechnology and pharmaceutical industry using an average of historical volatilities of Company’sindustry peers.Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury whose term was consistent with expected term of the Company’s stockoptions.Dividend Rate. The expected dividend was assumed to be zero as the Company has never paid dividends and has no current plans to do so.Expected Forfeiture Rate. The forfeiture rates were estimated based on actual employee head count and were immaterial to the financial statements during2015, 2104 and 2013. 104CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) 16. Related Party TransactionsCertain employees of Third Rock Ventures, a stockholder of the Company, provide consulting services to the Company. General and administrative expensesfor these services were $33,000, $46,000, $17,000 for the year ended December 31, 2015, 2014 and 2013, respectively. The amounts outstanding andincluded in accounts payable were $0 and $17,600 as of December 31, 2015 and 2014, respectively.The Company entered into full recourse loans (“stockholder notes” or “loans”) with current and former executive officers. Principal and interest under theseloans are due at the earliest of (i) the fifth anniversary of the related note, (ii) the sale of the shares securing the notes, or (iii) thirty days after the terminationof services. The principal loan amount and the accrued interest are reported as a deduction from stockholders’ equity (deficit) on the Company’s balancesheets. Loans made to two of the Company’s current and former executive officers were repaid and terminated in August 2015. The remaining balance ofthese loans was approximately $78,000 and $404,000 at December 31, 2015 and 2014, respectively. Interest income of $4,000, $5,000 and $6,000 wasrecorded in the years ended December 31, 2015, 2014 and 2013, respectively. 17. Income TaxesThe Company derives its income only from the United States. The components of the provision (benefit) for income taxes are as follows (in thousands): Years Ended December 31, 2015 2014 2013 Current: Federal $— $— $— State 2 1 1 Total current 2 1 1 Deferred: Federal 8 9 9 State — — — Total deferred 8 9 9 Provision for income taxes $10 $10 $10 A reconciliation of the Company’s effective tax rate to the statutory U.S. federal rate is as follows: Years Ended December 31, 2015 2014 2013 U.S. federal taxes at statutory rate 34.0% 34.0% 34.0%State tax, net of federal benefit 0.8% 1.0% 6.6%Stock compensation (1.1)% (0.3)% (0.5)%Tax attributes subject to 382 limitation (35.4)% 0.0% 0.0%Tax credits 0.8% 1.3% 3.3%Other (1.8)% (0.1)% (0.9)%Change in valuation allowance 2.7% (35.9)% (42.6)%Total —% —% (0.1)% 105CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) The types of temporary differences that give rise to significant portions of the Company’s deferred income tax liabilities are set out below (in thousands): Year Ended December 31, 2015 2014 2013 Net operating loss carryforwards $5,688 $22,484 $13,900 Research and development credits 1,337 2,009 1,324 Intangible—in-process R&D 88 96 124 Deferred revenue 16,182 1,579 — Accruals and deferred rent 998 276 321 Stock-based compensation 1,125 155 86 Other 26 — — Total gross deferred income tax assets 25,444 26,599 15,755 Less: valuation allowance (25,043) (26,012) (15,130)Deferred tax assets, net of valuation allowance 401 587 625 Fixed assets (313) (491) (419)In-process R&D (595) (595) (697)Deferred tax liabilities (908) (1,086) (1,116)Net deferred income tax liabilities $(507) $(499) $(491) A valuation allowance has been established for the portion of deferred assets for which realization is not probable. The net change in the total valuationallowance for the year ended December 31, 2015 was a decrease of $1.0 million and for the years ended December 31, 2014 and 2013 was an increase of$10.9 million and $6.7 million, respectively.The Company has net operating loss carryforwards for federal and state income tax purposes of approximately $14.3 million and $14.3 million, respectively,as of December 31, 2015 available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards will begin to expirein 2031 if not utilized.The Company also has federal and state research and development tax credits carryforwards of $0.4 million and $2.1 million, respectively, as of December 31,2015 available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2030 if not utilized. The state researchand development tax credits have no expiration date.Internal Revenue Code section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by net operatingloss (“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. TheCompany has performed