UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36112
MACROGENICS, INC.
(Exact name of registrant)
Delaware
(State of organization)
06-1591613
(I.R.S. Employer Identification Number)
9704 Medical Center Drive, Rockville, Maryland 20850
(Address of principal executive offices and zip code)
(301) 251-5172
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
MGNX
Nasdaq Global Select Market
Securities 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 ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The aggregate market value of the registrant's common stock, par value $0.01 per share, held by non-affiliates of the registrant on June 28, 2019, the last
business day of the registrant's most recently completed second fiscal quarter, was approximately $829.7 million based on the closing price of the registrant's
common stock on the Nasdaq Global Select Market on that date. Exclusion of shares held by any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the direction of management or policies of the registrant, or that such person is controlled by or
under common control with the registrant.
The number of shares of the registrant's common stock outstanding on February 21, 2020 was 48,984,218.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of MacroGenics, Inc.'s definitive proxy statement for the 2020 annual meeting of stockholders are incorporated by reference into Part III of this
Annual Report.
MACROGENICS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues
or performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular,
under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Forward-looking
statements can often be identified by the use of terminology such as "subject to", "believe", "anticipate", "plan", "expect", "intend", "estimate", "project",
"may", "will", "should", "would", "could", "can", the negatives thereof, variations thereon and similar expressions, or by discussions of strategy.
All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations
and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our
expectations, and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking
statements. The following uncertainties and factors, among others (including those set forth under "Risk Factors"), could affect future performance and cause
actual results to differ materially from those matters expressed in or implied by forward-looking statements:
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our plans to develop and commercialize our product candidates;
the outcomes of our ongoing and planned clinical trials and the timing of those outcomes, including when clinical trials will be initiated or completed,
and when data will be reported or regulatory filings made;
the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our ability to raise dilutive or non-dilutive capital to fund our operations;
our ability to enter into new collaborations or to identify additional products or product candidates with significant commercial potential that are
consistent with our commercial objectives;
the potential benefits and future operation of our existing collaborations;
our ability to recover the investment in our manufacturing capabilities;
the rate and degree of market acceptance and clinical utility of our products;
our commercialization, marketing and manufacturing capabilities and strategy;
significant competition in our industry;
costs of litigation and the failure to successfully defend lawsuits and other claims against us;
economic, political and other risks associated with our international operations;
our ability to receive research funding and achieve anticipated milestones under our collaborations;
our ability to protect and enforce patents and other intellectual property;
costs of compliance and our failure to comply with new and existing governmental regulations including, but not limited to, tax regulations;
loss or retirement of key members of management;
failure to successfully execute our growth strategy, including any delays in our planned future growth; and
our failure to maintain effective internal controls.
Consequently, forward-looking statements speak only as of the date that they are made and should be regarded solely as our current plans, estimates and
beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or
achievements. Except as required by law, we do not undertake and specifically decline any obligation to update, republish or revise forward-looking
statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.
ITEM 1. BUSINESS
PART I
Except as otherwise indicated herein or as the context otherwise requires, references in this annual report on Form 10-K to "MacroGenics," the "company,"
"we," "us" and "our" refer to MacroGenics, Inc. and its consolidated subsidiaries. MacroGenics®, the MacroGenics logo®, DART®, TRIDENTTM and the
phrases "Breakthrough Biologics, Life-Changing Medicines" and "Developing Breakthrough Biologics, Life-Changing Medicines" are our trademarks. The
other trademarks, trade names and service marks appearing in this report are the property of their respective owners.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering and developing innovative antibody-based therapeutics designed to
modulate the human immune response for the treatment of cancer. We currently have a pipeline of product candidates in human clinical testing, including
seven immuno-oncology programs, that have been created primarily using our proprietary, antibody-based technology platforms. We believe our product
candidates have the potential to have a meaningful effect on treating patients' unmet medical needs as monotherapy or, in some cases, in combination with
other therapeutic agents.
We are developing product candidates that target various tumor-associated antigens. These include tumor-associated antigens that have been well
characterized, such as human epidermal growth factor receptor 2 (HER2), which is expressed on some breast, gastroesophageal and other cancer types. Other
product candidates that we are developing target tumor-associated antigens against which there are currently no approved products, such as B7-H3, a
molecule in the B7 family of immune regulator proteins widely expressed by several different tumor types. We are also developing molecules that target
programmed cell death protein 1 (PD-1), a protein that is important in the regulation of the immune system’s response to cancer. Monoclonal antibodies that
inhibit PD-1 have been approved by the U.S. Food and Drug Administration (FDA) for the treatment of numerous cancers. Our clinical pipeline includes an
anti-PD-1 monoclonal antibody that we have out-licensed to a partner and two bispecific DART product candidates that co-engage PD-1 and LAG-3, and PD-
1 and CTLA-4, respectively. We are also developing a bispecific DART molecule that engages CD3 on immune effector cells to kill CD123-expressing
cancer cells in certain hematological malignancies, including acute myeloid leukemia (AML).
We have created our product candidates based on the following antibody-based technologies:
•
Fc Optimization platform, which introduces certain mutations into the Fc domain of a monoclonal antibody in order to modulate antibody
interaction with immune effector cells to enhance the killing of cancer cells;
• Multi-specific platforms, which enable us to design antibodies that can bind to two (in the case of our bispecific DART product candidates) or
more distinct targets; and
• Antibody drug conjugate (ADC) platforms, which we have licensed from collaboration partners, and which link monoclonal antibodies that
specifically target cytotoxins to cancer cells that are designed to trigger cell death in the cancer cell.
Our goal is to be a fully integrated biotechnology company leading in the discovery, development and commercialization of breakthrough antibody-
based biologics for the treatment of patients with cancer.
Our Pipeline of Immuno-Oncology Product Candidates
The table below depicts the current status of our immuno-oncology product candidates that are in clinical development and for which we retain all or
some commercial rights:
1
(a) MGC018 is an ADC based on a duocarmycin payload with cleavable peptide linker that was licensed from Synthon Biopharmaceuticals.
(b) MacroGenics retains rights to develop its pipeline assets in combination with MGA012 and to manufacture a portion of global clinical and commercial supply needs of MGA012. Incyte designates this molecule as
“INCMGA0012”.
Margetuximab
Margetuximab is an investigational, immune-enhancing, monoclonal antibody that targets HER2-expressing tumors, including certain types of breast
and gastroesophageal cancers. Margetuximab was designed to provide HER2 blockade with similar HER2 binding and antiproliferative effects as
trastuzumab. In addition, we have engineered the constant region (Fc region) of margetuximab using our Fc Optimization platform to enhance the
engagement of the immune system through an Fc-dependent mechanism, such as antibody dependent cell-mediated cytotoxicity (ADCC), to increase tumor
cell killing. Furthermore, ADCC may also lead to HER2-specific T-cell and antibody responses, facilitating the engagement of both innate and adaptive
immune responses.
HER2-positive Breast Cancer.
HER2 is a protein found on the surface of some cancer cells that promotes growth and is associated with aggressive disease and poor prognosis.
Approximately 15-20% of breast cancer cases are HER2-positive, representing approximately 45,000 new cases annually in the U.S. according to the
American Cancer Society Breast Cancer Facts & Figures 2019-2020. Monoclonal antibody-based therapies targeting HER2 have greatly improved outcomes
of patients with HER2-positive breast cancer and are now standard of care in both early- and late-stage disease. Ongoing HER2 blockade is recommended for
patients who have relapsed or refractory HER2-positive disease; after progression occurs during treatment with other HER2-directed therapies, the need for
additional agents in later lines remains.
In December 2019, we submitted a Biologics License Application (BLA) to the FDA for margetuximab for the treatment of patients with metastatic
HER2-positive breast cancer in combination with chemotherapy. The BLA submission was based primarily on data from SOPHIA, our Phase 3 clinical trial
comparing margetuximab plus chemotherapy versus trastuzumab plus chemotherapy in patients with HER2-positive metastatic breast cancer who have
previously been treated with anti-HER2-targeted therapies. In February 2020, the BLA was accepted for review by the FDA. We expect that there will be a
Standard Review process and anticipate a Prescription Drug User Fee Act (PDUFA) date by the end of 2020. In addition, we believe that the FDA will require
an Oncologic Drugs Advisory Committee (ODAC) and anticipate that meeting will likely occur in the second half of 2020.
The SOPHIA study enrolled 536 patients at approximately 200 trial sites across North America, Europe and Asia. Patients were treated with either
margetuximab or trastuzumab in combination with one of four chemotherapy agents (capecitabine, eribulin, gemcitabine or vinorelbine). All study patients
had previously received trastuzumab and pertuzumab, and approximately 90% had previously received ado-trastuzumab emtansine. Primary endpoints are
sequentially-assessed progression-free survival (PFS), determined by centrally-blinded radiological review, and overall survival (OS). A pre-specified
exploratory objective of the study was to evaluate the effect of CD16A (Fcγ receptor) allelic variation on margetuximab activity; approximately 85% of the
overall human population, as well as patients enrolled in the SOPHIA study, carry the
2
CD16A 158F allele, which has been previously associated with diminished clinical response to trastuzumab and other antibodies.
In February 2019, we announced topline PFS results from the SOPHIA trial as of an October 2018 data cut-off. In June 2019, at a medical
conference, we presented data from SOPHIA as of the aforementioned October 2018 data cut-off that showed a statistically significant improvement in PFS
in patients treated with margetuximab plus chemotherapy compared to trastuzumab plus chemotherapy in the intention-to-treat (ITT) population after 265
PFS events (median PFS=5.8 months versus 4.9 months; hazard ratio [HR]=0.76; 95% confidence interval [CI]: 0.59-0.98; P=0.033). In the pre-specified,
exploratory subpopulation of patients carrying the CD16A 158F allele, PFS was prolonged by 1.8 months in the margetuximab arm compared to the
trastuzumab arm (median PFS=6.9 months versus 5.1 months; HR=0.68; 95% CI: 0.52-0.90; P=0.005). We also presented data from the planned first interim
analysis of OS based on 158 OS events. This interim analysis was not expected to and did not reach statistical significance. In the ITT population, median OS
was 18.9 months in the margetuximab arm versus 17.2 months in the trastuzumab arm (HR=0.95; 95% CI: 0.69-1.31). In the pre-specified, exploratory
subpopulation of patients carrying the CD16A 158F allele, median OS was 23.6 months in the margetuximab arm versus 16.9 months in the trastuzumab arm
(HR=0.82; 95% CI: 0.58-1.17). As a secondary outcome measure in the SOPHIA study, the objective response rate (ORR) in the ITT population was 22% in
the margetuximab arm (95% CI: 17.3-27.7%) compared to 16% in the trastuzumab arm (95% CI: 11.8-21.0%).
At a medical conference in December 2019, we presented data from the planned second interim analysis of OS as of a September 2019 cut-off after
270 OS events. In this second interim OS analysis, OS favored margetuximab plus chemotherapy compared with trastuzumab plus chemotherapy in the ITT
population; however, these data were not expected to and did not reach statistical significance (median OS=21.6 months versus 19.8 months; HR=0.89; 95%
CI: 0.69-1.13; nominal P=0.326). The final pre-specified OS analysis is planned after 385 OS events have accrued, which is projected to occur in the second
half of 2020, at which point the results may or may not reach statistical significance. Among the genetically defined exploratory subpopulation of patients
carrying a CD16A 158F allele, the median OS at the second interim analysis was prolonged by 4.3 months in the margetuximab arm compared to the
trastuzumab arm (23.7 months versus 19.4 months; HR=0.79; 95% CI: 0.61-1.04; nominal P=0.087). Among the approximately 15% of patients who were
homozygous for the CD16A 158V allele, the trastuzumab arm performed better than the margetuximab arm.
We believe margetuximab plus chemotherapy has shown a safety profile generally comparable to that of trastuzumab plus chemotherapy in this
study. As of the April 2019 data cut-off for safety, Grade 3 or greater adverse events occurred in 142 (54%) patients on the margetuximab arm compared to
140 (53%) patients on the trastuzumab arm. Serious adverse events occurred in 43 (16%) patients on the margetuximab arm compared to 49 (18%) patients on
the trastuzumab arm. Infusion-related reactions (IRR) were more common with margetuximab treatment than with trastuzumab (13% versus 3%) and were
mostly Grade 1 or 2 and associated with the first dose. A substudy evaluating shorter, 30-minute infusions of margetuximab in Cycle 2 and beyond showed no
effect on safety outcomes, including risk or severity of IRR.
In January 2018, the FDA granted Fast Track designation for the investigation of margetuximab for treatment of patients with metastatic or locally
advanced HER2 positive breast cancer who have previously been treated with anti-HER2-targeted therapy. Although there are benefits associated with a Fast
Track designation, such as more frequent meetings with the FDA to discuss the drug's development plan, we anticipate a Standard Review process for the
BLA.
Gastric Cancer.
Cancer of the stomach, also called gastric cancer (GC), and cancer of the gastroesophageal junction (GEJ), which is where the esophagus joins the
stomach, are collectively referred to as gastroesophageal adenocarcinoma, which is the third leading cause of cancer death worldwide according to the World
Health Organization in 2018. Both GC and GEJ cancer are often diagnosed at an advanced stage and therefore have very poor prognosis, with a 5-year
survival of 5-20%. Chemotherapy is the standard of care for first-line therapy and may be combined with trastuzumab for the approximately 20% of patients
whose tumors are HER2-positive.
We are evaluating the combination of margetuximab plus PD-1 checkpoint blockade as a chemotherapy-free regimen in patients with advanced
HER2-positive GC or GEJ cancer in two separate clinical studies. We believe that combining checkpoint blockade and margetuximab may enhance tumor-
specific T-cell immunity and increase anti-tumor activity.
In September 2019, we presented data from our ongoing Phase 2, open-label, dose escalation and expansion study of margetuximab plus
pembrolizumab, an anti-PD-1 monoclonal antibody, in patients with advanced HER2-positive GC or GEJ cancer who have previously been treated with
chemotherapy and trastuzumab in the metastatic setting. In this study, 92 patients, including 61 patients with GC and 31 patients with GEJ, who had HER2-
positive disease, were treated at the recommended phase 2 dose of 15 mg/kg margetuximab and 200 mg pembrolizumab, both administered every three
weeks, and were included
3
in the analysis. HER2 positivity was characterized by a score of 3+ by immunohistochemistry (IHC), or IHC3-positve, or a score of 2+ by IHC and detection
by fluorescence in situ hybridization (FISH), or IHC2-positive/FISH-positive. Patients in the study were enrolled irrespective of programmed death-ligand 1
(PD-L1) expression status. We reported data as of July 10, 2019. As of this data cut-off date, the study was ongoing with eight patients remaining on therapy.
Acceptable tolerability was observed in this study in patients treated with margetuximab and pembrolizumab. Grade 3 or higher treatment-related adverse
events (TRAE) occurred in 19.6% of patients. Response rates, median PFS and OS observed in the ongoing study are summarized in the following table:
Gastroesophageal Adenocarcinoma
(GEA = GC + GEJ)
Gastric Cancer
(GC)
All Patients
HER2 IHC3+
ORR
20*/92
(21.7%)
20*/71
(28.2%)
DCR
50/92 (54.4%)
45/71 (63.4%)
HER2 IHC3+/PD-L1+
12/25 (48.0%) 19/25 (76.0%)
2.7
4.3
4.8
Median PFS
(months)
Median OS
(months)
12.5
13.9
ORR
18*/61
(29.5%)
18*/55
(32.7%)
DCR
40/61 (65.6%)
38/55 (69.1%)
20.5
12/23 (52.2%) 19/23 (82.6%)
Median PFS
(months)
Median OS
(months)
4.1
4.7
5.5
13.9
14.6
20.5
*Three unconfirmed responses; ORR includes complete responses (CR) and partial responses (PR); DCR=disease control rate and includes CR, PR and stable
disease (SD).
Based on these results, in September 2019, we initiated the MAHOGANY study, a Phase 2/3 registration-directed clinical trial to evaluate, in
Module A, margetuximab in combination with MGA012, an anti-PD-1 monoclonal antibody, in patients with tumors that are both HER2-positive and PD-L1
positive. This approach is designed as a chemotherapy-free regimen that engages both innate and adaptive immunity for the treatment of patients with GC or
GEJ cancer in the first-line setting. The primary outcome measure for efficacy in Module A is ORR per Response Evaluation Criteria in Solid Tumors
(RECIST) v 1.1. We expect to obtain initial data in the second half of 2020 to enable a decision whether to enroll additional patients into the study to support
a potential accelerated approval of the U.S. in the future.
We also plan to evaluate margetuximab with chemotherapy and MGA012 or MGD013, a PD-1 x LAG-3 bispecific DART molecule, compared to
standard of care therapy of trastuzumab with chemotherapy in Module B of the MAHOGANY study. In this portion of the randomized, controlled study,
patients are planned to be enrolled irrespective of PD-L1 expression. The primary outcome measure for efficacy in Module B is planned to be OS.
In November 2018, we licensed the right to develop and commercialize margetuximab in mainland China, Hong Kong, Macau and Taiwan to Zai
Lab Limited (Zai Lab). Zai Lab will lead clinical development in its territory by leveraging its regulatory and clinical development expertise and broad
regional network of investigators. We are prioritizing enrollment of MAHOGANY Module A in the U.S. We expect Zai Lab to initiate Module B in Greater
China in the second half of 2020, unless regional coronavirus related precautions or other circumstances delay such initiation . In February 2020, Zai Lab
announced that it had dosed a first patient in a registrational bridging study of margetuximab, in combination with chemotherapy, for the treatment of patients
with metastatic HER2-positive breast cancer. In 2010, we licensed the right to develop and commercialize margetuximab in South Korea to Green Cross
Corporation (GC Pharma).
Flotetuzumab
Flotetuzumab is an investigational bispecific, humanized DART molecule that recognizes both CD123 and CD3. CD123, the Interleukin-3 receptor
alpha chain, has been reported to be over-expressed on cancer cells in a wide range of hematological malignancies, including acute myeloid leukemia (AML)
and myelodysplastic syndrome (MDS). CD3 is expressed on immune effector cells, such as T cells. Flotetuzumab is designed to engage and redirect T cells to
kill CD123-expressing malignant cells.
Acute Myeloid Leukemia (AML)
AML is a hematopoietic stem cell malignancy characterized by uncontrolled clonal proliferation of neoplastic precursors and differentiation arrest
that prevent normal bone marrow hematopoiesis. AML is thought to arise in and be
4
perpetuated by a small population of leukemic stem cells (LSCs) that generally resist conventional chemotherapeutic agents. LSCs are characterized by high
levels of CD123 expression that is low or absent in the corresponding hematopoietic progenitors and stem cell populations in normal human bone marrow.
Flotetuzumab was designed to redirect T lymphocytes to kill CD123-expressing cells. To achieve this, the DART molecule combines an arm that recognizes
CD123 on the target cancer cells, with a portion of an antibody recognizing CD3, an activating protein expressed by normal T cells, which are specialized
white blood cells in the human immune system.
Approximately 20,000 new cases of AML were diagnosed in the U.S. in 2019, with a median age of 68 years at diagnosis, according to the
Surveillance, Epidemiology, and End Results (SEER) Program of the National Institutes of Health (NIH). Hematopoietic stem cell transplantation represents
the only treatment modality with curative potential. Approximately 40-50% of newly diagnosed patients fail to achieve a complete remission (CR) with
intensive induction therapy (primary induction failure) or experience disease recurrence after a short remission duration of less than 6 months (early relapsed).
A very small number of these patients are expected to respond to salvage therapy. In addition, although new targeted agents have been approved for the
treatment of first-line or relapsed/refractory AML in recent years, approximately 50% of patients have no known targetable mutations.
In December 2019, we presented data from our Phase 1/2 dose expansion study of flotetuzumab in relapsed/refractory patients with AML. In this
study, 30 patients classified as having primary induction failure or early relapsed AML who had received a median of four prior therapies were treated with
flotetuzumab at the recommended Phase 2 dose of 500 ng/kg/day by continuous infusion with a lead-in dosing strategy. Data were reported as of the cut-off
date of November 1, 2019. The study is currently ongoing, with additional patients being enrolled.
Responses, including CR, CRh (CR with partial hematological recovery) and CRi (CR with incomplete hematological improvement) per a modified
International Working Group (IWG) Response Criteria for AML, are summarized in the table below. Four responders received allogeneic hematopoietic stem
cell transplantation as consolidation therapy and remained in remission after 6 to 21 months.
Responders
(N)
ITT Population
(N = 30)
Evaluable Patients
(N = 28)
CR
CR + CRh
CR + CRh + CRi
5
8
9
16.6%
26.7%
30.0%
17.9%
28.6%
32.1%
The most common TRAE was infusion-related reaction/cytokine release syndrome (IRR/CRS) that occurred in all (30/30) patients. However, most
CRS events observed were of short duration and mild to moderate (grade 1 or 2) in severity, with only one grade 3 event reported in one patient.
We intend to define a potential registration path in the U.S. for the treatment of patients with primary induction failure and early relapsed AML in the
first half of 2020, pending discussions with the FDA. The FDA has granted orphan drug designation to flotetuzumab for the treatment of AML.
In addition, we believe our preclinical and translational data provide a scientific rationale for combining flotetuzumab with checkpoint blockade as a
potential mechanism for enhanced CD123-directed T cell killing and anti-leukemic activity. We have initiated a Phase 1/2 study of flotetuzumab in
combination with MGA012 in patients with relapsed/refractory AML. The study is currently being conducted in countries outside of the U.S.
MGA012
MGA012 (also known as INCMGA0012) is an investigational monoclonal antibody targeting PD-1. Marketed antibodies targeting this checkpoint
molecule have shown clinical efficacy in the treatment of various tumors by releasing the "brakes" of the immune system and help to restore the immune
system's ability to detect and kill tumor cells. In 2017, we licensed MGA012 to Incyte Corporation (Incyte) under a global collaboration and license
agreement, although we retain the right to develop the molecule in combination with product candidates from our pipeline. Incyte has stated it is pursuing
development of MGA012 monotherapy through potentially registration-enabling studies in squamous carcinoma of the anal canal (SCAC), MSI-high
endometrial cancer and Merkel cell carcinoma, with data in SCAC anticipated in the second half of 2020. In addition, we expect Incyte to initiate two Phase 3
studies of MGA012 in combination with chemo-radiation or chemotherapy in patients with advanced or metastatic non-small cell lung cancer (NSCLC),
known as POD1UM-301 and
5
POD1UM-304, respectively. Incyte is also pursuing development of MGA012 in combination with multiple product candidates from its pipeline. We are
currently studying MGA012 in combination with margetuximab in patients with GC or GEJ cancer and with flotetuzumab in patients with relapsed/refractory
AML.
Enoblituzumab
Enoblituzumab is an investigational, immune-enhancing, monoclonal antibody that targets B7-H3 that has been engineered using our Fc
Optimization platform. B7-H3, a protein in the B7 family of immune regulator proteins that is widely expressed by a number of different tumor types and
may play a key role in regulating the immune response to various cancers. There are no currently approved therapeutic agents directed against B7-H3.
We conducted a Phase 1 clinical study of enoblituzumab and pembrolizumab, an anti-PD-1 monoclonal antibody, to evaluate the combination in
patients with B7-H3-expressing melanoma, squamous cell carcinoma of the head and neck (SCCHN), NSCLC and urothelial cancer. The combination of
enoblituzumab and checkpoint blockade is designed to engage innate and adaptive immunity to enhance tumor cell killing. A total of 133 patients were
treated in the study and the data cut-off date was October 12, 2018.
As presented in November 2018, in the SCCHN dose expansion cohort, confirmed PRs were observed in 6 of 18 (33%) of patients evaluable for
response who had not previously received anti-PD-1 or anti-PD-L1 therapy. For the subset of patients with B7-H3 tumor expression ≥ 10%, 6 of 15 (40%)
had confirmed PRs. Objective response rates ranging from 13% to 16% have previously been reported in SCCHN patients treated with anti-PD-1 agents
alone. The combination of enoblituzumab and an anti-PD-1 monoclonal antibody demonstrated acceptable tolerability, with any adverse event ≥ Grade 3
occurring in 27.1% of patients as of the October 12, 2018 data cut-off date. The rate of immune-related adverse events experienced in the trial was
comparable to that historically observed by others in patients who received pembrolizumab as monotherapy.
To further inform the development of enoblituzumab, we plan to evaluate the molecule both in combination with MGA012 and in combination with
MGD013 as chemotherapy-free regimens in first-line patients with recurrent and metastatic SCCHN as a lead-in module to a Phase 2/3 study, before
proceeding with one of these combinations in the study.
In July 2019, we licensed the right to develop and commercialize enoblituzumab in mainland China, Hong Kong, Macau and Taiwan to I-Mab
Biopharma (I-Mab). I-Mab plans to both lead regional studies in its territories as well as participate in global studies conducted by MacroGenics.
MGD013
MGD013 is an investigational, first-in-class bispecific DART molecule targeting PD-1 and LAG-3, or lymphocyte-activation gene 3. We have
engineered MGD013 to concomitantly or independently bind to PD-1 and LAG-3 and disrupt these non-redundant inhibitory pathways to further restore
exhausted T-cell function. We are conducting a Phase 1 dose expansion study of MGD013 in up to nine tumor types, including both solid tumors and
hematological malignancies. We expect to select one or more indications for further development and submit data from the ongoing study for presentation at a
scientific conference in the first half of 2020.
Under our November 2018 license and collaboration agreement with Zai Lab, we also licensed to them the right to develop and commercialize
MGD013 in mainland China, Hong Kong, Macau and Taiwan. In February 2020, Zai Lab announced that it had dosed a first patient in a Phase 1b dose
escalation and expansion clinical study of MGD013 in combination with niraparib, a PARP (poly [ADP-ribose] polymerase) inhibitor, for the treatment of
patients with advanced or metastatic GC or GEJ cancer who failed prior treatment.
MGC018
MGC018 is an investigational ADC that is designed to target solid tumors expressing B7-H3. This molecule uses a duocarmycin payload with a
cleavable peptide linker that was licensed from Synthon Biopharmaceuticals. We are conducting a Phase 1 dose escalation study of MGC018. We expect to
complete the dose escalation portion of the study in 2020 and then initiate a focused dose expansion in one or more selected tumor types. In addition,
MacroGenics expects to submit data from the dose escalation cohorts for presentation at a scientific conference in 2020.
MGD019
Approved monoclonal antibodies that target the immune checkpoints PD-1 and CTLA-4, or cytotoxic T-lymphocyte-associated protein 4, have
shown enhanced clinical antitumor activity when given in combination in various cancers, including renal cell carcinoma and NSCLC with high tumor
mutational burden. MGD019 is an investigational, bispecific DART
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molecule in our pipeline that was designed to enable co-blockade of PD-1 and CTLA-4 immune checkpoint molecules co-expressed on T cells. We are
currently evaluating MGD019 in a Phase 1 dose escalation study. We expect to complete the dose escalation portion of the study in 2020 and then initiate a
focused dose expansion in one or more selected tumor types. In addition, MacroGenics expects to submit data from the dose escalation cohorts for
presentation at a scientific conference in 2020.
MGD014
MGD014 is a DART molecule that targets the envelope protein of human immunodeficiency virus (HIV) infected cells (Env) and T cells, via their
CD3 component, to redirect the immune system's T cells to kill HIV-infected cells. DART molecules could be used independently or become a key part of a
"shock-and-kill" strategy in conjunction with HIV latency-reversing agents currently under development. MGD014 is our first clinical DART molecule
designed to target virus-infected cells. A Phase 1 dose escalation study of MGD014 is ongoing. We are developing MGD014 under contract number
HHSN272201500032C awarded to us in September 2015 by the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes
of Health.
Our Therapeutic Area Focus: Cancer
Cancer is a broad group of diseases in which cells divide and grow in an uncontrolled manner, forming malignancies that can invade other parts of
the body. In normal tissues, the rates of new cell growth and cell death are tightly regulated and kept in balance. In cancerous tissues, this balance is disrupted
as a result of mutations, causing unregulated cell division or proliferation that leads to tumor formation and growth. While tumors can grow slowly or rapidly,
the dividing cells will nevertheless accumulate, and the normal organization of the tissue will become disrupted. Cancers subsequently can spread throughout
the body by processes known as invasion and metastasis. Once cancer spreads to sites beyond the primary tumor, it generally becomes more difficult to treat
and may be incurable. Cancer cells that arise in the lymphatic system and bone marrow are referred to as hematological malignancies. Cancer cells that arise
in other tissues or organs are referred to as solid tumors. Cancer can arise in virtually any part of the body, with the most common types arising in the prostate
gland, breast, lung, colon and skin. Cancer is the second leading cause of death in the United States, exceeded only by heart disease. An increasing number of
people are also living longer with cancer.
We believe that our platforms position us very well strategically to actively develop approaches for the treatment of both solid tumors and
hematologic malignancies.
