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MACROGENICS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 5, 2014

The following discussion of our financial condition and results of operations is based upon our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America, ("GAAP"), for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these unaudited consolidated financial statements and the notes thereto as well as in conjunction with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 and our subsequent Quarterly and Current Reports on Forms 10-Q and 8-K.



Overview

We are a clinical-stage biopharmaceutical company focused on discovering and developing innovative monoclonal antibody-based therapeutics for the treatment of cancer and autoimmune diseases. We generate our pipeline of product candidates from our proprietary suite of next-generation antibody technology platforms which we believe improve the performance of monoclonal antibodies and antibody-derived molecules. These product candidates, which we have identified through our understanding of disease biology and immune-mediated mechanisms, may address disease-specific challenges, which are not currently being met by existing therapies. The combination of our technology platforms and antibody engineering expertise has allowed us to generate promising product candidates and enter into several strategic collaborations with global pharmaceutical and biotechnology companies. These collaborations provide us with funding and allow us to leverage the additional expertise of our collaborators to advance the development of our product candidates. As of June 30, 2014, we have three oncology product candidates in clinical development and we expect to commence Phase 1 clinical trials on one additional product candidate later in 2014. Two of these programs utilize our Fc-optimization technology and two of them are based on our Dual-Affinity Re-Targeting ("DART") technology. We also intend to advance three additional pre-clinical DART product candidates to Investigational New Drug ("IND") submission and commence Phase 1 clinical trials with these product candidates in 2015. Key ongoing programs include:



Margetuximab is an Fc-optimized monoclonal antibody that targets

HER2-expressing tumors, including breast, gastroesophageal and other

cancers. HER2, or human epidermal growth factor receptor 2, is critical

for the growth of many types of tumors. We are currently enrolling a Phase

2a clinical trial in metastatic breast cancer and the planning for the

Phase 3 clinical trial in advanced gastroesophageal cancer is ongoing.

MGA271 is an Fc-optimized monoclonal antibody that targets B7-H3, a member

of the B7 family of molecules and is over-expressed on a wide variety of

solid tumor types. We expect to complete the first three dose expansion

cohorts of a Phase 1 clinical trial by the end of 2014. We plan to

initiate additional expansion cohorts using MGA271 as monotherapy in other

tumor types, as well as combining MGA271 with other therapies for certain

tumor types. MGD006 is a humanized DART molecule that recognizes both CD123, the



interleukin-3 receptor ("IL3R") alpha chain which is expressed on leukemia

and leukemic stem cells, but at very low levels if at all on normal hematopoietic stem cells, and CD3, which is expressed on T cells. We initiated our Phase 1 clinical trial with this program in the second quarter of 2014.



MGD007 is a humanized DART molecule that recognizes both the glycoprotein

gpA33, expressed on gastrointestinal tumors, including more than 95% of

human colon cancers, and CD3, which is expressed on T cells. In July 2014,

the IND application for MGD007 was cleared by the FDA. Accordingly, we

anticipate starting our Phase I clinical trial with this molecule later this year. MGD010 is a humanized DART molecule that targets both CD32B, a



co-inhibitory molecule, and CD79B, part of the B cell antigen receptor

complex, two proteins expressed on the immune system's B cells. 19



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We commenced active operations in 2000, and have since devoted substantially all of our resources to staffing our company, business planning, raising capital, developing our technology platforms, identifying potential product candidates, undertaking pre-clinical studies and conducting clinical trials. We have not generated any revenues from the sale of any products to date. We have financed our operations primarily through the private placements of convertible preferred stock, the public offerings of our common stock, collaborations, and government grants and contracts. From inception through June 30, 2014, we received $151.3 million from the sale of convertible preferred stock and warrants. We raised $85.6 million ($83.8 million net of expenses and deferred financing costs) in October 2013 through the sale of common stock in connection with our Initial Public Offering ("IPO") and exercise by the underwriters of their over-allotment option. We raised an additional $77.2 million ($76.7 million net of expenses and deferred financing costs) through a follow-on public offering of our common stock and full exercise by the underwriters of their over-allotment option in February 2014. In addition, we have received significant non-equity capital from our collaborators in the form of upfront fees, milestone payments, annual maintenance payments and license option fees as well as reimbursement payments through our collaborations and government grants and contracts. Although it is difficult to predict our funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents as of June 30, 2014, combined with the collaboration payments we anticipate receiving, will enable us to fund the clinical development of margetuximab, MGA271, MGD006, MGD007, MGD010 and two additional pre-clinical DART oncology product candidates into 2017, assuming all of our collaboration programs advance as currently contemplated. Through June 30, 2014, we had an accumulated deficit of $191.1 million. We expect that over the next several years we will increase our expenditures in research and development in connection with our ongoing activities with several clinical trials.



