10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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	(I.R.S. Employer
incorporation or organization)	Identification No.)

840 Memorial Drive Cambridge, MA 02139

(Address of principal executive offices)

(Zip Code)

(617) 498‑0020

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer	☐	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 revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes  ☐  No  ☒.

There were 23,153,418 shares of Common Stock ($0.0001 par value per share) outstanding as of August 13, 2018.

Unless otherwise stated or the context requires otherwise, all references to “us,” “our,” “Mersana,” “Mersana Therapeutics,” “we,” the “Company” and similar designations in this Quarterly Report on Form 10-Q refer to Mersana Therapeutics, Inc. and its consolidated subsidiary, Mersana Securities Corp.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward‑looking statements. Forward‑looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding 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 other similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain these 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 partnership arrangements;

· 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 expected cash resources and our need for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward‑looking statements, and you should not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward‑looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward‑looking statements that we make. Our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

The forward‑looking statements contained herein represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, although we may elect to update these forward‑looking statements at some point in the future, we have no current intention of doing so, except to the extent required by applicable law. You should, therefore, not rely on these forward‑looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

2

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	4
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	37
PART II - OTHER INFORMATION	38
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6. Exhibits	40
Signatures	41

3

PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

Mersana Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)

	June 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	51,142	$	26,591
Short-term marketable securities		45,367		88,143
Accounts receivable		1,681		784
Prepaid expenses and other current assets		3,995		2,025
Total current assets		102,185		117,543
Property and equipment, net		2,753		2,319
Long-term marketable securities		—		10,482
Other assets		1,970		371
Total assets	$	106,908	$	130,715
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,158	$	3,070
Accrued expenses		8,494		6,944
Deferred rent		—		232
Deferred revenue		19,224		21,635
Total current liabilities		31,876		31,881
Deferred rent, net of current portion		355		67
Deferred revenue, net of current portion		28,984		28,773
Commitments (Note 9)
Stockholders' equity
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		—		—
Common stock, $0.0001 par value; 175,000,000 shares authorized; 23,117,738 and 22,765,017 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		3		3
Additional paid-in capital		170,446		168,018
Accumulated other comprehensive loss		(90)		(149)
Accumulated deficit		(124,666)		(97,878)
Total stockholders’ equity		45,693		69,994
Total liabilities and stockholders’ equity	$	106,908	$	130,715

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except share and per share data)

	Three months ended				Six months ended
	June 30,				June 30,
		2018		2017		2018		2017
Collaboration revenue	$	4,191	$	3,727	$	7,255	$	8,017
Operating expenses:
Research and development		12,663		10,627		24,919		20,733
General and administrative		4,231		2,204		7,801		4,501
Total operating expenses		16,894		12,831		32,720		25,234
Other income:
Interest income		349		158		709		209
Total other income		349		158		709		209
Net loss	$	(12,354)	$	(8,946)	$	(24,756)	$	(17,008)
Other comprehensive loss:
Unrealized gain (loss) on marketable securities		72		(9)		59		(9)
Comprehensive loss	$	(12,282)	$	(8,955)	$	(24,697)	$	(17,017)
Net loss attributable to common stockholders — basic and diluted	$	(12,354)	$	(8,946)	$	(24,756)	$	(17,008)
Net loss per share attributable to common stockholders — basic and diluted	$	(0.54)	$	(6.33)	$	(1.08)	$	(12.36)
Weighted-average number of common shares used in net loss per share attributable to common stockholders — basic and diluted		22,966,314		1,412,308		22,891,831		1,375,595

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Six months ended
	June 30,
	2018		2017
Cash flows from operating activities
Net loss	$	(24,756)	$	(17,008)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		565		438
Loss on disposal of fixed assets		20		—
Net amortization of premiums and discounts on investments		(248)		—
Stock-based compensation		1,703		617
Change in deferred rent		56		(71)
Changes in operating assets and liabilities:
Accounts receivable		(897)		538
Prepaid expenses and other current assets		(1,970)		(926)
Other assets		(1,433)		(423)
Accounts payable		976		(205)
Accrued expenses		1,377		1,068
Deferred revenue		(4,231)		(4,627)
Net cash used in operating activities		(28,838)		(20,599)
Cash flows from investing activities
Maturities of marketable securities		53,565		—
Purchase of property and equipment		(820)		(328)
Purchase of marketable securities		—		(44,252)
Net cash provided by (used in) investing activities		52,745		(44,580)
Cash flows from financing activities
Proceeds from exercise of stock options		725		364
Payments of financing costs		(81)		(2,429)
Net cash provided by (used in) financing activities		644		(2,065)
Increase (decrease) in cash, cash equivalents and restricted cash		24,551		(67,244)
Cash, cash equivalents and restricted cash, beginning of period		26,962		100,668
Cash, cash equivalents and restricted cash, end of period	$	51,513	$	33,424
Supplemental disclosures of non-cash activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	234	$	—
Adjustment to accumulated deficit and deferred revenue upon adoption of Topic 606	$	2,031	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements

(unaudited)

(in thousands, except share and per share data)

1. Nature of business and basis of presentation

Mersana Therapeutics, Inc. is a clinical stage company located in Cambridge, Massachusetts. The Company is advancing a proprietary pipeline of targeted oncology therapeutics leveraging its Dolaflexin® antibody drug conjugate (ADC) platform. The Company’s first product candidate, XMT-1522, an ADC designed to address a much broader population of patients with HER2-antigen expressing tumors than served by currently approved HER2 therapies, is currently in a Phase 1 dose escalation study. The Company’s second product candidate, XMT-1536, an ADC targeting NaPi2b, an antigen broadly expressed in certain types of cancer, is also in a Phase 1 dose escalation study. In addition, the Company has established a strategic partnership with Takeda Pharmaceutical Company Limited (Takeda) under which Takeda obtained rights to XMT‑1522 outside of the United States and Canada. The Company has also established strategic research and development partnerships with Takeda and Merck KGaA for the development and commercialization of additional ADC product candidates against a limited number of targets selected by the Company’s partners based on the Company’s Dolaflexin platform.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval and reimbursement for any drug product candidate that it may 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, development of technological innovations by competitors, reliance on third party manufacturers and the ability to transition from pilot-scale production to large-scale manufacturing of products.

On July 19, 2018, the Company announced that the U.S. Food and Drug Administration (FDA) placed the Phase 1 study of XMT-1522 on partial clinical hold. The Company is working diligently with the FDA and the site investigators to resolve the partial clinical hold. See Note 10 to unaudited condensed consolidated financial statements for additional disclosure related to this partial clinical hold.

On July 3, 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 5,000,000 shares of its common stock at a public offering price of $15.00 per share, for aggregate gross proceeds of $75,000. The Company received $67,420 in net proceeds after deducting $7,580 of underwriting discounts and commissions and offering costs. On August 2, 2017, the Company issued and sold 51,977 shares of common stock at $15.00 per share for gross proceeds 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.

In connection with preparing for the IPO, the Company effected a 1-for-4.5 reverse stock split of the Company’s common stock. The reverse stock split became effective on June 15, 2017. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share amounts in the financial statements and the notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

The Company has incurred net losses since inception. The Company’s net loss was $24,756 for the six months ended June 30, 2018 and $38,707 for the year ended December 31, 2017. The Company expects to continue to incur operating losses for at least the next several years.  As of June 30, 2018, the Company had an accumulated deficit of $124,666. The future success of the Company is dependent on its ability to identify and develop its product candidates, and ultimately upon its ability to attain profitable operations. The Company has devoted substantially all of its financial resources and efforts to research and development and general and administrative expense to support such research and development. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on the Company’s stockholders' deficit and working capital. The Company believes that its existing cash, cash equivalents and marketable securities as of June 30, 2018, will enable it to fund its current operating plan for at least the next tweleve months, which the Company expects will allow it to achieve initial clinical data readouts for its two lead development programs.

7

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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 accepted accounting principles as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 28, 2018.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of June 30, 2018, the results of its operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017. Such adjustments are of a normal and recurring nature, other than the adjustments associated with the adoption of ASC Topic 606, Revenue from Contracts with Customers (Topic 606). The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018, or for any future period.

Effective January 1, 2018, the Company adopted the requirements of Topic 606 using the modified retrospective method as discussed below in Note 2: Summary of Significant Accounting Policies. All 2018 amounts and disclosures set forth in this Quartelry Report on Form 10-Q reflect these changes.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its subsidiary, Mersana Securities Corp. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, management’s judgments with respect to the performance obligations and estimated selling prices within its revenue arrangements, accrued expenses, valuation of stock-based awards and 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 the Company’s IPO. The Company has utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

8

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker, the Company's chief executive officer, view the Company's operations and manage its business as a single operating segment, which is the business of discovering and developing ADCs.

Research and Development

The Company expenses all costs incurred in performing research and development activities. Research and development expenses include salaries and benefits, materials and supplies, preclinical expenses, manufacturing expenses, stock-based compensation expense, depreciation of equipment, contract services and other outside expenses. Costs of certain development activities, such as manufacturing, are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected 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 development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Costs associated with collaboration agreements are included in research and development expense.

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of Topic 606, using the modified retrospective transition method.  Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts in process as of the date of adoption.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. 

The adoption of the new revenue recognition guidance resulted in increases of $2,031 in deferred revenue and accumulated deficit as of January 1, 2018. For the three months ended June 30, 2018, revenue increased by $326, net loss decreased by $326 and basic and diluted net loss per share decreased by $0.01, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. For the six months ended June 30, 2018, revenue decreased by $571, net loss increased by $571 and basic and diluted net loss per share increased by $0.02, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. These changes were primarily caused by the differences in determining and allocating transaction price under Topic 606.

The Company enters into collaboration agreements which are within the scope of Topic 606, under which the Company licenses rights to its technology and certain of the Company’s product candidates and performs research and development services for third parties.  The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front fees; reimbursement of research and development costs; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.  

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.   The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer. 

9

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

The promised good or services in the Company’s arrangement typically consist of license rights to the Company’s intellectual property and research and development services.  The Company also has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract.  Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer.  Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources or (ii) the promised good or service is separately identifiable from other promises in the contract.  In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract.  The consideration may include both fixed consideration or variable consideration.  At the inception of each arrangement that includes variable consideration and at each reporting period, the Company evaluates the amount of potential payment and the likelihood that the payments will be received.  The Company utilizes either the most likely amount method or expected amount method to estimate the amount expected to be received based on which method better predicts the amount expected to be received.  If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. We assessed each of our revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements because: (a) the promised consideration approximates the cash selling price of the promised goods and services or any significant difference is due to factors other than financing; and (b) timing of payment approximates the transfer of goods and services and performance is over a relatively short period of time within the context of the entire term of the contract.

The Company’s contracts often include development and regulatory milestone payments. At contract inception and at each reporting period, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.  If it is not probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.  Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not included in the transaction price.  At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration arrangements.

The Company allocates the transaction price based on the estimated standalone selling price of the underlying performance obligations or in the case of certain variable consideration to one or more performance obligations.  The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.  The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation.  Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts the Company would expect to receive for each performance obligation.   

For performance obligations consisting of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied

10

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees.  The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.  If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

The Company receives payments from its customers based on billing schedules established in each contract. Such billings generally have 30 day terms. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the right to consideration is unconditional.

Collaborative Arrangements

The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks 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 606 in determining the appropriate treatment for the transactions between the Company and its collaborative partners and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. To the extent revenue is generated from a collaboration, the Company will recognize its share of the net sales on a gross basis if it 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 in the transactions with customers, consistent with the guidance in Topic 606.

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820 Fair Value Measurement (ASC 820), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset 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 active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity, or a remaining maturity at the time of purchase, 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. These investments are subject to minimal credit and market risks. Cash and cash equivalents are stated at cost, which approximates market value.

11

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

The following amounts were presented as cash, cash equivalents and restricted cash:

	Six months ended				Six months ended
	June 30, 2018				June 30, 2017
	Beginning		End		Beginning		End
	of period		of period		of period		of period
Cash and cash equivalents	$	26,591	$	51,142	$	100,297	$	33,053
Restricted cash included in other assets		371		371		371		371
Total cash, cash equivalents and restricted cash per statement of cash flows	$	26,962	$	51,513	$	100,668	$	33,424

Marketable Securities

Short-term marketable securities consist of investments with maturities greater than three months and less than one year from the balance sheet date. Long-term marketable securities consist of investments with maturities greater than one year that are not 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 are recorded as interest income within other income. Unrealized gains and losses on available-for-sale securities are included in other comprehensive loss as a component of stockholders’ equity until realized.

Other Assets

The Company has recorded other assets of $1,970 and $371 as of June 30, 2018 and December 31, 2017, respectively. The June 30, 2018 amount is comprised of restricted cash of $371 held as security deposits for a standby letter of credit related to a facility lease and a corporate credit card program, $1,433 held by a service provider and $166 in deferred financing costs. The December 31, 2017 amount is comprised of restricted cash.

Accounting for Stock-based Compensation

The Company accounts for its stock-based compensation in accordance with ASC Topic 718 Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees and directors to be recognized as expense 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. The Company 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 (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividends. Due to the lack of a public market for the Company's common stock prior to completion of the IPO and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it 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 the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to do so.

12

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

There were significant judgments and estimates inherent in the determination of the fair value of our common stock prior to the closing of the IPO. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to its common stock at the time of, and the likelihood of, achieving a liquidity event, such as an IPO or sale.

In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance per ASU No. 2016-09. The adoption of this ASU did not have a material impact on the Company's financial statements.

Net Loss per Share

Basic 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-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods.

For purposes of the diluted net loss per share calculation, convertible preferred stock, warrants to purchase common stock and options to purchase common stock are considered to be potentially dilutive securities, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

	Three months ended		Six months ended
	June 30,		June 30,
	2018	2017	2018	2017
Series A-1 convertible preferred stock	—	5,574,467	—	5,574,467
Series B-1 convertible preferred stock	—	7,319,307	—	7,319,307
Series C-1 convertible preferred stock	—	3,260,897	—	3,260,897
Warrants	110,365	129,491	110,365	129,491
Stock options	3,635,541	3,177,630	3,635,541	3,177,630
	3,745,906	19,461,792	3,745,906	19,461,792

Patent Costs

The Company expenses patent application and related legal costs as incurred and classifies such costs as general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

Income Taxes

The Company accounts for income taxes using the liability method.  The difference between the financial statement and tax basis of the assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed using the tax laws 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 being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

13

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). For the three and six months ended June 30, 2018 and 2017, other comprehensive loss consisted of unrealized loss on marketable securities.

Concentration of Credit Risk and Off-Balance Sheet Risk

The 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 of credit risk primarily consist of cash equivalents and marketable securities. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. Cash, cash equivalents, and marketable securities are deposited with federally insured financial institutions in the United States and may, at times, exceed federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal risk exists with respect to those balances. Generally, these deposits may be redeemed upon demand and therefore bear minimal interest rate risk.

