Mersana Therapeutics
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2017. OR ☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-38129 Mersana Therapeutics, Inc.(Exact name of registrant as specified in its charter) Delaware 04-3562403(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 840 Memorial Drive Cambridge, MA 02139(Address of Principal Executive Offices) (Zip Code) Registrant’s telephone number, including area code (617) 498-0020 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock $0.0001 par value 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 Section 15(d) of the 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 thepreceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes ☒☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).Yes ☒☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not becontained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.☒☒ 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 emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 ofthe Exchange Act. Large accelerated filer☐Accelerated filer☐Non-accelerated filer (Do not check if a smaller reporting company)☒☒Smaller reporting company☐ Emerging growth company☒☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial 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 by Rule 12b-2 of the Exchange Act).Yes ☐ No ☒☒ As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s commonstock held by non-affiliates was $19,147,953, based on the last reported sale price of such stock on the NASDAQ Global Select Market as of such date. As of March 20, 2018, the registrant had 22,845,916 shares of common stock outstanding at a par value $0.0001 per share. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement that will be filed for the 2018 Annual Meeting of Stockholders are incorporated by reference in Part III. Table of ContentsTABLE OF CONTENTS Page PART I FORWARD LOOKING STATEMENTS 2 ITEM 1. BUSINESS 2 ITEM 1A. RISK FACTORS 38 ITEM 1B. UNRESOLVED STAFF COMMENTS 74 ITEM 2. PROPERTIES 75 ITEM 3. LEGAL PROCEEDINGS 75 ITEM 4. MINE SAFETY DISCLOSURES 75 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 76 ITEM 6. SELECTED FINANCIAL DATA 77 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS 79 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 93 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 94 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE 129 ITEM 9A. CONTROLS AND PROCEDURES 129 ITEM 9B. OTHER INFORMATION 129 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 130 ITEM 11 EXECUTIVE COMPENSATION 130 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS 130 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE 130 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 130 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 131 EXHIBIT INDEX 131 SIGNATURES 135 1 Table of Contents PART IFORWARD LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward‑looking statements. Forward‑looking statements are neither historicalfacts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptionsregarding the future of our business, future plans and strategies, our clinical results and other future conditions. The words“anticipate,” “believe,” “estimate,” “expect,” “goal,” “intend,” “may,” “seek,” “plan,” “predict,” “project,” “target,”“potential,” “will,” “would,” “possible,” “could,” “should,” “continue,” “contemplate” or the negative of these terms or othersimilar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements containthese identifying words.These forward‑looking statements include, among other things, statements about:·the initiation, cost, timing, progress and results of our current and future research and development activities,preclinical studies and clinical trials;·the potential benefits of strategic partnership agreements and our ability to enter into selective strategic partnershiparrangements;·the timing of, and our ability to obtain and maintain, regulatory approvals for our product candidates;·our ability to quickly and efficiently identify and develop additional product candidates;·our ability to advance any product candidate into, and successfully complete clinical trials;·our intellectual property position, including with respect to our trade secrets; and·our estimates regarding expenses, future revenues, capital requirements, the sufficiency of our current and expectedcash resources and our need for additional financing.We may not actually achieve the plans, intentions or expectations disclosed in our forward‑looking statements, and youshould not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from theplans, intentions and expectations disclosed in the forward‑looking statements we make. We have included important factorsin the cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk factors” section, that webelieve could cause actual results or events to differ materially from the forward‑looking statements that we make. Ourforward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, jointventures or investments we may make.The forward‑looking statements contained herein represent our views as of the date of this Annual Report on Form 10-K. Weanticipate that subsequent events and developments will cause our views to change. However, although we may elect toupdate these forward‑looking statements at some point in the future, we have no current intention of doing so except to theextent required by applicable law. You should, therefore, not rely on these forward‑looking statements as representing ourviews as of any date subsequent to the date of this Annual Report on Form 10-K. ITEM 1. BUSINESSWe are a clinical stage biopharmaceutical company focused on developing antibody drug conjugates, or ADCs, that offer aclinically meaningful benefit for cancer patients with significant unmet need. We have leveraged 20 years of industrylearning in the ADC field to develop proprietary technologies that enable us to design ADCs to have improved efficacy,safety and tolerability relative to existing ADC therapies. Our most advanced platform, Dolaflexin, has been used to generatea pipeline of proprietary ADC product candidates to address patient populations that are not currently amenable to treatmentwith traditional ADC‑based therapies. Our lead product candidate, XMT‑1522, is a HER2‑targeted ADC2 Table of Contentscurrently in a Phase 1 dose escalation study primarily in breast cancer patients as well as non‑small cell lung cancer (NSCLC)and gastric cancer. Upon the completion of dose escalation, we plan to expand clinical development of XMT‑1522 intoadditional breast cancer, NSCLC, and gastric cancer patient populations, all of which are not addressed by existing HER2therapies. Our second product candidate, XMT‑1536, is an ADC targeting NaPi2b, an antigen broadly expressed in ovariancancer and NSCLC. XMT‑1536 entered clinical development in late 2017 and is currently in a Phase 1 dose escalation study.Beyond our two lead product candidates, we continue to invest in our earlier stage product candidates and in our ADCtechnologies. In addition, we have established a strategic partnership with Takeda Pharmaceutical Company Limited, orTakeda, under which they obtained rights to XMT‑1522 outside of the United States and Canada. We have also establishedstrategic research and development partnerships with Takeda and Merck KGaA for the development and commercializationof additional ADC product candidates against a limited number of targets selected by our partners based on our Dolaflexinplatform. We believe the potential of our ADC technologies, supported by our world‑class management team and protectedby our robust intellectual property portfolio, will allow us to develop targeted and highly tailored therapies to help cancerpatients become cancer survivors. Our current product candidates all based on our Dolaflexin platform, are summarized in thechart below:ADCs are an established therapeutic approach in oncology used to selectively deliver a highly potent chemotherapeuticpayload directly to tumors thereby minimizing toxicity to surrounding healthy tissue. An ADC consists of an antibodyattached to a chemotherapeutic “payload” via a molecule known as a linker. The antibody provides targeting capabilityagainst a distinct antigen expressed preferentially on a tumor cell, which restricts the ADC binding only to those cells thatexpress the target antigen. Upon binding to the tumor cell antigen, the ADC is internalized by the tumor cell and the payloadis released, killing the cell in a targeted manner. Currently, there are four approved ADCs, (i) brentuximab vedotin marketedby Seattle Genetics, Inc., or Seattle Genetics, and Takeda; (ii) ado‑trastuzumab emtansine marketed by Genentech, Inc., orGenentech, a member of the Roche Group, or Roche; (iii) gemtuzumab ozogamicin, marketed by Pfizer Inc., or Pfizer; and(iv) inotuzumab ozogamicin, also marketed by Pfizer. Brentuximab vedotin and ado-trastuzumab emtansine achievedcombined worldwide net sales in excess of $1 billion in 2017. Gemtuzumab ozogamicin and inotuzumab ozogamicin wereboth approved for sale in the United States in 2017. In addition to these four marketed ADCs, there are six ADCs that havebeen granted FDA Breakthrough Therapy Designation based on promising clinical data. There are also approximately 74ADCs presently in development in over 300 clinical studies, the vast majority of which are focused on the treatment ofcancer. We believe the commercial success of previously approved ADCs, combined with the number of ADCs currently inclinical development, demonstrates the potential of ADCs to become a mainstay of cancer treatment.Despite the promise of ADCs, companies in the field have faced certain challenges in developing product candidates thatachieve the optimal therapeutic index, or the balance between efficacy and tolerability. These challenges are characterized asfollows:·Linker stability: Linkers must be stable in the bloodstream to ensure that free payload is not released intocirculation prior to delivery into the tumor. Free payload in circulation causes toxicity. Efforts to design betterlinkers to increase stability have, in turn, reduced the efficiency of payload release once the ADC is internalized inthe tumor cell, resulting in decreased efficacy.3 Table of Contents·Drug‑to‑antibody ratio: Increases in the number of payload molecules delivered per antibody internalization eventincreases potency. However, the drug‑to‑antibody ratio, or DAR, has typically been limited to three to four payloadmolecules per antibody due to aggregation, poor pharmacokinetics and loss of drug‑like properties of the ADC atlevels above this threshold. Other attempts to increase efficacy have involved the introduction of ultra‑potentpayloads, however these efforts appear to face safety and tolerability challenges, necessitating even further reducedDAR to maintain acceptable pharmacokinetics and drug‑like properties.·Target antigen expression level: Tumor cells typically require a threshold number of payload molecules to beinternalized in order to kill the cell. Antigens with lower levels of expression have proven less desirable as targetsfor ADCs, as a result of fewer binding, internalization and payload delivery events to drive cell‑killing activity. Inturn, this has limited the number of cancers amenable to treatment with ADC‑based approaches, as the use of ADCsrequires antigen targets to be highly expressed on tumor cells.·Bystander effect: A released payload that is able to diffuse into and kill neighboring tumor cells, irrespective ofantigen expression, is known as having a “bystander effect.” While the bystander effect has been shown to improveefficacy by killing adjacent tumor cells, it is also associated with indiscriminate healthy cell killing, which leads todose limiting toxicities, such as neutropenia.Our proprietary and highly differentiated Dolaflexin platform is designed to overcome these challenges and achieveimproved efficacy, safety and tolerability, hence improving the therapeutic index, compared to traditional ADCtechnologies. Unlike traditional ADCs, where the payload is attached directly to the antibody via a linker, our ADCs featureantibodies attached to multiple units of Dolaflexin, which each consist of our Fleximer polymer scaffold conjugated toseveral proprietary auristatin payload molecules. As a result, we believe our ADCs offer the following benefits relative totraditional ADCs:·Improved linker stability: Fleximer is a biodegradable, highly biocompatible and highly water soluble polymerscaffold. The Fleximer creates a highly hydrophilic microenvironment, which protects the linker and the payloadand results in a highly stable ADC in circulation. We have demonstrated in non‑human primates that an ADCutilizing Dolaflexin is highly stable, with less than 0.05% of free payload detected in circulation.·Higher drug‑to‑antibody ratio: The hydrophilic microenvironment of Fleximer shields the highly hydrophobicpayload molecules and allows the ADC to achieve a DAR of 10 to 15 while maintaining acceptablepharmacokinetics and drug‑like properties in animal models. In multiple preclinical models, our lead productcandidates, XMT‑1522 and XMT‑1536, both of which are based on the Dolaflexin platform, have demonstrated thathigher DAR results in a significant increase in efficacy relative to traditional ADCs administered at comparable oreven higher dose levels.·Expanded range of addressable target antigen expression levels: As a result of higher DAR, our ADCs can delivermore payload to the tumor cell per antibody binding and internalization event. As a result, in preclinical models wehave shown efficacy against tumors with lower levels of antigen expression. Our lead product candidates,XMT‑1522 and XMT‑1536, have demonstrated efficacy in animal models of low antigen‑expressing tumors wherealternative ADC platforms have shown either weak or no efficacy.·Controlled bystander effect: We have designed our proprietary auristatin payload, used in the Dolaflexin platform,with a feature, referred to as DolaLock, that allows us to capture the benefits of the bystander effect whileminimizing potential toxicities to healthy tissue. Specifically, the initial payload released from the ADC in thetumor is capable of a bystander effect. However, as the payload is metabolized over time, it loses the ability todiffuse into neighboring cells and becomes trapped in the cell, preventing further diffusion into healthy tissues.The benefits of the Dolaflexin platform have resulted in tolerable doses in our preclinical models well in excess of theefficacious doses. Based on these findings, we have advanced XMT‑1522 and XMT-1536 into Phase 1 development. Webelieve these advantageous characteristics of our Dolaflexin platform provide a substantial opportunity to develop4 Table of Contentsclinically meaningful ADC therapies with potential to address a broader range of cancers than traditional ADC‑basedapproaches.We have assembled a management team with extensive, relevant experience, including specific ADC experience, from priorwork at leading pharmaceutical companies such as Millennium Pharmaceuticals, Inc., Takeda, Biogen, Inc.,MedImmune, Inc., Bayer AG and Vertex Pharmaceuticals, Inc. We are supported by our board of directors and scientificadvisory board, who offer complementary experience in drug discovery and development, as well as expertise in buildingpublic companies, management and business development. Our key investors include funds managed by New EnterpriseAssociates, Arrowpoint Partners, Cormorant Asset Management, F‑Prime Capital Partners, Rock Springs Capital andWellington Management, as well as Pfizer and our strategic partner, Takeda. We successfully completed an Initial PublicOffering of 5 million shares at $15 per share in June 2017 raising gross proceeds of $75 million. We believe that our highlydifferentiated platform, together with the team we have assembled, positions us well to generate best‑in‑class ADCs with thepotential to transform the lives of cancer patients.Our strategyOur goal is to become a leading oncology company by leveraging the potential of our innovative and differentiated ADCtechnologies. Our strategy to achieve this goal is as follows:·Rapidly advance the clinical development of XMT‑1522. We have designed a robust Phase 1 study of XMT‑1522to yield data that could be sufficient to demonstrate clinical proof‑of‑concept in four indications. If theproof‑of‑concept study is positive, we will utilize the data from this study, with our partner Takeda, to drive ourglobal registration strategy. XMT‑1522 is in a Phase 1 dose escalation study, and we plan to expand this into fivepatient cohorts after identifying the recommended Phase 2 dose: two breast cancer (HER2-positive and HER2 IHC1+/2+), two NSCLC (HER2 IHC 1+ and HER2 IHC 2+/3+) and one gastric cancer (HER2-positive).·Rapidly advance the clinical development of XMT‑1536. Our second product candidate, XMT‑1536, is an ADCtargeting NaPi2b and has demonstrated significant anti‑tumor activity in preclinical models of ovarian cancer andNSCLC. Following dose escalation and establishment of a recommended Phase 2 dose, we will expand into threecohorts aimed at establishing proof-of-concept; platinum resistant ovarian cancer, non-squamous NSCLC and abasket of other orphan indications where a majority of patients express NaPi2b (papillary thyroid, papillary renal,endometrial, salivary duct).·Build a pipeline of ADCs that address the significant unmet medical needs of cancer patients. We plan to utilizeour proprietary ADC technology platforms and expertise to augment our pipeline in order to deliver clinicallymeaningful drug candidates. We plan to submit one Investigational New Drug Application, or IND, every 12 to24 months. Under our existing strategic partnership with Takeda, we have a right to participate in the developmentand commercialization of one of Takeda’s ADC product candidates in the United States, which we may exercise tofurther supplement our pipeline.·Expand our ADC technology platform capabilities. We intend to establish a leading position in the field of ADCsby continuing to advance platform innovations that further broaden the potential of our ADCs to deliver clinicallymeaningful benefit for cancer patients. Our areas of focus include the development of alternative scaffolds to drivehomogeneity of our ADCs, alternative payloads to address additional indications and drug resistance and alternativetargeting moieties to improve tumor penetration and biodistribution. We believe these efforts may lead to improvedefficacy and tolerability as well as expansion of the addressable patient population.·Evaluate strategic partnerships to maximize the value of our programs and platforms. Our platformtechnologies, and product discovery and development capabilities, drive the potential for multiple clinicallymeaningful opportunities for cancer patients. In order to preserve a disciplined drug development andcommercialization focus, we may choose to enter into strategic partnerships that facilitate our ability to bringdifferentiated product candidates to more patients. Our current partnerships with Takeda and Merck KGaAexemplify different aspects of this strategy and could be worth up to $2.1 billion to us in milestone payments plusadditional royalties, if product candidates under these agreements are successfully developed and5 Table of Contentscommercialized. In 2017, Takeda advanced one target utilizing the Dolaflexin platform to portfolio entry andcommenced IND enabling studies.·Attract and retain people that share our commitment to scientific excellence and patient care. In addition to ourteam’s deep experience with ADC science, drug development and operational management, we believe that ouraccomplishments are a testament to the talent and commitment of our people. Our team is driven by a shared passionto advance therapies that make a significant difference in the lives of cancer patients. We will continue to cultivatethe collaborative and passionate workplace culture that has allowed us to advance this mission.Background on antibody drug conjugates (ADCs) for cancerOverviewADCs for cancer traditionally consist of an antibody attached to a chemotherapeutic “payload” via a chemical known as alinker. The antibody provides targeting capability against a distinct antigen selectively expressed on a tumor cell, resultingin the ADC binding only to those cells that express the target antigen. Upon binding to the antigen, the ADC is internalizedby the tumor cell and the payload is released through either cleavage of the linker or degradation of the antibody. Cell deathresults once the threshold level of payload has been internalized by the target cell. Figure 1 illustrates the general mechanismby which ADCs kill tumor cells. The individual components of an ADC dictate the efficacy, safety and tolerability of thetreatment. Historically, ADC development has involved making compromises between features which may improve efficacyat the expense of safety and tolerability, and vice versa. The challenge of optimizing this balance is exemplified by thedearth of approved ADC products, despite the technology having existed for over 20 years.Figure 1.Monoclonal antibodiesThe first component of an ADC is a monoclonal antibody, which is the highly specific targeting agent enabling binding tothe tumor antigen and internalization of the ADC into the tumor cell. Antibodies themselves are a well establishedtherapeutic modality, with $85.4 billion in worldwide sales in 2015.6 Table of ContentsIn the context of an ADC, two factors are considered in the selection of the antigen to which the antibody is targeted:(i) preferential expression on tumor cells with as limited as possible expression on healthy tissues and (ii) level of antigenexpression on tumor cells. The amount of payload delivered to the tumor cell is related to the binding of the ADC to theantigen and internalization, and as a result, it is generally recognized that very high and consistent (or homogeneous)antigen expression throughout the tumor correlates with higher efficacy. For example, ado‑trastuzumab emtansine isindicated for HER2‑positive late stage metastatic breast cancer. The HER2 antigen expression levels in the tumors of thesepatients is very high, and it has been reported that patients with the highest levels of HER2 expression derive the mosttherapeutic benefit. The ability to achieve a therapeutic concentration of payload in the tumor quickly diminishes as thelevel of antigen expression decreases, which may explain why current ADC approaches have only demonstrated efficacy in alimited range of tumors with relatively high expression of a target antigen.Chemotherapeutic payloadsThe second component of an ADC is a chemotherapeutic payload, or cell‑killing agent, too potent to be delivered as astandalone therapy. In the context of an ADC, the payload, which is conjugated to the antibody, is selectively delivered tothe tumor as a result of the targeting ability of the antibody thereby limiting toxicity to healthy tissues.The majority of payloads currently used in ADCs fall within one of two categories, based on mechanism of action:anti‑tubulin agents or DNA damaging agents. Many of the ADCs in clinical development use anti‑tubulin linker‑payloadplatforms developed by ImmunoGen, Inc., or ImmunoGen (SMCC‑DM1 and SPDB‑DM4) and Seattle Genetics (mc‑MMAFand vc‑MMAE). Anti‑tubulin payloads are preferentially toxic to dividing cells versus resting cells, a feature that isbeneficial for ADCs where the target antigen is also expressed on healthy resting cells. Anti‑tubulins typically havepotencies of 0.1 to 10 nM but are not effective against certain tumors, such as colorectal. More recently, in order to increasepotency and potentially expand addressable indications, the field has seen an emergence of novel DNA damaging payloadclasses, such as pyrrolobenzodiazepine, or PBD, dimers, with potencies 100 to 1000 times higher than the anti‑tubulins.These payloads bind to the cell’s DNA, leading to cell death. To date, ADCs utilizing PBD dimers have been shown to behighly potent in early clinical development, however due to toxicities, the dose and duration of these ADCs have beenlimited.After internalization by the targeted tumor cell, some ADC payloads have an additional ability to passively diffuse into andkill neighboring cells. This bystander effect can be very useful in enhancing the efficacy of these ADCs in tumors withheterogeneous antigen expression by providing a mechanism to kill neighboring tumor cells which do not express the targetantigen. While the bystander effect can be beneficial in terms of efficacy, it can also be detrimental in terms of tolerability, asit allows for cell‑killing independent of targeting.Chemical linkersA third critical component of an ADC is the chemical linker used to attach the payload to the antibody, as it directly affectsefficacy, safety and tolerability. Ideally, a linker provides a stable connection between the payload and the antibody insystemic circulation. Premature release of the payload in systemic circulation can cause significant off‑target toxicity.Upon internalization of the ADC by the targeted tumor cell, the linker should release the payload from the antibody topromote rapid and efficient killing of the tumor. Linkers used for ADCs fall into one of two categories: cleavable ornon‑cleavable. In general, cleavable linkers are designed to be stable in the circulation and to be selectively cleaved as aresult of an inherent property of the tumor, such as degradation by tumor‑specific enzymes. In contrast, non‑cleavable linkersare resistant to this type of degradation and instead rely on the degradation of the antibody to release the payload. As a result,the released linker‑payload remains attached to a fragment of the antibody, which limits the cell permeability and bystandereffect. The solubility of the linker‑payload combination employed also has a significant influence on the properties of theresulting ADC. Many linkers and payloads used in traditional ADCs are highly insoluble, which limit DAR to three to fourdue to aggregation and poor drug‑like properties of ADCs. Because existing conjugation approaches use direct conjugation,the site of payload attachment can also influence the stability and performance of the ADC, as the microenvironmentssurrounding each attachment site can differ and affect the properties of the linker‑payload.7 Table of ContentsDolaflexin platformOur proprietary and highly differentiated Dolaflexin platform is designed to increase the efficacy, safety and tolerability ofADCs by overcoming key limitations of existing technologies based on direct conjugation. Dolaflexin consists of Fleximer,a biodegradable, highly biocompatible, water soluble polymer, to which are attached multiple copies of our proprietaryauristatin drug payload, using a linker specifically optimized for use with our polymer. The high water solubility of theFleximer polymer compensates for the low solubility of the payload, surrounding the payload and protecting it fromaggregation. Multiple copies of this Dolaflexin polymer‑drug conjugate can then be attached to an antibody of choice,which significantly increases the payload capacity of the resulting ADC. As shown in the schematic in Figure 2, thisapproach differs from most other ADC technologies where the payload is directly conjugated to the antibody via a linker.Using the Dolaflexin platform, we have been able to generate ADCs with DAR between 10 to 15 while maintainingacceptable pharmacokinetics and drug‑like properties in animal models. This represents a three to four fold increase in DARrelative to the traditional ADC approach.Figure 2.Direct conjugationFleximer ADC Below is a summary of key advantages that we believe our proprietary Dolaflexin platform offers over other existing ADCtechnologies. We believe these properties will enable us to develop ADCs with an improved therapeutic index that maybroaden the scope of addressable cancer patients for which ADC therapies are amenable.·Improved linker stability: There are two important linkers contributing to the stability of a Dolaflexin ADC: anon‑cleavable linker attaching the Fleximer to the antibody and a cleavable linker attaching the payload to theFleximer. The Fleximer provides for a highly hydrophilic and homogeneous microenvironment that stabilizes thepayload‑linker in circulation. However, the cleavable nature of the payload‑linker results in rapid release of thepayload upon internalization into the tumor cell.·Higher drug‑to‑antibody ratio: Dolaflexin consists of Fleximer conjugated to up to four molecules of ourproprietary auristatin payload. Our ADCs typically consist of three to four Dolaflexin units attached to eachantibody, which allows us to achieve significantly higher DAR compared to other ADC approaches. For example,our lead proprietary product candidates, XMT‑1522 and XMT‑1536, each carry between 10 to 15 payload moleculesper antibody, which we believe will result in greater efficacy than traditional ADCs with a lower DAR. Importantly,Fleximer is extremely water soluble, which helps maintain the pharmacokinetics and drug‑like qualities of the ADCin animal models even at relatively high DARs.·Expanded range of addressable antigen expression levels: The higher DAR enabled by our Dolaflexin platformresults in more chemotherapeutic payload being released into the tumor cell for every binding and internalizationevent. As a result, we have demonstrated in animal models that Dolaflexin ADCs have efficacy against tumors withlower levels of antigen expression where traditional ADCs have not been effective.8 Table of Contents·Controlled bystander effect: Our proprietary auristatin chemotherapeutic drug payload, has been specificallydesigned to maintain efficacy while improving safety and tolerability compared to payloads used in conventionalADCs. Upon internalization of the ADC into the tumor cell, cleavage of the linker occurs to release AuristatinF‑hydroxypropylamide, or AF‑HPA, as the primary chemotherapeutic payload. AF‑HPA is a highly potent, freelycell‑permeable anti‑tubulin agent, which readily kills rapidly dividing tumor cells but is not toxic to non‑dividingcells. Since AF‑HPA is freely cell‑permeable, it can diffuse into adjacent tumor cells and kill them in anantigen‑independent manner through the bystander effect. However, release of AF‑HPA into the systemic circulationcan also lead to toxicity if taken up by normal healthy cells. To counteract this, our proprietary auristatin payloadhas been engineered with the DolaLock feature that causes AF‑HPA to convert into the non‑cell permeablechemotherapeutic, auristatin F, or AF, when metabolized over time inside the cell. While AF can still kill dividingcells if generated intracellularly, it is approximately 8‑fold less potent than AF‑HPA at killing dividing cells whenoutside the cell. Consistent with this, AF was significantly better tolerated than AF‑HPA in rat safety studies. Figure3 shows the accumulation of AF‑HPA and its metabolite, AF, in a mouse tumor model demonstrating the conversionover time of AF‑HPA to AF, the trapping of free AF in the tumor cells and its almost negligible accumulation inhealthy tissues.Figure 3. Accumulation of AF‑HPA/AF in Tumor Consistent with Efficacy and TolerabilityAccumulation of Released Drugsin Tumor Over 2 WeeksAfter DosingFree Drug Exposurein Tumor and Normal Tissue Over 2 WeeksAfter Dosing The more limited exposure of free AF to healthy tissues corresponds to lower drug toxicities, such as neutropenia, seen insafety studies of Dolaflexin ADCs compared to competitor technologies (e.g., Seattle Genetics vc‑MMAE), with seven out ofnine ADCs that have reported Phase 1 results showing dose‑limiting neutropenia. As shown in Figure 4, neutrophil countsdid not decline in either rats or monkeys at Dolaflexin ADC doses above the maximum doses that can be administered ofvc‑MMAE ADCs, which are frequently dose‑limited by neutropenia and sepsis.9 Table of ContentsFigure 4. Neutrophil Counts as a Function of Dolaflexin ADC Dose (in Auristatin Equivalents) Our product candidatesWe are leveraging our platform to develop a robust pipeline of clinically meaningful cancer therapies. Our pipeline strategyfocuses on targets that have been biologically validated (either as ADCs or through another modality) and where theadvantages of our platform can lead to a clinically superior therapeutic. Our lead product candidates, XMT‑1522 and XMT-1536, are in Phase 1 dose escalation studies. A robust discovery stage pipeline supports our objective of bringing one newproduct candidate into clinical development every 12 to 24 months. In addition, our partners have multiple ADC productcandidates leveraging our technology in late discovery.XMT‑1522: our HER2‑targeted ADCProgram descriptionOur lead product candidate, XMT‑1522, is a Dolaflexin ADC targeting HER2‑expressing tumors. It is currently in Phase 1clinical development. HER2 belongs to a family of signaling molecules that are highly and preferentially expressed on thesurface of various cancer cells and are known to play a role in promoting tumor cell growth. XMT‑1522 is composed of aproprietary fully human anti‑HER2 antibody, selected for its advantageous internalization properties and its ability to bindto a unique epitope distinct from the epitopes of trastuzumab and pertuzumab, two approved therapies that also target HER2.The development of XMT‑1522 leverages the differentiating aspects of our Dolaflexin platform to focus on HER2‑expressingpatient populations that have the highest unmet medical need because they are not served by the existing HER2 therapiescurrently on the market. We are actively recruiting and dosing primarily breast cancer patients with a HER2 IHC score of 1+or greater, NSCLC patients with a HER2 IHC score greater than 2+ or gene-amplified, and gastric cancer patients that areHER2-positive.Unmet need and epidemiologyCurrently approved HER2‑targeted therapies are indicated only for breast or gastric cancer patients who are consideredHER2‑positive based on well established, Food and Drug Administration, or FDA, approved tests that rely onimmunohistochemistry, or IHC, or genetic methods. Patients are classified by their level of HER2 expression on a scale10 Table of Contentsranging from 0 to 3+, with 3+ representing the highest level of HER2 expression. Patients with HER2 3+ expression or whohave gene amplification that results in them having multiple copies of the HER2 gene are considered HER2‑positive. Thereis a significantly larger population of patients with HER2 expression of 1+ or 2+ and without gene amplification, and forthose patients, there are currently no approved HER2‑targeted therapies in breast, gastric or other cancers.Our development plan is supported by extensive preclinical data demonstrating XMT‑1522’s increased potency compared tocurrently marketed HER2 therapies, including against HER2 1+ and 2+ breast and gastric cancers where existing therapiesare not approved and HER2-expressing breast, NSCLC and gastric cancers where existing therapies have failed. Thefollowing chart shows the initial therapeutic focus for our XMT‑1522 product candidate. We are focused in areas thatleverage the advantages of XMT‑1522 and where patients have limited treatment options. Among breast cancer patients, approximately 55% express HER2 at the 1+ or 2+ level without HER2 gene amplification.These patients are not eligible to receive existing HER2 therapies (trastuzumab, pertuzumab or ado‑trastuzumab emtansine)and have limited other options. Initially, we are studying XMT‑1522 in advanced or metastatic breast cancer patients whoexpress HER2 at the 1+ and 2+ levels (whether hormone negative or have become hormone resistant or refractory) and haveprogressed on at least one line of chemotherapy. If proof‑of‑concept is established in this patient population, opportunitiesexist to move to an earlier stage of treatment in this hard‑to‑treat patient population. We are also planning to developXMT‑1522 for HER2-positive breast cancer patients whose tumors have progressed after treatment with other HER2therapies, such as ado‑trastuzumab emtansine and pertuzumab, and have limited other treatment options.Among patients with NSCLC, expression of the HER2 protein at the 1+, 2+ or 3+ level has been shown to occur at a rate ofapproximately 50%. We are developing XMT‑1522 in HER2 1+, 2+ and 3+ patients who have previously been treated with aplatinum‑containing regimen. Unlike HER2‑positive breast cancer, HER2 expression in NSCLC is not a dominant driver oftumor growth and hence HER2‑targeted antibodies have failed in this setting. If proof‑of‑concept is established in thispopulation, opportunities exist to move earlier in the treatment paradigm or consider combination treatment withPD‑1/PD‑L1 antibodies, the emerging standard of care in front line NSCLC. Our emerging preclinical data appear to alsosupport the potential for synergy with immune checkpoint inhibitors.Among gastric cancer patients, approximately 15% to 20% are HER2‑positive. Trastuzumab is approved for this patientpopulation but ado‑trastuzumab emtansine has failed to demonstrate a survival benefit. We are developing XMT‑1522 inHER2‑positive patients who have received prior therapy with trastuzumab. If proof‑of‑concept is established in thispopulation, opportunities exist to address gastric cancer patients expressing HER2 at the 1+ and 2+ levels.11 Table of ContentsClinical development plan and timelineXMT‑1522 is in a Phase 1, open label, multi‑center study and is administered as an intravenous infusion once every threeweeks. There are two parts to the Phase 1 study: (i) a dose escalation primarily in breast cancer patients with a HER2 score of1+ or greater and (ii) a dose expansion in five parallel patient cohorts. At the request of investigators we amended theprotocol for the dose escalation study to allow for enrollment of NSCLC patients expressing HER2 by IHC (2+ or 3+) or withgene amplification, and gastric patients that are HER2-positive post trastuzumab treatment. The primary objective of thedose escalation part of the study is to establish the maximum‑tolerated dose and a recommended Phase 2 dose. The objectiveof the cohort expansion stage is to further assess tolerability at the recommended Phase 2 dose and to estimate the objectiveresponse rate and durability of response in five patient cohorts.The dose escalation part of the study utilizes a 3+3 design with a three week evaluation period for dose limiting toxicity, orDLT. A Safety Review Committee will review the data after each dose cohort of three patients completes the DLT evaluationperiod and will recommend three patients be enrolled at the next dose level if a dose is reasonably well‑tolerated. After thefirst cycle, patients may continue to receive XMT‑1522 until disease progression, provided the drug is well‑tolerated andpatients continue to derive clinical benefit in the opinion of the investigator.XMT-1522 has been evaluated in 22 patients through dose level 6. Treatment-related adverse events have generally beenmild or moderate and reversible. There have been early signals of efficacy. The pharmacokinetic profile of XMT-1522 hasbeen generally consistent with the favorable profile seen in animal studies. The objective of the study is to establishmaximum tolerated dose and use that information to select a Phase 2 dose. The program has progressed to dose level 7. Anabstract of interim results has been submitted to the American Society of Clinical Oncology’s (ASCO) annual meeting.After completion of dose escalation, the expansion part of the study will be opened in five cohorts of approximately 20patients each:·Cohort 1: Advanced breast cancer, HER2 IHC 1+ or HER2 IHC 2+ without HER2 gene amplification·Cohort 2: Advanced breast cancer, HER2‑positive, who have received prior ado‑trastuzumab emtansine·Cohort 3: Advanced gastric cancer, HER2‑positive, who have received prior trastuzumab·Cohort 4: Advanced NSCLC, HER2 IHC 2+ or 3+, any HER2 gene amplification or mutation status, who havereceived prior platinum‑based chemotherapy·Cohort 5: Advanced NSCLC, HER2 IHC 1+, any HER2 gene amplification or mutation status, who have receivedprior platinum‑based chemotherapyThe expansion part of the study is designed to provide an initial estimate of the response rate for XMT‑1522 in each cohortand the durability of the observed responses. These data will be used to support end‑of‑Phase 1 interactions with regulatoryauthorities and to inform the design of subsequent studies. We anticipate that observation of a clinically meaningful rate ofdurable responses in any of the cohorts could be used to support the initiation of pivotal studies to support approval in theindication.Preclinical efficacy studiesWe have studied the efficacy of XMT‑1522 in xenograft as well as in patient‑derived models representing diverse levels ofHER2 expression and tumor types. The data are summarized in the waterfall plot below, showing the best tumor response toXMT‑1522 across 15 tumor models representing six indications (Figure 5). These indications informed our clinicaldevelopment plan. Each column represents an individual tumor model and measures the best overall change in tumor volumerelative to the measured tumor volume on the first day of XMT‑1522 administration. A more negative value representsgreater anti‑tumor efficacy of XMT‑1522, with a 100% reduction in tumor volume corresponding to complete regression ofthe tumor to the point where it was no longer measurable. In these experiments, XMT‑1522 was given in12 Table of Contentsdoses of 3 mg/kg or below, either as a single dose on Day 0 of the experiment or in three weekly doses on Days 0, 7 and 14.Experiments were allowed to run until at least Day 60, or at least 45 days following the last administration of XMT‑1522. Asdepicted in the graph, XMT‑1522 was able to achieve complete or near‑complete tumor regressions in 11 out of the 15models. Of the 11 models that achieved complete or near‑complete regression, the regressions were sustained until Day 60 in10 of the models even in the absence of additional therapy, showing the durability of tumor regressions induced byXMT‑1522 (Figure 6).Figure 5. Waterfall Plot of Best Tumor Response to XMT‑1522 in Xenograft ModelsFigure 6. Day 60 Tumor Volumes in Models Achieving Complete or Near‑Complete Regression After Treatment withXMT‑1522 To evaluate the relative efficacy of XMT‑1522 compared to ado‑trastuzumab emtansine, we conducted studies in tumormodels representing high, medium and low levels of HER2 expression (Figure 7). In the high HER2‑expressing model(NCI‑N87 gastric cancer, HER2 gene amplified, HER2 3+), XMT‑1522 induced complete tumor regressions after a single1 mg/kg dose on Day 1. As we expected, ado‑trastuzumab emtansine was similarly active in HER2 high expressing tumorsafter a single dose of 10 mg/kg. However, in the medium‑ and low‑expressing models, XMT‑1522 was still able to induce13 Table of Contentsdurable complete tumor regressions where ado‑trastuzumab emtansine failed to do so, even at doses at least 10‑fold higherthan the XMT‑1522 dose. XMT‑1522 was also capable of inducing complete tumor regressions in models of acquiredresistance to ado‑trastuzumab emtansine, both in a model generated in the laboratory and in a tumor model obtained from apatient who responded to ado‑trastuzumab emtansine but then experienced disease progression. In contrast, in the modelobtained from a patient, lapatinib/gemcitabine, the current standard of care, did not have material impact on tumor growth.These data suggest that our ADCs may have improved efficacy relative to traditional ADCs, even in tumors where the targetantigen is expressed at moderate to low levels.Figure 7. Comparing XMT‑1522 to Ado‑Trastuzumab Emtansine in Models Representing High, Medium and LowLevels of HER2 ExpressionHIGHN87 Gastric Cancer800,000 HER2/cellIHC 3+MEDIUMJIMT‑1 Breast Cancer80,000 HER2/cellIHC 2+LOWSNU5 Gastric Cancer22,000 HER2/cellIHC 0/1+ To evaluate the potential of XMT‑1522 in combination with other agents, we conducted preclinical studies with otherHER2‑targeted therapies and checkpoint inhibitors currently used in the treatment of cancer. Since XMT‑1522 binds to anepitope distinct from the HER2 epitopes to which trastuzumab and pertuzumab bind, it does not compete with either of thoseantibodies for HER2 binding. We have shown that the triple combination of XMT‑1522 with trastuzumab and pertuzumab ismore active than XMT‑1522 alone or the trastuzumab/pertuzumab doublet in a HER2‑driven tumor model (N87HER2‑positive gastric cancer) (Figure 8). In this experiment, XMT‑1522 was administered at a dose lower than the maximallyefficacious dose to manifest the triplet synergy. Consequently, we believe XMT‑1522 has the potential to be combined witheither or both of those monoclonal antibodies, even at doses of trastuzumab and pertuzumab over 20‑fold higher than thedose of XMT‑1522, to promote more complete inhibition of HER2 signaling while not interfering with delivery of theXMT‑1522 chemotherapeutic payload.14 Table of ContentsFigure 8. Synergy Seen in Triple Combination with Trastuzumab and PertuzumabADC payloads, including AF‑HPA, have been shown to induce immunogenic cell death, or ICD. Chemotherapeuticcompounds that induce ICD are hypothesized to increase the presentation of tumor antigens in the tumor microenvironmentand to generate an immune response to the tumor, resulting in increased sensitivity of the tumor to immune checkpoint drugssuch as the PD‑1 or PD‑L1 inhibitors. We have tested this hypothesis with XMT‑1522 in a mouse model carrying ahumanized immune system and a patient‑derived NSCLC tumor expressing HER2. In this experiment, we tested the PD‑1antibody pembrolizumab alone, XMT‑1522 alone and the combination of XMT‑1522 with pembrolizumab. As shown inFigure 9, the combination of XMT‑1522 with pembrolizumab is more active than either therapy alone. We believe these datasupport the potential to combine Dolaflexin ADCs with immune checkpoint inhibitors in cancer indications wherecheckpoint inhibitors are active.15 Table of ContentsFigure 9. XMT‑1522 in Combination with Pembrolizumab Results in Greater Efficacy than Either Treatment AlonePreclinical safety studiesWe have evaluated the safety and tolerability of XMT‑1522 in both non‑human primates and rats. Based on these studies, wehave established that the XMT‑1522 plasma concentrations necessary for efficacy in the variety of models studied are belowthe highest tolerated dose in non‑human primates. Furthermore, we have established that XMT‑1522 is stable in circulation,has predictable pharmacokinetics and has a safety profile acceptable for Phase 1 testing in patients with advanced cancer.The plasma concentrations of XMT‑1522 ADC and the monoclonal antibody were similar over the course of the study andthe concentration of free AF‑HPA payload was less than 0.05% the concentration of antibody conjugated AF‑HPA at all timepoints, indicating the stability of the ADC in circulation. Plasma exposure to free AF payload was also low and peaked at alater time point compared to free AF‑HPA, consistent with the metabolism of our AF‑HPA payload. There was no evidence ofcardiotoxicity in non‑human primates at any dose tested, including at doses significantly above the highest tolerated dose indose finding studies. The most pronounced hematologic finding in non‑human primates was a transient decrease in plateletcounts not associated with clinically‑significant bleeding. Neutropenia was not observed in either species. Opthalmologicalevaluation was performed in preclinical studies in both species. Adverse ocular events related to XMT‑1522 were seen onlyat the highest dose tested in the rat, associated with plasma exposure of XMT‑1522 greater than eight fold higher than theexposure at the highest non‑severely toxic dose in non‑human primates. Gastrointestinal toxicity was the primary toxicityassociated with XMT‑1522 and was seen only in non‑human primates. These effects were fully reversible at tolerated doses.XMT‑1536: our NaPi2b‑targeted ADCProgram descriptionOur second product candidate, XMT‑1536, is a Dolaflexin ADC targeting NaPi2b‑expressing tumors. NaPi2b is an antigenhighly expressed in 60 to 90% of both non‑squamous NSCLC and epithelial ovarian cancer. However, the expression ofNaPi2b in normal tissue is restricted to a limited subset of cell types, rendering it an ideal antigen for ADC development.XMT‑1536 is composed of a proprietary anti‑NaPi2b antibody, selected for its advantageous internalization properties.XMT‑1536 entered clinical development in late 2017 and is currently in a Phase 1 dose escalation study.16 Table of ContentsGenentech’s lifastuzumab vedotin, an ADC targeting NaPi2b utilizing the Seattle Genetics vc‑MMAE platform, providedencouraging results in Phase 1 studies in ovarian cancer, where a 41% confirmed objective response rate by RECIST criteriawas achieved without evidence of target‑mediated toxicities. However, in a randomized Phase 2 study in platinum‑resistantovarian cancer, lifastuzumab vedotin failed to demonstrate a statistically‑significant benefit to liposomal doxorubicin, thecomparator, on the primary endpoint of progression free survival, or PFS, despite a numerically superior response rate andimprovement in median progression‑free survival. Surprisingly, responses in NSCLC patients were also limited despitewidespread expression of the NaPi2b target in the Phase 1 patients. Genentech has since discontinued development oflifastuzumab vedotin. The partial validation of the NaPi2b target provided by these studies forms the basis of our rationale todevelop XMT‑1536 as a potentially clinically meaningful ADC for the treatment of epithelial ovarian cancer andnon‑squamous NSCLC. Based on our preclinical data, we believe that XMT‑1536 may offer improved efficacy and a widertherapeutic index in these patients.Unmet need and epidemiologyOvarian cancer patients who progress during or within six months of completion of platinum‑based therapy are considered tohave platinum‑resistant disease. These patients have limited treatment options other than single agent platinum‑basedchemotherapies (e.g., docetaxel, paclitaxel) or targeted therapies, such as bevacizumab (in patients who have not receivedbeviciaumab for treatment of earlier stage disease), olaparib (for patients carrying germline mutations in the BRCA1 andBRCA2 genes) and rucaparib (for patients carrying germline and somatic mutations in the BRCA1 and BRCA2 genes), whichhave either shown limited overall survival benefit (e.g., bevacizumab) or have yet to demonstrate survival benefit(e.g., olaparib and rucaparib). We plan to initially test XMT‑1536 in patients with platinum‑resistant ovarian cancer. Ifproof‑of‑concept is established, there are opportunities to address treatment of primary ovarian cancer and recurrent,platinum‑sensitive disease where platinum‑based chemotherapy regimens remain the standard of care.Given the breadth of NaPi2b expression in non‑squamous NSCLC, we believe XMT‑1536 also has the potential to treat abroad population of NSCLC patients. Initially, we plan to test XMT‑1536 in platinum‑resistant NSCLC patients. Ifproof‑of‑concept is established in this population, we believe that there are opportunities to move earlier in the treatmentparadigm or consider combination treatment with PD‑1/PD‑L1 antibodies, the emerging standard of care in front line NSCLC.Our preclinical data indicating that the AF‑HPA payload used in XMT‑1536 induced immunogenic cell death support thepotential for synergy with immune checkpoint inhibitors.There are currently no FDA‑approved tests to measure NaPi2b expression on tumor cells, however given the prevalence of itsexpression on epithelial ovarian and non‑squamous NSCLC tumors, our initial clinical studies of XMT‑1536 will beconducted without prospective identification of patients with NaPi2b‑expressing tumors. Nonetheless, we have developedand validated an immunohistochemistry assay to measure NaPi2b expression which we intend to use retrospectively toconfirm the broad prevalence of NaPi2b expression in our target patient populations while correlating those expressionlevels with the efficacy observed in such patients. To date, data generated using our assay has found NaPi2b expression in 12out of 20 and 16 out of 20 samples of ovarian and lung cancer, respectively. If results are sufficiently robust, we believe thereis an opportunity to develop XMT‑1536 without the need for a companion diagnostic, or with the inclusion of the NaPi2bassay in the label as a complementary diagnostic to guide physician decision making. If a companion diagnostic is requiredfor the label for XMT‑1536, we may seek approval for our validated assay as a companion diagnostic or we may contract withthird parties to create and obtain approval for a companion diagnostic.Preclinical studiesXMT‑1536 induced complete tumor regressions in the OVCAR3 ovarian cancer model after a single dose of 5 mg/kg or threeweekly doses of 3 mg/kg. In comparison, lifastuzumab vedotin administered via three weekly doses of 3 mg/kg failed toachieve tumor regressions (Figure 10). Genentech published regressions in this model at doses of 6 mg/kg and above, but,given the dose‑limiting neutropenia seen in monkeys at doses above 3 mg/kg, these higher doses are unlikely to betranslationally relevant.17 Table of ContentsFigure 10. Comparison of XMT‑1536 to Lifastuzumab Vedotin in the OVCAR3 OvarianCancer Xenograft ModelEstablished CTG‑0852 patient‑derived NSCLC xenograft tumors were treated with XMT‑1536, lifastuzumab vedotin ornon‑binding IgG1‑dolaflexin control ADC at a 3 mg/kg dose once weekly for three weeks and tumor volume was measuredfor 60 days. XMT‑1536 treatment resulted in nearly complete regression of the treated tumors that was durable for 45 daysafter cessation of treatment. In contrast, treatment with the non‑binding ADC control or lifastuzumab vedotin led to modesttumor growth control without achieving tumor regression.Figure 11. Comparison of XMT‑1536 to Lifastuzumab Vedotin in the CTG‑0852 NSCLC Xenograft Model XMT‑1536 was also tested in eight patient‑derived tumor models of NSCLC adenocarcinoma, where it led to complete ornear‑complete tumor regressions in five of eight models and significant tumor growth delay in two of the remaining threemodels (Figure 12). All models were treated with three weekly doses of 3 mg/kg or less. The models were not pre‑selected18 Table of Contentsfor NaPi2b expression and represented a range of tumor genotypes frequently observed in NSCLC adenocarcinoma,including RAS/RAF mutant tumors, EGFR mutant tumors, ALK‑translocated tumors and tumors not carrying knownoncogenic drivers. As with the data presented above, each column represents an individual tumor model, and the morenegative the value, the greater the degree of XMT‑1536 efficacy, with negative 100% representing complete tumorregression. In these experiments, the last dose of XMT‑1536 was administered on Day 14 and tumor volumes were measureduntil Day 60 to evaluate durability of the regressions. The regressions were maintained until Day 60 in four of the fivemodels achieving complete or near‑complete regression after a 45 day treatment‑free interval, indicating good durability ofthe tumor regressions (Figure 13).Figure 12. Waterfall Plot of Best Tumor Responseto XMT‑1536 in Eight NSCLC AdenocarcinomaModelsFigure 13. Day 60 Tumor Volumes in ModelsAchieving Complete or Near‑CompleteRegressions with XMT‑1536Best Tumor Responsein 8 Adenocarcinoma PDX Models3 mg/kg dose, weekly x3 XMT-1536 was tested at 3 mg/kg three times weekly in a series of 19 human primary xenograft models derived from serousovarian or fallopian tube cancers (n=3 animals/group). Models were not preselected for NaPi2B target expression. Growtheffects were evaluated by calculating median best response relative to day 0, at any time-point. An immunohistochemistry(IHC) assay to detect NaPi2b was established using a primary anti-NaPi2b antibody, that consisted of a human/rabbit chimeraof XMT-1535, the antibody included in XMT-1536. A tumor block from one untreated study animal, representing eachtumor model, was evaluated to determine an efficacy/staining pattern relationship, and IHC values were reported as an “H”Score.Median best response (Figure 14) calculation showed 10/19 models with a median best response of -50% to - 100%.Considering models with a 50% or greater median best response after XMT-1536 treatment, all had a NaPi2b IHC H-score of≥70 Amongst tumors with H-score ≥70, 10/12 (83%) models achieved 50% or greater reduction in tumor volume after XMT-1536 treatment, vs 0/7 (0%) models with H-score <70. There was an association between NaPi2b IHC H-score and tumorvolume change after XMT-1536 treatment (Spearman rank coefficient 0.76).19 Table of ContentsFigure 14. Median Best Response to XMT-1536 in an Unselected Series of Human Primary Ovarian