Strategic Collaborations and Licenses

We have entered into several strategic collaborations which provide us with significant additional funding in order to continue development of our pipeline and to extend our technology platforms and on-going programs. Our collaborations have allowed us to speed up the progress of our on-going pre-clinical and clinical stage programs. Our most significant strategic collaborations include the following:



Takeda. In May 2014, we entered into a license and option agreement with

Takeda for the development and commercialization of MGD010, a product candidate that incorporates our proprietary DART technology to simultaneously engage CD32B and CD79B, which are two B-cell surface proteins. MGD010 is currently in pre-clinical development for the treatment of autoimmune diseases. Upon execution of the agreement, Takeda



made a non-refundable payment of $15.0 million to us. Takeda has an option

to obtain an exclusive worldwide license for MGD010 following the

completion of a pre-defined Phase 1a study. We will lead all product

development activities until that time. If Takeda exercises its option, it

will assume responsibility for future development and pay us a license

option fee that, when combined with an early development milestone, would

total $18.0 million. Assuming successful development and commercialization

of MGD010, we are eligible to receive up to an additional $468.5 million

in development, regulatory and sales milestone payments. If

commercialized, we would receive double-digit royalties on any global net

sales and have the option to co-promote MGD010 with Takeda in the United

States. Finally, we may elect to fund a portion of Phase 3 clinical

development in exchange for a North American profit share.



Gilead. In January 2013, we entered into an agreement with Gilead for

Gilead to obtain exclusive worldwide rights for the research, development

and commercialization of up to four DART molecules. For each molecule

Gilead chooses to develop, the Company is entitled to receive an initial

$7.5 million license grant fee and is further eligible to receive up to an

additional $20 to $25 million in pre-clinical milestones and up to $240 to

$250 million in additional clinical, regulatory and sales milestones.

Gilead also provides funding for our internal and external research costs

under the agreement and we are eligible to receive tiered royalties on the

net sales at percentages ranging from the high-single digits to the low

double digits subject to reductions in specified circumstances.



Servier. In November 2011, we entered into a collaboration agreement with

Servier under which we granted Servier an option to obtain an exclusive

license to develop and commercialize MGA271 in all countries other than the United States, Canada, Mexico, Japan, South Korea and India. We



received a $20.0 million option grant fee and a $10.0 million milestone

payment, and 20



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may be eligible to receive up to approximately $415.0 million in license

option fees and clinical, development, regulatory and sales milestone

payments. In the event Servier exercises its option, Servier must pay a license option fee, which we estimate to be $30.0 million, based on the number of different indications represented within the planned Phase 1 patient population. We and Servier will share Phase 2 and Phase 3 development costs. In September 2012, we entered into a second agreement with Servier and granted it options to obtain three separate exclusive licenses to develop and commercialize DART molecules, consisting of those designated by us as MGD006 and MGD007, as well as a third DART molecule, in all countries other than the United States, Canada, Mexico, Japan, South Korea and India. We received a $20.0 million option grant fee. In addition, we became eligible to receive up to approximately $1 billion in additional license grant fees, and clinical, development, regulatory and sales milestone payments if Servier exercises all three of its options and successfully develops, obtains regulatory approval for, and commercializes a product under each license, including $5.0 million upon IND acceptance for each of MGD006, MGD007 and a third DART molecule. In addition to these milestone payments, we and Servier will share Phase 2 and Phase 3 development costs. In February 2014, Servier exercised its option to develop and commercialize MGD006, for which we received a $15.0 million license option fee. We also received a $5.0 million milestone payment from Servier in connection with the IND application for MGD006 clearing the 30-day review period by the U.S. Food and Drug Administration ("FDA"). In July 2014, the IND application for MGD007 cleared the 30-day review period by the FDA. This triggered an additional $5.0 million milestone payment due to us by Servier.