Recently Issued Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments (ASU No. 2016-01) related to the recording of financial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income (loss). However, an entity has the option to measure equity investments without readily determinable fair values either (i) at fair value or (ii) at cost, adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income (loss). The amended guidance became effective January 1, 2018. The Company adopted the new standard effective January 1, 2018. Based on the Company’s current investment holdings, the adoption of this new standard did not have a material impact on its consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This standard is effective for the Company in the fiscal year beginning after December 15, 2018, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU No. 2016-02 may have on its financial position and results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of contingent consideration payments made after a business combination and several other clarifications not currently applicable to the Company. The new standard also clarifies that an entity should determine each separately identifiable source or use within cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which 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 flows for the item. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (ASU No. 2016-18). The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

14

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance is intended to provide clarity and reduce diversity in practice as to when changes to the terms or conditions of share-based payments are accounted for as modifications. Under this new guidance, entities will apply modification accounting if the fair value, vesting conditions or classification of the award changes. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early adoption is permitted. The guidance per ASU 2017-09 is to be adopted prospectively to an award modified on or after the adoption date. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

3. Collaboration agreements

Takeda XMT-1522 strategic partnership

In January 2016, the Company entered into a Development Collaboration and Commercial License Agreement with Takeda through 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 to commercialize XMT-1522 outside of the United States and Canada. Under the XMT-1522 Agreement, the Company is responsible for conducting certain Phase 1 development activities for XMT-1522, including the ongoing Phase 1 clinical study, at its own expense. Takeda has the option to conduct Phase 1 development activities at its own expense within its territory. The parties will collaborate on the further development of XMT-1522 in accordance with a global development plan (Post-Phase 1 Development). The parties will share equally all clinical stage manufacturing costs and any Post-Phase 1 Development costs incurred in the performance of activities for the purpose of obtaining regulatory approval in either the United States or Canada and in certain other 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 approval in 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, the Company was entitled to a milestone payment of $20,000 upon achievement of the IND Clearance Date (as defined therein). The Company achieved the IND Clearance Date in October 2016.

In addition to the milestone payment upon achievement of the IND Clearance Date, the Company is entitled to receive future development, 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 net sales of XMT-1522 in Takeda's territory during the applicable royalty term. There are development milestones payable upon the achievement of nine separate events: the initiation of Phase 2 clinical trials and Phase 3 clinical trials for four separate specified 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 pricing approvals, as applicable, for the U.S., European Union and Japanese markets for up to four separate patient populations and multiple label indications. In addition, a regulatory milestone is payable upon the receipt of regulatory and pricing approval in two specified markets other than the United States, the European Union or Japan. There are three individual commercial milestones, which are payable upon the attainment of certain thresholds for annual net sales. The next potential milestone the Company will be eligible to receive is a development milestone of $12,000 related to the initiation of a Phase 2 clinical trial.

The XMT-1522 Agreement expires upon the expiration of the royalty term for XMT-1522, after which time, Takeda will have a perpetual, royalty-free license. However, Takeda may terminate the XMT-1522 Agreement in its entirety for convenience upon 30 days' prior written notice at any time up to the initiation of the first Phase 2 clinical study of XMT-1522 or upon 90 days' prior written notice following the initiation of the first Phase 2 clinical study of XMT-1522. Each party may terminate the XMT-1522 Agreement in its entirety upon bankruptcy or similar proceedings of the other party

15

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

and in its entirety or on a country-by-country basis upon an uncured material breach of the agreement by the other party. Following termination, XMT-1522 will revert to the Company for further development and commercialization.

Takeda strategic research and development partnership

In March 2014, the Company entered into a Research Collaboration and Commercial License Agreement with Takeda through Takeda’s wholly owned subsidiary, Millennium Pharmaceuticals, Inc. (the 2014 Agreement). The 2014 Agreement was amended in January 2015 and amended and restated in January 2016 (the 2016 Restated Agreement). The agreements initially provided Takeda with the right to develop ADCs directed to a total of seven exclusive targets, designated by Takeda, over a specified period of time. Takeda will be responsible for the product development and marketing of any products resulting from this collaboration.  To date, the Company has received $24,800 in non-refundable upfront fees, technology access fees or option exercise fees. 

For the two targets initially under the 2014 Agreement, the Company initially granted a research license upon designation of a target.  To receive a development and commercialization license for these designated targets, Takeda was required to pay an additional option exercise fee of $1,300.  For the remaining five targets, the Company grants a research, development and commercialization license upon the designation of a target.

For each designated target, the Company and Takeda develop research plans to evaluate Takeda's antibodies as ADCs incorporating the Company's technology. The Company receives service fees for its efforts under the research plans. The goal of the research plans is to provide Takeda with sufficient information to formally nominate a development candidate and begin Investigational New Drug Application (IND), enabling studies or cease development on the designated target. 

As of June 30, 2018, Takeda had designated four targets and received development and commercialization licenses for the first, third and fourth designated targets and a research license for the second designated target.  Takeda has limited replacement rights for two designated targets, subject to certain contractual restrictions.  Takeda is required to pay $500 to utilize the second limited replacement right.

As of June 30, 2018, if products are successfully developed and commercialized, the Company is entitled to receive aggregate milestones of up to $474,750 for all eligible designated targets consisting of $50,250 in development milestones, $153,000 in regulatory milestones, and $271,500 in commercial milestones. The total milestones payable on each of the remaining eligible three targets are $158,250. There are four individual development milestones per target, which are payable upon the filing of an IND application and the initiation of Phase 1 through Phase 3 clinical trials. There are eight individual regulatory milestones per target. These are payable upon regulatory submissions, regulatory approvals and pricing approvals, as applicable, for the U.S., European Union and Japanese markets and regulatory approvals for both a second and third indication. There are six individual commercial milestones, which are payable upon the first commercial sale in each of the U.S., European Union and Japanese markets and upon the attainment of three separate defined thresholds for annual net sales. The next potential milestone payment the Company will be eligible to receive is a development milestone of $750 related to the filing of an IND. The Company is also entitled to receive royalties on product sales, if any, during the applicable royalty term. Royalties payable on the remaining designated targets are in the mid to high single digits.

The Company may elect to exercise an option to co-develop and co-commercialize one product incorporating either Takeda's fifth, sixth or seventh target in the United States for a payment of $15,000. If the Company elects to exercise the option to co-develop and co-commercialize a product, the Company will share in 50% of the profits related to United States. The Company will be responsible for 50% of costs incurred specifically for the United States and 30% of global development costs. Any costs incurred specifically for a foreign country will be borne 100% by Takeda. If the Company elects to co-develop and co-commercialize a product, certain regulatory milestones and royalties related to the United States for that target would not be paid by Takeda.

16

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

Unless earlier terminated, the 2016 Restated Agreement will expire upon the expiration of the last royalty term for a product under the agreement, after which time, Takeda will have a perpetual, royalty-free license. Except with respect to the target antigen 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 upon 45 days' prior written notice. Each party may terminate the 2016 Restated Agreement in its entirety upon bankruptcy or similar proceedings of the other party or upon an uncured material breach of the agreement by the other party. However, if such breach only relates to one target, the agreement may only be terminated with respect to such target.

Accounting Analysis

For periods prior to January 1, 2018, the Company applied the provisions of ASC 605 in accounting for these arrangements.  Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 28, 2018 for the accounting analysis under these provisions.

Under ASC 605 and Topic 606, the Company has concluded that the 2016 Restated Agreement and the XMT-1522 Agreement should be accounted for as one arrangement due in part because the agreements are with the same party and were negotiated and executed contemporaneously. Further, in applying the contract modification practical expedient, the Company has aggregated the effect of all modifications through the initial date of application of Topic 606 for the purposes of (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. 

The performance obligations and the allocated transaction price as of the date of initial application of Topic 606 are as follows:

	Allocated
Performance obligations	Transaction Price
XMT-1522 license and research services	$	49,828
Joint research committee services for XMT-1522		449
Exclusive license to the first designated target and research services		6,611
Research license to the second designated target and research services		1,017
Material right related to the exclusive license to the second designated target		526
Exclusive license to the third designated target and research services		4,974
Exclusive license to the fourth designated target and research services		3,678
Material right related to the license to the fifth designated target and research services		3,506
Material right related to the license to the sixth designated target and research services		3,506
Material right to license to the seventh designated target and research services		3,506
Material right related to first replacement right for a designated target		3,506
Material right related to the second replacement right to a designated target		3,116
Rights to future technological improvements		1,750
Joint research committee services		150
	$	86,123

The Company has concluded the license related to each of the designated targets is not distinct from the research services performed related to each of the designated targets as Takeda cannot obtain the benefit of the license without the related research services.  Each license to a designated target and the related services performance obligation is considered distinct from every other license to a designated target and related services performance obligation as each research plan is pursued independent of the any other research plans for other designated targets.  Further, the material rights provided in the agreement provide Takeda incremental rights for either no additional consideration or for additional fees that contain a significant discount.  The material rights are distinct from the other performance

17

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

obligations in the arrangement as they are options in the contract and are not required for Takeda to obtain the benefit of the other promised goods or services in the arrangement. 

Similarly, the Company concluded that the XMT-1522 license and the related research and development services, including the Phase 1 development and the transfer certain materials and know how related to the Company's manufacturing processes are one performance obligation. The license to the Company's intellectual property is not distinct from the research and related development services that the Company is obligated to perform. Takeda would not have the ability to realize the value of the license without the Company performing the related services.

The Company has concluded that the Post-Phase 1 Development activities under the XMT-1522 Agreement represent joint operating activities in which both parties are active participants and of which both parties are exposed to significant risks and rewards that are dependent on the commercial success of the activities. Accordingly, the Company is accounting for the Post-Phase 1 Development activities in accordance with ASC 808 and they are not considered revenue elements under Topic 606. For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company was billed approximately $1,080, $501, $2,803 and $795, respectively, from Takeda representing the Company's share of Post-Phase 1 Development costs incurred by Takeda. These amounts have been reflected as research and development costs in the consolidated statement of operations. The Company did not perform any Post-Phase 1 Development activities or incur any associated costs prior to January 1, 2018.   During the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company billed Takeda $1,054, $0, $1,794 and $0, respectively, related to ASC 808 costs.

As of the date of initial application of Topic 606, the total transaction price for the 2016 Restated Agreement and the XMT-1522 Agreement was $86,123, which includes approximately $14,023 of fees associated with research and development activities which have been or are expected to be received.  The Company utilizes the expected value approach to estimate the amount of consideration related to the fees associated with development and research services.  The Company utilizes the most likely amount approach to estimate any development and regulatory milestone payments to be received.  As of the date of initial application of Topic 606, there were no milestone payments, which had not been received, included in the estimated transaction price.  The Company considered the stage of development and the remaining risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Takeda.  The milestone payment amounts were fully constrained, as a result of the uncertainty whether any of the associated milestones would be achieved.  The Company has determined that any commercial milestones and sales based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted and therefore have also been excluded from the transaction price.  The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.  There were no changes to the transaction price during the three and six months ended June 30, 2018. 

The transaction price was allocated to the performance obligations based on the relative estimated standalone selling prices of each performance obligation or, in the case of certain variable consideration, to one or more performance obligations.  The estimated standalone selling prices for performance obligations which include a license and research services, was developed using the estimated selling price of the license and an estimate of the overall effort to perform the research service and an estimated market rate for research services. The estimated standalone selling price of the licenses was established based on comparable transactions.  The estimated standalone selling price for the material rights and rights to future technological improvements were developed based on the estimated selling prices of a license or rights received and any fees payable upon exercise of the associated option, as well as considering the probability that additional technology would be made available or the probability the counterpart would utilize the technology or exercise the option. The estimated standalone selling price for the joint research committee services was developed using an estimate of the time and costs incurred to participate in the committees.

The Company will recognize revenue related to the performance obligations, which include research licenses or an exclusive development and commercialization license and the related research services, over the estimated period of the research and development services using a proportional performance model. The Company measures proportional

18

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

performance based on the costs incurred relative to the total estimated costs of the research.  To the extent that the Company receives fees for the research services as they are performed, these amounts are recorded as deferred revenue. Revenue related to material rights will be recognized when the option is exercised, unless there are additional research services that the Company is required to perform related to the designated target (in which case revenue will be recognized based on the proportional performance model) or at the time the option right lapses. To the extent that the company receives a fee upon exercise of the option, such amounts are recorded as deferred revenue. Revenue related to the material rights related to replacement rights will be recognized over the research term of the replacement target once the replacement right is exercised or at the time the right lapses unused. To the extent that the Company receives a fee upon exercise of the replacement right, such amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the performance period (which in the case of the joint research committee services approximates the time and cost incurred), which is expected to be ten years and six years, respectively. The Company will reassess the estimated remaining term at each subsequent reporting period.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded total revenue of $2,079, $2,754, $4,616 and $6,284, respectively, related to its efforts under the 2016 Restated Agreement and the XMT-1522 Agreement. Included in accounts receivable as of June 30, 2018 and December 31, 2017 was $2 and $454, respectively, related to the Takeda agreements.

As of June 30, 2018, the Company had $41,056 of deferred revenue related to the Takeda agreements that will be recognized over the remaining performance periods for the applicable obligations.

Takeda invested $10,000 as part of the Company’s IPO.

Merck KGaA

In June 2014, the Company entered into a Collaboration and Commercial License Agreement with Merck KGaA (the Merck KGaA Agreement). Upon the execution of the agreement, Merck KGaA paid the Company a nonrefundable technology access fee of $12,000 for the right to develop ADCs directed to six exclusive targets over a specified period of time. No additional fees are due when a target is designated and the commercial license to the target is granted. Merck KGaA will be responsible for the product development and marketing of any products resulting from this collaboration.  All six targets were designated prior to 2018.

Under the terms of the agreement, the Company and Merck KGaA develop research plans to evaluate Merck KGaA's antibodies as ADCs incorporating the Company's technology. The Company receives fees for its efforts under the research plans. The goal of the research plans is to provide Merck KGaA with sufficient information to formally nominate a development 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, the Company 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; and sales milestones—$432,000. There are six individual development milestones per target, payable upon the completion of various 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 for annual net sales.

Prior to 2018, the Company had received $3,000 related to development milestones under the agreement.   There have been no additional milestone payments in the six months ended June 30, 2018.  The next potential milestone payment the Company will be eligible to receive will be a development milestone of $500 on Merck KGaA's designation of a

19

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

preclinical development candidate for any target. Revenue will be recognized upon achievement of the milestone. The Company and Merck KGaA may also enter into a future supply agreement to provide clinical study material should Merck KGaA pursue clinical development of any candidates nominated under the agreement.

Unless earlier terminated, the agreement will expire upon the expiration of the last royalty term for a product under the agreement, after which time, Merck KGaA will have a perpetual, royalty-free license, or if Merck KGaA does not designate any ADC product candidates produced by the Company under the agreement as preclinical development candidates, upon the expiration of the last to expire research program. Merck KGaA may terminate the agreement in its entirety or with respect to any target for convenience upon 60 days' prior written notice. Each party may terminate the Merck KGaA Agreement in its entirety upon bankruptcy or similar proceedings of the other party or upon an uncured material breach of the agreement by the other party. However, if such breach only relates to one target, the agreement may only be terminated with respect to such target.

Accounting Analysis

For periods prior to January 1, 2018, the Company applied the provisions of ASC 605 in accounting for this arrangement.  Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 28, 2018 for the accounting analysis under these provisions.

By applying the contract modification practical expedient, the Company has aggregated the effect of all modifications through the initial date of application of Topic 606 for the purposes of (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. 

The Company identified the following performance obligations under the agreement: (i) exclusive license and research services for six designated targets, (ii) rights to future technological improvements and (iii) participation of project team leaders and providing joint research committee services.

The Company has concluded that each license for a designated target is not distinct from the research services performed related to the designated target as Merck KGaA cannot obtain the benefit of the license without the related research services.  Each license for a designated target and the related services performance obligation is considered distinct from every other license for a designated target and related services performance obligation as each research plan is pursued independent of every other research plans for other designated targets. 

As of the date of initial application of Topic 606, the total transaction price for the Merck KGaA Agreement was $22,875, which includes approximately $7,875 fees for research and development activities which have been or are expected to be received and $3,000 of milestone payments previously earned.  The Company utilizes the expected value approach to estimate the amount of consideration related to the payment of fees associated with development and research services.  The Company utilizes the most likely amount approach to estimate any development and regulatory milestone payments to be received.  As of the date of initial application of Topic 606, there were no milestones payments, which had not already been received, included in the estimated transaction price.  The Company considered the stage of development and the remaining risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Merck KGaA.  The milestone payment amounts were fully constrained, as a result of the uncertainty whether any of the associated milestones would be achieved.  The Company has determined that any commercial milestones and sales based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted and therefore have also been excluded from the transaction price.  The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.  There were no changes to the transaction price during the three and six months ended  June 30, 2018.