Our Platforms and Technology Expertise
We apply our understanding of disease biology, immune-mediated mechanisms and next generation antibody technologies to design specifically
targeted antibody-based product candidates based on our DART and Fc Optimization platforms. Through these platforms we have designed antibody-based
product candidates that have the potential to improve on standard treatments by having one or more of the following attributes: (1) multiple specificities; (2)
increased abilities to interact with the body's immune system to fight tumors; (3) capacity to bind more avidly to antigen targets: (4) increased potency; (5)
reduced immunogenicity or (6) the ability to target and kill cancer cells that are resistant to standard treatments. Moreover, these technology platforms are
complementary and can be combined to address the complex biology of cancer.
DART and TRIDENT Platforms: Our Proprietary Approach to Engineer Multi-Specific Antibodies
We use our DART platform to create derivatives of antibodies with the ability to bind to two distinct targets instead of a single one found in
traditional monoclonal antibodies. DART product candidates are therefore bispecific. An example of a bispecific molecule from our DART platform is
illustrated below:
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Because cancer cells have developed ways to escape the immune system, we have created DART molecules, which are alternative antibody-like
structures with more potent immune properties than the parent antibody molecules from which they are derived. The two variable regions of an antibody are
mono-specific and are able to target only a single type structural component of an antigen. For many years, researchers have sought to create recombinant
molecules that are capable of targeting two antigens or epitopes (i.e., specific part of an antigen bound by the antibody) within the same molecule. The
challenges in creating such molecules have been the instability of the resulting bispecific molecules and their inherently short half-lives, as well as the
inefficiencies in manufacturing these compounds. We believe our DART platform has overcome these engineering challenges by incorporating proprietary
covalent di-sulfide linkages and particular amino acid sequences that efficiently pair the chains of the DART molecule. This is designed to provide a structure
with enhanced manufacturability, long-term structural stability and the ability to tailor the half-lives of the DART molecules to their clinical needs. This
engineered antibody-like protein has a compact and stable structure and enables the targeting of two different antigens with a single recombinant molecule.
The DART platform has been specifically engineered to accommodate virtually any variable region sequence with predictable expression, folding
and antigen recognition. We believe our multi-specific platforms may provide a significant advantage over current biological interventions in cancer,
autoimmune disorders and infectious disease by enabling a range of modalities, including those described below.
Our DART platform enables us to design multi-specific molecules that seek to exploit different mechanisms of action, including those set forth
below.
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• Redirected T cell activation and killing. In this version of the DART molecule, we are engaging the cancer-
fighting properties of the immune effector cells, such as T lymphocytes to: (1) recognize and bind to proteins
expressed on a cancer cell, or tumor associated antigens (e.g., CD123), (2) enable the recruitment of all types
of cytotoxic, or cell killing, T cells, irrespective of their ability to recognize cancer cells (e.g., CD3, a common
component of the T cell antigen receptor) and (3) trigger T cell activation, expansion, and cell killing
mechanisms to destroy a cancer cell. The outcome is that any of the body's T cells, in theory, could be
recruited to destroy a cancer cell and thus, are not limited to the small numbers of specific T cells that might
have been generated in response to cancer to kill tumor cells. Furthermore, given the design of a DART
molecule, since any T cell could be recruited for this killing process, relatively small amounts of a DART
molecule may be required to trigger this potent immune response. Additionally, the compact structure of the
DART protein makes it well suited for maintaining cell-to-cell contact, which we believe contributes to the
high level of target cell killing. Our DART molecules that redirect T cells against cancer or other targets,
including flotetuzumab, are manufactured using a conventional antibody platform without the complexity of
having to genetically modify T cells from individual patients, as would be required by approaches such as
chimeric antigen receptor (CAR) T cells. We have continued to evolve our bispecific platform with the
introduction of a next-generation CD3-engaging DART technology designed to recruit, engage and activate T
cells to kill tumor target cells with reduced release of pro-inflammatory cytokines. This next-generation CD3
DART platform is aimed at addressing cytokine-release syndrome, the most frequent and often dose-limiting
adverse event associated with CD3-engaging molecules. We believe the next-generation CD3 DART platform
could expand the therapeutic window of CD3-engaing DART molecules and further increase their potential
application in oncology.
• Targeting of multiple co-inhibitory receptors or checkpoints, such as those involved in inhibiting T cell
responses. The immune system generally prevents the development of autoimmune phenomena by regulating
activated immune cells that have responded to non-self or foreign antigens. This negative feedback loop is
triggered by the interactions of co-inhibitory receptors, or checkpoint molecules, expressed on the immune
cells with ligands expressed by other cells, such as antigen-presenting cells. This phenomenon is exploited by
cancer, whereby tumor cells express checkpoint ligands that block the development of an immune response
against the tumor. Antibodies that block the interaction of checkpoint molecules with their ligands have been
shown to significantly improve the clinical outcomes of patients with certain advanced cancers. Because of the
diversity of immune checkpoint pathways, blockade of a single axis, while clinically significant, as shown in
the case of the blockade of the PD-1/PD-L1 axis with pembrolizumab or nivolumab, will not benefit all
patients. In fact, combinations of checkpoint inhibitors, such as nivolumab and ipilimumab, a CTLA-4 blocker,
have resulted in significantly enhanced benefit compared to ipilimumab or nivolumab alone. We believe that
DART molecules targeting two immunoregulatory pathways, such as two checkpoints in a single molecule,
could afford the clinical benefit of the combination together with the potential for synergistic activity, as well
as significant advantages in manufacturing, simplified clinical development, and enhanced patient
convenience.
In addition to the ability to tailor a DART molecule's valency, we have the capacity to modify the strength by which the binding sites attach to their
targets and the molecule's half-life in the blood circulation after delivery to a patient. Furthermore, when an Fc domain is coupled with a DART molecule,
additional changes can be included that can modulate the DART molecule's engagement with different immune cells.
We are currently developing specific product candidates using this technology, including flotetuzumab, MGD013, MGD019 and MGD014 in clinical
trials, as well as others in preclinical development.
We have also advanced beyond our DART platform to establish a TRIDENT platform, which reflects the continuing evolution of our multi-specific
antibody-based targeting expertise. Built on the DART module, the trivalent TRIDENT platform incorporates in an Ig-like format an additional domain
capable of engaging an independent antigen. With the inclusion of a third targeting arm, TRIDENT molecules enable a broader range of mechanisms of action
than bispecific targeting, allowing, for instance, the engagement of multiple antigens on a single or on different cells or enabling enhanced target selectivity
by
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modulating the avidity of one of two antigens. Product candidates using this technology are currently in preclinical development.
Fc Optimization Platform: Our Proprietary Approach to Enhance Immune-Mediated Cancer Cell Killing
To enhance the body's immune ability, we developed our Fc Optimization platform which introduces certain mutations into the Fc region of an
antibody and is able to modulate antibody interaction with immune effector cells. Such interaction enhances the body's immune ability to mediate the killing
of cancer cells through ADCC.
ADCC
The Fc region mediates the function of IgG antibodies by binding to different activating and inhibitory receptors, referred to as FcγRs, on immune
effector cells found within the innate immune system. By engineering Fc regions to bind with an increased affinity to the activating FcγRs and with a reduced
affinity to the inhibitory FcγRs, we have been able to impart a more effective immune response and improve effector functions, such as ADCC. This is
another example in which small changes in antibody structure can confer improvements on normal immune processes.
We have established a proprietary platform to engineer, screen, identify and test antibodies' Fc regions with customizable activity. In particular, we
have licenses to use transgenic mice that express human FcγRs. These mice can be used for in vivo testing of antibodies that incorporate Fc domain variants,
including those antibodies intended for cancer therapy.
To date, we have successfully incorporated our Fc variants in two of our clinical-stage antibody product candidates, margetuximab and
enoblituzumab. We have preclinical data demonstrating that these Fc variants have substantially improved the activity of these antibodies. In addition, clinical
data from our Phase 3 SOPHIA study of margetuximab demonstrated an improvement in PFS over that of trastuzumab, an analog monoclonal antibody with a
wild-type, non-engineered Fc domain.
Our Collaborations
Throughout our company's history, we have entered into collaborations with other biopharmaceutical companies and plan to continue to do so. We
enter into collaborations when there is a strategic advantage to us and when we believe the financial terms of the collaboration are favorable for meeting our
short-term and long-term strategic objectives. We are not dependent upon any one of these collaborations, but in many cases we have rights to receive sales
royalties and other significant financial payments if the partnered product candidates achieve certain development and sales milestones. We endeavor to
establish collaborations that preserve our right to participate in future commercialization, for example by securing co-promotion or profit-sharing rights under
certain circumstances.
We pursue a balanced approach between product candidates that we develop ourselves and those that we develop with our collaborators. Under our
strategic collaborations to date, we have received significant non-dilutive funding and continue to have rights to additional funding upon completion of
certain research, achievement of key product development milestones and royalties and other payments upon the commercial sale of products. Each of our
collaborations has a unique set of terms and conditions.
Intellectual Property
We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patents intended to
protect, for example, the composition of matter of our product candidates, their methods of use, the technology platforms used to generate them, related
technologies and/or other aspects of the inventions that are important to our business. We also rely on trade secrets, confidentiality and invention assignment
agreements and careful monitoring of our
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proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important
technology, inventions and know-how related to our business. In addition, there is cost and risk to our business in defending and enforcing our patents,
maintaining our licenses to use intellectual property owned by third parties and preserving the confidentiality of our trade secrets and operating without
infringing the valid and enforceable patents and other proprietary rights of third parties. We also rely on know-how, continuing technological innovation and
in-licensing opportunities to develop, strengthen and maintain our proprietary positions. We currently use multiple industry-standard patent monitoring
systems to monitor new United States Patent and Trademark Office (USPTO) filings for any applications by third parties that may infringe on our patents.
The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In
addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted by the courts
after issuance. Consequently, we do not know whether any of our product candidates will be protectable or remain protected by enforceable patents. We
cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued
patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged, narrowed, circumvented or invalidated
by third parties.
A third party may hold patents or other intellectual property rights that are important to or necessary for the development of our product candidates
or use of our technology platforms. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our product
candidates, in which case we would be required to obtain a license from these third parties on commercially reasonable terms, or our business could be
harmed, possibly materially. For example, certain patents held by third parties cover Fc engineering methods and mutations in Fc regions to enhance the
binding of Fc regions to Fc receptors on immune cells. Although we believe that these patents are not infringed, invalid, and unenforceable, should a court
find that they cover margetuximab or enoblituzumab and we are unable to invalidate them, or if licenses for them are not available on commercially
reasonable terms, our business could be harmed, perhaps materially.
Because patent applications in the United States and certain other jurisdictions can be maintained in secrecy for 18 months or potentially even
longer, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of
inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the USPTO to determine
priority of invention. In the ordinary course of business we participate in post-grant challenge proceedings, such as oppositions, that challenge the
patentability of third party patents. Such proceedings could result in substantial cost, even if the eventual outcome is favorable to us.
Pipeline Patent Protection
As of December 31, 2019, we held 85 patents in the United States with 50 patent applications pending and 562 patents in other countries of the
world with 619 patent applications pending. In addition to patents and patent applications generally providing protection for various aspects of our Fc
Optimization, DART, and TRIDENT platforms, we have patent and patent applications for the composition of matter of each of our clinical pipeline product
candidates and, in some cases, we also have other patents and patent application related to various aspects of the technology underlying these product
candidates or their methods of use.
Patent terms may be adjusted or extended, as described in greater detail below, in certain circumstances. However, assuming no adjustments or
extensions, the primary composition of matter patent for each of our clinical pipeline product candidates is expected to expire in the following timeframes:
Product Candidate
margetuximab
enoblituzumab
flotetuzumab
MGA012
MGD013
MGD019
MGC018
* pending
Expiration Date
2029
2031
2034
2036*
2036*
2036*
2037*
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Patent Term Extension and Reference Product Exclusivity
The Hatch-Waxman Act permits a patent term extension for FDA-approved drugs, including biological products, of up to five years beyond the
expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot
extend the remaining 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 our pharmaceutical product candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those products. 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 the
applicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and even if
granted, the length of such extensions.
The Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Affordability Reconciliation Act (collectively the
ACA) created a regulatory scheme authorizing the FDA to approve biosimilars via an abbreviated licensure pathway. In many cases, this allows biosimilars to
be brought to market without conducting the full suite of clinical trials typically required of originators. Under the ACA, a manufacturer may submit an
application for licensure of a biologic product that is "biosimilar to" or "interchangeable with" a previously approved biological product or "reference
product." The "biosimilar" application must include specific information demonstrating biosimilarity based on data derived from: (1) analytical studies, (2)
animal studies, and (3) a clinical study or studies that are sufficient to demonstrate safety, purity, and potency in one or more appropriate conditions of use for
which the reference product is licensed, except that FDA may waive some of these requirements for a given application. Under this new statutory scheme, an
application for a biosimilar product may not be submitted to the FDA until four years after the date of first licensure. The FDA may not approve a biosimilar
product until 12 years from the date on which the reference product was first licensed. The law does not change the duration of patents granted on biological
products. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product
if the FDA approves a full BLA for such product containing the sponsor's own preclinical data and data from adequate and well-controlled clinical trials to
demonstrate the safety, purity and potency of their product. There have been recent proposals to repeal or modify the ACA and it is uncertain how any of
those proposals, if approved, would affect these provisions.
Trade Secrets
We also rely on trade secret protection for our confidential and proprietary information. Although we take steps to protect our proprietary
information and trade secrets, including through contractual means with our employees and consultants, third parties may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. Thus, we may not be able to
meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other
advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all
confidential information concerning our business or financial affairs developed or made known to the individual during the course of the individual's
relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual, and which are related to our current or planned business or research and development or made during
normal working hours, on our premises or using our equipment or proprietary information, are our exclusive property. In many cases our confidentiality and
other agreements with consultants, outside scientific collaborators, sponsored researchers and other advisors require them to assign or grant us licenses to
inventions they invent as a result the work or services they render under such agreements or grant us an option to negotiate a license to use such inventions.
In-Licensed Intellectual Property
We have entered into patent and know-how license agreements that grant us the rights to use certain technologies related to biological manufacturing
for our clinical product candidates. We anticipate using these technologies for future product candidates. These licensors have businesses dedicated to
licensing this type of technology and we anticipate that licenses to use these technologies for our future products will be available. The licenses typically
include yearly maintenance payments and sales royalties, and may also include upfront payments or milestone payments.
Manufacturing
We currently manufacture our drug substance for our clinical trials at our manufacturing facilities located in Rockville, Maryland. For several of our
antibody product candidates, we have supplemented our drug substance manufacturing capacity through an arrangement with AGC Biologics, Inc. (AGC,
formerly CMC Biologics, Inc.), a contract manufacturing organization, and plan to commercially produce margetuximab at AGC assuming approval of
margetuximab. We also intend to commercially produce material for our product candidates, when and if approved by the FDA. In addition, we currently rely
on
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and will continue to rely on contract fill-finish service providers, primarily Ajinomoto Bio-Pharma Services and Baxter Healthcare Corporation, to fulfill our
fill-finish needs for our current and future product candidates.
Most of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw
materials principally from only one source. In the event one of these suppliers was unable to provide the materials or product, we generally seek to maintain
sufficient inventory to supply the market until an alternative source of supply can be implemented. However, in the event of an extended failure of a supplier,
it is possible that we could experience an interruption in supply until we established new sources or, in some cases, implemented alternative processes.
Production processes for biological therapeutic products are complex, highly regulated, and vary widely from product to product. Shifting or adding
manufacturing capacity can be a very lengthy process requiring significant capital expenditures, process modifications, and regulatory approvals.
Accordingly, if we were to experience extended plant shutdowns at one of our own facilities, extended failure of a contract supplier or contract manufacturing
organization, or extraordinary unplanned increases in demand, we could experience an interruption in supply of certain products or product shortages until
production could be resumed or expanded.
Commercialization
We currently have no approved products in the United States or any country. We cannot market or promote a new product in a country until a
marketing application has been approved by the appropriate regulatory authority for that jurisdiction. Subject to receiving marketing authorization in a
jurisdiction, we believe we will be able to commercialize in that market through arrangements with third-party commercial partners. We currently have not
established a sales, marketing or distribution infrastructure. If we are unable to enter into a third-party commercial arrangement with respect to the United
States, we believe that we could potentially put in place an appropriately sized organization to commercialize our approved product or products. Outside the
United States, our strategy is to enter into arrangements with third-party commercial partners for any of our product candidates that obtain marketing
approval.
Competition
There are a large number of companies developing or marketing treatments for cancer, including many major pharmaceutical and biotechnology
companies. These treatments consist both of small molecule drug products, as well as biologic therapeutics that work by using next-generation antibody
technology platforms to address specific cancer targets. In particular, margetuximab is directed against HER2 and several companies have cancer therapeutics
directed against HER2 that are either currently approved and on the market or in development, such as F. Hoffmann-La Roche Ltd and Hoffmann-La Roche
Inc. (Roche), particularly through its affiliate, Genentech, Inc., as well as Puma Biotechnology, Inc., Daiichi Sankyo Company, Limited and AstraZeneca plc.
(AstraZeneca), Seattle Genetics Inc., Zymeworks, Inc., and Synthon Biopharmaceuticals, many of which have significantly greater resources than we do.
Market competition may limit the utilization of margetuximab as a therapeutic, even if market approval and adequate reimbursement is obtained, and
competition among development-stage programs for patients enrolling in clinical trials for HER2-directed therapies may delay expected timelines for our
clinical trials.
In addition, the immuno-oncology field is competitive, with treatments currently approved and on the market or in development for various tumor
types and patient populations from a variety of different companies such as Merck & Co., Inc. (Merck), The Bristol-Myers Squibb Company (BMS), and
Roche, all of which have significantly greater resources than we do. Many of our pipeline programs, if successful, will likely face significant competition both
by therapeutics that are already being marketed as well as those that will be approved for marketing before our programs. In particular, we are developing PD-
1-directed product candidates, including a monoclonal antibody that we have outlicensed and two DART molecules. Merck, BMS, Roche, AstraZeneca,
Pfizer Inc. and Merck KGaA, and Regeneron Pharmaceuticals, Inc. all have approved products that target either the PD-1 receptor or its ligand, PD-L1, and
there are several other companies that have anti-PD-1 or anti-PD-L1 antibodies in clinical development, all of which would compete with our PD-1-directed
programs. In addition, these and other companies are developing product candidates directed against other immuno-oncology targets that we are pursuing
through our bispecific approaches.
Finally, several companies are also developing therapeutics that work by targeting multiple specificities using a single recombinant molecule. Amgen
Inc. has obtained marketing approval for one product that works by targeting antigens both on immune effector cell populations and those expressed on
certain cancer cells, and has other product candidates in development that use this mechanism. In addition, other companies are developing new treatments for
cancer that utilize multi-specific approaches, including Abbvie Inc., Affimed Therapeutics AG Corporation, Eli Lilly and Company, Genmab A/S, Merus
B.V., Regeneron, Roche, Astra Zeneca, Xencor, Inc. and Zymeworks, Inc.
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Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we
do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a
smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies. These competitors also compete with us in recruiting and retaining top qualified scientific and
management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or
necessary for, our programs.
The key competitive factors affecting the success of all of our therapeutic product candidates, if approved, are likely to be their efficacy, safety,
dosing convenience, price, the effectiveness of companion diagnostics in guiding the use of related therapeutics, the level of generic or biosimilar competition
and the availability of reimbursement from government and other third-party payors. In addition, the standard of medical care provided to cancer patients
continues to evolve as more scientific and medical information becomes available. These changes in medical care relate to pharmaceutical products, but are
also affected by other factors, and such changes can positively or negatively affect the prospects of our product candidates as well as those of our competitors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are more effective, have
fewer or less severe effects, are more convenient or are less expensive than any products that we may develop, or the standards of care for cancer patients
change while our clinical trials are ongoing. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may
obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our
ability to compete may be affected in many cases by insurers or other third party payors seeking to encourage the use of biosimilar products. Biosimilar
products are expected to become available over the coming years. For example, trastuzumab biosimilars have been approved in the U.S. by FDA.
The most common methods of treating patients with cancer are surgery, radiation and drug therapy. There are a variety of available drug therapies
marketed for cancer. Many of these approved drugs are well established therapies and are widely accepted by physicians, patients and third party payors. In
many cases, these drugs are administered in combination to enhance efficacy. While our product candidates may compete with many existing drug and other
therapies, to the extent an approved drug is ultimately used in combination with or as an adjunct to these therapies, our product candidates will not be
competitive with the approved drug.
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the
research, development, testing, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export
of pharmaceutical products such as those we are developing. The processes for obtaining regulatory approvals in the United States and in foreign countries,
along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.
FDA Regulation
All of our current product candidates are subject to regulation in the United States by the FDA as biological products (biologics). The FDA subjects
biologics to extensive pre- and post-market regulation. The Public Health Service Act, the Federal Food, Drug, and Cosmetic Act (FDCA) and other federal
and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling,
promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of biologics. Failure to comply with
applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending BLAs,
withdrawal of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, civil penalties, or criminal penalties.
Preclinical Studies. Drug development in our industry is complex, challenging and risky; failure rates are high. Product development cycles are long
- approximately 10 to 15 years from discovery to market. A potential new biological product must undergo many years of preclinical and clinical testing to
establish it is pure, potent and safe.
Preclinical studies include laboratory evaluation of product chemistry, formulation and toxicity, pharmacology, as well as animal trials to assess the
characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements
including FDA's good laboratory practice (GLP) regulations and the U.S. Department of Agriculture's regulations implementing the Animal Welfare Act.
After laboratory analysis and preclinical testing in animals, we file an Investigational New Drug (IND) application with the FDA to begin human testing. An
IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available
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clinical data or literature, and a proposed clinical trial protocol, among other things, to the FDA as part of an IND application. Certain preclinical tests, such
as animal tests of reproductive toxicity and carcinogenicity, may continue even after the IND application is submitted. An IND application automatically
becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical
trials and places the clinical trial on a clinical hold or agrees on an alternate approach with us. In such a case, the IND sponsor and the FDA must resolve any
outstanding concerns before the clinical trial can begin. As a result, submission of an IND application may not result in the FDA allowing clinical trials to
commence.
Clinical Development. Clinical trials involve the administration of the investigational drug to human subjects (healthy volunteers or patients) under
the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with all applicable federal regulations and guidance, including
those pertaining to good clinical practice (GCP) standards that are meant to protect the rights, safety, and welfare of human subjects and to define the roles of
clinical trial sponsors, investigators, and monitors; as well as (ii) under protocols detailing, among other things, the objectives of the trial, the parameters to be
used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing of a new drug in the United States (whether in
patients or healthy volunteers) must be included in the IND application submission, and FDA must be notified of subsequent protocol amendments. In
addition, the protocol must be reviewed and approved by an institutional review board (IRB) and all study subjects must provide informed consent prior to
participating in the study. Typically, each institution participating in the clinical trial will require review of the protocol before any clinical trial commences at
that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health (NIH) for public
dissemination on their ClinicalTrials.gov website. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA
and there are additional, more frequent reporting requirements for suspected unexpected serious adverse events.
A study sponsor might choose to discontinue a clinical trial or a clinical development program for a variety of reasons. The FDA may impose a
temporary or permanent clinical hold, or other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA
requirements or presents an unacceptable risk to the clinical trial subjects. An IRB may also require the clinical trial at the site to be halted, either temporarily
or permanently, for failure to comply with the IRB's requirements, or may impose other conditions.
Clinical trials to support BLAs for marketing approval are typically conducted in three pre-approval phases, but the phases may overlap or be
combined, particularly in testing for oncology indications. In Phase 1, testing is conducted in a small group of subjects who may be patients with the target
disease or condition or healthy volunteers, to evaluate its safety, determine a safe dosage range, and identify side effects. In Phase 2, the drug is given to a
larger group of subjects with the target condition to further evaluate its safety and gather preliminary evidence of efficacy. Phase 3 studies typically last
multiple years for oncology indications. In Phase 3, the drug is given to a large group of subjects with the target disease or condition (several hundred to
several thousand), often at multiple geographical sites, to confirm its effectiveness, monitor side effects, and collect data to support drug approval. In some
cases, FDA may require post-market studies, known as Phase 4 studies, to be conducted as a condition of approval in order to gather additional information
on the drug's effect in various populations and any side effects associated with long-term use. Depending on the risks posed by the drugs, other post-market
requirements may be imposed. Only a small percentage of investigational drugs complete all three phases and obtain marketing approval.
Product Approval. After completion of the required clinical testing, a BLA can be prepared and submitted to the FDA. FDA approval of the BLA is
required before marketing of the product may begin in the United States. The BLA must include the results of preclinical, clinical and other testing and a
compilation of data relating to the product's chemistry, manufacture and controls. The cost of preparing and submitting a BLA is substantial. Under federal
law, the submission of most BLAs is additionally subject to a substantial application user fee, and annual program user fees also apply. These fees are
typically increased annually.
The FDA has 60 days from its receipt of a BLA to determine whether the application will be accepted for filing based on the FDA's threshold
determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins a substantive review,
and the review period under the Prescription Drug User Fee Act begins. The standard for reviewing a BLA is whether the product is safe, pure and potent,
which has been interpreted to include that the product is safe and effective and has a favorable benefit-risk profile. FDA's current performance goals call for
FDA to complete review of 90 percent of standard (non-priority) BLAs within 10 months of filing and within six months for priority BLAs, which is 12
months and eight months, respectively, if the 60-day review of the initial application is included in the timeline. In addition, the FDA has developed
approaches intended to make certain qualifying products available to patients rapidly - Priority Review, Breakthrough Therapy, Accelerated Approval, and
Fast Track. While the timelines for approval under these pathways may be shorter, there are requirements and conditions associated with each pathway, and
there can be no assurance that any of our investigational products will be able to meet the conditions or requirements necessary to receive any such
designation or be able to receive the review or approval benefits associated with such designations.
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The FDA may refer applications for novel products or products that present difficult questions of safety or efficacy to an advisory committee,
typically a panel that includes outside clinicians and other experts, for review, evaluation and a recommendation as to whether sufficient data exist in the
application to support product approval. The FDA is not bound by the recommendation of an advisory committee, but it generally gives significant deference
to such recommendations.
Before approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will
typically inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMPs is
satisfactory. FDA also reviews the proposed labeling submitted with the BLA and typically requires changes in the labeling text.
After the FDA evaluates the BLA and the manufacturing and testing facilities, it issues either an approval letter or a complete response letter.
Complete response letters generally outline the deficiencies in the submission and delineate the additional testing or information needed in order for the FDA
to reconsider the application. If and when deficiencies outlined in a complete response letter have been addressed to the FDA's satisfaction in a resubmission
of the BLA, the FDA will issue an approval letter. The FDA has committed to reviewing 90 percent of resubmissions within two or six months from receipt
depending on the type of information included.
An approval letter authorizes commercial marketing of the drug for the approved indication or indications and the other conditions of use set out in
the approved prescribing information. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or
problems are identified following initial marketing.
As a condition of BLA approval, the FDA may require substantial post-approval testing and surveillance to monitor the drug's safety or efficacy and
may impose other conditions, including labeling restrictions that can materially affect the potential market and profitability of the product. As a condition of
approval, or after approval, the FDA also may require submission of a risk evaluation and mitigation strategy (REMS) to mitigate any identified or suspected
serious risks. The REMS may include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as
restricted distribution methods, patient registries, or other risk minimization tools.
Other U.S. Post-Marketing Regulatory Requirements. Once a BLA is approved, a product will be subject to certain post-approval requirements,
including those relating to advertising, promotion, adverse event reporting, recordkeeping, and cGMPs, as well as registration, listing, and inspection. There
also are continuing, annual program user fee requirements for marketed products, as well as new application fees for supplemental applications with clinical
data.
FDA regulates the content and format of prescription drug labeling, advertising, and promotion, including direct-to-consumer advertising and
promotional Internet communications. FDA also establishes parameters for permissible non-promotional communications between industry and the medical
community, including industry-supported scientific and educational activities. The FDA and other agencies actively enforce the laws and regulations
prohibiting the promotion for uses not consistent with the approved labeling, and a company that is found to have improperly promoted off-label uses or
otherwise not to have met applicable promotion rules may be subject to significant liability under both the FDCA and other statutes, including the False
Claims Act. See "Other Healthcare Laws and Compliance Requirements" below for more information.
All aspects of pharmaceutical manufacture must conform to cGMPs after approval. Drug manufacturers and certain of their subcontractors are
required to register their establishments with FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA during which
the FDA inspects manufacturing facilities to assess compliance with cGMPs. Changes to the manufacturing process are strictly regulated and often require
prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMPs and impose
reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly,
manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs.
Products may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the
conditions established in an approved application, including changes in indications, labeling, product formulation or manufacturing processes or facilities,
require submission and FDA approval of a new BLA or BLA supplement, in some cases before the change may be implemented. A BLA supplement for a
new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA
supplements as it does in reviewing BLAs.