and Fallopian TubeCancer Xenografts; Gray Scale by NaPi2b IHC H ScoreRegression Observed in 14/19 Models Preclinical tolerability data and therapeutic indexXMT‑1536 is cross‑reactive with cynomolgous monkey and rat NaPi2b, allowing an informative evaluation of whetherXMT‑1536 retains good tolerability in these commonly used safety species. In the exploratory repeat dose NHP study as wellas the IND-enabling study, there was no evidence of neutropenia at payload doses that were at least four times the maximumtolerated dose of lifastuzumab vedotin and at least two times the dose that caused fatal neutropenia and sepsis in monkeystreated with lifastuzumab vedotin. Further, there was no evidence of significant pulmonary toxicity. We believe these data,combined with the strong efficacy data for XMT‑1536 in models of NSCLC and ovarian cancer, are indicative of a favorabletherapeutic index and supported moving into Phase 1 trials in cancer patients.Clinical development plan and timelineThe Phase 1 study is an open label, multi‑center study of XMT‑1536 administered as an intravenous infusion once everythree weeks. The dose escalation part of the study is expected to establish a recommended Phase 2 dose for XMT‑1536 inpatients primarily with advanced epithelial ovarian cancer and non‑squamous NSCLC. We expect the study will not requiremolecular testing for eligibility and will be open to all patients regardless of NaPi2b expression. Upon completion of doseescalation, the cohort expansion segment of the study is expected to consist of three parallel cohorts of patients to estimatethe objective response rate and durability of responses. Retrospective analysis of tumor response and durability of responseas a function of NaPi2b expression will be performed to determine the necessity of developing a companion diagnostic forNaPi2b expression in subsequent studies.XMT-1536 entered clinical development in late 2017. The first two dose levels were cleared without dose limiting toxicity.Enrollment of the third dose cohort is complete with patients currently being evaluated for dose limiting toxicity. Treatment-related AEs have generally been mild or moderate and reversible. Dose escalation is ongoing in accordance with the studyprotocol. The objective of the study is to establish maximum tolerated dose and use that information to select a Phase 2 dose.20 Table of ContentsPlatform developmentWe intend to establish a leading position in the field of ADCs by continuing to advance platform innovations that furtherbroaden the potential of our ADCs to deliver clinically meaningful benefit for cancer patients. Our areas of focus include thedevelopment of alternative scaffolds to drive homogeneity of our ADCs, alternative payloads to address additionalindications and drug resistance and alternative targeting moieties to improve tumor penetration and biodistributuion. Webelieve these efforts may lead to improved efficacy and tolerability as well as expansion of the addressable patientpopulation. Strategic partnershipsStrategic partnerships with leading biopharmaceutical companies to advance Fleximer ADC product candidatesWe believe that our ADC platform has broad applicability across a number of targets. We have used strategic partnering toaccelerate bringing Fleximer ADCs to patients. Since 2012, we have entered into a strategic partnership for XMT‑1522 withTakeda, through its wholly owned subsidiary Millennium Pharmaceuticals, Inc., and strategic research and developmentpartnerships with Takeda, Merck KGaA and Asana BioSciences, LLC (by assignment from Endo Pharmaceuticals Inc.) toenable development of certain ADC product candidates utilizing Fleximer. In establishing each of these partnerships, ourprimary objectives were to collaborate with leading biopharmaceutical companies to validate the potential of ADC productcandidates utilizing Fleximer, gain meaningful near‑term funding and drive significant long‑term value. Under each of ourpartnerships, we own the rights to any improvements to our ADC platform. The details of our material existing strategicpartnerships are as follows:Takeda XMT‑1522 strategic partnershipIn January 2016, we entered into a collaboration agreement with Takeda for the development and commercialization ofXMT‑1522. Under this agreement, we granted Takeda an exclusive license under certain of our ADC‑related patents andknow‑how to commercialize XMT‑1522 outside of the United States and Canada. We will conduct certain Phase 1development activities for XMT‑1522, including the ongoing Phase 1 clinical study, at our own expense, and Takeda mayalso conduct Phase 1 development activities at its own expense. The parties will collaborate on the further development ofXMT‑1522 in accordance with a global development plan. In addition, the parties will share equally all clinical‑stagemanufacturing costs and any post‑Phase 1 development costs incurred in connection with obtaining regulatory approval ineither the United States or Canada and in certain major markets in the rest of the world. Each party will be responsible for allpost‑Phase 1 development costs specific to such party’s territory incurred for the purpose of obtaining regulatory approval insuch party’s territory. Subject to certain restrictions, each party may conduct independent development of XMT‑1522 andthe other party may elect to use any resulting data if it agrees to share the development costs equally and pays a premium forpreviously incurred costs.During 2016, we received an upfront payment of $26.5 million and a milestone payment of $20 million under thisagreement. We are entitled to receive future development, regulatory and commercial milestones of up to $288 million andtiered royalties in the low‑ to mid‑teen percentages on net sales of XMT‑1522 in Takeda’s territory during the applicableroyalty term, if XMT‑1522 is successfully developed and commercialized. Pursuant to this Agreement, Takeda investedapproximately $10 million in our Series C‑1 financing in June 2016 and $10 million in our initial public offering.Unless earlier terminated, this agreement will expire upon the expiration of the last royalty term for XMT‑1522 under theagreement in all countries. The royalty term for XMT‑1522 means, on a country‑by‑country basis, the period commencingupon the first commercial sale of XMT‑1522 and ending upon the later to occur of: (i) expiration of the last Mersana orjointly‑owned patent right that covers XMT‑1522 in such country, (ii) expiration of any exclusive marketing right, dataexclusivity right, orphan drug designation or other country‑wide exclusive right or status conferred by any governmentalauthority with respect to XMT‑1522 in such country, other than a patent right, or (iii) 15 years from the date of firstcommercial sale of XMT‑1522 in such country. Upon the expiration of the royalty term for XMT‑1522 on acountry‑by‑country basis, Takeda will have a perpetual, exclusive license to XMT‑1522 in such country. Takeda mayterminate this agreement in its entirety for convenience upon 30 days’ prior written notice at any time up to the initiation ofthe first Phase 2 clinical study of XMT‑1522 or upon 90 days’ prior written notice following the initiation of the first21 Table of ContentsPhase 2 clinical study of XMT‑1522. Each party may terminate this agreement in its entirety upon bankruptcy or similarproceedings of the other party and in its entirety or on a country‑by‑country basis upon an uncured material breach of theagreement by the other party. Following any such termination, all rights in XMT‑1522 licensed to Takeda will revert to us forfurther development and commercialization.Takeda strategic research and development partnershipIn March 2014, we entered into a collaboration agreement with Takeda for the development and commercialization of ADCproduct candidates utilizing Fleximer. We formed a strategic partnership with Takeda because of their industry expertise inoncology drug development and their experience developing and commercializing brentuximab vedotin outside of theUnited States, one of only four approved ADCs. Under this agreement, Takeda received rights to select up to seven targetantigens, of which it has selected four to date. Takeda is responsible for generating antibodies against the target antigens, andwe are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create theADC product candidates. With respect to each target antigen selected by Takeda, we granted Takeda an exclusive, worldwidelicense under certain of our Fleximer ADC‑related patents and know‑how to develop, manufacture and commercialize ADCproduct candidates directed to such target antigen. Takeda is then responsible for the further development, manufacture andcommercialization of these ADC product candidates. Takeda selected its first Dolaflexin ADC in 2017 and initiated fullpreclinical IND enabling studies.Takeda is responsible for its own costs in the development, commercialization and manufacture of ADC product candidatesand reimburses us for our costs incurred in performing our research activities under this agreement, except in the event thatwe exercise our opt‑in right as described below.Through December 31, 2017, we have received $24.8 million in upfront payments and option fees under this agreement. Ifproducts are successfully developed and commercialized against all seven potential target antigens, we are entitled to receivefuture development, regulatory and commercial milestones of up to $1.063 billion, except in the event that we exercise ouropt‑in right as described below. During the applicable royalty term, we are entitled to receive tiered royalties in themid‑single digit percentages on net sales of each product targeting Takeda’s first or second target antigen and in the mid‑ tohigh‑single digit percentages on net sales of each product targeting Takeda’s third through seventh target antigens ifproducts are successfully developed and commercialized by Takeda and except in the event that we exercise our opt‑in rightas described below.In addition, we have an option to co‑develop and co‑commercialize one product targeting one of Takeda’s third throughseventh target antigens in the United States for a payment of $15 million in cash or in our common stock, and we mayexercise such option with respect to an applicable product no later than 30 days after initiation of a Phase 2 clinical study forsuch product or at an earlier time if Takeda intends to grant rights to such product to a third party. If we elect to exercise theoption to co‑develop and co‑commercialize a product, we will share development costs related to such product in the UnitedStates equally with Takeda and we will be responsible for 30% of the global development costs for such product. If we electto exercise the option to co‑develop and co‑commercialize a product, we will share the profits and losses related to suchproduct in the United States equally with Takeda in lieu of certain milestones and royalties on the net sales in the UnitedStates.Unless earlier terminated, this agreement will expire upon the expiration of the last royalty term for a product under theagreement in all countries. The royalty term means, on a product‑by‑product and country‑by‑country basis, the periodcommencing upon the first commercial sale of a product and ending upon the later to occur of: (i) the later of expiration ofthe last Mersana patent right that would be infringed by the manufacture or commercialization of such product in suchcountry and the expiration of the first‑to‑expire patent right claiming the composition of matter of the ADC contained insuch product, or (ii) 10 years from the date of first commercial sale of such product in such country. Upon the expiration ofeach royalty term for each product on a country‑by‑country basis, Takeda’s exclusive license will convert to a perpetual,non‑exclusive, royalty‑free license with respect to such product in such country. Except with respect to the target antigen of aproduct for which we exercised our option to co‑develop and co‑commercialize in the United States, Takeda may terminatethis agreement in its entirety or with respect to any target antigen for convenience upon 45 days’ prior written notice. Eachparty may terminate this agreement in its entirety upon bankruptcy or similar proceedings of the other party22 Table of Contentsor upon an uncured material breach of the agreement by the other party. However, if such breach only relates to one targetantigen, the agreement may only be terminated with respect to such target antigen.Merck KGaA strategic research and development partnershipIn June 2014, we entered into a collaboration agreement with Merck KGaA for the development and commercialization ofADC product candidates utilizing Fleximer for up to six target antigens. We formed a strategic partnership with Merck KGaAbecause of their expertise in oncology drug development. Under this agreement, we are responsible for generating ADCproduct candidates against Merck KGaA‑selected target antigens. Merck KGaA received rights to select up to six targetantigens, of which it has selected all six. Merck KGaA is responsible for generating antibodies against the target antigens,and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to such antibodies tocreate the ADC product candidates. With respect to each target antigen selected by Merck KGaA, we granted Merck KGaA anexclusive, worldwide license under certain of our Fleximer ADC‑related patents and know‑how to develop, manufacture andcommercialize ADC product candidates directed to such target antigen. Merck KGaA is then responsible for the furtherdevelopment and commercialization of these ADC product candidates. In addition, if Merck KGaA advances candidates, weare responsible for manufacturing these ADC product candidates for GLP toxicology studies and Phase 1 clinical studies atMerck KGaA’s expense and Merck KGaA is responsible for all further manufacture of these ADC product candidates. MerckKGaA is required to pay its own costs in the development, commercialization and manufacture of these ADC productcandidates and to reimburse us for our costs incurred in performing our research activities under this agreement. The mostadvanced product candidates in this partnership are in the lead optimization stage.Through December 31, 2017, we have received an upfront payment of $12 million and milestone payments of $3 millionunder this agreement. If products are successfully developed and commercialized against all six target antigens, we areentitled to receive future development, regulatory and commercial milestones of up to $778 million. We are entitled toreceive tiered royalties in the low‑ to mid‑single digit percentages on net sales of products targeting Merck KGaA’s targetantigens during the applicable royalty term if products are successfully developed and commercialized by Merck KGaAunder this agreement.Unless earlier terminated, this agreement will expire upon the expiration of the last royalty term for a product under theagreement in all countries or, if Merck KGaA does not designate any ADC product candidates produced by us under theagreement as preclinical development candidates, upon the expiration of the last‑to‑expire research program. The royaltyterm means, on a product‑by‑product and country‑by‑country basis, the period commencing upon the first commercial sale ofa product and ending upon the later to occur of: (i) the expiration of the last Mersana patent right that covers or claims theexploitation of such product in such country, or (ii) 10 years from the date of first commercial sale of such product in suchcountry. Upon the expiration of each royalty term for each product on a country‑by‑country basis, Merck KGaA’s exclusivelicense will convert to a perpetual, non‑exclusive, royalty‑free license with respect to such product in such country. MerckKGaA may terminate this agreement in its entirety or with respect to any target antigen for convenience upon 60 days’ priorwritten notice. Each party may terminate this agreement in its entirety upon an uncured material breach of the agreement bythe other party.Strategic partnerships to access antibodies to progress our proprietary pipelineOur focus is to progress our proprietary pipeline of Fleximer based ADCs. For this reason, we have partnered withbiotechnology companies that have the capability to generate high quality antibodies or that have existing antibodies thatwe can license for inclusion in our ADCs. These strategic partnerships have facilitated the acceleration of our proprietarypipeline.Adimab strategic partnership for the antibody in XMT‑1522In July 2012, we entered into a collaboration agreement with Adimab, LLC, or Adimab. We formed a strategic partnershipwith Adimab because we believe they have industry leading capabilities in antibody discovery, as evidenced by theirexisting partnerships with numerous significant pharmaceutical and biotechnology companies. The initial focus of thispartnership was for the discovery of antibodies by Adimab directed to two targets, which would then be conjugated to our23 Table of ContentsDolaflexin platform technology. Our HER2‑targeted antibody used in XMT‑1522 was the result of this partnership. Weexercised an option under this agreement to acquire Adimab’s interest in this antibody and certain other antibodiesdeveloped under this partnership. Through exercising this option, we have also acquired Adimab’s interests in patents andknow‑how arising from its work that were solely related to such antibodies and obtained a non‑exclusive, worldwide licenseto Adimab’s background technology to exploit ADCs containing these antibodies. Under the agreement, we are responsiblefor all development, manufacture and commercialization activities related to ADCs containing these antibodies, includingXMT‑1522, and we must use commercially reasonable efforts to develop or commercialize one such ADC or our rights tothese antibodies will revert to Adimab. During 2014, we paid an option exercise fee of $1.5 million under this agreement andare obligated to pay Adimab up to $26.5 million in development and regulatory milestones for each product containing oneof these antibodies and a low‑single digit percentage royalty on net sales of each product during the applicable royalty termif this product is successfully developed and commercialized. The royalty term for XMT‑1522 means, on acountry‑by‑country basis, the period during which (i) the sale of XMT‑1522 in the country of sale, or the manufacture ofXMT‑1522 in the country of manufacture, is covered by a licensed patent in such country or (ii) XMT‑1522 has regulatoryexclusivity granted by the FDA or any other regulatory authority in such country providing a period of marketingexclusivity or data exclusivity. During 2017, we made a milestone payment of $1.5 million to Adimab with respect toXMT‑1522.Recepta license for the antibody in XMT‑1536In July 2015, we entered into a license agreement with Recepta Biopharma S.A., or Recepta, a Brazilian biopharmaceuticalcompany, licensing Recepta’s NaPi2b antibody for use in XMT‑1536 and granting Recepta the exclusive right tocommercialize XMT‑1536 in Brazil. Under this agreement, Recepta granted us an exclusive license and sub‑license withrespect to certain patents licensed by Recepta from Ludwig Institute for Cancer Research and technology owned by Receptato develop and exploit products containing Recepta’s NaPi2b antibody, including XMT‑1536, worldwide for the diagnosis,prophylaxis and treatment of human cancer. We granted Recepta an exclusive license under our rights in such patents andtechnology and certain of our ADC‑related patents and technology to commercialize any such products developed by us,including XMT‑1536, in Brazil. We are responsible for the worldwide development and commercialization of products underthis agreement at our own expense in certain major markets, including at least one study site in our Phase 3 clinical studies inBrazil. Recepta may conduct development activities in Brazil at its own expense after providing us the opportunity to firstconduct such activities at Recepta’s expense. If a product is successfully developed and commercialized by Recepta inBrazil, we will use diligent efforts to enter into an agreement for the supply of such products to Recepta for sale in Brazil.Under this agreement, we paid Recepta an upfront payment of $1 million during the year ended December 31, 2015 and areobligated to pay Recepta up to $65.5 million in development, regulatory and commercial milestones and tiered royalties inthe low‑single digit percentages on net sales of products outside of Brazil until the expiration of the royalty term if productsare successfully developed and commercialized. We are entitled to receive tiered royalties in the low‑ to mid‑single digitpercentages on net sales of products in Brazil until the expiration of the royalty term if products are successfully developedand commercialized. The royalty term means, on a product‑by‑product and country‑by‑country basis, the period ending uponthe later of (i) with respect to products commercialized by Mersana, the expiration of the last‑to‑expire Recepta patent thatcovers the product in such country (including the term of any applicable supplementary protection certificate) or with respectto products commercialized by Recepta, the expiration of the last‑to‑expire Mersana Patent that covers the product in Brazil(including the term of any applicable supplementary protection certificate) or (ii) 10 years from the date of first commercialsale of such product in such country. Upon the expiration of each royalty term in each country for each applicable product,the exclusive licenses granted to each party under the agreement will become fully‑paid up and royalty‑free. This agreementwill remain in effect until otherwise terminated as set forth below. We may terminate this agreement for convenience in itsentirety or on a country‑by‑country basis (except with respect to Brazil) or product‑by‑product basis upon 180 days’ priorwritten notice for a termination in its entirety or upon 45 days’ prior written notice for a termination in part. Each party mayterminate this agreement in its entirety upon bankruptcy or similar proceedings of the other party, upon a patent challenge bythe other party or upon an uncured material breach of the agreement by the other party. However, if such breach only relatesto one country, the agreement may only be terminated with respect to such country. During 2017, we made aggregatemilestone payments of $1.25 million to Recepta with respect to XMT‑1536.24 Table of ContentsManufacturingWe do not own or operate and currently have no plans to establish any cGMP compliant manufacturing facilities. Wecurrently rely, and expect to continue to rely, on external Contract Manufacturing Organizations, or CMOs, for themanufacture of product to support clinical testing. In the future, we expect to use CMOs to manufacture commercial supplyof our products. The Dolaflexin manufacturing process involves readily available starting materials and uses unit operationsthat are well‑precedented in the field of chemical/pharmaceutical production.Government regulationGovernment authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions,including the European Union, extensively regulate, among other things, the research, development, clinical and preclinicaltesting, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing and importand export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in foreigncountries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatoryauthorities, require the expenditure of substantial time and financial resources. Failure to comply with the applicablerequirements at any time during the product development process, approval process or after approval may subject anapplicant and/or sponsor to a variety of administrative or judicial sanctions, including imposition of a clinical hold, refusalto approve marketing applications, withdrawal of an approval, import/export delays, issuance of warning letters and othertypes of enforcement letters, product recalls, product seizures, total or partial suspension of production or distribution,injunctions, fines, refusals of government contracts, restitution, disgorgement of profits or civil or criminal investigations andpenalties.Review and approval in the United StatesIn the United States, our ADC product candidates are subject to regulation by the FDA as biologics. The FDA regulatesbiologics under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health Service Act, or PHS Act, andassociated implementing regulations. The failure to comply with the FDCA, the PHS Act and other applicable U.S.requirements at any time during the product development process, approval process or after approval may subject anapplicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approvepending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types ofenforcement‑related letters, product recalls, product seizures, total or partial suspension of production or distribution,injunctions, fines, refusals of government contracts, restitution, disgorgement of profits or civil or criminal investigations andpenalties brought by the FDA and the Department of Justice, or DOJ, or other governmental entities.The steps before a biological product may be approved for marketing in the United States generally include:·completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s GLPregulations;·the submission to the FDA of an Investigational New Drug, or IND application which must take effect before humanclinical studies may begin in the United States;·approval by an independent Institutional Review Board, or IRB representing each clinical site before each clinicalstudy may be initiated;·performance of adequate and well‑controlled clinical studies to establish the safety and efficacy of the proposedproduct for each indication, conducted in accordance with GCP;·preparation and submission to the FDA of a Biologics License Application, or BLA;·FDA acceptance, review and approval of the BLA, which might include an Advisory Committee review;25 Table of Contents·satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which theproduct, or components thereof, are produced to assess compliance with cGMP requirements and to assure that thefacilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;·satisfactory completion of any FDA audits of clinical study sites to assure compliance with GCPs and the integrity ofthe clinical data;·payment of user fees, if any, for FDA review of the BLA; and·compliance with any post‑approval requirements, including a Risk Evaluation and Mitigation Strategy, or REMS,where applicable, and post‑approval studies required by the FDA as a condition of approval.The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of anyapproval is uncertain.Preclinical studiesPreclinical studies include laboratory evaluation of the product candidate, as well as in vitro and animal studies to assess thepotential safety and efficacy of the product candidate for use in humans. The conduct of preclinical studies is subject tofederal regulations and requirements, including GLP regulations. The results of the preclinical studies, together withmanufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, amongother things, are submitted to the FDA as part of an IND. Additional preclinical testing, such as toxicity studies, maycontinue after the IND is submitted.Clinical studiesClinical studies involve the administration of the product candidate to human subjects under the supervision of qualifiedinvestigators in accordance with GCP requirements. GCP requirements include, among other things, conducting the study inaccordance with a written protocol, obtaining informed consent from study subjects and approval and ongoing review of thestudy by an IRB at each site where the study will be conducted.A protocol for each clinical study and any subsequent protocol amendments must be submitted to the FDA as part of the IND.An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns orquestions related to a proposed clinical study or places the study on clinical hold. In such a case, the IND sponsor and theFDA must resolve any outstanding concerns before the clinical study can begin.Clinical studies are typically conducted in three sequential phases prior to approval, which may overlap or be combined:Phase 1: The product candidate is initially introduced into healthy human subjects or, in some cases, patients withthe target disease (e.g., cancer) or condition. In Phase 1, the product candidate is typically tested for safety, dosage tolerance,absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and todetermine optimal dosage.Phase 2: The product candidate is administered to a limited patient population to preliminarily evaluate theefficacy of the product for specific targeted diseases, to identify possible adverse effects and safety risks and to determinedosage tolerance and optimal dosage.Phase 3: The product candidate is administered to an expanded patient population, generally at geographicallydispersed clinical study sites, in well‑controlled clinical studies to generate enough data to statistically evaluate the efficacyand safety of the product for approval, to establish the overall risk‑benefit profile of the product and to provide adequateinformation for the labeling of the product.26 Table of ContentsPhase 4 clinical studies may be conducted after initial marketing approval. These studies are used to gain additionalexperience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in thecase of products approved under accelerated approval regulations or when otherwise requested by the FDA in the form ofpost‑market requirements or commitments.Clinical studies at each phase of development may not be completed successfully within any specified period, or at all.Furthermore, the FDA, an IRB, the sponsor or the data monitoring committee, if applicable, may suspend or terminate aclinical study at any time on various grounds, including a finding that the research subjects are being exposed to anunacceptable health risk. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and theintegrity of the clinical data submitted.Submission of a marketing application to the FDAAssuming successful completion of required clinical testing and other requirements, the results of the preclinical studies andclinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposedlabeling, among other things, are submitted to the FDA as part of a BLA requesting approval to market the product for one ormore indications.BLA pathwayOur ADC product candidates must be licensed via FDA approval of a BLA under Section 351 of the PHS Act on the basis of ademonstration that the product is safe, pure and potent. Once a BLA has been accepted for filing, the FDA’s goal is to reviewBLAs within ten months of the filing date for standard review or six months of the filing date for priority review. The reviewprocess is often significantly extended by FDA requests for additional information or clarification. The FDA may refer theapplication to an advisory committee for review, evaluation and recommendation as to whether the application should beapproved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows suchrecommendations.Before approving the BLA, the FDA will inspect the facilities at which the biological product is manufactured and will notapprove the product unless the facility is compliant with cGMPs. Additionally, the FDA will typically inspect one or moreclinical study sites for compliance with GCP and integrity of the data supporting safety and efficacy.During the approval process, the FDA also will determine whether to require post‑approval testing, including Phase 4 clinicalstudies and surveillance programs to monitor the effect of approved biologics after they are commercialized. In addition, theFDA will determine whether the biologic will require a REMS to ensure that the benefits of the product outweigh its risks,which could include medication guides, physician communication plans or elements to assure safe use, such as restricteddistribution methods, patient registries and other risk minimization tools.On the basis of the FDA’s evaluation of the BLA and accompanying information, including the results of the inspection ofthe manufacturing facilities, the FDA will issue either an approval of the BLA or a Complete Response Letter, detailing thedeficiencies in the submission and the additional testing or information required for reconsideration of the application. Evenwith submission of this additional information, the FDA ultimately may decide that the application does not satisfy theregulatory criteria for approval.If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications,warnings or precautions be included in the product labeling, require that post‑approval studies, including Phase 4 clinicalstudies, be conducted to further assess the product’s safety after approval, require testing and surveillance programs tomonitor the product after commercialization or impose other conditions, including a REMS, which can materially affect thepotential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on theresults of post‑market studies or surveillance programs. After approval, many types of changes to the approved product, suchas adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirementsand FDA review and approval.27 Table of ContentsFast track, breakthrough therapy and priority review designationsThe FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medicalneed in the treatment of a serious or life‑threatening disease or condition. These programs are fast track designation,breakthrough therapy designation and priority review designation.First, the FDA may designate a product for “fast track” review if it is intended for the treatment of a serious or life‑threateningdisease or condition and it demonstrates the potential to address unmet medical needs for such disease or condition. For fasttrack products, sponsors may have greater interactions with the FDA, and the FDA may initiate review of sections of a fasttrack product’s BLA before the application is complete. This “rolling review” is available if the FDA determines, afterpreliminary evaluation of clinical data submitted by the sponsor, that a fast track product may be effective. The sponsor mustalso provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor mustpay applicable user fees.Second, the FDA may designate a product as a breakthrough therapy if it is intended to treat a serious or life‑threateningdisease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvementover existing therapies on one or more clinically significant endpoints. The FDA may take certain actions with respect tobreakthrough therapies, including holding meetings with the sponsor throughout the development process, providing timelyadvice to the product sponsor regarding development and approval, involving more senior staff in the review process,assigning a cross‑disciplinary project lead for the review team and taking other steps to design the clinical studies in anefficient manner.Third, the FDA may designate a product for priority review if it treats a serious condition and, if approved, would provide asignificant improvement in safety or effectiveness. A priority designation is intended to direct overall attention and resourcesto the evaluation of such applications and shortens the FDA’s goal for taking action on a marketing application from tenmonths to six months from the filing date.Accelerated approval pathwayThe FDA may grant accelerated approval to a product for a serious or life‑threatening condition that provides meaningfultherapeutic advantage to patients over existing treatments. A product eligible for accelerated approval may be approved onthe basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that canbe measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversiblemorbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and theavailability or lack of alternative treatments.The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extendedperiod of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate orintermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development andapproval of products for treatment of a variety of cancers in which the goal of therapy is generally to improve survival ordecrease morbidity and the duration of the typical disease course requires lengthy and sometimes large studies todemonstrate a clinical or survival benefit.The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner,additional post‑approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a productcandidate approved on this basis is subject to rigorous post‑marketing compliance requirements, including the completion ofPhase 4 or post‑approval clinical studies to confirm the effect on the clinical endpoint. Failure to conduct requiredpost‑approval studies, or to confirm a clinical benefit during post‑marketing studies, would allow the FDA to withdraw theproduct from the market on an expedited basis. All promotional materials for product candidates approved under acceleratedregulations are subject to prior review by the FDA.28 Table of ContentsPost‑approval requirementsProducts manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by theFDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling anddistribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changesto the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review andapproval. There also are continuing, annual user fee requirements for any marketed products and the establishments at whichsuch products are manufactured, as well as new application fees for certain supplemental applications.In addition, manufacturers and other entities involved in the manufacture and distribution of approved products are requiredto register their establishments with the FDA and state agencies and are subject to periodic unannounced inspections by theFDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictlyregulated and often require prior FDA approval before being implemented. FDA regulations also require investigation andcorrection of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and anythird‑party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time,money and effort in the area of production and quality control to maintain cGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standardsis not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problemswith a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failureto comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information,imposition of post‑market studies or clinical studies to assess new safety risks or imposition of distribution or otherrestrictions under a REMS program. Other potential consequences include, among other things:·restrictions on the marketing or manufacturing of the product, suspension of the approval, complete withdrawal ofthe product from the market or product recalls;·fines, warning or other enforcement‑related letters or holds on post‑approval clinical studies;·refusal of the FDA to approve pending BLAs or supplements to approved BLAs, or suspension or revocation ofproduct 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.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Suchproducts may be promoted only for the approved indications and in accordance with the provisions of the approved label.The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off‑label uses, and acompany that is found to have improperly promoted off‑label uses may be subject to significant liability.Biosimilars and exclusivityThe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, signedinto law on March 23, 2010, or the Health Care Reform Act, includes a subtitle called the Biologics Price Competition andInnovation Act of 2009, or the BPCIA, which created an abbreviated approval pathway for biological products shown to bebiosimilar to, or interchangeable with, an FDA‑licensed reference biological product. Biosimilarity requires a showing thatthe product is “highly similar” to the reference product notwithstanding minor differences in clinically inactive componentsand that there are no clinically meaningful differences between the biological product and the reference product in terms ofsafety, purity and potency. Interchangeability requires that a product is biosimilar to the reference product and the productmust demonstrate that it can be expected to produce the same clinical results as the reference product in any given patientand, for products administered multiple times, the biologic and the reference biologic may be switched after one has beenpreviously administered without increasing safety risks or risks of diminished efficacy29 Table of Contentsrelative to exclusive use of the reference biologic. To date, the FDA has approved a number of biosimilars and has issuedseveral guidance documents outlining its approach to the review and approval of biosimilars.A reference biologic is entitled to 12 years of exclusivity from the time of first licensure of the product. In addition, the firstbiological product submitted under the abbreviated approval pathway that is determined to be interchangeable with, not justbiosimilar to, the reference product has exclusivity against other biologics submitting under the abbreviated approvalpathway for the lesser of (i) one year after the first commercial marketing, (ii) 18 months after approval if there is no legalchallenge, (iii) 18 months after the resolution in the applicant’s favor of a lawsuit challenging the biologics’ patents if anapplication has been submitted or (iv) 42 months after the application has been approved if a lawsuit is ongoing within the42‑month period.The BPCIA is complex and is still being implemented by the FDA. In addition, recent government proposals have sought toreduce the 12-year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact the BPCIAexclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact, implementation andmeaning of the BPCIA is subject to significant uncertainty.Pediatric studies and exclusivityUnder the Pediatric Research Equity Act of 2003, all applications for new active ingredients, new indications, new dosageforms, new dosing regimens or new routes of administration are required to contain an assessment of the safety andeffectiveness of the product for the claimed indication in pediatric patients unless this requirement is waived, deferred orinapplicable.Under the Best Pharmaceuticals for Children Act, a product may be eligible for pediatric exclusivity, which, if granted, addssix months to existing exclusivity periods and patent terms. This six‑month exclusivity, which runs from the end of otherexclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordancewith an FDA‑issued written request for such a study.Orphan drug designation and exclusivityUnder the Orphan Drug Act, the FDA may designate a product, including a biological product, as an “orphan drug” if it isintended to treat a rare disease that affects fewer than 200,000 individuals in the United States or, if it affects more than200,000 individuals in the United States, a disease for which there is no reasonable expectation that the cost of developingand making the product for this type of disease or condition will be recovered from sales in the United States.A product that receives the first FDA approval for a product for the indication for which it has orphan designation is entitledto orphan drug exclusivity, which means the FDA may not approve any other application to market the same product for thesame indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority overthe product with orphan exclusivity.Patent term restorationA patent claiming a new product may be eligible for a limited patent term extension under the Hatch‑Waxman Amendments,which permits a patent restoration of up to five years for patent term lost during product development and the FDA regulatoryreview. The restoration period granted is typically one‑half the time between the effective date of an IND and the submissiondate of a BLA, plus the time between the submission date of a BLA and the ultimate approval date. Patent term restorationcannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only onepatent applicable to an approved drug product is eligible for the extension, and the application for the extension must besubmitted prior to the expiration of the patent in question. The USPTO, reviews and approves the application for any patentterm extension or restoration in consultation with the FDA.30 Table of ContentsReview and approval outside the United StatesIn order to market any product outside of the United States, we would need to comply with numerous and varying regulatoryrequirements of other countries and jurisdictions governing, among other things, clinical studies, marketing authorization,commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we would need toobtain the necessary approvals by the comparable foreign regulatory authorities before we can commence clinical studies ormarketing of the product in foreign countries and jurisdictions. Although many of the issues discussed above with respect tothe United States apply similarly in the context of the European Union and other geographies, the approval process variesbetween countries and jurisdictions and can involve additional product testing and additional administrative review periods.The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required toobtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, buta failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatoryprocess in others.Pharmaceutical coverage, pricing and reimbursementSignificant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and othergovernment authorities. Sales of pharmaceutical products depend in significant part on the availability and adequacy ofthird‑party reimbursement. Third‑party payors include government health administrative authorities, including authorities atthe U.S. federal and state level, managed care providers, private health insurers and other organizations. Third‑party payorsare increasingly challenging the prices charged for, examining the medical necessity of and assessing the cost‑effectivenessof medical products and services.In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need toconduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost‑effectiveness of theproduct, in addition to the costs required to obtain FDA or other comparable regulatory approvals. A payor’s decision toprovide coverage for a product does not imply that an adequate reimbursement rate will be approved. Third‑partyreimbursement may not be sufficient to maintain price levels high enough to realize an appropriate return on investment inproduct development.The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices ofdrugs and biologics have been a focus in this effort. Governments have shown significant interest in implementingcost‑containment programs, including price controls, restrictions on reimbursement and requirements for substitution ofgeneric products. Adoption of price controls and cost‑containment measures, and adoption of more restrictive policies injurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of anyapproved products. Coverage policies and third‑party reimbursement rates may change at any time. Even if favorablecoverage and reimbursement status is attained for one or more products for which a company or its collaborators receivemarketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries providethat products may be marketed only after a reimbursement price has been agreed. Some countries may require the completionof additional studies that compare the cost‑effectiveness of a particular product candidate to currently available therapies, orso called health technology assessments, to obtain reimbursement or pricing approval. For example, the European Unionprovides options for its member states to restrict the range of products for which their national health insurance systemsprovide reimbursement and to control the prices of medicinal products for human use. European Union member states mayapprove a specific price for a product or may instead adopt a system of direct or indirect controls on the profitability of thecompany.The downward pressure on healthcare costs in general, particularly prescription drugs and biologics, has become intense. Asa result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross‑borderimports from low‑priced markets exert competitive pressure that may reduce pricing within a country. Any country that hasprice controls or reimbursement limitations for products may not allow favorable reimbursement and pricing arrangements.31 Table of ContentsHealthcare law and regulationOur current and future arrangements with healthcare professionals, principal investigators, consultants, customers andthird‑party payors are and will be subject to various federal, state and foreign fraud and abuse laws and other healthcare lawsand regulations. These laws and regulations may impact, among other things, our arrangements with third‑party payors,healthcare professionals who participate in our clinical research programs, healthcare professionals and others who purchase,recommend or prescribe our approved products and our proposed sales, marketing, distribution and education programs. Thefederal and state healthcare laws and regulations that may affect our ability to operate include, without limitation, thefollowing:·the federal Anti‑Kickback Statute, which prohibits, among other things, persons from knowingly and willfullysoliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce orreward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, forwhich payment may be made, in whole or in part, under a federal healthcare program such as Medicare andMedicaid;·the federal False Claims Act, which imposes civil penalties, and provides for civil whistleblower or qui tam actions,against individuals or entities for knowingly presenting, or causing to be presented, to the federal government,claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal anobligation to pay money to the federal government;·the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal andcivil liability for executing a scheme to defraud any healthcare benefit program or making false statements relatingto healthcare matters;·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and theirrespective implementing regulations, including the Final Omnibus Rule published in January 2013, which alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security andtransmission of individually identifiable health information;·the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing or covering up amaterial fact or making any materially false statement in connection with the delivery of or payment for healthcarebenefits, items or services;·the federal transparency requirements under the Physician Payments Sunshine Act, which require manufacturers ofdrugs, devices, biologics and medical supplies to report to the Centers for Medicare & Medicaid Services within theDepartment of Health and Human Services information related to payments and other transfers of value to physiciansand teaching hospitals and physician ownership and investment interests held by physicians and their immediatefamily members; and·analogous state and foreign laws and regulations, such as state anti‑kickback and false claims laws, which may applyto sales or marketing arrangements and claims involving healthcare items or services reimbursed bynon‑governmental third‑party payors, including private insurers. State and foreign laws also govern the privacy andsecurity of health information in some circumstances, many of which differ from each other in significant ways andoften are not preempted by HIPAA, thus complicating compliance efforts.We will be required to spend substantial time and money to ensure that our business arrangements with third parties complywith applicable healthcare laws and regulations. Violations of these laws can subject us to criminal, civil and administrativesanctions including monetary penalties, damages, fines, disgorgement, individual imprisonment and exclusion fromparticipation in government funded healthcare programs, such as Medicare and Medicaid, additional reporting requirementsand oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations ofnon‑compliance with these laws, and reputational harm. Additionally, we may be required to curtail or32 Table of Contentsrestructure our operations. Moreover, we expect that there will continue to be federal and state laws and regulations,proposed and implemented, that could impact our future operations and business.Healthcare reformOur revenue and operations could be affected by changes in healthcare spending and policy in the United States andelsewhere. We operate in a highly regulated industry and new laws, regulations or judicial decisions, or new interpretationsof existing laws, regulations or decisions, related to healthcare availability, the method of delivery or payment for healthcareproducts and services could negatively impact our business, operations and financial condition. As noted above, the U.S.Congress, state legislatures and foreign regulators from time to time propose and adopt initiatives aimed at cost containment,which could impact our ability to sell our products profitably. For example, the Health Care Reform Act substantiallychanged the way healthcare is financed by both governmental and private insurers. The law contains a number of provisionsthat affect coverage and reimbursement of drug products and/or that could potentially reduce the demand for our productssuch as:·increasing rebates under state Medicaid programs for brand name prescription products and extending those rebatesto Medicaid managed care;·assessing a fee on manufacturers and importers of brand name prescription products reimbursed under certaingovernment programs, including Medicare and Medicaid; and·requiring manufacturers to provide a 50% discount on Medicare Part D brand name prescription products sold toMedicare beneficiaries whose prescription product costs cause the beneficiaries to be subject to the Medicare Part Dcoverage gap (i.e., the so‑called “donut hole”).Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Health Care Reform Act,and we expect there will be additional challenges and amendments to the Health Care Reform Act in the future. The currentPresidential administration and members of the U.S. Congress have indicated that they may continue to seek to modify,repeal or otherwise invalidate all, or certain provisions of, the Health Care Reform Act. Most recently, on December 22, 2017,the Tax Cuts and Jobs Act was enacted, which, among other things, removes penalties for not complying with the individualmandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business or financialcondition. We cannot predict the ultimate content, timing or effect of any changes to the Health Care Reform Act or otherfederal and state reform efforts. There is no assurance that federal or state healthcare reform will not adversely affect ourbusiness and financial results, and we cannot predict how future federal or state legislative, judicial or administrative changesrelating to healthcare reform will affect our business.In addition, other legislative changes have been proposed and adopted since the Health Care Reform Act was enacted. TheBudget Control Act of 2011 includes provisions to reduce the federal deficit. The Budget Control Act, as amended, resultedin the imposition of 2% reductions in Medicare payments to providers which began in April, 2013, and will remain in effectthrough 2024 unless additional Congressional action is taken. Any significant spending reductions affecting Medicare,Medicaid or other publicly funded or subsidized health programs that may be implemented and/or any significant taxes orfees that may be imposed on us, as part of any broader deficit reduction effort or legislative replacement to the BudgetControl Act, could have an adverse impact on our results of operations.Additional regulationIn addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, includingthe Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances ControlAct, affect our business. These and other laws govern the use, handling and disposal of various biologic, chemical andradioactive substances used in, and wastes generated by, operations. If our operations result in contamination of theenvironment or expose individuals to hazardous substances, we could be liable for damages and governmental fines.Equivalent laws have been adopted in foreign countries that impose similar obligations.33 Table of ContentsIntellectual propertyWe actively seek to protect the proprietary technology that we consider important to our business, including pursuingpatents that cover our ADC platform, proprietary composition of matter, ADC product candidates and methods of using andmanufacturing the same, as well as any other relevant inventions and improvements that are considered commerciallyimportant to the development of our business. We also rely on trade secrets, know‑how and continuing technologicalinnovation to develop and maintain our proprietary and intellectual property position.Our commercial success will depend significantly on our ability to obtain and maintain patent and other proprietaryprotection for the technology, inventions and improvements we consider important to our business, and to defend ourpatents, preserve the confidentiality of our trade secrets and operate without infringing the patents and proprietary rights ofthird parties. Our policy is to seek to protect our proprietary and intellectual property position by, among other methods,filing U.S., international (under Patent Cooperation Treaty, or PCT) and foreign patent applications related to our proprietarytechnology, inventions and improvements that we consider to be important to the development and implementation of ourbusiness.The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In mostcountries, including the United States, the patent term is 20 years from the earliest filing date of a non‑provisional patentapplication. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates apatentee for administrative delays by the USPTO in examining and granting a patent, or may be shortened if a patent isterminally disclaimed over an earlier filed patent. The term of a patent that covers a drug or biological product may also beeligible for patent term extension when FDA approval is granted, provided statutory and regulatory requirements are met. Inthe future, if and when our drug candidates receive approval by the FDA or foreign regulatory authorities, we expect to applyfor patent term extensions on issued patents covering those drugs, depending upon the length of the clinical studies for eachdrug and other factors. There can be no assurance that any of our pending patent applications will issue or that we willbenefit from any patent term extension or favorable adjustments to the terms of any of our patents.As with other biotechnology and pharmaceutical companies, our ability to maintain and solidify our proprietary andintellectual property position for our drug candidates and technologies will depend on our success in obtaining effectivepatent claims and enforcing those claims if granted. However, our pending patent applications, and any patent applicationsthat we may in the future file or license from third parties, may not result in the issuance of patents. We also cannot predictthe breadth of claims that may be allowed or enforced in our patents. Any issued patents that we may currently own or licenseor may receive in the future may be challenged, invalidated, circumvented or have the scope of their claims narrowed. Forexample, we cannot be certain of the priority of inventions covered by pending third‑party patent applications. If thirdparties prepare and file patent applications in the United States that also claim technology or therapeutics to which we haverights, we may have to participate in interference proceedings in the USPTO to determine priority of invention, which couldresult in substantial costs to us, even if the eventual outcome is favorable to us, which is highly unpredictable. In addition,because of the extensive time required for clinical development and regulatory review of a drug candidate we may develop, itis possible that, before any of our drug candidates can be commercialized, any related patent may expire or remain in forcefor only a short period following commercialization, thereby limiting the protection such patent would afford the respectiveproduct and any competitive advantage such patent may provide. For more information regarding the risks related to ourintellectual property, please see “Risk factors—Risks related to our intellectual property.”As of February 28, 2018, we owned, in all of our patent portfolios, 13 issued U.S. patents, 13 pending non‑provisional U.S.patent applications (including one allowed U.S. patent application), 10 pending provisional U.S. patent applications, 25issued foreign patents, five pending PCT patent applications and 80 pending foreign patent applications in a number ofjurisdictions, including, but being not limited to, Australia, Brazil, Canada, China, Europe, Eurasia, Gulf CooperationCouncil, Hong Kong, Israel, India, Indonesia, Iran, Japan, Mexico, Macau, New Zealand, Russia, South Korea, South Africaand Taiwan. Our seven issued U.S. patents covering our Fleximer ADC platform are projected to expire in 2032, excludingany additional term for patent term adjustments or patent term extensions; our one issued U.S. patent covering our DolaflexinADC platform is projected to expire in 2034, excluding any additional term for patent term adjustments or patent termextensions; our two issued U.S. patents covering our XMT-1522 ADC are projected to expire in 2035, excluding anyadditional term for patent term adjustments or patent term extensions; our additional two issued U.S. patents34 Table of Contentsare projected to expire in 2033 and 2035, excluding any additional term for patent term adjustments or patent termextensions; and any patent that may issue from our pending U.S. applications is projected to expire between 2032 and 2038,in each case, excluding any additional term for patent term adjustments or patent term extensions. In addition, we haveexclusively in‑licensed three issued U.S. patents, one pending U.S. patent application and one issued European patent for theNaPi2b antibody from Recepta. These in‑licensed issued U.S. and foreign patents are projected to expire in 2029, excludingany additional term for patent term adjustments or patent term extensions. We have so far not filed for patent protection in allnational and regional jurisdictions where such protection may be available. In addition, we may decide to abandon nationaland regional patent applications before they are granted. Finally, the grant proceeding of each national or regional patent isan independent proceeding which may lead to situations in which applications might in some jurisdictions be refused by therelevant registration authorities, while granted by others. It is also quite common that depending on the country, variousscopes of patent protection may be granted on the same product candidate or technology.The intellectual property portfolio of our ADC platform, our ADC product candidates and components thereof aresummarized below. Some of these portfolios are in very early stages and prosecution has yet to commence on most of thepending patent applications. Prosecution is a lengthy process, during which the scope of the claims initially submitted forexamination by the USPTO may be narrowed (sometimes significantly) by the time they issue, if they issue at all. We expectthis to be the case with respect to our pending patent applications referred to below.Fleximer ADC platformThe intellectual property portfolio for our Fleximer ADC platform is directed to compositions of matter for the FleximerADCs, as well as methods of using and making these novel conjugates, compositions of matter for Fleximer drug conjugatesprior to conjugation with the antibody or antibody fragment and methods of making the same and compositions of matter forour proprietary auristatin compounds (and by extension our proprietary DolaLock feature) and conjugates thereof (e.g., toFleximer and/or an antibody or antibody fragment). As of February 28, 2018, we owned seven issued U.S. patents, threepending U.S. patent applications (including one allowed U.S. patent application), 25 issued foreign patents and 18 pendingforeign patent applications in a number of jurisdictions, including Australia, Brazil, Canada, China, Europe, Hong Kong,Israel, India, Japan, Macau, Mexico, Russia, South Korea, and Taiwan. Any U.S. or foreign patent issuing from the pendingapplications covering the Fleximer ADC platform is projected to expire in June 2032, excluding any additional term forpatent term adjustments or patent term extensions.Dolaflexin ADC platformThe intellectual property portfolio for our Dolaflexin ADC platform is directed to compositions of matter for the DolaflexinADCs, as well as methods of using and making these novel conjugates, compositions of matter for Dolaflexin drugconjugates prior to conjugation with the antibody or antibody fragment and methods of making the same. As of February 28,2018, we owned one issued U.S. patent, four pending U.S. patent applications (including three pending provisional U.S.patent applications) and 13 pending foreign patent applications in a number of jurisdictions, including Australia, Brazil,Canada, China, Eurasia, Europe, Israel, India, Japan, South Korea, Mexico and South Africa. Any U.S. or foreign patentissuing from the pending applications covering Dolaflexin ADC platform is projected to expire in October 2034, and anyU.S. or foreign patent issuing from the pending applications covering the method of making the Dolaflexin ADC is projectedto expire in June 2038, excluding any additional term for patent term adjustments or patent term extensions.XMT‑1522 ADCThe intellectual property portfolio for our HER2 ADC product candidate, XMT‑1522, is directed to compositions of matterfor our novel HER2 antibody or fragment thereof and conjugates and combinations thereof (including XMT‑1522) based onour Dolaflexin platform, as well as methods of using and making these novel conjugates. This intellectual property portfoliocovering the novel HER2 antibody or fragment thereof is assigned to us from Adimab. As of February 28, 2018, we ownedtwo issued U.S. patents, three pending U.S. patent applications (including one pending provisional U.S. patent application),one pending PCT patent application, and 38 pending foreign patent applications in a number of jurisdictions, includingAlgeria, African Regional Intellectual Property Organization, or the ARIPO, Argentina, Australia, Brazil, Canada, Chile,China, Columbia, Costa Rica, Dominican Republic, Ecuador, Egypt, Eurasia, Europe, Georgia, Gulf Cooperation Council,Israel, India, Indonesia, Iran, Japan, Pakistan, South Korea, Malaysia, Mexico, New Zealand, Peru,35 Table of ContentsPhilippines, Singapore, South Africa, Thailand, Taiwan, Tunisia, Ukraine, Uzbekistan and Vietnam. Any U.S. or foreignpatent issuing from the pending applications covering XMT‑1522 ADC platform is projected to expire in June 2035, and anyU.S. or foreign patent issuing from the pending applications covering the XMT‑1522 ADC platform in combination withcheckpoint inhibitors is projected to expire in February 2038, excluding any additional term for patent term adjustments orpatent term extensions.XMT‑1536 ADCThe intellectual property portfolio for our NaPi2b ADC product candidate, XMT‑1536, is directed to compositions of matterfor our novel ADC based on exclusively in‑licensed NaPi2b antibody and our Dolaflexin platform, as well as methods ofusing and making these novel conjugates. As of February 28, 2018, we owned three pending U.S. applications (including twopending provisional U.S. patent applications), four pending foreign patent applications, and one pending PCT applicationdirected to the composition of matter for XMT‑1536, methods of using and making same and companion diagnostics forXMT-1536 ADC. We also intend to enter the national/regional phase of the pending PCT patent application in foreignjurisdictions, including Australia, Brazil, Canada, China, Eurasia, Europe, Israel, India, Japan, South Korea, Mexico andSouth Africa. Any U.S. or foreign patent issuing from the pending applications covering XMT‑1536 is projected to expire inMarch 2037, and any U.S. or foreign patent issuing from the pending applications covering XMT‑1536 companiondiagnostics is projected to expire in September 2038, excluding any additional term for patent term adjustments or patentterm extensions.In addition, we have exclusively in‑licensed three issued U.S. patents, one pending U.S. patent application and one issuedEuropean patent for the novel NaPi2b antibody from Recepta, which Recepta licensed from Ludwig Institute for CancerResearch. These in‑licensed issued U.S. and European patents are projected to expire in 2029, excluding any additional termfor patent term adjustments or patent term extensions. Recepta still owns one pending Brazilian patent application for theNaPi2b antibody, which is not licensed to us. A patent issuing from this Brazilian patent application is projected to expire in2029.Novel DNA Alkylators and Novel ScaffoldsThe intellectual property portfolio for our novel DNA alkylators and novel scaffold platforms is directed to compositions ofmatter for the novel DNA alkylators, ADCs thereof, novel scaffolds, as well as methods of using and making these novelconjugates, scaffolds and compositions of matter. As of February 28, 2018, we owned five pending U.S. patent applications(including three pending provisional U.S. patent applications), three pending foreign patent applications, and three pendingPCT patent applications. We intend to enter the national/regional phase of the PCT patent applications in a number ofjurisdictions, including Australia, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan, Macau, Mexico, Russia,South Korea, and Taiwan. Any U.S. or foreign patent issuing from the pending applications covering the novel DNAalkylators and novel scaffold platforms is projected to expire between 2037 and 2038, excluding any additional term forpatent term adjustments or patent term extensions.In addition to patents, we rely upon unpatented trade secrets and know‑how and continuing technological innovation todevelop and maintain our competitive position. We seek to protect our proprietary information, in part, by executingconfidentiality agreements with our collaborators and scientific advisors and non‑competition, non‑solicitation,confidentiality and invention assignment agreements with our employees and consultants. We have also executedagreements requiring assignment of inventions with selected scientific advisors and collaborators. The confidentialityagreements we enter into are designed to protect our proprietary information and the agreements or clauses requiringassignment of inventions to us are designed to grant us ownership of technologies that are developed through ourrelationship with the respective counterparty. We cannot guarantee, however, that we will have executed such agreementswith all applicable employees and contractors, or that these agreements will afford us adequate protection of our intellectualproperty and proprietary information rights. With respect to the building of our proprietary compound library, we considertrade secrets and know‑how to be our primary intellectual property. Trade secrets and know‑how can be difficult to protect. Inparticular, we anticipate that with respect to this technology platform, these trade secrets and know‑how will over time bedisseminated within the industry through independent development and public presentations describing the methodology.For more information regarding the risks associated with our trade secrets, please see “Risk36 Table of Contentsfactors—Risks related to our intellectual property—Confidentiality agreements with employees and third parties may notprevent unauthorized disclosure of trade secrets and other proprietary information.”CompetitionThe biotechnology and biopharmaceutical industries, and the oncology subsector, are characterized by rapid evolution oftechnologies, fierce competition and strong defense of intellectual property. Any product candidates that we successfullydevelop and commercialize will have to compete with existing therapies and new therapies that may become available in thefuture. While we believe that our proprietary ADC platform and scientific expertise provide us with competitive advantages,a wide variety of institutions, including large biopharmaceutical companies, specialty biotechnology companies, academicresearch departments and public and private research institutions, are actively developing potentially competitive productsand technologies. These competitors generally fall within the following categories:New cancer treatments: Many global pharmaceutical companies, as well as medium and small biotechnology companies,are pursuing new cancer treatments whether small molecules, biologics or ADCs. Any of these treatments could prove to besuperior clinically to our products.ADC platforms: Although Dolaflexin and the new platform initiatives we have underway are highly differentiated andproprietary, many companies continue to invest in innovation in the ADC field including new payload classes, newconjugation approaches and new targeting moieties. Any of these initiatives could lead to a platform that has superiorproperties to ours. We are aware of multiple companies with ADC technologies that may be competitive to our ADCplatforms, including Astellas, AstraZeneca, Bristol‑Myers Squibb, Daiichi Sankyo, ImmunoGen, Immunomedics, Pfizer andSeattle Genetics. These companies or their partners, including AbbVie, Genentech, Lilly, Novartis, Sanofi and Takeda, maydevelop ADCs based on these ADC technologies which compete in the same indications as our current and future ADCproduct candidates. We expect to compete on improved efficacy, safety and tolerability compared to other ADCs and if ourproducts are not demonstrably superior in these respects compared to other approved therapeutics, we may not be able tocompete effectively.One of the four currently approved ADC therapies in the United States, ado‑trastuzumab emtansine marketed by Genentech,is a HER2‑targeted ADC approved for use in HER2‑positive patients and, even though we are developing, and expect to getapproval for, XMT‑1522 for lower expressing HER2 patients, ado‑trastuzumab emtansine may compete with ourHER2‑targeted ADC, XMT‑1522, if XMT‑1522 is approved. In addition, other companies are exploring treatments forpatients with low HER2 expression, or may do so in the future.Many of our competitors, either alone or with strategic partners, have substantially greater financial, technical and humanresources than we do. Accordingly, our competitors may be more successful than us in obtaining approval for treatments andachieving widespread market acceptance, rendering our treatments obsolete or non‑competitive. Accelerated merger andacquisition activity in the biotechnology and biopharmaceutical industries may result in even more resources beingconcentrated among a smaller number of our competitors. These companies also compete with us in recruiting and retainingqualified scientific and management personnel, establishing clinical study sites and patient registration for clinical studiesand acquiring technologies complementary to, or necessary for, our programs. Smaller or early‑stage companies may alsoprove to be significant competitors, particularly through collaborative arrangements with large and established companies.Our commercial opportunity could be substantially limited in the event that our competitors develop and commercializeproducts that are more effective, safer, less toxic, more convenient or less expensive than our comparable products. Ingeographies that are critical to our commercial success, competitors may also obtain regulatory approvals before us, resultingin our competitors building a strong market position in advance of our products’ entry. We believe the factors determiningthe success of our programs will be the efficacy, safety and tolerability of our product candidatesEmployeesAs of February 28, 2018, we had 78 full time employees, including 62 with M.D., Ph.D. or other advanced degrees. Of thesefull time employees, 64 are engaged in research and development and 14 are engaged in general and administrative37 Table of Contentsactivities. None of our employees are represented by a labor union or covered by a collective bargaining agreement. Weconsider our relationship with our employees to be good.FacilitiesWe occupy approximately 34,000 square feet of office and laboratory space in Cambridge, MA under a lease that expires inearly 2021. We have an option to extend the lease term for an additional five years. We believe that this office and laboratoryspace is sufficient to meet our current needs and that suitable additional space will be available as and when needed.Legal proceedingsFrom time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our businessactivities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this AnnualReport on Form 10-K, we do not believe we are party to any claim or litigation, the outcome of which, if determinedadversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on ourbusiness. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs,diversion of management resources and other factors. ITEM 1A. RISK FACTORSThe following risk factors and other information included in this Annual Report on Form 10-K should be carefullyconsidered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertaintiesnot presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of thefollowing risks occur, our business, financial condition, results of operations and future growth prospects could bematerially and adversely affected.Risks related to our financial position and need for additional capitalWe have incurred net losses since our inception, we have no products approved for commercial sale and we anticipate thatwe will continue to incur substantial operating losses for the foreseeable future. We may never achieve or sustainprofitability.We have incurred net losses since our inception. Our net loss was $38.7 million for the year ended December 31, 2017. As ofDecember 31, 2017, we had an accumulated deficit of $97.9 million. We do not know when or whether we will becomeprofitable. To date, we have not commercialized any products and therefore have never generated any revenues from the saleof products, and we do not expect to generate any product revenues in the foreseeable future. Our losses have resultedprincipally from costs incurred in our discovery and development activities. Our net losses may fluctuate significantly fromquarter to quarter and year to year.We have devoted most of our financial resources to research and development, including our clinical and preclinicaldevelopment activities. To date, we have financed our operations primarily through the sale of equity securities and thereceipt of funds through strategic partnerships with third parties. The amount of our future net losses will depend, in part, onthe rate of our future expenditures. We have not completed pivotal clinical studies for any product candidate and only havetwo product candidates in clinical studies. It will be several years, if ever, before we have a product candidate ready forcommercialization. Even if we obtain regulatory approval to market a product candidate, our future revenues would dependupon the size of the market or markets in which our product candidates received such approval and our ability to achievesufficient market acceptance, reimbursement from third‑party payors and adequate market share for our product candidates inthose markets.We expect to continue to incur significant expenses and increasing net losses for at least the next several years. We expectour expenses will increase substantially in connection with our ongoing activities, as we:·conduct clinical development of XMT‑1522, including our Phase 1 clinical study;38 Table of Contents·conduct clinical development of XMT-1536, including our Phase 1 clinical study;·seek regulatory approval for XMT‑1522 and XMT‑1536;·add personnel to support our product development efforts;·continue our research and development efforts for new product opportunities; and·continue to operate as a public company.If we are required by the United States Food and Drug Administration, or FDA, or any equivalent foreign regulatory authorityto perform clinical studies or studies in addition to those we currently expect to conduct, or if there are any delays incompleting the clinical studies of XMT‑1522 or XMT‑1536, our expenses could increase.To become and remain profitable, we must succeed in developing our ADC product candidates, obtaining regulatoryapproval for them, and manufacturing, marketing and selling those products for which we may obtain regulatory approval.We may not succeed in these activities, and we may never generate revenue from product sales or strategic partnerships in anamount sufficient to achieve profitability. Even if we achieve profitability in the future, we may not be able to sustainprofitability in subsequent periods. Our failure to become or remain profitable would depress our market value and couldimpair our ability to raise capital, expand our business, discover or develop other ADC product candidates or continue ouroperations.We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital whenneeded could force us to delay, limit, reduce or terminate our product development or commercialization efforts.Our cash, cash equivalents and marketable securities were $125.2 million as of December 31, 2017. We have utilizedsubstantial amounts of cash since our inception and expect that we will continue to expend substantial resources for theforeseeable future developing XMT‑1522, XMT‑1536 and any future ADC product candidates. These expenditures mayinclude costs associated with research and development, conducting preclinical studies and clinical studies, potentiallyobtaining regulatory approvals and manufacturing products, as well as marketing and selling products approved for sale, ifany, and potentially acquiring new technologies. In addition, other unanticipated costs may arise. Because the outcome ofour planned and anticipated clinical studies is highly uncertain, we cannot reasonably estimate the actual amounts necessaryto successfully complete the development and commercialization of our ADC product candidates. Our costs will increase ifwe experience any delays in our clinical studies for XMT‑1522 or XMT‑1536, including delays in enrollment of patients. Wealso incur costs associated with operating as a public company, hiring additional personnel and expanding our facilities.Our future capital requirements depend on many factors, including:·the scope, progress, results and costs of researching and developing XMT‑1522 and XMT‑1536 and any otherpotential ADC product candidates and conducting preclinical studies and clinical studies;·the timing of, and the costs involved in, obtaining regulatory approvals for XMT‑1522 and XMT‑1536 and anyother potential ADC product candidates if preclinical studies and clinical studies are successful;·the cost of manufacturing XMT‑1522 and XMT‑1536 and any other potential ADC product candidates for clinicalstudies in preparation for regulatory approval and in preparation for commercialization;·the cost of commercialization activities for XMT‑1522 and XMT‑1536 and any other potential ADC productcandidates, if any ADC product candidates are approved for sale, including manufacturing, marketing, sales anddistribution costs;39 Table of Contents·our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial termsof such agreements;·the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, includinglitigation costs and the outcome of such litigation; and·the timing, receipt and amount of sales of, or royalties on, our future products, if any, or products developed by ourpartners.Based on our current operating plan, we estimate that our existing cash, cash equivalents and marketable securities will besufficient to fund our projected operating requirements through at least mid-2019 and to fund our Phase 1 clinical studies forXMT‑1522 and XMT‑1536. Our operating plan, however, may change as a result of many factors currently unknown to usand we may need additional funds sooner than planned. Additional funds may not be available when we need them on termsthat are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay,limit, reduce or terminate preclinical studies, clinical studies or other development activities for one or more of our ADCproduct candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or otheractivities that may be necessary to commercialize our ADC product candidates. In addition, we may seek additional capitaldue to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current orfuture operating plans.Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us torelinquish rights to our technologies or ADC product candidates on unfavorable terms to us.We may seek additional capital through a variety of means, including through private and public equity offerings and debtfinancings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, theownership interests of our common stockholders will be diluted, and the terms of such equity or convertible debt securitiesmay include liquidation or other preferences that are senior to or otherwise adversely affect the rights of our commonstockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our abilityto take certain actions, such as incurring additional debt, making capital expenditures, declaring dividends or encumberingour assets to secure future indebtedness, each of which could adversely impact our ability to conduct our business andexecute our operating plan. If we raise additional funds through strategic partnerships with third parties, we may have torelinquish valuable rights to our technologies, including our ADC platforms, or ADC product candidates, or grant licenses onterms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, wemay be required to delay, limit, reduce or terminate our product development or commercialization efforts for XMT‑1522,XMT‑1536 or any other ADC product candidate, or grant rights to third parties to develop and market ADC productcandidates that we would otherwise prefer to develop and market ourselves.We may expend our resources to pursue a particular product candidate and fail to capitalize on product candidates thatmay be more profitable or for which there is a greater likelihood of success.Because we have limited financial and managerial resources, we focus on specific product candidates. As a result, we mayforgo or delay pursuit of opportunities with other product candidates 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 marketopportunities. Failure to properly assess potential product candidates could result in our focus on product candidates withlow market potential, which would harm our business and financial condition. Our spending on current and future researchand development programs and product candidates for specific indications may not yield any commercially viable productcandidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, wemay relinquish valuable rights to that product candidate through partnering, licensing or other royalty arrangements in casesin which it would have been more advantageous for us to retain sole development and commercialization rights to suchproduct candidate.40 Table of ContentsRisks related to development and approval of our ADC product candidatesFailure of a discovery program or product candidate may occur at any stage of preclinical or clinical development, and,because our and our partner’s discovery programs and our product candidates are in an early stage of preclinical orclinical development, there is a relatively higher risk of failure and we or our partners may never succeed in generatingrevenue from such discovery programs or product candidates.Our early encouraging preclinical results for XMT‑1522 and XMT‑1536 are not necessarily predictive of the results of ourongoing or future discovery programs or clinical studies. Promising results in preclinical studies of a drug candidate may notbe predictive of similar results in later‑stage preclinical studies or in humans during clinical studies. Many companies in thepharmaceutical and biotechnology industries have suffered significant setbacks in late‑stage clinical studies after achievingpositive results in early‑stage development, including early‑stage clinical studies, and we cannot be certain that we will notface similar setbacks. These companies’ setbacks have been caused by, among other things, preclinical findings made whileclinical studies were underway or safety or efficacy observations made in preclinical studies and clinical studies, includingpreviously unreported adverse events.Any clinical studies that we may conduct may not demonstrate the efficacy and safety necessary to obtain regulatoryapproval to market our product candidates. If the results of our ongoing or future clinical studies are inconclusive withrespect to the efficacy of our ADC product candidates or if we do not meet the clinical endpoints with statistical significanceor if there are safety concerns or adverse events associated with our ADC product candidates, we may be prevented or delayedin obtaining marketing approval for our ADC product candidates. There can be significant variability in safety or efficacyresults between different clinical studies of the same product candidate due to numerous factors, including changes in studyprocedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to theclinical study protocols and the rate of dropout among clinical study participants. Moreover, preclinical and clinical data areoften susceptible to varying interpretations and analyses, and many companies that believed their product candidatesperformed satisfactorily in preclinical studies and clinical studies nonetheless failed to obtain FDA approval.Alternatively, even if we obtain regulatory approval, that approval may be for indications or patient populations that are notas broad as intended or desired or may require labeling that includes significant use or distribution restrictions or safetywarnings. We may also be required to perform additional or unanticipated clinical studies to obtain approval or be subject toadditional post‑marketing testing requirements to maintain regulatory approval. In addition, regulatory authorities maywithdraw their approval of a product or impose restrictions on its distribution, such as in the form of a modified REMS. Thefailure to obtain timely regulatory approval of product candidates, any product marketing limitations or a productwithdrawal would negatively impact our business, results of operations and financial condition.We currently have only two ADC product candidates, XMT‑1522 and XMT-1536, in clinical studies. A failure of theseproduct candidates in clinical development would adversely affect our business and may require us to discontinuedevelopment of other ADC product candidates based on the same technology.XMT‑1522 and XMT-1536 are our only clinical‑stage development product candidates. While we have certain otherpreclinical programs in development and we intend to develop other product candidates, it will take additional investmentand time for such programs to reach the same stage of development as XMT‑1522 and XMT-1536. In addition, we have otherproduct candidates in our current pipeline that are based on the same ADC platform. If XMT‑1522 or XMT-1536 fails indevelopment as a result of any underlying problem with our ADC platform, then we may be required to discontinuedevelopment of the ADC product candidates that are based on the same technology. If we were required to discontinuedevelopment of XMT‑1522 or XMT-1536 or if XMT‑1522 or XMT-1536 were to fail to receive regulatory approval or wereto fail to achieve sufficient market acceptance, we could be prevented from or significantly delayed in achievingprofitability.41 Table of ContentsDelays in the commencement, enrollment or completion of clinical studies of our ADC product candidates could result inincreased costs to us as well as a delay or failure in obtaining regulatory approval, or prevent us from commercializing ourADC product candidates on a timely basis, or at all.We cannot guarantee that clinical studies, including our ongoing Phase 1 clinical studies and anticipated additional clinicalstudies for XMT‑1522 and XMT-1536, will be conducted as planned or completed on schedule, if at all. A failure of one ormore clinical studies can occur at any stage of testing. Events that may prevent successful or timely commencement,enrollment or completion of clinical development include, among others:·delays by us in reaching a consensus with regulatory agencies on study design;·delays in reaching, or failing to reach, agreement on acceptable terms with prospective clinical researchorganizations, or CROs, and clinical study sites;·difficulties in obtaining required IRB approval at each clinical study site;·challenges in recruiting and enrolling suitable patients to participate in clinical studies that meet the criteria of theprotocol for the clinical study;·imposition of a clinical hold by regulatory agencies or IRBs for any reason, including safety concerns or after aninspection of clinical operations or study sites;·failure by CROs, other third parties or us to adhere to clinical study requirements;·failure to perform in accordance with the FDA’s good clinical practices, or GCP, or applicable regulatory guidelinesin other countries;·inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical studies,including, for example, delays in the testing, validation, manufacturing and delivery of the ADC product candidatesto the clinical sites;·patients not completing participation in a study or not returning for post‑treatment follow‑up;·clinical study sites or patients dropping out of a study;·safety issues, including occurrence of serious adverse events, or SAEs, in clinical studies that are associated with theADC product candidates that are viewed to outweigh their potential benefits or unforeseen safety issues in ourongoing preclinical studies;·changes in regulatory requirements and guidance that require amending or submitting new clinical protocols; or·lack of adequate funding to continue the clinical study.Delays, including delays caused by the above factors, can be costly and could negatively affect our ability to complete aclinical study. If we or our partners are not able to successfully complete clinical studies, we or they will not be able to obtainregulatory approval and will not be able to commercialize our ADC product candidates or our partners’ ADC productcandidates based on our technology.42 Table of ContentsAn inability to enroll sufficient numbers of patients in our clinical studies could result in increased costs and longerdevelopment periods for our product candidates.Clinical studies require sufficient patient enrollment, which is a function of many factors, including:·the size and nature of the patient population;·the severity of the disease under investigation;·the nature and complexity of the study protocol, including eligibility criteria for the study;·the number of clinical study sites and the proximity of patients to those sites;·standard of care in the diseases under investigation;·the commitment of clinical investigators to identify eligible patients;·competing studies or trials; and·clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation toother available therapies, including any new drugs that may be approved for the indications we are investigating.Challenges in recruiting and enrolling suitable patients to participate in clinical studies that meet the criteria of the protocolfor clinical studies could increase costs and result in delays to our current development plan for XMT‑1522, XMT‑1536 orany other future ADC product candidate.We may seek a Breakthrough Therapy Designation or Fast Track Designation by the FDA for any of our productcandidates, and we may be unsuccessful. If we are successful, the designation may not actually lead to a faster developmentor regulatory review or approval process, and it does not increase the likelihood that any product candidate would receivemarketing approval.We may seek a Breakthrough Therapy Designation or Fast Track Designation for any of our product candidates. Abreakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat aserious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstratesubstantial improvement over currently approved therapies on one or more clinically significant endpoints, such assubstantial treatment effects observed early in clinical development. Fast Track Designation may be available if a product isintended for the treatment of a serious or life-threatening condition and preclinical or clinical data demonstrate the potentialto address an unmet medical need for this condition. Drugs that receive Breakthrough Therapy Designation or Fast TrackDesignation by the FDA are eligible for accelerated approval and priority review.The FDA has broad discretion whether or not to grant Breakthrough Therapy Designation or Fast Track Designation. Even ifwe receive Breakthrough Therapy Designation or Fast Track Designation for a product candidate, such designation may notresult in a faster development process, review or approval compared to conventional FDA procedures and does not assureultimate approval by the FDA. In addition, even if any of our product candidates receives Breakthrough Therapy Designationor Fast Track Designation, the FDA may later decide that the drugs no longer meet the conditions for qualification andrescind the designation.43 Table of ContentsClinical development, regulatory review and approval by the FDA and comparable foreign authorities are lengthy, timeconsuming and inherently unpredictable. If we or our partners are ultimately unable to obtain regulatory approval for ourproduct candidates, our business will be substantially harmed.The preclinical studies and clinical studies of our product candidates are, and the manufacturing and marketing of ourproduct candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities inthe United States and in other countries where we intend to test and, if approved, market any such product candidate. Thesegovernment regulations relate to, among other things, development, clinical studies, manufacturing and commercialization.In order to obtain regulatory approval for the commercial sale of any ADC product candidates, we or our partners mustdemonstrate through extensive preclinical studies and clinical studies that the ADC product candidate is safe and effectivefor use in each target indication.The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes manyyears following the commencement of clinical studies and depends upon numerous factors. Of the large number of drugs indevelopment in the United States, only a small percentage will successfully complete the FDA regulatory approval processand will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund ourdevelopment and preclinical studies and clinical studies, we cannot be assured that any of our product candidates will besuccessfully developed or commercialized.In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may changeduring the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delaysin the approval of or the decision not to approve an application. Regulatory approval has not been obtained for any productcandidate based on our ADC technology, and it is possible that none of our existing product candidates or any productcandidates we may seek to develop in the future will ever obtain regulatory approval. In addition, we may gain regulatoryapproval for XMT‑1522, XMT‑1536 or any other ADC product candidate in some but not all of the territories for which weseek approval or some but not all of the target indications, resulting in limited commercial opportunity for the approvedADC product candidates.Applications for our or our partners’ product candidates could be delayed or could fail to receive regulatory approval formany reasons, including, but not limited to the following:·the FDA or comparable foreign regulatory authorities may disagree with the number, design or implementation ofour clinical studies;·the population studied in the clinical program may not be sufficiently broad or representative to assure safety in thefull population for which we seek approval;·the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinicalstudies or clinical studies;·the data collected from clinical studies of our product candidates may not meet the level of statistical or clinicalsignificance required by the FDA or comparable foreign regulatory authorities for marketing approval or mayotherwise not be sufficient to support the submission of a new drug application or biologics license application, orother submission or to obtain regulatory approval in the United States or elsewhere;·the FDA may not accept data generated at our preclinical studies and clinical study sites;·the FDA may require us to conduct additional preclinical studies and clinical studies;·we may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’srisk‑benefit ratio for its proposed indication is acceptable;44 Table of Contents·the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, testprocedures and specifications or facilities of third‑party manufacturers with which we contract for clinical andcommercial supplies;·we or any third‑party service providers may be unable to demonstrate compliance with current Good ManufacturingPractices, or cGMPs, to the satisfaction of the FDA or comparable foreign regulatory authorities, which could resultin delays in regulatory approval or require us to withdraw or recall products and interrupt commercial supply of ourproducts; or·the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantlychange in a manner rendering our clinical data insufficient for approval.Any of these factors, many of which are beyond our control, may result in our failing to obtain regulatory approval to marketany of our product candidates, which would significantly harm our business, results of operations and prospects.If we fail to obtain regulatory approval in jurisdictions outside the United States, we will not be able to market ourproducts in those jurisdictions.We intend to market our ADC product candidates, including XMT‑1522 and XMT‑1536, if approved, in internationalmarkets either directly or through partnerships. We have entered into an agreement with Takeda to commercialize XMT‑1522outside of the United States and Canada. Such marketing will require separate regulatory approvals in each market andcompliance with numerous and varying regulatory requirements. The approval procedures vary from country to country andmay require additional testing that we are not required to perform to obtain regulatory approval in the United States.Moreover, the time required to obtain approval in countries outside the United States may differ from that required to obtainFDA approval. In addition, in many countries outside the United States, an ADC drug must be approved for reimbursementbefore it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities inother countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatoryauthorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risksassociated with obtaining FDA approval. We or our partners may not obtain foreign regulatory approvals on a timely basis, ifat all. We or our partners may not be able to file for regulatory approvals and may not receive necessary approvals tocommercialize our products in any market. If we or any existing or future partner are unable to obtain regulatory approval forXMT‑1522 or XMT‑1536 in one or more significant foreign jurisdictions, then the commercial opportunity for XMT‑1522 orXMT‑1536, as applicable, and our financial condition, will be adversely affected.Even if we receive regulatory approval for our ADC product candidates, such products will be subject to ongoingregulatory review, which may result in significant additional expense. Additionally, our ADC product candidates, ifapproved, could be subject to labeling and other restrictions, and we may be subject to penalties if we fail to comply withregulatory requirements or experience unanticipated problems with our products.Any regulatory approvals that we receive for our ADC product candidates may also be subject to limitations on the approvedindicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentiallycostly post‑marketing testing and surveillance to monitor safety and efficacy. In addition, if the FDA or any other governingregulatory body approves any of our ADC product candidates, the manufacturing processes, labeling, packaging,distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject toextensive and ongoing regulatory requirements. These requirements include submissions of safety and other post‑marketinginformation and reports, registration, as well as continued compliance with cGMP and GCP, for any clinical studies that weconduct post‑approval.45 Table of ContentsLater discovery of previously unknown problems with an approved ADC drug, including adverse events of unanticipatedseverity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, mayresult in, among other things:·restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market orvoluntary or mandatory product recalls;·fines, warning letters or holds on clinical studies;·refusal by the FDA or any other governing regulatory body to approve pending applications or supplements toapproved applications filed by us, or suspension or revocation of product license approvals;·product seizure or detention, or refusal to permit the import or export of products; and·injunctions or the imposition of civil or criminal penalties.The policies of the FDA or any other governing regulatory body may change and additional government regulations may beenacted that could prevent, limit or delay regulatory approval of our ADC product candidates. We cannot predict thelikelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either inthe United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of newrequirements or policies, or not able to maintain regulatory compliance, we may lose any marketing approval that may havebeen obtained and we may not achieve or sustain profitability, which would adversely affect our business.Our ADC product candidates or ADCs developed or commercialized by our competitors may cause undesirable side effectsor have other properties that delay or prevent regulatory approval of our ADC product candidates or limit theircommercial potential.Undesirable side effects caused by our ADC product candidates or ADCs being developed or commercialized by ourcompetitors could cause us or regulatory authorities to interrupt, delay or halt clinical studies and could result in a morerestrictive label or the denial of regulatory approval by the FDA or other regulatory authorities and potential product liabilityclaims. Further, clinical studies by their nature utilize a sample of the potential patient population. With a limited number ofsubjects and limited duration of exposure, rare and severe side effects of our product candidates or those of our competitorsmay only be uncovered with a significantly larger number of patients exposed to the drug. SAEs deemed to be caused by ourADC product candidates or those of our competitors, either before or after receipt of marketing approval, could have amaterial adverse effect on the development of our ADC product candidates and our business as a whole.If we or others identify undesirable side effects caused by our ADC product candidates or those of our competitors eitherbefore or after receipt of marketing approval, a number of potentially significant negative consequences could result,including:·our clinical studies may be put on hold;·we may be unable to obtain regulatory approval for our ADC product candidates;·regulatory authorities may withdraw or limit their approvals of our ADC product candidates;·regulatory authorities may require the addition of labeling statements, such as a contraindication, black boxwarnings or additional warnings;·the FDA may require development of a REMS with Elements to Assure Safe Use as a condition of approval orpost‑approval;·we may decide to remove such product candidates from the marketplace;46 Table of Contents·we may be subject to regulatory investigations and government enforcement actions;·we could be sued and held liable for harm caused to patients; and·our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of our ADC product candidates andcould substantially increase commercialization costs.If we or our third‑party collaborators are unable to successfully develop and commercialize any required companiondiagnostics for our product candidates or engage a third party to do so, or we or they experience significant delays indoing so, we may not realize the full potential of our product candidates.If a companion diagnostic is required for the label for XMT‑1536 or any of our future product candidates, thereforeconditioning our ability to market such product candidates on the commercial availability of an approved companiondiagnostic, we may seek approval for our validated assay as a companion diagnostic or we may contract with third parties tocreate and obtain approval for a companion diagnostic. To be successful in developing and commercializing such acompanion diagnostic, we need to address a number of scientific, technical and logistical challenges. We have littleexperience in the development and commercialization of diagnostics and may not be successful in developing andcommercializing appropriate diagnostics to pair with XMT‑1536 or any of our other product candidates. Companiondiagnostics are subject to regulation by the FDA and equivalent foreign regulatory authorities as medical devices and requireseparate regulatory approval prior to commercialization. Given our limited experience in developing and commercializingdiagnostics, we may rely in part or in whole on third parties for their design, manufacture and commercialization. We, ourcollaborators or such third parties may encounter difficulties in developing and obtaining approval for the companiondiagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility or clinical validation.Any delay or failure by us, our collaborators or such third parties to develop or obtain regulatory approval of the companiondiagnostics could delay or prevent approval of our product candidates. If we, or any third parties that we may contract with toassist us, are unable to successfully develop and commercialize companion diagnostics for our product candidates, orexperience delays in doing so:·the development of XMT‑1536 and our product candidates, may be adversely affected if we are unable toappropriately select patients for enrollment in our clinical trials;·our product candidates may not receive marketing approval if safe and effective use of a therapeutic productcandidate depends on the availability of an in vitro diagnostic; and·we may not realize the full commercial potential of any product candidates that receive marketing approval if,among other reasons, we are unable to appropriately select patients who are likely to benefit from therapy with ourproducts.As a result, our business would be harmed, possibly materially.In addition, third‑party collaborators may encounter production difficulties that could constrain the supply of the companiondiagnostics, and both they and we may have difficulties gaining acceptance of the use of the companion diagnostics in theclinical community. If such companion diagnostics fail to gain market acceptance, it would have an adverse effect on ourability to derive revenues from sales of our product candidates, if approved. In addition, any diagnostic company with whomwe contract may decide to discontinue selling or manufacturing the companion diagnostic that we anticipate using inconnection with development and commercialization of our product candidates or our relationship with such diagnosticcompany may otherwise terminate. We may not be able to enter into arrangements with another diagnostic company toobtain supplies of an alternative diagnostic test for use in connection with the development and commercialization of ourproduct candidates or do so on commercially reasonable terms, which could adversely affect and/or delay the development orcommercialization of our product candidates.47 Table of ContentsWe or our partners may fail to discover and develop additional potential product candidates.Our and our partners’ research programs to identify new product candidates will require substantial technical, financial andhuman resources, and we or our partners may be unsuccessful in our or their efforts to identify new product candidates. If weor our partners are unable to identify suitable additional product candidates for preclinical and clinical development, our ortheir ability to develop product candidates and our ability to obtain revenues from commercializing our products or toreceive royalties from our partners’ sales of their products in future periods could be compromised, which could result insignificant harm to our financial position and adversely impact our stock price.Risks related to our reliance on third partiesBecause we rely on third‑party manufacturing and supply partners, our supply of research and development, preclinicaland clinical development materials may become limited or interrupted or may not be of satisfactory quantity or quality.We rely on third‑party contract manufacturers to manufacture our preclinical and clinical study product supplies, and we lackthe internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. Thefacilities used by our contract manufacturers to manufacture the active pharmaceutical ingredient and final drug productmust be acceptable to the FDA and other comparable foreign regulatory agencies pursuant to inspections that would beconducted after we submit our marketing application or relevant foreign regulatory submission to the applicable regulatoryagency. There can be no assurance that our preclinical and clinical development product supplies will be sufficient,uninterrupted or of satisfactory quality or continue to be available at acceptable prices. If our contract manufacturers cannotsuccessfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA orapplicable foreign regulatory agencies, they will not be able to secure or maintain regulatory approval for theirmanufacturing facilities. Any replacement of our manufacturers could require significant effort and expertise because theremay be a limited number of qualified replacements.The manufacturing process for an ADC product candidate is subject to FDA and foreign regulatory authority review.Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and processvalidation tests required by regulatory authorities in order to comply with regulatory standards, such as cGMP. We have nodirect control over our contract manufacturers’ ability to maintain adequate quality control, quality assurance and qualifiedpersonnel. In the event that any of our manufacturers fails to comply with regulatory requirements or to perform itsobligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomeslimited or interrupted for other reasons, we may be forced to manufacture the materials ourselves, for which we currently donot have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do onreasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our ADC productcandidates may be unique or proprietary to the original manufacturer and we may have difficulty transferring such skills ortechnology to another third party and a feasible alternative may not exist. These factors would increase our reliance on suchmanufacturer or require us to obtain a license from such manufacturer in order to have another third-party manufacture ourADC product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the newmanufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations andguidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to developADC product candidates in a timely manner or within budget. Our reliance on contract manufacturers also exposes us to thepossibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets orother proprietary information.We expect to continue to rely on third‑party manufacturers if we receive regulatory approval for any ADC product candidate.To the extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend onthese third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements,including those related to quality control and assurance. If we are unable to obtain or maintain third‑party manufacturing forADC product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercializeour ADC product candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements andcomply with cGMP could adversely affect our business in a number of ways, including:·an inability to initiate or continue clinical studies of ADC product candidates under development;48 Table of Contents·delay in submitting regulatory applications, or receiving regulatory approvals, for ADC product candidates;·loss of the cooperation of an existing or future strategic partner;·subjecting third‑party manufacturing facilities or our manufacturing facilities to additional inspections byregulatory authorities;·a requirement to cease distribution or to recall batches of our ADC product candidates; and·in the event of approval to market and commercialize an ADC product candidate, an inability to meet commercialdemands for our products.We, or our third‑party manufacturers, may be unable to successfully scale‑up manufacturing of our ADC productcandidates in sufficient quality and quantity, which would delay or prevent us from developing our ADC productcandidates and commercializing approved products, if any.In order to conduct clinical studies of our ADC product candidates and commercialize any approved ADC productcandidates, we, or our manufacturing partners, will need to manufacture them in large quantities. We, or our manufacturingpartners, may be unable to successfully increase the manufacturing capacity for any of our product candidates in a timely orcost‑effective manner, or at all. In addition, quality issues may arise during scale‑up activities. If we, or any manufacturingpartners, are unable to successfully scale up the manufacture of our ADC product candidates in sufficient quality andquantity, the development, testing and clinical studies of that ADC product candidates may be delayed or infeasible, andregulatory approval or commercial launch of any resulting product may be delayed or not obtained, which couldsignificantly harm our business. We have evaluated which third‑party manufactures to engage for scale‑up to commercialsupply of our ADC product candidates, including XMT‑1522 and XMT‑1536 and we have begun transfer and scale-up ofcertain manufacturing activities. If we are unable to obtain or maintain third‑party manufacturing for commercial supply ofADC product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercializeour ADC product candidates successfully.We rely on third parties to conduct preclinical studies and clinical studies for our ADC product candidates, includingXMT‑1522 and XMT‑1536, and if they do not properly and successfully perform their obligations to us, we may not be ableto obtain regulatory approvals for XMT‑1522 or XMT‑1536 or any other ADC product candidates that we may develop inthe future.We have designed the Phase 1 clinical studies for XMT‑1522 and XMT-1536 and intend to design any future clinical studyfor any future unpartnered ADC product candidates that we may develop if preclinical studies are successful. However, werely on CROs and other third parties to assist in managing, monitoring and otherwise carrying out many of these studies. As aresult, we have less direct control over the conduct, timing and completion of these clinical studies and the management ofdata developed through clinical studies than would be the case if we were relying entirely upon our own staff. These CROsand other third parties are not our employees and we have limited control over the amount of time and resources that theydedicate to our programs. We compete with many other companies for the resources of these third parties. These third partiesmay have contractual relationships with other entities, some of which may be our competitors, which may draw time andresources from our programs. The third parties with whom we contract might not be diligent, careful or timely in conductingour preclinical studies or clinical studies, resulting in the preclinical studies or clinical studies being delayed orunsuccessful.The third parties on whom we rely generally may terminate their engagements at any time, and having to enter intoalternative arrangements would delay development and commercialization of our ADC product candidates. Communicatingwith outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities.Outside parties may:·have staffing difficulties;49 Table of Contents·fail to comply with contractual obligations;·experience regulatory compliance issues;·undergo changes in priorities or become financially distressed; or·form relationships with other entities, some of which may be our competitors.The FDA and comparable foreign regulatory authorities require compliance with regulations and standards, including GCP,for designing, conducting, monitoring, recording, analyzing and reporting the results of clinical studies to assure that thedata and results are credible and accurate and that the rights, integrity and confidentiality of study participants are protected.Although we rely, and intend to continue to rely, on third parties to conduct our clinical studies, they are not our employees,and we are responsible for ensuring that each of these clinical studies is conducted in accordance with its generalinvestigational plan, protocol and other requirements. Our reliance on these third parties for research and developmentactivities will reduce our control over these activities but will not relieve us of our responsibilities.If these third parties do not successfully carry out their duties under their agreements, if the quality or accuracy of the datathey obtain is compromised due to their failure to adhere to clinical study protocols or to regulatory requirements, or if theyotherwise fail to comply with clinical study protocols or meet expected deadlines, the clinical studies of our ADC productcandidates may not meet regulatory requirements. The FDA enforces GCP regulations through periodic inspections ofclinical study sponsors, principal investigators and study sites. If we or our CROs fail to comply with applicable GCPs orother regulatory requirements, the clinical data generated in our clinical studies may be deemed unreliable, third parties mayneed to be replaced and preclinical development activities or clinical studies may be extended, delayed, suspended orterminated. If any of these events occur, we may not be able to obtain regulatory approval of our ADC product candidates ona timely basis or at all.We depend on strategic partnerships with other companies to assist in the research, development and commercialization ofour ADC platforms and ADC product candidates. If our existing partners do not perform as expected, this may negativelyaffect our ability to commercialize our ADC product candidates, including XMT‑1522, or generate revenues throughtechnology licensing, or may otherwise negatively affect our business.We have established strategic partnerships and intend to continue to establish strategic partnerships with third parties toresearch, develop and commercialize our ADC platforms and existing and future ADC product candidates. We entered into acollaboration agreement with Takeda in January 2016 for the co‑development of XMT‑1522 that granted Takeda rights tocommercialize XMT‑1522 outside of the United States and Canada. We also have entered into another collaborationagreement with Takeda and a collaboration agreement with Merck KGaA for the development and commercialization ofother ADC product candidates. For certain of these programs, we will depend on our partners to design and conduct theirclinical studies. As a result, we may not be able to conduct these programs in the manner or on the time schedule we currentlycontemplate, which may negatively impact our business operations. In addition, if any of these partners withdraw support forthese programs or proposed products or otherwise impair their development, our business could be negatively affected.Our partners may terminate their agreements with us for cause under certain circumstances or at will in certain cases anddiscontinue use of our technologies. In addition, we cannot control the amount and timing of resources our partners maydevote to products utilizing or incorporating our technology. Moreover, our relationships with our partners may divertsignificant time and effort of our scientific staff and management team and require effective allocation of our resources tomultiple internal and collaborative projects. Our partners may fail to perform their obligations under the collaborationagreements or may not perform their obligations in a timely manner. If conflicts arise between our partners and us, the otherparty may act in a manner adverse to us and could limit our ability to implement our strategies. If any of our partnersterminate or breach our agreements with them, or otherwise fail to complete their obligations in a timely manner, it may havea detrimental effect on our financial position by reducing or eliminating the potential for us to receive technology access andlicense fees, milestones and royalties, reimbursement of development costs, as well as possibly requiring us to devoteadditional efforts and incur costs associated with pursuing internal development of product candidates. Furthermore, if ourpartners do not prioritize and commit sufficient resources to programs associated with our product50 Table of Contentscandidates or collaboration product candidates, we or our partners may be unable to commercialize these product candidates,which would limit our ability to generate revenue and become profitable.In particular, if Takeda were to terminate the XMT‑1522 strategic partnership, we would not receive milestone payments,co‑funded development payments or, following approval, royalties for the sale of XMT‑1522 outside the United States andCanada. As a result of such termination, we would have to engage another strategic partner to complete the XMT‑1522development process and to commercialize XMT‑1522 outside the United States and Canada, or to complete thedevelopment process and undertake commercializing XMT‑1522 outside the United States and Canada ourselves, either ofwhich could significantly delay the continued development and commercialization of XMT‑1522 and would increase ourcosts. In turn, this could significantly harm our financial position, adversely affect our stock price and require us to incur allthe costs of developing and commercializing XMT‑1522, which are now being co‑funded by Takeda.Our partners may separately pursue competing products, therapeutic approaches or technologies to develop treatments for thediseases targeted by us or our partners. Competing products, either developed by the partners or to which the partners haverights, may result in the withdrawal of partner support for our product candidates. Even if our partners continue theircontributions to the strategic partnerships, they may nevertheless determine not to actively pursue the development orcommercialization of any resulting products. Any of these developments could harm our product development efforts.To date, we have depended on a small number of partners for a substantial portion of our revenue. The loss of any one ofthese partners could result in a material decline in our revenue.We have strategic partnerships with a limited number of companies. To date, a substantial portion of our revenue has resultedfrom payments made under agreements with our strategic partners, and we expect that a portion of our revenue will continueto come from strategic partnerships. If XMT‑1522 receives regulatory approval, our revenues will still depend in part onTakeda’s ability and willingness to market the approved product outside of the United States and Canada. The loss of any ofour partners, especially Takeda, or the failure of our partners to perform their obligations under their agreements with us,including paying license or technology fees, milestone payments, royalties or reimbursements, could have a material adverseeffect on our financial performance. Payments under our existing and future strategic partnerships are also subject tosignificant fluctuations in both timing and amount, which could cause our revenue to fall below the expectations ofsecurities analysts and investors and cause a decrease in our stock price.We may not be successful in establishing and maintaining additional strategic partnerships, which could adversely affectour ability to develop and commercialize products, negatively impacting our operating results.We continue to strategically evaluate our partnerships and, as appropriate, we expect to enter into additional strategicpartnerships in the future, including potentially with major biotechnology or biopharmaceutical companies. We facesignificant competition in seeking appropriate partners for our ADC product candidates, and the negotiation process istime‑consuming and complex. In order for us to successfully partner our ADC product candidates, potential partners mustview these ADC product candidates as economically valuable in markets they determine to be attractive in light of the termsthat we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts toestablish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintainsuch strategic partnerships if, for example, development or approval of an ADC product candidate is delayed or sales of anapproved product are disappointing. Any delay in entering into strategic partnership agreements related to our ADC productcandidates could delay the development and commercialization of such candidates and reduce their competitiveness even ifthey reach the market. If we are not able to generate revenue under our strategic partnerships when and in accordance withour expectations or the expectations of industry analysts, this failure could harm our business and have an immediate adverseeffect on the trading price of our common stock.If we fail to establish and maintain additional strategic partnerships related to our unpartnered ADC product candidates, wewill bear all of the risk and costs related to the development of any such ADC product candidate, and we may need to seekadditional financing, hire additional employees and otherwise develop expertise, such as regulatory expertise, for which wehave not budgeted. If we were not successful in seeking additional financing, hiring additional employees or developingadditional expertise, our cash burn rate would increase or we would need to take steps to reduce our rate of51 Table of ContentsADC product candidate development. This could negatively affect the development of any unpartnered ADC productcandidate.Risks related to commercialization of our ADC product candidatesOur future commercial success depends upon attaining significant market acceptance of our ADC product candidates, ifapproved, among physicians, patients and health care payors.Even if we obtain regulatory approval for XMT‑1522, XMT‑1536 or any other ADC product candidates that we may developor acquire in the future, the product candidate may not gain market acceptance among physicians, health care payors,patients and the medical community. Market acceptance of any approved products depends on a number of factors,including:·the efficacy and safety of the product, as demonstrated in clinical studies;·the indications for which the product is approved and the label approved by regulatory authorities for use with theproduct, including any warnings that may be required on the label;·acceptance by physicians and patients of the product as a safe and effective treatment;·the cost, safety and efficacy of treatment in relation to alternative treatments;·the availability of adequate reimbursement and pricing by third‑party payors and government authorities;·relative convenience and ease of administration;·the prevalence and severity of adverse side effects; and·the effectiveness of our sales and marketing efforts.Perceptions of any product are influenced by perceptions of competitors’ products that are in the same class of drugs or havea similar mechanism of action. As a result, adverse public perception of our competitors’ ADC products may negativelyimpact the market acceptance of our ADC product candidates. Market acceptance is critical to our ability to generatesignificant revenue and become profitable. Any therapeutic candidate, if approved and commercialized, may be accepted inonly limited capacities or not at all. If any approved products are not accepted by the market to the extent that we expect, wemay not be able to generate significant revenue and our business would suffer.The incidence and prevalence for target patient populations of our drug candidates have not been established withprecision. If the market opportunities for our drug candidates are smaller than we estimate or if any approval that weobtain is based on a narrower definition of the patient population, our revenue and ability to achieve profitability will beadversely affected, possibly materially.The precise incidence and prevalence of breast cancer, NSCLC and gastric cancer with low HER2 expression and ofepithelial ovarian cancer and non‑squamous NSCLC with NaPi2b expression are unknown. Our projections of both thenumber of people who have these diseases, as well as the subset of people with these diseases who have the potential tobenefit from treatment with our drug candidates, are based on estimates. The total addressable market opportunity forXMT‑1522 for the treatment of patients with breast cancer, NSCLC and gastric cancer with HER2 expression and XMT‑1536for the treatment of epithelial ovarian cancer and non‑squamous NSCLC with NaPi2b expression will ultimately dependupon, among other things, the diagnosis criteria included in the final label for each of XMT‑1522 and XMT‑1536, if our drugcandidates are approved for sale for these indications, acceptance by the medical community and patient access, drug pricingand reimbursement. The number of patients who can be treated with our drug candidates may turn out to be lower thanexpected, patients may not be otherwise amenable to treatment with our drugs, or new patients52 Table of Contentsmay become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operationsand our business.If we are unable to establish sales, marketing and distribution capabilities, we may not be successful in commercializingour product candidates if and when they are approved.We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of products.To achieve commercial success for any product for which we have obtained marketing approval, we will need to establish asales and marketing organization.In the future, we expect to build a focused sales and marketing infrastructure to market XMT‑1522 in the United States andCanada, if and when it is approved, and to market XMT‑1536 and other ADC product candidates in the United States andcertain foreign jurisdictions, if and when they are approved. There are risks involved with establishing our own sales,marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consumingand could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force andestablish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarilyincurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain orreposition our sales and marketing personnel.Factors that may inhibit our efforts to commercialize our products on our own include:·our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;·the inability of sales personnel to obtain access to physicians;·the lack of adequate numbers of physicians to prescribe any future products;·the lack of complementary products to be offered by sales personnel, which may put us at a competitivedisadvantage relative to companies with more extensive product lines; and·unforeseen costs and expenses associated with creating an independent sales and marketing organization.If we are unable to establish our own sales, marketing and distribution capabilities and enter into arrangements with thirdparties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were tomarket, sell and distribute any products that we develop ourselves.In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute certain ofour product candidates outside of the United States or may be unable to do so on terms that are favorable to us. We likely willhave little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell andmarket our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either onour own or in collaboration with third parties, we will not be successful in commercializing our product candidates.Reimbursement may be limited or unavailable in certain market segments for our ADC product candidates, which couldmake it difficult for us to sell our products profitably.In both domestic and foreign markets, sales of any of our product candidates, if approved, will depend, in part, on the extentto which the costs of our products will be covered by third‑party payors, such as government health programs, commercialinsurance and managed health care organizations. These third-party payors decide which drugs will be covered and establishreimbursement levels for those drugs. The containment of health care costs has become a priority of foreign and domesticgovernments as well as private third-party payors. The prices of drugs have been a focus in this effort. Governments andprivate third‑party payors have attempted to control costs by limiting coverage and the amount of reimbursement forparticular medications, which could affect our ability to sell our product candidates profitably.53 Table of ContentsCost‑control initiatives could cause us to decrease the price we might establish for products, which could result in lower thananticipated product revenues.Reimbursement by a third‑party payor may depend upon a number of factors, including the third‑party payor’s determinationthat use of a product is:·a covered benefit under its health plan;·safe, effective and medically necessary;·appropriate for the specific patient;·cost‑effective; and·neither experimental nor investigational.Adverse pricing limitations may hinder our ability to recoup our investment in XMT‑1522, XMT‑1536 or any future ADCproduct candidates, even if such product candidates obtain marketing approval.Obtaining coverage and reimbursement approval for a product from a government or other third‑party payor is a timeconsuming and costly process that could require us to provide supporting scientific, clinical and cost‑effectiveness data forthe use of our products to the payor. Further, there is significant uncertainty related to third‑party payor coverage andreimbursement of newly approved drugs. We may not be able to provide data sufficient to gain acceptance with respect tocoverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of ourADC product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of,our products. If reimbursement is not available or is available only to limited levels, we may not be able to commercializecertain of our products. In addition, in the United States, third‑party payors are increasingly attempting to contain health carecosts by limiting both coverage and the level of reimbursement of new drugs. As a result, significant uncertainty exists as towhether and how much third‑party payors will reimburse patients for their use of newly approved drugs, which in turn willput pressure on the pricing of drugs.Price controls may be imposed in foreign markets, which may adversely affect our future profitability.In some countries, including member states of the European Union, the pricing of prescription drugs is subject togovernmental control. Additional countries may adopt similar approaches to the pricing of prescription drugs. In suchcountries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approvalfor a product. In addition, there can be considerable pressure by governments and other stakeholders on prices andreimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments mayfurther complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained.Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low‑pricedand high‑priced member states, can further reduce prices. In some countries, we may be required to conduct a clinical study orother studies that compare the cost‑effectiveness of our ADC product candidates to other available therapies in order toobtain or maintain reimbursement or pricing approval. We cannot be sure that such prices and reimbursement will beacceptable to us or our strategic partners. Publication of discounts by third‑party payors or authorities may lead to furtherpressure on the prices or reimbursement levels within the country of publication and other countries. If pricing is set atunsatisfactory levels or if reimbursement of our products is unavailable or limited in scope or amount, our revenues fromsales by us or our strategic partners and the potential profitability of our ADC product candidates in those countries would benegatively affected.54 Table of ContentsThe impact of health care reform legislation and other changes in the health care industry and in health care spending onus is currently unknown and may adversely affect our business model.Our revenue prospects could be affected by changes in health care spending and policy in the United States and abroad. Weoperate in a highly regulated industry and new laws, regulations or judicial decisions, or new interpretations of existing laws,regulations or decisions, related to health care availability, the method of delivery or payment for health care products andservices could negatively impact our business, operations and financial condition.The United States and state governments continue to propose and pass legislation designed to reduce the cost of health care.In March 2010, the U.S. Congress enacted the Patient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act, or the Health Care Reform Act, which include changes to the coverage and reimbursement of drugproducts under government health care programs such as:·increasing drug rebates under state Medicaid programs for brand name prescription drugs and extending thoserebates to Medicaid managed care;·extending discounted rates on drug products available under the Public Health Service pharmaceutical pricingprogram to additional hospitals and other providers;·assessing a fee on manufacturers and importers of brand name prescription drugs reimbursed under certaingovernment programs, including Medicare and Medicaid; and·requiring drug manufacturers to provide a 50% discount on Medicare Part D brand name prescription drugs sold toMedicare beneficiaries whose prescription drug costs cause the beneficiaries to be subject to the Medicare Part Dcoverage gap (i.e., the so‑called “donut hole”).It is likely that federal and state legislatures within the United States and foreign governments will continue to considerchanges to existing health care legislation. We cannot predict the reform initiatives that may be adopted in the future orwhether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurancecompanies, managed care organizations and other payors of health care services to contain or reduce costs of health care mayadversely affect:·the demand for any products for which we may obtain regulatory approval;·our ability to set a price that we believe is fair for our products;·our ability to obtain coverage and reimbursement approval for a product;·our ability to generate revenues and achieve or maintain profitability; and·the level of taxes that we are required to pay.Modifications to or repeal of all or certain provisions of the Health Care Reform Act are expected as a result of the outcomeof the 2016 presidential election and Congressional Republicans maintaining control of Congress, consistent withstatements made by Donald Trump and members of Congress during the presidential campaign and following the election.Some of the provisions of the Health Care Reform Act have yet to be implemented, and there have been legal and politicalchallenges to certain aspects of the Health Care Reform Act. Since January 2017, President Trump has signed two executiveorders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the Health CareReform Act. Moreover, the Tax Cuts and Jobs Act of 2017 was enacted on December 22, 2017 and includes a provisionrepealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Health Care Reform Act oncertain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the“individual mandate.” Congress may consider other legislation to repeal or replace additional elements of the Health CareReform Act. We continue to evaluate the effect that the Health Care Reform Act, the repeal of the55 Table of Contentsindividual mandate, and any additional possible repeal and replacement efforts may have on our business but expect that theHealth Care Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures thatmay be adopted in the future could have a material adverse effect on our industry generally and on our ability to successfullycommercialize our product candidates, if approved. In addition to the Health Care Reform Act, there will continue to beproposals by legislators at both the federal and state levels, regulators and third party payors to address, among other things,healthcare costs and individual healthcare benefits. We cannot predict the ultimate content, timing or effect of any changesto the Healthcare Reform Act, and significant changes to, or repeal of, the Healthcare Reform Act could have a materialadverse effect on our business, financial condition and profitability.In addition, other legislative changes have been proposed and adopted since the 2010 health care reform legislation. TheBudget Control Act of 2011, as amended, or the Budget Control Act, includes provisions intended to reduce the federaldeficit. The Budget Control Act resulted in the imposition of 2% reductions in Medicare payments to providers beginning in2013. Legislation extends reductions through 2023. Any significant spending reductions affecting Medicare, Medicaid orother publicly funded or subsidized health programs that may be implemented, or any significant taxes or fees that may beimposed on us, as part of any broader deficit reduction effort or legislative replacement to the Budget Control Act, couldhave an adverse impact on our anticipated product revenues.We face substantial competition, which may result in others discovering, developing or commercializing products before,or more successfully than, we do.The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intensecompetition and a strong emphasis on proprietary products. Many third parties compete with us in developing variousapproaches to cancer therapy. They include pharmaceutical companies, biotechnology companies, academic institutions andother research organizations. Any treatments developed by our competitors could be superior to our ADC product candidates.It is possible that these competitors will succeed in developing technologies that are more effective than our ADC platformsor ADC product candidates or that would render our ADC platforms obsolete or noncompetitive. We anticipate that we willface increased competition in the future as additional companies enter our market and scientific developments surroundingother cancer therapies continue to accelerate.We are also aware of multiple companies with ADC technologies that may be competitive to our ADC platforms, includingAstellas, AstraZeneca, Bristol‑Myers Squibb, Daiichi Sankyo, ImmunoGen, Immunomedics, Pfizer and Seattle Genetics.These companies or their partners, including AbbVie, Genentech, Lilly, Novartis, Sanofi and Takeda, may develop ADCproduct candidates which compete in the same indications as our current and future ADC product candidates. There areapproximately 75 ADC product candidates in active clinical development. There are currently four approved ADC therapiesin the United States: brentuximab vedotin, marketed by Seattle Genetics and Takeda, ado‑trastuzumab emtansine, marketedby Genentech, gemtuzumab ozogamicin, marketed by Pfizer; and inotuzumab ozogamicin, also marketed by Pfizer.Ado‑trastuzumab emtansine is a HER2 targeted ADC approved for use in HER2-positive patients and, even though we aredeveloping, and expect to get approval for, XMT‑1522 for lower expressing HER2 patients, ado‑trastuzumab emtansine maycompete with our HER2 targeted ADC, XMT‑1522, if XMT‑1522 is approved. We expect to compete on improved efficacy,safety and tolerability compared to other ADC product candidates and if our products are not demonstrably superior in theserespects compared to other approved therapeutics, we may not be able to compete effectively.Many of our competitors have significantly greater financial resources and expertise in research and development,manufacturing, preclinical testing, conducting clinical studies, obtaining regulatory approval and marketing than we do. Inaddition, many of these competitors are active in seeking patent protection and licensing arrangements in anticipation ofcollecting royalties for use of technology that they have developed. Smaller or early‑stage companies may also prove to besignificant competitors, particularly through strategic partnerships with large and established companies. These third partiescompete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiringtechnologies complementary to our programs.In addition, if our product candidates are approved and commercialized, we may face competition from biosimilars. The routeto market for biosimilars was established with the passage of the Health Care Reform Act in March 2010. The Health CareReform Act establishes a pathway for the FDA approval of follow‑on biologics and provides twelve years data56 Table of Contentsexclusivity for reference products and an additional six months exclusivity period if pediatric studies are conducted. InEurope, the European Medicines Agency has issued guidelines for approving products through an abbreviated pathway, andbiosimilars have been approved in Europe. If a biosimilar version of one of our potential products were approved in theUnited States or Europe, it could have a negative effect on sales and gross profits of the potential product and our financialcondition.With respect to our current and potential future product candidates, we believe that our ability to compete effectively anddevelop products that can be manufactured cost‑effectively and marketed successfully will depend on our ability to:·advance our technology platforms;·obtain and maintain intellectual property protection for our technologies and products;·obtain required government and other public and private approvals on a timely basis;·attract and retain key personnel;·commercialize effectively;·obtain reimbursement for our products in approved indications;·comply with applicable laws, regulations and regulatory requirements and restrictions with respect to thecommercialization of our products, including with respect to any changed or increased regulatory restrictions; and·enter into additional strategic partnerships to advance the development and commercialization of our productcandidates.Risks related to our intellectual propertyIf we are unable to obtain or protect intellectual property rights related to our technology and ADC product candidates, orif our intellectual property rights are inadequate, we may not be able to compete effectively.Our success depends in large part on our ability to obtain and maintain protection with respect to our intellectual propertyand proprietary technology. We rely upon a combination of patents, trade secret protection and confidentiality agreements toprotect the intellectual property related to our ADC platforms and ADC product candidates, XMT‑1522 and XMT‑1536. Thepatent position of biopharmaceutical companies is generally uncertain because it involves complex legal and factualconsiderations and has, in recent years, been the subject of much litigation. As a result, the issuance, scope, validity,enforceability and commercial value of our patent rights is highly uncertain. The standards applied by the United StatesPatent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly orpredictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claimsallowable in patents. In addition, changes in either the patent laws or interpretation of the patent laws in the United Statesand other countries may diminish the value of our patents or narrow the scope of our patent protection. The patentprosecution process is expensive, complex and time‑consuming, and we may not be able to file, prosecute, maintain, enforceor license all necessary or desirable patents and patent applications at a reasonable cost or in a timely manner. It is alsopossible that we fail to identify patentable aspects of our research and development output before it is too late to obtainpatent protection. There is no assurance that all potentially relevant prior art relating to our patents and patent applicationshas been found. We may be unaware of prior art that could be used to invalidate an issued patent or prevent our pendingpatent applications from issuing as patents.The patent applications that we own or in‑license may fail to result in issued patents, and even if they do issue as patents,such patents may not cover our ADC platforms and ADC product candidates in the United States or in other countries. Theissuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be57 Table of Contentschallenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity orin patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using orcommercializing similar or identical technology and products, or limit the duration of the patent protection of ourtechnology and product candidates. For example, even if patent applications we license or own do successfully issue aspatents and even if such patents cover our ADC platforms and ADC product candidates, third parties may challenge theirvalidity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if theyare unchallenged, our patents and patent applications may not provide adequate protection or exclusivity for our ADCplatform or ADC product candidates, prevent others from designing around our claims or otherwise provide us with acompetitive advantage. Any of these outcomes could impair our ability to prevent competition from third parties, which mayhave an adverse impact on our business.If patent applications we own or have in‑licensed with respect to our ADC platforms or our ADC product candidates fail toissue as patents, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity, itcould dissuade companies from collaborating with us. We cannot offer any assurances about which, if any, patents will issue,the breadth of any such patents or whether any issued patents will be found invalid and unenforceable or will be threatenedby third parties. Any successful challenge to these patents or any other patents owned by or licensed to us could deprive us ofrights necessary for the successful development and commercialization of any ADC product candidate. Since patentapplications in the United States and most other countries are confidential for a period of time after filing, and some remainso until issued, we cannot be certain that we were the first to file any patent application related to an ADC product candidate.Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States can beinitiated by the USPTO or a third‑party to determine who was the first to invent any of the subject matter covered by thepatent claims of our applications. In addition, patents have a limited lifespan. In the United States, the natural expiration of apatent is generally 20 years after it is filed. Various extensions may be available; however, the life of a patent and theprotection it affords is limited. Given the amount of time required for the development, testing and regulatory review of newproduct candidates, our owned or in‑licensed patents protecting such candidates might expire before or shortly after suchcandidates are commercialized. If we encounter delays in obtaining regulatory approvals, the period of time during which wecould market an ADC drug under patent protection could be further reduced. Even if patents covering our ADC productcandidates are obtained, once the patent life has expired for a product, we may be open to competition from similar or genericproducts. The launch of a generic version of one of our products in particular would be likely to result in an immediate andsubstantial reduction in the demand for our product, which could have a material adverse effect on our business, financialcondition, results of operations and prospects.On September 16, 2011, the Leahy‑Smith America Invents Act, or the Leahy‑Smith Act, was signed into law, which couldincrease the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense ofour issued patents. The Leahy‑Smith Act includes a number of significant changes to U.S. patent law. These includeprovisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation and switchthe U.S. patent system from a “first‑to‑invent” system to a “first‑to‑file” system. Under a first‑to‑file system, assuming theother requirements for patentability are met, the first inventor to file a patent application generally will be entitled to thepatent on an invention regardless of whether another inventor had made the invention earlier. These provisions also allowthird‑party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack thevalidity of a patent by the USPTO administered post grant proceedings. The USPTO developed additional regulations andprocedures to govern administration of the Leahy‑Smith Act, and many of the substantive changes to patent law associatedwith the Leahy‑Smith Act, and, in particular, the first‑to‑file provisions, only became effective on March 16, 2013.Accordingly, it is not clear what, if any, impact the Leahy‑Smith Act will have on the operation of our business. TheLeahy‑Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patentapplications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects.Any loss of patent protection could have a material adverse impact on our business. We may be unable to preventcompetitors from entering the market with a product that is similar to or the same as our ADC product candidates.58 Table of ContentsIssued patents covering XMT‑1522 and XMT‑1536 and any future ADC product candidates could be found invalid orunenforceable if challenged in court or before the USPTO or comparable foreign authority.If we or one of our licensing partners initiate legal proceedings against a third party to enforce a patent covering one ofXMT‑1522, XMT‑1536 or any other future product candidates, the defendant could counterclaim that the patent coveringour product candidate is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleginginvalidity or unenforceability are commonplace, and there are numerous grounds upon which a third party can assertinvalidity or unenforceability of a patent. Grounds for a validity challenge could be, among other things, an alleged failureto meet any of several statutory requirements, including lack of novelty, obviousness, lack of written description ornon‑enablement. Grounds for an unenforceability assertion could be, among other things, an allegation that someoneconnected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement,during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad,even outside the context of litigation. Such mechanisms include re‑examination, inter partes review, post‑grant review,interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions (e.g., oppositionproceedings). Such proceedings could result in revocation, cancellation or amendment to our patents in such a way that theyno longer cover and protect our product candidates. The outcome following legal assertions of invalidity andunenforceability is unpredictable. With respect to the validity of our patents, for example, we cannot be certain that there isno invalidating prior art of which we, our licensors, our patent counsel and the patent examiner were unaware duringprosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part,and perhaps all, of the patent protection on one or more of our product candidates. Any such loss of patent protection couldhave a material adverse impact on our business, financial condition, results of operations and prospects.If we fail to comply with our obligations under any license, strategic partnership or other agreements, we may be requiredto pay damages and could lose intellectual property rights that are necessary for developing and protecting our productcandidates.We rely, in part, on license, collaboration and other agreements. We may need to obtain additional licenses from others toadvance our research or allow commercialization of our product candidates and it is possible that we may be unable to obtainadditional licenses at a reasonable cost or on reasonable terms, if at all. The licensing or acquisition of third party intellectualproperty rights is a competitive area, and several more established companies may pursue strategies to license or acquire thirdparty intellectual property rights that we may consider attractive. These established companies may have a competitiveadvantage over us due to their size, capital resources and greater clinical development and commercialization capabilities. Inaddition, companies that perceive us to be a competitor may be unwilling to assign or license rights to use. We also may beunable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriatereturn on our investment.In addition, our existing licenses and collaboration agreements, including our license with Recepta Biopharma S.A., orRecepta, for intellectual property covering the NaPi2b antibody in XMT‑1536 and our agreement with Adimab under whichwe acquired Adimab’s rights to XMT‑1519, the antibody in XMT‑1522, and were granted a license to certain intellectualproperty controlled by Adimab to exploit ADC product candidates containing XMT‑1519, including XMT‑1522, impose,and any future licenses, collaborations or other agreements we enter into are likely to impose, various development,commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement orother obligations on us. If we breach any of these obligations, or use the intellectual property licensed to us in anunauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license,including, in the case of our agreement with Recepta, the license for the rights covering the NaPi2b antibody in XMT‑1536.In addition, if we breach certain obligations under our agreement with Adimab, Adimab may have the right to reacquire therights to XMT‑1519. Any of the foregoing could result in us being unable to develop, manufacture and sell products that arecovered by the licensed technology or enable a competitor to gain access to the licensed technology. Disputes may ariseregarding intellectual property subject to a licensing, collaboration or other agreements, including:·the scope of rights granted under the license agreement and other interpretation related issues;·the extent to which our technology and processes infringe on intellectual property of the licensor that is not subjectto the licensing agreement;59 Table of Contents·the sublicensing of patent and other rights under our collaborative development relationships;·our diligence obligations under the license agreement and what activities satisfy those diligence obligations;·the inventorship and ownership of inventions and know how resulting from the joint creation or use of intellectualproperty by our licensors and us and our partners; and·the priority of invention of patented technology.In addition, the agreements under which we currently license intellectual property or technology to or from third parties arecomplex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of anycontract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevantintellectual property or technology, or increase what we believe to be our financial or other obligations under the relevantagreement, either of which could have a material adverse effect on our business, financial condition, results of operations andprospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain ourcurrent licensing arrangements on commercially acceptable terms, we may be unable to successfully develop andcommercialize the affected product candidates.In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, orto maintain the patents, covering the technology that we license from third parties. For example, pursuant to our licenseagreement with Recepta, Ludwig Institute for Cancer Research Ltd., a co‑owner of the intellectual property, retains control ofsuch activities. Therefore, we cannot be certain that these patents and applications will be prosecuted, maintained andenforced in a manner consistent with the best interests of our business. If our licensors fail to obtain or maintain suchintellectual property, or lose rights to such intellectual property, the rights we have licensed and our exclusivity may bereduced or eliminated and our right to develop and commercialize any of our products that are subject to such licensed rightscould be adversely affected.Moreover, our rights to our in‑licensed patents and patent applications are dependent, in part, on inter‑institutional or otheroperating agreements between the joint owners of such in‑licensed patents and patent applications. If one or more of suchjoint owners breaches such inter‑institutional or operating agreements, our rights to such in‑licensed patents and patentapplications may be adversely affected. In addition, while we cannot currently determine the amount of the royaltyobligations we would be required to pay on sales of future products, if any, the amounts may be significant. The amount ofour future royalty obligations will depend on the technology and intellectual property we use in products that wesuccessfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, wemay be unable to achieve or maintain profitability. Any of the foregoing could have a material adverse effect on ourcompetitive position, business, financial conditions, results of operations and prospects.If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existingintellectual property rights we have, we may have to abandon development of the relevant program or product candidate andour business, financial condition, results of operations and prospects could suffer.We may become involved in lawsuits to protect or enforce our intellectual property or to defend against intellectualproperty claims, which could be expensive, time consuming and unsuccessful.Competitors and other third parties may infringe our patents or misappropriate or otherwise violate our owned andin‑licensed intellectual property rights. To counter infringement or unauthorized use, litigation or other intellectual propertyproceedings may be necessary to enforce or defend our owned and in‑licensed intellectual property rights, to protect ourtrade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others.Such litigation or proceedings can be expensive and time consuming, and any such claims could provoke defendants toassert counterclaims against us, including claims alleging that we infringe their patents or other intellectual property rights.We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Many of ourcurrent and potential competitors have the ability to dedicate substantially greater resources to litigate intellectual propertyrights than we can and have more mature and developed intellectual property portfolios. Accordingly, despite our efforts, wemay not be able to prevent third parties from infringing upon or misappropriating our60 Table of Contentsintellectual property. Even if resolved in our favor, litigation or other intellectual property proceedings could result insubstantial costs and diversion of management attention and resources, which could harm our business and financial results.In addition, in a litigation or other proceeding, a court or administrative judge may decide that a patent owned by or licensedto us is invalid or unenforceable, or a court may refuse to stop the other party from using the technology at issue on thegrounds that our patents do not cover the technology in question. An adverse result in any litigation or other proceedingcould put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore,because of the substantial amount of discovery required in connection with intellectual property litigation and otherproceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type oflitigation. During the course of any patent or other intellectual property litigation or other proceeding, there could be publicannouncements of the results of hearings, rulings on motions and other interim proceedings or developments and if securitiesanalysts or investors regard these announcements as negative, the perceived value of our ADC product candidates, programsor intellectual property could be diminished. Accordingly, the market price of our common stock may decline. Any of theforegoing could have a material adverse effect on our business, financial conditions, results of operations and prospects.Third‑party claims of intellectual property infringement or misappropriation may prevent or delay our development andcommercialization efforts.Our commercial success depends in part on our ability and the ability of our strategic partners to develop, manufacture,market and sell product candidates and use our proprietary technologies without infringing, misappropriating or otherwiseviolating the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within andoutside the United States, involving patent and other intellectual property rights in the biopharmaceutical industries,including patent infringement lawsuits, interferences, oppositions, reexamination, inter partes review, derivation and postgrant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issuedpatents and pending patent applications owned by third parties exist in the fields in which we are developing and maydevelop our ADC product candidates. As the biopharmaceutical industries expand and more patents are issued, the riskincreases that our ADC product candidates may be subject to claims of infringement of the patent rights of third parties.Third parties may assert that we, our customers, licensees or parties indemnified by us are employing their proprietarytechnology without authorization or have infringed upon, misappropriated or otherwise violated their intellectual propertyor other rights, regardless of their merit. For example, we may be subject to claims that we are infringing the patent, trademarkor copyright rights of third parties, or that our employees have misappropriated or divulged their former employers’ tradesecrets or confidential information. There may be third‑party patents or patent applications with claims to materials,formulations, methods of manufacture or methods for treatment related to the use or manufacture of our ADC productcandidates, that we failed to identify. For example, applications filed before November 29, 2000 and certain applicationsfiled after that date that will not be filed outside the United States remain confidential until issued as patents. Except forcertain exceptions, including the preceding exceptions, patent applications in the United States and elsewhere are generallypublished only after a waiting period of approximately 18 months after the earliest filing, and sometimes not at all. Therefore,patent applications covering our ADC platforms or our ADC product candidates could have been filed by others without ourknowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be lateramended in a manner that could cover our ADC platforms, our ADC product candidates or the use or manufacture of our ADCproduct candidates.Even if we believe a third party’s claims against us are without merit, a court of competent jurisdiction could hold that suchthird party’s patent is valid, enforceable and cover aspects of our product candidates, including the materials, formulations,methods of manufacture, methods of analysis, or methods for treatment, in which case, such third party would be able toblock our ability to develop and commercialize the applicable technology or product candidate until such patent expired orunless we obtain a license and we may be required to pay such third-party monetary damages, which could be substantial.Such licenses may not be available on acceptable terms, if at all. Even if we were able to obtain a license, the rights may benonexclusive, which could result in our competitors gaining access to the same intellectual property and it could require usto make substantial licensing and royalty payments. Ultimately, we could be prevented61 Table of Contentsfrom commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual orthreatened patent infringement claims, we are unable to enter into licenses on acceptable terms.Parties making claims against us may also obtain injunctive or other equitable relief, which could effectively block ourability to further develop and commercialize our ADC technology or one or more of our ADC product candidates. Defendingagainst claims of patent infringement, misappropriation of trade secrets or other violations of intellectual property could becostly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an earlystage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigationcould result in significant demands on the time and attention of our management team, distracting them from the pursuit ofother company business. In the event of a successful claim of infringement against us, in addition to potential injunctiverelief, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, payroyalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible orrequire substantial time and monetary expenditure.We may face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets ofsuch third party. If we are found to have misappropriated a third party’s trade secrets, we may be prevented from further usingsuch trade secrets, limiting our ability to develop our ADC product candidates, we may be required to obtain a license tosuch trade secrets which may not be available on commercially reasonable terms or at all and may be non‑exclusive, and wemay be required to pay damages, which could be substantial. Any of the foregoing could have a material adverse effect onour business, financial condition, results of operations and prospects.We may not be able to protect our intellectual property and proprietary rights throughout the world.Filing, prosecuting and defending patents on product candidates in all countries throughout the world where we expect thereto be significant markets for our products could be prohibitively expensive, and the laws of foreign countries may not protectour rights to the same extent as the laws of the United States. In addition, our intellectual property license agreements maynot always include worldwide rights. For example, certain U.S. and foreign issued patents and patent applications arelicensed to us by Recepta on a worldwide basis, except that Recepta retains exclusive rights in such patents and patentapplications in Brazil. Consequently, we may not be able to prevent third parties from practicing our inventions in allcountries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtainedpatent protection to develop their own products and, further, may export otherwise infringing products to territories where wehave patent protection or licenses but enforcement is not as strong as that in the United States. These products may competewith our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them fromcompeting.Additionally, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws ofthe United States, and many companies have encountered significant problems in protecting and defending such rights inforeign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor theenforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which couldmake it difficult for us to stop the infringement of our licensed and owned patents or marketing of competing products inviolation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property andproprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from otheraspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patentapplications at risk of not issuing as patents, and could provoke third parties to assert claims against us. We may not prevailin any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate toobtain a significant commercial advantage from the intellectual property that we develop or license.Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to thirdparties. In addition, many countries limit the enforceability of patents against government agencies or governmentcontractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value ofsuch patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to ourbusiness, our competitive position may be impaired, and our business, financial condition, results of operations andprospects may be adversely affected.62 Table of ContentsConfidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets andother proprietary information.In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protectproprietary know‑how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforceand any other elements of our platform technology and discovery and development processes that involve proprietaryknow‑how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. Weseek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with ouremployees, consultants and outside scientific advisors, contractors and partners. We cannot guarantee that we have enteredinto such agreement with each party that may have or have had access to our trade secrets or proprietary technology andprocesses. Additionally, our confidentiality agreements and other contractual protections may not be adequate to protect ourintellectual property from unauthorized disclosure, third‑party infringement or misappropriation. We may not have adequateremedies in the case of a breach of any such agreements, and our trade secrets and other proprietary information could bedisclosed to our competitors or others may independently develop substantially equivalent or superior proprietaryinformation and techniques or otherwise gain access to our trade secrets or disclose such technologies.Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming,and the outcome is unpredictable. In addition, some courts outside and within the United States sometimes are less willing toprotect trade secrets. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive positionand may have a material adverse effect on our business.We may be subject to claims by third parties asserting that our licensors, employees, consultants, advisors or we havemisappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.Many of our and our licensors’ employees, including our senior management, consultants or advisors are currently, orpreviously were, employed at universities or other biotechnology or pharmaceutical companies, including our competitors orpotential competitors. Some of these employees, including members of our senior management, executed proprietary rights,non‑disclosure and non‑competition agreements, or similar agreements, in connection with such previous employment.Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know‑howof others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectualproperty, including trade secrets or other proprietary information, of any such individual’s current or former employer.Litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to payingmonetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectualproperty rights could be awarded to a third party, and we could be required to obtain a license from such third party tocommercialize our technology or products. Such a license may not be available on commercially reasonable terms or at all.Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction tomanagement. Any of the foregoing may have a material adverse effect on our business, financial condition, results ofoperations and prospects.In addition, while it is our policy to require our employees and contractors who may be involved in the conception ordevelopment of intellectual property to execute agreements assigning such intellectual property to us, we may beunsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property thatwe regard as our own. The assignment of intellectual property rights may not be self‑executing or the assignment agreementsmay be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us,to determine the ownership of what we regard as our intellectual property.If we do not obtain patent term extension and data exclusivity for any product candidates we may develop, our businessmay be materially harmed.Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidates we maydevelop, one or more of our owned or in‑licensed U.S. patents may be eligible for limited patent term extension under theDrug Price Competition and Patent Term Restoration Act of 1984, or Hatch‑Waxman Amendments. The Hatch‑WaxmanAmendments permit a patent term extension of up to five years as compensation for the patent term lost during the FDA63 Table of Contentsregulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 yearsfrom the date of product approval, only one patent may be extended and only those claims covering the approved drug, amethod for using it or a method for manufacturing it may be extended. However, we may not be granted an extension becauseof, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to applywithin applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicablerequirements. Moreover, the applicable time period or the scope of patent protection afforded 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, our competitorsmay obtain approval of competing products following our patent expiration, and our business, financial condition, results ofoperations and prospects could be materially harmed.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,fee payment, and other requirements imposed by government patent agencies, and our patent protection could be reducedor eliminated for non‑compliance with these requirements.Periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and patent applicationswill be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime ofour owned or licensed patents and applications. In certain circumstances, we rely on our licensing partners to pay these feesdue to U.S. and non‑U.S. patent agencies. The USPTO and various non‑U.S. government agencies require compliance withseveral procedural, documentary, fee payment and other similar provisions during the patent application process. We are alsodependent on our licensors to take the necessary action to comply with these requirements with respect to our licensedintellectual property. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means inaccordance with the applicable rules. There are situations, however, in which non‑compliance can result in abandonment orlapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. Insuch an event, potential competitors might be able to enter the market with similar or identical products or technology,which could have a material adverse effect on our business, financial condition, results of operations and prospects.Intellectual property rights do not necessarily address all potential threats.The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rightshave limitations and may not adequately protect our business or permit us to maintain our competitive advantage. Forexample:·others may be able to make ADC products that are similar to any product candidates we may develop or utilizesimilar ADC‑related technology but that are not covered by the claims of the patents that we license or may own inthe future;·we, or our license partners or current or future strategic partners, might not have been the first to make the inventionscovered by the issued patent or pending patent application that we license or may own in the future;·we, or our license partners or current or future strategic partners, might not have been the first to file patentapplications covering certain of our or their inventions;·others may independently develop similar or alternative technologies or duplicate any of our technologies withoutinfringing our owned or licensed intellectual property rights;·it is possible that our pending licensed patent applications or those that we may own in the future will not lead toissued patents;·issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challengesby our competitors;64 Table of Contents·our competitors might conduct research and development activities in countries where we do not have patent rightsand then use the information learned from such activities to develop competitive products for sale in our majorcommercial markets;·we may not develop additional proprietary technologies that are patentable;·the patents of others may harm our business; and·we may choose not to file a patent in order to maintain certain trade secrets or know how, and a third party maysubsequently file a patent covering such intellectual property.Should any of these events occur, they could have a material adverse effect on our business, financial condition, results ofoperations and prospects.Risks related to our business and industryIf we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully developour ADC product candidates, conduct our clinical studies and commercialize our ADC product candidates.Our ability to compete in the highly competitive biotechnology and biopharmaceutical industries depends upon our abilityto attract, motivate and retain highly qualified managerial, scientific and medical personnel. We are highly dependent onmembers of our senior management, including Anna Protopapas, our President and Chief Executive Officer. The loss of theservices of any of these persons could impede the achievement of our research, development and commercializationobjectives. Also, each of these persons may terminate their employment with us at any time. We do not maintain “keyperson” insurance for any of our executives or other employees.Recruiting and retaining qualified scientific, clinical, sales and marketing personnel will also be critical to our success. Weconduct our operations at our facility in Cambridge, Massachusetts, in a region that is headquarters to many otherbiopharmaceutical companies and many academic and research institutions. Competition for skilled personnel is intense andthe turnover rate can be high, which may limit our ability to hire and retain highly qualified personnel on acceptable terms orat all. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerouspharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors,including scientific and clinical advisors, to assist us in formulating our research and development and commercializationstrategy. Our consultants and advisors, may be employed or have commitments under consulting or advisory contracts withother entities that may limit their availability to us.We may encounter difficulties in managing our growth and expanding our operations successfully.As we seek to advance our ADC product candidates through clinical studies and commercialization, we will need to expandour development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide thesecapabilities for us. As our operations expand, we expect that we will need to manage additional relationships with variousstrategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on membersof management. Our future financial performance and our ability to commercialize our ADC product candidates and tocompete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be ableto manage our development efforts and clinical studies effectively and hire, train and integrate additional management,administrative and, if necessary, sales and marketing personnel. Due to our limited financial resources and the limitedexperience of our management team in managing a company with such anticipated growth, we may not be able toaccomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our companyor disrupt our operations.65 Table of ContentsOur relationships with health care professionals, institutional providers, principal investigators, consultants, customers(actual and potential) and third‑party payors are, and will continue to be, subject, directly and indirectly, to federal andstate health care fraud and abuse, false claims, marketing expenditure tracking and disclosure, government price reportingand health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws,we could face penalties, including, without limitation, civil, criminal and administrative penalties, damages, monetaryfines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal health care programs,contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of ouroperations.Our business operations and activities may be directly or indirectly subject to various federal and state fraud and abuse laws,including, without limitation, the federal Anti‑Kickback Statute and the federal False Claims Act. If we obtain FDA approvalfor any of our ADC product candidates and begin commercializing those products in the United States, our potentialexposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likelyto increase. These laws may impact, among other things, our current activities with principal investigators and researchsubjects, as well as proposed and future sales, marketing and education programs. In addition, we may be subject to patientprivacy regulation by the federal government and state governments in which we conduct our business. The laws that mayaffect our ability to operate include, but are not limited to:·the federal Anti‑Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting,receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly,overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase,lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or inpart, under a federal health care program, such as the Medicare and Medicaid programs;·federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval fromMedicare, Medicaid or other third‑party payors that are false or fraudulent or knowingly making a false statement toimproperly avoid, decrease or conceal an obligation to pay money to the federal government;·the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federalcriminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud anyhealth care benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any ofthe money or property owned by, or under the custody or control of, any health care benefit program, regardless ofthe payor (e.g., public or private) and knowingly and willfully falsifying, concealing, or covering up by any trick ordevice a material fact or making any materially false statements in connection with the delivery of, or payment for,health care benefits, items or services relating to health care matters;·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and theirrespective implementing regulations, which impose requirements on certain covered health care providers, healthplans, and health care clearinghouses as well as their respective business associates that perform services for themthat involve the use, or disclosure of, individually identifiable health information, relating to the privacy, securityand transmission of individually identifiable health information without appropriate authorization;·the federal physician self‑referral law, commonly known as the Stark Law, which prohibits a physician from makinga referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician or amember of the physician’s family has a financial relationship with the entity, and which also prohibits thesubmission of any claims for reimbursement for designated health services furnished pursuant to a prohibitedreferral;·the federal Physician Payments Sunshine Act, created under Section 6002 of the Health Care Reform Act, and itsimplementing regulations requires manufacturers of drugs, devices, biologicals and medical supplies for whichpayment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain66 Table of Contentsexceptions) to report annually to the United States Department of Health and Human Services information related topayments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists,podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held byphysicians and their immediate family members, with data collection required beginning August 1, 2013 andreporting to the Centers for Medicare & Medicaid Services required by March 31, 2014 and by the 90th day of eachsubsequent calendar year;·federal consumer protection and unfair competition laws, which broadly regulate marketplace activities andactivities that potentially harm consumers;·federal government price reporting laws, changed by the Health Care Reform Act to, among other things, increasethe minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program and offersuch rebates to additional populations, that require us to calculate and report complex pricing metrics togovernment programs, where such reported prices may be used in the calculation of reimbursement or discounts onour marketed drugs (participation in these programs and compliance with the applicable requirements may subjectus to potentially significant discounts on our products, increased infrastructure costs, and potentially limit ourability to offer certain marketplace discounts);·the Foreign Corrupt Practices Act, a United States law which regulates certain financial relationships with foreigngovernment officials (which could include, for example, certain medical professionals); and·state law equivalents of each of the above federal laws, such as anti‑kickback, false claims, consumer protection andunfair competition laws which may apply to our business practices, including, but not limited to, research,distribution, sales and marketing arrangements as well as submitting claims involving health care items or servicesreimbursed by any third‑party payor, including commercial insurers; state laws that require biotech companies tocomply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidancepromulgated by the federal government that otherwise restricts payments that may be made to health care providers;state laws that require drug manufacturers to file reports with states regarding marketing information, such as thetracking and reporting of gifts, compensation and other remuneration and items of value provided to health careprofessionals and entities (compliance with such requirements may require investment in infrastructure to ensurethat tracking is performed properly, and some of these laws result in the public disclosure of various types ofpayments and relationships, which could potentially have a negative effect on our business or increase enforcementscrutiny of our activities); and state laws governing the privacy and security of health information in certaincircumstances, many of which differ from each other in significant ways, with differing effects.In addition, the regulatory approval and commercialization of any of our product candidates outside the United States willalso likely subject us to foreign equivalents of the health care laws mentioned above, among other foreign laws.The Health Care Reform Act, among other things, amended the intent standard of the federal Anti‑Kickback Statute andcriminal health care fraud statutes to a stricter standard such that a person or entity no longer needs to have actual knowledgeof this statute or specific intent to violate it. In addition, the Health Care Reform Act codified case law that a claim includingitems or services resulting from a violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim forpurposes of the federal False Claims Act.Efforts to ensure that our business arrangements will comply with applicable health care laws may involve substantial costs.It is possible that governmental and enforcement authorities will conclude that our business practices may not comply withcurrent or future statutes, regulations or case law interpreting applicable fraud and abuse or other health care laws andregulations. If our operations are found to be in violation of any of the laws described above or any other governmentalregulations that apply to us, we may be subject to penalties, including, without limitation, civil, criminal and administrativepenalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and otherfederal health care programs, contractual damages, reputational harm, diminished profits and future earnings and curtailmentor restructuring of our operations.67 Table of ContentsOur employees may engage in misconduct or other improper activities, including noncompliance with regulatory standardsand requirements and insider trading.We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentionalfailures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturingstandards we have established, to comply with federal and state health care fraud and abuse laws and regulations, to reportfinancial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing andbusiness arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud,kickbacks, self‑dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range ofpricing, discounting, marketing and promotion, sales commission, customer incentive programs and other businessarrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinicalstudies, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identifyand deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective incontrolling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions orlawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted againstus, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact onour business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines,disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal health care programs,contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of ouroperations, any of which could adversely affect our ability to operate our business and our results of operations.If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limitcommercialization of our ADC product candidates.We face an inherent risk of product liability as a result of the clinical testing of our ADC product candidates and will face aneven greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causesinjury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such productliability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherentin the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumerprotection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantialliabilities or be required to limit commercialization of our ADC product candidates. Even a successful defense would requiresignificant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:·injury to our reputation;·decreased demand for our product candidates or products that we may develop;·withdrawal of clinical study participants;·costs to defend the related litigations;·a diversion of management’s time and our resources;·substantial monetary awards to study participants or patients;·product recalls, withdrawals or labeling, marketing or promotional restrictions;·loss of revenue;·the inability to commercialize our ADC product candidates; and·a decline in our stock price.68 Table of ContentsFailure to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential productliability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liabilityinsurance covering our clinical studies in the amount of $10 million in the aggregate. Although we maintain such insurance,any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, inwhole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also havevarious exclusions, and we may be subject to a product liability claim for which we have no coverage. In such instance, wemight have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or thatare not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. If we areunable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potentialproduct liability claims, it could prevent or inhibit the development and commercial production and sale of our productcandidates, which could adversely affect our business, financial condition, results of operations and prospects.We and our third‑party contract manufacturers must comply with environmental, health and safety laws and regulations,and failure to comply with these laws and regulations could expose us to significant costs or liabilities.We and our third‑party manufacturers are subject to numerous environmental, health and safety laws and regulations,including those governing laboratory procedures and the use, generation, manufacture, distribution, storage, handling,treatment, remediation and disposal of hazardous materials and wastes. Hazardous chemicals, including flammable andbiological materials, are involved in certain aspects of our business, and we cannot eliminate the risk of injury orcontamination from the use, generation, manufacture, distribution, storage, handling, treatment or disposal of hazardousmaterials and wastes. In the event of contamination or injury, or failure to comply with environmental, health and safety lawsand regulations, we could be held liable for any resulting damages and any such liability could exceed our assets andresources. We could also incur significant costs associated with civil or criminal fines and penalties for failure to comply withsuch laws and regulations.Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries toour employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage againstpotential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be assertedagainst us in connection with our storage or disposal of biological, hazardous or radioactive materials.Environmental, health and safety laws and regulations are becoming increasingly more stringent. We may incur substantialcosts in order to comply with current or future environmental, health and safety laws and regulations. These current or futurelaws and regulations may impair our research, development or production efforts. Our failure to comply with these laws andregulations also may result in substantial fines, penalties or other sanctions.Further, with respect to the operations of our third‑party contract manufacturers, it is possible that if they fail to operate incompliance with applicable environmental, health and safety laws and regulations or properly dispose of wastes associatedwith our products, we could be held liable for any resulting damages, suffer reputational harm or experience a disruption inthe manufacture and supply of our product candidates or products.We may acquire assets or form strategic alliances in the future, and we may not realize the benefits of such acquisitions.We may acquire additional technologies and assets, form strategic alliances or create joint ventures with third parties that webelieve will complement or augment our existing business. If we acquire assets with promising markets or technologies, wemay not be able to realize the benefit of acquiring such assets if we are unable to successfully integrate them with ourexisting technologies. We may encounter numerous difficulties in developing, manufacturing and marketing any newproducts resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits orenhancing our business. We cannot be assured that, following any such acquisition, we will achieve the expected synergiesto justify the transaction.69 Table of ContentsOur internal computer systems, or those of our strategic partners, third‑party CROs or other contractors or consultants,may fail or suffer security breaches, which could result in a material disruption of our product candidates’ developmentprograms.Despite the implementation of security measures, our internal computer systems and those of our strategic partners,third‑party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorizedaccess, natural disasters, terrorism, war and telecommunication and electrical failures. If a failure, accident or security breachwere to occur and cause interruptions in our or our CROs’ operations, it could result in a material disruption of our programs.For example, the loss of clinical study data for our product candidates could result in delays in our regulatory approvalefforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or securitybreach results in a loss of or damage to our data or applications or other data or applications relating to our technology orproduct candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and thefurther development of our product candidates could be delayed.Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.Our results of operations could be adversely affected by general conditions in the global economy and in the global financialmarkets. For example, the global financial crisis caused extreme volatility and disruptions in the capital and credit markets. Asevere or prolonged economic downturn, such as the global financial crisis, could result in a variety of risks to our business,including, weakened demand for our product candidates and our ability to raise additional capital when needed onacceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supplydisruption. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the currenteconomic climate and financial market conditions could adversely impact our business.Risks related to our common stockWe are an “emerging growth company,” as defined in the JOBS Act, and we cannot be certain if the reduced disclosurerequirements applicable to emerging growth companies will make our common stock less attractive to investors.We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growthcompany, we may take advantage of exemptions from various reporting requirements that are applicable to other publiccompanies that are not emerging growth companies, including, but not limited to, (1) not being required to comply with theauditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act, (2) reduced disclosure obligations regardingexecutive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding anon‑binding advisory vote on executive compensation.We could be an emerging growth company through 2022, although circumstances could cause us to lose that status earlier,including if the market value of our common stock held by non‑affiliates exceeds $700.0 million as of any June 30 beforethat time or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in whichcases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than$1.00 billion in non‑convertible debt during any three‑year period before that time, we would cease to be an emerginggrowth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a“smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosurerequirements, including not being required to comply with the auditor attestation requirements of Section 404 of theSarbanes‑Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxystatements. We cannot predict if investors will find our common stock less attractive because we may rely on theseexemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market forour common stock and our stock price may be more volatile. When these exemptions cease to apply, we expect to incuradditional expenses and devote increased management effort toward ensuring compliance with them, and we cannot predictor estimate the amount or timing of such additional costs.Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until suchtime as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption70 Table of Contentsfrom new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as otherpublic companies that are not emerging growth companies.If our stock price is volatile, our stockholders could incur substantial losses.Our stock price has been and may continue to be volatile. Since our initial public offering, or IPO, in June 2017, the price ofour common stock as reported on the NASDAQ Select Global Market has ranged from a low of $12.71 on June 29, 2017 to ahigh of $21.01 on October 3, 2017. The market price of shares of our common stock could be subject to wide fluctuations inresponse to many risk factors listed in this “Risk Factors” section, and others beyond our control, including:·results and timing of preclinical studies and clinical studies of our ADC product candidates, including XMT‑1522and XMT‑1536;·results of clinical studies of our competitors’ products;·failure to adequately protect our trade secrets;·the terms on which we raise additional capital or our ability to raise it;·commencement or termination of any strategic partnership or licensing arrangement;·regulatory developments, including actions with respect to our products or our competitors’ products;·actual or anticipated fluctuations in our financial condition and operating results;·publication of research reports by securities analysts about us or our competitors or our industry;·our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors maygive to the market;·additions and departures of key personnel;·strategic decisions by us or our competitors, such as acquisitions, divestitures, spin‑offs, joint ventures, strategicinvestments or changes in business strategy;·the passage of legislation or other regulatory developments affecting us or our industry;·fluctuations in the valuation of companies perceived by investors to be comparable to us;·sales of our common stock by us, our insiders or our other stockholders;·speculation in the press or investment community;·announcement or expectation of additional financing efforts;·changes in market conditions for biopharmaceutical stocks; and·changes in general market and economic conditions.In addition, the stock market has historically experienced significant volatility, particularly with respect to pharmaceutical,biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other lifesciences company stocks often does not relate to the operating performance of the companies represented by the stock. As71 Table of Contentsa result of this volatility, stockholders may not be able to sell their common stock at or above the price for which they paidfor their shares. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affectour industry or our products, or to a lesser extent our markets. In the past, securities class action litigation has often beeninitiated against companies following periods of volatility in their stock price. This type of litigation could result insubstantial costs and divert our management’s attention and resources, and could also require us to make substantialpayments to satisfy judgments or to settle litigation.Our principal stockholders and management own a significant percentage of our stock and are able to exercise significantinfluence over matters subject to stockholder approval.As of December 31, 2017, our executive officers, directors and stockholders who own more than 5% of our outstandingcommon stock, together with their respective affiliates, beneficially owned a substantial majority of our common stock,including shares subject to outstanding options and warrants that are exercisable within 60 days after such date. Accordingly,these stockholders are able to exert a significant degree of influence over our management and affairs and over mattersrequiring stockholder approval, including the election of our board of directors and approval of significant corporatetransactions. This concentration of ownership could have the effect of entrenching our management or board of directors,delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtaincontrol of us, which in turn could have a material and adverse effect on the fair market value of our common stock.We are incurring and will continue to incur significant increased costs as a result of operating as a public company, andour management is required to devote substantial time to compliance requirements and initiatives.As a public company, we are incurring and will continue to incur significant legal, insurance, accounting and other expensesthat we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules of the SEC and The NASDAQStock Market have imposed various requirements on public companies, including requiring establishment and maintenanceof effective disclosure and financial controls. Our management and other personnel need to devote a substantial amount oftime to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase ourlegal and financial compliance costs and will make some activities more time-consuming and costly.We do not expect to pay any cash dividends for the foreseeable future.We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead,we plan to retain any earnings to maintain and expand our operations. In addition, any future debt financing arrangementmay contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock.Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the onlyway to realize any return on their investment.Provisions in our amended and restated certificate of incorporation, our amended and restated by‑laws and Delaware lawmay have anti‑takeover effects that could discourage an acquisition of us by others, even if an acquisition would bebeneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our currentmanagement.Our amended and restated certificate of incorporation, amended and restated by‑laws and Delaware law contain provisionsthat may have the effect of discouraging, delaying or preventing a change in control of us or changes in our management thatstockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premiumfor their shares. Our amended and restated certificate of incorporation and by‑laws include provisions that:·authorize “blank check” preferred stock, which could be issued by our board of directors without stockholderapproval and may contain voting, liquidation, dividend and other rights superior to our common stock;·create a classified board of directors whose members serve staggered three‑year terms;·specify that special meetings of our stockholders can be called only by our board of directors;72 Table of Contents·prohibit stockholder action by written consent;·establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of ourstockholders, including proposed nominations of persons for election to our board of directors;·provide that vacancies on our board of directors may be filled only by a majority of directors then in office, eventhough less than a quorum;·provide that our directors may be removed only for cause;·specify that no stockholder is permitted to cumulate votes at any election of directors;·expressly authorize our board of directors to have discretion to modify, alter or repeal our amended and restatedby‑laws; and·require supermajority votes of the holders of our common stock to amend specified provisions of our amended andrestated certificate of incorporation and amended and restated by‑laws.These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in ourmanagement. These provisions could also limit the price that investors might be willing to pay in the future for shares of ourcommon stock, thereby depressing the market price of our common stock.In addition, because we are incorporated in the State of Delaware, we are governed by the provisions of Section 203 of theGeneral Corporation Law of the State of Delaware, or the DGCL, which prohibits a person who owns in excess of 15% of ouroutstanding voting stock from merging or combining with us for a period of three years after the date of the transaction inwhich the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved ina prescribed manner.Any provision of our amended and restated certificate of incorporation, amended and restated by‑laws or Delaware law thathas the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive apremium for their shares of our common stock, and could also affect the price that some investors are willing to pay for ourcommon stock.The recently passed comprehensive tax reform bill could adversely affect our business and financial condition. On December 22, 2017, the U.S. President signed into law new legislation that significantly revises the Internal RevenueCode of 1986, as amended (the Code). The newly enacted federal income tax law, among other things, contains significantchanges to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a rate of 21%,limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses),limitation of the deduction for net operating losses to 80% of current year taxable income in respect of net operating lossesgenerated during or after 2018 and elimination of net operating loss carrybacks, immediate deductions for certain newinvestments instead of deductions for depreciation expense over time, and modifying or repealing many business deductionsand credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law isuncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to whatextent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of ourcommon stock is also uncertain and could be adverse. We urge you to consult with your legal and tax advisors with respectto this legislation and the potential tax consequences of investing in or holding our common stock.73 Table of ContentsOur ability to use net operating losses and certain tax credit carryforwards may be subject to certain limitations.For the years ended December 31, 2017 and 2016, the Company recorded no income tax benefit for the net operating lossesincurred in each year, due to the uncertainty of realizing a benefit from those items. The Company has incurred net operatinglosses (NOLs) since its inception. At December 31, 2017, the Company had federal NOLs of approximately $34.2 millionand state NOLs of approximately $33.9 million. The federal and state NOLs will expire at various dates through 2037. AtDecember 31, 2017, the Company had Federal and State research and development tax credit carryforwards of approximately$5.6 million and $2.6 million, respectively, which expire at various dates through 2037. Under the newly enacted federalincome tax law, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely, but the deductibilityof such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the newly enacted federaltax law. In addition, under Section 382 of the Internal Revenue Code, and corresponding provisions of state law, if acorporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in itsequity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change taxattributes to offset its post-change income or taxes may be limited. Our past issuances of stock and other changes in our stockownership may have resulted in ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. If we determine that we have not undergone an ownershipchange, the Internal Revenue Service could challenge our analysis, and our ability to use our NOLs to offset taxable incomecould be limited by Section 382 of the Code. Future changes in our stock ownership, including in connection with thisoffering and some of which are outside of our control, could result in ownership changes under Section 382 of the Codefurther limiting our ability to utilize our NOLs. Our NOLs may also be impaired under state law. Accordingly, we may not beable to utilize a material portion of our NOLs. The Company has determined that ownership changes have occurred throughDecember 31, 2015 and that certain NOLs and research and development tax credit carryforwards will be subject tolimitation. We may also have incurred subsequent ownership changes. Furthermore, our ability to utilize our NOLs isconditioned upon our attaining profitability and generating U.S. federal taxable income. We have incurred net losses sinceour inception and anticipate that we will continue to incur significant losses for the foreseeable future; thus, we do not knowwhether or when we will generate the U.S. federal taxable income necessary to utilize our NOLs. We have recorded a fullvaluation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of thefuture benefits of those assets.Our amended and restated certificate of incorporation designates the state or federal courts within the State of Delaware asthe exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which couldlimit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers oremployees.Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the state or federal courtswithin the State of Delaware will be exclusive forums for (1) any derivative action or proceeding brought on our behalf,(2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us orour stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended andrestated certificate of incorporation or our amended and restated by‑laws or (4) any other action asserting a claim against usthat is governed by the internal affairs doctrine. Any person or entity that purchases or otherwise acquires any interest inshares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended andrestated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability tobring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees,which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to findthese provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, oneor more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such mattersin other jurisdictions, which could adversely affect our business and financial condition. ITEM 1B. UNRESOLVED STAFF COMMENTS.None.74 Table of Contents ITEM 2. PROPERTIES.We occupy approximately 34,000 rentable square feet of office and laboratory space in Cambridge, Massachusetts under alease that expires on March 31, 2021. We have an option to extend the lease term for an additional five years. We believethat this office and laboratory space is sufficient to meet our current needs and that suitable additional space will be availableas and when needed. ITEM 3. LEGAL PROCEEDINGS.None. ITEM 4. MINE SAFETY DISCLOSURES.Not applicable.75 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIESCertain Information Regarding the Trading of Our Common StockOur common stock trades under the symbol “MRSN” on the NASDAQ Global Select Market and has been publicly tradedsince June 28, 2017. Prior to this time, there was no public market for our common stock. The following table sets forth thehigh and low sales price of our common stock as reported on the NASDAQ Global Select Market for the periods indicated: High Low Year ended December 31, 2017 Second Quarter (beginning June 28, 2017) $14.70 $12.71Third Quarter $18.48 $13.03Fourth Quarter $21.01 $14.50 Holders of Our Common StockAs of February 28, 2018, there were approximately 40 holders of record of shares of our common stock.Dividend PolicyWe have never declared nor paid cash dividends on our common stock. We currently intend to retain all of our futureearnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in respect ofour common stock in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion ofour board of directors and will depend on restrictions and other factors our board of directors may deem relevant. Investorsshould not purchase our common stock with the expectation of receiving cash dividends.Stock Performance GraphThe following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed”with the Securities and Exchange Commission, or SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, asamended, or the Exchange Act, nor shall such information be incorporated by reference into any future filing under theExchange Act or Securities Act of 1933, as amended, or the Securities Act, except to the extent that we specificallyincorporate it by reference into such filing.The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQBiotechnology Index from June 28, 2017 (the first date that shares of our common stock were publicly traded) throughDecember 29, 2017, which was the last trading day of the year. The comparison assumes $100 was invested in our commonstock and in each of the foregoing indices after the market closed on June 28, 2017, and it assumes76 Table of Contentsreinvestment of dividends, if any. The stock price performance included in this graph is not necessarily indicative of futurestock price performance.Use of Proceeds from Registered SecuritiesOn July 3, 2017, we completed an initial public offering (IPO), in which we issued and sold 5,000,000 shares of our commonstock at a public offering price of $15.00 per share, for aggregate gross proceeds of $75 million. We received $67.4 million innet proceeds after deducting $7.6 million of underwriting discounts and commissions and offering costs. On August 2, 2017,we issued and sold 51,977 shares of common stock at $15.00 per share for gross proceeds of $0.8 million upon the partialexercise of the underwriters’ overallotment option. We received net proceeds of $0.7 million after deducting $0.1 million inunderwriting discounts and commissions. No offering expenses were paid directly or indirectly to any of our directors orofficers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates. All of the shares issued and sold in the IPO were registered under the Securities Act pursuant to a Registration Statement onForm S-1 (File No. 333-218412), which was declared effective by the SEC on June 27, 2017. J.P. Morgan Securities LLC,Cowen and Company, LLC and Leerink Partners LLC acted as joint book-running managers of the offering and asrepresentatives of the underwriters. The offering commenced on June 27, 2017 and did not terminate until the sale of all ofthe shares offered.As of December 31, 2017, we estimate that we have used approximately $11.0 million of the net proceeds from the IPO tofund manufacturing and clinical development activities for XMT-1522 and XMT-1536 and other research activities insupport of our preclinical programs, and for working capital and other general corporate purposes. We have invested theunused proceeds from the offering in marketable securities and money market accounts. There has been no material change inour planned use of the net proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule424(b)(4) on June 29, 2017. ITEM 6. SELECTED FINANCIAL DATAYou should read the following selected financial data together with our financial statements and the related notes appearingelsewhere in this Annual Report on Form 10-K and the information under the heading “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” We have derived the statement of operations data for the yearsended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 from our audited77 Table of Contentsfinancial statements included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarilyindicative of the results that should be expected in the future. Year ended 2017 2016 2015 (in thousands, except share and per share data)Statements of Operations Data: Collaboration revenue $17,545 $25,171 $10,359Operating expenses: Research and development 46,700 $32,008 $21,353General and administrative 10,462 6,984 5,347Total operating expenses 57,162 $38,992 $26,700Other income (expense): Other income (expense), net 910 121 (87)Total other income (expense) 910 121 (87)Net loss $(38,707) $(13,700) $(16,428)Net loss attributable to common stockholders — basic and diluted $(38,707) $(13,700) $(16,428)Net loss per share attributable to common stockholders — basic and diluted $(3.22) $(10.82) $(13.43)Weighted-average number of common shares used in net loss per shareattributable to common stockholders — basic and diluted(1) 12,022,733 1,266,758 1,223,457 As of December 31, December 31, 2017 2016 (in thousands)Balance Sheet Data: Cash, cash equivalents and marketable securities $125,216 $100,297Working capital(2) 85,662 73,787Total assets 130,715 105,087Convertible preferred stock — 94,450Total stockholders’ equity (deficit) 69,994 (55,619)(1)See Note 2 to our financial statements appearing elsewhere in this Annual report on Form 10-K for further details on thecalculation of basic and diluted net loss per share applicable to common stockholders.