an IRC Section 382 analysis and determined there was an ownership change in 2015. As a result, the federal and state carryforwardsassociated with the NOL and credit deferred tax assets were reduced by the amount of tax attributes estimated to expire during their respective carryforwardperiods. There may be further ownership changes after December 31, 2015.The Company had approximately $0.7 million of unrecognized tax benefits as of December 31, 2015, none of which would affect the Company’s effectivetax rate if recognized, due to the Company’s valuation allowance.A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands): Year Ended December 31, 2015 2014 2013 Balance at the beginning of the year $3,019 $532 $200 Additions based on tax positions related to current year (2,312) 2,473 60 Adjustment based on submitted prior year tax returns (41) 14 272 Balance at end of the year $666 $3,019 $532 The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do notultimately become payable, amounts accrued will be reduced and reflected as a reduction of the provision for income taxes in the period that suchdetermination is made.106CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) Interest and penalties have not been accrued at December 31, 2015, 2014 and 2013.The Company files income tax returns in the United States, including California state jurisdiction. The tax years 2010 to 2015 remains open to U.S. federaland state examination to the extent of the utilization of net operating loss and credit carryovers. As of December 31, 2015, the Company is not underexamination by the Internal Revenue Service or any state or foreign tax jurisdiction. 18. Defined Contribution PlanThe Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code covering substantially all full-time U.S. employees.Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal tax regulations. During theyears ended December 31, 2015, 2014 and 2013, the Company made contributions to the plan of $25,000, $16,500 and $9,000, respectively. 19. Net Loss Per Share Attributable to Common StockholdersThe following weighted-average outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per shareattributable to common stockholders for the periods presented, because including them would have been anti-dilutive: Year Ended December 31, 2015 2014 2013 Redeemable convertible preferred stock (on an as-converted basis) 17,507,788 15,024,251 11,995,481 Convertible preferred stock (on an as-converted basis) 192,473 244,782 244,782 Options to purchase common stock 3,865,842 1,987,532 1,482,579 Convertible preferred stock warrants 64,178 81,620 36,559 Total 21,630,281 17,338,185 13,759,401 A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share attributable to common stockholders isas follows (in thousands except share and per share amounts): Year Ended December 31, 2015 2014 2013 Numerator: Net loss $(35,374) $(30,310) $(15,143)Add: accretion to redemption value and cumulative dividends on preferred stock (6,705) (4,566) (3,751)Net loss attributable to common stockholders (42,079) (34,876) (18,894)Denominator: Weighted-average common shares outstanding used to calculate net loss per share attributable to common stockholders, basic and diluted 8,595,247 989,453 772,320 Net loss per share attributable to common stockholders, basic and diluted $(4.90) $(35.25) $(24.46) 107CytomX Therapeutics, Inc.Notes to the Financial Statements—(Continued) 20. Supplementary Data – Quarterly Financial Data (Unaudited) The following table represents certain unaudited financial information for each of the quarters ended December 31, 2015 and 2014: Three Months Ended (in thousands, except per share data) December 31,2015 September 30,2015 June 30,2015 March 31,2015 Revenue $1,988 $1,939 $2,043 $1,742 Net loss $(11,487) $(11,870) $(5,806) $(6,211)Net loss attributable to common stockholders $(12,045) $(14,828) $(7,563) $(7,643)Net loss per share attributable to common stockholders, basic and diluted $(0.39) $(14.26) $(7.56) $(7.67) Three Months Ended (in thousands, except per share data) December 31,2014 September 30,2014 June 30,2014 March 31,2014 Revenue $1,861 $1,915 $666 $635 Net loss $(4,787) $(3,589) $(4,930) $(17,004)Net loss attributable to common stockholders $(5,983) $(4,758) $(6,080) $(18,055)Net loss per share attributable to common stockholders, basic and diluted $(6.03) $(4.86) $(6.33) $(18.26) 21. Subsequent Events On January 20, 2016, BMS selected an additional target pursuant to the BMS Agreement entered in May 2014. Under the terms of the BMS Agreement, BMS shall pay theCompany a $10 million milestone payment upon the selection of the third target. This amount has