Manufacturers are subject to requirements for adverse event reporting and submission of periodic reports following FDA approval of a BLA. Later
discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes,
or failure to comply with regulatory requirements, or failure of Phase 4 studies to meet their specified endpoints, may result in revisions to the approved
labeling to add new safety
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information, the need to conduct additional post-market studies or clinical trials to assess new safety risks, imposition of distribution or other restrictions
under a REMS program, or recall of the product and withdrawal of the BLA.
Noncompliance with postmarket requirements can result in one or more of the following consequences:
•
Restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
• Warning letters;
• Holds on post-approval clinical trials;
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Refusal of the FDA to approve pending BLAs or supplements to approved BLAs, or suspension or revocation of product license approvals;
Product seizure or detention, or refusal to permit the import or export of products; or
Injunctions or the imposition of civil or criminal penalties.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act (PDMA) which regulates the
distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states.
Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in
distribution.
Approval of Biosimilars. The ACA authorized the FDA to approve biosimilars via a separate, abbreviated pathway. In many cases, this allows
biosimilars to be brought to market without conducting the full suite of clinical trials typically required of originators. The law establishes a period of 12 years
of exclusivity for reference products in order to preserve incentives for future innovation, and outlines statutory criteria for science-based biosimilar approval
standards that take into account patient safety considerations. Under this framework, exclusivity protects innovator products by prohibiting others, for a
period of 12 years, from being granted FDA approval based in part on reliance on or reference to the innovator's data in their application to the FDA. The law
does not change the duration of patents granted on biological products. There are regular legislative proposals to rescind or reduce the biologics exclusivity
provisions of the ACA and it is uncertain whether or if any of those proposals may be approved, and if approved, how exclusivity for biologics would be
affected.
Other Healthcare Laws and Compliance Requirements
In the United States, our activities are potentially subject to regulation by federal, state, and local authorities in addition to the FDA, including the
Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General),
the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments.
For example, certain financial interactions with healthcare professionals may be subject to the anti-kickback and fraud and abuse provisions of the
Social Security Act and the False Claims Act, and in addition our activities may be affected by the privacy regulations issued under the Health Insurance
Portability and Accountability Act, as amended, and similar state laws.
International Regulation
In addition to regulations in the United States, we and our collaborators, may be subject to a variety of foreign regulations governing clinical trials,
drug registration, commercial sales and distribution of our product candidates outside the United States. These regulations can vary between jurisdictions and
can be more onerous than regulations in the United States. Whether or not we obtain FDA approval for a product candidate, we must obtain approval from the
comparable regulatory authorities of foreign countries or economic areas, such as the European Union (EU) before we may commence clinical trials or
market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from place to place, and the time to approval may be longer or shorter than that required for FDA approval.
Certain countries outside of the United States have a process that requires the submission of a clinical trial application (CTA) much like an IND prior
to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to the competent national health authority and to
independent ethics committees in each country in which a company intends to conduct clinical trials. Once the CTA is approved in accordance with a
country’s requirements, clinical trial development may proceed in that country. In all cases, the clinical trials must be conducted in accordance with GCP, and
other applicable regulatory requirements. A separate CTA must be submitted for each clinical trial to be conducted.
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In the EU, for example, to obtain regulatory approval of an investigational medicinal product, we must submit a marketing authorisation application
(MAA). The content of the MAA is similar to that of a New Drug Application or BLA filed in the United States, with the exception of, among other things,
EU-specific document requirements. Under the EU regulatory system, a company may submit marketing authorisation applications either under a centralised
or decentralised procedure. Under the centralised procedure in the EU, a MAA is submitted to the European Medicines Agency (EMA) where it will be
evaluated by the Committee for Medicinal Products for Human Use (CHMP). The maximum timeframe for a CHMP evaluation of an MAA that has been
validated is 210 days, excluding time taken by an applicant to respond to questions. A favorable opinion on the application by the CHMP will typically result
in the granting of the marketing authorisation by the European Commission within 67 days of receipt of the opinion. Generally, the entire review process
takes approximately 13-14 months. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be
of a major public health interest, particularly from the point of view of therapeutic innovation. In this circumstance, the EMA ensures that the opinion of the
CHMP is given within 150 days, excluding time taken by an applicant to respond to questions.
As in the United States, we or our collaborators may apply for designation of a product as an orphan drug for the treatment of a specific indication in
the EU before the MAA is made. Orphan drugs in Europe enjoy certain benefits, including up to 10 years of exclusivity for the approved indication unless
another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product. The PRIority MEdicines
(PRIME) initiative was established by the EMA to help promote and foster the development of new medicines in the EU that demonstrate potential for a
major therapeutic advantage in areas of unmet medical need. Benefits from the PRIME designation include early confirmation of potential for accelerated
assessment, early dialogue and increased interaction with relevant regulatory committees to discuss development options, scientific advice at key
development milestones, and proactive regulatory support from the EMA.
If we, or our collaborators, fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
BioPharmaceutical Coverage, Pricing, and Reimbursement
In the United States and other countries, sales of any future products for which we receive regulatory approval for commercial sale will depend in
part on the availability of adequate reimbursement from third-party payors, including government health administrative authorities, managed care providers,
private health insurers, and other organizations. Third-party payors are increasingly examining the medical necessity and cost effectiveness of medical
products and services in addition to safety and efficacy and, accordingly, significant uncertainty exists as to the reimbursement status of newly approved
therapeutics. Third-party reimbursement adequate to enable us to realize an appropriate return on our investment in research and product development may
not be available or optimal for our products.
Drug prices have become a subject of increased focus in recent years. Although there are currently no direct government price controls over private
sector purchases in the U.S., federal law requires pharmaceutical manufacturers to pay prescribed rebates on certain government or Medicaid-reimbursed
drugs to enable them to be eligible for reimbursement under certain public healthcare programs such as Medicaid and Medicare Part B. Various states have
adopted further mechanisms that seek to control drug prices, including by disfavoring certain higher priced drugs or by seeking supplemental rebates from
manufacturers. Managed care has also become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products.
Public and private healthcare payers control costs and influence drug pricing through a variety of mechanisms, including through negotiating
discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others
within a therapeutic class. Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or
otherwise covered.
Employees
As of February 21, 2020, we had 384 full-time employees, 328 of whom were primarily engaged in research and development activities and 76 of
whom had an M.D. or Ph.D. degree.
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Available Information
Our website address is www.macrogenics.com. We post links to our website to the following filings as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended. All such filings are available through our website free of charge. In addition, the SEC makes available at its website
(www.sec.gov), free of charge, reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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ITEM 1A. RISK FACTORS
Our business, uncertainties and other factors described below could have a materially adverse effect on our business, financial condition or results of
operations and could cause the trading price of our common stock to decline substantially.
Risks Related to Our Business and the Development and Commercialization of Our Product Candidates.
All of our product candidates are in preclinical or clinical development. Clinical drug development is expensive, time consuming and uncertain and we
may ultimately not be able to obtain regulatory approvals for the commercialization of some or all of our product candidates.
The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by
the U.S. Food and Drug Administration (FDA) and non-U.S. regulatory authorities, which regulations differ from country to country. We are not permitted to
market our product candidates in the United States or in other countries until we receive approval of a Biologics License Application (BLA) from the FDA or
marketing approval from applicable regulatory authorities outside the United States. Our product candidates are in various stages of development and are
subject to the risks of failure inherent in drug development. For example, we submitted a BLA for the approval of margetuximab to the FDA in December of
2019. Obtaining approval of a BLA can be a lengthy, expensive and uncertain process, and as a company we had no experience with the preparation of a BLA
submission or any other application for marketing approval. In addition, failure to comply with FDA and non-U.S. regulatory requirements may, either before
or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including:
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restrictions on our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;
restrictions on the products, manufacturers, manufacturing facilities or manufacturing process;
• warning letters;
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civil and criminal penalties;
injunctions;
suspension or withdrawal of regulatory approvals;
product seizures, detentions or import bans;
voluntary or mandatory product recalls and publicity requirements;
total or partial suspension of production;
imposition of restrictions on operations, including costly new manufacturing requirements; and
refusal to approve pending BLAs or supplements to approved BLAs or analogous marketing approvals outside the United States.
The FDA and foreign regulatory authorities also have substantial discretion in the drug approval process. The number of preclinical studies and clinical trials
that will be required for regulatory approval varies depending on the product candidate, the disease or condition that the product candidate is designed to
address, and the regulations applicable to any particular drug candidate. Regulatory agencies can delay, limit or deny approval of a product candidate for
many reasons, including:
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a product candidate may not be deemed safe or effective;
the results may not confirm the positive results from earlier preclinical studies or clinical trials;
regulatory agencies may not find the data from preclinical studies and clinical trials sufficient or meaningful;
regulatory agencies might not approve or might require changes to our manufacturing processes or facilities; or
regulatory agencies may change their approval policies or adopt new regulations.
Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenue from the particular product
candidate, which likely would result in significant harm to our financial position and adversely
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impact our stock price. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may
market the product. These limitations may limit the size of the potential market for a product candidate, if approved.
If clinical trials for our product candidates are prolonged, delayed or stopped, for any reason, we may be unable to obtain regulatory approval and
commercialize our product candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any product revenue.
We are either currently enrolling patients in clinical trials or anticipate initiating or continuing clinical trials for molecules that include
margetuximab, enoblituzumab, flotetuzumab, MGA012, MGC018, MGD013, MGD014, and MGD019, as monotherapies or in combination with other
product candidates in 2020. In addition, our collaborators are currently enrolling patients in clinical trials for MGA012, which is being developed by Incyte
Corporation, and we anticipate our collaborators will initiate or continue clinical trials including our other product candidates, The commencement of new
clinical trials could be substantially delayed or prevented by several factors, including:
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further discussions with the FDA or other regulatory agencies regarding the scope or design of our clinical trials;
the limited number of, and competition for, suitable sites to conduct our clinical trials, many of which may already be engaged in other clinical
trial programs, including some that may be for the same indication as our product candidates;
any delay or failure in patient recruitment or enrollment in our or our collaborators’ trials for any reason, including as a result of public health
crises such as the coronavirus outbreak in 2020;
any delay or failure to obtain regulatory approval or agreement to commence a clinical trial in any of the countries where enrollment is planned;
inability to obtain sufficient funds required for a clinical trial;
clinical holds on, or other regulatory objections to, a new or ongoing clinical trial;
delay or failure to manufacture sufficient supplies of the product candidate for our clinical trials;
delay or failure to reach agreement on acceptable clinical trial terms or clinical trial protocols with prospective sites or clinical research
organizations (CROs) the terms of which can be subject to extensive negotiation and may vary significantly among different sites or CROs; and
delay or failure to obtain institutional review board (IRB) approval to conduct a clinical trial at a prospective site.
The progress or completion of our, or our collaborators', clinical trials could also be substantially delayed or prevented by many factors, including:
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delays in expected site initiation, patient recruitment and enrollment;
failure of patients to complete the clinical trial;
unforeseen safety issues, including severe or unexpected drug-related adverse effects experienced by patients, including possible deaths;
lack of efficacy during clinical trials;
termination of our clinical trials by one or more clinical trial sites;
inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols;
inability to monitor patients adequately during or after treatment by us, our collaboration partners and/or our CROs; and
the need to repeat or terminate clinical trials as a result of inconclusive or negative results or unforeseen complications in testing.
Changes in regulatory requirements and guidance may also occur and we may need to significantly amend clinical trial protocols to reflect these
changes with appropriate regulatory authorities. Amendments may require us to renegotiate terms with
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CROs or resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. Our
clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the IRB overseeing the clinical trial at issue, any of our
clinical trial sites with respect to that site, or us, due to a number of factors, including:
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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks;
lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and
upon a breach or pursuant to the terms of any agreement with, or for any other reason by, current or future collaborators that have responsibility
for the clinical development of any of our product candidates.
Clinical trials of our product candidates are subject to partial or full clinical holds from time to time. For example, between December 2018 and
January 2019, the FDA imposed a partial clinical hold on our Phase 1 monotherapy study of MGD009, as well as on a combination study of MGD009 and
MGA012, which hold was later removed. A clinical hold may delay the timing of a clinical trial, or may require us to modify or discontinue such trial. Any
failure or significant delay in completing clinical trials for our product candidates would adversely affect our ability to obtain regulatory approval and our
commercial prospects and ability to generate product revenue will be diminished.
The results of previous clinical trials may not be predictive of future results, and interim or top line data may be subject to change or qualification based
the complete analysis of data. In addition, the results of our current and planned clinical trials may not satisfy the requirements of the FDA or non-U.S.
regulatory authorities.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any of our
current and future collaborators may decide, or regulators may require us, to conduct additional clinical or preclinical testing. Success in early clinical trials
does not mean that future larger registration clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate
sufficient safety and efficacy to the satisfaction of the FDA and non-U.S. regulatory authorities despite having progressed through initial clinical trials. A
number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in
advanced clinical trials, even after obtaining promising results in earlier clinical trials.
We may publicly disclose top line or interim data from time to time, which is based on a preliminary analysis of then-available data, and the results
and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. For
example, in October 2019 we announced second interim overall survival data for the SOPHIA trial of margetuximab for the treatment of certain metastatic
breast cancer patients. The top line or interim results that we report may differ from future results of the same studies, or different conclusions or
considerations may qualify such results, once additional data have been received and fully evaluated. Top line and interim data also remain subject to audit
and verification procedures that may result in the final data being materially different from the preliminary data we previously published. In addition, the
achievement of one primary endpoint for a trial does not guarantee that additional co-primary endpoints or secondary endpoints will be achieved. For
example, the achievement by margetuximab of its first sequential endpoint for progression-free survival events in the SOPHIA trial does not indicate whether
the second sequential endpoint of overall survival will be achieved. In particular, the second interim overall survival analysis, based on 270 events, did not
show statistically significant results. We currently expect to receive final overall survival results in the second half of 2020, and such results may not show
statistical significance. Failure to achieve statistical significance in this second sequential endpoint of overall survival in the SOPHIA trial may have an
adverse effect on our ability to obtain or retain regulatory approval of margetuximab in the U.S. or in other jurisdictions.
Further, our product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials or registration trials. For
example, we submitted a BLA to the FDA for margetuximab in December 2019. We expect the BLA to be subject to a 12-month target review period from
the time of FDA acceptance of the BLA for filing. We also expect that the FDA will convene an advisory committee meeting to discuss the application, and
the FDA will take the recommendation of the advisory committee into account in assessing the application. Regardless of any advisory committee
recommendation, FDA may decline to approve the BLA for a number of reasons including, if the clinical benefit, safety profile or effectiveness of the drug is
not deemed by the FDA to warrant approval. The FDA or other non-U.S. regulatory authorities may disagree with our trial design for SOPHIA or other trials,
and our interpretation of data from preclinical studies and clinical trials. In particular, the FDA may not view our data as being clinically meaningful or
statistically persuasive. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing
and providing comments or advice on a protocol for a pivotal Phase 3 clinical trial. Any of these regulatory authorities may also approve a product candidate
for fewer or more limited indications than we request or may grant approval contingent on the
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performance of costly post-marketing clinical trials. The FDA or other non-U.S. regulatory authorities may not approve the labeling claims that we believe
would be necessary or desirable for the successful commercialization of our product candidates.
We use new technologies in the development of our product candidates and the FDA and other regulatory authorities have not approved products that
utilize these technologies.
Our products in development are based on our technology platforms, including Fc Optimization, DART and TRIDENT technologies. Given the
novelty of these technologies, we intend to work closely with the FDA and other regulatory authorities to perform the requisite scientific analyses and
evaluation of our methods to obtain regulatory approval for our product candidates. The validation process takes time and resources, may require independent
third-party analyses, and may not be accepted by the FDA and other regulatory authorities. For some of our product candidates that are based on these
technology platforms, the regulatory approval path and requirements may not be clear or evolve as more data becomes available for this product candidates,
which could add significant delay and expense. Delays or failure to obtain regulatory approval of any of the product candidates that we develop would
adversely affect our business.
We may not be successful in our efforts to use and expand our technology platforms to build a pipeline of product candidates. We may expend our limited
resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or
for which there is a greater likelihood of success.
A key element of our strategy is to use and expand our technology platforms to build a pipeline of product candidates and progress these product
candidates through clinical development for the treatment of a variety of different types of diseases. Although our research and development efforts to date
have resulted in a pipeline of product candidates directed at various cancers, as well as autoimmune disorders and infectious diseases, we may not be able to
develop product candidates that are safe and effective. Even if we are successful in continuing to build our pipeline, the potential product candidates that we
identify may not be suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics that indicate
that they are unlikely to be products that will receive marketing approval and achieve market acceptance. If we do not continue to successfully develop and
begin to commercialize product candidates, we will face difficulty in obtaining product revenues in future periods, which could result in significant harm to
our financial position and adversely affect our stock price.
Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific
indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater
commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.
Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially
viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable
rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us
to retain sole development and commercialization rights.
Even if we obtain FDA approval of any of our product candidates, we and/or our collaboration partners may never obtain approval or commercialize our
products outside of the United States, which would limit our ability to realize their full market potential.
In order to market any products outside of the United States, we and our current and potential collaboration partners must establish and comply with
numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted
by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other
country. Approval procedures vary among countries and may require additional preclinical studies or clinical trials or additional administrative review
periods, which could result in significant delays, difficulties and costs for us. In addition, our failure to obtain regulatory approval in any country may delay or
have negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in any jurisdiction,
including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory
requirements in international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market
potential of our products will be harmed.
Our product candidates may have undesirable side effects which may delay or prevent further clinical development or marketing approval, or, if approval
is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.
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Although all of our product candidates have undergone or will undergo safety testing, not all adverse effects of drugs can be predicted or anticipated.
Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved by regulatory authorities, after the
approved product has been marketed. All of our product candidates are still in clinical or preclinical development. Ongoing or future trials of our product
candidates may not support the conclusion that one or more of these product candidates have acceptable safety profiles. The results of future clinical or
preclinical trials may show that our product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and
result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and
other regulatory authorities with restrictive label warnings or potential product liability claims.
If any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such
products:
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regulatory authorities may require us to take our approved product off the market;
regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and
pharmacies;
• we may be required to change the way the product is administered, impose other risk-management measures, conduct additional clinical trials or
change the labeling of the product;
• we may be subject to limitations on how we may promote the product;
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sales of the product may decrease significantly;
• we may be subject to litigation or product liability claims; and
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our reputation may suffer.
Any of these events could prevent us, our collaborators or our potential future partners from achieving or maintaining market acceptance of the
affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant
revenue from the sale of our products.
Even if approved, if any of our product candidates do not achieve broad market acceptance among physicians, patients, the medical community, and
third-party payors our revenue generated from their sales will be limited.
The commercial success of our product candidates will depend upon their acceptance among physicians, patients, the medical community, and third-
party payors. The degree of market acceptance of our product candidates will depend on a number of factors, including:
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limitations or warnings contained in the approved labeling for a product candidate;
changes in the standard of care for the targeted indications for any of our product candidates;
limitations in the approved clinical indications for our product candidates;
demonstrated clinical safety and efficacy compared to other products;
lack of significant adverse side effects;
sales, marketing and distribution support;
availability and extent of reimbursement from managed care plans and other third-party payors;
timing of market introduction and perceived effectiveness of competitive products;
the degree of cost-effectiveness of our product candidates;
availability of alternative therapies at similar or lower cost, including generic and over-the-counter products;
the extent to which the product candidate is approved for inclusion on formularies of hospitals and managed care organizations;
• whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular
diseases;
adverse publicity about our product candidates or favorable publicity about competitive products;
convenience and ease of administration of our products; and
potential product liability claims.
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If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, patients, the medical community,
and third party payors, we may not generate sufficient revenue from these products, and we
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may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates
may require significant resources and may never be successful.
The manufacture of our product candidates, for ourselves and our collaborators, is complex, and we may encounter difficulties in production. If we
encounter any such difficulties, our ability to supply our product candidates for clinical trials or, if approved, for commercial sale could be delayed or
halted entirely, and our business, financial results, and reputation could be materially harmed.
The process of manufacturing our product candidates for ourselves and our collaborators is extremely susceptible to product loss due to a variety of
factors, including but not limited to contamination, equipment failure, improper installation or operation of equipment, vendor or operator error, inconsistency
in yields, variability in product characteristics, and difficulties in scaling the production process. Even minor deviations from manufacturing processes could
result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our product
candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended
period of time to investigate and remedy the contamination. Any adverse developments affecting manufacturing operations for our product candidates, if any
are approved, may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our
products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly
remediation efforts or seek more costly manufacturing alternatives. In addition, if we fail to supply required quantities of a product candidate for one of our
collaborators, our collaborator may terminate our agreement.
Although we currently maintain insurance coverage against damage to our property and to cover business interruption and research and development
restoration expenses, our insurance coverage may not reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. If
there were to be a catastrophic event or failure of our manufacturing facilities or processes, we may be unable to meet our requirements for supply of our
product candidates.
We have limited experience in large-scale or commercial manufacturing, and there can be no assurance that we will be able to effectively
manufacture clinical or commercial quantities of our products.
We currently have two current Good Manufacturing Practice (cGMP) manufacturing facilities located in Rockville, Maryland, one of which is a
commercial scale facility which is intended to support future clinical and, if any are approved by the FDA, commercial production of our and our
collaborators’ product candidates. Although some of our employees have experience in the manufacturing of pharmaceutical products from prior employment
at other companies, we as a company have limited experience in large-scale manufacturing and no experience in commercial manufacturing. The design and
build of a large scale manufacturing facility was time-consuming and expensive, and we may not realize the benefit of this investment. As a manufacturer of
pharmaceutical products, we are required to demonstrate and maintain compliance with cGMPs which include requirements related to production processes,
quality control and assurance and recordkeeping. Furthermore, establishing and maintaining manufacturing operations requires a reallocation of other
resources, particularly the time and attention of certain of our senior management. Any failure or delay in our manufacturing capabilities could adversely
impact the clinical development or commercialization of our or our collaborators’ product candidates.
Our manufacturing facilities are subject to significant government regulations and approvals, which are often costly and could result in adverse
consequences to our business if we fail to comply with the regulations or maintain the approvals.
We must comply with the FDA’s cGMP requirements, as set out in statute, regulations and interpreted through guidance. We may encounter
difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. We are subject to inspections by the FDA
and comparable agencies in other jurisdictions to confirm compliance with applicable regulatory requirements. See “Other U.S. Post-Marketing Regulatory
Requirements” above for additional information. Any failure to follow cGMP or other regulatory requirements or delay, interruption or other issues that arise
in the manufacture, fill-finish, packaging, or storage of our product candidates as a result of a failure of our facilities or the facilities or operations of third
parties to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize
our product candidates, including leading to significant delays in the availability of drug product for our clinical trials or the termination or hold on a clinical
trial, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant noncompliance could also result in the
imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates,
delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of
which could damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our product candidates and/or
may be subject to product recalls, seizures, injunctions, or criminal prosecution.
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We currently have no sales or distribution infrastructure, and limited marketing, sales, and distribution experience in our organization. If we are unable
to develop marketing, sales and distribution capabilities through collaborations or on our own , we will not be successful in commercializing
margetuximab or any of our product candidates, if approved.
We currently have no sales and distribution infrastructure and we have limited marketing, sales and distribution experience within our organization.
If margetuximab or any of our other product candidates are approved, we may engage a third party collaborator to establish a sales and marketing
organization with technical expertise and supporting distribution capabilities to commercialize our product candidates in the United States and, potentially, to
outsource this function to a third party outside of the United States, or we may choose to establish our own sales, marketing and distribution capabilities in the
United States commensurate with the potential market size of the specific product candidate. Either or both of these options would be expensive and time
consuming, and would require a significant allocation of resources, including the time and attention of our management. In addition, we would need to devote
resources to the development, maintenance, monitoring and enforcement of policies to ensure compliance with various health care laws related to sales and
marketing of pharmaceutical products. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to
engage a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. Any failure or delay
in the engagement of a third party collaborator or the development of our internal sales, marketing and distribution capabilities would adversely impact the
commercialization of our products.
With respect to certain of our existing and future product candidates, we have entered into collaboration or other licensing arrangements with third
party collaborators that have direct sales forces and established distribution systems. To the extent that we enter into additional collaboration agreements, our
product revenue may be lower than if we directly marketed or sold any approved products. In addition, any revenue we receive will depend in whole or in part
upon the efforts of these third party collaborators, which may not be successful and are generally not within our control. If we are unable to enter into
additional arrangements on acceptable terms or at all, we may not be able to successfully commercialize certain approved products. If we are not successful in
commercializing approved products, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we
may incur significant additional losses.
We face significant competition and if our competitors develop and market products that are more effective, safer or less expensive than our product
candidates, our commercial opportunities will be negatively impacted.
The life sciences industry is highly competitive and subject to rapid and significant technological change. We are currently developing therapeutics
that will compete with other drugs and therapies that currently exist or are being developed. Products we may develop in the future are also likely to face
competition from other drugs and therapies, some of which we may not currently be aware. We have competitors both in the United States and internationally,
including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, universities and other
research institutions. Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human
resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting
patients and manufacturing pharmaceutical products. These companies also have significantly greater research and marketing capabilities than we do and may
also have products that have been approved or are in late stages of development, and collaborative arrangements in our target markets with leading companies
and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to
in-license novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed,
or may have succeeded, in obtaining patent protection and/or FDA approval or discovering, developing and commercializing products in our field before we
do.
Specifically, there are a large number of companies developing or marketing treatments for cancer, including many major pharmaceutical and
biotechnology companies. These treatments consist both of small molecule drug products, as well as biologic therapeutics that work by using next-generation
antibody technology platforms to address specific cancer targets. In addition, several companies are developing therapeutics that work by targeting multiple
specificities using a single recombinant molecule. See “Competition” above for additional information.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective,
have fewer or less severe effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or
other regulatory approval for their products more rapidly than we may obtain approval for ours. For example, Daiichi Sankyo Inc.'s product Enhertu® (fam-
trastuzumab deruxtecan-nxki) recently launched in the United Sates in a patient population that may compete with the patient population for which
margetuximab has currently submitted a BLA. This could result in our competitors establishing a strong market position before we are able to enter the
market. In addition, our ability to compete may be affected in many cases by insurers or other third
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party payors seeking to encourage the use of biosimilar products. Biosimilar products are expected to become available over the coming years. For example,
certain HER2 biosimilar products are approved in certain countries, including the United States, and others may be approved prior to a margetuximab
approval, if any. Even if our product candidates achieve marketing approval, they may be priced at a significant premium over competitive biosimilar
products.
Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical
trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. In addition, the
biopharmaceutical industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change, we may be unable to
compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less
competitive or not economical.
Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for
our products, it is less likely that our products will be widely used.
Even if our product candidates are approved for sale by the appropriate regulatory authorities, market acceptance and sales of these products may
depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payors, such as private
health insurers and health maintenance organizations, decide which drugs they will reimburse and establish payment levels and, in some cases, utilization
management strategies, such as tiered formularies and prior authorization. We cannot be certain that reimbursement will be available for any products that we
develop or that the reimbursement level will be adequate to allow us to operate profitably. Also, we cannot be certain that reimbursement policies will not
reduce the demand for, or the price paid for, our products. Our ability to commercialize our products may depend, in part, on the extent to which
reimbursement for the products will be available from government authorities and third-party payors. If reimbursement for our products is not available or is
available on a limited basis, or if the reimbursement amount for our products is inadequate, we may not be able to successfully commercialize any of our
approved products.
Actual or anticipated changes to the laws and regulations governing the health care system may have a negative impact on cost and access to health
insurance coverage and reimbursement of healthcare items and services.
The United States and several foreign jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect our ability to sell any of our future approved products profitably. Among policy makers and payors in
the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs,
improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has
been significantly affected by major legislative initiatives, including the Patient Protection and Affordable Care Act (ACA), which became law in 2010.
While it is difficult to assess the impact of the ACA in isolation, either in general or on our business specifically, it is widely thought that the ACA increases
the likelihood of downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of, and the price we may charge for,
any products we develop that receive regulatory approval. Further, the United State and foreign governments regularly consider reform measures that affect
healthcare coverage and costs. Such reforms may include changes to the coverage and reimbursement of healthcare services and products. In particular, there
have been recent judicial and Congressional challenges to the ACA, which could have an impact on coverage and reimbursement for healthcare services
covered by plans authorized by the ACA, and we expect there will be additional challenges and amendments to the ACA in the future.
In September 2017, members of the United States Congress introduced legislation with the announced intention to repeal major provisions of the
ACA. Although it is unclear whether such legislation will ultimately become law, executive or legislative branch attempts to repeal, reform or to repeal and
replace the ACA will likely continue. In addition, various other healthcare reform proposals have also emerged at the federal and state level. In addition,
recent changes to United States tax laws could negatively impact the ACA. We cannot predict what healthcare initiatives, if any, will be implemented at the
federal or state level, however, government and other regulatory oversight and future regulatory and government interference with the healthcare systems
could adversely impact our business and results of operations.
We expect to experience pricing pressures in connection with the sale of any products that we develop, due to the trend toward managed healthcare,
the increasing influence of various and evolving payor models and additional legislative proposals.