(2)We define working capital as current assets less current liabilities.78 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunctionwith our audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, orindicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of futureperformance and that our actual results of operations, financial condition and liquidity, and the development of theindustry in which we operate may differ materially from the forward-looking statements contained in this Annual Report. Inaddition, even if our results of operations, financial condition and liquidity, and the development of the industry in whichwe operate are consistent with the forward-looking statements contained in this Annual Report, they may not be predictiveof results or developments in future periods. The following information and any forward-looking statements should be considered in light of factors discussed elsewherein the Annual Report on Form 10-K, including those risks identified under Part II, Item 1A. Risk Factors.We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of thedate they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publiclyupdate or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances onwhich any such statements may be based, or that may affect the likelihood that actual results will differ from those set forthin the forward-looking statements.OverviewWe are a clinical stage biopharmaceutical company focused on developing antibody drug conjugates (ADCs), that offer aclinically meaningful benefit for cancer patients with significant unmet need. We have leveraged 20 years of industrylearning in the ADC field to develop proprietary technologies that enable us to design ADCs to have improved efficacy,safety and tolerability relative to existing ADC therapies. Our most advanced platform, Dolaflexin, has been used to generatea pipeline of proprietary ADC product candidates to address patient populations that are not currently amenable to treatmentwith traditional ADC-based therapies. Our lead product candidate, XMT‑1522, is a HER2‑targeted ADC currently in aPhase 1 dose escalation study primarily in breast cancer patients as well as non‑small cell lung cancer (NSCLC) and gastriccancer. Upon the completion of dose escalation, we plan to expand clinical development of XMT‑1522 into additional breastcancer, NSCLC, and gastric cancer patient populations, all of which are not addressed by existing HER2 therapies. Oursecond product candidate, XMT-1536, is an ADC targeting NaPi2b, an antigen broadly expressed in ovarian cancer andNSCLC. XMT-1536 entered clinical development in late 2017 and is currently in a Phase 1 dose escalation study. Beyondour two lead product candidates, we continue to invest in our earlier stage product candidates and in our ADC technologies.In addition, we have established a strategic partnership with Takeda Pharmaceutical Company Limited, or Takeda, underwhich they obtained rights to XMT-1522 outside of the United States and Canada. We have also established strategicresearch and development partnerships with Takeda and Merck KGaA for the development and commercialization ofadditional ADC product candidates against a limited number of targets selected by our partners based on our Dolaflexinplatform. We believe the potential of our ADC technologies, supported by our world-class management team and protectedby our robust intellectual property portfolio, will allow us to develop targeted and highly tailored therapies to help cancerpatients become cancer survivors.On July 3, 2017 we closed our IPO of 5,000,000 shares at a price of $15.00 per share for gross proceeds of $75.0 million. Wereceived approximately $67.4 million after deducting underwriting discounts and commissions and offering costs ofapproximately $7.6 million. On August 2, 2017, we issued and sold 51,977 shares of common stock at $15.00 per share forgross proceeds of $0.78 million upon the partial exercise of the underwriters’ overallotment option. We received net proceedsof $0.73 million after deducting $0.05 million in underwriting discounts and commissions.Since inception, our operations have focused on building our platform, identifying potential product candidates, producingdrug substance and drug product material for use in preclinical studies, conducting preclinical studies, including GoodLaboratory Practice, or GLP, toxicology studies, manufacturing clinical trial material and conducting clinical trials,79 Table of Contentsestablishing and protecting our intellectual property, staffing our company and raising capital. We do not have any productsapproved for sale and have not generated any revenue from product sales. We have funded our operations primarily throughour strategic partnerships, private placements of our convertible preferred stock and our initial public offering.Since inception, we have incurred significant operating losses. Our net losses were $38.7 million, $13.7 million and$16.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had anaccumulated deficit of $97.9 million. We expect to continue to incur significant expenses and operating losses over the nextseveral years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:·continue clinical development of our lead product candidate XMT-1522; · continue clinical development activities for our second product candidate XMT-1536; · continue activities to discover, validate and develop additional product candidates; · maintain, expand and protect our intellectual property portfolio; · hire additional research, development and general and administrative personnel; and · incur additional costs associated with operating as a public company.Financial Operations OverviewRevenueTo date, all of our revenue has been generated from strategic partnerships. We have not generated any revenue from productsales, and we do not expect to generate any revenue from product sales for the foreseeable future.In March 2014, we entered into a collaboration agreement with Takeda for the development and commercialization of ADCproduct candidates utilizing Fleximer. Under this agreement, as amended, Takeda may select up to seven target antigens andhas selected four target antigens to date. Takeda is responsible for generating antibodies against the target antigens and weare responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADCproduct candidates. Takeda then has the exclusive right to and is responsible for the further development, manufacture andcommercialization of these ADC product candidates, except that we have an option to co-develop and co-commercialize oneproduct targeting one of Takeda's third through seventh target antigens and may exercise such option with respect to anapplicable product no later than 30 days after initiation of a Phase 2 clinical study for such product or at an earlier time ifTakeda intends to grant rights to such product to a third party.In addition, in January 2016, we entered into a collaboration agreement with Takeda for the development andcommercialization of XMT-1522. Under this agreement, Takeda is granted the exclusive right and responsibility tocommercialize XMT-1522 outside the United States and Canada.For the years ended December 31, 2017, 2016 and 2015, we recognized revenue of $13.8 million, $21.4 million and$5.5 million, respectively, related to the Takeda agreements.In June 2014, we entered into a collaboration agreement with Merck KGaA for the development and commercialization ofADC product candidates utilizing Fleximer for up to six target antigens. Merck KGaA is responsible for generatingantibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads andconjugating this to the antibody to create the ADC product candidates. Merck KGaA then has the exclusive right to and isresponsible for the further development and commercialization of these ADC product candidates.80 Table of ContentsFor the years ended December 31, 2017, 2016 and 2015, we recognized revenue of $3.6 million, $3.6 million and$4.6 million, respectively, related to the Merck KGaA agreement.For the foreseeable future, we expect substantially all of our revenue to be generated from our collaboration agreements withTakeda and Merck KGaA and any other collaboration agreements we may enter into. Given the schedule of potentialmilestone payments and the uncertain nature and timing of clinical development, we cannot predict when or whether we willreceive further milestone payments or any royalty payments under these collaborations.For information about our revenue recognition policy, see the notes to condensed consolidated financial statements includedin this Annual Report on Form 10-K.ExpensesResearch and Development ExpensesResearch and development expenses consist primarily of costs incurred for our research and development activities,including our drug discovery efforts, and the development of our product candidates, which include:· employee-related expenses, including salaries, benefits, and stock-based compensation expense; · costs of funding research and development performed by third parties that conduct research, preclinical activities,manufacturing and clinical trials on our behalf; · laboratory supplies; · facility costs, including rent, depreciation and maintenance expenses; and · upfront and milestone payments under our third-party licensing agreements.Research and development costs are expensed as incurred. Costs of certain activities, such as manufacturing, preclinicalstudies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks.Nonrefundable advance payments for goods or services to be received in the future for use in research and developmentactivities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or theservices are performed.We expect research and development costs to increase significantly for the foreseeable future as our product candidatedevelopment programs progress. There are numerous factors associated with the successful development andcommercialization of any of our product candidates, including future trial design and various regulatory requirements, manyof which cannot be determined with accuracy at our current stage of development. Additionally, future commercial andregulatory factors beyond our control may impact our clinical development programs and plans.A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis following nomination as a product candidate. Our internal research and development costs are primarilypersonnel-related costs, facility costs, including depreciation and lab consumables. We have not historically tracked all ofour internal research and development expenses on a program-by-program basis as they are deployed across multiple projectsunder development. The following table summarizes our external research and development expenses, by program followingnomination as a development candidate for the years ended December 31, 2017, 2016 and 2015. Pre-81 Table of Contentsdevelopment candidate expenses, unallocated costs and internal research and development costs have been stated separately. Year ended December 31, (in thousands) 2017 2016 2015XMT-1522 external costs $14,661 $12,107 $8,893XMT-1536 external costs 8,647 3,971 1,946External costs for discovery stage programs and platform development 3,093 1,439 1,357Internal research and development costs 20,298 14,491 9,157Total research and development costs $46,700 $32,008 $21,353 The successful development of our product candidates is highly uncertain. As such, we cannot reasonably estimate or knowthe nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development ofour product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from thedevelopment efforts associated with our product candidates. This is due to the numerous risks and uncertainties associatedwith developing drugs, including the uncertainty of:· successful completion of preclinical studies and IND-enabling studies; · successful enrollment in and completion of clinical trials; · receipt of marketing approvals from applicable regulatory authorities; · establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; · obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; · commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and · continued acceptable safety profile of the drugs following approval.A change in the outcome of any of these variables with respect to the development, manufacture or commercialization of anyof our product candidates would significantly change the costs, timing and viability associated with the development of thatproduct candidate.General and Administrative ExpensesGeneral and administrative expenses consist primarily of salaries and other related costs, including stock-basedcompensation, for personnel in executive, finance, accounting, business development, legal and human resources functions.Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relatingto patent and corporate matters and fees for accounting and consulting services.We anticipate that our general and administrative expenses will increase in the future to support continued research anddevelopment activities. This will likely include increased costs related to the hiring of additional personnel, fees to outsideconsultants and patent costs, among other expenses. We also anticipate increased expenses associated with being a publiccompany, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums andinvestor relations costs.82 Table of ContentsOther Income (Expense)Other income (expense) consists primarily of interest income earned on cash equivalents and marketable securities.Critical Accounting Policies and EstimatesOur management's discussion and analysis of our financial condition and results of operations are based on our financialstatements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation ofthese financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities,revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base ourestimates on historical experience, known trends and events, and various other factors that are believed to be reasonableunder the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On anongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. Theeffects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date ofchange in estimates.We believe that our most critical accounting policies are those relating to revenue recognition, accrued research anddevelopment expenses and stock-based compensation, discussed in the notes to consolidated financial statements includedin this Annual Report on Form 10-K.Revenue RecognitionWe recognize revenue from collaboration arrangements in accordance with FASB ASC Topic 605, Revenue Recognition, orASC 605. Accordingly, revenue is recognized when all of the following criteria are met:·persuasive evidence of an arrangement exists;·delivery has occurred or services have been rendered;·the seller’s price to the buyer is fixed or determinable; and·collectibility is reasonably assured.Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the consolidatedbalance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date areclassified as current liabilities. Amounts not expected to be recognized as revenue within the 12 months following thebalance sheet date are classified as deferred revenue, net of current portion.Multiple Element ArrangementsWe analyze multiple element arrangements based on the guidance in FASB ASC Topic 605‑25, Revenue Recognition -Multiple Element Arrangements, or ASC 605‑25. Pursuant to the guidance in ASC 605‑25, we evaluate multiple elementarrangements to determine i) the deliverables included in the arrangement and ii) whether the individual deliverablesrepresent separate units of accounting or whether they must be accounted for as a combined unit of accounting. Thisevaluation requires subjective determinations and requires management to make judgments about the individualdeliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverablesare considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a stand‑alonebasis and (ii) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance ofthe undelivered item(s) is considered probable and substantially in our control. In assessing whether an item has stand‑alonevalue, we consider factors such as the research, manufacturing and commercialization capabilities of the collaborationpartner and the availability of the associated expertise in the general marketplace. In addition, we consider whether thecollaboration partner can use the deliverable(s) for their intended purpose without the receipt of the remaining83 Table of Contentselement(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendorsthat can provide the undelivered element(s).Options are considered substantive if, at the inception of the arrangement, we are at risk as to whether the collaborationpartner will choose to exercise the option. Factors that we consider in evaluating whether an option is substantive include thecost to exercise the option, the overall objective of the arrangement, the benefit the collaborator might obtain from thearrangement without exercising the option and the likelihood the option will be exercised. When an option is consideredsubstantive, we do not consider the option or item underlying the option to be a deliverable at the inception of thearrangement and the associated option fees are not included in the allocable consideration, assuming the option is not pricedat a significant and incremental discount. Conversely, when an option is not considered substantive, we would consider theoption including other deliverables contingent upon the exercise of the option, to be a deliverable at the inception of thearrangement and a corresponding amount would be included in the allocable arrangement consideration. Notwithstandingwhether the option is considered substantive or non-substantive, if the price of the option includes a significant incrementaldiscount, the discount would be included as a deliverable at the inception of the arrangement.Allocation of Arrangement ConsiderationArrangement consideration that is fixed or determinable is allocated among the separate units of accounting using therelative selling price method. Then, the applicable revenue recognition criteria in ASC 605‑25 are applied to each of theseparate units of accounting in determining the appropriate period and pattern of recognition. We determine the selling priceof a unit of accounting following the hierarchy of evidence prescribed by ASC 605‑25. Accordingly, we determine theestimated selling price for units of accounting within each arrangement using vendor‑specific objective evidence, or VSOE,of selling price, if available, third‑party evidence, or TPE, of selling price if VSOE is not available, or best estimate of sellingprice, or BESP, if neither VSOE nor TPE is available. We typically use BESP to estimate the selling price, since it generallydoes not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accountingrequires significant judgment. In developing the BESP for a unit of accounting, we consider applicable market conditionsand relevant entity‑specific factors, including factors that were contemplated in negotiating the agreement with the customerand estimated costs. We validate the BESP for units of accounting by evaluating whether changes in the key assumptionsused to determine the BESP will have a significant effect on the allocation of arrangement consideration between multipleunits of accounting.Pattern of RecognitionWe recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria inASC 605 are satisfied for that particular unit of accounting. Deliverables under collaboration agreements generally consist oflicenses and research and development services. License revenue is recognized when the license is delivered when it isdetermined to have stand-alone value from the undelivered elements of the arrangement. If the license does not have stand-alone value, the amounts allocated to the license option will be combined with the related undelivered items as a single unitof accounting. The revenue recognition of a combined unit of account typically follows the pattern of revenue of the lastdelivered item in the combined accounting unit.We recognize the amounts associated with research and development services and other service related deliverables ratablyover the associated period of performance. If there is no discernable pattern of performance or objectively measureableperformance measures do not exist, then we recognize revenue under the arrangement on a straight line basis over the periodwe are expected to complete its performance obligations. Conversely, if the pattern of performance in which the service isprovided to the customer can be determined and objectively measurable performance exists, then we recognize revenueunder the arrangement using the proportional performance method.We recognize revenue associated with license options upon exercise of the option, if the underlying license has standalonevalue from the other deliverables to be provided subsequent to delivery of the license. If the license does not have standalonevalue, the amounts allocated to the license option will be combined with the related undelivered items as a single unit ofaccounting.84 Table of ContentsRevenue recognized is limited to the lesser of the cumulative amount of payments received of the cumulative revenue earneddetermined using the straight line method or proportional performance, as applicable, as of the period end date.Recognition of Milestones and RoyaltiesAt the inception of each arrangement that includes milestone payments, we evaluate whether each milestone is substantiveand at-risk. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) theentity’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of aspecific outcome resulting at least in part from the entity’s performance to achieve the milestone; (b) the consideration relatessolely to past performance; and (c) the consideration is reasonable relative to all of the deliverables and payment termswithin the arrangement. We evaluate factors such as the scientific, regulatory, commercial, and other risks that must beovercome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone,and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement inmaking this assessment. On the milestone achievement date, assuming all other revenue recognition criteria are met and themilestone is deemed substantive and at-risk, we recognize the payment as collaboration revenue. For milestones that are notdeemed substantive and at-risk, where payment is reasonably assured, we recognize a cumulative adjustment to revenuebased on proportion of services performed prior to the milestone payment and the remaining amount of the payment over theremaining service period.We will recognize royalty revenue, if any, in the period of sale of the related product(s), based on the underlying contractterms, provided that the reported sales are reliably measurable and we have no remaining performance obligations, assumingall other revenue recognition criteria are met.Collaborative ArrangementsWe record the elements of our collaboration agreements that represent joint operating activities in accordance with ASCTopic 808, Collaborative Arrangements, or ASC 808. Accordingly, the elements of the collaboration agreements thatrepresent activities in which both parties are active participants and to which both parties are exposed to the significant risksand rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements. Weconsider the guidance in ASC Topic 605‑45, Revenue Recognition—Principal Agent Considerations, or ASC 605‑45, indetermining the appropriate treatment for the transactions between us and our collaborative partner and the transactionsbetween us and third parties. Generally, the classification of transactions under the collaborative arrangements is determinedbased on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Tothe extent revenue is generated from a collaboration, the Company will recognize its share of the net sales on a gross basis ifit is deemed to be the principal in the transactions with customers, or on a net basis if it is instead deemed to be the agent inthe transactions with customers, consistent with the guidance in ASC 605‑45.Accrued ExpensesAs part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of eachbalance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnelto identify services that have been performed on our behalf and estimating the level of service performed and the associatedcost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of ourservice providers invoice us monthly in arrears for services performed or when contractual milestones are met. We makeestimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time.We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Thesignificant estimates in our accrued expenses include the costs incurred for services performed by our vendors in connectionwith activities for which we have not yet been invoiced.We record our expenses related to research and development activities based upon our estimates of the services received andefforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. Thefinancial terms of these agreements are subject to negotiation, vary from contract to contract and may result in unevenpayment flows. There may be instances in which payments made to our vendors will exceed the level of services providedand result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period85 Table of Contentsover which services will be performed and the level of effort to be expended in each period. If the actual timing of theperformance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.Nonrefundable advance payments for goods and services that will be used in future research and development activities areexpensed when the activity has been performed or when the goods have been received rather than when the payment is made.Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of thestatus and timing of services performed differ from the actual status and timing of services performed, it could result in usreporting amounts that are too high or too low in any particular period. To date, there have been no material differencesbetween our estimates of such expenses and the amounts actually incurred.Stock‑based CompensationWe account for stock‑based awards in accordance with ASC Topic 718, Compensation—Stock Compensation, or ASC 718.ASC 718 requires all stock‑based compensation awards to employees, including grants of restricted stock and stock options,to be recognized as expense in the statements of operations based on their grant date fair values. We estimate the fair value ofoptions granted using the Black‑Scholes option pricing model.The Black‑Scholes option pricing model requires the input of certain subjective assumptions, including (1) the expectedstock price volatility, (2) the calculation of expected term of the award, (3) the risk‑free interest rate, and (4) the expecteddividend yield. Due to the lack of a public market for the trading of our common stock prior to the completion of the IPO anda lack of company‑specific historical and implied volatility data, we have based our estimates of expected volatility on thehistorical volatility of a group of similar companies that are publicly traded. We calculate historical volatility based on aperiod of time commensurate with the expected term. We compute expected volatility based on the historical volatility of arepresentative group of companies with similar characteristics to us, including their stages of product development and focuson the life science industry. We use the simplified method as prescribed by the Securities and Exchange Commission’s StaffAccounting Bulletin No. 107, Share‑Based Payment, to calculate the expected term for options granted to employees as wedo not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Foroptions granted to non‑employees, we utilize the contractual term of the arrangement as the basis for the expected term. Wedetermine the risk‑free interest rate based on a treasury instrument whose term is consistent with the expected term of thestock options. We use an assumed dividend yield of zero as we have never paid dividends and do not have current plans todo so.The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of stockoptions granted to employees and directors were as follows: Year ended December 31, 2017 2016 2015 Risk-free interest rate 2.2% 1.5%2.0%Expected dividend yield —% —% —%Expected term (years) 6.21 6.25 6.25 Expected stock price volatility 67% 69%61% We expense the fair value of stock‑based awards granted to employees and directors on a straight‑line basis over theassociated service period, which is generally the period in which the related services are received. We measure stock‑basedcompensation awards granted to non‑employees at fair value as the awards vest and recognize the resulting value asstock‑based compensation expense during the period the related services are rendered.Through December 31, 2016, we were required to estimate forfeitures at the time of grant, and revise those estimates insubsequent periods if actual forfeitures differed from its estimates. We used historical data to estimate post-vesting forfeituresand recorded stock-based compensation expense only for those awards that were expected to vest. To the extent that actualforfeitures differed from estimates, the difference was recorded as a cumulative adjustment in the period the estimates wererevised. Stock-based compensation expense recognized in the financial statements is based on awards that86 Table of Contentswere ultimately expected to vest. The fair value of stock-based payments was recognized as expense, net of estimatedforfeitures, over the requisite service period which was generally the vesting period.In the first quarter of 2017, we made an accounting policy election to recognize forfeitures as they occur upon adoption ofguidance per ASU No. 2016‑09. The adoption of this ASU did not have a material impact on our financial statements.Results of OperationsComparison of Years Ended December 31, 2017 and 2016The following table summarizes our results of operations for the years ended December 31, 2017 and 2016, together with thechanges in those items: Year ended December 31, (in thousands) 2017 2016 Dollar ChangeCollaboration revenue $17,545 $25,171 $(7,626)Operating expenses: Research and development 46,700 32,008 14,692General and administrative 10,462 6,984 3,478Total operating expenses 57,162 38,992 18,170Other income: Other income (expense) — — —Interest income 910 121 789Total other income 910 121 789Net loss $(38,707) $(13,700) $(25,007) Collaboration RevenueThe decrease in collaboration revenue from $25.2 million during the year ended December 31, 2016 to $17.5 million for2017 is primarily the result of a decrease in revenue due to the timing of activities performed under the XMT-1522agreement, partially offset by a $4.0 million increase in revenue due to the impact of changes in estimates of the total costs tocomplete the research services under the Takeda agreements.Research and Development ExpenseResearch and development expense increased by $14.7 million from $32.0 million for the year ended December 31, 2016 to$46.7 million for the year ended December 31, 2017, an increase of 46%.The increase in research and development expense was primarily attributable to the following:·approximately $4.8 million in increased employee compensation and $0.6 million in increased lab consumablesprimarily due to an increase in headcount as our programs progressed in clinical and preclinical studies;·approximately $3.4 million in increased external research and development expenses for IND‑enabling pre‑clinicaland toxicology studies related to XMT-1536 as well as the manufacturing activities for our two lead programs andresearch efforts to evaluate potential product candidates;·approximately $2.8 million in increased external clinical and regulatory expenses due to the commencement of ourfirst in-human trials for our lead candidate XMT‑1522 and our second candidate XMT-1536; and·approximately $2.8 million related to milestone payments in connection with the XMT-1522 and XMT-1536clinical trials.87 Table of ContentsWe expect our research and development expenses to increase as we continue our clinical development of XMT‑1522 andXMT-1536 and continue to advance our preclinical product candidate pipeline and invest in improvements in our ADCtechnologies.General and Administrative ExpenseGeneral and administrative expense increased by $3.5 million from $7.0 million during the year ended December 31, 2016 to$10.5 million for the year ended December 31, 2017, an increase of 50%.The increase in general and administrative expense was primarily attributable to the following:·approximately $0.9 million in increased personnel costs primarily due to additional headcount as we build theinfrastructure to support the growth of the research and development organization;·approximately $1.8 million in increased professional fees, including external legal fees, corporate communicationsand public relations costs to support operations as a public company; and·approximately $0.8 million in increased other costs, including insurance, software and franchise taxes.We expect that our general and administrative expense will increase in future periods as we expand our operations and incuradditional costs in connection with being a public company. These increases will likely include legal, auditing and filingfees, additional insurance premiums and general compliance and consulting expenses.Other IncomeOther income increased by $0.8 million from $0.1 million for the year ended December 31, 2016 to $0.9 million for the yearended December 31, 2017. The change in other income was primarily due to increased interest income in the year endedDecember 31, 2017 due to higher investment balances.Comparison of Years Ended December 31, 2016 and 2015The following table summarizes our results of operations for the years ended December 31, 2016 and 2015, together with thechanges in those items: Year ended December 31, (in thousands) 2016 2015 Dollar ChangeCollaboration revenue $25,171 $10,359 $14,812Operating expenses: Research and development 32,008 21,353 10,655General and administrative 6,984 5,347 1,637Total operating expenses 38,992 26,700 12,292Other income (expense): Other income (expense) — (89) 89Interest income 121 2 119Total other income (expense) 121 (87) 208Net loss $(13,700) $(16,428) $2,728 Collaboration RevenueThe increase in collaboration revenue from $10.4 million during the year ended December 31, 2015 to $25.2 million duringthe comparable period of 2016 is primarily due to the Company’s Takeda agreements executed in January 2016.88 Table of ContentsResearch and Development ExpenseResearch and development expense increased by 10.7 million from $21.4 million for the year ended December 31, 2015 to$32.0 million for the year ended December 31, 2016, an increase of 50%.The increase in research and development expense was primarily attributable to the following:·approximately $3.2 million in increased personnel costs and $0.9 million in increased lab consumables primarilydue to an increase in headcount as our programs advanced towards clinical trials;·approximately $3.6 million in increased external research and development expenses for external IND‑enablingpre‑clinical and toxicology studies as well as the commencement of manufacturing activities for our two leadprograms;·approximately $1.7 million in increased external clinical and regulatory expenses due to the commencement of ourfirst in-human trial for our lead candidate XMT‑1522; and·approximately $0.9 million in increased facility costs due to a new lease for additional office and lab space.General and Administrative ExpenseGeneral and administrative expense increased by $1.7 million from $5.3 million during the year ended December 31, 2015 to$7.0 million for the year ended December 31, 2016, an increase of 31%.The increase in general and administrative expense was primarily attributable to the following:·approximately $0.9 million in increased personnel costs primarily due to additional headcount as we build theinfrastructure to support the growth of the research and development organization and advance our lead programstowards clinical trials; and·approximately $0.4 million in increased professional fees, including external legal fees, corporate communicationsand public relations costs.Other Income (Expense), NetOther income (expense) was $(0.1) million for the year ended December 31, 2015 compared to $0.1 million for the yearended December 31, 2016. The change in other income (expense) was primarily due to increased interest income in the yearended December 31, 2016 due to higher investment balances. Liquidity and Capital ResourcesSources of LiquidityWe have financed our operations primarily through private placements of our convertible preferred stock, strategicpartnerships and the 2017 initial public offering of our common stock. As of December 31, 2017, we had cash, cashequivalents and marketable securities of $125.2 million.89 Table of ContentsCash FlowsThe following table provides information regarding our cash flows for the years ended December 31, 2017, 2016 and 2015: Year ended December 31, (in thousands) 2017 2016 2015Net cash provided by (used in) operating activities $(42,679) $31,588 $(9,636)Net cash used in investing activities (99,624) (1,084) (783)Net cash provided by financing activities 68,597 58,259 9,960Increase (decrease) in cash and cash equivalents $(73,706) $88,763 $(459) Net Cash Provided by (Used in) Operating ActivitiesNet cash used in operating activities for the year ended December 31, 2017 was $42.7 million as compared to net cashprovided by operating activities of $31.6 million during the year ended December 31, 2016. We incurred losses during bothperiods, but the 2016 operating loss was offset by an increase in deferred revenue relating to upfront payments received fromthe 2016 Takeda agreements. Net cash used in operating activities was $9.6 million during the year ended December 31,2015. As in 2016, we incurred losses in 2015, but they were not offset by an increase in deferred revenue.Net Cash Used in Investing ActivitiesNet cash used in investing activities was $99.6 million during the year ended December 31, 2017 compared to $1.1 millionduring the year ended December 31, 2016. Net cash used in investing activities for the year ended December 31, 2017consisted primarily of purchases of marketable securities offset by maturities of marketable securities. Net cash used ininvesting activities for the years ended December 31, 2016 and 2015 consisted primarily of purchases of property andequipment.Net Cash Provided by Financing ActivitiesNet cash provided by financing activities was $68.6 million during the year ended December 31, 2017 compared to net cashprovided by financing activities of $58.3 million during the year ended December 31, 2016. During the year endedDecember 31, 2017 cash provided by financing activities consisted primarily of the proceeds from our initial publicoffering. During the year ended December 31, 2016 cash provided by financing activities resulted from the proceedsreceived from sales of Series B‑1 and C‑1 Convertible Preferred Stock. During the year ended December 31, 2015 cashprovided by financing activities resulted from the proceeds received from sales of Series B‑1 Convertible Preferred Stock.Funding RequirementsWe expect our cash expenditures to increase in connection with our ongoing activities, particularly as we continue theresearch and development of, initiate clinical trials of, and seek marketing approval for, our product candidates. In addition,if we obtain marketing approval for any of our product candidates, we expect to incur significant commercializationexpenses related to drug sales, marketing, manufacturing and distribution to the extent that such sales, marketing anddistribution are not the responsibility of potential collaborators. Furthermore, we expect to incur additional costs associatedwith operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection withour continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay,reduce or eliminate our research and development programs or future commercialization efforts.90 Table of ContentsWe expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating planthrough at least mid-2019. Our future capital requirements will depend on many factors, including:·the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinicaltrials for our product candidates;·the scope, prioritization and number of our research and development programs;·the costs, timing and outcome of regulatory review of our product candidates;·our ability to establish and maintain collaborations on favorable terms, if at all;·the achievement of milestones or occurrence of other developments that trigger payments under any collaborationagreements we obtain;·the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under futurecollaboration agreements, if any;·the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectualproperty rights and defending intellectual property‑related claims;·the extent to which we acquire or in‑license other product candidates and technologies;·the costs of securing manufacturing arrangements for clinical and commercial production; and·the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals tomarket our product candidates.Identifying potential product candidates and conducting preclinical testing and clinical trials is a time‑consuming,expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or resultsrequired to obtain marketing approval and achieve drug sales. In addition, our product candidates, if approved, may notachieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to becommercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing toachieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through acombination of equity offerings, debt financings, strategic partnerships and licensing arrangements. We do not have anycommitted external source of funds outside of those to be earned in connection with our agreements with Merck KGaA andTakeda, if development activities are successful under those agreements. To the extent that we raise additional capitalthrough the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted,and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our commonstockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our abilityto take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.If we raise funds through additional strategic partnerships or licensing arrangements with third parties, we may have torelinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grantlicenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financingswhen needed, we may be required to delay, limit, reduce or terminate our drug development or future commercializationefforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and marketourselves.91 Table of ContentsContractual ObligationsThe following table summarizes our significant contractual obligations as of payment due date by period at December 31,2017: Lessthan 1 to 3 3 to 5 Morethan(in thousands) Total 1 Year Years Years 5 yearsOperating lease commitments(1) $7,450 2,089 4,665 696 —(1)Represents future minimum lease payments under our non‑cancelable operating leases, which expire throughMarch 2022. The minimum lease payments above do not include any related common area maintenance charges or realestate taxes.We enter into agreements in the normal course of business with contract research organizations for clinical trials and clinicalsupply manufacturing and with vendors for pre‑clinical research studies, and other services and products for operatingpurposes. We have not included these payments in the table of contractual obligations above since the contracts arecancelable at any time by us, generally upon 30 days prior written notice to the vendor. Milestone payments associated withour license agreements have not been included in the above table of contractual obligations as we cannot reasonablyestimate if or when they will occur. We do not expect any milestone payments for the year ended December 31, 2018 inconnection with our development efforts.Off‑Balance Sheet ArrangementsWe did not have, during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as definedunder applicable Securities and Exchange Commission rules.JOBS ActIn April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Actprovides that an “emerging growth company,” or an EGC, can take advantage of the extended transition period provided inSection 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revisedaccounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards wouldotherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition periodand, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standardsis required for other public companies.We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under theJOBS Act. Subject to certain conditions, as an EGC, we intend to rely on certain of these exemptions, including withoutlimitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant toSection 404(b) of the Sarbanes‑Oxley Act and (ii) complying with any requirement that may be adopted by the PublicCompany Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’sreport providing additional information about the audit and the financial statements, known as the auditor discussion andanalysis. We will remain an EGC until the earlier of (i) the last day of the fiscal year in which we have total annual grossrevenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of thecompletion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during theprevious three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securitiesand Exchange Commission. 92 Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk-related to changes in interest rates. Our primary exposure to market risk is interest ratesensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments,including cash equivalents and marketable securities are invested in U.S. Treasury obligations, commercial paper andcorporate bonds. However, we believe that due to the short-term duration of our investment portfolio and low-risk profile ofour investments, an immediate 100 basis points change in interest rates would not have a material effect on the fair marketvalue of our investments portfolio.We are currently not exposed to market risk related to changes in foreign currency exchange rates, but we may contract withvendors that are located Asia and Europe and may be subject to fluctuations in foreign currency rates at that time. 93 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAMersana Therapeutics, Inc.Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm 95Consolidated Balance Sheets 96Consolidated Statements of Operations and Comprehensive Loss 97Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 98Consolidated Statements of Cash Flows 99Notes to Consolidated Financial Statements 10094 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Mersana Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Mersana Therapeutics, Inc. (the Company) as ofDecember 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, convertiblepreferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31,2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company at December31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2017, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinionon the Company’s financial statements based on our audits. We are a public accounting firm registered with the PublicCompany Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dueto error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. As part of our audits we are required to obtain an understanding of internal control over financialreporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control overfinancial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whetherdue to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a testbasis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation ofthe financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013.Boston, MassachusettsMarch 28, 2018 95 Table of ContentsMersana Therapeutics, Inc.Consolidated Balance Sheets(in thousands except share and per share data) December 31, December 31, 2017 2016Assets Current assets: Cash and cash equivalents $26,591 $100,297Short-term marketable securities 88,143 —Accounts receivable 784 1,051Prepaid expenses and other current assets 2,025 825Total current assets 117,543 102,173Property and equipment, net 2,319 2,483Long-term marketable securities 10,482 —Other assets 371 431Total assets $130,715 $105,087Liabilities, convertible preferred stock and stockholders’ equity (deficit) Current liabilities: Accounts payable $3,070 $2,068Accrued expenses 6,944 3,428Deferred rent 232 159Deferred revenue 21,635 22,731Total current liabilities 31,881 28,386Deferred rent, net of current portion 67 299Deferred revenue, net of current portion 28,773 37,571Commitments (Note 13) Series A-1 convertible preferred stock, $0.0001 par value: 0 and 25,085,153 shares authorized, issuedand outstanding at December 31, 2017 and December 31, 2016, respectively — 26,336 Series B-1 convertible preferred stock, $0.0001 par value: 0 and 32,936,919 shares authorized, issued andoutstanding at December 31, 2017 and December 31, 2016, respectively — 35,232 Series C-1 convertible preferred stock, $0.0001 par value: 0 and 14,674,062 shares authorized, issued andoutstanding at December 31, 2017 and December 31, 2016, respectively — 32,882 Stockholders’ equity (deficit) Preferred stock, $0.0001 par value; 25,000,000 and 0 shares authorized; 0 shares issued and outstandingat December 31, 2017 and December 31, 2016, respectively — —Common stock, $0.0001 par value; 175,000,000 and 95,000,000 shares authorized; 22,765,017 and1,294,352 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively 3 1Additional paid-in capital 168,018 3,551Accumulated other comprehensive loss (149) —Accumulated deficit (97,878) (59,171)Total stockholders’ equity (deficit) 69,994 (55,619)Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) $130,715 $105,087 The accompanying notes are an integral part of these consolidated financial statements.96 Table of ContentsMersana Therapeutics, Inc.Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share data) Year ended December 31, 2017 2016 2015Collaboration revenue $17,545 $25,171 $10,359Operating expenses: Research and development 46,700 32,008 21,353General and administrative 10,462 6,984 5,347Total operating expenses 57,162 38,992 26,700Other income: Other income (expense) — — (89)Interest income 910 121 2Total other income 910 121 (87)Net loss $(38,707) $(13,700) $(16,428)Other comprehensive loss: Unrealized loss on marketable securities (149) — —Comprehensive loss $(38,856) $(13,700) $(16,428)Net loss attributable to common stockholders — basic and diluted $(38,707) $(13,700) $(16,428)Net loss per share attributable to common stockholders — basic and diluted $(3.22) $(10.82) $(13.43)Weighted-average number of common shares used in net loss per shareattributable to common stockholders — basic and diluted 12,022,733 1,266,758 1,223,457 The accompanying notes are an integral part of these consolidated financial statements. 97 Table of ContentsMersana Therapeutics, Inc.Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)(in thousands, except share and per share data) Series A-1 Series B-1 Series C-1 Convertible Convertible Convertible Additional Accumulated Stockholders’ Preferred Stock Preferred Stock Preferred Stock Common Stock Paid-in OtherComprehensive Accumulated Equity Shares Amount Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit (Deficit)Balance atDecember 31, 2014 25,085,153 $26,336 — $ — — $ — 1,223,457 $ 1 $2,429 $ — $(29,043) $(26,613)Issuance ofSeries B-1convertiblepreferred stock,net of issuancecosts of $168 — — 9,410,551 9,960 — — — — — — — —Stock-basedcompensationexpense — — — — — — — — 349 — — 349Net loss — — — — — — — — — — (16,428) (16,428)Balance atDecember 31, 2015 25,085,153 $26,336 9,410,551 $9,960 — $ — 1,223,457 $ 1 $2,778 $ — $(45,471) $(42,692)Issuance ofSeries B-1convertiblepreferred stock,net of issuancecosts of $50 — — 23,526,368 25,272 — — — — — — — —Issuance ofSeries C-1convertiblepreferred stock,net of issuancecosts of $218 — — — — 14,674,062 32,882 — — — — — —Exercise of stockoptions — — — — — — 70,895 — 105 — — 105Stock-basedcompensationexpense — — — — — — — — 668 — — 668Net loss — — — — — — — — — — (13,700) (13,700)Balance atDecember 31, 2016 25,085,153 $26,336 32,936,919 $35,232 14,674,062 $32,882 1,294,352 $ 1 $3,551 $ — $(59,171) $(55,619)Issuance ofcommon stockunder InitialPublic Offering,net of issuancecosts of $7,580 — — — — — — 5,000,000 — 67,420 — — 67,420Issuance ofcommon stockunder partialexercise ofoverallotmentoption, net ofissuance costs of$55 — — — — — — 51,977 — 725 — — 725Conversion ofpreferred stockinto commonstock (25,085,153) (26,336) (32,936,919) (35,232) (14,674,062) (32,882) 16,154,671 2 94,448 — — 94,450Exercise of stockoptions andwarrants — — — — — — 264,017 — 452 — — 452Stock-basedcompensationexpense — — — — — — — — 1,422 — — 1,422Othercomprehensiveloss — — — — — — — — — (149) — (149)Net loss — — — — — — — — — — (38,707) (38,707)Balance atDecember 31, 2017 — $ — — $ — — $ — 22,765,017 $ 3 $168,018 $(149) $(97,878) $69,994 The accompanying notes are an integral part of these consolidated financial statements. 98 Table of ContentsMersana Therapeutics, Inc.Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2017 2016 2015Cash flows from operating activities Net loss $(38,707) $(13,700) $(16,428)Adjustments to reconcile net loss to net cash provided by (used in)operating activities: Depreciation 928 655 297Net amortization of premiums and discounts on investments (293) — —Stock-based compensation 1,422 668 349Change in deferred rent (159) 102 —Changes in operating assets and liabilities: Accounts receivable 267 (411) 1,197Prepaid expenses and other current assets (1,200) (245) (240)Other assets 60 (60) —Accounts payable 1,335 (325) 926Accrued expenses 3,562 1,726 544Deferred revenue (9,894) 43,178 3,719Net cash provided by (used in) operating activities (42,679) 31,588 (9,636) Cash flows from investing activities Purchase of marketable securities (145,701) — —Maturities of marketable securities 47,220 — —Purchase of property and equipment (1,143) (1,084) (619)Change in restricted cash — — (164)Net cash used in investing activities (99,624) (1,084) (783) Cash flows from financing activities Net proceeds from sale of Series B-1 convertible preferred stock — 25,272 9,960Net proceeds from sale of Series C-1 convertible preferred stock — 32,882 —Net proceeds from initial public offering 67,420 — —Net proceeds from issuance of common stock upon partial exercise ofoverallotment 725 — —Proceeds from exercise of stock options and warrants 452 105 —Net cash provided by financing activities 68,597 58,259 9,960 Increase (decrease) in cash and cash equivalents (73,706) 88,763 (459)Cash and cash equivalents, beginning of period 100,297 11,534 11,993Cash and cash equivalents, end of period $26,591 $100,297 $11,534 Supplemental disclosures of non-cash activities: Conversion of preferred stock to common stock upon closing of initialpublic offering $94,450 $ — $ —Purchases of property and equipment included in accounts payable andaccrued expenses $35 $414 $ —Purchases of property and equipment reimbursed by landlord $ — $356 $ — The accompanying notes are an integral part of these consolidated financial statements. 