been recorded as deferred revenue and will be recognized over the remainingperformance period.On February 12, 2016, the Company exercised its option under the ImmunoGen Agreement entered in January 2014 to obtain a worldwide, exclusive,sublicensable license from ImmunoGen for the development and commercialization of products directed against the target selected by the Company underthe research collaboration pursuant to the ImmunoGen Agreement.On March 1, 2016, the Company entered into an agreement to terminate the current lease (“Lease Termination”) with its current landlord. The LeaseTermination provides for early termination of the current lease effective on November 30, 2016. The Company will not be required to pay the landlord atermination payment in connection with the early termination of the lease. Prior to the execution of the Lease Termination, the current lease had beenscheduled to expire on January 31, 2019.The future minimum lease payments for all the Company’s facility leases as of March 1, 2016 are as follows (in thousands): Year Ending December 31: 2016 $1,298 2017 3,387 2018 4,374 2019 4,506 2020 and beyond 34,144 Total $47,709 108 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NoneItem 9A.Controls and ProceduresEvaluation of Disclosure Controls and Procedures.The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that aredesigned to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under theExchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls andprocedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed toprovide reasonable assurance of achieving their control objectives.Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2015, the end of the period covered by this Annual Report on Form 10-K. Based upon such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level asof such date.This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of thecompany’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2015 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B.Other InformationNot applicable. 109 PART IIIItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this Item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission within120 days after the Company’s fiscal year end and is incorporated herein by reference.We have adopted a code of business conduct and ethics that applies to all employees, including our principal executive officer, principal financial officer,principal accounting officer or controller, or persons performing similar functions. The code of business conduct and ethics is available on our website atwww.cytomx.com. Amendments to, and waivers from, the code of business conduct and ethics that apply to any director, executive officer or personsperforming similar functions will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a CurrentReport on Form 8-K filed with the SEC.Item 11.Executive CompensationThe information required by this Item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission within120 days after the Company’s fiscal year end and is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission within120 days after the Company’s fiscal year end and is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions and Director IndependenceThe information required by this Item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission within120 days after the Company’s fiscal year end and is incorporated herein by reference.Item 14.Principal Accountant Fees and ServicesThe information required by this Item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission within120 days after the Company’s fiscal year end and is incorporated herein by reference.PART IVItem 15.Exhibits and Financial Statement Schedules (1)Financial Statements:The financial statements required by Item 15(a) are filed as part of this Annual Report on Form 10-K under Item 8 “Financial Statements and SupplementaryData.” (2)Financial Statement Schedules: None (3)Exhibits.Except as so indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K. EXHIBITNUMBER EXHIBIT DESCRIPTION 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) Amended and Restated Bylaws. 4.1(2) Specimen Common Stock Certificate. 4.2(3) Amended and Restated Investors’ Rights Agreement dated as of June 12, 2015, by and among CytomX Therapeutics, Inc. and the investorsnamed therein. 10.1(3)+ 2011 Stock Incentive Plan, adopted on February 7, 2012, as amended (“2011 Plan”).110 EXHIBITNUMBER EXHIBIT DESCRIPTION 10.2(3)+ Form of Restricted Stock Award Agreement and Option Exercise Agreement under the 2011 Plan. 10.3(3)+ 2010 Stock Incentive Plan adopted on September 21, 2010 (“2010 Plan”). 