The transaction price was allocated to the performance obligations based on the relative estimated standalone selling prices of each performance obligation or in the case of certain variable consideration to one or more performance

20

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

obligations.  The estimated standalone selling prices for performance obligations, that include a license and research services, were developed using the estimated selling price of the license and an estimate of the overall effort to perform the research service and an estimated market rate for research services. The estimated standalone selling price of the licenses was established based on comparable transactions.  The estimated standalone selling price for the rights to future technological improvements was developed based on the estimated selling prices of a license or rights received, as well as considering the probability that additional technology would be made available or the probability the counterpart would utilize the technology. The estimated standalone selling price for the joint research committee services was developed using an estimate of the time and costs incurred to participate in the committees.

The transaction price of $22,875 was allocated to the performance obligations as follows: approximately $4,226 for each of the license and corresponding research and development services units of account for the first and second designated targets; $3,439 for each of the license and corresponding research and development services units of account for the third, fourth, fifth and sixth designated target; $425 for rights to future technological improvements; and $242 for joint research committee services.

The Company is recognizing revenue related to the exclusive license and research and development services performance obligation over the estimated period of the research and development services using a proportional performance model.  The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred.  To the extent that the Company receives fees for the research services as they are preformed, these amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the performance period (which in the case of the joint research committee services approximate the time and cost incurred each period), which are 10 and 5 years, respectively.  The Company is continuing to reassess the estimated remaining term at each subsequent reporting period.

During the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded revenue of $612, $910, $944 and $1,607, respectively, related to its efforts under the collaboration agreement. Included in accounts receivable as of June 30, 2018 and December 31, 2017 was $180 and $330, respectively, related to the Merck KGaA Agreement.

As of June 30, 2018, the Company had recorded $6,957 in deferred revenue related to the Merck KGaA agreement that will be recognized over the remaining performance period.

Summary of Contract Assets and Liabilities

The following table presents changes in the balances of our contract assets and liabilities during the three and six months ended June 30, 2018:

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Three months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	50,462	$	437	$	2,691	$	48,208

21

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Six months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	52,439	$	1,524	$	5,755	$	48,208

The impact of the adoption of the new revenue recognition guidance is reflected within the beginning of period balance.

During the three months and six months ended June 30, 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$	2,691	$	5,755
Performance obligations satisfied in previous periods	$	—	$	—

Other Revenue

The Company has provided limited services for a collaboration partner, Asana BioSciences. For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded revenue of $0, $63, $195 and $125, respectively, related to these services. In addition, during the three months ended June 30, 2018, the Company recognized revenue of $1,500 related to a milestone achieved upon the completion of a GLP toxicology study by Asana BioSciences. The next potential milestone the Company is eligible to receive is $2,500 upon dosing the fifth patient in a Phase 1 clinical study by Asana BioSciences.

22

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

4. Fair value measurements

The following table presents information about the Company's assets and liabilities regularly measured and carried at a fair value and indicates the level within fair value hierarchy of the valuation techniques utilized to determine such value as of June 30, 2018 and December 31, 2017:

					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
	Fair		Markets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2018
Cash and cash equivalents	$	51,142	$	51,142	$	—	$	—
Marketable securities:
U.S. Treasuries		45,367		45,367		—		—
	$	96,509	$	96,509	$	—	$	—

					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	$	—

There were no changes in valuation techniques or transfers between fair value measurement levels during the six months ended June 30, 2018 and 2017. As of June 30, 2018 and December 31, 2017, cash and cash equivalents were comprised of cash and money market funds.

5. Marketable securities

The following table summarizes marketable securities held at June 30, 2018 and December 31, 2017:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2018
U.S. Treasuries	$	45,457	$	—	$	(90)	$	45,367
	$	45,457	$	—	$	(90)	$	45,367

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2017
U.S. Treasuries	$	62,777	$	—	$	(137)	$	62,640
Commercial paper		24,931		—		—		24,931
Corporate bonds		11,066		—		(12)		11,054
	$	98,774	$	—	$	(149)	$	98,625

23

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

As of June 30, 2018, the Company held 13 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months at June 30, 2018 was $45,367 and there were no securities held by the Company in an unrealized loss position for more than 12 months. As of June 30, 2018, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in an unrealized loss position before recovery of their amortized cost basis. Furthermore, the Company has determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any securities with any other-than-temporary impairment as of June 30, 2018.

There were no realized gains or losses on available-for-sale securities during the six month periods ended June 30, 2018 and 2017.

6. Accrued expenses

Accrued expenses consist of the following:

	June 30,		December 31,
	2018		2017
Accrued payroll and related expenses	$	1,996	$	3,041
Accrued preclinical, manufacturing and clinical expenses		5,558		3,183
Accrued professional fees		439		492
Accrued other		501		228
	$	8,494	$	6,944

7. Stockholders’ equity

The following table presents the changes in the separate accounts comprising stockholders’ equity for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively.

				Additional		Accumulated				Stockholders’
	Common Stock			Paid-in		Other Comprehensive		Accumulated		Equity
	Shares	Amount		Capital		Income (Loss)		Deficit		(Deficit)
Balance at December 31, 2016	1,294,352	$	1	$	3,551	$	—	$	(59,171)	$	(55,619)
Change	21,470,665		2		164,467		(149)		(38,707)		125,613
Balance at December 31, 2017	22,765,017		3		168,018		(149)	$	(97,878)		69,994
Change	352,721		—		2,428		59		(26,788)		(24,301)
Balance at June 30, 2018	23,117,738	$	3	$	170,446	$	(90)	$	(124,666)	$	45,693

Preferred stock

As of June 30, 2018, the Company has 25,000,000 shares of authorized preferred stock. No shares of preferred stock have been issued.

Common stock

The holders of the common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors (the Board).

24

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

At June 30, 2018, and December 31, 2017, there were 3,745,906 and 3,315,850 shares of common stock, respectively, reserved for the exercise of outstanding stock options and warrants (in common stock equivalent shares).

	June 30,	December 31,
	2018	2017
Warrants	110,365	110,365
Stock options	3,635,541	3,205,485
	3,745,906	3,315,850

Warrants

In connection with a 2013 Series A-1 Preferred Stock issuance, the Company granted to certain investors warrants to purchase 129,491 shares of common stock. The warrants have a $0.05 per share exercise price and a contractual life of 10 years. The fair value of these warrants was recorded as a component of equity at the time of issuance. As of June 30, 2018, warrants to purchase 110,365 shares of common stock were outstanding.

8. Stock options

Stock option plans

In June 2017 the Company’s shareholders approved the 2017 Stock Incentive Plan (the 2017 Plan or the Plan).  Under the 2017 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 of common stock issuable under the Plan will be cumulatively increased annually by 4% of the outstanding shares or such lesser amount specified by the Board. The terms of the awards are determined by the Board, subject to the provisions of the Plan. As of the adoption date of the 2017 Plan, there were 3,141,625 options outstanding under the Company’s 2007 Stock Incentive Plan (the 2007 Plan). Any cancellations under the 2007 Plan would increase the number of shares that could be granted under the 2017 Plan. On January 1, 2018, the number of shares of common stock issuable under the Plan was increased by 910,600 shares. As of June 30, 2018 there were 1,366,503 shares available for future issuance under the Plan.

With respect to incentive stock options, the option price per share will equal the fair market value of the common stock on the date of grant, as determined by the Board, and the vesting period is generally four years. Nonqualified stock options will be granted at an exercise price established by the Board at its sole discretion (which has not been less than fair market value on the date of grant) and the vesting periods may vary. Options granted under the Plan expire no later than 10 years 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.

25

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

A summary of the activity under the Plans is as follows:

		Weighted-		Remaining
	Number	Average		Contractual Life	Aggregate
	of Shares	Exercise Price		(in years)	Intrinsic Value
Options outstanding at January 1, 2018	3,205,485	$	3.44	7.8	$	41,709
Granted	1,028,415		14.53
Exercised	(352,721)		2.06
Cancelled	(245,638)		7.63
Options outstanding at June 30, 2018	3,635,541	$	6.42	8.0	$	41,612
Options exercisable at June 30, 2018	1,647,661	$	2.82	7.0	$	24,786

The weighted-average grant date fair value of options granted during the six months ended June 30, 2018 and 2017, was $9.56 and $4.61 per share, respectively.

Cash received from the exercise of stock options was $725 and $364 for the six months ended June 30, 2018 and 2017, respectively.

Stock-based compensation

The Company uses the provisions of ASC 718, Stock Compensation, to account for stock-based awards.

The measurement date for employee awards is generally the date of grant. Stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period, using the straight-line method.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded stock-based compensation expense of $958, $352, $1,703 and $617, respectively. The Company has an aggregate of $11,461 of unrecognized stock compensation cost as of June 30, 2018 remaining to be amortized over the weighted-average period of 3.2 years. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Risk-free interest rate	2.8	%	1.9	%	2.7	%	2.2	%
Expected dividend yield	—	%	—	%	—	%	—	%
Expected term (years)	6.10		6.25		6.08		6.25
Expected stock price volatility	73	%	68	%	73	%	67	%

Employee Stock Purchase Plan

In connection with the IPO, the Board adopted and the Company's stockholders approved the 2017 employee stock purchase plan (the 2017 ESPP), which became effective upon the closing of the IPO in July 2017. The Company has reserved 225,000 shares of common stock for issuance under the 2017 ESPP. The Company has not issued any shares under the 2017 ESPP.

26

Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(unaudited)

(in thousands, except share and per share data)

9. Commitments

Operating leases

The Company leases office space in Cambridge, MA under an operating lease, which was last amended in January 2018, which is effective through March 2021. The lease also provided the Company with a tenant improvement allowance of up to $356. The Company fully utilized the allowance and recorded the assets acquired with the allowance as leasehold improvements. The Company recorded the tenant improvement allowance as a deferred lease incentive and is amortizing the deferred lease incentive through a reduction 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 amount of $321 as of each of June 30, 2018 and December 31, 2017, respectively, collateralized by a money market account. The Company classified this amount as restricted cash in the accompanying unaudited condensed consolidated balance sheets.

For the three months ended June 30, 2018 and 2017 and for the six months ended June 30, 2018 and 2017, rent expense was $497, $419, $978 and $838, respectively.

The Company is recording rent expense on a straight-line basis over the term of the lease and has recorded deferred rent in the unaudited condensed consolidated balance sheets, accordingly.

License agreements

Through June 30, 2018, the Company has licensed intellectual property from two biotechnology companies. The consideration included upfront payments and a commitment to pay annual license fees, milestone payments, and, upon product commercialization, royalties on revenue generated from the sale of products covered by the licenses. The Company recorded milestone payments of $0 and $1,500 during the six months ended June 30, 2018 and 2017, respectively.

10. Subsequent events

For the purposes of the unaudited financial statements as of June 30, 2018 and the period then ended, the Company has evaluated subsequent events through August 14, 2018, the date the unaudited interim financial statements were issued. There were no items requiring adjustment or disclosure in the consolidated financial statements.

On July 19, 2018, the Company announced that the U.S. Food and Drug Administration FDA placed the Phase 1 study of XMT-1522 on partial clinical hold. While this event did not impact expenses incurred or revenue recognized associated with the XMT-1522 license and research services performance obligation for any periods prior to June 30, 2018, the Company is currently evaluating the impact, if any, on the future expenditures that may be incurred and the potential impact on the proportional performance model utilized to recognize revenue in future periods. The Company is working diligently with the FDA and the site investigators to resolve the partial clinical hold.

27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (SEC) on March 28, 2018.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. 

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, 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 the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical stage biopharmaceutical company focused on developing antibody drug conjugates (ADCs), that offer a clinically meaningful benefit for cancer patients with significant unmet need. We have leveraged 20 years of industry learning 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 generate a pipeline of proprietary ADC product candidates to address patient populations that are not currently amenable to treatment with traditional ADC-based therapies. Our lead product candidate, XMT‑1522, is a HER2‑antigen targeted ADC currently 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 into additional breast cancer, NSCLC, and gastric cancer patient populations, all of which are not adequately addressed by existing HER2 therapies. Our second product candidate, XMT-1536, is an ADC targeting NaPi2b, an antigen broadly expressed in ovarian cancer 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 ADC technologies. In addition, we have established a strategic partnership with Takeda Pharmaceutical Company Limited (Takeda) under which they obtained rights to XMT-1522 outside of the United States and Canada. We have also established strategic research and development partnerships with Takeda and Merck KGaA for the development and commercialization of additional ADC product candidates against a limited number of targets selected by our partners based on our Dolaflexin platform. We believe the potential of our ADC technologies, supported by our world-class management team and protected by our robust intellectual property portfolio, will allow us to develop targeted and highly tailored therapies to help cancer patients become cancer survivors.

On July 19, 2018, we announced that the U.S. Food and Drug Administration (FDA) placed the Phase 1 study of XMT-1522 on partial clinical hold. We are working diligently with the FDA and the site investigators to resolve the partial clinical hold. See Note 10 to unaudited condensed consolidated financial statements for additional disclosure related to this partial clinical hold.

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.  We received approximately $67.4 million after deducting underwriting discounts and commissions and offering costs of approximately $7.6 million. On August 2, 2017, we issued and sold 51,977 shares of common stock at $15.00 per share for gross proceeds of $0.78 million upon the partial exercise of the underwriters’ overallotment option. We received net proceeds of $0.73 million after deducting $0.05 million in underwriting discounts and commissions.

28

Since inception, our operations have focused on building our platform, identifying potential product candidates, producing drug substance and drug product material for use in preclinical studies, conducting preclinical studies, including Good Laboratory Practice (GLP), toxicology studies, manufacturing clinical trial material and conducting clinical trials, establishing and protecting our intellectual property, staffing our company and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through our strategic partnerships, private placements of our convertible preferred stock and the IPO.

Since inception, we have incurred significant operating losses. Our net losses were $24.8 million and $17.0 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had an accumulated deficit of $124.7 million. We expect to continue to incur significant expenses and operating losses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

· continue clinical development activities for 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 

· continue to incur additional costs associated with operating as a public company.

Financial operations overview

Revenue

Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective method as discussed above in Note 2 to our unaudited condensed consolidated financial statements. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q reflect these changes.

To date, all of our revenue has been generated from strategic partnerships. We have not generated any revenue from product sales, 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 ADC product candidates utilizing Fleximer. Under this agreement, as amended, Takeda may select up to seven target antigens and has selected four target antigens to date. Takeda is responsible for generating antibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADC product candidates. Takeda then has the exclusive right to and is responsible for the further development, manufacture and commercialization of these ADC product candidates, except that we have an option to co-develop and co-commercialize one product targeting one of Takeda's third through seventh target antigens and may exercise such option with respect to an applicable product no later than 30 days after initiation of a Phase 2 clinical study for such product or at an earlier time if Takeda 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 and commercialization of XMT-1522. Under this agreement, Takeda is granted the exclusive right and responsibility to commercialize XMT-1522 outside the United States and Canada.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, we recognized revenue of $2.1 million, $2.8 million, $4.6 million and $6.3 million, respectively, related to the Takeda agreements.

In June 2014, we entered into a collaboration agreement with Merck KGaA for the development and commercialization of ADC product candidates utilizing Fleximer for up to six target antigens. Merck KGaA is responsible for generating

29

antibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADC product candidates. Merck KGaA then has the exclusive right to and is responsible for the further development and commercialization of these ADC product candidates.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, we recognized revenue of $0.6 million, $0.9 million, $0.9 million and $1.6 million, respectively, related to the Merck KGaA agreement.