Inadequate funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent
new products and services from being developed or commercialized in a timely manner or
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otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively
impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels,
ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory and policy changes. Average review times at the agency
have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely,
including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government
agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain
regulatory agencies, such as the FDA, have had to furlough critical FDA, and other government employees and pause or stop critical activities. If a prolonged
government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have
a material adverse effect on our business.
If any product liability lawsuits are successfully brought against us or any of our collaborators, we may incur substantial liabilities and may be required
to limit commercialization of our product candidates.
We face an inherent risk of product liability lawsuits related to the testing of our product candidates in seriously ill patients, and will face an even
greater risk if product candidates are approved by regulatory authorities and introduced commercially. Product liability claims may be brought against us or
our collaborators by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling any of our future
approved products. If we cannot successfully defend ourselves against any such claims, we may incur substantial liabilities. Regardless of their merit or
eventual outcome, liability claims may result in:
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decreased demand for our future approved products;
injury to our reputation;
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termination of clinical trial sites or entire trial programs;
increased regulatory scrutiny;
significant litigation costs;
substantial monetary awards to or costly settlement with patients or other claimants;
product recalls or a change in the indications for which they may be used;
loss of revenue;
diversion of management and scientific resources from our business operations; and
the inability to commercialize our product candidates.
If any of our product candidates are approved for commercial sale, we will be highly dependent upon consumer perceptions of us and the safety and
quality of our products. We could be adversely affected if we are subject to negative publicity. We could also be adversely affected if any of our products or
any similar products distributed by other companies prove to be, or are asserted to be, harmful to patients. Because of our dependence upon consumer
perceptions, any adverse publicity associated with illness or other adverse effects resulting from patients’ use or misuse of our products or any similar
products distributed by other companies could have a material adverse impact on our financial condition or results of operations.
We currently hold $20 million in product liability insurance coverage in the aggregate, with a per incident limit of $20 million, which may not be
adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage when we begin the commercialization of our product
candidates. Insurance coverage is becoming increasingly expensive. As a result, we may be unable to maintain or obtain sufficient insurance at a reasonable
cost to protect us against losses that could have a material adverse effect on our business. A successful product liability claim or series of claims brought
against us, particularly if judgments exceed any insurance coverage we may have, could decrease our cash resources and adversely affect our business,
financial condition and results of operation.
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Our contract with the National Institute of Allergy and Infectious Diseases (NIAID) makes us a government contractor. Laws and regulations affecting
government contracts may make it more costly and difficult for us to successfully conduct our business.
We must comply with numerous laws and regulations relating to the procurement, formation, administration and performance of government
contracts. Failure to comply with these laws could result in significant civil and criminal penalties. Among the most significant government contracting
regulations that may affect our business are: the Federal Acquisition Regulation (FAR) and NIH-NIAID-specific regulations supplemental to the FAR, which
comprehensively regulate the procurement, formation, administration and performance of government contracts; business ethics and public integrity
obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying
activities and incorporate other requirements such as the Anti-Kickback Act, the Procurement Integrity Act, and the False Claims Act; export and import
control laws and regulations; and laws, regulations and executive orders restricting the use and dissemination of sensitive information we may receive
pursuant to our performance of the government contract. U.S. government agencies routinely audit and investigate government contractors for compliance
with applicable laws and standards. If we are audited, such audit could result in disallowance of expected cost reimbursement, or if such audit were to
uncover improper or illegal activities, we could be subject to civil and criminal penalties, administrative sanctions, including suspension or debarment from
government contracting and significant reputational harm.
Changes in U.S. tax law may have a material adverse effect on our business, financial condition and results of operations, and changes in international
trade relations may have a material adverse effect on the commercialization of some or all of our product candidates.
Changes in laws and policy relating to taxes may have an adverse effect on our business, financial condition and results of operations. Recent tax
reforms in the United States have resulted in significant changes to preexisting U.S. tax rules and regulations. These changes may trigger an adverse effect on
our business, financial conditions and results of operations.
Additionally, the U.S. government may seek to implement more protective trade measures with countries in which we plan to conduct business in,
with great deal of uncertainty regarding trade policies, tariffs and government regulations, which if altered could have the potential to create a significant
adverse effect on trade between the United States and other countries. Overall, changes in international trade relations, such as the imposition of or increase in
tariffs or other trade barriers, could materially and adversely impact our costs, the ability to make sales of our product candidates to any of our significant
customers in other countries, and reduce the competitiveness of our product candidates.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We have no products
approved for commercial sale, and to date we have not generated any revenue or profit from product sales. We may never achieve or sustain profitability.
We are a clinical-stage biopharmaceutical company. We have incurred significant losses since our inception. As of December 31, 2019, our
accumulated deficit was approximately $642.1 million. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase
as we continue our research and development of, and seek regulatory approvals for, our product candidates, prepare for and begin to commercialize any
approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company. The net losses and
negative cash flows incurred to date, together with expected future losses, have had, and likely will continue to have, an adverse effect on our stockholders'
deficit and working capital. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate
revenue.
Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to
accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. For example, our expenses could
increase if we are required by the FDA to perform trials in addition to those that we currently expect to perform, or if there are any delays in completing our
currently planned clinical trials or in the development of any of our product candidates. Our expenses would significantly increase to the extent we build out a
sales force and other commercially relevant functions to support the commercialization of margetuximab, if approved, or any of our other product candidates.
To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require
us to be successful in a range of challenging activities for which we are only in the preliminary stages, including developing product candidates, obtaining
regulatory approval for them, and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We may never succeed
in these activities and may never generate revenue from product sales that is significant enough to achieve profitability. Even if we achieve
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profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become or remain profitable would depress our
market value and could impair our ability to raise capital, expand our business, develop other product candidates, or continue our operations. A decline in the
value of our company could also cause you to lose all or part of your investment.
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not available, may require us to
delay, scale back, or cease our product development programs or operations.
We are advancing our product candidates through clinical development. Developing and commercializing pharmaceutical products, including
conducting preclinical studies and clinical trials, is expensive. In order to obtain such regulatory approval, we will be required to conduct clinical trials for
each indication for each of our product candidates. We will continue to require additional funding beyond what was raised in our public offerings and through
our collaborations and license agreements to complete the development and commercialization of our product candidates and to continue to advance the
development of our other product candidates, and such funding may not be available on acceptable terms or at all. Although it is difficult to predict our
funding requirements, based upon our current operating plan, we anticipate that our cash, cash equivalents and marketable securities as of December 31,
2019, combined with anticipated and potential collaboration payments, will enable us to fund our operations into 2021, assuming all of our programs and
collaborations advance as currently contemplated. Because successful development of our product candidates is uncertain, we are unable to estimate the
actual funds we will require to complete research and development and to commercialize our product candidates.
Our future funding requirements will depend on many factors, including but not limited to:
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the number and characteristics of other product candidates and indications that we pursue;
the scope, progress, timing, cost and results of research, preclinical development, and clinical trials;
the costs, timing and outcome of seeking and obtaining FDA and non-U.S. regulatory approvals;
the costs associated with manufacturing our product candidates;
the costs of establishing sales, marketing, and distribution capabilities;
our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we
may be required to make in connection with the licensing, filing, defense and enforcement of any patents or other intellectual property rights;
our need and ability to hire additional management, scientific, and medical personnel;
the effect of competing products that may limit market penetration of our product candidates;
our need to implement additional internal systems and infrastructure, including financial and reporting systems; and
the economic and other terms, timing of and success of our existing collaborations, and any collaboration, licensing, or other arrangements into
which we may enter in the future, including the timing of receipt of any milestone or royalty payments under these agreements.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future
cash needs primarily through a combination of public or private equity offerings, debt financings, strategic collaborations, and grant funding. If sufficient
funds on acceptable terms are not available when needed, or at all, we could be forced to significantly reduce operating expenses and delay, scale back or
eliminate one or more of our development programs or our business operations.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish substantial rights.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the
terms of these new securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if
available at all, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt,
making capital expenditures, or declaring dividends. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with
third parties,
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we may have to relinquish valuable rights to our technologies, product candidates, or future revenue streams, or grant licenses on terms that are not favorable
to us. We cannot assure you that we will be able to obtain additional funding if and when necessary. If we are unable to obtain adequate financing on a timely
basis, we could be required to delay, scale back or eliminate one or more of our development programs or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.
Our ability to use our net operating loss carryforwards and other tax attributes may be limited.
Our ability to utilize our federal net operating losses (NOLs) and federal tax credits is currently limited, and may be limited further, under Sections
382 and 383 of the Internal Revenue Code of 1986, as amended. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally,
an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership
percentage in a testing period, which is typically three years or since the last ownership change. We are already subject to Section 382 limitations due to
acquisitions we made in 2002 and 2008. As of December 31, 2019, we had federal and state NOL carryforwards of $554.5 million and federal research and
development tax credits of $58.2 million available. Future changes in stock ownership may also trigger an ownership change and, consequently, another
Section 382 limitation. Any limitation may result in expiration of a portion of the net operating loss or tax credit carryforwards before utilization which would
reduce our gross deferred income tax assets and corresponding valuation allowance. As a result, if we earn net taxable income, our ability to use our pre-
change NOL carryforwards and tax credit carryforwards to reduce United States federal income tax may be subject to limitations, which could potentially
result in increased future cash tax liability to us.
Risks Related to Our Dependence on Third Parties
Our existing therapeutic collaborations are important to our business, and future collaborations may also be important to us. If we are unable to
maintain any of these collaborations, or if these collaborations are not successful, our business could be adversely affected.
We have limited capabilities for drug development and have little to no capability for sales, marketing or distribution. We have entered into
collaborations with other companies that we believe can provide such capabilities, including our collaboration and license agreements with, for example,
Incyte Corporation, Zai Lab Limited and I-Mab Biopharma. These current collaborations also have provided us with important funding for our development
programs and technology platforms and we expect to receive additional funding under these collaborations in the future. Our existing therapeutic
collaborations, and any future collaborations we enter into, may pose a number of risks, including the following:
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collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
collaborators may not perform their obligations as expected;
collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may elect not to
continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators' strategic focus or
available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product
candidate, 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 products or
product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized
under terms that are more economically attractive than ours;
product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or
products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit
sufficient resources to the marketing and distribution of such product or products;
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disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of
development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to
additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-
consuming and expensive;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to
invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise additional capital to
pursue further development or commercialization of the applicable product candidates. For example, each of our collaboration and license
agreements may be terminated for convenience upon the completion of a specified notice period.
If our therapeutic collaborations do not result in the successful development and commercialization of products or if one of our collaborators
terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. For example, in
2019, Les Laboratoires Servier and Institut de Recherches Servier (collectively, Servier), to which we had previously granted exclusive options to obtain three
separate exclusive licenses to develop and commercialize DART molecules, notified us of its intent to terminate its agreement with us. This termination
became effective January 15, 2020. All of the risks relating to product development, regulatory approval and commercialization described in this report also
apply to the activities of our program collaborators.
Additionally, subject to its contractual obligations to us, if one of our collaborators is involved in a business combination, the collaborator might de-
emphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one of our collaborators terminates its
agreement with us, we may find it more difficult to attract new collaborators.
For some of our product candidates, we may in the future determine to collaborate with additional pharmaceutical and biotechnology companies for
development and potential commercialization of therapeutic products. We face significant competition in seeking appropriate collaborators. Our ability to
reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms
and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. These factors may include the design or
results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject
product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the
existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of
the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar
indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate.
Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If we are unable to reach
agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a product candidate, reduce
or delay one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or
increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or
commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable
terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and
commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our technology
platforms and our business may be materially and adversely affected.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators.
Aside from our agreement with Green Cross Corporation, subject to certain specified exceptions, each of our existing therapeutic collaborations contains a
restriction on our engaging in activities that are the subject of the collaboration with third parties for specified periods of time.
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Independent clinical investigators and contract research organizations (CROs) that we engage to conduct our clinical trials may not devote sufficient time
or attention to our clinical trials or be able to repeat their past success.
We expect to continue to depend on independent clinical investigators and CROs to conduct our clinical trials. CROs may also assist us in the
collection and analysis of data. There is a limited number of third-party service providers that specialize or have the expertise required to achieve our business
objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our
development programs. These investigators and CROs will not be our employees and we will not be able to control, other than by contract, the amount of
resources, including time, which they devote to our product candidates and clinical trials. If independent investigators or CROs fail to devote sufficient
resources to the development of our product candidates, or if their performance is substandard, it may delay or compromise the prospects for approval and
commercialization of any product candidates that we develop. In addition, the use of third-party service providers requires us to disclose our proprietary
information to these parties, which could increase the risk that this information will be misappropriated. Further, the FDA requires that we comply with
standards, commonly referred to as current Good Clinical Practice (GCP) for conducting, recording and reporting clinical trials to assure that data and
reported results are credible and accurate and that the rights, integrity and confidentiality of trial subjects are protected. Failure of clinical investigators or
CROs to meet their obligations to us or comply with GCP procedures could adversely affect the clinical development of our product candidates and harm our
business.
Failure of third-party contractors and/or our inability to successfully develop and commercialize companion diagnostics for use with our product
candidates could harm our ability to commercialize our product candidates.
We plan to develop companion diagnostics for our product candidates where appropriate. At least in some cases, the FDA and similar regulatory
authorities outside the United States may request or require the development and regulatory approval of a companion diagnostic as a condition to approving
one or more of our product candidates, including, for example, margetuximab. We do not have experience or capabilities in developing or commercializing
diagnostics and plan to rely in large part on third parties to perform these functions.
In most cases, we will likely outsource the development, production and commercialization of companion diagnostics to third parties. By
outsourcing these companion diagnostics to third parties, we become dependent on the efforts of our third party contractors to successfully develop and
commercialize these companion diagnostics. Our contractors:
• may not perform their obligations as expected;
• may encounter production difficulties that could constrain the supply of the companion diagnostic;
• may have difficulties gaining acceptance of the use of the companion diagnostic in the clinical community;
• may not commit sufficient resources to the marketing and distribution of such product; and
• may terminate their relationship with us.
If any companion diagnostic for use with one of our product candidates fails to gain market acceptance, our ability to derive revenues from sales of
such product candidate could be harmed. If our third party contractors fail to commercialize such companion diagnostic, we may not be able to enter into
arrangements with another diagnostic company to obtain supplies of an alternative diagnostic test for use in connection with such product candidate or do so
on commercially reasonable terms, which could adversely affect and delay the development or commercialization of such product candidate.
We expect to contract with third parties for the manufacture of some of our product candidates for clinical testing in the future and expect to do so for
commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or
such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We currently have two cGMP manufacturing facilities located in Rockville, Maryland, one of which was completed in 2018 and is designed to
increase our internal capacity to manufacture more drug substance lots, at larger scale and in full compliance with cGMP to support future clinical and
commercial production of our and our collaborators’ product candidates. We manufacture drug substance lots at these facilities that we use for research and
development purposes and for clinical trials of our and our collaborators’ product candidates. Although we believe we currently have capacity to produce all
of the material required for our and our collaborators’ clinical trials, we may not be able to do so in the future, and may rely on arrangements with third
parties. Our current facilities may also be insufficient to support our needs for commercial quantities of such candidates, and we may rely on arrangements
with third parties. We have limited experience in manufacturing products at commercial scale.
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We have entered into agreements with contract manufacturing organizations to supplement our clinical supply and internal capacity as we advance
our product candidate pipeline. We expect to use third parties for the manufacture of certain of our product candidates for clinical testing, as well as for
commercial manufacture of some of our product candidates that receive marketing approval and that are not manufactured by one of our third party
collaborators. We have entered into two long-term supply agreements with manufacturers for commercial supply, and may in the future enter into one or more
additional supply agreements for our product candidates. We may be unable to reach agreement with any of these contract manufacturers, or to identify and
reach arrangements on satisfactory terms with other contract manufacturers, to manufacture any of our product candidates. Additionally, the facilities used by
any contract manufacturer to manufacture any of our product candidates must be the subject of a satisfactory inspection before the FDA and other regulatory
authorities approve a BLA or marketing authorization for the product candidate manufactured at that facility. We will depend on these third-party
manufacturing partners for compliance with the FDA’s requirements for the manufacture of our finished products. If our manufacturers cannot successfully
manufacture material that conforms to our specifications and the FDA and other regulatory authorities’ cGMP requirements, our product candidates will not
be approved or, if already approved, may be subject to recalls.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:
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the possibility of a breach of the manufacturing agreements by the third parties because of factors beyond our control;
the possibility of termination or nonrenewal of the agreements by the third parties before we are able to arrange for a qualified replacement
third-party manufacturer; and
the possibility that we may not be able to secure a manufacturer or manufacturing capacity in a timely manner and on satisfactory terms in order
to meet our manufacturing needs.
Any of these factors could cause the delay of approval or commercialization of our product candidates, cause us to incur higher costs or prevent us
from commercializing our product candidates successfully. Furthermore, if any of our product candidates are approved and contract manufacturers fail to
deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices, and we are unable to find one or more
replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we
would likely be unable to meet demand for our products and could lose potential revenue. It may take several years to establish an alternative source of supply
for our product candidates and to have any such new source approved by the FDA or any other relevant regulatory authorities.
A disruption in our computer networks, including those related to cybersecurity, could adversely affect our financial performance as well as our research,
development and commercialization efforts.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system
disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal information or protected health information is improperly
accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected
individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security federal or state laws
protecting confidential personal information. In addition, a cybersecurity breach could hurt our reputation, subject us to liability claims or regulatory penalties
for compromised personal information and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Intellectual Property
Our commercial success depends significantly on our ability to operate without infringing the valid patents and other proprietary rights of third parties.
Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. Other entities may have or obtain
patents or proprietary rights that could limit our ability to make, use, sell, offer for sale or import our future approved products or impair our competitive
position. For example, certain patents held by third parties cover Fc engineering methods and mutations in Fc regions to enhance the binding of Fc regions to
Fc receptors on immune cells. Although we believe that these patents are not infringed, and/or are invalid and/or unenforceable, if a court should find that
they cover margetuximab or enoblituzumab and we are unable to invalidate such patents, or if licenses for them are not available on commercially reasonable
terms, our business could be harmed, perhaps materially.
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Patents that we may ultimately be found to infringe could be issued to third parties. Third parties may have or obtain valid and enforceable patents or
proprietary rights that could block us from developing product candidates using our technology. Our failure to obtain a license to any technology that we
require may materially harm our business, financial condition and results of operations. Moreover, our failure to maintain a license to any technology that we
require may also materially harm our business, financial condition, and results of operations. Furthermore, we would be exposed to a threat of litigation.
In the pharmaceutical industry, significant litigation and other proceedings regarding patents, patent applications, trademarks and other intellectual
property rights have become commonplace. The types of situations in which we may become a party to such litigation or proceedings include:
• we or our collaborators may initiate litigation or other proceedings against third parties seeking to invalidate the patents held by those third
parties or to obtain a judgment that our products or processes do not infringe those third parties' patents;
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if our competitors file patent applications that claim technology also claimed by us or our licensors, we or our licensors may be required to
participate in interference or opposition proceedings to determine the priority of invention, which could jeopardize our patent rights and
potentially provide a third party with a dominant patent position;
if third parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we and our
collaborators will need to defend against such proceedings; and
if a license to necessary technology is terminated, the licensor may initiate litigation claiming that our processes or products infringe or
misappropriate their patent or other intellectual property rights and/or that we breached our obligations under the license agreement, and we and
our collaborators would need to defend against such proceedings.
These lawsuits would be costly and could affect our results of operations and divert the attention of our management and scientific personnel. There
is a risk that a court would decide that we or our collaborators are infringing the third party’s patents and would order us or our collaborators to stop the
activities covered by the patents. In that event, we or our collaborators may not have a viable alternative to the technology protected by the patent and may
need to halt work on the affected product candidate or cease commercialization of an approved product. In addition, there is a risk that a court will order us or
our collaborators to pay the other party damages. An adverse outcome in any litigation or other proceeding could subject us to significant liabilities to third
parties and require us to cease using the technology that is at issue or to license the technology from third parties. We may not be able to obtain any required
licenses on commercially acceptable terms or at all. Any of these outcomes could have a material adverse effect on our business.
The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry
participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts,
and the interpretation is not always uniform or predictable. If we are sued for patent infringement, we would need to demonstrate that our products or methods
either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is
difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity
enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in
pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be
required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We
may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing
technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may incur substantial monetary damages,
encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our product candidates.
The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to
sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. Uncertainties resulting from
the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Patent litigation and other proceedings may also absorb significant management time.
If we are unable to obtain and enforce patent protection for our product candidates and related technology, our business could be materially harmed.
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Issued patents may be challenged, narrowed, invalidated or circumvented. In addition, court decisions may introduce uncertainty in the
enforceability or scope of patents owned by biotechnology companies. The legal systems of certain countries do not favor the aggressive enforcement of
patents, and the laws of foreign countries may not allow us to protect our inventions with patents to the same extent as the laws of the United States. Because
patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and
because publications of discoveries in scientific literature lag behind actual discoveries, we cannot be certain that we were the first to make the inventions
claimed in our issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in our patents or patent
applications. As a result, we may not be able to obtain or maintain protection for certain inventions. Therefore, the enforceability and scope of our patents in
the United States and in foreign countries cannot be predicted with certainty and, as a result, any patents that we own or license may not provide sufficient
protection against competitors. We may not be able to obtain or maintain patent protection from our pending patent applications, from those we may file in
the future, or from those we may license from third parties. Moreover, even if we are able to obtain patent protection, such patent protection may be of
insufficient scope to achieve our business objectives.
Our strategy depends on our ability to identify and seek patent protection for our discoveries. This process is expensive and time consuming, and we
may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner or in all jurisdictions where
protection may be commercially advantageous. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use
information that we regard as proprietary.
The issuance of a patent does not ensure that a court or agency finds or will find the patent valid or enforceable, so even if we obtain patents, they
may not be valid or enforceable against third parties. In addition, the issuance of a patent does not give us the right to practice the patented invention. Third
parties may have blocking patents that could prevent us from marketing our own patented product and practicing our own patented technology. Third parties
may also seek to market biosimilar versions of any approved products. Alternatively, third parties may seek approval to market their own products similar to
or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging
patent infringement. In any of these types of proceedings, a court or agency with jurisdiction may find our patents invalid and/or unenforceable. Even if we
have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business
objectives.
The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual
considerations. The standards which the United States Patent and Trademark Office (USPTO) and its foreign counterparts use to grant patents are not always
applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or
allowable in pharmaceutical or biotechnology patents. The laws of some foreign countries do not protect proprietary information to the same extent as the
laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign
countries. Outside the United States, patent protection must be sought in individual jurisdictions, further adding to the cost and uncertainty of obtaining
adequate patent protection outside of the United States. Accordingly, we cannot predict whether additional patents protecting our technology will issue in the
United States or in foreign jurisdictions, or whether any patents that do issue will have claims of adequate scope to provide competitive advantage. Moreover,
we cannot predict whether third parties will be able to successfully obtain claims or the breadth of such claims. The allowance of broader claims may increase
the incidence and cost of patent interference proceedings, opposition proceedings, and/or reexamination proceedings, the risk of infringement litigation, and
the vulnerability of the claims to challenge. On the other hand, the allowance of narrower claims does not eliminate the potential for adversarial proceedings,
and may fail to provide a competitive advantage. Our issued patents may not contain claims sufficiently broad to protect us against third parties with similar
technologies or products, or provide us with any competitive advantage.
We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.
Even after they have been issued, our patents and any patents which we license may be challenged, narrowed, invalidated or circumvented. If our
patents are invalidated or otherwise limited or will expire prior to the commercialization of our product candidates, other companies may be better able to
develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition.
The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or
patents licensed to us:
• we or our collaborators may initiate litigation or other proceedings against third parties to enforce our patent rights;
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third parties may initiate litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory
judgment that their product or technology does not infringe our patents or patents licensed to us;
third parties may initiate opposition, reexamination or inter partes review proceedings challenging the validity or scope of our patent rights,
requiring us or our collaborators and/or licensors to participate in such proceedings to defend the validity and scope of our patents;
there may be a challenge or dispute regarding inventorship or ownership of patents currently identified as being owned by or licensed to us;
the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors,
requiring us or our collaborators and/or licensors to participate in an interference proceeding to determine the priority of invention, which could
jeopardize our patent rights; or
third parties may seek approval to market biosimilar versions of our future approved products prior to expiration of relevant patents owned by or
licensed to us, requiring us to defend our patents, including by filing lawsuits alleging patent infringement.
These lawsuits and proceedings would be costly and could affect our results of operations and divert the attention of our managerial and scientific
personnel. There is a risk that a court or administrative body would decide that our patents are invalid or not infringed by a third party’s activities, or that the
scope of certain issued claims must be further limited. An adverse outcome in a litigation or proceeding involving our own patents could limit our ability to
assert our patents against these or other competitors, affect our ability to receive royalties or other licensing consideration from our licensees, and may curtail
or preclude our ability to exclude third parties from making, using and selling similar or competitive products. Any of these occurrences could adversely
affect our competitive business position, business prospects and financial condition.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep our competitive advantage. For example:
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others may be able to develop a platform that is similar to, or better than, ours in a way that is not covered by the claims of our patents;
others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;
• we might not have been the first to make the inventions covered by patents or pending patent applications;
• we might not have been the first to file patent applications for these inventions;
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any patents that we obtain may not provide us with any competitive advantages or may ultimately be found invalid or unenforceable; or
• we may not develop additional proprietary technologies that are patentable.
If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our
business.
We are currently party to various intellectual property license agreements. These license agreements impose, and we expect that future license
agreements may impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, we have entered into patent and
know-how license agreements that grant us the right to use certain technologies related to biological manufacturing to manufacture our clinical product
candidates. These licenses typically include an obligation to pay yearly maintenance payments and royalties on sales, and may also include upfront and
milestone payments. If we fail to comply with our obligations under the licenses, the licensors may have the right to terminate their respective license
agreements, in which event we might not be able to market any product that is covered by the agreements. Termination of the license agreements or reduction
or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms, which could adversely affect
our competitive business position and harm our business.
If we are unable to protect the confidentiality of our proprietary information, the value of our technology and products could be adversely affected.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets, and other proprietary information. To
maintain the confidentiality of trade secrets and proprietary information, we enter into confidentiality agreements with our employees, consultants,
collaborators and others upon the commencement of their
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relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during
the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees and our personnel
policies also provide that any inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. However, we
may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. Thus, despite
such agreement, such inventions may become assigned to third parties. In the event of unauthorized use or disclosure of our trade secrets or proprietary
information, these agreements, even if obtained, may not provide meaningful protection, particularly for our trade secrets or other confidential information.
To the extent that our employees, consultants or contractors use technology or know-how owned by third parties in their work for us, disputes may arise
between us and those third parties as to the rights in related inventions. To the extent that an individual who is not obligated to assign rights in intellectual
property to us is rightfully an inventor of intellectual property, we may need to obtain an assignment or a license to that intellectual property from that
individual, or a third party or from that individual’s assignee. Such assignment or license may not be available on commercially reasonable terms or at all.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our proprietary information. The disclosure of our trade secrets
would impair our competitive position and may materially harm our business, financial condition and results of operations. Costly and time consuming
litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to maintain trade secret protection could adversely affect
our competitive business position. In addition, others may independently discover or develop our trade secrets and proprietary information, and the existence
of our own trade secrets affords no protection against such independent discovery.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously or concurrently employed at
research institutions and/or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to
claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers,
or that patents and applications we have filed to protect inventions of these employees, even those related to one or more of our product candidates, are
rightfully owned by their former or concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial costs and be a distraction to management.
Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to the USPTO
and various foreign patent offices at various points over the lifetime of our patents and/or applications. We have systems in place to remind us to pay these
fees, and we rely on our outside counsel or our agents to pay these fees when due. Additionally, the USPTO and various foreign patent offices require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable
law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in
accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of
the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, it could have a
material adverse effect on our business. In addition, we may be responsible for the payment of patent fees for patent rights that we license from other parties.
If any licensor of these patents does not itself elect to make these payments, and we fail to do so, we may be liable to the licensor for any costs and
consequences of any resulting loss of patent rights.
If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation for extending the term of patents covering each of
our product candidates, our business may be materially harmed.
Depending upon the timing, duration and conditions of FDA marketing approval of our product candidates, one or more of our U.S. patents may be
eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman
Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years for a patent covering an approved product as compensation
for effective patent term lost during product development and the FDA regulatory review process. However, we may not receive an extension if we fail to
apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length
of the extension could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the
period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing
products sooner. As a result, our revenue from applicable products could be reduced, possibly materially,
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Risks Related to Legal Compliance Matters
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 and development involves, and may in the future involve, the use of potentially hazardous materials and chemicals. Our operations may
produce hazardous waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards
mandated by local, state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an
accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and
workplace safety laws and regulations and fire and building codes, including those governing laboratory procedures, exposure to blood-borne pathogens, use
and storage of flammable agents and the handling of biohazardous materials. Although we maintain workers’ compensation insurance as prescribed by the
States of Maryland and California 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 not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims
that may be asserted against us. Additional federal, state and local laws and regulations affecting our 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 laws or regulations.