10.4(3)+ Form of Stock Option Agreement under the 2010 Plan. 10.5(4)+ 2015 Equity Incentive Plan (“2015 Plan”). 10.6(2)+ 2015 CytomX Therapeutics, Inc. Employee Stock Purchase Plan . 10.7(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Sean A. McCarthy, D. Phil, dated as of December 15, 2010. 10.8(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Sean A. McCarthy, D. Phil, dated as of April1, 2015. 10.9(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Bob Goeltz, dated as of March 19, 2015. 10.10(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Bob Goeltz, dated as of May 11, 2015. 10.11(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and W. Michael Kavanaugh, M.D., dated as of December 13,2014. 10.12(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Michael Kavanaugh, dated as of April 1,2015. 10.13(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Cynthia J. Ladd, dated as of May 1, 2015. 10.14(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Cynthia Ladd, dated as of June 15, 2015. 10.15(2)+ Separation Agreement and General Release of Terms, by and between Henry B. Lowman, Ph.D. and CytomX Therapeutics, Inc., dated as ofSeptember 30, 2014. 10.16(3)+ Form of Indemnification Agreement by and between CytomX Therapeutics, Inc. and each of its directors. 10.17(5)† Research Collaboration Agreement dated as of January 8, 2014, by and between ImmunoGen, Inc. and CytomX Therapeutics, Inc., asamended by the First Amendment to Research Collaboration Agreement effective as of April 3, 2015. 10.18(5)† Collaboration and License Agreement dated as of May 23, 2014, by and between CytomX Therapeutics, Inc. and Bristol-Myers SquibbCompany. 10.19(5)† Research Collaboration, Option and License Agreement dated as of May 30, 2013, by and between Pfizer, Inc. and CytomX Therapeutics,Inc. 10.20(3) Lease Agreement dated as of March 29, 2013, by and between ARE-Technology Center SSF, LLC and CytomX Therapeutics, Inc. 10.21(3) Exclusive Licence Agreement dated as of August 19, 2010, by and between The Regents of the University of California and CytomXTherapeutics, Inc., as amended by Amendment No. 1 to Exclusive Agreement effective as of May 30, 2013 and Amendment No. 2 toExclusive Agreement effective as of November 8, 2013. 10.22(6)+ Form of Option Award Notice under the 2015 Plan. 10.23(6)+ Form of Early Exercise Option Award Notice under the 2015 Plan. 10.24(7) Lease dated as of December 10, 2015, by and between CytomX Therapeutics, Inc. and HCP Oyster Point III LLC. 23.1(8) Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney (included on signature page to this Annual Report on Form 10-K). 31.1(8) Certification of the Company’s principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).111 EXHIBITNUMBER EXHIBIT DESCRIPTION 31.2(8) Certification of the Company’s principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a). 32.1* Section 1350 Certifications. 101.INS(8) XBRL Report Instance Document. 101.SCH(8) XBRL Taxonomy Extension Schema Document. 101.CAL(8) XBRL Taxonomy Calculation Linkbase Document. 101.LAB(8) XBRL Taxonomy Label Linkbase Document. 101.PRE(8) XBRL Taxonomy Presentation Linkbase Document. 101.DEF(8) XBRL Taxonomy Extension Definition Linkbase Document. +Indicates a management contract or compensatory plan.†Portions of this exhibit have been omitted pursuant to a request for confidential treatment, and omitted portions have been filed separately with theSecurities and Exchange Commission.*Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to theliability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed underthe Securities Act, or the Exchange Act, except as otherwise stated in such filing.(1)Incorporated by reference to the indicated exhibit in the Company’s Current Report on Form 8-K filed on October 19, 2015.(2)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 3 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on September 28, 2015.(3)Incorporated by reference to the indicated exhibit in the Company’s Registration Statement on Form S-1 (No. 333-206658) filed with the SEC onAugust 28, 2015.(4)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 5 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on October 6, 2015.(5)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 4 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on October 2, 2015.(6)Incorporated by reference to the indicated exhibit in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filedwith the SEC on November 23, 2015.(7)Incorporated by reference to the indicated exhibit in the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2015.(8)Filed herewith. 