The Company has provided limited services for Asana BioSciences. For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, we recorded revenue of $0, $0.1 million, $0.2 million and $0.1 million, respectively, related to these services. In addition, the Company recognized revenue of $1.5 million related to a milestone achieved during the three months ended June 30, 2018.

For the foreseeable future, we expect substantially all of our revenue to be generated from our collaboration agreements with Takeda and Merck KGaA and any other collaboration agreements we may enter into. Given the schedule of potential milestone payments and the uncertain nature and timing of clinical development, we cannot predict when or whether we will receive further milestone payments or any royalty payments under these collaborations.

For information about our revenue recognition policy, see Note 2 to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Operating expenses

Research and development expenses

Research 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, bonus, 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, preclinical studies 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 development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. There are numerous factors associated with the successful development and commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at our current stage of development. Additionally, future commercial and regulatory 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 primarily personnel-related costs, facility costs, including depreciation and lab consumables. We have not historically tracked all of our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development. The following table summarizes our external research and development expenses, by

30

program following nomination as a development candidate. Pre-development candidate expenses, unallocated costs and internal research and development costs have been stated separately.

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2018		2017		2018		2017
XMT-1522 external costs	$	3,214	$	2,152	$	6,701	$	5,554
XMT-1536 external costs		2,816		2,876		4,633		4,319
External costs for discovery stage programs and platform development		719		661		1,845		1,168
Internal research and development costs		5,914		4,938		11,740		9,692
Total research and development costs	$	12,663	$	10,627	$	24,919	$	20,733

The successful development of our product candidates is highly uncertain. As such, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the development efforts associated with our product candidates. This is due to the numerous risks and uncertainties associated with 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 any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other employee-related costs, including stock-based compensation, for personnel in executive, finance, accounting, information technology, business development, legal operations and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to 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 and development activities. This will likely include increased costs related to the hiring of additional personnel, fees to outside consultants and patent costs, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs.

Other income

Other income consists primarily of interest income earned on cash equivalents and marketable securities.

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Critical accounting policies and estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these 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 our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates.

We believe that our most critical accounting policies are those relating to revenue recognition, accrued research and development expenses and stock-based compensation, discussed in the notes to condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the three months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017:

	Three months ended
	June 30,
(in thousands)	2018		2017		Dollar Change
Collaboration revenue	$	4,191	$	3,727	$	464
Operating expenses:
Research and development		12,663		10,627		2,036
General and administrative		4,231		2,204		2,027
Total operating expenses		16,894		12,831		4,063
Other income:
Interest income		349		158		191
Total other income		349		158		191
Net loss	$	(12,354)	$	(8,946)	$	(3,408)

Collaboration Revenue

Collaboration revenue was $4.2 million during the three months ended June 30, 2018, compared to $3.7 million during the three months ended June 30, 2017, an increase of $0.5 million. The net increase was primarily the result of a reduction in efforts required to support collaboration activities, partially offset by $1.5 million milestone achieved during the three months ended June 30, 2018.

Research and Development Expense

Research and development expense increased by $2.0 million from $10.6 million for the three months ended June 30, 2017 to $12.7 million for the three months ended June 30, 2018, an increase of 19%. The increase in research and development expense was primarily attributable to the following:

· approximately $0.6 million in increased employee compensation primarily due to an increase in headcount as our programs progress in clinical and preclinical studies;

· approximately $1.3 million due to in increased external clinical and regulatory expenses due to the progress of XMT‑1522 and XMT-1536; and

· approximately $0.4 million in increased lab consumables and facilities costs, partially offset by,

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· approximately $0.3 million in decreased external research and development expenses related to our platform development, target evaluation and manufacturing activities for our two lead programs.

We expect our research and development expenses to increase as we continue our clinical development of XMT‑1522 and XMT-1536 and continue to advance our preclinical product candidate pipeline and invest in improvements in our ADC technologies.

General and Administrative Expense

General and administrative expense increased by $2.0 million from $2.2 million during the three months ended June 30, 2017 to $4.2 million for the three months ended June 30, 2018, an increase of 91%. The increase in general and administrative expense was primarily attributable to the following:

· approximately $0.8 million in increased employee compensation primarily due to additional headcount as we build the infrastructure to support the growth of the research and development organization;

· approximately $0.8 million in increased consulting and professional fees, including external legal fees, corporate communications and public relations costs; and

· approximately $0.4 million in increased other costs, including taxes, insurance and hosted and cloud based software.

We expect that our general and administrative expense will increase in future periods as we expand our operations and continue to incur additional costs in connection with being a public company. These increases will likely include legal, auditing and filing fees, additional insurance premiums and general compliance and consulting expenses.

Other Income

Other income was $0.3 million for the three months ended June 30, 2018, compared to $0.2 million for the three months ended June 30, 2017. The increase in other income was primarily related to the recognition of interest income during the period ended June 30, 2018 due to higher cash, cash equivalents and marketable securities balances.

Comparison of the six months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the six months ended June 30, 2018 and 2017:

	Six months ended
	June 30,
(in thousands)	2018		2017		Dollar Change
Collaboration revenue	$	7,255	$	8,017	$	(762)
Operating expenses:
Research and development		24,919		20,733		4,186
General and administrative		7,801		4,501		3,300
Total operating expenses		32,720		25,234		7,486
Other income (expense):
Interest income		709		209		500
Total other income (expense)		709		209		500
Net loss	$	(24,756)	$	(17,008)	$	(7,748)

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Collaboration Revenue

Collaboration revenue was $7.3 million during the six months ended June 30, 2018, compared to $8.0 million during the six months ended June 30, 2017, a decrease of $0.7 million. The net decrease was primarily due to a reduction in efforts required to support collaboration activities, partially offset by the receipt of a $1.5 million milestone during the six months ended June 30, 2018.

Research and Development Expense

Research and development expense increased by $4.2 million from $20.7 million for the six months ended June 30, 2017 to $24.9 million for the six months ended June 30, 2018, an increase of 20%. The increase in research and development expense was primarily attributable to the following:

· approximately $1.7 million in increased employee compensation primarily due to an increase in headcount as our programs progress in clinical and preclinical studies;

· approximately $1.2 million in increased external research and development expenses related to our platform development, target evaluation and manufacturing activities for our two lead programs;

· approximately $2.3 million due to in increased external clinical and regulatory expenses due to the progress of XMT‑1522 and XMT-1536; and

· approximately $0.5 in increased lab consumables and facilities costs, partially offset by;

· approximately $1.5 million due to milestone payment made in the comparable quarter of 2017.

We expect our research and development expenses to increase as we continue our clinical development of XMT‑1522 and XMT-1536 and continue to advance our preclinical product candidate pipeline and invest in improvements in our ADC technologies.

General and Administrative Expense

General and administrative expense increased by $3.3 million from $4.5 million during the six months ended June 30, 2017 to $7.8 million for the six months ended June 30, 2018, an increase of 73%. The increase in general and administrative expense was primarily attributable to the following:

· approximately $1.4 million in increased employee compensation primarily due to additional headcount as we build the infrastructure to support the growth of the research and development organization;

· approximately $1.0 million in increased consulting and professional fees, including external legal fees, corporate communications and public relations costs; and

· approximately $0.9 million in increased other costs, including taxes, insurance and software.

We expect that our general and administrative expense will increase in future periods as we expand our operations and continue to incur additional costs in connection with being a public company. These increases will likely include legal, auditing and filing fees, additional insurance premiums and general compliance and consulting expenses.

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Other Income

Other income was $0.7 million for the six months ended June 30, 2018, compared to $0.2 million for the six months ended June 30, 2017. The increase in other income was primarily related to the recognition of interest income during the period ended June 30, 2018 due to higher cash, cash equivalents and marketable securities balances.

Liquidity and Capital Resources

Sources of Liquidity

Prior to our IPO, we financed our operations primarily through private placements of our convertible preferred stock and strategic partnerships.

On July 3, 2017, we closed our IPO of 5,000,000 shares at $15.00 per share with gross proceeds of $75.0 million and net proceeds $67.4 million after deducting offering costs of $7.6 million. On August 2, 2017, we issued and sold 51,977 shares of common stock at $15.00 per share for gross proceeds of $0.78 upon the partial exercise of the underwriters’ overallotment option. We received net proceeds of $0.73 after deducting $0.05 in underwriting discounts and commissions.

As of June 30, 2018, we had cash, cash equivalents and short-term marketable securities of $96.5 million.

Cash Flows

The following table provides information regarding our cash flows for the six months ended June 30,2018 and 2017:

	Six months ended
	June 30,
(in thousands)	2018		2017
Net cash used in operating activities	$	(28,838)	$	(20,599)
Net cash provided by (used in) investing activities		52,745		(44,580)
Net cash provided by (used in) financing activities		644		(2,065)
Increase (decrease) in cash, cash equivalents and restricted cash	$	24,551	$	(67,244)

Net Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2018 was $28.8 million as compared to $20.6 million during the six months ended June 30, 2017.  The increase was due primarily to an increase in operating expenses for 2018 and timing of payments made to vendors.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $52.7 million during the six months ended June 30, 2018 and consisted primarily of maturities of marketable securities.  Net cash used in investing activities was $44.6 million during the six months ended June 30, 2017 and consisted primarily of purchases of marketable securities.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $0.6 million during the six months ended June 30, 2018 as compared to net cash used in financing activities of $2.1 million during the six months ended June 30, 2017. During the six month ended June 30, 2018 cash provided by financing activities consisted primarily of the proceeds from exercises of stock options.  During the six months ended June 30, 2017, cash used in financing activities resulted from the payment of IPO costs, partially offset by the proceeds from exercises of stock options.

Funding Requirements

We expect our cash expenditures to increase in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical trials of, and seek marketing approval for, our product candidates. In

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addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our 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.

We expect that our existing cash, cash equivalents and marketable securities will enable us to fund our current operating plan for at least the next twelve months. Our future capital requirements will depend on many factors, including:

· the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates;

· the scope, prioritization and number of our research and development programs;

· the costs, timing and outcome of reviews of our product candidates by regulatory agencies;

· 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 collaboration agreements we obtain;

· the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under future collaboration agreements, if any;

· the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property 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 to market 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 results required to obtain marketing approval and achieve drug sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve 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 a combination of equity offerings, debt financings, strategic partnerships and licensing arrangements. We do not have any committed external source of funds outside of those to be earned in connection with our agreements with Merck KGaA and Takeda, if development activities are successful under those agreements. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through additional strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future

36

commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Off‑Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined under applicable SEC rules.

Item 3. 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 rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash and cash equivalents and, short-term marketable securities are in a money market fund that invests in U.S. Treasury obligations. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

We are currently not exposed to market risk related to changes in foreign currency exchange rates, but we may contract with vendors that are located in Asia and Europe and may be subject to fluctuations in foreign currency rates at that time.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three or six months ended June 30, 2018 and 2017.

Item 4. Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the end of the period covered by this report, we did not believe we were party to any claim or litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. 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 Factors

Risk Factors

Other than as disclosed below, there have been no material changes to the Company’s risk factors as set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K, as filed with the SEC on March 28, 2018.

Events that may delay or prevent successful commencement, enrollment or completion of clinical studies of our ADC product candidates could result in increased costs to us as well as a delay in obtaining, or failure to obtain, regulatory approval, or cause us to terminate a clinical trial, which could prevent us from commercializing our ADC 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 clinical studies for XMT‑1522 and XMT-1536, will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of testing, and other events may cause us to temporarily or permanently cease a clinical study. 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 research organizations, 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 the protocol for the clinical study;

· imposition of a clinical hold by regulatory agencies or IRBs for any reason, including safety concerns or after an inspection 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 guidelines in 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 candidates to 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;

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· safety issues, including occurrence of serious adverse events, or SAEs, in clinical studies that are associated with the ADC product candidates that are viewed to outweigh their potential benefits or unforeseen safety issues in our ongoing 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.

For example, in July 2018, the FDA placed a partial clinical hold on the Phase 1 study of XMT-1522, following our report to the FDA of a Grade 5 SAE (patient death) in dose level 7 of the XMT-1522 Phase 1 trial, which was classified by the investigator as possibly drug-related.  We are working diligently with the FDA and site investigators to resolve the partial clinical hold. We cannot predict when or if such hold will be released or if we may need to agree to changes in our clinical trial design with regulatory authorities to have this hold released, which changes may cause the completion of such clinical trial to be delayed, may not be commercially reasonable for us to implement or may result in clinical trial results that affect the future development or feasibility of this product candidate.

Delays, including delays caused by the above factors, can be costly and could negatively affect our ability to complete a clinical study. If we or our partners are not able to successfully complete clinical studies, we or they will not be able to obtain regulatory approval and will not be able to commercialize our ADC product candidates or our partners’ ADC product candidates based on our technology.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds from the Sale of Registered Securities

On July 3, 2017, we closed our IPO, in which we issued and sold 5,000,000 shares of our common stock at a public offering price of $15.00 per share, for aggregate gross proceeds of $75.0 million.  On August 2, 2017, we issued and sold an additional 51,977 shares of common stock at $15.00 per share for gross proceeds of $0.78 million. All of the shares issued and sold in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No.  333-218412), which was declared effective by the SEC on June 29, 2017.

The net offering proceeds to us upon the initial closing were, after deducting underwriting discounts and offering costs payable by us totaling $7.5 million, were approximately $67.5 million. Upon the exercise of the overallotment option by the underwriters, we received an additional $0.73 million after $0.05 million of underwriting discounts. No material offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates.

As of June 30, 2018, we estimate that we have used approximately $41.0 million of the net proceeds from the IPO to fund manufacturing and clinical development activities for XMT-1522 and XMT-1536 and other research activities in support of our preclinical programs, and for working capital and other general corporate purposes. We have invested the unused proceeds from the offering in marketable securities and money market accounts. There has been no material change in our planned use of the net proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b)(4) on June 29, 2017.

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Item 6. Exhibits.

EXHIBIT 3.1	-	Fifth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on July 10, 2017).
EXHIBIT 3.2	-	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on July 10, 2017).
EXHIBIT 10.1	-	Amendment 4 to Collaboration and Commercial License Agreement dated May 15, 2018, by and between Mersana Therapeutics, Inc. and Merck KGaA.
EXHIBIT 31.1	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.
EXHIBIT 31.2	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.
EXHIBIT 32.1	-	Section 1350 Certifications.
EXHIBIT 101.INS	-	XBRL Instance Document.
EXHIBIT 101.SCH	-	XBRL Taxonomy Extension Schema Document.
EXHIBIT 101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase Document.
EXHIBIT 101.DEF	-	XBRL Taxonomy Extension Definition Linkbase Document.
EXHIBIT 101.LAB	-	XBRL Taxonomy Extension Label Linkbase Document.
EXHIBIT 101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Mersana Therapeutics, Inc.
Dated:  August 14, 2018	By:	/s/ Anna Protopapas
		Anna Protopapas
		President and Chief Executive Officer
Dated:  August 14, 2018	By:	/s/ David A. Spellman
		David A. Spellman
		Chief Financial Officer

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EX-10.1

Exhibit 10.1

AMENDMENT 4

TO

COLLABORATION AND COMMERCIAL LICENSE AGREEMENT

This Amendment 4 to the Collaboration and Commercial License Agreement (“Amendment 4”) is entered into  as of the date that  it  is fully executed (the  “Amendment 4 Effective Date”)  by  and between Mersana Therapeutics, Inc., a Delaware corporation, having its principal place of business at 840 Memorial Drive Cambridge, MA 02139 (hereinafter referred to as “Mersana”)  and Merck KGaA, a  corporation with general partners having its principal place of business at  Frankfurter Str. 250, 64293 Darmstadt, Germany (hereinafter  referred to as “Merck,”  and together  with Mersana,  the “Parties”). This Amendment 4 amends that certain Collaboration and Commercial License Agreement by and between Mersana and Merck dated  June 23, 2014, as  amended on June 1, 2016 (“Amendment 1”), August 12, 2016 (“Amendment  2”), and February 28, 2017 (“Amendment  3”)  (together the “Original Agreement,”  and together with this Amendment 4, the “Agreement”). Capitalized terms used but not defined in this Amendment 4 will have the definition set forth in the Original Agreement.