If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to
civil or criminal penalties.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare laws commonly referred
to as “fraud and abuse” laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include false
claims and anti-kickback statutes.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal
government or knowingly making, or causing to be made, a false statement to get a claim paid. The federal healthcare program anti-kickback statute prohibits,
among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or
arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare
programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and
formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from
prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or
recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. In addition, under the Sunshine Act provisions of the ACA,
pharmaceutical manufacturers with one or more products for which payment is available under a federal health care program are subject to federal reporting
and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Most states also have statutes or
regulations similar to the federal anti-kickback law and federal false claims laws, which may apply to items such as pharmaceutical products and services
reimbursed by private insurers. Some state laws also prohibit certain gifts to healthcare providers, require pharmaceutical companies to report payments to
healthcare professionals, and/or require companies to adopt compliance programs or codes of conduct. Administrative, civil and criminal sanctions may be
imposed under these federal and state laws.
Over the past few years, a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of
promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers;
reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label
promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. At such time, if ever, as
we market any of our future approved products and these products are paid for by governmental programs, it is possible that some of our business activities
could also be subject to challenge under one or more of these “fraud and abuse” laws.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. If we fail to comply with these laws, we could be subject to civil
or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial
condition.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, (FCPA) and other anti-corruption laws that
apply in countries where we do business. The FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being
bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We
and our commercial partners operate in a number of jurisdictions that pose a risk of potential FCPA violations, and we participate in collaborations and
relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. There is no
39
assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws. If we violate provisions of the FCPA or
other anti-corruption laws or are subject to an investigation or audit pursuant to these laws, we may be subject to criminal and civil penalties, disgorgement
and other sanctions and remedial measures and legal expenses, which could have an adverse impact on our business, financial condition and results of
operations.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider
trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA
regulations, to provide accurate information to the FDA or other agencies, to comply with federal and state health care fraud and abuse laws and regulations,
to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the
health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices.
Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions
and serious harm to our reputation. We have adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted
against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including
the imposition of significant fines or other sanctions.
Risks Relating to Employee Matters and Managing Growth
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the research and development, clinical and business development expertise of Scott Koenig, M.D., Ph.D., our President
and Chief Executive Officer, as well as the other members of our senior management team. Although we have entered into employment agreements with our
executive officers, each of them may terminate their employment with us at any time. The loss of the services of our executive officers or other key
employees could impede the achievement of our research, development, manufacturing and commercialization objectives and seriously harm our ability to
successfully implement our business strategy.
Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. In
addition, we will need to expand and effectively manage our managerial, operational, financial, development and other resources in order to successfully
pursue our research, development and commercialization efforts for our existing and future product candidates. Furthermore, replacing executive officers and
key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of
skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is
intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from
universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our
research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have
commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain
high quality personnel, our ability to pursue our growth strategy will be limited.
If we are unable to provide meaningful equity incentives to our key employees, it could adversely affect our ability to retain these key employees, which in
turn could affect our ability to implement our business strategies.
We are dependent upon the members of our senior management team and other key employees. In our industry, it is common to attract and retain
executive and other key employees with compensation packages that include a significant equity component. At this time, the vast majority of our outstanding
equity awards, which are generally issued in the form of stock options, are significantly out-of-the-money, are unlikely to be exercised in the future, and as a
result, provide little present value to employees holding such awards. As a result, we may have difficulty retaining key personnel, which would have a
material adverse effect on our ability to execute our business strategy.
We may need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
As of February 21, 2020, we had 384 full-time employees. As our development and commercialization plans and strategies develop, we may choose
to expand our employee base for managerial, operational, manufacturing, sales, marketing,
40
financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify,
recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of their attention away
from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the
expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational errors, loss of business opportunities, loss of
employees and reduced productivity among remaining employees. Any such growth could require significant capital expenditures and may divert financial
resources from other projects, such as the development of existing and additional product candidates. If our management is unable to effectively manage such
growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced and we may not be able to implement
our business strategy. Our future financial performance and our ability to commercialize our product candidates and compete effectively with others in our
industry will depend, in part, on our ability to effectively manage any such growth.
Risks Relating to Our Common Stock
We are subject to securities litigation, which is expensive and could divert management attention and adversely impact our business.
The market price of our common stock has been and may continue to be volatile. Companies that have experienced volatility in the market price of
their common stock are often subject to securities class action litigation. For example, on September 13, 2019, a securities class action complaint was filed
against us, and certain of our officers and/or directors in the U.S. District Court for the District of Maryland. This or any future securities litigation could
result in substantial costs and diversion of management’s attention and resources, which could adversely impact our business. Any adverse determination in
litigation could also subject us to significant liabilities.
The market price of our stock may fluctuate unpredictably in response to factors unrelated to our operating performance. The stock market has
recently experienced significant volatility, particularly with respect to pharmaceutical, biotechnology, and other life sciences company stocks. The volatility
of pharmaceutical, biotechnology, and other life sciences company stocks often does not relate to the operating performance of the companies represented by
the stock. Some of the factors that may cause the market price of our common stock to fluctuate include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
results and timing of our clinical trials and clinical trials of our competitors’ products;
failure or discontinuation of any of our development programs;
issues in manufacturing our product candidates or future approved products;
regulatory developments or enforcement in the United States and foreign countries with respect to our product candidates or our competitors’
products;
competition from existing products or new products that may emerge;
developments or disputes concerning patents or other proprietary rights;
introduction of technological innovations or new commercial products by us or our competitors;
announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or
capital commitments;
changes in estimates or recommendations by securities analysts, if any cover our common stock;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
public concern over our product candidates or any future approved products;
threatened or actual litigation;
future or anticipated sales of our common stock;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions or departures of key personnel;
changes in the structure of health care payment systems in the United States or overseas;
failure of any of our product candidates, if approved, to achieve commercial success;
economic and other external factors or other disasters or crises;
41
•
•
•
period-to-period fluctuations in our financial condition and results of operations, including the timing of receipt of any milestone or other
payments under commercialization or licensing agreements;
general market conditions and market conditions for biopharmaceutical stocks; and
overall fluctuations in U.S. equity markets.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action
litigation against the company that issued the stock. For example, we currently have one such securities class action lawsuit brought against us. We could
incur substantial costs defending this or similar lawsuits, as well as diversion of the time and attention of our management, any or all of which could seriously
harm our business
Provisions of our charter, bylaws, third-party agreements and Delaware law may make an acquisition of us or a change in our management more
difficult.
Certain provisions of our restated certificate of incorporation and amended and restated bylaws could discourage, delay, or prevent a merger,
acquisition, or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for
your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing
the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, since
our board of directors is responsible for appointing the members of our management team, these provisions could prevent or frustrate attempts by our
stockholders to replace or remove our management by making it more difficult for stockholders to replace members of our board of directors. These
provisions:
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•
•
•
allow the authorized number of directors to be changed only by resolution of our board of directors;
establish a classified board of directors, providing that not all members of the board of directors be elected at one time;
authorize our board of directors to issue without stockholder approval blank check preferred stock that, if issued, could operate as a "poison pill"
to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent;
establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at
stockholder meetings;
limit who may call stockholder meetings; and
require the approval of the holders of 75% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of
our restated certificate of incorporation and restated bylaws.
Furthermore, in the ordinary course of our business, from time to time we discuss and enter into collaborations, licenses and other transactions with
various third parties, including other pharmaceutical companies and biotechnology companies. When we deem it appropriate, our agreements with such third
parties may include standstill provisions. These standstill provisions, several of which may be in force from time-to-time, typically prohibit such parties from
acquiring our securities for a period of time, which may discourage such parties from acquiring MacroGenics even if doing so would be beneficial to our
stockholders.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging
or combining with us for a prescribed period of time. This provision could have the effect of delaying or preventing a change of control, whether or not it is
desired by or beneficial to our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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We lease a total of approximately 225,000 square feet of manufacturing, office and laboratory space in Rockville, Maryland and Brisbane,
California. Our headquarters building in Rockville currently houses laboratory, office and manufacturing operations to support clinical, and potentially
commercial, quantities and scale. This location is occupied under a lease that expires in 2027. We also lease another space supporting smaller-scale
manufacturing operations in Rockville. The lease of that space expires in December 2024. These leases and all but one of the leases on our other properties
include one or more options to renew, with those renewal periods ranging from five to fourteen years. We believe that our properties are generally in good
condition, well maintained, suitable and adequate to carry on our business. We believe our capital resources are sufficient to lease any additional facilities
required to meet our expected growth needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are or may be involved in various legal or regulatory proceedings, claims or class actions related to alleged
patent infringements and other intellectual property rights, or alleged violation of commercial, corporate, securities, labor and employment, and other matters
incidental to our business. We do not, however, expect such legal proceedings to have a material adverse effect on our business, financial condition or results
of operations. However, depending on the nature and timing of a given dispute, an eventual unfavorable resolution could materially affect our current or
future results of operations or cash flows.
See note 10, Commitments and Contingencies, to the consolidated financial statements for more information.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
PART II
EQUITY SECURITIES
Market Information
Our common stock is listed on the Nasdaq Global Select Market under the symbol "MGNX". As of February 21, 2020, we had 48,984,218 shares of
common stock outstanding held by approximately 69 holders of record, which include shares held by a broker, bank or other nominee. We have never
declared or paid any cash dividends. We do not anticipate declaring or paying cash dividends for the foreseeable future. Instead, we will retain our earnings, if
any, for the future operation and expansion of our business.
Performance Graph
The following graph compares the five-year cumulative total return of our common stock with the Nasdaq Composite Index (U.S.) and the Nasdaq
Biotechnology Index. The comparison assumes a $100 investment on December 31, 2014 in our common stock, the stocks comprising the Nasdaq Composite
Index, and the stocks comprising the Nasdaq Biotechnology Index, and assumes reinvestment of the full amount of all dividends, if any. Historical
stockholder return is not necessarily indicative of the performance to be expected for any future periods.
The information set forth under the heading "Performance Graph" shall not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that such information be treated as soliciting material
or specifically be incorporated by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.
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ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations and comprehensive loss data for the years ended December 31, 2019, 2018 and 2017 and the consolidated
balance sheet data as of December 31, 2019 and 2018 presented below have been derived from our audited consolidated financial statements and footnotes
included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations and comprehensive loss data for the years ended
December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016 and 2015 have been derived from our audited
consolidated financial statements which are not included herein. Historical results are not necessarily indicative of future results. The following data should be
read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data:
Total revenues
Costs and expenses:
Research and development
General and administrative
Total costs and expenses
Loss from operations
Other income (expense)
Net loss
Other comprehensive loss:
Year Ended December 31,
2019
2018
2017
2016
2015
(in thousands, except share and per share data)
$
64,188 $
60,121 $
157,742 $
100,854 $
47,797
195,309
46,064
241,373
190,827
40,500
231,327
(177,185)
(171,206)
25,374
(247)
(151,811)
(171,453)
147,232
32,653
179,885
(22,143)
2,517
(19,626)
98,271
22,765
121,036
(20,182)
42
70,186
15,926
86,112
(38,315)
2
(20,140)
(38,313)
Unrealized gain (loss) on investments
19
58
21
(5)
—
Comprehensive loss
Basic and diluted net loss per common share
$
$
(151,792) $
(171,395) $
(19,605) $
(20,145) $
(38,313)
(3.16) $
(4.19) $
(0.54) $
(0.63) $
(1.40)
Basic and diluted weighted average number of common shares
48,082,728
40,925,318
36,095,080
31,801,645
27,384,990
2019
2018
2017
2016
2015
As of December 31,
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities
$
215,756 $
232,863 $
284,982 $
339,049 $
Total assets
Deferred revenue
Total stockholders' equity
312,501
19,853
230,628
332,130
40,722
242,877
311,263
14,306
268,751
359,269
18,497
313,337
157,591
173,886
30,720
121,286
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with our selected consolidated financial data and the
consolidated financial statements and related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and
uncertainties. As a result of many factors including, but not limited to, those set forth under the sections entitled "Risk Factors" and "Forward-Looking
Statements", our actual results may differ materially from those anticipated in such forward-looking statements.
For the discussion of our financial condition and results of operations for the year ended December 31, 2018 compared to the year ended
December 31, 2017, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 26, 2019.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering and developing innovative antibody-based therapeutics designed to
modulate the human immune response for the treatment of cancer. We currently have a pipeline of product candidates in human clinical testing, including
seven immuno-oncology programs, that have been created primarily using our proprietary, antibody-based technology platforms. We believe our product
candidates have the potential to have a meaningful effect on treating patients' unmet medical needs as monotherapy or, in some cases, in combination with
other therapeutic agents.
We commenced active operations in 2000, and have since devoted substantially all of our resources to staffing our company, developing our
technology platforms, identifying potential product candidates, undertaking preclinical studies, conducting clinical trials, developing collaborations, business
planning and raising capital. We have not generated any revenues from the sale of any products to date. We have financed our operations primarily through
the public and private offerings of our securities, collaborations with other biopharmaceutical companies, and government grants and contracts. Although it is
difficult to predict our funding requirements, we anticipate that our cash, cash equivalents and marketable securities as of December 31, 2019, combined with
anticipated and potential collaboration payments, will enable us to fund our operations into 2021 assuming our programs and collaborations advance as
currently contemplated. Through the prioritization of programs and ongoing realignment of our resources, we are focused on extending our cash runway into
2022.
Through December 31, 2019, we had an accumulated deficit of $642.1 million. We expect that over the next several years this deficit will increase as
we increase our expenditures in research and development in connection with our ongoing activities with several clinical trials.
Collaborations
We pursue a balanced approach between product candidates that we develop ourselves and those that we develop with our collaborators. Under our
strategic collaborations to date, we have received significant non-dilutive funding and continue to have rights to additional funding upon completion of
certain research, achievement of key product development milestones and royalties and other payments upon the commercial sale of products. Our current
collaborations include the following:
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Incyte. In 2017, we entered into an exclusive global collaboration and license agreement with Incyte Corporation (Incyte) for MGA012, an
investigational monoclonal antibody that inhibits programmed cell death protein 1 (PD-1) (Incyte License Agreement). Incyte has obtained
exclusive worldwide rights for the development and commercialization of MGA012 in all indications, while we retain the right to develop our
pipeline assets in combination with MGA012. Incyte paid us an upfront payment of $150.0 million under the terms of the agreement.
Under the terms of the Incyte License Agreement, Incyte will lead global development of MGA012. Assuming successful development and
commercialization of MGA012 by Incyte, we could receive development and regulatory milestones of up to approximately $420.0 million, of
which we have already received $15.0 million, and up to $330.0 million in commercial milestones. If MGA012 is commercialized, we would be
eligible to receive tiered royalties of 15% to 24% on any global net sales and we have the option to co-promote MGA012 with Incyte. We retain
the right to develop our pipeline assets in combination with MGA012, with Incyte commercializing MGA012 and us commercializing our
asset(s), if any such potential combinations are approved. We also have an agreement with Incyte under which we are to perform development
and manufacturing services
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for Incyte's clinical needs of MGA012 (Incyte Clinical Supply Agreement). In addition, we retain the right to manufacture a portion of both
companies' global commercial supply needs of MGA012.
Zai Lab. In 2018, we entered into a collaboration and license agreement with Zai Lab Limited (Zai Lab) under which Zai Lab obtained regional
development and commercialization rights in mainland China, Hong Kong, Macau and Taiwan (Zai Lab’s territory) for (i) margetuximab, an
immune-optimized anti-HER2 monoclonal antibody, (ii) MGD013, a bispecific DART molecule designed to provide coordinate blockade of PD-
1 and LAG-3 for the potential treatment of a range of solid tumors and hematological malignancies, and (iii) an undisclosed multi-specific
TRIDENT molecule in preclinical development. Zai Lab will lead clinical development in its territory.
Under the terms of the agreement, Zai Lab paid us an upfront payment of $25.0 million less foreign withholding tax of $2.5 million. Assuming
successful development and commercialization of margetuximab, MGD013 and the TRIDENT molecule, we could receive up to $140.0 million
in development and regulatory milestones. In addition, Zai Lab would pay us tiered royalties at percentage rates of mid-teens to twenty percent
for net sales of margetuximab in Zai Lab’s territory, mid-teens for net sales of MGD013 in Zai Lab’s territory and 10% for net sales of the
TRIDENT molecule in Zai Lab’s territory, which may be subject to adjustment in specified circumstances.
I-Mab Biopharma. In July 2019, we entered into a collaboration and license agreement with I-Mab Biopharma (I-Mab) to develop and
commercialize enoblituzumab, an immune-optimized, anti-B7-H3 monoclonal antibody that incorporates our proprietary Fc Optimization
technology platform. I-Mab obtained regional development and commercialization rights in mainland China, Hong Kong, Macau and Taiwan (I-
Mab's territory), will lead clinical development of enoblituzumab in its territories, and will participate in global studies conducted by us.
the terms of the agreement, I-Mab paid us an upfront payment of $15.0 million. Assuming successful development and commercialization of
enoblituzumab, we could receive up to $135.0 million in development and regulatory milestones. In addition, I-Mab would pay us tiered
royalties ranging from mid teens to twenty percent on annual net sales in its territories.
Under
Financial Operations Overview
Revenue
Our revenue consists primarily of collaboration revenue, including amounts recognized relating to upfront nonrefundable payments for licenses or
options to obtain future licenses, amounts earned by performing development and manufacturing services, research and development funding and milestone
payments earned under our collaboration and license agreements with our strategic collaborators. In addition, we have earned revenues through several grants
and/or contracts with the U.S. government and other research institutions on behalf of the U.S. government, primarily with respect to research and
development activities related to infectious disease product candidates.
Research and Development Expense
Research and development expense consists of expenses incurred in performing research and development activities. These expenses include
conducting preclinical experiments and studies, clinical trials, manufacturing efforts and regulatory filings for all product candidates, and other indirect
expenses in support of our research and development activities. We capture research and development expense on a program-by-program basis for our
product candidates and recognize these expenses as they are incurred. The following are items we include in research and development expense:
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Employee-related expenses, such as salaries and benefits;
Employee-related overhead expenses, such as facilities and other allocated items;
Stock-based compensation expense to employees engaged in research and development activities;
• Depreciation of laboratory and manufacturing equipment, computers and leasehold improvements;
•
Fees paid to consultants, subcontractors, clinical research organizations (CROs) and other third party vendors for work performed under our
preclinical and clinical trials including, but not limited to, investigator grants, laboratory work and analysis, database management, statistical
analysis, and other items;
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• Amounts paid to vendors and suppliers for laboratory supplies;
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Internal and third party costs related to manufacturing clinical trial materials, including vialing, packaging and testing;
License fees and other third party vendor payments related to in-licensed product candidates and technology; and
Costs related to compliance with regulatory requirements.
It is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our
product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain
regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical
trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical trials and preclinical studies,
uncertainties in clinical trial enrollment rates and significant and changing government regulation. In addition, the probability of success for each product
candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to
pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each
product candidate's commercial potential.
General and Administrative Expenses
General and administrative expenses consist of salaries and related benefit costs for employees in our executive, finance, legal and intellectual
property, business development, human resources, information technology and other support functions, travel expenses and other legal and professional fees.
Other Income (Expense)
Other income (expense) consists of realized and unrealized gains and losses on equity securities and interest income earned on our cash, cash
equivalents and marketable securities, offset by other expenses.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial conditions and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these
consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amount of the revenue and expenses recorded during the
reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. We review and evaluate
these estimates on an on-going basis. These assumptions and estimates form the basis for making judgments about the carrying values of assets and liabilities
and amounts that have been recorded as revenues and expenses. Actual results and experiences may differ from these estimates. The results of any material
revisions would be reflected in the consolidated financial statements prospectively from the date of the change in estimate.
While a summary of significant accounting policies is described fully in Note 2 in our consolidated financial statements, we believe that the
following accounting policies are the most critical to assist you in fully understanding and evaluating our financial results and the effect of the estimates and
judgments we used in preparing our consolidated financial statements.
Revenue Recognition
Beginning January 1, 2018, we recognize revenue under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers
and all related amendments (collectively ASC 606) when our customer obtains control of promised goods or services, in an amount that reflects the
consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are
within the scope of ASC 606, management performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v)
recognize revenue when (or as) we satisfy a performance obligation. We recognize as revenue the amount of the transaction price that is allocated to the
respective performance obligation when (or as) the performance obligation is satisfied.
48
We enter into licensing agreements that are within the scope of ASC 606, under which we may license rights to research, develop, manufacture and
commercialize our product candidates to third parties. The terms of these arrangements typically include payment to us of one or more of the following: non-
refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone
payments; and royalties on net sales of licensed products. We may also enter into development and manufacturing service agreements with our collaborators.
For each arrangement that results in revenues, we identify all performance obligations, which may include a license to intellectual property and
know-how, research and development activities, transition activities and/or manufacturing services. In order to determine the transaction price, in addition to
any upfront payment, management estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most
likely amount method, depending on the facts and circumstances relative to the contract. We constrain (reduce) the estimates of variable consideration such
that it is probable that a significant reversal of previously recognized revenue will not occur. When determining if variable consideration should be
constrained, management considers whether there are factors outside our control that could result in a significant reversal of revenue. In making these
assessments, management considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as
required.
Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction
price is generally allocated to each separate performance obligation on a relative standalone selling price basis. We must develop assumptions that require
judgment to determine the standalone selling price in order to account for these agreements. To determine the standalone selling price, management’s
assumptions may include (i) the probability of obtaining marketing approval for the product candidate, (ii) estimates regarding the timing and the expected
costs to develop and commercialize the product candidate, and (iii) estimates of future cash flows from potential product sales with respect to the product
candidate. Standalone selling prices used to perform the initial allocation are not updated after contract inception. We do not include a financing component to
its estimated transaction price at contract inception unless we estimate that certain performance obligations will not be satisfied within one year.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the
12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts
not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Licenses. If the license to our intellectual property is determined to be distinct from the other promises or performance obligations identified in the
arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and when (or as)
the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, we
consider factors such as the research, development, manufacturing and commercialization capabilities of the licensee and the availability of the associated
expertise in the general marketplace. In addition, we consider whether the licensee can benefit from a promise for its intended purpose without the receipt of
the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the
remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, management
utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over
time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of
progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby
periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development
and licensing agreement. Such a change could have a material impact on the amount of revenue we record in future periods.
Research, Development and/or Manufacturing Services. The promises under our agreements may include research and development or
manufacturing services to be performed by us on behalf of the counterparty. If these services are determined to be distinct from the other promises or
performance obligations identified in the arrangement, we recognize the transaction price allocated to these services as revenue over time based on an
appropriate measure of progress when the performance by us does not create an asset with an alternative use and we have an enforceable right to payment for
the performance completed to date. If these services are determined not to be distinct from the other promises or performance obligations identified in the
arrangement, we recognize the transaction price allocated to the combined performance obligation as the related performance obligations are satisfied.
Customer Options. If an arrangement contains customer options, we evaluate whether the options are material rights because they allow the customer
to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is
recognized as a separate performance obligation at the outset of the
49
arrangement. We allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified
discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the
earliest, the option is exercised. If the options are deemed not to be a material right, they are excluded as performance obligations at the outset of the
arrangement.
Milestone Payments. At the inception of each arrangement that includes development milestone payments, management evaluates whether the
milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If
it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that
are not within our control or the licensee's control, such as regulatory approvals, are not considered probable of being achieved until those approvals are
received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone
in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur.
At the end of each subsequent reporting period, management reevaluates the probability of achievement of all milestones subject to constraint and, if
necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect
revenues and earnings in the period of adjustment.
Royalties. For arrangements that include sales-based royalties which are the result of a customer-vendor relationship and for which the license is
deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the
performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any
royalty revenue resulting from any of our licensing arrangements.
We analyze our collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties who are both
active participants in the activities and are both exposed to significant risks and rewards dependent on the commercial success of such activities. Such
arrangements generally are within the scope of ASC 808, Collaborative Arrangements (ASC 808). While ASC 808 defines collaborative arrangements and
provides guidance on income statement presentation, classification, and disclosures related to such arrangements, it does not address recognition and
measurement matters, such as (1) determining the appropriate unit of accounting or (2) when the recognition criteria are met. Therefore, the accounting for
these arrangements is either based on an analogy to other accounting literature or an accounting policy election by management. We account for certain
components of the collaboration agreement that are reflective of a vendor-customer relationship (e.g., licensing arrangement) based on an analogy to ASC
606. We account for other components based on a reasonable, rational and consistently applied accounting policy election. Reimbursements from the counter-
party that are the result of a collaborative relationship with the counter-party, instead of a customer relationship, such as co-development activities, are
recorded as a reduction to research and development expense as the services are performed.
Research and Development Expenses, Including Clinical Trial Accruals/Expenses
Research and development expenses consist of costs we incur for our own research and development activities and costs incurred by our
collaborators under cost sharing arrangements. Research and development costs consist of salaries and benefits, including related stock-based compensation,
laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf, such as
clinical research organizations (CROs) and contract manufacturing organizations (CMOs). Research and development costs are expensed as incurred. We
receive estimates from our collaborators when we are sharing development expenses, and use these estimates to record an increase or decrease in research and
development expense, depending on how much we have each spent during the period.
Clinical trial expenses are a significant component of research and development expenses, and we outsource a significant portion of these costs to
third parties. Third party clinical trial expenses include investigator fees, site and patient costs, CRO costs, costs for central laboratory testing, data
management and CMO costs. The accrual for site and patient costs includes inputs such as estimates of patient enrollment, patient cycles incurred, clinical
site activations, and other pass-through costs. These inputs are required to be estimated due to a lag in receiving the actual clinical information from third
parties. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are
reflected on the consolidated balance sheets as a prepaid asset or accrued expenses. These third party agreements are generally cancelable, and related costs
are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or services that will be used or rendered
for future research and development activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related
services are performed. When evaluating the adequacy of the accrued expenses, we analyze progress of the studies, including the phase or completion of
events, invoices received and contracted costs. Significant judgments and estimates may be made in determining
50
the accrued balances at the end of any reporting period. Actual results could differ from the estimates made. The historical clinical accrual estimates have not
been materially different from the actual costs.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is
reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Financial
statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position
being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. Our policy is to record interest and penalties related to uncertain tax positions as a component of income tax expense.
Stock-Based Compensation
We account for stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations and
comprehensive loss based on their grant date fair values. We estimate the grant date fair value of each option award using the Black-Scholes option pricing
model. The resulting fair value is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the option. The
use of a Black-Scholes model requires us to make assumptions with respect to the expected term of the option, the expected volatility of our common stock
consistent with the expected term of the option, the risk-free interest rate consistent with the expected term of the option, the expected dividend yield of our
common stock and the expected forfeiture rate.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements for information under the caption "Recently Issued
Accounting Standards."
Results of Operations
Revenue
The following represents a comparison of our revenue for the years ended December 31, 2019 and 2018:
Year Ended December 31,
2019
2018
Increase/(Decrease)
(dollars in millions)
Revenue from collaborative and other agreements
Revenue from government agreements
Total revenue
$
$
62.0 $
2.2
64.2 $
58.6 $
1.5
60.1 $
3.4
0.7
4.1
6 %
47 %
7 %
The increase of $3.4 million in revenue from collaborative and other agreements for the year ended December 31, 2019 compared to the year ended
December 31, 2018 was primarily due to:
•
•
•
a full year of revenue recognition of the deferred upfront payment under the Zai Lab collaboration and license agreement during the year ended
December 31, 2019 compared to only one month during the year ended December 31, 2018;
revenue recognized during the year ended December 31, 2019 related to manufacturing services performed under the Zai Lab clinical supply
agreements;
increased revenue recognition of the Les Laboratoires Servier and Institut de Recherches Servier (collectively, Servier) flotetuzumab license
grant fee during the year ended December 31, 2019 due to Servier's notice of their intention to terminate the agreement effective January 15,
2020; and
51
•
increased revenue recognition of the F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (Roche) upfront payment during the year ended
December 31, 2019 due to Roche's termination of the agreement effective November 2019.
These increases were partially offset by:
•
•
decreased revenue recognized under the Incyte License Agreement. Revenue recognized during the year ended December 31, 2018 included
$15.0 million in milestones and revenue related to certain clinical activities performed; and
decreased revenue recognized under the Provention Bio, Inc. (Provention) license agreement and Provention asset purchase agreement. Revenue
recognized during the year ended December 31, 2018 included $6.1 million recognized when the Company satisfied its performance obligations
under the agreements.