112 SIGNATURESPursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this Registration Statement to besigned on its behalf by the undersigned, thereunto duly authorized. CYTOMX THERAPEUTICS, INC. Date: March 7, 2016 By:/s/ Sean A. McCarthy Name:Sean A. McCarthy, D.Phil. Title:President and Chief Executive Officer By:/s/ Robert C. Goeltz Name:Robert C. Goeltz II Title:Chief Financial Officer113 POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Sean A. McCarthy, D. Phil. and Robert C. Goeltz II and each of them,with full power of substitution and resubstitution, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and toexecute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Reporton Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing, ratifying and confirming all that saidattorney-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Sean A. McCarthy President, Chief Executive Officer and Director March 7, 2016Sean A. McCarthy, D.Phil. (Principal Executive Officer) /s/ Robert C. Goeltz Chief Financial Officer March 7, 2016Robert C. Goeltz II (Principal Financial and Accounting Officer) /s/ Hoyoung Huh, M.D., Ph.D. Chairman of the Board March 7, 2016Hoyoung Huh, M.D., Ph.D. /s/ Neil Exter Director March 7, 2016Neil Exter /s/ Frederick W. Gluck Director March 7, 2016Frederick W. Gluck /s/ Elaine V. Jones, Ph.D. Director March 7, 2016Elaine V. Jones, Ph.D. /s/ Timothy M. Shannon, M.D. Director March 7, 2016Timothy M. Shannon, M.D. /s/ Matthew P. Young Director March 7, 2016Matthew P. Young 114 EXHIBIT INDEX EXHIBITNUMBER EXHIBIT DESCRIPTION 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) Amended and Restated Bylaws. 4.1(2) Specimen Common Stock Certificate. 4.2(3) Amended and Restated Investors’ Rights Agreement dated as of June 12, 2015, by and among CytomX Therapeutics, Inc. and the investorsnamed therein. 10.1(3)+ 2011 Stock Incentive Plan, adopted on February 7, 2012, as amended (“2011 Plan”). 10.2(3)+ Form of Restricted Stock Award Agreement and Option Exercise Agreement under the 2011 Plan. 10.3(3)+ 2010 Stock Incentive Plan adopted on September 21, 2010 (“2010 Plan”). 10.4(3)+ Form of Stock Option Agreement under the 2010 Plan. 10.5(4)+ 2015 Equity Incentive Plan (“2015 Plan”). 10.6(2)+ 2015 CytomX Therapeutics, Inc. Employee Stock Purchase Plan . 10.7(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Sean A. McCarthy, D. Phil, dated as of December 15, 2010. 10.8(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Sean A. McCarthy, D. Phil, dated as of April1, 2015. 10.9(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Bob Goeltz, dated as of March 19, 2015. 10.10(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Bob Goeltz, dated as of May 11, 2015. 10.11(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and W. Michael Kavanaugh, M.D., dated as of December 13,2014. 10.12(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Michael Kavanaugh, dated as of April 1,2015. 10.13(3)+ Employment Offer Letter Agreement between CytomX Therapeutics, Inc. and Cynthia J. Ladd, dated as of May 1, 2015. 10.14(3)+ Severance and Change of Control Agreement, by and between CytomX Therapeutics, Inc. and Cynthia Ladd, dated as of June 15, 2015. 10.15(2)+ Separation Agreement and General Release of Terms, by and between Henry B. Lowman, Ph.D. and CytomX Therapeutics, Inc., dated as ofSeptember 30, 2014. 10.16(3)+ Form of Indemnification Agreement by and between CytomX Therapeutics, Inc. and each of its directors. 10.17(5)† Research Collaboration Agreement dated as of January 8, 2014, by and between ImmunoGen, Inc. and CytomX Therapeutics, Inc., asamended by the First Amendment to Research Collaboration Agreement effective as of April 3, 2015. 10.18(5)† Collaboration and License Agreement dated as of May 23, 2014, by and between CytomX Therapeutics, Inc. and Bristol-Myers SquibbCompany. 10.19(5)† Research Collaboration, Option and License Agreement dated as of May 30, 2013, by and between Pfizer, Inc. and CytomX Therapeutics,Inc. 10.20(3) Lease Agreement dated as of March 29, 2013, by and between ARE-Technology Center SSF, LLC and CytomX Therapeutics, Inc. 115 EXHIBITNUMBER EXHIBIT DESCRIPTION 10.21(3) Exclusive Licence Agreement dated as of August 19, 2010, by and between The Regents of the University of California and CytomXTherapeutics, Inc., as amended by Amendment No. 1 to Exclusive Agreement effective as ofMay 30, 2013 and Amendment No. 2 to Exclusive Agreement effective as of November 8, 2013. 10.22(6)+ Form of Option Award Notice under the 2015 Plan. 10.23(6)+ Form of Early Exercise Option Award Notice under the 2015 Plan. 10.24(7) Lease dated as of December 10, 2015, by and between CytomX Therapeutics, Inc. and HCP Oyster Point III LLC. 23.1(8) Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney (included on signature page to this Annual Report on Form 10-K). 