99 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements 1. Nature of Business and Basis of PresentationMersana Therapeutics, Inc. (the Company) is a clinical stage company located in Cambridge, Massachusetts. The Companyis advancing a proprietary pipeline of targeted oncology therapeutics leveraging its Dolaflexin® antibody drug conjugate(ADC) platform. Mersana's first product candidate, XMT-1522, an ADC designed to address a much broader population ofpatients with HER2-expressing tumors than served by currently approved HER2 therapies, is currently in a Phase 1 doseescalation study. The Company’s second product candidate, XMT-1536, an ADC targeting NaPi2b, an antigen broadlyexpressed in certain types of cancer, is also in a Phase 1 dose escalation study. In addition, we have established a strategicpartnership with Takeda Pharmaceutical Company Limited, or Takeda, under which they obtained rights to XMT‑1522outside of the United States and Canada. We have also established strategic research and development partnerships withTakeda and Merck KGaA for the development and commercialization of additional ADC product candidates against alimited number of targets selected by our partners based on our Dolaflexin platform.The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks offailure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that itmay identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates,dependence on key personnel, protection of proprietary technology, compliance with government regulations, developmentof technological innovations by competitors, reliance on third party manufacturers and ability to transition from pilot-scaleproduction to large-scale manufacturing of products.On July 3, 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 5,000,000shares of its common stock at a public offering price of $15.00 per share, for aggregate gross proceeds of $75,000. TheCompany received $67,420 in net proceeds after deducting $7,580 of underwriting discounts and commissions and offeringcosts. On August 2, 2017, the Company issued and sold 51,977 shares of common stock at $15.00 per share for grossproceeds of $780 upon the partial exercise of the underwriters’ overallotment option. The Company received net proceeds of$725 after deducting $55 in underwriting discounts and commissions.Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into16,154,671 shares of common stock. In connection with the IPO, the Company amended and restated its certificate ofincorporation to change the authorized capital stock to 175,000,000 shares designated as common stock and 25,000,000shares designated as preferred stock, all with a par value of $0.0001 per share.In connection with preparing for its IPO, the Company effected a 1-for-4.5 reverse stock split of the Company’s commonstock. The reverse stock split became effective on June 15, 2017. The par value and authorized shares of common stock andconvertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share amounts in thefinancial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reversestock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-incapital. The financial statements have also been retroactively adjusted to reflect adjustments to the conversion ratio for eachseries of convertible preferred stock effected in connection with the reverse stock split.The Company has incurred net losses since inception. The Company’s net loss was $38,707, $13,700 and $16,428 for theyears ended December 31, 2017, 2016 and 2015. The Company expects to continue to incur operating losses for at least thenext several years. As of December 31, 2017, the Company had an accumulated deficit of $97,878. The future success of theCompany is dependent on its ability to identify and develop its product candidates, and ultimately upon its ability to attainprofitable operations. The Company has devoted substantially all of its financial resources and efforts to research anddevelopment and general and administrative expense to support such research and development. The Company’s net lossesmay fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and willcontinue to have, an adverse effect on the Company’s stockholders’ equity and working capital. The Company believes thatits existing cash, cash equivalents and marketable securities as of December 31, 2017, will enable it to fund100 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) its operating plan through at least mid-2019, which the Company expects will allow it to achieve initial clinical datareadouts for its two lead development programs.The accompanying consolidated financial statements have been prepared in accordance with accounting principles generallyaccepted in the United States (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC).Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally acceptedaccounting principles as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) ofthe Financial Accounting Standards Board (FASB). All dollar amounts, except per share data in the text and tables herein, arestated in thousands unless otherwise indicated.2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include those of the Company and its subsidiary, Mersana SecuritiesCorp., which was established in December 2016. All intercompany balances and transactions have been eliminated.Use of EstimatesThe preparation of the Company's consolidated financial statements in conformity with U.S. GAAP requires management tomake estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and relateddisclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue andexpenses during the reporting period. On an ongoing basis, the Company's management evaluates its estimates, whichinclude, but are not limited to, management's judgments with respect to the separate units of accounting and best estimate ofselling price of those units of accounting within its revenue arrangements, accrued expenses, valuation of stock-based awardsand income taxes. Actual results could differ from those estimates.The Company utilized significant estimates and assumptions in determining the fair value of its common stock prior to theCompany’s IPO. The Company has utilized various valuation methodologies in accordance with the framework of theAmerican Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company EquitySecurities Issued as Compensation, the Practice Aid, to estimate the fair value of its common stock. Each valuationmethodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptionsinclude a number of objective and subjective factors, including external market conditions, the prices at which the Companysold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at thetime of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes tothe key assumptions used in the valuations could result in different fair values of common stock at each valuation date.Segment InformationOperating segments are defined as components of an enterprise about which separate discrete information is available forevaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. TheCompany and the Company's chief operating decision-maker, the Company's chief executive officer, view the Company'soperations and manage its business as a single operating segment, which is the business of discovering and developingADCs.101 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Research and DevelopmentThe Company expenses all costs incurred in performing research and development activities. Research and developmentexpenses include salaries and benefits, materials and supplies, preclinical expenses, manufacturing expenses, stock-basedcompensation expense, depreciation of equipment, contract services and other outside expenses. Costs of certaindevelopment activities, such as manufacturing, are recognized based on an evaluation of the progress to completion ofspecific tasks. Payments for these activities are based on the terms of the individual arrangements, which may differ from thepattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development costs.Nonrefundable advance payments for goods or services to be received in the future for use in research and developmentactivities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or theservices are performed. Costs associated with collaboration agreements are included in research and development expense.Revenue RecognitionThe Company recognizes revenue from collaboration arrangements in accordance with FASB ASC Topic 605, RevenueRecognition (ASC 605). Accordingly, revenue is recognized when all of the following criteria are met:·Persuasive evidence of an arrangement exists;·Delivery has occurred or services have been rendered;·The seller's price to the buyer is fixed or determinable; and·Collectibility is reasonably assured.Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the consolidatedbalance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date areclassified as current liabilities. Amounts not expected to be recognized as revenue within the 12 months following thebalance sheet date are classified as deferred revenue, net of current portion.Multiple element arrangementsThe Company analyzes its strategic partnerships that include multiple element arrangements based on the guidance in FASBASC Topic 605-25, Revenue Recognition—Multiple Element Arrangements, or ASC 605-25.Pursuant to the guidance in ASC 605-25, the Company evaluates multiple element arrangements to determine i) thedeliverables included in the arrangement and (ii) whether the individual deliverables represent separate units of accountingor whether they must be accounted for as a combined unit of accounting. This evaluation requires subjective determinationsand requires management to make judgments about the individual deliverables and whether such deliverables are separablefrom the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that:(i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement includes a general right ofreturn relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable andsubstantially in the Company's control. In assessing whether an item has standalone value, the Company considers factorssuch as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability ofthe associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partnercan use the deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of thedeliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undeliveredelement(s).102 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Options are considered substantive if, at the inception of the arrangement, the Company is at risk as to whether thecollaboration partner will choose to exercise the option. Factors that the Company considers in evaluating whether an optionis substantive include the cost to exercise the option, the overall objective of the arrangement, the benefit the collaboratormight obtain from the arrangement without exercising the option and the likelihood the option will be exercised. When anoption is considered substantive, the Company does not consider the option or item underlying the option to be adeliverable at the inception of the arrangement and the associated option fees are not included in the allocable consideration,assuming the option is not priced at a significant and incremental discount. Conversely, when an option is not consideredsubstantive, the Company would consider the option including other deliverables contingent upon the exercise of theoption, to be a deliverable at the inception of the arrangement and a corresponding amount would be included in theallocable arrangement consideration. Notwithstanding whether the option is considered substantive or non-substantive, if theprice of the option includes a significant incremental discount, the discount would be included as a deliverable at theinception of the arrangement.Allocation of arrangement considerationArrangement consideration that is fixed or determinable is allocated among the separate units of accounting using therelative selling price method. Then, the applicable revenue recognition criteria in ASC 605-25 are applied to each of theseparate units of accounting in determining the appropriate period and pattern of recognition. The Company determines theselling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, theCompany determines the estimated selling price for units of accounting within each arrangement using vendor-specificobjective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available,or best estimate of selling price (BESP) if neither VSOE nor TPE is available. The Company typically uses BESP to estimatethe selling price, since it generally does not have VSOE or TPE of selling price for its units of accounting. Determining theBESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Companyconsiders applicable market conditions and relevant entity-specific factors, including factors that were contemplated innegotiating the agreement with the customer and estimated costs. The Company validates the BESP for units of accountingby evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on theallocation of arrangement consideration between multiple units of accounting.Pattern of recognitionThe Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenuerecognition criteria in ASC 605 are satisfied for that particular unit of accounting. Deliverables under collaborationagreements generally consist of licenses and research and development services. License revenue is recognized when thelicense is delivered when it is determined to have standalone value from the undelivered elements of the arrangement. If thelicense does not have standalone value, the amounts allocated to the license will be combined with the related undelivereditems as a single unit of accounting. The revenue recognition of a combined unit of accounting typically follows the patternof revenue of the last delivered item in the combined accounting unit.The Company recognizes the amounts associated with research and development services and other service relateddeliverables over the associated period of performance. If there is no discernable pattern of performance or objectivelymeasurable performance measures do not exist, then the Company recognizes revenue under the arrangement on a straight-line basis over the period the Company is expected to complete its performance obligations. Conversely, if the pattern ofperformance in which the service is provided to the customer can be determined and objectively measurable performanceexists, then the Company recognizes revenue under the arrangement using the proportional performance method.The Company recognizes revenue associated with license options upon exercise of the option, if the underlying license hasstandalone value from the other deliverables to be provided subsequent to delivery of the license. If the license does103 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) not have standalone value, the amounts allocated to the license option will be combined with the related undelivered itemsas a single unit of accounting.Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative revenue earneddetermined using the straight-line method or proportional performance, as applicable, as of the period end date.Recognition of milestones and royaltiesAt the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone issubstantive and at-risk. This evaluation includes an assessment of whether (a) the consideration is commensurate with either(1) the entity's performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a resultof a specific outcome resulting at least in part from the entity's performance to achieve the milestone, (b) the considerationrelates solely to past performance, and (c) the consideration is reasonable relative to all of the deliverables and payment termswithin the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial, and other risks thatmust be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respectivemilestone, and whether the milestone consideration is reasonable relative to all deliverables and payment terms in thearrangement in making this assessment. On the milestone achievement date, assuming all other revenue recognition criteriaare met and the milestone is deemed substantive and at-risk, the Company recognizes the payment as collaboration revenue.For milestones that are not deemed substantive and at-risk, where payment is reasonably assured, the Company recognizesthe milestone payment over the remaining service period.The Company will recognize royalty revenue, if any, in the period of sale of the related product(s), based on the underlyingcontract terms, provided that the reported sales are reliably measurable and the Company has no remaining performanceobligations, assuming all other revenue recognition criteria are met.Collaborative arrangementsThe Company records the elements of its collaboration agreements that represent joint operating activities in accordancewith ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreementsthat represent activities in which both parties are active participants and to which both parties are exposed to the significantrisks and rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements.The Company considers the guidance in ASC Topic 605-45, Revenue Recognition—Principal AgentConsiderations (ASC 605-45) in determining the appropriate treatment for the transactions between the Company and itscollaborative partner and the transactions between the Company and third parties. Generally, the classification oftransactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangementalong with the nature of the operations of the participants. To the extent revenue is generated from a collaboration, theCompany will recognize its share of the net sales on a gross basis if it is deemed to be the principal in the transactions withcustomers, or on a net basis if it is instead deemed to be the agent in the transactions with customers, consistent with theguidance in ASC 605-45.Fair Value MeasurementsFair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between marketparticipants at measurement dates. ASC Topic 820 Fair Value Measurement (ASC 820), establishes a three-level valuationhierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of anasset or liability as of the measurement date. The three levels are defined as follows:Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in activemarkets.104 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financialinstrument.Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.Cash and Cash EquivalentsThe Company considers all highly liquid investments with an original maturity, or a remaining maturity at the time ofpurchase, of three months or less to be cash equivalents. The Company invests excess cash primarily in money market funds,commercial paper and government agency securities, which are highly liquid and have strong credit ratings. Theseinvestments are subject to minimal credit and market risks. Cash and cash equivalents are stated at cost, which approximatesmarket value.Marketable SecuritiesShort-term marketable securities consist of investments with maturities greater than three months and less than one year fromthe balance sheet date. Long-term marketable securities consist of investments with maturities greater than one year that arenot expected to be used to fund current operations. The Company classifies all of its marketable securities as available-for-sale. Accordingly, these investments are recorded at fair value. Amortization and accretion of discounts and premiums arerecorded as interest income within other income. Unrealized gains and losses on available-for-sale securities are included inother comprehensive loss as a component of stockholders’ equity (deficit) until realized.Restricted CashRestricted cash of $371 is recorded in other non-current assets as of December 31, 2017 and 2016 and includes amounts heldas security deposits for a standby letter of credit related to a facility lease and a corporate credit card program.Accounting for Stock-based CompensationThe Company accounts for its stock-based compensation in accordance with ASC Topic 718 Compensation—StockCompensation (ASC 718). ASC 718 requires all stock-based payments to employees and directors to be recognized asexpense in the statements of operations based on their grant date fair values. Expense related to stock awards to non-employees is required to be recognized in the statement of operations based on the awards' vesting date fair values. TheCompany estimates the fair value of options granted using the Black-Scholes option pricing model.The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expectedstock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expecteddividends. Due to the lack of a public market for the Company's common stock prior to completion of the IPO and a lack ofcompany-specific historical and implied volatility data, the Company has based its estimate of expected volatility on thehistorical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on aperiod of time commensurate with the expected term assumption. The computation of expected volatility is based on thehistorical volatility of a representative group of companies with similar characteristics to the Company, including stage ofproduct development and life science industry focus. The Company uses the simplified method as prescribed by the SECStaff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees asit does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.For options granted to non-employees, the Company utilizes the contractual term of the arrangement as the basis for theexpected term assumption. The risk-free interest rate is based on a treasury instrument105 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero asthe Company has never paid dividends and has no current plans to do so.There were significant judgments and estimates inherent in the determination of the fair value of our common stock prior tothe closing of the IPO. These estimates and assumptions include a number of objective and subjective factors, includingexternal market conditions, the prices at which the Company sold shares of preferred stock, the superior rights andpreferences of securities senior to its common stock at the time of, and the likelihood of, achieving a liquidity event, such asan IPO or sale.Through December 31, 2016, the Company was required to estimate forfeitures at the time of grant, and revise those estimatesin subsequent periods if actual forfeitures differ from its estimates. The Company used historical data to estimate post-vestingforfeitures and recorded stock-based compensation expense only for those awards that were expected to vest. To the extentthat actual forfeitures differ from estimates, the difference was recorded as a cumulative adjustment in the period the estimateswere revised. Stock-based compensation expense recognized in the financial statements is based on awards that wereultimately expected to vest. The fair value of stock-based payments was recognized as expense, net of estimated forfeitures,over the requisite service period which is generally the vesting period.In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur uponadoption of guidance per ASU No. 2016-09. The adoption of this ASU did not have a material impact on the Company'sfinancial statements.Net Loss per ShareBasic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities.Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-averagenumber of common shares and potentially dilutive securities outstanding for the period determined using the treasury stockand if-converted methods.For purposes of the diluted net loss per share calculation, convertible preferred stock, warrants to purchase common stock andoptions to purchase common stock are considered to be potentially dilutive securities, but are excluded from the calculationof diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share werethe same for all periods presented.The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation ofdiluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares): Year ended December 31, 2017 2016 2015Series A-1 convertible preferred stock — 5,574,467 5,574,467Series B-1 convertible preferred stock — 7,319,307 2,091,229Series C-1 convertible preferred stock — 3,260,897 —Warrants 110,365 129,491 129,491Stock options 3,205,485 2,901,985 2,146,436 3,315,850 19,186,147 9,941,623 106 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Property and EquipmentProperty and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-linemethod over the estimated useful life of each asset as follows:Computer equipment, office equipment and software 3 yearsLaboratory equipment 5 yearsLeasehold improvements Shorter of useful life or life of lease Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from thebalance sheet and related gains or losses are reflected in the statement of operations. There were no material retirements orsales of assets during the years ended December 31, 2017, 2016 and 2015.The Company reviews its property and equipment for impairment whenever events or changes in business circumstancesindicate that the carrying amount of the assets may not be fully recoverable. If an impairment review is performed to evaluatean asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use andeventual disposition of the asset to its carrying value. If the carrying amount of the asset exceeds its estimated undiscountedfuture net cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceedsthe fair value of the asset. The Company did not recognize impairment charges during the years ended December 31, 2017,2016 and 2015.Repairs and maintenance costs are expensed as incurred.Deferred Initial Public Offering CostsThe Company capitalized deferred initial public offering (IPO) costs, which primarily consisted of direct, incremental legaland accounting fees, within other non-current assets. As of December 31, 2016, $60 of deferred issuance costs were incurredand capitalized. The deferred IPO costs were offset against IPO proceeds upon the consummation of the offering.Patent CostsThe Company expenses patent application and related legal costs as incurred and classifies such costs as general andadministrative expenses in the accompanying consolidated statements of operations.Income TaxesThe Company accounts for income taxes using the liability method. The difference between the financial statement and taxbasis of the assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed using the taxlaws and rates that are expected to apply for periods in which such differences reverse. Valuation allowances are established,if necessary, to reduce the deferred tax asset to the amount that will more likely than not be realized.The Company recognizes the effect of income tax positions only if those positions are more likely than not of beingsustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of beingrealized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.107 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Comprehensive Income (Loss)Comprehensive income (loss) is comprised of net loss and other comprehensive loss. For the year ended December 31, 2017,other comprehensive loss consisted of unrealized loss on marketable securities. For the years ended December 31, 2016 and2015 comprehensive loss equaled net loss.Concentration of Credit Risk and Off-balance Sheet RiskThe Company has no financial instruments with off-balance sheet risk, such as foreign exchange contracts, option contracts,or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentrations ofcredit risk primarily consist of cash equivalents and marketable securities. Under its investment policy, the Company limitsamounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except forsecurities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk fromthese financial instruments.Recently Issued Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, ASU No. 2014-09, Revenue fromContracts with Customers (ASU No. 2014-09), as amended, which will supersede nearly all existing revenue recognitionguidance. Under ASU No. 2014-09, an entity is required to recognize revenue upon transfer of promised goods or services tocustomers in an amount that reflects the expected consideration received in exchange for those goods or services. ASUNo. 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment andestimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing anduncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimatesused.The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016,and December 2016 within ASU 2016-08 Revenue from Contracts with Customers: Principal vs. Agent Considerations, ASU2016-10 Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, ASU 2016-12Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period ofadoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standardrecognized at the date of initial application and providing certain additional disclosures. The new standard is effective forannual reporting periods beginning after December 15, 2017. The Company adopted the new standard effective January 1,2018 using the modified retrospective approach.The Company is analyzing the potential impact the new standard may have on its historical revenue recognition under itsagreements with Takeda and Merck KGaA. Since inception, the Company has recognized approximately $42,500 and$12,800 in revenue under its agreements with Takeda and Merck KGaA, respectively. This analysis includes, but is notlimited to, reviewing variable compensation including the inclusion of milestone payments in the transaction price,evaluating whether a significant financing component is present, and assessing the allocation of the transaction price to oneor more of the performance obligations in the agreements. The Company has substantially completed this analysis. However,the Company is still finalizing its assessment of the potential impact of adoption as of January 1, 2018. The Company willcomplete its assessment in the first quarter of 2018. The adoption of the new standard may have a significant impact on theallocation of transaction price as compared to historical accounting, however final conclusions will be108 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) reached during the quarter ended March 31, 2018. Additionally, the Company expects that the adoption of the new standardwill have a significant change on the financial statement disclosuresIn January 2016, the FASB issued ASU No. 2016-01 Financial Instruments (ASU No. 2016-01) related to the recording offinancial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for underthe equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value withchanges in fair value recognized in net income (loss). However, an entity has the option to measure equity investmentswithout readily determinable fair values either (i) at fair value or (ii) at cost, adjusted for changes in observable prices minusimpairment. Changes in measurement under either alternative will be recognized in net income (loss). The amended guidancebecame effective January 1, 2018. Based on the Company’s current investment holdings, the adoption of this new standard isnot expected to have a material impact on its consolidated financial position or results of operations; however, it will resultin the reclassification of where the Company recognizes changes in fair value related to certain investments prospectively.In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will replace the existing guidance inASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiringlessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information aboutleasing arrangements. This standard is effective for the Company in the fiscal year beginning after December 15, 2018, butearly adoption is permissible. The Company is currently evaluating the potential impact that ASU No. 2016-02 may have onits financial position and results of operations.In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (ASU No. 2016-09), which amendsASC Topic 718, Compensation—Stock Compensation. The new standard identifies areas for simplification involving severalaspects of accounting for share-based payment transactions, including income tax consequences, classification of awards aseither equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized asthey occur, as well as certain classifications on the consolidated statements of cash flows. The amendments are effective forannual reporting periods (including interim reporting periods within those years) beginning after December 15, 2016. TheCompany adopted this ASU effective January 1, 2017. The adoption of this ASU did not have a material impact on theCompany's financial statements. Upon adoption of ASU No. 2016-09, the Company accounts for forfeitures as they occur.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts andCash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification ofcontingent consideration payments made after a business combination and several other clarifications not currentlyapplicable to the Company. The new standard also clarifies that an entity should determine each separately identifiablesource or use within cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations inwhich cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use,the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flowsfor the item. The new standard will be effective for the Company on January 1, 2018. The adoption of this standard is notexpected to have a material impact on the Company’s consolidated statement of cash flows upon adoption.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (ASU No. 2016-18). Theamendments in this update require that amounts generally described as restricted cash and restricted cash equivalents beincluded within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownon the statement of cash flows. ASU No. 2016-18 will be effective January 1, 2018, with early adoption permitted. TheCompany expects the adoption to impact its consolidated statement of cash flows as, upon adoption, it will include theCompany’s restricted cash balance in the cash and cash equivalents reconciliation of operating, investing and financingactivities.109 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of ModificationAccounting. This guidance is intended to provide clarity and reduce diversity in practice as to when changes to the terms orconditions of share-based payments are accounted for as modifications. Under this new guidance, entities will applymodification accounting if the fair value, vesting conditions or classification of the award changes. This guidance will beeffective for annual reporting periods beginning after December 15, 2017, including interim periods within those annualreporting periods, and early adoption is permitted. The guidance per ASU 2017-09 is to be adopted prospectively to an awardmodified on or after the adoption date. The Company does not anticipate a material impact to the consolidated financialstatements as a result of the adoption of this guidance.3. Collaboration AgreementsTakeda strategic research and development partnershipIn March 2014, the Company entered into a Research Collaboration and Commercial License Agreement with Takedathrough its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. (the 2014 Agreement). The 2014 Agreement wasamended in January 2015 (the 2015 Amended Agreement) and amended and restated in January 2016 (the 2016 RestatedAgreement). The agreements provide Takeda with the right to develop ADCs directed to a total of seven exclusive targetsover a specified period of time. Takeda will be responsible for the product development and marketing of any productsresulting from this collaboration.The 2014 Agreement was structured to allow Takeda the right to evaluate two targets upon payment of a per targettechnology access fee with the right to receive a development and commercialization license upon the exercise of an optionwith an additional payment to the Company. The 2014 Agreement also provided a limited replacement right for a target. The2015 Amended Agreement granted Takeda the right to develop two additional targets and also gave Takeda an additionallimited replacement right. The 2016 Restated Agreement provided Takeda with the right to develop three additional targets.Under the terms of the 2014 Agreement, the Company was eligible to receive a nonrefundable technology access fee of $500per target, payable upon designation of the target, and an option exercise fee of $1,300 per target to receive a developmentand commercialization license. The Company received an upfront payment of $1,150 representing the $500 technologyaccess fee for the first designated target and a $650 nonrefundable payment creditable against the $1,300 option exercisepayment for the development and commercialization license for the first designated target. In 2014, the Company alsoreceived the remaining $650 option exercise fee for the first designated target and the $500 technology access fee for thesecond designated target.In connection with the 2015 Amended Agreement, the Company received a nonrefundable payment of $9,000 for the right todevelop two additional targets. Takeda is required to pay $500 in order to utilize the second limited replacement right. Underthe terms of the 2016 Restated Agreement, the Company received a nonrefundable payment of $13,500 for the right todevelop three additional targets, bringing the total to seven.For all targets under the 2015 Amended Agreement and the 2016 Restated Agreement, the Company grants a research,development and commercialization license upon the designation of a target, including targets initially covered by the 2015Amended Agreement.Through December 31, 2017 Takeda has designated four targets and received development and commercialization licensesfor the first, third and fourth designated targets. In order to receive a development and commercialization license for thesecond designated target, Takeda must exercise its option and make a payment of $1,300. Takeda still has three targets110 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) and the limited replacement rights for two targets available. Takeda advanced one target to portfolio entry and commencedIND-enabling studies. Takeda has discontinued efforts on a previously designated target.Under the terms of the agreements, the Company and Takeda develop research plans to evaluate Takeda's antibodies as ADCsincorporating the Company's technology. The Company receives reimbursement for its efforts under the research plans. Thegoal of the research plans is to provide Takeda with sufficient information to formally nominate a development candidateand begin Investigational New Drug Application, or IND, enabling studies or cease development on the designated target.If products are successfully developed and commercialized, the Company is entitled to receive aggregate milestones of up to$1,063,300 for all seven designated targets consisting of $107,800 in development milestones, $325,000 in regulatorymilestones, and $630,500 in commercial milestones. The total milestones payable on each of the first and second designatedtargets are $136,000 and the total milestones payable on each of the third, fourth, fifth, sixth and seventh designated targetare $158,300. There are four individual development milestones per target, which are payable upon either the initiation of aGLP toxicology study or the filing of an IND application (depending upon the designated target), and the initiation ofPhase 1 through Phase 3 clinical trials. There are six or eight individual regulatory milestones per target, depending on thetarget. These are payable upon regulatory submissions, regulatory approvals and pricing approvals, as applicable, for theU.S., European Union and Japanese markets and regulatory approvals for both a second and third indication. There are sixindividual commercial milestones, which are payable upon the first commercial sale in each of the U.S., European Union andJapanese markets and upon the attainment of three separate defined thresholds for annual net sales. The next potentialmilestone payment the Company will be eligible to receive is either a development milestone of $500 related to a GLPtoxicology study or a development milestone of $750 related to the filing of an IND, depending upon the designated target.The Company is also entitled to receive royalties on product sales, if any, during the applicable royalty term. Royaltiespayable on the first and second designated targets are in the mid single digits and royalties payable on the third, fourth, fifth,sixth and seventh designated target are in the mid to high single digits.In connection with the 2016 Restated Agreement, the Company may elect to exercise an option to co-develop and co-commercialize one product incorporating either Takeda's third, fourth, fifth, sixth or seventh target in the United States for apayment of $15,000. If the Company elects to exercise the option to co-develop and co-commercialize a product, theCompany will share in 50% of the profits related to United States. The Company will be responsible for 50% of costsincurred specifically for the United States and 30% of global development costs. Any costs incurred specifically for a foreigncountry will be borne 100% by Takeda. If the Company elects to co-develop and co-commercialize a product, certainregulatory milestones and royalties related to the United States for that target would not be paid by Takeda.Unless earlier terminated, the 2016 Restated Agreement will expire upon the expiration of the last royalty term for a productunder the agreement, after which time, Takeda will have a perpetual, royalty-free license. Except with respect to the targetantigen of a product for which the Company exercised its option to co-develop and co-commercialize in the United States,Takeda may terminate the 2016 Restated Agreement in its entirety or with respect to any target for convenience upon45 days' prior written notice. Each party may terminate the 2016 Restated Agreement in its entirety upon bankruptcy orsimilar proceedings of the other party or upon an uncured material breach of the agreement by the other party. However, ifsuch breach only relates to one target, the agreement may only be terminated with respect to such target.Takeda XMT-1522 strategic partnershipIn January 2016, the Company entered into a Development Collaboration and Commercial license Agreement with Takedathrough its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. for the development and commercialization of XMT-1522 (the XMT-1522 Agreement). Under the XMT-1522 Agreement, Takeda was granted the exclusive right tocommercialize XMT-1522 outside of the United States and Canada. Under the XMT-1522 Agreement, the Company is111 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) responsible for conducting certain Phase 1 development activities for XMT-1522, including the ongoing Phase 1 clinicalstudy, at its own expense. Takeda has the option to conduct Phase 1 development activities at its own expense within itsterritory. The parties will collaborate on the further development of XMT-1522 in accordance with a global developmentplan (Post-Phase 1 Development). The parties will share equally all clinical stage manufacturing costs and any Post-Phase 1Development costs incurred in the performance of activities for the purpose of obtaining regulatory approval in either theUnited States or Canada and in certain major markets in the rest of the world. Each party will be responsible for all Post-Phase 1 Development costs incurred in the performance of activities solely for the purpose of obtaining regulatory approvalin such party's territory. Each party may conduct independent development of XMT-1522, subject to certain restrictions.The Company received an upfront payment of $26,500 upon execution of the XMT-1522 Agreement. In addition, theCompany was entitled to a milestone payment of $20,000 upon achievement of the IND Clearance Date. The Companyachieved the IND Clearance Date in October 2016. Accordingly, the right to credit a portion of the upfront payment lapsedand the Company received the $20,000 milestone payment in October 2016.In addition to the milestone payment upon achievement of the IND Clearance Date, the Company is entitled to receive futuredevelopment, regulatory and commercial milestones of up to $288,000 consisting of $87,000 of development milestones,$128,000 of regulatory milestones and $73,000 of commercial milestones, as well as royalties in the low to mid teens on netsales of XMT-1522 in Takeda's territory during the applicable royalty term. There are development milestones payable uponthe achievement of nine separate events: the initiation of Phase 2 clinical trials and Phase 3 clinical trials for four separatespecified patient populations and the initiation of a Phase 3 clinical trial for one additional unspecified patient population.There are 14 regulatory milestones, which are payable upon regulatory submissions, regulatory approvals and pricingapprovals, as applicable, for the U.S., European Union and Japanese markets for up to four separate patient populations andmultiple label indications. In addition, a regulatory milestone is payable upon the receipt of regulatory and pricing approvalin two specified markets other than the United States, the European Union or Japan. There are three individual commercialmilestones, which are payable upon the attainment of certain thresholds for annual net sales. The next potential milestone theCompany will be eligible to receive is a development milestone of $12,000 related to the initiation of a Phase 2 clinical trial.Under the XMT-1522 Agreement, Takeda committed to make equity investments in the Company of up to $20,000 in theaggregate in either a qualified private financing or in connection with the Company's IPO at the same price paid by theinvestors in the qualified private financing or the price per share in the IPO. Takeda invested approximately $10,000 in theCompany's Series C-1 financing in June 2016 and invested the remaining $10,000 in the Company's IPO.The XMT-1522 Agreement expires upon the expiration of the royalty term for XMT-1522, after which time, Takeda will havea perpetual, royalty-free license. However, Takeda may terminate the XMT-1522 Agreement in its entirety for convenienceupon 30 days' prior written notice at any time up to the initiation of the first Phase 2 clinical study of XMT-1522 or upon90 days' prior written notice following the initiation of the first Phase 2 clinical study of XMT-1522. Each party mayterminate the XMT-1522 Agreement in its entirety upon bankruptcy or similar proceedings of the other party and in itsentirety or on a country-by-country basis upon an uncured material breach of the agreement by the other party. Followingtermination, XMT-1522 will revert to the Company for further development and commercialization.Accounting for agreementsIn accordance with ASC 605-25, the Company identified the deliverables under the 2014 Agreement. The deliverables weredetermined to be (i) research license for the first designated target, (ii) exclusive development and commercialization licensefor the first designated target, (iii) research and development services under the research plan associated with the firstdesignated target, (iv) replacement right for a designated target, (v) rights to future technological improvements, and(vi) providing joint research committee services. The Company determined that the option to obtain an exclusive112 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) development and commercialization license for the first designated target was not a substantive option for accountingpurposes, primarily because Takeda had made an upfront nonrefundable payment of 50% of the option exercise fee. As aresult, the exclusive development and commercialization license was considered a deliverable at the inception of thearrangement. In addition, the total option exercise fee of $1,300 related to the first designated target was included in theallocable consideration. Similarly, the Company concluded the option to replace a designated target was not a substantiveoption as there were no additional payments required in connection with the first replacement option. Conversely, theCompany concluded that Takeda's ability to designate a second designated target was a substantive option as thedesignation of an additional target was at Takeda's option and was not required to pursue the development of the firstdesignated target. The Company has determined that the research license for the first designated target and the research anddevelopment services under the research plan associated with the first designated target should be combined into one unit ofaccounting (the research license and related service) as the research license does not have standalone value from the researchservices as the research services are required for Takeda to obtain the benefit of the research license. The Company hasconcluded the research license and related services have standalone value from the other units of accounting. The exclusivecommercial license, replacement right for a designated target, rights to future technological improvements and joint researchcommittee services are not required for Takeda to realize the value of the initial research license and related services.Under the terms of the 2014 Agreement, the total arrangement consideration of $4,500 (which comprises the $500 upfronttechnology access payment, expected fees of $2,700 for the research services and $1,300 for the option exercise fee for thefirst designated target) was allocated to the units of accounting based on management's BESP. The Company determined theBESP for the research license and related research services based on the estimated selling price of a research license and anestimate of the overall effort to perform the research services and an estimated market rate for research services. In developingthe BESP for the exclusive development and commercialization license, the replacement rights for a designated target andthe future technological improvements, the Company considered other comparable transactions, the selling price for aresearch license and the probability that the future technology will be developed and utilized. The BESP for the jointresearch committee services was developed using an estimate of the time and costs incurred to participate in the committees.The Company applied the relative selling price allocation using these BESP, which resulted in the consideration beingallocated as follows: $2,790 to the research license and related service for the first designated target, $1,125 related to thecommercial license on the first designated target, $450 to the replacement right for a designated target, $45 to rights to futuretechnological improvements and $90 to joint research committee services. In addition, Takeda paid $500 in 2014 for thetechnology access fee and research license associated with the second designated target.In connection with the 2015 Amended Agreement, the Company reassessed the units of accounting from the 2014 Agreementand identified incremental deliverables, resulting in the following units of accounting at the time of the 2015 AmendedAgreement (i) exclusive license to the first designated target and related research services, (ii) research license to the seconddesignated target and related research services, (iii) research license to the third designated target and related services,(iv) research license to the fourth designated target and related services, (v) replacement right to the first or second designatedtarget, (vi) discount on the option for an exclusive development and commercialization license for the second designatedtarget, (vii) option for exclusive development and commercialization license for the third designated target, (viii) option foran exclusive development and commercialization license for the fourth designated target, (ix) rights to future technologicalimprovements and (x) joint research committee services. The Company concluded that the option for the exclusivedevelopment and commercialization license for the second designated target includes a significant incremental discount asthe option exercise fee was at a discount to the then-current estimated selling price of an exclusive development andcommercialization license for a designated target. The Company concluded the options to obtain exclusive development andcommercialization licenses for the third and fourth designated targets were not substantive options as there were noadditional payments required to exercise those options. Consistent with the assessment of the units of accounting under the2014 Agreement, the research licenses (and the exclusive commercial license as it relates to the first designated target) havebeen combined with the related research services under the related research plan as the license does not have standalonevalue from the related research services. Upon execution of the 2015 Amended113 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Agreement the total arrangement consideration of $16,697 (which comprises the $9,000 upfront payment, expected fees of$5,776 for the research services and $1,921 of remaining deferred revenue related to the initial 2014 Agreement) wasallocated to the units of accounting based on management's BESP, which were developed using consistent methodologies tothe 2014 Agreement, as follows: $4,308 to the exclusive development and commercialization license to the first designatedtarget and related research services, $1,611 to each of the research licenses and related research services for the second, thirdand fourth designated targets, $388 to the replacement right on the first or second designated target, $524 to the discount onthe exclusive license to the second designated target, $3,105 to each of the exclusive development and commercializationlicenses on the third and fourth designated targets, $262 to rights to future technological improvements and $174 to jointresearch committee services.The Company has concluded that the 2016 Restated Agreement and the XMT-1522 Agreement should be accounted for asone arrangement due in part because the agreements are with the same party and were negotiated and executedcontemporaneously. The Company reassessed the accounting units from the 2015 Amended Agreement and identified theadditional deliverables and units of accounting. As such, the Company identified the units of accounting: (i) exclusivedevelopment and commercialization license to the first designated target and related research services, (ii) research license tothe second designated target and related research services, (iii) discount on the exclusive development andcommercialization license to the second designated target, (iv) exclusive development and commercialization license to thethird designated target and related research services, (v) exclusive development and commercialization license to the fourthdesignated target and related research services, (vi) exclusive development and commercialization license to the fifthdesignated target and related research services, (vii) exclusive development and commercialization license to the sixthdesignated target and related research services, (viii) exclusive development and commercialization license to the seventhdesignated target and related research services, (ix) first replacement right for a designated target, (x) discount on the secondreplacement right to a designated target, (xi) rights to future technological improvements, (xii) joint research committeeservices, (xiii) XMT-1522 license and related services, and (xiv) joint research committee services for XMT-1522.Consistent with the assessment under the prior Takeda agreements, the Company has concluded that the license does nothave standalone value from the research services and has accounted for each exclusive license and the related researchservices as a combined unit of accounting.In addition, in assessing the additional accounting units under the XMT-1522 Agreement, the Company concluded that thelicense to the Company's intellectual property and the related obligations to perform services, including Phase 1development and transfer certain materials and know how related to the Company's manufacturing processes should be acombined unit of accounting. The license to the Company's intellectual property does not have standalone value from theservices that the Company is obligated to perform. Takeda would not have the ability to realize the value of the licensewithout the Company performing the related services.The Company has concluded that the Post-Phase 1 Development activities under the XMT-1522 Agreement represent jointoperating activities in which both parties are active