RECITALS

WHEREAS, the Parties wish to amend the Original Agreement as set forth in this Amendment 4;

WHEREAS, the Parties have agreed to create a Joint Steering Committee to oversee the Project Leaders, Joint  Project Teams and Joint Intellectual Property Committee; and

NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth herein, the Parties  hereto, intending to be legally bound, agree as follows:

ARTICLE 1 –  AMENDMENTS

1.1New Definitions. The following new definitions are hereby added to Article 1 of the Original  Agreement in  alphabetical order:

(a)  “Amendment 4 Effective Date” means [·] 2018.

(b)  “Joint Steering Committee” or  “JSC” is defined in Section 2.5.5.1.

1.2Project   Leaders   Functions  and   Authority.Section  2.5.2.2  of  the  Original Agreement is hereby deleted in its entirety and replaced with the following:

2.5.2.2Functions and Authority. The Project Leaders will be responsible for supervising and managing the Research  Programs;  provided that in the  event of a conflict  between the JSC’s responsibilities and the Project Leaders’ responsibilities, the JSC shall have final decision-making authority. The Project  Leaders’ functions will be:

(a) Overseeing and coordinating the progress, timelines, budget and results of the Research  Programs;

(b) Reviewing and approving each Research  Plan (including the budget  therein) and any proposed  amendments to the Research  Plans proposed pursuant to  Section Error! Reference source not found.,  provided that the Research  Plan (including the budget  therein) for the first and second Designated Targets attached hereto as  Schedule Error! Reference source not found.-1 shall be deemed approved  by the Project Leaders;

(c) Reviewing each  Party’s reports regarding its  activities under each Research  Plan;

(d) Deciding whether it is scientifically or technically feasible to create an ADC Directed to the  applicable Designated Target in accordance with each Research  Plan;

(e) Deciding whether  an ADC meets the  applicable Performance Specifications set forth in  each Research  Plan;

(f) Approval of any changes to the  Strategic IP  Plan proposed  by the JIPC.

(g) Resolving any disputes delegated to the  Project Leaders by the JPT or the JIPC, provided that if the Project Leaders are unable to resolve any such dispute within thirty (30) days of the matter first being submitted to the Project Leaders, then the dispute shall be elevated to the JSC; and

(h) Such other matters as the Parties may mutually agree in writing.

1.3Joint Project Team Decisions. Section 2.5.3.4 of the Original Agreement is hereby deleted in its  entirety and replaced with the following:

“2.5.3.4Decisions. The JPT will take action by unanimous consent of the Parties, with each Party  having a single vote, irrespective of the number of members actually in attendance at a meeting (but provided that at least one member from each Party is in attendance), or  by a written resolution signed  by the designated members of each of the Parties. In the event the JPT is unable to secure unanimous consent for a period in excess of thirty (30) days on any matter the decision shall be escalated to the Joint Steering Committee. For clarity, the JPT shall not have the authority to amend the Research  Plan or this Agreement.”

1.4Creation of the Joint Steering Committee. The following new Section 2.5.5 is hereby inserted immediately following Section 2.5.4.4 of the Original Agreement:

“2.5.5Joint Steering Committee.

2.5.5.1Formation and Composition.   Within  ten  (10)  days   of   the Amendment 4 Effective Date, the Parties shall establish a joint steering committee

(the “Joint  Steering Committee” or “JSC”)  composed of three (3)  appointed members of each of Merck and Mersana. A Party may  change one or more of its members on the JSC at any time, subject to  written notice to the other Party’s alliance   manager,  or  elect   to  have  one  (1)  of  its  members  represented  by  a delegate at a meeting of the  JSC, subject to the confidentiality provisions of Section 7. One (1) member from each Party shall alternate in acting as the chairperson of the JSC for one (1) Calendar Year term, with Mersana’s member  chairing the JSC for the first Calendar Year. The chairperson shall not have any  greater authority than any other member on the JSC. The Parties may allow additional employees, including the Parties’ alliance managers, Project Leaders and project managers, to attend meetings of the JSC subject to the confidentiality provisions in Section 7. Each Party’s JSC members shall collectively have sufficient expertise and sufficient seniority  and authority with respect to the applicable Party to make other decisions within the scope of the JSC’s authority, including with respect  to strategic decisions under the Agreement.

2.5.5.2Functions and Authority. The JSC shall have responsibility for:

(a) attempting to resolve any disputes arising under  any subcommittee of the JSC;

(b) overseeing the performance  and decisions of any subcommittee of the JSC;

(c) overseeing the performance  and decisions of the JPT  and Project  Leaders and resolving any disputes arising with the Project  Leaders or under the JPT or JIPC;

(d) monitoring the implementation of the Research  Programs and Research  Plans and approving the going-forward strategy for the Research  Programs and Research  Plans;

(e) managing the overall allocation of  FTEs and other resources used under  each Research  Program and approving deviations from the Research  Plans with  respect  to resources  allocated  by each  Party;

(f) overseeing the activities conducted and any subcommittee formed pursuant to  each  Supply Agreement;

(g) overseeing the research, development and manufacturing of

(h) Licensed Products; and performing such other functions as appropriate to further the purposes of this Agreement, as mutually agreed upon by the Parties in writing.

2.5.5.3Subcommittees. The Parties may establish such subcommittees of the JSC as required under this Agreement or as deemed necessary  by the Parties. Each such subcommittee shall consist of an equal number of members designated by 

each Party, which number shall be mutually  agreed by the Parties. Each Party shall be free to change its members upon notice  to the other or to  send a  substitute member to any subcommittee meeting, subject to the confidentiality provisions of Section 7; provided, however, that each Party shall ensure that at all times during the existence of any subcommittee, its members on such subcommittee have appropriate expertise and seniority, in each case to the extent applicable to the role of the subcommittee. Each subcommittee shall report to, and any disputes under a subcommittee shall be referred to the JSC, subject  to  Section 2.5.5.5.

2.5.5.4Meetings. During the Term of the  Agreement, the  JSC will  meet  in person or by  teleconference or videoconference at least twice during every Calendar Year. The JSC may meet either (a) in person at either Party’s facilities or at such locations as the Parties may otherwise agree or (b) by audio or video teleconference; provided, that no less than one (1) meeting of the JSC during each Calendar Year shall be conducted in person. The JSC also may each choose to meet more frequently on an as needed basis. The Project Leaders will attend all meetings of the JSC, and will report to the JSC progress, timelines and results of each Research  Program  and under  each Research Plan and propose going-forward strategic directions with respect to  each Research Program and Research Plan for approval  by  the JSC. Each Party’s alliance manager will alternate in being responsible for (a) organizing, coordinating and steering  each meeting of the  JSC  and (b) for preparing  and distributing an agenda  for each meeting. The applicable alliance manager will include on the  agenda any item within the scope of the responsibility of the JSC that is requested to be  included by  either Party, and will distribute the agenda to the Parties no less than five (5) days  before  each meeting of the  JSC.  Each Party shall be  responsible for all of its own expenses incurred in connection with participating in the JSC meetings.

2.5.5.5Decisions.

2.5.5.5.1Quorum. A quorum is  required for any meeting of the JSC, which quorum will exist if at least one (1) member of each Party is present. If a quorum exists, then the  unanimous consent of all attending members  of the JSC is required in order for any decision to be approved or action taken on behalf of the JSC.

2.5.5.5.2Decision Making. In the event the JSC is unable to secure unanimous consent on a matter that is subject to its decision-making  authority within fourteen (14)  days of the matter first being submitted to the JSC, the Chief Executive Officer (or equivalent) of Mersana and the Chief Executive Officer (or equivalent) of Merck will meet at a mutually agreed upon time and location for the purpose of resolving such dispute.  If such officers are not able to resolve such dispute within fourteen (14) days of such meeting, then Merck, acting  reasonably and in good faith, shall make the final determination on any  matter related to the Research Programs, which shall be binding on the Parties as though it had been made by a consensus of the JSC; provided, that any amendments to a Research  Plan that would require that Mersana use more FTEs in any period than the

maximum number of FTEs required under such Research Plan would require Mersana’s consent, which consent may be withheld in Mersana’s reasonable discretion.

2.5.5.6JSC Meeting Minutes. The alliance managers shall alternate in preparing and issuing minutes of each meeting of the JSC, which shall be circulated to each member of the JSC for review within twenty (20) days after  each meeting of the JSC.   Minutes will be deemed approved unless any member of the JSC objects to the accuracy of such minutes by providing written notice to the other members of the JSC within five (5) days of receipt of the minutes. In the event that any such objection is not resolved by the mutual agreement of each  Party’s members on the JSC, such minutes will be amended to reflect such unresolved dispute.

2.5.5.7Duration.   The  JSC   shall  remain  constituted  until   the  Parties mutually agree to disband the JSC.

2.5.5.8Limitations of Powers of the JSC.   The JSC shall not have the power or authority to amend the Agreement and shall only have those powers that are specifically delegated to it hereunder.”

ARTICLE 2 –  MISCELLANEOUS

2.1Effectiveness. Except  as set forth in this Amendment 4, all of the terms and conditions of the Original Agreement are hereby ratified and shall remain in full force and effect. Amendments made pursuant to this Amendment 4 shall be effective as of the Amendment 4 Effective Date.

2.2Conflicts.   In   the  event  of  a   conflict   between   a   provision  of  the  Original Agreement and a provision of this Amendment 4, the provisions of this Amendment 4 will control to the extent of such  conflict.

2.3Counterparts. This Amendment 4 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.  Counterparts may be signed or delivered  by facsimile or  electronically scanned signature page.

(The remainder of this page has been intentionally left blank.  The signature page follows.)

IN WITNESS WHEREOF, the Parties have executed this Amendment 4 to be effective as of the

Amendment 4 Effective Date.

MERSANA THERAPEUTICS, INC.
By :	/s/ Michael Kaufman
Name:	Michael Kaufman
Title:	SVP, CMC
Date:	5/10/2018

MERCK KGaA
By :	/s/  Axel Hoffmann
Name:	Axel Hoffmann
Title:	Director Alliance Management GBD&AM
Date:	5/11/2018

By :	/s/ Tobias Greven
Name:	Tobias Greven
Title:	Head of Legal Business Development
Date:	5/15/2018

[Signature Page to Third Amendment to Amended and Restated Research Collaboration and Commercial License Agreement]

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)  

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Anna Protopapas, certify that:  

1.       I have reviewed this Quarterly Report on Form 10-Q 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 a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Mersana Therapeutics, Inc.

/s/ Anna Protopapas

Anna Protopapas

President and Chief Executive Officer

(Principal Executive Officer)

Dated: August 14,  2018

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, David A. Spellman, certify that:

1.       I have reviewed this Quarterly Report on Form 10-Q 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 a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Mersana Therapeutics, Inc.

/s/ David A. Spellman

David A. Spellman

Chief Financial Officer

(Principal Financial Officer)

Dated: August 14, 2018

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Mersana Therapeutics, Inc. (the “Company”) for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned  officers of the company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that to the best of her knowledge:

1)     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2018	/s/ Anna Protopapas
	Anna Protopapas
	President and Chief Executive Officer (Principal Executive Officer)

Dated: August 14, 2018	/s/ David A. Spellman
	David A. Spellman
	Chief Financial Officer (Principal Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 13, 2018
Document and Entity Information
Entity Registrant Name	Mersana Therapeutics, Inc.
Entity Central Index Key	0001442836
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		23,153,418
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 51,142	$ 26,591
Short-term marketable securities	45,367	88,143
Accounts receivable	1,681	784
Prepaid expenses and other current assets	3,995	2,025
Total current assets	102,185	117,543
Property and equipment, net	2,753	2,319
Long-term marketable securities		10,482
Other assets	1,970	371
Total assets	106,908	130,715
Current liabilities:
Accounts payable	4,158	3,070
Accrued expenses	8,494	6,944
Deferred rent		232
Deferred revenue	19,224	21,635
Total current liabilities	31,876	31,881
Deferred rent, net of current portion	355	67
Deferred revenue, net of current portion	28,984	28,773
Commitments (Note 9)
Stockholder's equity (deficit)
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
Common stock, $0.0001 par value; 175,000,000 shares authorized; 23,117,738 and 22,765,017 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	3	3
Additional paid-in capital	170,446	168,018
Accumulated other comprehensive loss	(90)	(149)
Accumulated deficit	(124,666)	(97,878)
Total stockholders’ equity	45,693	69,994
Total liabilities and stockholders’ equity	$ 106,908	$ 130,715

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2018	Dec. 31, 2017
Condensed Consolidated Balance Sheets
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	25,000,000	25,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	175,000,000	175,000,000
Common stock, shares issued	23,117,738	22,765,017
Common stock, shares outstanding	23,117,738	22,765,017

XML

Consolidated Statements of Operations and Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Condensed Consolidated Statements of Operations and Comprehensive Loss
Collaboration revenue	$ 4,191	$ 3,727	$ 7,255	$ 8,017
Operating expenses:
Research and development	12,663	10,627	24,919	20,733
General and administrative	4,231	2,204	7,801	4,501
Total operating expenses	16,894	12,831	32,720	25,234
Other income:
Interest income	349	158	709	209
Total other income	349	158	709	209
Net loss	(12,354)	(8,946)	(24,756)	(17,008)
Other comprehensive loss:
Unrealized gain (loss) on marketable securities	72	(9)	59	(9)
Comprehensive loss	(12,282)	(8,955)	(24,697)	(17,017)
Net loss attributable to ordinary shareholders - basic	$ (12,354)	$ (8,946)	$ (24,756)	$ (17,008)
Net loss per share attributable to common stockholders — basic and diluted	$ (0.54)	$ (6.33)	$ (1.08)	$ (12.36)
Weighted-average number of common shares used in net loss per share attributable to common stockholders — basic and diluted	22,966,314	1,412,308	22,891,831	1,375,595

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Cash flows from operating activities
Net loss	$ (24,756)	$ (17,008)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	565	438
Loss on disposal of fixed assets	20
Net amortization of premiums and discounts on investments	(248)
Stock-based compensation	1,703	617
Change in deferred rent	56	(71)
Changes in operating assets and liabilities:
Accounts receivable	(897)	538
Prepaid expenses and other current assets	(1,970)	(926)
Other assets	(1,433)	(423)
Accounts payable	976	(205)
Accrued expenses	1,377	1,068
Deferred revenue	(4,231)	(4,627)
Net cash used in operating activities	(28,838)	(20,599)
Cash flows from investing activities
Maturities of marketable securities	53,565
Purchase of property and equipment	(820)	(328)
Purchase of marketable securities		(44,252)
Net cash provided by (used in) investing activities	52,745	(44,580)
Cash flows from financing activities
Proceeds from exercise of stock options	725	364
Payments of financing costs	(81)	(2,429)
Net cash provided by (used in) financing activities	644	(2,065)
Increase (decrease) in cash, cash equivalents and restricted cash	24,551	(67,244)
Cash, cash equivalents and restricted cash, beginning of period	26,962	100,668
Cash, cash equivalents and restricted cash, end of period	51,513	$ 33,424
Supplemental disclosures of non-cash activities:
Purchases of property and equipment included in accounts payable and accrued expenses	234
Adjustment to accumulated deficit and deferred revenue upon adoption of Topic 606	$ 2,031

XML

Nature of business and basis of presentation

6 Months Ended

Jun. 30, 2018

Nature of business and basis of presentation

Nature of business and basis of presentation

1. Nature of business and basis of presentation

Mersana Therapeutics, Inc. is a clinical stage company located in Cambridge, Massachusetts. The Company is advancing a proprietary pipeline of targeted oncology therapeutics leveraging its Dolaflexin® antibody drug conjugate (ADC) platform. The Company’s first product candidate, XMT-1522, an ADC designed to address a much broader population of patients with HER2-antigen expressing tumors than served by currently approved HER2 therapies, is currently in a Phase 1 dose escalation study. The Company’s second product candidate, XMT-1536, an ADC targeting NaPi2b, an antigen broadly expressed in certain types of cancer, is also in a Phase 1 dose escalation study. In addition, the Company has established a strategic partnership with Takeda Pharmaceutical Company Limited (Takeda) under which Takeda obtained rights to XMT‑1522 outside of the United States and Canada. The Company has also established strategic research and development partnerships with Takeda and Merck KGaA for the development and commercialization of additional ADC product candidates against a limited number of targets selected by the Company’s partners based on the Company’s Dolaflexin platform.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval and reimbursement for any drug product candidate that it may 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, development of technological innovations by competitors, reliance on third party manufacturers and the ability to transition from pilot-scale production to large-scale manufacturing of products.