31.1(8) Certification of the Company’s principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a). 31.2(8) Certification of the Company’s principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a). 32.1* Section 1350 Certifications. 101.INS(8) XBRL Report Instance Document. 101.SCH(8) XBRL Taxonomy Extension Schema Document. 101.CAL(8) XBRL Taxonomy Calculation Linkbase Document. 101.LAB(8) XBRL Taxonomy Label Linkbase Document. 101.PRE(8) XBRL Taxonomy Presentation Linkbase Document. 101.DEF(8) XBRL Taxonomy Extension Definition Linkbase Document. +Indicates a management contract or compensatory plan.†Portions of this exhibit have been omitted pursuant to a request for confidential treatment, and omitted portions have been filed separately with theSecurities and Exchange Commission.*Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to theliability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed underthe Securities Act, or the Exchange Act, except as otherwise stated in such filing.(1)Incorporated by reference to the indicated exhibit in the Company’s Current Report on Form 8-K filed on October 19, 2015.(2)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 3 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on September 28, 2015.(3)Incorporated by reference to the indicated exhibit in the Company’s Registration Statement on Form S-1 (No. 333-206658) filed with the SEC onAugust 28, 2015.(4)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 5 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on October 6, 2015.(5)Incorporated by reference to the indicated exhibit in the Company’s Amendment No. 4 to Registration Statement on Form S-1 (No. 333-206658) filedwith the SEC on October 2, 2015.(6)Incorporated by reference to the indicated exhibit in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filedwith the SEC on November 23, 2015.(7)Incorporated by reference to the indicated exhibit in the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2015.(8)Filed herewith. 116 Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the use in the Registration Statement on Form S-8 (No. 333-207694) of CytomX Therapeutics, Inc. of our report dated March 7, 2016relating to the financial statements, which appears in this Form 10‑K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 7, 2016 Exhibit 31.1CERTIFICATIONSI, Sean A. McCarthy, D.Phil., certify that:1. I have reviewed this Annual Report on Form 10-K of CytomX Therapeutics, Inc. for the year ended December 31, 2015;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andc) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting.5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 7, 2016 /s/ Sean A. McCarthySean A. McCarthy, D.Phil.President and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATIONSI, Robert C. Goeltz II, certify that:1. I have reviewed this Annual Report on Form 10-K of CytomX Therapeutics, Inc. for the year ended December 31, 2015;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andc) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting.5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 7, 2016 /s/ Robert C. GoeltzRobert C. Goeltz IIChief Financial Office(Principal Financial and Accounting Officer) Exhibit 32.1SECTION 1350 CERTIFICATIONS*Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 ofChapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Sean A. McCarthy, D.Phil., President and Chief Executive Officer (Principal ExecutiveOfficer) of CytomX Therapeutics, Inc. (the “Company”), and Robert C. Goeltz II, Chief Financial Officer (Principal Financial and Accounting Officer) of theCompany, each hereby certifies that, to the best of his knowledge:1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2015, to which this Certification is attached as Exhibit 32.1 (the“Annual Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany for the period covered by the Annual Report.Dated: March 7, 2016 /s/ Sean A. McCarthy /s/ Robert C. GoeltzSean A. McCarthy, D.Phil. Robert C. Goeltz IIPresident and Chief Executive Officer(Principal Executive Officer) Chief Financial Officer(Principal Financial and Accounting Officer) *This certification accompanies the Annual Report on Form 10-K, to which it relates, is not deemed filed with the Securities and Exchange Commissionand is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Actof 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in suchfiling. 

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