participants and of which both parties are exposed to significant risksand rewards that are dependent on the commercial success of the activities. Accordingly, the Company is accounting for thePost-Phase 1 Development activities in accordance with ASC No. 808, Collaborative Arrangements (ASC 808) and they arenot considered revenue elements under ASC 605-25. For the years ended December 31, 2017 and 2016, the Company wasbilled approximately $3,408 and $340, respectively, from Takeda representing the Company's share of Post-Phase 1Development costs incurred by Takeda. These amounts have been reflected as research and development costs in theconsolidated statement of operations for the years ended December 31, 2017 and 2016. The Company did not perform anyPost-Phase 1 Development activities or incur any associated costs during the years ended December 31, 2017 and 2016.114 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) The total allocable arrangement consideration for the 2016 Restated Agreement and the XMT-1522 Agreement was $50,089comprised of the following: (i) nonrefundable upfront payment—$13,500, (ii) expected fees for the remaining researchservices—$9,515, (iii) remaining deferred revenue from the 2015 Amended Agreement—$7,498, (iv) non-creditable portionof the XMT-1522 upfront fee—$13,250, and (v) expected reimbursement for related services—$6,326. In the third quarter2017, based on an assessment of the total costs to complete research services, the Company revised its estimate for (i) theexpected fees for the remaining research services under the 2016 Restated Agreement to $4,160 and (ii) the expectedreimbursement for the related services under the XMT-1522 Agreement to $7,740. The revised total allocable arrangementconsideration for the 2016 Restated Agreement and the XMT-1522 Agreement is $46,148.Additionally, the Company has received approximately $800 in additional license consideration and research plan extensionfees through December 2017, which has been included in total allocable arrangement consideration.The Company excluded from the initial allocable consideration $13,250 of the upfront fee under the XMT-1522 Agreementas it was contingent on the Company achieving IND Clearance before January 30, 2017. Upon achievement of the INDClearance, which occurred in October 2016, the contingent consideration was included in the allocable consideration andthe Company recognized the cumulative revenue that would have been recognized if the contingent consideration wasincluded in allocable consideration at the inception of the agreements.The allocable arrangement consideration was allocated to the units of accounting based on the relative estimated sellingprices of each unit of accounting. The Company utilized BESP for each accounting unit which was developed on a basissimilar to the prior Takeda agreements. The BESP for units of accounting which include a license and research services, wasdeveloped using the estimated selling price of the license and an estimate of the overall effort to perform the research serviceand an estimated market rate for research services. The BESP for the discounts on exclusive license, replacement rights (ordiscounts thereon) and rights to future technological improvements were developed based on the estimated selling prices of alicense, as well as considering the probability that additional technology would be made available or the probability thecounterpart would utilize the technology or exercise the option. The BESP for the joint research committee services wasdeveloped using an estimate of the time and costs incurred to participate in the committees.The total allocable consideration, as revised in the third quarter 2017 and including contingent fees received after achievingIND Clearance in October 2016, was allocated to each unit of accounting as follows (i) exclusive development andcommercialization license to the first designated target and related research services—$4,502, (ii) research license to thesecond designated target and related research services—$1,362, (iii) discount on the exclusive development andcommercialization license to the second designated target—$553, (iv) exclusive development and commercialization licenseto the third designated target and related research services—$4,546, (v) exclusive development and commercializationlicense to the fourth designated target and related research services—$4,975, (vi) exclusive development andcommercialization license to the fifth designated target and related research services—$4,975, (vii) exclusive developmentand commercialization license to the sixth designated target and related research services—$4,975, (viii) exclusivedevelopment and commercialization license to the seventh designated target and related research services—$4,975, (ix) firstreplacement right for a designated target—$3,685, (x) discount on the second replacement right to a designated target—$3,276, (xi) rights to future technological improvements—$1,843, (xii) joint research committee services—$157, (xiii) XMT-1522 license and related services—$39,901, and (xiv) XMT-1522 joint research committee services—$472.The Company will recognize revenue related to the combined units of accounting which include research licenses or anexclusive development and commercialization license (if the license option is exercised during the research term) and therelated research services, over the estimated period of the research and development services using a proportionalperformance model. Revenue related to discounts on options will be recognized when the option is exercised, unless thereare additional research services that the Company is required to perform related to the designated target or at the time theoption right lapses. Revenue related to the replacement rights will be recognized over the research term of the replacement115 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) target once the replacement right is exercised or at the time the right lapses unused. Revenue related to future technologicalimprovements and joint research committee services will be recognized ratably over the performance period, which isexpected to be ten years and six years, respectively. The Company will reassess the estimated remaining term at eachsubsequent reporting period.The Company has evaluated all of the development, regulatory and commercial milestones that may be received inconnection with the Takeda agreements. In evaluating if a milestone is substantive, the Company assesses whether: (i) theconsideration is commensurate with either the Company's performance to achieve the milestone or the enhancement of thevalue of the delivered item(s) as a result of a specific outcome resulting from the Company's performance to achieve themilestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all ofthe deliverables and payment terms within the arrangement. With the exception of the $20,000 milestone payment due uponachievement of IND Clearance under the XMT-1522 Agreement, all development and regulatory milestones are consideredsubstantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific,clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effortand investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which theassociated milestone is achieved, assuming all other revenue recognition criteria have been met. The $20,000 milestonepayment was not considered a substantive milestone as the payment was not considered commensurate with the Company'sperformance to achieve IND Clearance nor was the payment solely for past performance. The $20,000 milestone payment wasin substance part of the overall consideration for the license and development services the Company is required to performunder the XMT-1522 Agreement. Upon achievement of the IND Clearance, which occurred in October 2016, the contingentconsideration was included in the allocable consideration and the Company recognized the cumulative revenue that wouldhave been recognized if the contingent consideration as included in allocable consideration at the inception of theagreement. All commercial milestones will be accounted for in the same manner as royalties and recorded as revenue uponachievement of the milestone, assuming all other revenue recognition criteria are met.The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contractterms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations,assuming all other revenue recognition criteria are met.For the years ended December 31, 2017, 2016 and 2015, the Company recorded total revenue of $13,784, $21,401 and$5,477, respectively, related to its efforts under the 2016 Restated Agreement and the XMT-1522 Agreement. Included inaccounts receivable as of December 31, 2017 and December 31, 2016 was $454 and $542, respectively, related to the Takedaagreements.During the quarter ended September 30, 2017, the Company revised its estimates of the total costs to complete the researchservices under the Takeda agreements, which changed the total consideration to be received under the agreements and theamount of revenue recognized during the year ended December 31, 2017. Approximately $4,028 of the Company’s revenuefrom the Takeda agreements for the year ended December 31, 2017 is a result of the Company’s change in estimates. Thechange in estimates decreased net loss by $4,028 for the year ended December 31, 2017, or $0.33 per common share.As of December 31, 2017 and 2016, the Company had $43,579 and $52,066, respectively, of deferred revenue related to theTakeda agreements that will be recognized over the remaining performance period.Merck KGaAIn June 2014, the Company entered into a Collaboration and Commercial License Agreement with Merck KGaA. Upon theexecution of the agreement, Merck KGaA paid the Company a nonrefundable technology access fee of $12,000 for the116 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) right to develop ADCs directed to six exclusive targets over a specified period of time. No additional fees are due when atarget is designated and the commercial license to the target is granted. Merck KGaA will be responsible for the productdevelopment and marketing of any products resulting from this collaboration.Under the terms of the agreement, the Company and Merck KGaA develop research plans to evaluate Merck KGaA'santibodies as ADCs incorporating the Company's technology. The Company receives reimbursement for its efforts under theresearch plans. The goal of the research plans is to provide Merck KGaA with sufficient information to formally nominate adevelopment candidate and begin IND-enabling studies or cease development on the designated target.In addition to the payments received for research and development activities performed on behalf of Merck KGaA, theCompany is also eligible to receive up to a total of $780,000 in future milestones related to all targets under the agreement,plus low to mid single digit royalties on the commercial sales of any resulting products during the applicable royalty term.The total milestones are categorized as follows: development milestones—$84,000; regulatory milestones—$264,000; andsales milestones—$432,000. There are six individual development milestones per target, payable upon the completion ofvarious activities from the delivery of ADCs meeting defined specifications, through the dosing in a Phase 3 clinical trial.There are five regulatory milestones, which are payable upon regulatory approvals for a first indication in each of the U.S.,European Union and Japanese markets and regulatory approvals for both a second and a third indication in the United States.There are three individual commercial milestones, which are payable upon the attainment of certain defined thresholds forannual net sales. During each of the years ended December 31, 2017, 2016 and 2015, the Company received and recognizedas revenue $1,000 related to development milestones under the agreement. At the time of the execution of the agreement,there was significant uncertainty as to whether the milestones would be achieved. In consideration of this, as well as theCompany's expected involvement in the research, these milestones were deemed to be substantive. The next potentialmilestone payment the Company will be eligible to receive will be a development milestone of $500 on Merck KGaA'sdesignation of a preclinical development candidate for any target. Revenue will be recognized upon achievement of themilestone. The Company and Merck KGaA may also enter into a future supply agreement to provide clinical study materialshould Merck KGaA pursue clinical development of any candidates nominated under the agreement. Through December 31,2017, Merck KGaA has designated six targets, all of which are still covered by research plans.Unless earlier terminated, the agreement will expire upon the expiration of the last royalty term for a product under theagreement, after which time, Merck KGaA will have a perpetual, royalty-free license, or if Merck KGaA does not designateany ADC product candidates produced by the Company under the agreement as preclinical development candidates, uponthe expiration of the last to expire research program. Merck KGaA may terminate the agreement in its entirety or with respectto any target for convenience upon 60 days' prior written notice. Each party may terminate the Merck KGaA Agreement in itsentirety upon bankruptcy or similar proceedings of the other party or upon an uncured material breach of the agreement bythe other party. However, if such breach only relates to one target, the agreement may only be terminated with respect to suchtarget.In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the agreement. Thedeliverables were determined to be (a) commercial licenses for six designated targets, (b) research and development servicesfor each research plan associated with a designated target, (c) rights to future technological improvements and(d) participation of project team leaders and providing joint research committee services. The commercial licenses andassociated research services for each target were combined into a single unit of accounting as the research licenses do nothave stand alone value without the research services.The Company determined the BESP for the commercial license and related research services based on the estimated sellingprice of a commercial license and an estimate of the overall effort to perform the research services and an estimated marketrate for research services. In developing the BESP for the future technological improvements, the Company considered othercomparable transactions, and the probability that the future technology will be developed and utilized. The BESP for117 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) the joint research committee services was developed using an estimate of the time and costs incurred to participate in thecommittees. The Company applied the relative selling price allocation using these BESPs.The total arrangement consideration of $23,025 (which comprises the $12,000 upfront payment and expected fees of$11,025 for the research services) was allocated to the units of accounting based on management's best estimate of sellingprice as follows: $3,723 for each of the license and corresponding research and development services units of account; $437for rights to future technological improvements; and $248 for joint research committee services. In the third quarter 2017,based on an assessment of the total costs to complete research services, the Company revised its estimate for the expectedfees for the research services to $7,875 which changed the total arrangement consideration to $19,875. The Companyallocated the revised arrangement consideration to the units of accounting based on management’s best estimate of sellingprice as follows: $6,428 for the first and second targets (combined); $3,214 for each of the other license and correspondingresearch and development services units of account; $376 for rights to future technological improvements; and $214 for jointresearch committee services.The Company is recognizing revenue related to the commercial license and research and development services unit ofaccounting over the estimated period of the research and development services using a proportional performance modelbased on projected Company efforts. Revenue related to future technological improvements and joint research committeeservices will be recognized ratably over the performance period, which is expected to be ten years and six years, respectively.The Company is continuing to reassess the estimated remaining term at each subsequent reporting period.During the years ended December 31, 2017, 2016 and 2015, the Company recorded revenue of $3,636, $3,644 and $4,557,respectively, related to its efforts under the collaboration agreement. Included in accounts receivable as of December 31,2017 and 2016 was $330 and $509, respectively, related to the Merck KGaA Agreement.As of December 31, 2017 and 2016 the Company had recorded $6,634 and $8,236, respectively, in deferred revenue relatedto the Merck KGaA agreement that will be recognized over the remaining performance period.Other RevenueIn 2015, the Company entered into a feasibility study agreement to evaluate the Company's technology. The Companysatisfied its service obligations under the agreement and recognized related revenue of $325 during the year endedDecember 31, 2015.In 2016, the Company entered into an agreement to provide limited services for Asana BioSciences, an existing partner, for$250. For the years ended December 31, 2017 and 2016 the Company recorded revenue of $125 and $125, respectively,related to these services.118 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) 4. Fair Value MeasurementsThe following table presents information about the Company’s assets and liabilities regularly measured and carried at a fairvalue and indicates the level within fair value hierarchy of the valuation techniques utilized to determine such value as ofDecember 31, 2017 and 2016: Significant Quoted Prices Other Significant in Active Observable Unobservable Fair Markets Inputs Inputs Value (Level 1) (Level 2) (Level 3)December 31, 2017 Cash and cash equivalents $26,591 $26,591 $ — $ —Marketable securities: U.S. Treasuries 62,640 62,640 — —Commercial paper 24,931 — 24,931 —Corporate bonds 11,054 — 11,054 — $125,216 $89,231 $35,985 $ — Significant Quoted Prices Other Significant in Active Observable Unobservable Fair Markets Inputs Inputs Value (Level 1) (Level 2) (Level 3)December 31, 2016 Cash and cash equivalents $100,297 $100,297 $ — $ — $100,297 $100,297 $ — $ — There were no changes in valuation techniques or transfers between fair value measurement levels during the years endedDecember 31 2017, 2016 and 2015. As of December 31, 2017 and 2016, cash and cash equivalents were comprised of cashand money market funds.5. Marketable SecuritiesThe following table summarizes marketable securities held at December 31, 2017. There were no marketable securities as ofDecember 31, 2016. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses ValueDecember 31, 2017 U.S. Treasuries $62,777 $ — $(137) $62,640Commercial paper 24,931 — — 24,931Corporate bonds 11,066 — (12) 11,054 $98,774 $ — $(149) $98,625 As of December 31, 2017, the Company held 22 securities that were in an unrealized loss position. The aggregate fair valueof securities held by the Company in an unrealized loss position for less than 12 months at December 31, 2017 was $73,695and there were no securities held by the Company in an unrealized loss position for more than 12 months. As of December31, 2017, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in anunrealized loss position before recovery of their amortized cost basis. Furthermore, the Company has119 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) determined that there was no material change in the credit risk of these securities. As a result, the Company determined it didnot hold any securities with any other-than-temporary impairment as of December 31, 2017.There were no realized gains or losses on available-for-sale securities during the years ended December 31, 2017,2016 and 2015.6. Property and EquipmentProperty and equipment consists of the following as of December 31, 2017 and 2016: December 31, December 31, 2017 2016Laboratory equipment $5,237 $4,672Computer equipment, office equipment and software 718 579Leasehold improvements 1,504 1,444Total property and equipment at cost 7,459 6,695Less: Accumulated depreciation (5,140) (4,212) $2,319 $2,483 Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $928, $655 and $297, respectively.7. Accrued ExpensesAccrued expenses consist of the following as of December 31, 2017 and 2016: December 31, December 31, 2017 2016Accrued payroll and related expenses $3,041 $2,276Accrued preclinical, manufacturing and clinical expenses 3,183 602Accrued professional fees 492 402Accrued other 228 148 $6,944 $3,428 8. Convertible Preferred StockPrior to January 1, 2016, the Company issued 25,085,153 shares of Series A-1 convertible preferred stock (Series A-1Preferred Stock) at a purchase price of $1.0763 per share resulting in net proceeds of $26,336.In February 2015 and June 2016, the Company issued 9,410,551 and 23,526,368 shares of Series B-1 convertible preferredstock (Series B-1 Preferred Stock) at a purchase price of $1.0763 per share resulting in net proceeds of $35,232.In June 2016 the Company issued 14,674,062 shares of Series C-1 convertible preferred stock (Series C-1 Preferred Stock) ata purchase price of $2.25568 resulting in net proceeds of $32,882.In connection with the closing of the Company’s IPO in July 2017, all outstanding convertible preferred stock was convertedinto 16,154,671 shares of common stock.As of December 31, 2017, the Company has 25,000,000 shares of authorized preferred stock. No shares of preferred stockhave been issued.120 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) 9. Stockholders’ Equity (Deficit)Common StockThe holders of the common stock are entitled to one vote for each share held. Common stockholders are not entitled toreceive dividends, unless declared by the Board of Directors (the Board).As of December 31, 2017 there were 3,315,850 shares of common stock reserved for the exercise of outstanding stock optionsand warrants. As of December 31, 2016 there were 19,186,147 shares of common stock reserved for the conversion ofoutstanding Series A‑1, Series B‑1 and Series C‑1 Preferred Stock and for the exercise of outstanding stock options andwarrants. December 31, December 31, 2017 2016Series A-1 Preferred Stock — 5,574,467Series B-1 Preferred Stock — 7,319,307Series C-1 Preferred Stock — 3,260,897Warrants 110,365 129,491Stock options 3,205,485 2,901,985 3,315,850 19,186,147 WarrantsIn connection with a 2013 Series A‑1 Preferred Stock issuance, the Company granted to certain investors warrants to purchase129,491 shares of common stock. The warrants have a $0.05 per share exercise price and a contractual life of 10 years. Thefair value of these warrants was recorded as a component of equity at the time of issuance. During the year ended December31, 2017, the Company issued 19,071 shares of common stock upon the exercise of a warrant.10. Stock OptionsStock Option PlanAs of June 30, 2017, there were 3,141,625 options outstanding under the Company’s 2007 Stock Incentive Plan. The 2007Plan expired in June 2017 and there will be no future grants under this plan.In June 2017 the Company’s shareholders approved the 2017 Stock Incentive Plan (the 2017 Plan or the Plan). Under the2017 Plan, up to 2,255,000 shares of common stock may be granted to the Company's employees, officers, directors,consultants and advisors in the form of options, restricted stock awards or other stock-based awards. The number of shares ofcommon stock issuable under the Plan will be cumulatively increased annually by 4% of the outstanding shares or suchlesser amount specified by the Board. The terms of the awards are determined by the Board, subject to the provisions of thePlan. Any cancellations under the 2007 Plan would increase the number of shares that could be granted under the 2017 Plan.As of December 31, 2017 there were 2,149,280 shares available for future issuance under the Plan. In January 2018, thenumber of shares of common stock that might be issued under the Plan was increased by 910,600 shares.With respect to incentive stock options, the exercise price per share will equal the fair market value of the common stock onthe date of grant, as determined by the Board, and the vesting period is generally four years. Nonqualified stock options willbe granted at an exercise price established by the Board at its sole discretion (which has not been less than fair market valueon the date of grant) and the vesting periods may vary. Options granted under the Plan expire no later than 10 years121 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) from the date of grant. The Board may accelerate vesting or extend the expiration of granted options in the case of a merger,consolidation, dissolution, or liquidation of the Company.A summary of the activity under the Plan is as follows: Weighted- Remaining Number Average Contractual Life Aggregate of Shares Exercise Price (in years) Intrinsic Value Options outstanding at January 1, 2017 2,901,985 $2.23 8.4 $8,906Granted 574,124 8.93 Exercised (244,946) 1.84 Cancelled (25,678) 5.04 Options outstanding at December 31, 2017 3,205,485 $3.44 7.8 $41,709 Options exercisable at December 31, 2017 1,595,337 $2.11 7.1 $22,845 The weighted-average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015,was $5.53, $2.34 and $0.86 per share, respectively.Cash received from the exercise of stock options was $452, $105 and $0 for the years ended December 31, 2017, 2016 and2015, respectively.Stock-Based CompensationThe Company uses the provisions of ASC 718, Stock Compensation, to account for all stock-based awards to employees andnonemployees.The measurement date for employee awards is generally the date of grant. Stock-based compensation expense is recognizedover the requisite service period, which is generally the vesting period, using the straight-line method.For the years ended December 31, 2017, 2016 and 2015, the Company recorded stock-based compensation expense of$1,366, $664 and $349, respectively, related to employee grants. The Company has an aggregate of $4,526 of unrecognizedstock compensation cost as of December 31, 2017 remaining to be amortized over the weighted-average period of 2.9 years.The fair value of each option award is estimated on the date of grant using the Black–Scholes option pricing model with thefollowing weighted average assumptions: December 31, 2017 2016 2015 Risk-free interest rate 2.2% 1.5%2.0%Expected dividend yield —% —% —%Expected term (years) 6.21 6.25 6.25 Expected stock price volatility 67% 69%61% Expected volatility for the Company’s common stock was determined based on the historical volatility of comparablepublicly traded companies. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent with theexpected term of the option. No dividend yield was assumed as the Company has not historically and does not expect to122 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) pay dividends on its common stock. The expected term of the options granted is based on the use of the simplified method,in which the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.The fair value of the common stock has been determined by the Board at each date of grant based on the variety of factors,including the Company’s financial position and historical financial performance, the status of developments within theCompany’s research and development activities, the composition and ability of the current research and management team,an evaluation of the Company’s competition, the current climate in the marketplace, the illiquid nature of the common stock,the effect of the rights and preferences of the preferred shareholders, and the prospects of the liquidity event, among others.Prior to its IPO, the Company’s common stock valuations were prepared using the hybrid method. The hybrid method is ahybrid between the probability‑weighted expected return method (PWERM) and the option‑pricing method (OPM). Thehybrid method estimates the probability‑weighted average value across multiple scenarios using the OPM to allocated equityvalue within at least one of those scenarios.The Company granted stock option awards to non-employees. Total expense recorded during the years ended December 31,2017, 2016 and 2015 related to these awards was $56, $4 and $0, respectively.Employee Stock Purchase PlanIn connection with the IPO, the Board adopted and the Company's stockholders approved the 2017 employee stock purchaseplan (the 2017 ESPP), which became effective upon the closing of the Company's IPO in July 2017. The Company hasreserved 225,000 shares of common stock for issuance under the 2017 ESPP. The Company has not issued any shares underthe 2017 ESPP.11. Income TaxesFor the years ended December 31, 2017, 2016 and 2015, the Company recorded no income tax benefit for the net operatinglosses incurred in each year, due to its uncertainty of realizing a benefit from those items.A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations as ofDecember 31, 2017, 2016 and 2015 are as follows: 2017 2016 2015 Income tax computed at federal statutory tax rate 34.0% 34.0%34.0%State taxes, net of federal benefit 5.1% 5.1%5.4%Permanent differences (0.8)% (1.3)%(0.6)%Research and development expenditures (2.3)% —% —% General business credits 8.2% 12.9%7.3%Impact of tax reform (27.3)% —% —%Section 382 adjustment for net operating losses and credits —% —%(120.1)%Other —% (0.1)%(0.2)%Change in valuation allowance (16.9)% (50.6)%74.2% —% —% —% On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act (the Tax Act) was signed into law. TheTax Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21%, requires taxpayers to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new123 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) taxes on certain foreign sourced earnings. As of December 31, 2017, the Company did not have any foreign subsidiaries andthe international aspects of the Tax Act are not applicable.The Company is still in the process of analyzing the impact to the Company of the Tax Act. On December 22, 2017, the SECstaff issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessaryinformation available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting forcertain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to the revaluationof the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the yearended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things,additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance thatmay be issued, and actions the Company may take as a result of the Tax Act, which could result in changes to the provisionaltax impacts during 2018.Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of theCompany’s net deferred tax assets as of December 31, 2017 and 2016 are as follows: 2017 2016Deferred tax assets: Net operating losses $9,324 $9,263Tax credit carryforwards 7,516 4,055Deferred revenue 13,718 11,061Licensed technology 1,266 856Depreciation 268 286Accrued expenses 53 215Deferred expenses 313 180Unrealized loss 41 —Other state credits 103 75Total deferred tax assets 32,602 25,991Valuation allowance (32,602) (25,991)Net deferred tax assets $ — $ — The Company has incurred net operating losses (“NOL”) since inception. At December 31, 2017, the Company had Federaland State net operating loss carryforwards of approximately $34,200 and $33,900, respectively, which expire at various datesthrough 2037. At December 31, 2017, the Company had Federal and State research and development tax credit carryforwardsof approximately $5,600 and $2,600, respectively, which expire at various dates through 2037.As required by ASC 740, management of the Company has evaluated the evidence bearing upon the reliability of its deferredtax assets. Based on the weight of available evidence, both positive and negative, management has determined that it is morelikely than not that the Company will not realize the benefits of these assets. Accordingly, the Company recorded a valuationallowance of $32,602 and $25,991 at December 31, 2017 and December 31, 2016, respectively. The valuation allowanceincreased by $6,611 and $6,930 during the years ended December 31, 2017 and 2016, respectively, primarily as a result ofnet operating losses generated during the periods.Utilization of the NOLs and research and development tax credit carryforwards may be subject to a substantial annuallimitation under Section 382 due to ownership change limitations that have occurred previously or that could occur in thefuture in accordance with Section 382, as well as similar state provisions. These ownership changes may limit the amount ofNOLs and research and development tax credit carryforwards that can be utilized annually to offset future taxable incomeand tax, respectively. If a change in control as defined by Section 382 has occurred at any time since the Company’s124 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) formation, utilization of its NOLs or research and development tax credit carryforwards would be subject to an annuallimitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of theownership change by the applicable long-term tax-exempt rate, which could then be subject to additional adjustments, asrequired. Any limitation may result in expiration of a portion of the NOLs or research and development tax carryforwardsbefore their utilization. The Company has determined that ownership changes have occurred through December 31, 2015 andthat certain NOLs and research and development tax credit carryforwards will be subject to limitation. The amounts presenteddo not include NOLs or research and development tax credit carryforwards that will expire unused due to ownership changes.The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. TheCompany’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by theCompany in its tax filings or positions is more likely than not to be realized following resolution of any potentialcontingencies present related to the tax benefit. As of December 31, 2017 and 2016, the Company had no unrecognized taxbenefits.The Company has not conducted a study of its research and development credit carryforwards. This study may result in anadjustment to research and development credit carryforwards; however, until a study is completed and any adjustment isknown, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided againstthe Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by anadjustment to the valuation allowance. Thus, there would be no impact to the balance sheets or statements of operations if anadjustment were required.Interest and penalties related to uncertain tax positions would be classified as income tax expense in the accompanyingstatements of operations. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related touncertain tax positions.The Company files income tax returns in the United States federal tax jurisdiction and one state jurisdiction. The Companydid not have any foreign operations during the years ended December 31, 2017, 2016 and 2015. The statute of limitations forassessment by the Internal Revenue Service and state tax authorities is closed for tax years prior to 2014, althoughcarryforward attributes that were generated prior to tax year 2014 may still be adjusted upon examination to the extentutilized in a future period. There are currently no federal or state audits in progress.12. Employee Benefit PlanThe Company has a defined contribution plan established under Section 401(k) of the Internal Revenue Code (401(k) Plan),which covers substantially all employees. Employees who have attained the age of 21 are eligible to participate in the401(k) Plan with no service requirement. Employees may contribute up to 75% of eligible pay on a pre–tax basis up to thefederal annual limits. The Company matches the employees’ contributions at 50% on the first 6% up to $6. For the yearsended December 31, 2017, 2016 and 2015, the Company recorded expense of $273, $136 and $100, respectively, related toits contribution to its 401(k) Plan.13. CommitmentsOperating LeasesThe Company leases office space in Cambridge, MA under an operating lease, which was effective through March 2019. Thelease also provided the Company with a tenant improvement allowance of up to $356. The Company fully utilized theallowance and recorded the assets acquired with the allowance as leasehold improvements. The Company recorded the125 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) tenant improvement allowance incurred as a deferred lease incentive and has amortized the deferred lease incentive through areduction of rent expense ratably over the lease term.In connection with the office lease, the Company has a letter of credit agreement for the benefit of its landlord in the amountof $321 as of each December 31, 2017 and 2016, respectively, collaterized by a money market account. The Companyclassified this amount as restricted cash in the accompanying consolidated balance sheets.In January 2018, the Company amended the lease agreement and extended the lease term through March 2021.In addition, the Company leases certain equipment under operating leases that expire through February 2022. Futureminimum lease payments under operating leases, as amended, were as follows:2018 $2,0892019 2,2712020 2,3942021 6872022 9 $7,450 Rent expense was approximately $1,834, $1,572 and $947 for the years ended December 31, 2017, 2016 and 2015,respectively.The Company is recording rent expense on a straight-line basis over the term of the lease and has recorded deferred rent inthe consolidated balance sheets accordingly.License AgreementsThrough December 31, 2017 the Company has licensed intellectual property from two biotechnology companies. Theconsideration included upfront payments and a commitment to pay annual license fees, milestone payments, and, uponproduct commercialization, royalties on revenue generated from the sale of products covered by the licenses. The Companyrecorded a $1,000 upfront payment as research and development expense for the year ended December 31, 2015. During theyear ended December 31, 2017, the Company recorded expense related to milestone payments of $2,750 related to theseagreements.14. Related Party TransactionsIncluded in Series C‑1 financing and the Company’s IPO were investments of $10,000 and $10,000, respectively, by Takeda,one of the Company’s collaborators.15. Subsequent EventsThe Company considered the events or transactions occurring after the balance sheet date, but prior to the issuance of theconsolidated financial statements, for potential recognition or disclosure in its consolidated financial statements. Allsignificant subsequent events have been properly disclosed in the consolidated financial statements. 126 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) 16. Selected Quarterly Financial Data (unaudited)The following table contains selected quarterly financial information for 2017 and 2016. The Company believes that thefollowing information reflects all normal recurring adjustments necessary for a fair statement of the information for theperiods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Three months ended March 31,2017 June 30, 2017 September 30,2017 December 31,2017Collaboration revenue $4,290 $3,727 $6,267 $3,261Operating expenses: Research and development 10,106 10,627 11,412 14,555General and administrative 2,296 2,204 2,905 3,057Total operating expenses 12,402 12,831 14,317 17,612Other income: Other income (expense) — — — —Interest income 51 158 318 383Total other income 51 158 318 383Net loss $(8,061) $(8,946) $(7,732) $(13,968)Net loss per share attributable to common stockholders— basic and diluted $(6.02) $(6.33) $(0.35) $(0.61)Weighted-average number of common shares used innet loss per share attributable to common stockholders— basic and diluted 1,338,475 1,412,308 22,242,129 22,750,425 127 Table of ContentsMersana Therapeutics, Inc.Notes to consolidated financial statements(continued) Three months ended March 31,2016 June 30, 2016 September 30,2016 December 31,2016Collaboration revenue $3,697 $6,215 $3,262 $11,997Operating expenses: Research and development 7,436 8,171 7,555 8,846General and administrative 1,621 1,826 1,598 1,939Total operating expenses 9,057 9,997 9,153 10,785Other income: Other income (expense) — — — —Interest income 4 16 54 47Total other income 4 16 54 47Net income (loss) $(5,356) $(3,766) $(5,837) $1,259Net income attributable to participating securities — — — (1,166)Net income (loss) attributable to common stockholders $(5,356) $(3,766) $(5,837) $93Net income (loss) per share attributable to commonstockholders — basic $(4.31) $(3.00) $(4.56) $0.07Net income (loss) per share attributable to commonstockholders — diluted $(4.31) $(3.00) $(4.56) $0.07Weighted-average number of common shares used innet income (loss) per share attributable to commonstockholders — basic 1,242,993 1,254,104 1,279,383 1,290,224Weighted-average number of common shares used innet income (loss) per share attributable to commonstockholders — diluted 1,242,993 1,254,104 1,279,383 2,647,181 128 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENone. ITEM 9A. CONTROLS AND PROCEDURESManagement’s Evaluation of our Disclosure Controls and ProceduresWe maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated andcommunicated to our management, including our principal executive and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achieving their objectives and our managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Ourdisclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.Our management, with the participation of our chief executive officer and chief financial officer, has evaluated theeffectiveness of our disclosure controls and procedures as of December 31, 2017, the end of the period covered by thisAnnual Report on Form 10-K. Based upon such evaluation, our chief executive officer and chief financial officer haveconcluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.Internal Control Over Financial ReportingManagement’s Report on Internal Control Over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control overfinancial reporting or an attestation report of our independent registered public accounting firm due to a transition periodestablished by rules of the SEC for newly public companies.Changes in Internal Control over Financial ReportingDuring the three months ended December 31, 2017, we implemented a new enterprise resource system for the purposes ofmaintaining our general ledger and reporting. There were no other changes in our internal control over financial reportingthat occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATIONNone.129 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this Item 10 will be included under the captions “Executive Officers,” “Election of Directors”and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed with the SECwith respect to our 2018 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item 11 will be included under the captions “Executive and Director Compensation” and“Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement to be filed with the SECwith respect to our 2018 Annual Meeting of Stockholders and is incorporated here by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSThe information required by this Item 12 will be included under the Captions “Security Ownership of Certain BeneficialOwners and Management” and “Securities Authorized for issuance Under Equity Compensation Plans” in our definitiveproxy statement to be filed with the SEC with respect to our 2018 Annual Meeting of Stockholders and is incorporatedherein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this Item 13 will be included under the Captions “Employment Agreements,” “PotentialPayments Upon Termination or Change in Control,” “Board Determination of Independence” and “Related PersonTransactions” in our definitive proxy statement to be filed with the SEC with respect to our 2018 Annual Meeting ofStockholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this Item 14 will be included under the Captions “Audit Fees and Services” and “Pre-ApprovalPolicies and Procedures” in our definitive proxy statement to be filed with the SEC with respect to our 2018 Annual Meetingof Stockholders and is incorporated herein by reference.130 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.Financial StatementsFor a list of the consolidated financial statements included herein, see Index to the Consolidated Financial Statements in thisAnnual Report on Form 10-K, which is incorporated into this Item by reference.Financial Statement SchedulesNo financial statement schedules have been submitted because they are not required or are not applicable or because theinformation required is included in the consolidated financial statements or the notes thereto.ExhibitsEXHIBIT INDEXExhibitNumber Description of Exhibit3.1 Fifth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to theCompany’s Form S-1, File No. 333-218412, filed on June 1, 2017). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to the Company’s Form S-1, File No.333-218412, filed on June 1, 2017). 4.1 Form of Common Stock Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1, FileNo. 333-218412, filed on June 1, 2017). 4.2 Third Amended and Restated Investor Rights Agreement, dated as of June 15, 2016, by and among MersanaTherapeutics, Inc. and the Stockholders listed therein (incorporated by reference to Exhibit 4.2 to theCompany’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.1† Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Form S-1/A,File No. 333-218412, filed on June 16, 2017). 10.2 Commercial Lease, dated February 24, 2009, between Mersana Therapeutics, Inc. and Rivertech Associates II,LLC (incorporated by reference to Exhibit 10.2 to the Company’s Form S-1, File No. 333-218412, filed onJune 1, 2017). 10.3 Fifth Lease Extension and Modification Agreement, dated November 30, 2015, by and between MersanaTherapeutics, Inc. and Rivertech Associates II LLC (incorporated by reference to Exhibit 10.3 to theCompany’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.4+ Collaboration and Commercial License Agreement, dated June 23, 2014, by and between MersanaTherapeutics, Inc. and Merck KGaA (incorporated by reference to Exhibit 10.4 to the Company’s Form S-1,File No. 333-218412, filed on June 1, 2017). 10.5+ Amendment 1 to the Collaboration and Commercial License Agreement, dated June 1, 2016, by and betweenMersana Therapeutics, Inc. and Merck KGaA (incorporated by reference to Exhibit 10.5 to the Company’sForm S-1, File No. 333-218412, filed on June 1, 2017). 131 Table of Contents10.6+ Amendment 2 to the Collaboration and Commercial License Agreement, dated August 12, 2016, by andbetween Mersana Therapeutics, Inc. and Merck KGaA (incorporated by reference to Exhibit 10.6 to theCompany’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.7+ Amendment 3 to the Collaboration and Commercial License Agreement, dated February 28, 2017, by andbetween Mersana Therapeutics, Inc. and Merck KGaA (incorporated by reference to Exhibit 10.7 to theCompany’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.8+ License, Development and Commercialization Agreement, dated July 9, 2015, by and between MersanaTherapeutics, Inc. and Recepta Biopharma S.A. (incorporated by reference to Exhibit 10.8 to the Company’sForm S-1, File No. 333-218412, filed on June 1, 2017). 10.9+ Agreement Regarding LICR Technology, dated July 9, 2015, by and between Ludwig Institute for CancerResearch, Recepta Biopharma S.A. and Mersana Therapeutics, Inc. (incorporated by reference to Exhibit 10.9to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.10+ Collaboration Agreement, dated as of July 25, 2012, by and between Adimab, LLC and MersanaTherapeutics, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.11+ Amendment Number One to the Collaboration Agreement, dated February 21, 2013, by and between Adimab,LLC and Mersana Therapeutics, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Form S-1,File No. 333-218412, filed on June 1, 2017). 10.12+ Amendment Number One, to the Collaboration Agreement dated June 17, 2014, by and between Adimab,LLC and Mersana Therapeutics, Inc. (incorporated by reference to Exhibit 10.12 to the Company’s Form S-1,File No. 333-218412, filed on June 1, 2017). 10.13+ Development Collaboration and Commercial License Agreement, dated January 29, 2016, by and betweenMersana Therapeutics, Inc. and Millennium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.13to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.14+ Amended and Restated Research Collaboration and Commercial License Agreement, dated as of January 29,2016, by and between Mersana Therapeutics, Inc. and Millennium Pharmaceuticals, Inc. (incorporated byreference to Exhibit 10.14 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.15+ Amendment Number One to the A&R Research Collaboration and Commercial License Agreement, datedMarch 9, 2017, by and between Mersana Therapeutics, Inc. and Millennium Pharmaceuticals, Inc.(incorporated by reference to Exhibit 10.15 to the Company’s Form S-1, File No. 333-218412, filed on June 1,2017). 10.16 Second Amendment to Amended and Restated Research Collaboration and Commercial License Agreement,as amended, dated August 2, 2017 by and between Mersana Therapeutics, Inc. and MillenniumPharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, File No. 001-38129, filed on August 11, 2017). 10.17 Third Amendment to the Amended and Restated Research Collaboration and Commercial LicenseAgreement, as amended, dated October 30, 2017 by and between Mersana Therapeutics, Inc. and MillenniumPharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s From 10-Q, file No. 001-38129, filed on November 13.2017). 132 Table of Contents10.18† Amended and Restated Offer Letter, by and between Mersana Therapeutics, Inc. and Anna Protopapas, datedMarch 17, 2017 (incorporated by reference to Exhibit 10.16 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.19† Amended and Restated Offer Letter, by and between Mersana Therapeutics, Inc. and Donald A. Bergstrom,dated March 8, 2017 (incorporated by reference to Exhibit 10.17 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.20† Amended and Restated Offer Letter, by and between Mersana Therapeutics, Inc. and Timothy B. Lowinger,dated March 8 (incorporated by reference to Exhibit 10.18 to the Company’s Form S-1, File No. 333-218412,filed on June 1, 2017). 10.21† 2007 Stock Incentive Plan; as amended (incorporated by reference to Exhibit 10.19 to the Company’s FormS-1, File No. 333-218412, filed on June 1, 2017). 10.22† Form of Incentive Stock Option under the 2007 Stock Incentive Plan (incorporated by reference to Exhibit10.20 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.23† Form of Nonqualified Stock Option under the 2007 Stock Incentive Plan (incorporated by reference toExhibit 10.21 to the Company’s Form S-1, File No. 333-218412, filed on June 1, 2017). 10.24† 2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to the Company’s Form S-1/A, File No.333-218412, filed on June 16, 2017). 10.25† Form of Incentive Stock Option under the 2017 Stock Incentive Plan (incorporated by reference to Exhibit10.23 to the Company’s Form S-1/A, File No. 333-218412, filed on June 16, 2017). 10.26† Form of Nonqualified Stock Option under the 2017 Stock Incentive Plan (incorporated by reference toExhibit 10.24 to the Company’s Form S-1/A, File No. 333-218412, filed on June 16, 2017). 10.27† 2017 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.25 to the Company’s Form S-1/A, File No. 333-218412, filed on June 16, 2017). 10.28† 2017 Cash Bonus Plan (incorporated by reference to Exhibit 10.26 to the Company’s Form S-1/A, File No.333-218412, filed on June 16, 2017). 21.1* Subsidiaries of Mersana Therapeutics, Inc. 23.1* Consent of Ernst & Young LLP. 31.1* Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002 by Chief Executive Officer. 31.2* Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002 by Chief Financial Officer. 32.1** Certification of periodic financial report pursuant to Section 906 of Sarbanes Oxley Act of 2002 by ChiefExecutive Officer and Chief Financial Officer. 101. *INS XBRL Instance Document.101. *SCH XBRL Taxonomy Extension Schema.101. *CAL XBRL Taxonomy Extension Calculation Linkbase.133 Table of Contents101. *DEF XBRL Taxonomy Extension Definition Linkbase.101. *LAB XBRL Taxonomy Extension Label Linkbase.101. *PRE XBRL Taxonomy Extension Presentation Linkbase. *Filed herewith.**Furnished herewith.†Indicates a management contract or compensatory plan.+Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request forconfidential treatment and this exhibit has been submitted separately to the Securities and ExchangeCommission.134 Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized. Mersana Therapeutics, Inc. Dated: March 28, 2018/s/ Anna Protopapas Anna Protopapas President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on dates indicated.Signature Title Date /s/ ANNA PROTOPAPASAnna Protopapas President, Chief Executive Officer and Director(Principal Executive Officer) March 28, 2018/s/ DAVID A. SPELLMANDavid A. Spellman Chief Financial Officer (Principal Financial Officer) March 28, 2018/s/ WAYNE FOSTERWayne Foster Vice President of Finance (Principal AccountingOfficer) March 28, 2018/s/ DAVID MOTTDavid Mott Chairman of the Board March 28, 2018/s/ ELAINE V. JONESElaine V. Jones, Ph.D. Director March 28, 2018/s/ SARA NAYEEMSara Nayeem, M.D. Director March 28, 2018 /s/ KRISTEN HEGEKristen Hege, M.D. Director March 28, 2018/s/ ANDREW A. F. HACKAndrew A. F. Hack, M.D., Ph.D. Director March 28, 2018/s/ LAWRENCE M. ALLEVALawrence M. Alleva Director March 28, 2018/s/ WILLARD H. DERE, M.D.Willard H. Dere, M.D. Director March 28, 2018 135Exhibit 21.1 Subsidiaries of the Registrant Entity State of Incorporation or OrganizationMersana Securities Corp. Massachusetts Exhibit 23.1 Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement (Form S-8 No. 333-222845) pertaining to the Mersana Therapeutics, Inc. 2017 StockIncentive Plan,(2)Registration Statement (Form S-8 No. 333-219388) pertaining to the Mersana Therapeutics, Inc. 2007 StockIncentive Plan, as amended, the Mersana Therapeutics, Inc. 2017 Stock Incentive Plan and the MersanaTherapeutics, Inc. 2017 Employee Stock Purchase Plan;of our report dated March 28, 2018, with respect to the consolidated financial statements of Mersana Therapeutics, Inc.included in this Annual Report (Form 10-K) of Mersana Therapeutics, Inc. for the year ended December 31, 2017./s/ Ernst & Young LLPBoston, MassachusettsMarch 28, 2018Exhibit 31.1CERTIFICATIONSI, Anna Protopapas, certify that: 1. I have reviewed this Annual Report on Form 10-K of Mersana Therapeutics, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent 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;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the periodin which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport), that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (orpersons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant's internal control over financial reporting. Date: March 28, 2018By: /s/ Anna Protopapas Anna Protopapas President and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATIONSI, David A. Spellman, certify that:1. I have reviewed this Annual Report on Form 10-K of Mersana Therapeutics, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent 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;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the periodin which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport), that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant's internal control over financial reporting. Date: March 28, 2018By: /s/ David A. Spellman David A. Spellman Chief Financial Officer(Principal Financial Officer) Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANTTO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Mersana Therapeutics, Inc. (the “Company”) for the year endedDecember 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of theundersigned officers of the company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United StatesCode, that to the best of her or his knowledge:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Actof 1934; and(2) the information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company. Date: March 28, 2018By: /s/ Anna Protopapas Anna Protopapas President and Chief Executive Officer(Principal Executive Officer) Date: March 28, 2018By: /s/ David A. Spellman David A. Spellman Chief Financial Officer(Principal Financial Officer) 

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