On July 19, 2018, the Company announced that the U.S. Food and Drug Administration (FDA) placed the Phase 1 study of XMT-1522 on partial clinical hold. The Company is working diligently with the FDA and the site investigators to resolve the partial clinical hold. See Note 10 to unaudited condensed consolidated financial statements for additional disclosure related to this partial clinical hold.

On July 3, 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 5,000,000 shares of its common stock at a public offering price of $15.00 per share, for aggregate gross proceeds of $75,000. The Company received $67,420 in net proceeds after deducting $7,580 of underwriting discounts and commissions and offering costs. On August 2, 2017, the Company issued and sold 51,977 shares of common stock at $15.00 per share for gross proceeds 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.

In connection with preparing for the IPO, the Company effected a 1-for-4.5 reverse stock split of the Company’s common stock. The reverse stock split became effective on June 15, 2017. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share amounts in the financial statements and the notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

The Company has incurred net losses since inception. The Company’s net loss was $24,756 for the six months ended June 30, 2018 and $38,707 for the year ended December 31, 2017. The Company expects to continue to incur operating losses for at least the next several years.  As of June 30, 2018, the Company had an accumulated deficit of $124,666. The future success of the Company is dependent on its ability to identify and develop its product candidates, and ultimately upon its ability to attain profitable operations. The Company has devoted substantially all of its financial resources and efforts to research and development and general and administrative expense to support such research and development. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on the Company’s stockholders' deficit and working capital. The Company believes that its existing cash, cash equivalents and marketable securities as of June 30, 2018, will enable it to fund its current operating plan for at least the next tweleve months, which the Company expects will allow it to achieve initial clinical data readouts for its two lead development programs.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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 accepted accounting principles as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 28, 2018.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of June 30, 2018, the results of its operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017. Such adjustments are of a normal and recurring nature, other than the adjustments associated with the adoption of ASC Topic 606, Revenue from Contracts with Customers (Topic 606). The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018, or for any future period.

Effective January 1, 2018, the Company adopted the requirements of Topic 606 using the modified retrospective method as discussed below in Note 2: Summary of Significant Accounting Policies. All 2018 amounts and disclosures set forth in this Quartelry Report on Form 10-Q reflect these changes.

XML

Summary of significant accounting policies

6 Months Ended

Jun. 30, 2018

Summary of significant accounting policies

Summary of significant accounting policies

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its subsidiary, Mersana Securities Corp. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, management’s judgments with respect to the performance obligations and estimated selling prices within its revenue arrangements, accrued expenses, valuation of stock-based awards and 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 the Company’s IPO. The Company has utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker, the Company's chief executive officer, view the Company's operations and manage its business as a single operating segment, which is the business of discovering and developing ADCs.

Research and Development

The Company expenses all costs incurred in performing research and development activities. Research and development expenses include salaries and benefits, materials and supplies, preclinical expenses, manufacturing expenses, stock-based compensation expense, depreciation of equipment, contract services and other outside expenses. Costs of certain development activities, such as manufacturing, are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected 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 development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Costs associated with collaboration agreements are included in research and development expense.

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of Topic 606, using the modified retrospective transition method.  Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts in process as of the date of adoption.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. 

The adoption of the new revenue recognition guidance resulted in increases of $2,031 in deferred revenue and accumulated deficit as of January 1, 2018. For the three months ended June 30, 2018, revenue increased by $326, net loss decreased by $326 and basic and diluted net loss per share decreased by $0.01, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. For the six months ended June 30, 2018, revenue decreased by $571, net loss increased by $571 and basic and diluted net loss per share increased by $0.02, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. These changes were primarily caused by the differences in determining and allocating transaction price under Topic 606.

The Company enters into collaboration agreements which are within the scope of Topic 606, under which the Company licenses rights to its technology and certain of the Company’s product candidates and performs research and development services for third parties.  The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front fees; reimbursement of research and development costs; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.  

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.   The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer. 

The promised good or services in the Company’s arrangement typically consist of license rights to the Company’s intellectual property and research and development services.  The Company also has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract.  Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer.  Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources or (ii) the promised good or service is separately identifiable from other promises in the contract.  In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract.  The consideration may include both fixed consideration or variable consideration.  At the inception of each arrangement that includes variable consideration and at each reporting period, the Company evaluates the amount of potential payment and the likelihood that the payments will be received.  The Company utilizes either the most likely amount method or expected amount method to estimate the amount expected to be received based on which method better predicts the amount expected to be received.  If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. We assessed each of our revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements because: (a) the promised consideration approximates the cash selling price of the promised goods and services or any significant difference is due to factors other than financing; and (b) timing of payment approximates the transfer of goods and services and performance is over a relatively short period of time within the context of the entire term of the contract.

The Company’s contracts often include development and regulatory milestone payments. At contract inception and at each reporting period, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.  If it is not probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.  Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not included in the transaction price.  At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration arrangements.

The Company allocates the transaction price based on the estimated standalone selling price of the underlying performance obligations or in the case of certain variable consideration to one or more performance obligations.  The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.  The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation.  Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts the Company would expect to receive for each performance obligation.   

For performance obligations consisting of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees.  The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.  If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

The Company receives payments from its customers based on billing schedules established in each contract. Such billings generally have 30 day terms. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the right to consideration is unconditional.

Collaborative Arrangements

The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks 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 606 in determining the appropriate treatment for the transactions between the Company and its collaborative partners and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. To the extent revenue is generated from a collaboration, the Company will recognize its share of the net sales on a gross basis if it 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 in the transactions with customers, consistent with the guidance in Topic 606.

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820 Fair Value Measurement (ASC 820), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset 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 active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity, or a remaining maturity at the time of purchase, 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. These investments are subject to minimal credit and market risks. Cash and cash equivalents are stated at cost, which approximates market value.

The following amounts were presented as cash, cash equivalents and restricted cash:

	Six months ended				Six months ended
	June 30, 2018				June 30, 2017
	Beginning		End		Beginning		End
	of period		of period		of period		of period
Cash and cash equivalents	$	26,591	$	51,142	$	100,297	$	33,053
Restricted cash included in other assets		371		371		371		371
Total cash, cash equivalents and restricted cash per statement of cash flows	$	26,962	$	51,513	$	100,668	$	33,424

Marketable Securities

Short-term marketable securities consist of investments with maturities greater than three months and less than one year from the balance sheet date. Long-term marketable securities consist of investments with maturities greater than one year that are not 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 are recorded as interest income within other income. Unrealized gains and losses on available-for-sale securities are included in other comprehensive loss as a component of stockholders’ equity until realized.

Other Assets

The Company has recorded other assets of $1,970 and $371 as of June 30, 2018 and December 31, 2017, respectively. The June 30, 2018 amount is comprised of restricted cash of $371 held as security deposits for a standby letter of credit related to a facility lease and a corporate credit card program, $1,433 held by a service provider and $166 in deferred financing costs. The December 31, 2017 amount is comprised of restricted cash.

Accounting for Stock-based Compensation

The Company accounts for its stock-based compensation in accordance with ASC Topic 718 Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees and directors to be recognized as expense 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. The Company 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 (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividends. Due to the lack of a public market for the Company's common stock prior to completion of the IPO and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it 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 the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the 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 to the closing of the IPO. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to its common stock at the time of, and the likelihood of, achieving a liquidity event, such as an IPO or sale.

In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance per ASU No. 2016-09. The adoption of this ASU did not have a material impact on the Company's financial statements.

Net Loss per Share

Basic 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-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods.

For purposes of the diluted net loss per share calculation, convertible preferred stock, warrants to purchase common stock and options to purchase common stock are considered to be potentially dilutive securities, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

	Three months ended		Six months ended
	June 30,		June 30,
	2018	2017	2018	2017
Series A-1 convertible preferred stock	—	5,574,467	—	5,574,467
Series B-1 convertible preferred stock	—	7,319,307	—	7,319,307
Series C-1 convertible preferred stock	—	3,260,897	—	3,260,897
Warrants	110,365	129,491	110,365	129,491
Stock options	3,635,541	3,177,630	3,635,541	3,177,630
	3,745,906	19,461,792	3,745,906	19,461,792

Patent Costs

The Company expenses patent application and related legal costs as incurred and classifies such costs as general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

Income Taxes

The Company accounts for income taxes using the liability method.  The difference between the financial statement and tax basis of the assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed using the tax laws 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 being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). For the three and six months ended June 30, 2018 and 2017, other comprehensive loss consisted of unrealized loss on marketable securities.

Concentration of Credit Risk and Off-Balance Sheet Risk

The 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 of credit risk primarily consist of cash equivalents and marketable securities. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. Cash, cash equivalents, and marketable securities are deposited with federally insured financial institutions in the United States and may, at times, exceed federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal risk exists with respect to those balances. Generally, these deposits may be redeemed upon demand and therefore bear minimal interest rate risk.

Recently Issued Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments (ASU No. 2016-01) related to the recording of financial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income (loss). However, an entity has the option to measure equity investments without readily determinable fair values either (i) at fair value or (ii) at cost, adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income (loss). The amended guidance became effective January 1, 2018. The Company adopted the new standard effective January 1, 2018. Based on the Company’s current investment holdings, the adoption of this new standard did not have a material impact on its consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This standard is effective for the Company in the fiscal year beginning after December 15, 2018, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU No. 2016-02 may have on its financial position and results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of contingent consideration payments made after a business combination and several other clarifications not currently applicable to the Company. The new standard also clarifies that an entity should determine each separately identifiable source or use within cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which 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 flows for the item. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (ASU No. 2016-18). The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance is intended to provide clarity and reduce diversity in practice as to when changes to the terms or conditions of share-based payments are accounted for as modifications. Under this new guidance, entities will apply modification accounting if the fair value, vesting conditions or classification of the award changes. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early adoption is permitted. The guidance per ASU 2017-09 is to be adopted prospectively to an award modified on or after the adoption date. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

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Collaboration agreements

6 Months Ended

Jun. 30, 2018

Collaboration Agreements

Collaboration agreements

3. Collaboration agreements

Takeda XMT-1522 strategic partnership

In January 2016, the Company entered into a Development Collaboration and Commercial License Agreement with Takeda through 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 to commercialize XMT-1522 outside of the United States and Canada. Under the XMT-1522 Agreement, the Company is responsible for conducting certain Phase 1 development activities for XMT-1522, including the ongoing Phase 1 clinical study, at its own expense. Takeda has the option to conduct Phase 1 development activities at its own expense within its territory. The parties will collaborate on the further development of XMT-1522 in accordance with a global development plan (Post-Phase 1 Development). The parties will share equally all clinical stage manufacturing costs and any Post-Phase 1 Development costs incurred in the performance of activities for the purpose of obtaining regulatory approval in either the United States or Canada and in certain other 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 approval in 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, the Company was entitled to a milestone payment of $20,000 upon achievement of the IND Clearance Date (as defined therein). The Company achieved the IND Clearance Date in October 2016.

In addition to the milestone payment upon achievement of the IND Clearance Date, the Company is entitled to receive future development, 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 net sales of XMT-1522 in Takeda's territory during the applicable royalty term. There are development milestones payable upon the achievement of nine separate events: the initiation of Phase 2 clinical trials and Phase 3 clinical trials for four separate specified 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 pricing approvals, as applicable, for the U.S., European Union and Japanese markets for up to four separate patient populations and multiple label indications. In addition, a regulatory milestone is payable upon the receipt of regulatory and pricing approval in two specified markets other than the United States, the European Union or Japan. There are three individual commercial milestones, which are payable upon the attainment of certain thresholds for annual net sales. The next potential milestone the Company will be eligible to receive is a development milestone of $12,000 related to the initiation of a Phase 2 clinical trial.

The XMT-1522 Agreement expires upon the expiration of the royalty term for XMT-1522, after which time, Takeda will have a perpetual, royalty-free license. However, Takeda may terminate the XMT-1522 Agreement in its entirety for convenience upon 30 days' prior written notice at any time up to the initiation of the first Phase 2 clinical study of XMT-1522 or upon 90 days' prior written notice following the initiation of the first Phase 2 clinical study of XMT-1522. Each party may terminate the XMT-1522 Agreement in its entirety upon bankruptcy or similar proceedings of the other party and in its entirety or on a country-by-country basis upon an uncured material breach of the agreement by the other party. Following termination, XMT-1522 will revert to the Company for further development and commercialization.

Takeda strategic research and development partnership

In March 2014, the Company entered into a Research Collaboration and Commercial License Agreement with Takeda through Takeda’s wholly owned subsidiary, Millennium Pharmaceuticals, Inc. (the 2014 Agreement). The 2014 Agreement was amended in January 2015 and amended and restated in January 2016 (the 2016 Restated Agreement). The agreements initially provided Takeda with the right to develop ADCs directed to a total of seven exclusive targets, designated by Takeda, over a specified period of time. Takeda will be responsible for the product development and marketing of any products resulting from this collaboration.  To date, the Company has received $24,800 in non-refundable upfront fees, technology access fees or option exercise fees. 

For the two targets initially under the 2014 Agreement, the Company initially granted a research license upon designation of a target.  To receive a development and commercialization license for these designated targets, Takeda was required to pay an additional option exercise fee of $1,300.  For the remaining five targets, the Company grants a research, development and commercialization license upon the designation of a target.

For each designated target, the Company and Takeda develop research plans to evaluate Takeda's antibodies as ADCs incorporating the Company's technology. The Company receives service fees for its efforts under the research plans. The goal of the research plans is to provide Takeda with sufficient information to formally nominate a development candidate and begin Investigational New Drug Application (IND), enabling studies or cease development on the designated target. 

As of June 30, 2018, Takeda had designated four targets and received development and commercialization licenses for the first, third and fourth designated targets and a research license for the second designated target.  Takeda has limited replacement rights for two designated targets, subject to certain contractual restrictions.  Takeda is required to pay $500 to utilize the second limited replacement right.

As of June 30, 2018, if products are successfully developed and commercialized, the Company is entitled to receive aggregate milestones of up to $474,750 for all eligible designated targets consisting of $50,250 in development milestones, $153,000 in regulatory milestones, and $271,500 in commercial milestones. The total milestones payable on each of the remaining eligible three targets are $158,250. There are four individual development milestones per target, which are payable upon the filing of an IND application and the initiation of Phase 1 through Phase 3 clinical trials. There are eight individual regulatory milestones per target. These are payable upon regulatory submissions, regulatory approvals and pricing approvals, as applicable, for the U.S., European Union and Japanese markets and regulatory approvals for both a second and third indication. There are six individual commercial milestones, which are payable upon the first commercial sale in each of the U.S., European Union and Japanese markets and upon the attainment of three separate defined thresholds for annual net sales. The next potential milestone payment the Company will be eligible to receive is a development milestone of $750 related to the filing of an IND. The Company is also entitled to receive royalties on product sales, if any, during the applicable royalty term. Royalties payable on the remaining designated targets are in the mid to high single digits.