Additionally, under both agreements, Servier would be obligated to pay us low- to mid-double digit royalties on product sales in its territories.

Boehringer. In October 2010, we entered into an agreement with Boehringer

to discover, develop and commercialize up to ten DART molecules which may

span multiple therapeutic areas. We granted Boehringer an exclusive

worldwide, royalty-bearing license and received an upfront payment of $15.0 million. In the fourth quarter of 2013, Boehringer nominated a bi-specific antibody therapeutic candidate generated by our DART technology for pre-clinical development. This formal selection of a development candidate triggered a $5.0 million milestone payment to us



under the agreement. We have received three annual maintenance payments,

including a $4.0 million payment in the fourth quarter of 2013. We have

the potential to earn development, regulatory and sales milestone payments

that can reach up to approximately $210.0 million for each of the DART

programs under this agreement. Boehringer provides funding for our

internal and external research costs and is required to pay us mid-single

digit royalties on product sales.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2014 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013. 21



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Results of Operations

Research and Development Revenue

The following represents a comparison of our research and development revenue for the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in millions) Revenue from collaborative research $ 9.2 $ 11.8$ (2.6 ) (22 %) Grant revenue 0.0 0.5 (0.5 ) (96 %) Total revenue $ 9.2 $ 12.3$ (3.1 ) (25 )% Six Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in millions) Revenue from collaborative research $ 23.6$ 21.9$ 1.7 8 % Grant revenue 0.3 1.0 (0.7 ) (66 %) Total revenue $ 23.9$ 22.9$ 1.0 5 % The decrease in collaboration revenue of $2.6 million for the three months ended June 30, 2014 compared to the same period in 2013 is due to a decrease in revenue recognition related to the Servier MGA271 agreement as the estimated development period, and therefore the revenue recognition period of previously deferred revenues, was extended. Additionally, the Pfizer development period was completed in January 2014. These decreases were partially offset by an increase in revenue under the Boehringer agreement. The increase in collaboration revenue of $1.7 million for the six months ended June 30, 2014 compared to the same period in 2013 is due to the receipt of a $5.0 million milestone payment under our agreement with Servier, revenue recognized related to the Green Cross amendment and related accounting adjustment of $1.3 million (see Note 4 to the financial statements for additional information), increased revenue under the Boehringer agreement and revenue recognized under the Takeda agreement. These increases were partially offset by the decrease in revenue recognition related to the Servier MGA271 agreement and the decrease in revenue under the Pfizer agreement. Grant revenue decreased in the three and six month periods ended June 30, 2014 as compared to the same periods in 2013 due primarily to less activity on the Dengue virus grant. 22



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Research and Development Expense

The following represents a comparison of our research and development expense for the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in millions) Margetuximab $ 3.1 $ 2.1 $ 1.0 48 % MGA271 5.5 2.0 3.5 175 % DART product candidates 6.9 5.7 1.2 21 % Teplizumab 0.2 0.8 (0.6 ) (75 %) Other discovery and pre-clinical programs, collectively 1.6 0.4 1.2 300 % Total research and development expense $ 17.3$ 11.0$ 6.3 57 % Six Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in millions) Margetuximab $ 7.6 $ 3.1 $ 4.5 145 % MGA271 7.9 3.6 4.3 119 % DART product candidates 12.6 10.6 2.0 19 % Teplizumab 0.5 1.2 (0.7 ) (58 %) Other discovery and pre-clinical programs, collectively 3.3 2.6 0.7 27 % Total research and development expense $ 31.9$ 21.1$ 10.8 51 % During the three and six months ended June 30, 2014 our research and development expense increased by $6.3 million and $10.8 million, respectively, compared to the same period in 2013 due primarily to the initiation of clinical manufacturing of two product candidates and preparations for the margetuximab Phase 3 study and DART product candidate Phase 1 studies.