Research and Development Expenses
The following represents a comparison of our research and development expenses for the years ended December 31, 2019 and 2018:
Margetuximab
MGD013
Enoblituzumab
MGA012
Flotetuzumab (a)
MGC018
MGD009
MGD019
MGD007
Other immune modulator programs
Discovery and other pipeline programs, collectively
Year Ended December 31,
2019
2018
Increase/(Decrease)
$
52.2 $
68.4 $
(16.2)
(dollars in millions)
22.5
20.7
19.7
15.1
12.6
7.2
7.0
5.2
9.7
23.4
10.3
15.8
28.6
14.4
7.0
8.9
5.5
6.7
6.4
18.8
190.8 $
12.2
4.9
(8.9)
0.7
5.6
(1.7)
1.5
(1.5)
3.3
4.6
4.5
(24) %
118 %
31 %
(31) %
5 %
80 %
(19) %
27 %
(22) %
52 %
24 %
2 %
Total research and development expenses
$
195.3 $
(a) Expenses are shown net of reimbursements from collaboration partner.
Research and development expenses for the year ended December 31, 2019 increased by $4.5 million compared to the year ended December 31,
2018. This increase was primarily attributable to:
•
•
•
•
increased clinical costs related to the preparation for a Phase 2/3 study of enoblituzumab in combination with MGA012;
increased clinical trial costs related to our ongoing MGD013 Phase 1 study;
increased costs related to the initiation of a Phase 1 study of MGC018; and
increased costs related to preclinical development of product candidates in our pipeline.
These increases were partially offset by:
•
•
reduced clinical trial costs due to completed enrollment in our margetuximab Phase 3 SOPHIA study; and
reduced clinical trial costs for MGA012, as the monotherapy trial was transferred to Incyte in 2018 and decreased development and
manufacturing activities.
General and Administrative Expenses
The following represents a comparison of our general and administrative expenses for the years ended December 31, 2019 and 2018:
52
Year Ended December 31,
Increase/(Decrease)
2019
2018
(dollars in millions)
General and administrative expenses
$
46.1 $
40.5 $
5.6
14 %
General and administrative expenses increased for the year ended December 31, 2019 by $5.6 million compared to 2018 primarily due to an increase
in consulting costs related to market research and other commercial preparation activities.
Other Income (Expense)
The change to other income for the year ended December 31, 2019 from other expense for the year ended December 31, 2018 is primarily due to the
revaluation of the warrants we received as consideration under the Provention license agreement and Provention asset purchase agreement of $20.1 million.
Liquidity and Capital Resources
We have historically financed our operations primarily through public and private offerings of equity, upfront fees, milestone payments, license
option fees and payments for development and manufacturing services from collaborators and reimbursement through government grants and contracts. As
of December 31, 2019, we had $215.8 million in cash, cash equivalents and marketable securities. In addition to our existing cash, cash equivalents and
marketable securities, we are eligible to receive additional reimbursement from our collaborators, including under various government grants or contracts, for
certain research and development services rendered, additional milestone and opt-in payments and grant revenue. However, our ability to receive these
milestone payments is dependent upon our ability to successfully complete specified research and development activities and is therefore uncertain at this
time.
Funding Requirements
We have not generated any revenue from product sales to date and do not expect to do so until such time as we obtain regulatory approval for and
commercialize one or more of our product candidates. As we are currently in the clinical trial stage of development, it may be some time before we expect to
generate revenue from product sales and it is uncertain that we ever will. We expect that we will continue to increase our operating expenses in connection
with ongoing as well as additional clinical trials and preclinical development of product candidates in our pipeline. We expect to continue our collaboration
arrangements and will look for additional collaboration opportunities. We also expect to continue our efforts to pursue additional grants and contracts from
the U.S. government in order to further our research and development. Although it is difficult to predict our funding requirements, based upon our current
operating plan, we anticipate that our existing cash, cash equivalents and marketable securities as of December 31, 2019, combined with anticipated and
potential collaboration payments, will enable us to fund our operations into 2021, assuming all of our programs and collaborations advance as currently
contemplated.
Cash Flows
The following table represents a summary of our cash flows for the years ended December 31, 2019 and 2018:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
Year Ended December 31,
Increase/(Decrease)
2019
2018
(dollars in millions)
$
$
(134.3) $
(153.2) $
(79.4)
120.0
56.6
105.0
(93.7) $
8.4 $
18.9
(136.0)
15.0
(102.1)
(12) %
(240) %
14 %
(1215) %
Net cash provided by or used in operating activities reflects, among other things, the amounts used to advance our clinical trials and preclinical
activities. The principal use of cash in operating activities for all periods presented was primarily the result of our net loss, adjusted for non-cash items, with
the year ended December 31, 2019 benefiting from the $22.5 million net upfront payment from Zai Lab and the $15.0 million upfront payment from I-Mab,
and the year ended December 31, 2018
53
benefiting from the $15.0 million in milestone payments received from Incyte and the $10.0 million upfront payment from Roche.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2019 is primarily due to purchases of marketable securities, partially offset
by maturities of marketable securities. Net cash provided by investing activities during the year ended December 31, 2018 is primarily due to maturities of
marketable securities, partially offset by purchases of marketable securities and making leasehold improvements to our facilities, including the build out of a
manufacturing suite at our headquarters building in Rockville, Maryland.
Financing Activities
Net cash provided by financing activities for the years ended December 31, 2019 and 2018 reflects net cash proceeds from our securities offerings of
approximately $118.7 million and $103.3 million, respectively, and cash from stock option exercises and the purchase of shares under our employee stock
purchase plan.
Contractual Obligations and Contingent Liabilities
Our current obligations and contingent liabilities are limited to the operating leases at our facilities in Rockville, Maryland and Brisbane,
California. The following table represents future minimum operating lease payments under non-cancelable operating leases as of December 31, 2019:
Operating Leases
$
42.3 $
5.9 $
13.2 $
12.1 $
11.1
Total
Less than 1 year
1 to 3 years
3 to 5 years
More than 5 years
(in millions)
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under the rules and regulations of the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary objective when considering our investment activities is to preserve capital in order to fund our operations. We also seek to maximize
income from our investments without assuming significant risk. Our current investment policy is to invest principally in deposits and securities issued by the
U.S. government and its agencies, Government Sponsored Enterprise agency debt obligations, corporate debt obligations and money market instruments. As
of December 31, 2019, we had cash, cash equivalents and marketable securities of $215.8 million. Our primary exposure to market risk is related to changes
in interest rates. Due to the short-term maturities of our cash equivalents and marketable securities and the low risk profile of our marketable securities, an
immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and marketable securities.
We have the ability to hold our marketable securities until maturity, and we therefore do not expect a change in market interest rates to affect our operating
results or cash flows to any significant degree.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 - F-28 in this Annual Report on Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
54
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2019. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be
disclosed in this Annual Report on Form 10-K has been appropriately recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our
principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive
and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control
Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial
reporting that occurred during the quarterly period ended December 31, 2019, and has concluded that there was no change that occurred during the quarterly
period ended December 31, 2019 that have materially affected, or are reasonably likely to materially effect, the Company's internal control over financial
reporting.
Management's Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed
by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
•
•
pertain to the management of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. In
making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (COSO) in Internal Control-Integrated Framework. Based on our assessment, management believes that, as of December 31, 2019, the
Company's internal control over financial reporting is effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young, LLP, an independent
registered public accounting firm, as stated in their report which is included herein on page 56.
ITEM 9B. OTHER INFORMATION
None.
55
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MacroGenics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited MacroGenics, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, MacroGenics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 25, 2020,
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 25, 2020
56
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
We incorporate herein by reference the relevant information concerning directors, executive officers and corporate governance to be included in our
definitive proxy statement for the 2020 annual meeting of stockholders (the 2020 Proxy Statement).
ITEM 11. EXECUTIVE COMPENSATION
We incorporate herein by reference the relevant information concerning executive compensation to be included in the 2020 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
We incorporate herein by reference the relevant information concerning security ownership of certain beneficial owners and management to be
included in the 2020 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We incorporate herein by reference the relevant information concerning certain other relationships and related transactions to be included in the 2020
Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We incorporate herein by reference the relevant information concerning principal accountant fees and services to be included in the 2020 Proxy
Statement.
57
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements:
PART IV
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F - 1
F - 3
F - 4
F - 5
F - 6
F - 7
2. Financial Statement Schedules:
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the
financial statements or the notes thereto.
3. Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately following our consolidated financial
statements. The Exhibit Index is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized:
SIGNATURES
MacroGenics, Inc.
By:
/s/ Scott Koenig
Scott Koenig, M.D., Ph.D.
President and CEO and Director
Pursuant to the requirements of the Securities Act of 1934, as amended, this Report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Scott Koenig
Scott Koenig, M.D., Ph.D.
President and CEO and Director
(Principal Executive Officer)
February 25, 2020
/s/ James Karrels
James Karrels
/s/ Lynn Cilinski
Lynn Cilinski
/s/ Paulo Costa
Paulo Costa
/s/ Karen Ferrante, M.D.
Karen Ferrante, M.D.
/s/ Matthew Fust
Matthew Fust
/s/ Kenneth Galbraith
Kenneth Galbraith
/s/ Edward Hurwitz
Edward Hurwitz
/s/ Scott Jackson
Scott Jackson
/s/ Jay Siegel, M.D.
Jay Siegel, M.D.
/s/ David Stump, M.D.
David Stump, M.D.
Senior Vice President, Chief Financial
February 25, 2020
Officer and Secretary (Principal Financial Officer)
Vice President, Controller and Treasurer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
59
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2019 and December 31, 2018
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
Number
F - 1
F - 3
F - 4
F - 5
F - 6
F - 7
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MacroGenics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MacroGenics, Inc. (the Company) as of December 31, 2019 and 2018, the related
consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2020 expressed an unqualified
opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers in
2018 due to the adoption of ASU No. 2014-09, “Revenues from Contracts with Customers,” as amended (Topic 606).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required
to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the account or disclosure to which it relates.
F - 1
Clinical Trial Accruals
Description of the Matter
How We Addressed the Matter
in Our Audit
As disclosed in Note 2 to the consolidated financial statements, the Company expenses research and development
expenditures as incurred, which include costs relating to clinical trial activities. The Company accrues costs for clinical trial
activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the
clinical research organizations (CROs), investigators, professional service providers, and other vendors providing
development services (collectively, the “service providers”). The Company’s clinical trial accrual balance at December 31,
2019 is included in accrued expenses of $27.1 million on the consolidated balance sheet, and the Company’s related 2019
clinical trial expenses are included in research and development costs and expenses of $195.3 million on the consolidated
statement of operations and comprehensive loss for the year ended December 31, 2019.
Auditing the Company’s accruals for clinical trial costs involved complex and subjective auditor judgment due to the
significant estimation required by management in determining the progress to completion of services that have been
performed by the service providers and the associated costs that will be invoiced by the service providers subsequent to the
date that the consolidated financial statements are issued.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls addressing the
identified risks related to the Company’s process for estimating accrued clinical trial costs. For example, we tested controls
over management’s review of the clinical trial expense calculations, the significant assumptions about the status of research
and development services incurred, and the completeness and accuracy of the data used to calculate the estimates.
To test the clinical trial accruals, our audit procedures included, among others, reviewing a sample of agreements with the
service providers to corroborate key financial and contractual terms, and testing the accuracy and completeness of the
underlying data used in the accrual computations. We also evaluated management’s estimates of the progress of a sample of
clinical trials by making direct inquiries of the Company’s operations personnel that oversee the clinical trials and obtaining
information directly from certain service providers about the service providers’ estimate of costs that had been incurred
through December 31, 2019. To evaluate the completeness of the accruals, we also examined subsequent invoices from the
service providers and cash disbursements to the service providers, to the extent such invoices were received, or payments
were made prior to the date that the consolidated financial statements were issued.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2006.
Baltimore, Maryland
February 25, 2020
F - 2
MACROGENICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Prepaid expenses and other current assets
Total current assets
Property, equipment and software, net
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Deferred rent
Lease Liabilities
Total current liabilities
Deferred revenue, net of current portion
Lease liabilities, net of current portion
Deferred rent, net of current portion
Total liabilities
Stockholders' equity:
Common stock, $0.01 par value -- 125,000,000 shares authorized, 48,958,763 and 42,353,301 shares outstanding at
December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes.
F - 3
December 31,
2019
2018
$
126,472 $
220,128
$
$
89,284
12,744
11,285
12,735
29,583
6,678
239,785
269,124
48,211
24,505
56,712
6,294
312,501 $
332,130
4,308 $
27,139
10,700
—
3,020
45,167
9,153
27,553
—
81,873
4,005
33,196
21,721
1,018
—
59,940
19,001
—
10,312
89,253
490
872,204
16
(642,082)
230,628
$
312,501 $
424
732,727
(3)
(490,271)
242,877
332,130
MACROGENICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Revenues:
Revenue from collaborative and other agreements
Revenue from government agreements
Total revenues
Costs and expenses:
Research and development
General and administrative
Total costs and expenses
Loss from operations
Other income (expense)
Net loss
Other comprehensive loss:
Unrealized gain on investments
Comprehensive loss
Basic and diluted net loss per common share
Basic and diluted weighted average number of common shares
See accompanying notes.
F - 4
Year Ended December 31,
2019
2018
2017
$
62,024 $
58,644 $
155,516
2,164
64,188
1,477
60,121
2,226
157,742
195,309
46,064
241,373
190,827
40,500
231,327
147,232
32,653
179,885
(177,185)
(171,206)
(22,143)
25,374
(151,811)
(247)
(171,453)
2,517
(19,626)
19
58
21
(151,792) $
(171,395) $
(19,605)
(3.16) $
(4.19) $
(0.54)
48,082,728
40,925,318
36,095,080
$
$
Balance, December 31, 2016
Share-based compensation
—
Issuance of common stock, net of offering costs
1,699,284
Stock plan related activity
Retirement of treasury stock
Unrealized gain on investments
Net loss
289,186
—
—
—
Balance, December 31, 2017
36,859,077
369
Cumulative effect of adoption of accounting
standards
Share-based compensation
—
—
Issuance of common stock, net of offering costs
5,175,000
Stock plan related activity
Retirement of treasury stock
Unrealized gain on investments
Net loss
Balance, December 31, 2018
Share-based compensation
Stock plan related activity
Unrealized gain on investments
Net loss
Balance, December 31, 2019
See accompanying notes.
Issuance of common stock, net of offering costs
6,325,000
MACROGENICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
34,870,607 $ 349
— $ — $ 561,198 $ (292,714) $
(82) $
268,751
—
17
3
—
—
—
—
—
52
3
—
—
—
—
63
3
—
—
—
—
—
—
1,862
(40)
(1,862)
—
—
—
—
—
—
40
—
—
—
—
—
—
11,070
(260)
(11,070)
260
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,744
34,227
1,141
(40)
—
—
—
—
—
—
—
(19,626)
—
—
—
—
21
—
14,744
34,244
1,104
—
21
(19,626)
611,270
(312,340)
(61)
299,238
—
(6,478)
16,520
103,207
1,990
(260)
—
—
—
—
—
—
—
(171,453)
732,727
(490,271)
19,571
118,594
1,312
—
—
—
—
—
—
(151,811)
—
—
—
—
—
58
—
(3)
—
—
—
19
—
(6,478)
16,520
103,259
1,733
—
58
(171,453)
242,877
19,571
118,657
1,315
19
(151,811)
42,353,301
424
319,224
—
—
—
—
280,462
—
—
48,958,763 $ 490
— $ — $ 872,204 $ (642,082) $
16 $
230,628
F - 5
MACROGENICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Share-based compensation
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Other assets
Accounts payable
Accrued expenses
Lease liabilities
Deferred revenue
Deferred rent
Other liabilities
Year Ended December 31,
2019
2018
2017
$
(151,811) $
(171,453) $
(19,626)
10,845
19,571
16,839
(4,878)
(1,578)
787
(6,057)
2,881
(20,869)
—
—
8,279
16,520
7,228
14,744
(15,941)
(10,878)
(3,255)
(4,580)
1,554
3,506
—
13,405
(971)
(298)
332
262
(1,544)
12,832
—
6,533
6,115
(1,593)
14,405
Net cash provided by (used in) operating activities
(134,270)
(153,234)
Cash flows from investing activities
Purchases of marketable securities
Proceeds from sales and maturities of marketable securities
Purchases of property, equipment and software
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs
Proceeds from stock option exercises and ESPP purchases
Purchase of treasury stock
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Non-cash operating and investing activities:
Right-of-use assets modified in exchange for operating lease obligation
Fair value of warrants received
See accompanying notes.
F - 6
(264,399)
(132,750)
(135,122)
189,330
(4,289)
(79,358)
214,348
(24,954)
56,644
118,657
103,259
1,315
—
119,972
(93,656)
220,128
1,992
(260)
104,991
8,401
211,727
126,472 $
220,128 $
242,401
(29,403)
77,876
34,244
1,144
(40)
35,348
127,629
84,098
211,727
6,408 $
— $
— $
6,130 $
—
—
$
$
$
MACROGENICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
MacroGenics, Inc. (the Company) is incorporated in the state of Delaware. The Company is a biopharmaceutical company focused on discovering
and developing innovative antibody-based therapeutics designed to modulate the human immune response for the treatment of cancer. The Company
currently has a pipeline of investigational product candidates in human clinical testing that have been created primarily using its proprietary, antibody-based
technology platforms. The Company believes its programs have the potential to have a meaningful effect on treating patients' unmet medical needs as
monotherapy or, in some cases, in combination with other therapeutic agents.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MacroGenics UK Limited and
MacroGenics Limited. All intercompany accounts and transactions have been eliminated in consolidation. The Company currently operates in one operating
segment. Operating segments are defined as components of an enterprise about which separate discrete information is available for the chief operating
decision maker, or decision making group, in deciding how to allocate resources and assessing performance. The Company views its operations and manages
its business in one segment, which is developing monoclonal antibody-based therapeutics for cancer, autoimmune and infectious diseases.
Use of Estimates
The preparation of the financial statements in accordance with generally accepted accounting principles (GAAP) requires the Company to make
estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including
those related to revenue recognition, fair values of assets, stock-based compensation, income taxes, preclinical study and clinical trial accruals and other
contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the
circumstances. Actual results could differ from these estimates.
Cash, Cash Equivalents and Marketable Securities
The Company considers all investments in highly liquid financial instruments with a maturity of 90 days or less at the date of purchase to be cash
equivalents. Cash and cash equivalents includes investments in money market funds with commercial banks and financial institutions, securities issued by the
U.S. government and its agencies, Government Sponsored Enterprise agency debt obligations and corporate debt obligations. Cash equivalents are stated at
amortized cost, plus accrued interest, which approximates fair value.
The Company carries marketable securities classified as available-for-sale at fair value as determined by prices for identical or similar securities at the
balance sheet date. Marketable securities consist of Level 2 financial instruments in the fair-value hierarchy. The Company records unrealized gains and
losses as a component of other comprehensive loss within the statements of operations and comprehensive loss and as a separate component of stockholders'
equity. Realized gains or losses on available-for-sale securities are determined using the specific identification method and the Company includes net realized
gains and losses in other income (expense).
At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss
is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost basis, underlying factors
contributing to a decline in the prices of securities in a single asset class, the length of time the market value of the security has been less than its cost basis,
the security's relative performance versus its peers, sector or asset class, expected market volatility and the market and economy in general. The Company
also evaluates whether it is more likely than not that it will be required to sell a security prior to recovery of its fair value. An impairment loss is recognized at
the time the Company determines that a decline in the fair value below its cost basis is other-than-temporary. There were no unrealized losses at
December 31, 2019 or 2018 that the Company determined to be other-than-temporary.
F - 7
Accounts Receivable
Accounts receivable that management has the intent and ability to collect are reported in the consolidated balance sheets at outstanding amounts, less
an allowance for doubtful accounts. The Company writes off uncollectible receivables when the likelihood of collection is remote.
The Company evaluates the collectability of accounts receivable on a regular basis. The allowance, if any, is based upon various factors including the
financial condition and payment history of customers, an overall review of collections experience on other accounts and economic factors or events expected
to affect future collections experience. No allowance was recorded as of December 31, 2019 or 2018, as the Company has a history of collecting on all
outstanding accounts.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued
expenses. The carrying amount of accounts receivable, accounts payable and accrued expenses are generally considered to be representative of their
respective fair values because of their short-term nature. The Company accounts for recurring and non-recurring fair value measurements in accordance with
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820).
ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair
value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires
assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
•
•
•
Level 1 – Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2 – Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include
quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related
inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by
observable market data.
Level 3 – Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant
and subjective judgments to be made by a reporting entity – e.g., determining an appropriate adjustment to a discount factor for illiquidity
associated with a given security.
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at
which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in
determining fair value and where such inputs lie within the ASC 820 hierarchy.
Financial assets measured at fair value on a recurring basis were as follows (in thousands):
Assets:
Money market funds
Government-sponsored enterprises
Corporate debt securities
Total assets measured at fair value (a)
Fair Value Measurement at December 31, 2019
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant Other
Observable Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
46,149
$
46,149
$
—
$
13,222
103,135
—
—
13,222
103,135
162,506
$
46,149
$
116,357
$
—
—
—
—
F - 8
Assets:
Money market funds
U.S Treasury securities
Corporate debt securities
Common stock warrants
Total assets measured at fair value (b)
Fair Value Measurement at December 31, 2018
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant Other
Observable Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
46,257
$
46,257
$
—
$
12,488
100,214
1,890
—
—
—
160,849
$
46,257
$
12,488
100,214
—
112,702
$
$
—
—
—
1,890
1,890
(a) Total assets measured at fair value at December 31, 2019 includes approximately $73.2 million reported in cash and cash equivalents on the balance sheet.
(b) Total assets measured at fair value at December 31, 2018 includes approximately $146.2 million reported in cash and cash equivalents on the balance
sheet.
The fair value of Level 2 securities is determined from market pricing and other observable market inputs for similar securities obtained from
various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable
market data. The fair value of Level 3 securities is determined using the Black-Scholes option-pricing model. There were no transfers between levels during
the periods presented.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable
securities and accounts receivable. The Company maintains its cash and money market funds with financial institutions that are federally insured. While
balances deposited in these institutions often exceed Federal Deposit Insurance Corporation limits, the Company has not experienced any losses on related
accounts to date. The Company's investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and
institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The counterparties are various
corporations, financial institutions and government agencies of high credit standing.
The Company's revenue relates to agreements with various collaborators and contracts and research grants received from U.S. government
agencies. The following table includes those collaborators that represent more than 10% of total revenue earned in the periods indicated:
Incyte Corporation (Incyte)
Zai Lab Limited (Zai Lab)
Les Laboratoires Servier and Institut de Recherches Servier (Servier)
* Balance is less than 10%
Year Ended December 31,
2019
35%
29%
18%
2018
68%
*
*
2017
96%
*
*
The following table includes those counterparties that represent more than 10% of accounts receivable at the date indicated:
Incyte
Zai Lab
December 31,
2019
62%
23%
2018
16%
76%
F - 9
Property, Equipment and Software
Property, equipment and software are stated at cost. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed
as incurred. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
Computer equipment
Software
Furniture
Laboratory and office equipment
Leasehold improvements
Impairment of Long-Lived Assets
3 years
3 years
10 years
5 years
Shorter of lease term or useful life
The Company assesses the recoverability of its long-lived assets in accordance with the provisions of ASC 360, Property, Plant and Equipment
(ASC 360). ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset or asset group. If carrying value exceeds the sum of undiscounted cash flows, the Company
then determines the fair value of the underlying asset group. Any impairment to be recognized is measured by the amount by which the carrying amount of
the asset group exceeds the estimated fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell. For the years ended December 31, 2019, 2018 and 2017, the Company determined that there were no impaired assets.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is
reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Financial
statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position
being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the largest amount that is more likely than not to be
realized upon ultimate settlement. The Company's policy is to record interest and penalties related to uncertain tax positions as a component of income tax
expense.
Revenues
Beginning on January 1, 2018, the Company recognizes revenue under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers and all related amendments (collectively ASC 606) when its customer obtains control of promised goods or services, in an amount that
reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that
an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the
performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company recognizes as revenue the amount of the transaction price
that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company enters into licensing agreements that are within the scope of ASC 606, under which it may license rights to research, develop,
manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or
more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and
commercial milestone payments; and royalties on net sales of licensed products. The Company may also enter into development and manufacturing service
agreements with its collaborators.
For each arrangement that results in revenues, the Company identifies all performance obligations, which may include a license to intellectual
property and know-how, research and development activities, transition activities and/or manufacturing services. In order to determine the transaction price,
in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected
value or most likely amount method, depending
F - 10
on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a
significant reversal of previously recognized revenue will not occur. When determining if variable consideration should be constrained, management
considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the
Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction
price is generally allocated to each separate performance obligation on a relative standalone selling price basis. The Company must develop assumptions that
require judgment to determine the standalone selling price in order to account for these agreements. To determine the standalone selling price, the Company’s
assumptions may include (i) the probability of obtaining marketing approval for the product candidate, (ii) estimates regarding the timing and the expected
costs to develop and commercialize the product candidate, and (iii) estimates of future cash flows from potential product sales with respect to the product
candidate. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing
component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the
12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts
not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Licenses. If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations
identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to
the customer and when (or as) the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct
from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the licensee
and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the licensee can benefit from a
promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise,
whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses
that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the
combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of
recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related
revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and
may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue
the Company records in future periods.
Research, Development and/or Manufacturing Services. The promises under the Company’s agreements may include research and development or
manufacturing services to be performed by the Company on behalf of the counterparty. If these services are determined to be distinct from the other promises
or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to these services as revenue over time based
on an appropriate measure of progress when the performance by the Company does not create an asset with an alternative use and the Company has an
enforceable right to payment for the performance completed to date. If these services are determined not to be distinct from the other promises or performance
obligations identified in the arrangement, the Company recognizes the transaction price allocated to the combined performance obligation as the related
performance obligations are satisfied.
Customer Options. If an arrangement contains customer options, the Company evaluates whether the options are material rights because they allow
the customer to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material
right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based
on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option.
Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised. If the options are deemed not to be a material
right, they are excluded as performance obligations at the outset of the arrangement.
Milestone Payments. At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the
milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If
it is probable that a significant revenue reversal would not
F - 11
occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee,
such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the
scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is
considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent
reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the
overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of
adjustment.
Royalties. For arrangements that include sales-based royalties which are the result of a customer-vendor relationship and for which the license is
deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when
the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not
recognized any royalty revenue resulting from any of its licensing arrangements.
The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties
who are both active participants in the activities and are both exposed to significant risks and rewards dependent on the commercial success of such activities.
Such arrangements generally are within the scope of ASC 808, Collaborative Arrangements (ASC 808). While ASC 808 defines collaborative arrangements
and provides guidance on income statement presentation, classification, and disclosures related to such arrangements, it does not address recognition and
measurement matters, such as (1) determining the appropriate unit of accounting or (2) when the recognition criteria are met. Therefore, the accounting for
these arrangements is either based on an analogy to other accounting literature or an accounting policy election by the Company. The Company accounts for
certain components of the collaboration agreement that are reflective of a vendor-customer relationship (e.g., licensing arrangement) based on an analogy to
ASC 606. The Company accounts for other components based on a reasonable, rational and consistently applied accounting policy election. Reimbursements
from the counter-party that are the result of a collaborative relationship with the counter-party, instead of a customer relationship, such as co-development
activities, are recorded as a reduction to research and development expense as the services are performed.
For a complete discussion of accounting for revenue from collaborative and other agreements, see Note 9, Collaboration and Other Agreements.
Research and Development Costs, Including Clinical Trial Accruals/Expenses
Research and development expenditures are expensed as incurred. Research and development costs primarily consist of employee related expenses,
including salaries and benefits, expenses incurred under agreements with contract research organizations (CROs), investigative sites and consultants that
conduct the Company's clinical trials, the cost of acquiring and manufacturing clinical trial materials, including costs incurred under agreements with contract
manufacturing organizations (CMOs), and other allocated expenses, license fees for and milestone payments related to in-licensed products and technologies,
stock-based compensation expense, and costs associated with non-clinical activities and regulatory approvals.
Right-to-develop agreements may contain cost-sharing provisions whereby the Company and the collaborator share the cost of research and
development activities. Reimbursement of research and development expenses received in connection with these agreements is recorded as a reduction of
such expenses.
Clinical trial expenses are a significant component of research and development expenses, and the Company outsources a significant portion of these
costs to third parties. Third party clinical trial expenses include investigator fees, site and patient costs, clinical research organization (CRO) costs, costs for
central laboratory testing, data management and CMO costs. The accrual for site and patient costs includes inputs such as estimates of patient enrollment,
patient cycles incurred, clinical site activations, and other pass-through costs. These inputs are required to be estimated due to a lag in receiving the actual
clinical information from third parties. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern
of costs incurred, and are reflected on the consolidated balance sheets as a prepaid asset or accrued expenses. These third party agreements are generally
cancellable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or
services that will be used or rendered for future research and development activities are recorded as a prepaid asset and recognized as expense as the related
goods are delivered or the related services are performed. When evaluating the adequacy of the accrued expenses, management analyzes progress of the
studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining
the accrued balances at the end of any reporting period.