The Company may elect to exercise an option to co-develop and co-commercialize one product incorporating either Takeda's fifth, sixth or seventh target in the United States for a payment of $15,000. If the Company elects to exercise the option to co-develop and co-commercialize a product, the Company will share in 50% of the profits related to United States. The Company will be responsible for 50% of costs incurred specifically for the United States and 30% of global development costs. Any costs incurred specifically for a foreign country will be borne 100% by Takeda. If the Company elects to co-develop and co-commercialize a product, certain regulatory 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 product under the agreement, after which time, Takeda will have a perpetual, royalty-free license. Except with respect to the target antigen 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 upon 45 days' prior written notice. Each party may terminate the 2016 Restated Agreement in its entirety upon bankruptcy or similar proceedings of the other party or upon an uncured material breach of the agreement by the other party. However, if such breach only relates to one target, the agreement may only be terminated with respect to such target.

Accounting Analysis

For periods prior to January 1, 2018, the Company applied the provisions of ASC 605 in accounting for these arrangements.  Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 28, 2018 for the accounting analysis under these provisions.

Under ASC 605 and Topic 606, the Company has concluded that the 2016 Restated Agreement and the XMT-1522 Agreement should be accounted for as one arrangement due in part because the agreements are with the same party and were negotiated and executed contemporaneously. Further, in applying the contract modification practical expedient, the Company has aggregated the effect of all modifications through the initial date of application of Topic 606 for the purposes of (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. 

The performance obligations and the allocated transaction price as of the date of initial application of Topic 606 are as follows:

	Allocated
Performance obligations	Transaction Price
XMT-1522 license and research services	$	49,828
Joint research committee services for XMT-1522		449
Exclusive license to the first designated target and research services		6,611
Research license to the second designated target and research services		1,017
Material right related to the exclusive license to the second designated target		526
Exclusive license to the third designated target and research services		4,974
Exclusive license to the fourth designated target and research services		3,678
Material right related to the license to the fifth designated target and research services		3,506
Material right related to the license to the sixth designated target and research services		3,506
Material right to license to the seventh designated target and research services		3,506
Material right related to first replacement right for a designated target		3,506
Material right related to the second replacement right to a designated target		3,116
Rights to future technological improvements		1,750
Joint research committee services		150
	$	86,123

The Company has concluded the license related to each of the designated targets is not distinct from the research services performed related to each of the designated targets as Takeda cannot obtain the benefit of the license without the related research services.  Each license to a designated target and the related services performance obligation is considered distinct from every other license to a designated target and related services performance obligation as each research plan is pursued independent of the any other research plans for other designated targets.  Further, the material rights provided in the agreement provide Takeda incremental rights for either no additional consideration or for additional fees that contain a significant discount.  The material rights are distinct from the other performance obligations in the arrangement as they are options in the contract and are not required for Takeda to obtain the benefit of the other promised goods or services in the arrangement. 

Similarly, the Company concluded that the XMT-1522 license and the related research and development services, including the Phase 1 development and the transfer certain materials and know how related to the Company's manufacturing processes are one performance obligation. The license to the Company's intellectual property is not distinct from the research and related development services that the Company is obligated to perform. Takeda would not have the ability to realize the value of the license without the Company performing the related services.

The Company has concluded that the Post-Phase 1 Development activities under the XMT-1522 Agreement represent joint operating activities in which both parties are active participants and of which both parties are exposed to significant risks and rewards that are dependent on the commercial success of the activities. Accordingly, the Company is accounting for the Post-Phase 1 Development activities in accordance with ASC 808 and they are not considered revenue elements under Topic 606. For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company was billed approximately $1,080,  $501,  $2,803 and $795, respectively, from Takeda representing the Company's share of Post-Phase 1 Development costs incurred by Takeda. These amounts have been reflected as research and development costs in the consolidated statement of operations. The Company did not perform any Post-Phase 1 Development activities or incur any associated costs prior to January 1, 2018.   During the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company billed Takeda $1,054,  $0,  $1,794 and $0, respectively, related to ASC 808 costs.

As of the date of initial application of Topic 606, the total transaction price for the 2016 Restated Agreement and the XMT-1522 Agreement was $86,123, which includes approximately $14,023 of fees associated with research and development activities which have been or are expected to be received.  The Company utilizes the expected value approach to estimate the amount of consideration related to the fees associated with development and research services.  The Company utilizes the most likely amount approach to estimate any development and regulatory milestone payments to be received.  As of the date of initial application of Topic 606, there were no milestone payments, which had not been received, included in the estimated transaction price.  The Company considered the stage of development and the remaining risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Takeda.  The milestone payment amounts were fully constrained, as a result of the uncertainty whether any of the associated milestones would be achieved.  The Company has determined that any commercial milestones and sales based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted and therefore have also been excluded from the transaction price.  The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.  There were no changes to the transaction price during the three and six months ended June 30, 2018. 

The transaction price was allocated to the performance obligations based on the relative estimated standalone selling prices of each performance obligation or, in the case of certain variable consideration, to one or more performance obligations.  The estimated standalone selling prices for performance obligations which include a license and research services, was developed using the estimated selling price of the license and an estimate of the overall effort to perform the research service and an estimated market rate for research services. The estimated standalone selling price of the licenses was established based on comparable transactions.  The estimated standalone selling price for the material rights and rights to future technological improvements were developed based on the estimated selling prices of a license or rights received and any fees payable upon exercise of the associated option, as well as considering the probability that additional technology would be made available or the probability the counterpart would utilize the technology or exercise the option. The estimated standalone selling price for the joint research committee services was developed using an estimate of the time and costs incurred to participate in the committees.

The Company will recognize revenue related to the performance obligations, which include research licenses or an exclusive development and commercialization license and the related research services, over the estimated period of the research and development services using a proportional performance model. The Company measures proportional performance based on the costs incurred relative to the total estimated costs of the research.  To the extent that the Company receives fees for the research services as they are performed, these amounts are recorded as deferred revenue. Revenue related to material rights will be recognized when the option is exercised, unless there are additional research services that the Company is required to perform related to the designated target (in which case revenue will be recognized based on the proportional performance model) or at the time the option right lapses. To the extent that the company receives a fee upon exercise of the option, such amounts are recorded as deferred revenue. Revenue related to the material rights related to replacement rights will be recognized over the research term of the replacement target once the replacement right is exercised or at the time the right lapses unused. To the extent that the Company receives a fee upon exercise of the replacement right, such amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the performance period (which in the case of the joint research committee services approximates the time and cost incurred), which is expected to be ten years and six years, respectively. The Company will reassess the estimated remaining term at each subsequent reporting period.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded total revenue of $2,079,  $2,754,  $4,616 and $6,284, respectively, related to its efforts under the 2016 Restated Agreement and the XMT-1522 Agreement. Included in accounts receivable as of June 30, 2018 and December 31, 2017 was $2 and $454, respectively, related to the Takeda agreements.

As of June 30, 2018, the Company had $41,056 of deferred revenue related to the Takeda agreements that will be recognized over the remaining performance periods for the applicable obligations.

Takeda invested $10,000 as part of the Company’s IPO.

Merck KGaA

In June 2014, the Company entered into a Collaboration and Commercial License Agreement with Merck KGaA (the Merck KGaA Agreement). Upon the execution of the agreement, Merck KGaA paid the Company a nonrefundable technology access fee of $12,000 for the right to develop ADCs directed to six exclusive targets over a specified period of time. No additional fees are due when a target is designated and the commercial license to the target is granted. Merck KGaA will be responsible for the product development and marketing of any products resulting from this collaboration.  All six targets were designated prior to 2018.

Under the terms of the agreement, the Company and Merck KGaA develop research plans to evaluate Merck KGaA's antibodies as ADCs incorporating the Company's technology. The Company receives fees for its efforts under the research plans. The goal of the research plans is to provide Merck KGaA with sufficient information to formally nominate a development 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, the Company 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; and sales milestones—$432,000. There are six individual development milestones per target, payable upon the completion of various 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 for annual net sales.

Prior to 2018, the Company had received $3,000 related to development milestones under the agreement.   There have been no additional milestone payments in the six months ended June 30, 2018.  The next potential milestone payment the Company will be eligible to receive will be a development milestone of $500 on Merck KGaA's designation of a preclinical development candidate for any target. Revenue will be recognized upon achievement of the milestone. The Company and Merck KGaA may also enter into a future supply agreement to provide clinical study material should Merck KGaA pursue clinical development of any candidates nominated under the agreement.

Unless earlier terminated, the agreement will expire upon the expiration of the last royalty term for a product under the agreement, after which time, Merck KGaA will have a perpetual, royalty-free license, or if Merck KGaA does not designate any ADC product candidates produced by the Company under the agreement as preclinical development candidates, upon the expiration of the last to expire research program. Merck KGaA may terminate the agreement in its entirety or with respect to any target for convenience upon 60 days' prior written notice. Each party may terminate the Merck KGaA Agreement in its entirety upon bankruptcy or similar proceedings of the other party or upon an uncured material breach of the agreement by the other party. However, if such breach only relates to one target, the agreement may only be terminated with respect to such target.

Accounting Analysis

For periods prior to January 1, 2018, the Company applied the provisions of ASC 605 in accounting for this arrangement.  Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 28, 2018 for the accounting analysis under these provisions.

By applying the contract modification practical expedient, the Company has aggregated the effect of all modifications through the initial date of application of Topic 606 for the purposes of (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. 

The Company identified the following performance obligations under the agreement: (i) exclusive license and research services for six designated targets, (ii) rights to future technological improvements and (iii) participation of project team leaders and providing joint research committee services.

The Company has concluded that each license for a designated target is not distinct from the research services performed related to the designated target as Merck KGaA cannot obtain the benefit of the license without the related research services.  Each license for a designated target and the related services performance obligation is considered distinct from every other license for a designated target and related services performance obligation as each research plan is pursued independent of every other research plans for other designated targets. 

As of the date of initial application of Topic 606, the total transaction price for the Merck KGaA Agreement was $22,875, which includes approximately $7,875 fees for research and development activities which have been or are expected to be received and $3,000 of milestone payments previously earned.  The Company utilizes the expected value approach to estimate the amount of consideration related to the payment of fees associated with development and research services.  The Company utilizes the most likely amount approach to estimate any development and regulatory milestone payments to be received.  As of the date of initial application of Topic 606, there were no milestones payments, which had not already been received, included in the estimated transaction price.  The Company considered the stage of development and the remaining risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Merck KGaA.  The milestone payment amounts were fully constrained, as a result of the uncertainty whether any of the associated milestones would be achieved.  The Company has determined that any commercial milestones and sales based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted and therefore have also been excluded from the transaction price.  The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.  There were no changes to the transaction price during the three and six months ended  June 30, 2018.

The transaction price was allocated to the performance obligations based on the relative estimated standalone selling prices of each performance obligation or in the case of certain variable consideration to one or more performance obligations.  The estimated standalone selling prices for performance obligations, that include a license and research services, were developed using the estimated selling price of the license and an estimate of the overall effort to perform the research service and an estimated market rate for research services. The estimated standalone selling price of the licenses was established based on comparable transactions.  The estimated standalone selling price for the rights to future technological improvements was developed based on the estimated selling prices of a license or rights received, as well as considering the probability that additional technology would be made available or the probability the counterpart would utilize the technology. The estimated standalone selling price for the joint research committee services was developed using an estimate of the time and costs incurred to participate in the committees.

The transaction price of $22,875 was allocated to the performance obligations as follows: approximately $4,226 for each of the license and corresponding research and development services units of account for the first and second designated targets; $3,439 for each of the license and corresponding research and development services units of account for the third, fourth,  fifth and sixth designated target; $425 for rights to future technological improvements; and $242 for joint research committee services.

The Company is recognizing revenue related to the exclusive license and research and development services performance obligation over the estimated period of the research and development services using a proportional performance model.  The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred.  To the extent that the Company receives fees for the research services as they are preformed, these amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the performance period (which in the case of the joint research committee services approximate the time and cost incurred each period), which are 10 and 5 years, respectively.  The Company is continuing to reassess the estimated remaining term at each subsequent reporting period.

During the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded revenue of $612,  $910,  $944 and $1,607, respectively, related to its efforts under the collaboration agreement. Included in accounts receivable as of June 30, 2018 and December 31, 2017 was $180 and $330, respectively, related to the Merck KGaA Agreement.

As of June 30, 2018, the Company had recorded $6,957 in deferred revenue related to the Merck KGaA agreement that will be recognized over the remaining performance period.

Summary of Contract Assets and Liabilities

The following table presents changes in the balances of our contract assets and liabilities during the three and six months ended June 30, 2018:

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Three months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	50,462	$	437	$	2,691	$	48,208

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Six months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	52,439	$	1,524	$	5,755	$	48,208

The impact of the adoption of the new revenue recognition guidance is reflected within the beginning of period balance.

During the three months and six months ended June 30, 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$	2,691	$	5,755
Performance obligations satisfied in previous periods	$	—	$	—

Other Revenue

The Company has provided limited services for a collaboration partner, Asana BioSciences. For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded revenue of $0,  $63,  $195 and $125, respectively, related to these services. In addition, during the three months ended June 30, 2018, the Company recognized revenue of $1,500 related to a milestone achieved upon the completion of a GLP toxicology study by Asana BioSciences. The next potential milestone the Company is eligible to receive is $2,500 upon dosing the fifth patient in a Phase 1 clinical study by Asana BioSciences.

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Fair value measurements

6 Months Ended

Jun. 30, 2018

Fair value measurements

Fair value measurements

4. Fair value measurements

The following table presents information about the Company's assets and liabilities regularly measured and carried at a fair value and indicates the level within fair value hierarchy of the valuation techniques utilized to determine such value as of June 30, 2018 and December 31, 2017:

					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
	Fair		Markets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2018
Cash and cash equivalents	$	51,142	$	51,142	$	—	$	—
Marketable securities:
U.S. Treasuries		45,367		45,367		—		—
	$	96,509	$	96,509	$	—	$	—

					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	$	—

There were no changes in valuation techniques or transfers between fair value measurement levels during the six months ended June 30, 2018 and 2017. As of June 30, 2018 and December 31, 2017, cash and cash equivalents were comprised of cash and money market funds.

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Marketable securities

6 Months Ended

Jun. 30, 2018

Marketable securities

Marketable securities

5. Marketable securities

The following table summarizes marketable securities held at June 30, 2018 and December 31, 2017:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2018
U.S. Treasuries	$	45,457	$	—	$	(90)	$	45,367
	$	45,457	$	—	$	(90)	$	45,367

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2017
U.S. Treasuries	$	62,777	$	—	$	(137)	$	62,640
Commercial paper		24,931		—		—		24,931
Corporate bonds		11,066		—		(12)		11,054
	$	98,774	$	—	$	(149)	$	98,625

As of June 30, 2018, the Company held 13 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months at June 30, 2018 was $45,367 and there were no securities held by the Company in an unrealized loss position for more than 12 months. As of June 30, 2018, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in an unrealized loss position before recovery of their amortized cost basis. Furthermore, the Company has determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any securities with any other-than-temporary impairment as of June 30, 2018.

There were no realized gains or losses on available-for-sale securities during the six month periods ended June 30, 2018 and 2017.

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Accrued expenses

6 Months Ended

Jun. 30, 2018

Accrued expenses

Accrued expenses

6. Accrued expenses

Accrued expenses consist of the following:

	June 30,		December 31,
	2018		2017
Accrued payroll and related expenses	$	1,996	$	3,041
Accrued preclinical, manufacturing and clinical expenses		5,558		3,183
Accrued professional fees		439		492
Accrued other		501		228
	$	8,494	$	6,944

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Stockholders' equity (deficit)

6 Months Ended

Jun. 30, 2018

Stockholders' equity (deficit)

Stockholders' deficit

7. Stockholders’ equity

The following table presents the changes in the separate accounts comprising stockholders’ equity for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively.