General and Administrative Expense

The following represents a comparison of our general and administrative expense for the three and six months ended June 30, 2014 and 2013:

Three Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in millions) General and administrative expense $ 4.1 $ 1.5 $ 2.6 176 % Six Months Ended June 30, Increase/(Decrease) 2014 2013 (dollars in



millions)

General and administrative expense $ 7.4 $ 5.3 $ 2.1

39 % General and administrative expense increased for the three and six months ended June 30, 2014 by $2.6 million and $2.1 million compared to the same period in 2013 primarily due to an increase in stock-based compensation expense and increased insurance, professional fees and other costs associated with public company operations in 2014. 23



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Other Income (Expense)

The change from other expense to other income for the three and six months ended June 30, 2014 compare to the same period in 2013 is primarily due to the change in the fair market value of the preferred stock warrant liability in 2013. This liability was settled in connection with our IPO in October 2013.



Cash Flows

The following table represents a summary of our cash flows for the six months ended June 30, 2014 and 2013:

Six Months Ended June 30, 2014 2013 (dollars in millions) Net cash provided by (used in): Operating activities $ 1.7$ (13.8 ) Investing activities (1.2 ) (0.9 ) Financing activities 77.0 0.7



Net increase (decrease) in cash and cash equivalents $ 77.5

$ (14.0 ) Operating Activities Net cash provided by (used in) operating activities reflects, among other things, the amounts used to run our clinical trials and pre-clinical activities, including toxicology studies. The difference between net cash provided by operating activities during the six months ended June 30, 2014 and net cash used in operating activities during the same period in 2013 was primarily due to receipt of $20.0 million from Servier in the first quarter of 2014 and $15.0 million from Takeda in the second quarter of 2014, offset by increased spending on contract manufacturing activities and clinical trials.



Investing Activities

Net cash used in investing activities was primarily due to the acquisition of additional lab equipment needed to further our research and development activities.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014 includes net proceeds from our follow-on equity offering and cash from stock option exercises. Net cash provided by financing activities for the six months ended June 30, 2013 includes cash from stock option exercises. 24



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Liquidity and Capital Resources

We have financed our operations primarily through the private placements of convertible preferred stock, the public offerings of our common stock, upfront fees, milestone payments, annual maintenance payments and license option fees from collaborators and reimbursement through government grants and contracts. As of June 30, 2014, we had $194.0 million in cash and cash equivalents.



In addition to our existing cash and cash equivalents, we expect to continue to receive additional reimbursement from our collaborators for research and development services rendered, additional milestone and opt-in payments and grant revenue. However, our ability to receive these milestone payments is dependent upon our ability to successfully complete specified research and development activities and is therefore uncertain at this time.

Funding Requirements

We have not generated any revenue from product sales to date and do not expect to do so until such time as we obtain regulatory approval of and commercialize one or more of our product candidates. As we are currently in the clinical trial stage of development, it will be some time before we expect to achieve this and it is uncertain that we ever will. We expect that we will continue to increase our operating expenses in connection with ongoing as well as additional clinical trials and pre-clinical development of product candidates in our pipeline. We expect to continue our collaboration arrangements and will look for additional collaboration opportunities. We also expect to continue our efforts to pursue additional grants and contracts from the U.S. government in order to further our research and development. Although it is difficult to predict our funding requirements, based upon our current operating plan, we anticipate that our existing cash and cash equivalents as of June 30, 2014, combined with the collaboration payments we anticipate receiving, will enable us to fund the clinical development of margetuximab, MGA271, MGD006, MGD007, MGD010 and two additional pre-clinical DART oncology product candidates into 2017, assuming all of our collaboration programs advance as currently contemplated.



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined under the rules and regulations of the Securities and Exchange Commission.


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