F - 12
Actual results could differ from the estimates made. The historical clinical accrual estimates have not been materially different from the actual costs.
Stock-based Compensation
Stock-based payments are accounted for in accordance with the provisions of ASC 718, Compensation – Stock Compensation. The fair value of
stock-based payments is estimated, on the date of grant, using the Black-Scholes model. The resulting fair value is recognized ratably over the requisite
service period, which is generally the vesting period of the option.
For all time-vesting awards granted, expense is amortized using the straight-line attribution method. For awards that contain a performance
condition, expense is amortized using the accelerated attribution method. Recognition of stock-based compensation expense is based on the value of the
portion of stock-based awards that is ultimately expected to vest during the period.
The Company utilizes the Black-Scholes model for estimating fair value of its stock options granted. Option valuation models, including the Black-
Scholes model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an
award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award.
Comprehensive Loss
Comprehensive loss represents net loss adjusted for the change during the periods attributed to unrealized gains and losses on available-for-sale debt
securities.
Net Loss Per Share
Basic and diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the
period. All stock options and restricted stock units (RSUs) are excluded from the per share calculations as such securities were anti-dilutive for all periods
presented. The following table presents the number of stock options and RSUs that were excluded from the calculation of net loss per share:
Stock options and RSUs
Recently Adopted Accounting Standards
Year Ended December 31,
2019
7,159,494
2018
5,273,964
2017
4,504,642
In May 2014, the FASB issued ASC 606. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all
contracts that were not completed as of January 1, 2018. For contracts that were modified before the effective date, the Company reflected the aggregate
effect of all modifications when identifying performance obligations and allocating transaction price in accordance with available practical expedients.
Comparative prior period information continues to be reported under the accounting standards in effect for the period presented.
As a result of applying the modified retrospective method to adopt the new guidance, the following adjustments were made to accounts on the
consolidated balance sheet as of January 1, 2018 (in thousands):
Deferred revenue, current
Deferred revenue, net of current portion
Accumulated deficit
Pre-Adoption
ASC 606
Adjustment
Post-Adoption
$
7,202 $
540 $
13,637
(312,340)
5,939
(6,478)
7,742
19,576
(318,818)
The transition adjustment resulted primarily from changes in the pattern of revenue recognition for upfront fees and license grant fees.
F - 13
The following table shows the impact of adoption to the consolidated statement of income and balance sheet (in thousands):
Revenue from collaborative agreements
Net loss
Basic and diluted net loss per common share
Deferred revenue, current
Deferred revenue, net of current portion
Accumulated deficit
Year Ended December 31, 2018
As Reported
Balances Without
Adoption of ASC 606
Effect of Change
Higher/(Lower)
58,644 $
(171,453)
(4.19) $
58,104 $
(171,993)
(4.20) $
540
(540)
0.01
As of December 31, 2018
As Reported
Balances Without
Adoption of ASC 606
Effect of Change
Higher/(Lower)
21,721 $
19,001
(490,271) $
22,210 $
12,573
(484,332) $
(489)
6,428
(5,939)
$
$
$
The following table presents changes in the Company’s contract liabilities during the year ended December 31, 2018 (in thousands):
Deferred revenue (current and non-current)
$
27,318 $
22,992 $
(9,588) $
40,722
Balance at Beginning of
Period
Additions
Deductions
Balance at End of
Period
During the year ended December 31, 2018, the Company recognized $9.6 million in revenue as a result of changes in the contract liability balance.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-of-use (ROU) asset and a lease liability for all leases
with terms greater than 12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from
leases. Subsequent to the issuance of ASU 2016-02, the FASB clarified the guidance through several ASUs, with the resulting guidance collectively referred
to as ASC 842. The Company adopted ASC 842 effective January 1, 2019, using the optional transition method provided under ASU 2018-11, which did not
require adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company has elected not to recognize leases
with terms of one year or less on the balance sheet.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and
circumstances. For leases where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term and lease
liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement
date based on the present value of lease payments over the lease term. The interest rate implicit in lease contracts is typically not readily determinable. As
such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term of the
lease for which the rate is estimated. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
The lease terms used to calculate the ROU asset and related lease liabilities include options to extend or terminate the lease when it is reasonably certain that
the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense
while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The
Company has lease agreements which require payments for lease and non-lease components and has elected the practical expedient not to separate non-lease
components from lease components for all classes of underlying assets.
As a result of the cumulative impact of adopting ASC 842, the Company recorded operating lease ROU assets of $16.4 million and operating lease
liabilities of $27.7 million as of January 1, 2019, primarily related to real estate leases, based on the present value of the future lease payments on the date of
adoption. The ROU asset is included in Other assets on the consolidated balance sheets. Refer to Note 5, Leases, for additional disclosures required by ASC
842.
F - 14
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13), which modifies the measurement
of expected credit losses on certain financial instruments. In addition, for available-for-sale debt securities, the standard eliminates the concept of other-than-
temporary impairment and requires the recognition of an allowance for credit losses rather than reductions in the amortized cost of the securities. The
standard is effective for interim and annual periods beginning after December 15, 2019 and requires a modified-retrospective approach with a cumulative-
effect adjustment to retained earnings as of the beginning of the first reporting period. Based on the composition of the Company's investment portfolio,
current market conditions and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated
financial position, results of operations or the related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (ASU 2018-15). This new standard
requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, Accounting for
Internal-Use Software, to determine which implementation costs to capitalize as assets and amortize over the term of the hosting arrangement or expense as
incurred. This standard is effective for interim and annual periods beginning after December 15, 2019. Entities have the option to apply this standard
prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is evaluating this new standard, but does not
expect it to have a significant impact on its financial statement presentation or results.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and
Topic 606 (ASU 2018-18). The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be
accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of
account, (ii) adds unit-of-account guidance in ASC 808 to align with guidance in ASC 606, and (iii) precludes presenting revenue from a collaborative
arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective
for fiscal years beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The Company does not anticipate the
adoption of this standard will have a material impact on its consolidated financial statements.
The Company has evaluated all other ASUs issued through the date the consolidated financials were issued and believes that the adoption of these
will not have a material impact on the Company's consolidated financial statements.
3. Marketable Securities
Available-for-sale marketable securities as of December 31, 2019 and 2018 were as follows (in thousands):
Government-sponsored enterprises
Corporate debt securities
Total
Amortized
Cost
$
$
13,216 $
76,052
89,268 $
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
6 $
20
26 $
— $
(10)
(10) $
Fair
Value
13,222
76,062
89,284
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Corporate debt securities
$
12,738 $
— $
(3) $
12,735
All of the Company's available-for-sale securities held at December 31, 2019 and 2018 had maturity dates of less than one year.
All available-for-sale securities in an unrealized loss position as of December 31, 2019 and 2018 were in a loss position for less than twelve
months. There were no unrealized losses at December 31, 2019 or 2018 that the Company determined to be other-than-temporary. The Company recorded
interest income of $3.4 million, $2.3 million and $2.4 million during the years ended December 31, 2019, 2018 and 2017, respectively, which is included in
Other income (expense) on the consolidated statements of operations and comprehensive loss.
F - 15
4. Property, Equipment and Software
Property, equipment and software consists of the following (in thousands):
Computer equipment
Software
Furniture and office equipment
Motor Vehicles
Lab equipment
Leasehold improvements
Construction in progress
Property, equipment and software
Less accumulated depreciation and amortization
Property, equipment and software, net
December 31,
2019
2018
$
2,430 $
7,513
713
50
38,368
48,675
187
97,936
(49,725)
$
48,211 $
2,360
7,011
668
—
36,062
48,328
218
94,647
(37,935)
56,712
There was $0.1 million in property, equipment and software at December 31, 2019 that was purchased in 2019 but was not paid for by year end. The
property, equipment and software balance at December 31, 2018 includes approximately $0.6 million in assets that were purchased in 2018 but were not paid
for by year end. Depreciation and amortization expense related to property, equipment and software for the years ended December 31, 2019, 2018 and 2017
was $12.3 million, $9.2 million and $7.0 million, respectively.
5. Leases
The Company has non-cancelable operating leases for manufacturing, laboratory and office space in Rockville, Maryland and a non-cancelable
operating lease for laboratory and office space in Brisbane, California. A portion of the space under one of these leases is subleased to a third party. All but
one of these leases include one or more options to renew, with those renewal periods ranging from five to fourteen years. At December 31, 2019, the
Company's weighted-average remaining lease term relating to its operating leases is 5.6 years, with a weighted-average discount rate of 9.9%.
Upon adoption of ASC 842 on January 1, 2019, it was not reasonably certain that the Company would extend any of its operating leases, therefore
the options to extend the lease terms were not recognized as part of the ROU assets or lease liabilities. During the year ended December 31, 2019, the
Company exercised the options to extend two leases for an additional five years each, therefore the Company remeasured the lease liability and adjusted the
carrying amount of the ROU asset related to these leases. The Company made cash payments of $6.4 million for operating leases during the year ended
December 31, 2019. As of December 31, 2019, the Company’s ROU assets were valued at $20.2 million and are included in Other assets on the consolidated
balance sheet.
The components of lease cost for the year ended December 31, 2019 were as follows (in thousands):
Operating lease cost
Variable lease cost
Sublease income
Net lease cost
$
$
5,463
1,366
(942)
5,887
F - 16
As of December 31, 2019, the maturities of our operating lease liabilities were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Present value adjustment
Lease liabilities
6. Stockholders' Equity
5,913
6,507
6,688
6,536
5,588
11,068
42,300
(11,727)
30,573
$
The Company's amended and restated certificate of incorporation authorizes 125,000,000 shares of common stock, and 5,000,000 shares of
undesignated preferred stock, both with a par value of $.01 per share. There were no shares of undesignated preferred stock issued or outstanding as of
December 31, 2019 or 2018.
In April 2017, the Company entered into a definitive agreement with an institutional healthcare investor to purchase 1,100,000 shares of its common
stock at a purchase price of $21.50 per share in a registered direct offering. Proceeds to the Company, before deducting estimated offering expenses, were
$23.7 million. The shares were offered pursuant to the Company’s effective shelf registration on Form S-3 that was filed with the Securities and Exchange
Commission (SEC) on November 2, 2016.
In May 2017, the Company entered into a sales agreement with an agent to sell, from time to time, shares of its common stock having an aggregate
sales price of up to $75.0 million through an “at the market offering” (ATM Offering) as defined in Rule 415 under the Securities Act of 1933, as amended.
The shares that may be sold under the sales agreement would be issued and sold pursuant to the Company's shelf registration statement on Form S-3 that was
filed with the SEC on November 2, 2016. During the year ended December 31, 2017, the Company sold 599,284 shares of common stock resulting in net
proceeds of approximately $10.8 million related to the ATM Offering.
In April 2018, the Company completed a firm-commitment underwritten public offering, in which the Company sold 4,500,000 shares of its
common stock at a price of $21.25 per share. Additionally, the underwriters of the offering exercised the full amount of their over-allotment option resulting
in the sale of an additional 675,000 shares of the Company's common stock at a price of $21.25 per share. Upon closing, the Company received net proceeds
of approximately $103.3 million from this offering, net of underwriting discounts and commissions and other offering expenses.
In February 2019, the Company completed a firm-commitment underwritten public offering, in which the Company sold 5,500,000 shares of its
common stock at a price of $20.00 per share. Additionally, the underwriters of the offering exercised the full amount of their over-allotment option resulting
in the sale of an additional 825,000 shares of the Company’s common stock at a price of $20.00 per share. The Company received net proceeds of
approximately $118.7 million from this offering, net of underwriting discounts and commissions and other offering expenses.
7. Stock-based Compensation
Employee Stock Purchase Plan
In May 2017, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the 2016 ESPP). The 2016 ESPP is structured as a
qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974. The Company reserved 800,000 shares of common stock for issuance under the 2016 ESPP. The 2016
ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 10% of their eligible
compensation, subject to any plan limitations. The 2016 ESPP provides for six-month offering periods ending on May 31 and November 30 of each year. At
the end of each offering period, employees are able to purchase shares at 85% of the fair market value of the Company’s common stock on the last day of the
offering period. During the year ended December 31, 2019,
F - 17
employees purchased 61,417 shares of common stock under the 2016 ESPP for net proceeds to the Company of approximately $0.7 million.
Employee Stock Incentive Plans
Effective February 2003, the Company implemented the 2003 Equity Incentive Plan (2003 Plan), and it was amended and approved by the
Company's stockholders in 2005. Stock options granted under the 2003 Plan may be either incentive stock options as defined by the Internal Revenue Code
(IRC), or non-qualified stock options. In 2013, the 2003 Plan was terminated, and no further awards may be issued under the plan. Any shares of common
stock subject to awards under the 2003 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased without having been fully
exercised, or resulting in any common stock being issued, will become available for issuance under the 2013 Stock Incentive Plan (2013 Plan), up to a
specified number of shares. As of December 31, 2019, under the 2003 Plan, there were options to purchase an aggregate of 550,572 shares of common stock
outstanding at a weighted average exercise price of $2.32 per share.
In October 2013, the Company implemented the 2013 Plan. The 2013 Plan provides for the grant of stock options and other stock-based awards, as
well as cash-based performance awards. The aggregate number of shares of common stock initially available for issuance pursuant to awards under the 2013
Plan was 1,960,168 shares. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each year from January
1, 2014 through and including January 1, 2023, by the lesser of (a) 1,960,168 shares, (b) 4.0% of the total number of shares of common stock outstanding on
December 31 of the preceding calendar year, or (c) the number of shares of common stock determined by the Board of Directors. During the year ended
December 31, 2019, the maximum number of shares of common stock authorized to be issued by the Company under the 2013 Plan was increased to
9,932,263. If an option expires or terminates for any reason without having been fully exercised, if any shares of restricted stock are forfeited, or if any award
terminates, expires or is settled without all or a portion of the shares of common stock covered by the award being issued, such shares are available for the
grant of additional awards. However, any shares that are withheld (or delivered) to pay withholding taxes or to pay the exercise price of an option are not
available for the grant of additional awards. As of December 31, 2019, under the 2013 Plan, there were options to purchase an aggregate of 6,156,422 shares
of common stock outstanding at a weighted average exercise price of $24.12 per share.
The following stock-based compensation amounts were recognized for the periods indicated (in thousands):
Research and development
General and administrative
Total stock-based compensation expense
Employee Stock Options
Year Ended December 31,
2019
2018
2017
$
$
10,023 $
9,548
7,919 $
8,601
7,388
7,356
19,571 $
16,520 $
14,744
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions in the
following table:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term
Year Ended December 31,
2019
0%
2018
0%
2017
0%
74% - 76%
68% - 72%
67% - 68%
1.4% - 2.6%
2.4% - 3.1%
1.9% - 2.3%
6.25 years
6.25 years
6.25 years
Expected Dividend Yield – The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.
Expected Volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or
is expected to fluctuate (expected volatility) during a period. As the Company does not yet have sufficient history of its own volatility, the Company has
identified several public entities of similar size, complexity and stage of development and estimates volatility based on the volatility of these companies.
F - 18
Risk-Free Interest Rate – This is the U.S. Treasury rate for the week of each option grant during the year, having a term that most closely resembles
the expected life of the option.
Expected Term – This is the period of time that the options granted are expected to remain unexercised. Options granted have a maximum term of
ten years. The Company uses a simplified method to calculate the average expected term.
In addition to the assumptions above, the Company estimates the forfeiture rate based on turnover data with further consideration given to the class
of the employees to whom the options were granted. The forfeiture rate is the estimated percentage of options granted that is expected to be forfeited or
canceled on an annual basis before becoming fully vested.
The following table summarizes stock option activity for 2019:
Outstanding, December 31, 2018
Granted
Exercised
Forfeited or expired
Outstanding, December 31, 2019
December 31, 2019:
Exercisable
Vested and expected to vest
Shares
5,273,964 $
1,946,770
(219,045)
(294,695)
6,706,994
4,298,178
6,446,218
Weighted-
Average
Exercise Price
22.23
20.81
3.03
24.72
22.33
22.21
22.31
Weighted-
Average
Remaining
Contractual
Term
(Years)
6.8
Aggregate
Intrinsic Value
(in thousands)
6.9 $
4,749
5.9
6.9
4,712
4,746
During 2019, 2018 and 2017 the Company issued 219,045, 274,362 and 253,036 net shares of common stock, respectively, in conjunction with stock
option exercises. The Company received cash proceeds from the exercise of stock options of approximately $0.7 million, $0.9 million and $0.5 million during
2019, 2018 and 2017, respectively.
The weighted-average grant-date fair value of options granted during 2019, 2018 and 2017 was $13.98, $17.90 and $12.53 per share, respectively.
The total intrinsic value of options exercised during 2019, 2018 and 2017 was approximately $2.9 million, $5.2 million and $4.2 million, respectively. The
total fair value of stock options which vested during 2019, 2018 and 2017 was $17.7 million, $16.4 million and $14.6 million, respectively. As of
December 31, 2019, the total unrecognized compensation expense related to non-vested stock options, net of related forfeiture estimates, was $30.2 million,
which the Company expects to recognize over a weighted-average period of approximately 2.6 years.
Restricted Stock Units
During 2019, the Company awarded RSUs under the 2013 Plan to all employees except executive officers and employees with less than six months
of service as of the grant date. Each RSU entitles the holder to receive one share of the Company's common stock when the RSU vests. The RSUs vest in two
equal installments on the first and second anniversary of the grant date. Compensation expense is recognized on a straight-line basis. No RSUs were granted
during the years ended December 31, 2018 and 2017.
F - 19
The following table summarizes RSU activity for 2019:
Outstanding, December 31, 2018
Granted
Exercised
Forfeited or expired
Outstanding, December 31, 2019
Shares
Weighted-Average
Grant Date Fair Value
—
467,600
$
—
(15,100)
452,500
—
15.32
—
15.32
15.32
At December 31, 2019, there was $5.3 million of total unrecognized compensation cost related to unvested RSUs, which the Company expects to
recognize over a remaining weighted-average period of 1.6 years.
8. Income Taxes
For the years ended December 31, 2019, 2018 and 2017 there was no provision for income taxes due to taxable losses generated, fully offset by a
valuation allowance.
The significant components of the Company's deferred income tax assets (liabilities) were as follows (in thousands):
Deferred income tax assets:
Federal U.S. net operating loss carryforward
State net operating loss carryforward
Research and development credit, net
Orphan drug credit, net
Operating lease liabilities
Deferred revenue
Other
Gross deferred income tax assets
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Depreciation
Operating lease ROU assets
Prepaid expenditures
Gross deferred income tax liabilities
Net deferred income tax asset/(liability)
December 31,
2019
2018
$
116,436 $
31,110
35,580
22,881
8,413
367
9,123
223,910
(214,893)
9,017
(438)
(5,547)
(3,032)
(9,017)
$
— $
87,284
22,809
29,750
22,580
—
3,736
9,972
176,131
(172,457)
3,674
(1,911)
—
(1,763)
(3,674)
—
The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the
likelihood of realization, management considers (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing
temporary difference and carryforwards; (iii) taxable income in prior carryback years if carryback is permitted under applicable tax law; and (iv) tax planning
strategies. The Company's net deferred income tax asset is not more likely than not to be utilized due to the lack of sufficient sources of future taxable income
and cumulative book losses which have resulted over the years.
F - 20
As of December 31, 2019, the Company has U.S. federal and state net operating loss (NOL) carryforwards of approximately $554.5 million. Of
these NOLs, $237.8 million will expire in various years beginning in 2025 through 2037. $316.7 million of NOLs were generated post December 31, 2017
and carryforward indefinitely. In addition, the Company has U.S. federal tax credits of $58.2 million which will expire in various years beginning in 2022
through 2039.
The use of the Company's U.S. federal NOL and tax credit carryforwards in future years are restricted due to changes in the Company's ownership
and tax attributes acquired through the Company's acquisitions. As of December 31, 2019, $13.5 million of the Company's U.S. Federal NOLs are limited for
use over the years 2020 – 2028 in which a range of such amounts could be utilized on an annual basis of $0.2 million to $1.4 million. The remaining $541.0
million of NOLs is not limited and can be offset against future taxable income, subject to certain limitations for newly enacted tax legislation.
The reconciliation of the reported estimated income tax benefit to the amount that would result by applying the U.S. federal statutory tax rate to the
net income is as follows (in thousands):
United States federal tax at statutory rate
State taxes (net of federal benefit)
Deferred income tax adjustments
Deferred state blended rate adjustments
Deferred federal rate change reduction in corporate rate
Research credit, net
Orphan drug credit, net
Other permanent items
Equity-based compensation
Change in valuation allowance
Income tax expense/(benefit)
Year Ended December 31,
2019
2018
2017
$
(31,880) $
(36,005) $
(6,869)
(9,524)
2,004
—
—
(5,830)
(301)
1,206
1,889
42,436
(11,133)
(4,435)
—
—
(8,466)
(872)
148
758
(735)
607
(485)
39,447
(8,455)
(1,853)
276
2,067
60,005
(24,000)
$
— $
— $
—
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Beginning balance
Increases for current year tax positions
Increases/(decreases) for prior year tax positions
Ending balance
Year Ended December 31,
2019
2018
2017
$
$
4,318 $
3,395 $
637
(5)
642
281
4,950 $
4,318 $
2,465
569
361
3,395
As of December 31, 2019 and 2018, of the total gross unrecognized tax benefits, approximately $4.9 million and $4.3 million would favorably
impact the Company's effective income tax rate, respectively. Although, due to the Company's determination that the deferred income tax asset would not
more likely than not be realized, a valuation allowance would be recorded, therefore, zero net impact would result within the Company's effective income tax
rate. The Company's uncertain income tax position liability has been recorded to deferred income taxes to offset the tax attribute carryforward amounts.
For the years ended December 31, 2019, 2018 and 2017, the Company has not recognized any interest or penalties related to the uncertain income
tax positions due to the fact such position is related to tax attribute carryforwards which have not yet been utilized. The Company does not expect its
unrecognized income tax position to significantly decrease within the next twelve months.
The Company's U.S. Federal and state income tax returns from 2001 forward remain open to examination due to the carryover of unused net
operating losses and tax credits.
F - 21
9. Collaboration and Other Agreements
Incyte
In October 2017, the Company entered into an exclusive global collaboration and license agreement with Incyte for MGA012 (also known as
INCMGA0012), an investigational monoclonal antibody that inhibits programmed cell death protein 1 (PD-1) (Incyte License Agreement). Incyte has
obtained exclusive worldwide rights for the development and commercialization of MGA012 in all indications, while the Company retains the right to
develop its pipeline assets in combination with MGA012. Under the terms of the Incyte License Agreement, Incyte paid the Company an upfront payment of
$150.0 million in 2017.
Under the terms of the Incyte License Agreement, Incyte will lead global development of MGA012. Assuming successful development and
commercialization by Incyte, the Company could receive up to approximately $420.0 million in development and regulatory milestones, and up to $330.0
million in commercial milestones. As of December 31, 2019, the Company has recognized $15.0 million in development milestones under this agreement. If
commercialized, the Company would be eligible to receive tiered royalties of 15% to 24% on any global net sales. The Company retains the right to develop
its pipeline assets in combination with MGA012, with Incyte commercializing MGA012 and the Company commercializing its asset(s), if any such potential
combinations are approved. In addition, the Company retains the right to manufacture a portion of both companies' global commercial supply needs of
MGA012, subject to a separate commercial supply agreement to be negotiated. Finally, Incyte funded the Company's activities related to the ongoing
monotherapy clinical study and will continue to fund certain related clinical activities.
Upon the adoption of ASC 606 on January 1, 2018, the Company evaluated the Incyte Agreement under the provisions of ASC 606 and identified
the following two performance obligations under the agreement: (i) the license of MGA012 and (ii) the performance of certain clinical activities through a
brief technology transfer period. The Company determined that the license and clinical activities are separate performance obligations because they are
capable of being distinct, and are distinct in the context of the contract. The license has standalone functionality as it is sublicensable, Incyte has significant
capabilities in performing clinical trials, and Incyte is capable of performing these activities without the Company's involvement; the Company performed the
activities during the transfer period as a matter of convenience. The Company determined that the transaction price of the Incyte Agreement at inception was
$154.0 million, consisting of the consideration to which the Company was entitled in exchange for the license and an estimate of the consideration for clinical
activities to be performed. The transaction price was allocated to each performance obligation based on their relative standalone selling price. The standalone
selling price of the license was determined using the adjusted market assessment approach considering similar collaboration and license agreements. The
standalone selling price for agreed-upon clinical activities to be performed was determined using the expected cost approach based on similar arrangements
the Company has with other parties. The potential development and regulatory milestone payments are fully constrained until the Company concludes that
achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts
recognized in future periods, and as such have been excluded from the transaction price. Any consideration related to sales-based milestones and royalties
will be recognized when the related sales occur, as they were determined to relate predominantly to the license granted to Incyte and, therefore, have also
been excluded from the transaction price. The Company re-assesses the transaction price in each reporting period and when events whose outcomes are
resolved or other changes in circumstances occur. During the year ended December 31, 2018, it became probable that a significant reversal of cumulative
revenue would not occur for three development milestones totaling $15.0 million related to MGA012 meeting certain clinical proof-of-concept criteria.
Therefore the associated consideration was added to the estimated transaction price and was recognized as revenue. During the year ended December 31,
2019 there were no adjustments to the transaction price of the Incyte Agreement.
The Company recognized the $150.0 million allocated to the license when it satisfied its performance obligation and transferred the license to
Incyte in 2017. The $4.0 million allocated to the clinical activities was recognized over the period from the effective date of the agreement until such time as
the clinical activities were transferred to Incyte using an input method according to research and development costs incurred to date compared to estimated
total research and development costs. These clinical activities were substantially completed in 2018. Prior to the adoption of ASC 606 on January 1, 2018, the
accounting for this agreement did not materially differ from the accounting under ASC 606. The Company recognized revenue of $0.1 million and $18.8
million under the Incyte Agreement during the years ended December 31, 2019 and 2018, respectively. The revenue recognized during the year ended
December 31, 2018 included milestone revenue of $15.0 million.
The Company also has an agreement with Incyte, which was entered into in 2018, under which the Company is to perform development and
manufacturing services for Incyte’s clinical needs of MGA012 (Incyte Clinical Supply Agreement). The Company evaluated this agreement under ASC 606
and identified one performance obligation under the agreement: to perform services related to the development and manufacturing of the clinical supply of
MGA012. The transaction price is based on the costs incurred to develop and manufacture drug product and drug substance, and is recognized over time as
the services are provided, as the performance by the Company does not create an asset with an alternative use and the Company has
F - 22
an enforceable right to payment for the performance completed to date. During the years ended December 31, 2019 and 2018, the Company recognized
revenue of $22.1 million and $22.2 million, respectively, for services performed under this agreement.
Servier
In September 2012, the Company entered into a collaboration agreement with Servier and granted it exclusive options to obtain three separate
exclusive licenses to develop and commercialize DART molecules, consisting of those designated by the Company as flotetuzumab (also known as MGD006
or S80880) and MGD007, as well as a third DART molecule, in all countries other than the United States, Canada, Mexico, Japan, South Korea and India
(Servier Agreement). In 2014, Servier exercised its exclusive option to develop and commercialize flotetuzumab. During the term of the agreement, Servier
did not exercise its options for either MGD007 or the third DART molecule. In July 2019, Servier informed the Company of its intention to terminate the
Servier Agreement and the agreement was terminated effective January 15, 2020. As a result of this termination, the Company will regain full exclusive,
worldwide commercialization rights to develop and market flotetuzumab.
Upon execution of the agreement, Servier made a nonrefundable payment of $20.0 million to the Company. The Company evaluated the Servier
Agreement under the provisions of ASC 606 and concluded that Servier is a customer prior to the exercise of any of the three options. The Company
identified the following material promises under the arrangement for each of the three molecules: (i) a limited evaluation license to conduct activities under
the research plan and (ii) research and development services concluding with an option trigger data package. The Servier Agreement also provided exclusive
options for an exclusive license to research, develop, manufacture and commercialize each subject molecule. The Company evaluated these options and
concluded that the options were not issued at a significant and incremental discount, and therefore do not provide material rights. As such, they are excluded
as performance obligations at the outset of the arrangement. The Company determined that each license and the related research and development services
were not distinct from one another, as the license has limited value without the performance of the research and development activities. As such, the
Company determined that these promises should be combined into a single performance obligation for each molecule, resulting in a total of three performance
obligations; one for flotetuzumab, one for MGD007, and one for the third DART molecule.
The Company determined that the $20.0 million upfront payment from Servier constituted the entirety of the consideration to be included in the
transaction price as of the outset of the arrangement, and the transaction price was allocated to the three performance obligations based on their relative
standalone selling price. The milestone payments that the Company was eligible to receive prior to the exercise of the options were excluded from the
transaction price, as all milestone amounts were fully constrained based on the probability of achievement. Two milestones were achieved in 2014 when the
INDs for flotetuzumab and MGD007 were cleared by the Food and Drug Administration (FDA). Upon achievement of each milestone, the constraint related
to the $5.0 million milestone payment was removed and the transaction price was re-assessed. This variable consideration was allocated to each specific
performance obligation in accordance with ASC 606.
Revenue associated with each performance obligation was recognized as the research and development services were provided using a cost-based
input method according to research and development costs incurred to date compared to estimated total research and development costs. The transfer of
control occurred over this time period and, in management’s judgment, was the best measure of progress towards satisfying the performance obligation. No
revenue was recognized related to the MGD007 option during the year ended December 31, 2019. During the years ended December 31, 2018 and 2017, the
Company recognized revenue of $1.9 million and $1.1 million, respectively, related to the MGD007 option. No revenue was deferred related to the MGD007
option at December 31, 2018.
As discussed above, in 2014, Servier exercised its option to obtain a license to develop and commercialize flotetuzumab in its territories and paid the
Company a $15.0 million license grant fee. Upon exercise, the Company's contractual obligations include (i) granting Servier an exclusive license to its
intellectual property, (ii) technical, scientific and intellectual property support to the research plan and (iii) participation on an executive committee and a
research and development committee. Under the terms of the Servier Agreement, the Company and Servier will share costs incurred to develop flotetuzumab
during the license term. Due to the fact that both parties share costs and are exposed to significant risks and rewards dependent on the commercial success of
the product, the Company determined that the arrangement is a collaborative arrangement within the scope of ASC 808. The arrangement consists of two
components; the license of flotetuzumab and the research and development activities, including committee participation, to support the research plan. Under
the provisions of ASC 808, the Company has determined that it will use ASC 606 by analogy to recognize the revenue related to the license. The Company
evaluated its performance obligation to provide Servier with an exclusive license to develop and commercialize flotetuzumab and determined that its
transaction price is equal to the license grant fee payment of $15.0 million and Servier consumes the benefits of the license over time as the research and
development activities are performed. Therefore, the Company is recognizing the transaction price over the development period, using an input method
according to research and development costs incurred to date compared to estimated total research and development costs. As noted above, in July 2019,
Servier informed the Company of its intention to terminate the Servier Agreement and the agreement
F - 23
was terminated effective January 15, 2020. Therefore, the Company reassessed the end date of its performance obligations under the contract to be January
15, 2020.
During the years ended December 31, 2019, 2018 and 2017 the Company recognized revenue of $11.6 million, $1.2 million, and $1.4 million,
respectively, related to the flotetuzumab license grant fee. At December 31, 2019, $1.0 million of revenue related to the flotetuzumab license grant fee was
deferred, all of which was current.
The research and development activities component of the arrangement is not analogous to ASC 606, therefore the Company follows its policy to
record expense incurred as research and development expense and record reimbursements received from Servier as an offset to research and development
expense on the consolidated statement of operations and comprehensive loss during the development period. During the years ended December 31, 2019,
2018 and 2017, the Company recorded approximately $3.6 million, $6.0 million and $3.2 million, respectively, as an offset to research and development
expense under this collaborative arrangement.
Zai Lab
In November 2018, the Company entered into a collaboration and license agreement with Zai Lab (Zai Lab Agreement) under which Zai Lab
obtained regional development and commercialization rights in mainland China, Hong Kong, Macau and Taiwan (Zai Lab’s territory) for (i) margetuximab,
an immune-optimized anti-HER2 monoclonal antibody, (ii) MGD013, a bispecific DART molecule designed to provide coordinate blockade of PD-1 and
LAG-3 for the potential treatment of a range of solid tumors and hematological malignancies, and (iii) an undisclosed multi-specific TRIDENT molecule in
preclinical development. Zai Lab will lead clinical development of these molecules in its territory.
Under the terms of the Zai Lab Agreement, Zai Lab paid the Company an upfront payment of $25.0 million, less foreign withholding tax of
$2.5 million. Assuming successful development and commercialization of margetuximab, MGD013 and the TRIDENT molecule, the Company could receive
up to $140.0 million in development and regulatory milestones. In addition, Zai Lab would pay the Company tiered royalties at percentage rates of mid-teens
to 20% for net sales of margetuximab in Zai Lab’s territory, mid-teens for net sales of MGD013 in Zai Lab’s territory and 10% for net sales of the TRIDENT
molecule in Zai Lab’s territory, which may be subject to adjustment in specified circumstances.
The Company evaluated the Zai Lab Agreement under the provisions of ASC 606 and identified the following material promises under the
arrangement for each of the two product candidates, margetuximab and MGD013: (i) an exclusive license to develop and commercialize the product
candidate in Zai Lab’s territory and (ii) certain research and development activities. The Company determined that each license and the related research and
development activities were not distinct from one another, as the license has limited value without the performance of the research and development activities.
As such, the Company determined that these promises should be combined into a single performance obligation for each product candidate. Activities related
to margetuximab and MGD013 are separate performance obligations from each other because they are capable of being distinct, and are distinct in the context
of the contract. The Company evaluated the promises related to the TRIDENT molecule and determined they were immaterial in context of the contract,
therefore there is no performance obligation related to that molecule. The Company determined that the $25.0 million (less foreign withholding tax of $2.5
million) upfront payment from Zai Lab constituted the entirety of the consideration to be included in the transaction price as of the outset of the arrangement,
and the transaction price was allocated to the two performance obligations based on their relative standalone selling price. The standalone selling price of the
performance obligations was determined using the adjusted market assessment approach considering similar collaboration and license agreements. The
potential development and regulatory milestone payments are fully constrained until the Company concludes that achievement of the milestone is probable,
and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods, and as such have been
excluded from the transaction price. Any consideration related to royalties will be recognized if and when the related sales occur, as they were determined to
relate predominantly to the license granted to Zai Lab and, therefore, have also been excluded from the transaction price. The Company re-assesses the
transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.
Due to the relatively short-term nature of the recognition period, the revenue associated with the MGD013 performance obligation is being recognized on a
straight-line basis as the Company performs research and development activities under the agreement. The fixed consideration related to the margetuximab
performance obligation is also being recognized on a straight-line basis as the Company performs research and development activities under the agreement.
Straight-line recognition is materially consistent with the pattern of performance of the research and development activities of each product candidate. The
variable consideration related to the margetuximab performance obligation will be recognized upon certain regulatory achievements. During the years ended
December 31, 2019 and 2018, the Company recognized revenue of $16.1 million and $1.3 million, respectively, related to the Zai Lab Agreement. At
December 31, 2019, $5.0 million of revenue was deferred under this agreement, all of which was current. In February 2020, Zai Lab announced that the first
patients were
F - 24
dosed in two separate clinical studies; one utilizing MGD013 and one utilizing margetuximab. The Company is entitled to a total of $4.0 million as a result of
these milestones (less foreign withholding tax).
During the year ended December 31, 2019, the Company entered into two agreements under which the Company is to perform manufacturing
services for Zai Lab’s clinical needs of margetuximab and MGD013 (Zai Lab Clinical Supply Agreements). The Company evaluated the agreements under
ASC 606 and determined that they should be accounted for as a single contract and identified two performance obligations within that contract: to perform
services related to manufacturing the clinical supply of margetuximab and MGD013. The transaction price is based on the costs incurred to manufacture drug
product and drug substance, and is recognized over time as the services are provided, as the performance by the Company does not create an asset with an
alternative use and the Company has an enforceable right to payment for the performance completed to date. During the year ended December 31, 2019, the
Company recognized revenue of $2.2 million related to the Zai Lab Clinical Supply Agreements.
I-Mab Biopharma
In July 2019, the Company entered into a collaboration and license agreement with I-Mab Biopharma (I-Mab) to develop and commercialize
enoblituzumab, an immune-optimized, anti-B7-H3 monoclonal antibody that incorporates the Company's proprietary Fc Optimization technology platform (I-
Mab Agreement). I-Mab obtained regional development and commercialization rights in mainland China, Hong Kong, Macau and Taiwan (I-Mab's territory),
will lead clinical development of enoblituzumab in its territories, and will participate in global studies conducted by the Company.
Under the terms of the I-Mab Agreement, I-Mab paid the Company an upfront payment of $15.0 million. Assuming successful development and
commercialization of enoblituzumab, the Company could receive up to $135.0 million in development and regulatory milestones. In addition, I-Mab would
pay the Company tiered royalties ranging from mid teens to twenty percent on annual net sales in I-Mab's territory.
The Company evaluated the I-Mab Agreement under the provisions of ASC 606 and identified the following material promises under the
arrangement: (i) an exclusive license to develop and commercialize enoblituzumab in I-Mab’s territories, (ii) perform certain research and development
activities and (iii) conduct a chronic toxicology study. The Company determined that the license and the related research and development activities were not
distinct from one another, as the license has limited value without the performance of the research and development activities. As such, the Company
determined that the license and related research and development activities should be combined into a single performance obligation. The Company
determined that the $15.0 million upfront payment from I-Mab constituted the entirety of the consideration to be included in the transaction price as of the
outset of the arrangement for the license and related research and development activities. The Company has also determined that the chronic toxicology study
is distinct from the other promises and has estimated the variable consideration of that performance obligation to be approximately $1.0 million. I-Mab will
pay the Company for the cost of this study as the costs are incurred and I-Mab will be entitled to a one-time credit of eighty percent of the total amount of
such costs against a future milestone, at which point the Company will reassess the transaction price for that milestone. The potential development and
regulatory milestone payments are fully constrained until the Company concludes that achievement of the milestone is probable, and that recognition of
revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods, and as such have been excluded from the
transaction price. Any consideration related to royalties will be recognized if and when the related sales occur, as they were determined to relate
predominantly to the license granted to I-Mab and, therefore, have also been excluded from the transaction price. The Company re-assesses the transaction
price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.
Revenue under the I-Mab Agreement is being recognized using a cost-based input method according to costs incurred to date compared to estimated total
costs. The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance
obligations. During the year ended December 31, 2019, the Company recognized revenue of $2.3 million related to the I-Mab Agreement. At December 31,
2019, $13.5 million in revenue was deferred under the I-Mab Agreement, $4.4 million of which was current and $9.1 million of which was non-current.
Roche
In December 2017, the Company entered into a research collaboration and license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La
Roche Inc. (Roche) to jointly discover and develop novel bispecific molecules to undisclosed targets (Roche Agreement). During the research term, both
companies would leverage their respective platforms, including the Company's DART platform and Roche's CrossMAb and DutaFab technologies to select a
bispecific format and lead product candidate. Roche would then further develop and commercialize any such product candidate. Each company would be
responsible for their own expenses during the research period. In August 2019, Roche informed the Company of its intention to terminate the Roche
Agreement, and the agreement was terminated effective November 21, 2019.
F - 25
Under the terms of the Roche Agreement, Roche received rights to use certain of the Company’s intellectual property rights to exploit collaboration
compounds and products, and paid the Company an upfront payment of $10.0 million which was received in January 2018. The Company will also be
eligible to receive up to $370.0 million in potential milestone payments and royalties on future sales. As of December 31, 2019, the Company has not
recognized any milestone revenue under this agreement.
The Company evaluated the Roche Agreement under the provisions of ASC 606 and identified the following promises under the agreement: (i) the
non-exclusive, non-transferable, non-sublicensable license to the Company's intellectual property and (ii) the performance of certain activities during the
research period. The Company determined that the license was capable of being distinct, but was not distinct in the context of the contract because it had
limited value to Roche without the research activities required to be performed by the Company. Therefore, the Company concluded that there was one
performance obligation under the agreement. The Company determined that the transaction price of the Roche Agreement was $10.0 million. The potential
milestone payments were fully constrained and were excluded from the transaction price. Any consideration related to sales-based royalties would be
recognized when the related sales occur as they were determined to relate predominantly to the license granted to Roche and therefore were also excluded
from the transaction price.
The $10.0 million transaction price was being recognized over the expected research period, which was originally 30 months, using a cost-based
input method to measure performance. Upon notice of Roche's intent to terminate the agreement in August 2019, the recognition period was adjusted to end
in November 2019. The Company recognized revenue under this agreement of $6.0 million and $4.0 million, respectively, during the years ended
December 31, 2019 and 2018. There was no revenue deferred under this agreement at December 31, 2019. At December 31, 2018, $6.0 million was deferred
under this agreement, $4.0 million of which was current and $2.0 million of which was non-current.
Provention Bio, Inc.
In May 2018, the Company entered into a license agreement with Provention Bio, Inc. (Provention) pursuant to which the Company granted
Provention exclusive global rights for the purpose of developing and commercializing MGD010 (renamed PRV-3279), a CD32B x CD79B DART molecule
being developed for the treatment of autoimmune indications (Provention License Agreement). As partial consideration for the Provention License
Agreement, Provention granted the Company a warrant to purchase shares of Provention’s common stock at an exercise price of $2.50 per share. If
Provention successfully develops, obtains regulatory approval for, and commercializes PRV-3279, the Company will be eligible to receive up to $65.0 million
in development and regulatory milestones and up to $225.0 million in commercial milestones. As of December 31, 2019, the Company has not recognized
any milestone revenue under this agreement. If commercialized, the Company would be eligible to receive single-digit royalties on net sales of the product.
The license agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Provention without cause upon prior
notice to the Company, and by the Company in the event that Provention challenges the validity of any licensed patent under the agreement, but only with
respect to the challenged patent.
Also in May 2018, the Company entered into an asset purchase agreement with Provention pursuant to which Provention acquired the Company’s
interest in teplizumab (renamed PRV-031), a monoclonal antibody being developed for the treatment of type 1 diabetes (Asset Purchase Agreement). As
partial consideration for the Asset Purchase Agreement, Provention granted the Company a warrant to purchase shares of Provention’s common stock at an
exercise price of $2.50 per share. If Provention successfully develops, obtains regulatory approval for, and commercializes PRV-031, the Company will be
eligible to receive up to $170.0 million in regulatory milestones and up to $225.0 million in commercial milestones. As of December 31, 2019, the Company
has not recognized any milestone revenue under this agreement. If commercialized, the Company would be eligible to receive single-digit royalties on net
sales of the product. Provention has also agreed to pay third-party obligations, including low single-digit royalties, a portion of which is creditable against
royalties payable to the Company, aggregate milestone payments of up to approximately $1.3 million and other consideration, for certain third-party
intellectual property under agreements Provention is assuming pursuant to the Asset Purchase Agreement. Further, Provention is required to pay the Company
a low double-digit percentage of certain consideration to the extent it is received in connection with a future grant of rights to PRV-031 by Provention to a
third party.
The Company evaluated the Provention License Agreement and Asset Purchase Agreement under the provisions of ASC 606 and determined that
they should be accounted for as a single contract and identified two performance obligations within that contract: (i) the license of MGD010 and (ii) the title
to teplizumab. The Company determined that the transaction price of the Provention agreements was $6.1 million, based on the Black-Scholes valuation of
the warrants to purchase a total of 2,432,688 shares of Provention's common stock. The transaction price was allocated to each performance obligation based
on the number of shares of common stock the Company is entitled to purchase under each warrant. The potential development and regulatory milestone
payments are fully constrained until the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the
milestone will not result in a significant reversal in amounts recognized in future
F - 26
periods, and as such have been excluded from the transaction price. Any consideration related to sales-based milestones and royalties will be recognized when
the related sales occur, therefore they have also been excluded from the transaction price. The Company re-assesses the transaction price in each reporting
period and when events whose outcomes are resolved or other changes in circumstances occur.
The Company recognized revenue of $6.1 million when it satisfied its performance obligations and transferred the MGD010 license and teplizumab
assets to Provention in 2018. The warrants were revalued at each reporting period based on current Black-Scholes parameters until the warrants were
exercised in July 2019. The resulting increase or decrease is reflected in Other income (expense) on the consolidated statement of operations and
comprehensive loss. The warrants were valued at $1.9 million as of December 31, 2018, and were reported in Other assets on the consolidated balance sheet.
During 2019, through the date that they were exercised, the Company recorded an increase in the valuation of the warrants of approximately $20.1 million. In
July 2019, the Company exercised the warrants on a cashless basis, and subsequently sold all the shares of Provention common stock acquired through the
exercise. No shares of Provention stock were held at December 31, 2019.
NIAID Contract
The Company entered into a contract with the National Institute of Allergy and Infectious Diseases (NIAID), effective as of September 15, 2015, to
perform product development and to advance up to two DART molecules, including MGD014. Under this contract, the Company will develop these product
candidates for Phase 1/2 clinical trials as therapeutic agents, in combination with latency reversing treatments, to deplete cells infected with human
immunodeficiency virus (HIV) infection. NIAID does not receive goods or services from the Company under this contract, therefore the Company does not
consider NIAID to be a customer and concluded this contract is outside the scope of ASC 606.
This contract includes a base period of $7.5 million to support development of MGD014 through IND application submission with the FDA, as well
as up to $17.0 million in additional development funding via NIAID options. Should NIAID fully exercise such options, the Company could receive total
payments of up to $24.5 million. The total potential period of performance under the award is from September 15, 2015 through December 31, 2024. During
the year ended December 31, 2017, NIAID exercised the first option in the amount of $10.8 million. The Company recognized revenue of $2.2 million, $1.3
million and $1.7 million under this contract during the years ended December 31, 2019, 2018 and 2017, respectively.
10. Commitments and Contingencies
On September 13, 2019, a securities class action complaint was filed in the U.S. District Court for the District of Maryland by Todd Hill naming the
Company, its Chief Executive Officer, Dr. Koenig, and its Chief Financial Officer, Mr. Karrels, as defendants for allegedly making false and materially
misleading statements regarding the Company’s SOPHIA trial. The complaint asserts a putative class period stemming from February 6, 2019 to June 3,
2019. On November 12, 2019, the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge sought appointment as lead
plaintiff, which motion remains pending. The Company intends to vigorously defend against this action. However, the outcome of this legal proceeding is
uncertain at this time and the Company cannot reasonably estimate a range of loss, if any. Accordingly, the Company has not accrued any liability associated
with this action.
11. Employee Benefit Plan
In 2002, the Company established the MacroGenics 401(k) Plan (the Plan) for its employees under Section 401(k) of the IRC. Under this Plan, all
employees at least 21 years of age are eligible to participate in the Plan, starting on the first day of each month. Employees may contribute up to 100% of their
salary, subject to government maximums.
Employees are 100% vested in their contributions to the Plan. The Company's contribution to the Plan, as determined by the Board of Directors, is
discretionary. The Company's contributions to the Plan totaled $1.4 million, $1.3 million and $1.1 million for the years ended December 31, 2019, 2018 and
2017, respectively.
F - 27
12. Quarterly Financial Information (unaudited)
2019
Revenue
Net loss
Net loss per share, basic and diluted
2018
Revenue
Net loss
Net loss per share, basic and diluted
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
(in thousands, except per share data)
9,662 $
10,593 $
18,741 $
(45,017)
(31,767)
(44,631)
(0.99) $
(0.65) $
(0.91) $
25,192
(30,396)
(0.62)
4,695 $
18,834 $
20,798 $
(49,536)
(43,244)
(34,029)
(1.34) $
(1.03) $
(0.81) $
15,794
(44,644)
(1.06)
$
$
$
$
F - 28
Exhibit
No.
3.1
3.2
4.1
4.2
4.3†
10.1
10.2†
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15†
23.1
31.1
EXHIBIT INDEX
Description
Restated Certificate of Incorporation of the Company and Certificate of Correction to the Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibits 3.1 and 3.3, respectively, to the Company's Current Report on Form 8-K filed on
October 18, 2013)
Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-1
(File No. 333-190994) filed by the Company on October 1, 2013)
Specimen Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 (File No. 333-190994)
filed by the Company on October 9, 2013)
Description of Common Stock
Investor Agreement by and between Johnson and Johnson Innovation-JJDC, Inc. and the Company, dated December 19, 2014
(incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K filed on March 3, 2015)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 (File No.
333-190994) filed by the Company on October 1, 2013)
Global Collaboration and License Agreement by and between the Company and Incyte Corporation, dated October 24, 2017
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed on February 27, 2018)
Company 2003 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (File No.
333-190994) filed by the Company on September 4, 2013)
Form of Incentive Stock Option Agreement under 2003 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 (File No. 333-190994) filed by the Company on September 4, 2013)
Company 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 (File No.
333-190994) filed by the Company on October 1, 2013)
Form of Incentive Stock Option Agreement under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-1 (File No. 333-190994) filed by the Company on October 1, 2013)
Form of Nonstatutory Stock Option Agreement under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 (File No. 333-190994) filed by the Company on October 1, 2013)
Form of Restricted Stock Units Grant Notice under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed on May 6, 2015)
2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-
214386) filed by the Company on November 2, 2016)
Employment Agreement between the Company and Scott Koenig, M.D., Ph.D. (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K filed by the Company on February 29, 2016)
Employment Agreement between the Company and James Karrels (incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K filed by the Company on February 29, 2016)
Employment Agreement between the Company and Jon Wigginton, M.D. (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed on May 4, 2016)
Employment Agreement between the Company and Ezio Bonvini, M.D. (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q filed on May 4, 2016)
Employment Agreement between the Company and Eric Risser (incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K filed on February 28, 2017)
Amendment No, 1 to the Global Collaboration and License Agreement by and between the Company and Incyte Corporation, dated
March 15, 2018 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2017)
Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm
Rule 13a-14(a) Certification of Principal Executive Officer
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Rule 13a-14(a) Certification of Principal Financial Officer
Section 1350 Certification of Principal Executive Officer
Section 1350 Certification of Principal Financial Officer
XBRL Instance Document
XBRL Schema Document
XBRL Calculation Linkbase Document
XBRL Definition Linkbase Document
XBRL Labels Linkbase Document
XBRL Presentation Linkbase Document
Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith)
† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment granted by the SEC.
+ Indicates management contract or compensatory plan.
Exhibit 4.2
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
As of December 31, 2019, MacroGenics, Inc. (“we”, “our” and “us”), has one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended: common stock, par value of $0.01 per share (Common Stock).
The following description of our Common Stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by
reference to our Amended and Restated Certificate of Incorporation, as amended (our Certificate of Incorporation), our Certificate of Correction of our
Certificate of Incorporation (our Certificate of Correction), our Amended and Restated By-laws (our By-laws) and applicable provisions of the Delaware
General Corporation Law (DGCL). Our Certificate of Incorporation, Certificate of Correction and By-laws are included as exhibits to the Annual Report on
Form 10-K of which this Exhibit 4.2 forms a part. We encourage you to carefully read our Certificate of Incorporation, Certificate of Correction and By-laws
and the applicable provisions of the DGCL for additional information.
General
Under our Certificate of Incorporation, we have the authority to issue 125,000,000 shares of our Common Stock.
Our Common Stock is listed on the Nasdaq Global Select Market under the symbol “MGNX.” The rights, preferences and privileges of holders of
our Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock we may issue in the
future.
Common Stock Outstanding
The outstanding shares of our Common Stock are duly authorized, validly issued, fully paid and non-assessable. As of December 31, 2019,
48,958,763 shares of our Common Stock were issued and outstanding.
Voting Rights
Holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote
on the election. Subject to the supermajority votes for some matters, other matters shall be decided by the affirmative vote of our stockholders having a
majority in voting power of the votes cast by the stockholders present or represented and voting on such matter.
Dividend Rights
Holders of our Common Stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any
preferential dividend rights of any outstanding preferred stock.
Liquidation Rights
In the event of our liquidation or dissolution, the holders of our Common Stock are entitled to receive proportionately all assets available for
distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock.
Other Rights
Exhibit 4.2
Holders of our Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders
of our Common Stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may
designate and issue in the future.
Transfer Agent and Registrar
Computershare Trust Company, Inc. is the transfer agent and registrar for our Common Stock.
Provisions of our Certificate of Incorporation and By-laws and Delaware Law that may have Anti-Takeover Effects
Delaware law contains, and our Certificate of Incorporation and our By-laws contain, provisions that could have the effect of delaying, deferring or
discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our
board of directors.
Authorized but Unissued Shares. The authorized but unissued shares of our Common Stock will be available for future issuance without obtaining
stockholder approval and the authorized but unissued shares of our preferred stock are available for future issuance. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions, and employee benefit plans. The
existence of authorized but unissued shares of our Common Stock and preferred stock could render more difficult or discourage an attempt to obtain control
over us by means of a proxy contest, tender offer, merger or otherwise
Removal of Directors. A director may be removed only for cause and only by the affirmative vote of the holders of at least 75% of the votes that all
of our stockholders would be entitled to cast in an annual election of directors. Any vacancy on our board of directors, including a vacancy resulting from an
enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.
Staggered Board of Directors. Our Certificate of Incorporation provides for a staggered board of directors consisting of three classes of directors.
Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of our directors will be elected by
our stockholders. Additionally, there is no cumulative voting in the election of directors. This classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors
will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a
tender offer or change in control might be believed by our stockholders to be in their best interest.
Stockholder Action by Written Consent; Special Meetings. Our Certificate of Incorporation provides that any action required or permitted to be taken
by our stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such
holders. Our Certificate of Incorporation and By-laws also provide that, except as otherwise required by law, special meetings of our stockholders can only be
called by our chairman of the board, our chief executive officer or our board of directors.
Advance Notice Requirements for Stockholder Proposals. Our by-laws have established an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors. Stockholders at an annual
meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our
board of directors or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has delivered timely written
notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of
delaying until the next
Exhibit 4.2
stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities.
Amendment of Our Certificate of Incorporation and By-laws. The DGCL provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s restated certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. Our By-laws may be amended or repealed by a majority vote of our board of
directors or by the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of
directors. In addition, the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual
election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our Certificate of Incorporation
described above under “Removal of Directors” and “Stockholder Action by Written Consent; Special Meetings.”
Delaware Business Combination Statute. We are subject to Section 203 of the DGCL. Subject to specified exceptions, Section 203 of the DGCL
restricts some types of transactions and business combinations between a corporation and a 15% stockholder. A 15% stockholder is generally considered by
Section 203 to be a person owning 15% or more of the corporation’s outstanding voting stock. Section 203 refers to a 15% stockholder as an “interested
stockholder.” Section 203 restricts these transactions for a period of three years from the date the stockholder acquires 15% or more of our outstanding voting
stock. With some exceptions, unless the transaction is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock
of the corporation, Section 203 prohibits significant business transactions such as:
•
•
a merger with, disposition of significant assets to or receipt of disproportionate financial benefits by the interested stockholder; and
any other transaction that would increase the interested stockholder’s proportionate ownership of any class or series of our capital stock.
The shares held by the interested stockholder are not counted as outstanding when calculating the two-thirds of the outstanding voting stock needed
for approval.
The prohibition against these transactions does not apply if:
•
•
prior to the time that any stockholder became an interested stockholder, the board of directors approved either the business combination or the
transaction in which such stockholder acquired 15% or more of our outstanding voting stock; or
the interested stockholder owns at least 85% of our outstanding voting stock as a result of a transaction in which such stockholder acquired 15% or
more of our outstanding voting stock. Shares held by persons who are both directors and officers or by some types of employee stock plans are not
counted as outstanding when making this calculation.
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
1. Registration Statement (Form S-8 No. 333-192277) pertaining to the 2000 Stock Option and Incentive Plan, the 2003 Equity Incentive Plan, and
2013 Equity Incentive Plan of MacroGenics, Inc.;
2. Registration Statements (Form S-8 No. 333-202470, Form S-8 No. 333-209812, Form S-8 No. 333-217620, Form S-8 No. 333-223682 and Form S-
8 No. 333-230292) pertaining to the 2013 Equity Incentive Plan of MacroGenics, Inc.;
3. Registration Statement (Form S-8 No. 333-214386) pertaining to the 2016 Employee Stock Purchase Plan of MacroGenics, Inc.;
4. Registration Statement (Form S-3 No. 333-235691) of MacroGenics, Inc.
of our reports dated February 25, 2020, with respect to the consolidated financial statements of MacroGenics, Inc. and the effectiveness of internal control
over financial reporting of MacroGenics, Inc. included in this Annual Report (Form 10-K) of MacroGenics, Inc. for the year ended December 31, 2019.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 25, 2020
I, Scott Koenig, certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2019 of MacroGenics, Inc.;
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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange 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 the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 25, 2020
/s/ Scott Koenig
Scott Koenig, M.D., Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
I, James Karrels, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2019 of MacroGenics, Inc.;
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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange 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 the registrant and have:
EXHIBIT 31.2
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions)
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 25, 2020
/s/ James Karrels
James Karrels
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
I, Scott Koenig, President and Chief Executive Officer (principal executive officer) of MacroGenics, Inc. (the “Registrant”), certify, to the best of my
knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 31, 2019 of the Registrant (the “Report”), that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
EXHIBIT 32.1
/s/ Scott Koenig
Name: Scott Koenig, M.D., Ph.D.
Date: February 25, 2020
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
I, James Karrels, Senior Vice President and Chief Financial Officer (principal financial officer) of MacroGenics, Inc. (the “Registrant”), certify, to the best of
my knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 31, 2019 of the Registrant (the “Report”), that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
EXHIBIT 32.2
/s/ James Karrels
Name: James Karrels
Date: February 25, 2020