				Additional		Accumulated				Stockholders’
	Common Stock			Paid-in		Other Comprehensive		Accumulated		Equity
	Shares	Amount		Capital		Income (Loss)		Deficit		(Deficit)
Balance at December 31, 2016	1,294,352	$	1	$	3,551	$	—	$	(59,171)	$	(55,619)
Change	21,470,665		2		164,467		(149)		(38,707)		125,613
Balance at December 31, 2017	22,765,017		3		168,018		(149)	$	(97,878)		69,994
Change	352,721		—		2,428		59		(26,788)		(24,301)
Balance at June 30, 2018	23,117,738	$	3	$	170,446	$	(90)	$	(124,666)	$	45,693

Preferred stock

As of June 30, 2018, the Company has 25,000,000 shares of authorized preferred stock. No shares of preferred stock have been issued.

Common stock

The holders of the common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors (the Board).

At June 30, 2018, and December 31, 2017, there were 3,745,906 and 3,315,850 shares of common stock, respectively, reserved for the exercise of outstanding stock options and warrants (in common stock equivalent shares).

	June 30,	December 31,
	2018	2017
Warrants	110,365	110,365
Stock options	3,635,541	3,205,485
	3,745,906	3,315,850

Warrants

In connection with a 2013 Series A-1 Preferred Stock issuance, the Company granted to certain investors warrants to purchase 129,491 shares of common stock. The warrants have a $0.05 per share exercise price and a contractual life of 10 years. The fair value of these warrants was recorded as a component of equity at the time of issuance. As of June 30, 2018, warrants to purchase 110,365 shares of common stock were outstanding.

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Stock options

6 Months Ended

Jun. 30, 2018

Stock options

Stock options

8. Stock options

Stock option plans

In June 2017 the Company’s shareholders approved the 2017 Stock Incentive Plan (the 2017 Plan or the Plan).  Under the 2017 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 of common stock issuable under the Plan will be cumulatively increased annually by 4% of the outstanding shares or such lesser amount specified by the Board. The terms of the awards are determined by the Board, subject to the provisions of the Plan. As of the adoption date of the 2017 Plan, there were 3,141,625 options outstanding under the Company’s 2007 Stock Incentive Plan (the 2007 Plan). Any cancellations under the 2007 Plan would increase the number of shares that could be granted under the 2017 Plan. On January 1, 2018, the number of shares of common stock issuable under the Plan was increased by 910,600 shares. As of June 30, 2018 there were 1,366,503 shares available for future issuance under the Plan.

With respect to incentive stock options, the option price per share will equal the fair market value of the common stock on the date of grant, as determined by the Board, and the vesting period is generally four years. Nonqualified stock options will be granted at an exercise price established by the Board at its sole discretion (which has not been less than fair market value on the date of grant) and the vesting periods may vary. Options granted under the Plan expire no later than 10 years 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 Plans is as follows:

		Weighted-		Remaining
	Number	Average		Contractual Life	Aggregate
	of Shares	Exercise Price		(in years)	Intrinsic Value
Options outstanding at January 1, 2018	3,205,485	$	3.44	7.8	$	41,709
Granted	1,028,415		14.53
Exercised	(352,721)		2.06
Cancelled	(245,638)		7.63
Options outstanding at June 30, 2018	3,635,541	$	6.42	8.0	$	41,612
Options exercisable at June 30, 2018	1,647,661	$	2.82	7.0	$	24,786

The weighted-average grant date fair value of options granted during the six months ended June 30, 2018 and 2017, was $9.56 and $4.61 per share, respectively.

Cash received from the exercise of stock options was $725 and $364 for the six months ended June 30, 2018 and 2017, respectively.

Stock-based compensation

The Company uses the provisions of ASC 718, Stock Compensation, to account for stock-based awards.

The measurement date for employee awards is generally the date of grant. Stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period, using the straight-line method.

For the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Company recorded stock-based compensation expense of $958,  $352,  $1,703 and $617, respectively. The Company has an aggregate of $11,461 of unrecognized stock compensation cost as of June 30, 2018 remaining to be amortized over the weighted-average period of 3.2 years. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Risk-free interest rate	2.8	%	1.9	%	2.7	%	2.2	%
Expected dividend yield	—	%	—	%	—	%	—	%
Expected term (years)	6.10		6.25		6.08		6.25
Expected stock price volatility	73	%	68	%	73	%	67	%

Employee Stock Purchase Plan

In connection with the IPO, the Board adopted and the Company's stockholders approved the 2017 employee stock purchase plan (the 2017 ESPP), which became effective upon the closing of the IPO in July 2017. The Company has reserved 225,000 shares of common stock for issuance under the 2017 ESPP. The Company has not issued any shares under the 2017 ESPP.

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Commitments

6 Months Ended

Jun. 30, 2018

Commitments

Commitments

9. Commitments

Operating leases

The Company leases office space in Cambridge, MA under an operating lease, which was last amended in January 2018, which is effective through March 2021. The lease also provided the Company with a tenant improvement allowance of up to $356. The Company fully utilized the allowance and recorded the assets acquired with the allowance as leasehold improvements. The Company recorded the tenant improvement allowance as a deferred lease incentive and is amortizing the deferred lease incentive through a reduction 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 amount of $321 as of each of June 30, 2018 and December 31, 2017, respectively, collateralized by a money market account. The Company classified this amount as restricted cash in the accompanying unaudited condensed consolidated balance sheets.

For the three months ended June 30, 2018 and 2017 and for the six months ended June 30, 2018 and 2017, rent expense was $497,  $419,  $978 and $838, respectively.

The Company is recording rent expense on a straight-line basis over the term of the lease and has recorded deferred rent in the unaudited condensed consolidated balance sheets, accordingly.

License agreements

Through June 30, 2018, the Company has licensed intellectual property from two biotechnology companies. The consideration included upfront payments and a commitment to pay annual license fees, milestone payments, and, upon product commercialization, royalties on revenue generated from the sale of products covered by the licenses. The Company recorded milestone payments of $0 and $1,500 during the six months ended June 30, 2018 and 2017, respectively.

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Subsequent Events

6 Months Ended

Jun. 30, 2018

Subsequent events

Subsequent events

10. Subsequent events

For the purposes of the unaudited financial statements as of June 30, 2018 and the period then ended, the Company has evaluated subsequent events through August 14, 2018, the date the unaudited interim financial statements were issued. There were no items requiring adjustment or disclosure in the consolidated financial statements.

On July 19, 2018, the Company announced that the U.S. Food and Drug Administration FDA placed the Phase 1 study of XMT-1522 on partial clinical hold. While this event did not impact expenses incurred or revenue recognized associated with the XMT-1522 license and research services performance obligation for any periods prior to June 30, 2018, the Company is currently evaluating the impact, if any, on the future expenditures that may be incurred and the potential impact on the proportional performance model utilized to recognize revenue in future periods. The Company is working diligently with the FDA and the site investigators to resolve the partial clinical hold.

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Summary of significant accounting policies (Policies)

6 Months Ended

Jun. 30, 2018

Summary of significant accounting policies

Principles of Consolidation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its subsidiary, Mersana Securities Corp. All intercompany balances and transactions have been eliminated.

Use of Estimates

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, management’s judgments with respect to the performance obligations and estimated selling prices within its revenue arrangements, accrued expenses, valuation of stock-based awards and 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 the Company’s IPO. The Company has utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

Segment Information

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker, the Company's chief executive officer, view the Company's operations and manage its business as a single operating segment, which is the business of discovering and developing ADCs.

Research and Development

Research and Development

The Company expenses all costs incurred in performing research and development activities. Research and development expenses include salaries and benefits, materials and supplies, preclinical expenses, manufacturing expenses, stock-based compensation expense, depreciation of equipment, contract services and other outside expenses. Costs of certain development activities, such as manufacturing, are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected 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 development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Costs associated with collaboration agreements are included in research and development expense.

Revenue Recognition

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of Topic 606, using the modified retrospective transition method.  Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts in process as of the date of adoption.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. 

The adoption of the new revenue recognition guidance resulted in increases of $2,031 in deferred revenue and accumulated deficit as of January 1, 2018. For the three months ended June 30, 2018, revenue increased by $326, net loss decreased by $326 and basic and diluted net loss per share decreased by $0.01, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. For the six months ended June 30, 2018, revenue decreased by $571, net loss increased by $571 and basic and diluted net loss per share increased by $0.02, based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605 Revenue Recognition. These changes were primarily caused by the differences in determining and allocating transaction price under Topic 606.

The Company enters into collaboration agreements which are within the scope of Topic 606, under which the Company licenses rights to its technology and certain of the Company’s product candidates and performs research and development services for third parties.  The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front fees; reimbursement of research and development costs; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.  

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.   The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer. 

The promised good or services in the Company’s arrangement typically consist of license rights to the Company’s intellectual property and research and development services.  The Company also has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract.  Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer.  Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources or (ii) the promised good or service is separately identifiable from other promises in the contract.  In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract.  The consideration may include both fixed consideration or variable consideration.  At the inception of each arrangement that includes variable consideration and at each reporting period, the Company evaluates the amount of potential payment and the likelihood that the payments will be received.  The Company utilizes either the most likely amount method or expected amount method to estimate the amount expected to be received based on which method better predicts the amount expected to be received.  If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. We assessed each of our revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements because: (a) the promised consideration approximates the cash selling price of the promised goods and services or any significant difference is due to factors other than financing; and (b) timing of payment approximates the transfer of goods and services and performance is over a relatively short period of time within the context of the entire term of the contract.

The Company’s contracts often include development and regulatory milestone payments. At contract inception and at each reporting period, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.  If it is not probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.  Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not included in the transaction price.  At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration arrangements.

The Company allocates the transaction price based on the estimated standalone selling price of the underlying performance obligations or in the case of certain variable consideration to one or more performance obligations.  The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.  The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation.  Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts the Company would expect to receive for each performance obligation.   

For performance obligations consisting of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees.  The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.  If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

The Company receives payments from its customers based on billing schedules established in each contract. Such billings generally have 30 day terms. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the right to consideration is unconditional.

Collaborative Arrangements

The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks 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 606 in determining the appropriate treatment for the transactions between the Company and its collaborative partners and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. To the extent revenue is generated from a collaboration, the Company will recognize its share of the net sales on a gross basis if it 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 in the transactions with customers, consistent with the guidance in Topic 606.

Fair Value Measurements

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820 Fair Value Measurement (ASC 820), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset 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 active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity, or a remaining maturity at the time of purchase, 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. These investments are subject to minimal credit and market risks. Cash and cash equivalents are stated at cost, which approximates market value.

The following amounts were presented as cash, cash equivalents and restricted cash:

	Six months ended				Six months ended
	June 30, 2018				June 30, 2017
	Beginning		End		Beginning		End
	of period		of period		of period		of period
Cash and cash equivalents	$	26,591	$	51,142	$	100,297	$	33,053
Restricted cash included in other assets		371		371		371		371
Total cash, cash equivalents and restricted cash per statement of cash flows	$	26,962	$	51,513	$	100,668	$	33,424

Marketable Securities

Marketable Securities

Short-term marketable securities consist of investments with maturities greater than three months and less than one year from the balance sheet date. Long-term marketable securities consist of investments with maturities greater than one year that are not 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 are recorded as interest income within other income. Unrealized gains and losses on available-for-sale securities are included in other comprehensive loss as a component of stockholders’ equity until realized.

Other Assets

Other Assets

The Company has recorded other assets of $1,970 and $371 as of June 30, 2018 and December 31, 2017, respectively. The June 30, 2018 amount is comprised of restricted cash of $371 held as security deposits for a standby letter of credit related to a facility lease and a corporate credit card program, $1,433 held by a service provider and $166 in deferred financing costs. The December 31, 2017 amount is comprised of restricted cash.

Accounting for Stock-based Compensation

Accounting for Stock-based Compensation

The Company accounts for its stock-based compensation in accordance with ASC Topic 718 Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees and directors to be recognized as expense 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. The Company 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 (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividends. Due to the lack of a public market for the Company's common stock prior to completion of the IPO and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it 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 the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the 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 to the closing of the IPO. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to its common stock at the time of, and the likelihood of, achieving a liquidity event, such as an IPO or sale.

In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance per ASU No. 2016-09. The adoption of this ASU did not have a material impact on the Company's financial statements.

Net Loss per Share

Net Loss per Share

Basic 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-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods.

For purposes of the diluted net loss per share calculation, convertible preferred stock, warrants to purchase common stock and options to purchase common stock are considered to be potentially dilutive securities, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

	Three months ended		Six months ended
	June 30,		June 30,
	2018	2017	2018	2017
Series A-1 convertible preferred stock	—	5,574,467	—	5,574,467
Series B-1 convertible preferred stock	—	7,319,307	—	7,319,307
Series C-1 convertible preferred stock	—	3,260,897	—	3,260,897
Warrants	110,365	129,491	110,365	129,491
Stock options	3,635,541	3,177,630	3,635,541	3,177,630
	3,745,906	19,461,792	3,745,906	19,461,792

Patent Costs

Patent Costs

The Company expenses patent application and related legal costs as incurred and classifies such costs as general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

Income Taxes

Income Taxes

The Company accounts for income taxes using the liability method.  The difference between the financial statement and tax basis of the assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed using the tax laws 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 being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). For the three and six months ended June 30, 2018 and 2017, other comprehensive loss consisted of unrealized loss on marketable securities.

Concentration of Credit Risk and Off-balance Sheet Risk

Concentration of Credit Risk and Off-Balance Sheet Risk

The 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 of credit risk primarily consist of cash equivalents and marketable securities. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. Cash, cash equivalents, and marketable securities are deposited with federally insured financial institutions in the United States and may, at times, exceed federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal risk exists with respect to those balances. Generally, these deposits may be redeemed upon demand and therefore bear minimal interest rate risk.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments (ASU No. 2016-01) related to the recording of financial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income (loss). However, an entity has the option to measure equity investments without readily determinable fair values either (i) at fair value or (ii) at cost, adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income (loss). The amended guidance became effective January 1, 2018. The Company adopted the new standard effective January 1, 2018. Based on the Company’s current investment holdings, the adoption of this new standard did not have a material impact on its consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This standard is effective for the Company in the fiscal year beginning after December 15, 2018, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU No. 2016-02 may have on its financial position and results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of contingent consideration payments made after a business combination and several other clarifications not currently applicable to the Company. The new standard also clarifies that an entity should determine each separately identifiable source or use within cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which 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 flows for the item. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (ASU No. 2016-18). The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance is intended to provide clarity and reduce diversity in practice as to when changes to the terms or conditions of share-based payments are accounted for as modifications. Under this new guidance, entities will apply modification accounting if the fair value, vesting conditions or classification of the award changes. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early adoption is permitted. The guidance per ASU 2017-09 is to be adopted prospectively to an award modified on or after the adoption date. The Company adopted the new standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated statement of cash flows.

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Summary of significant accounting policies (Tables)

6 Months Ended

Jun. 30, 2018

Summary of significant accounting policies

Schedule of cash, cash equivalents and restricted cash

	Six months ended				Six months ended
	June 30, 2018				June 30, 2017
	Beginning		End		Beginning		End
	of period		of period		of period		of period
Cash and cash equivalents	$	26,591	$	51,142	$	100,297	$	33,053
Restricted cash included in other assets		371		371		371		371
Total cash, cash equivalents and restricted cash per statement of cash flows	$	26,962	$	51,513	$	100,668	$	33,424

Schedule of outstanding potentially dilutive securities excluded from calculation of diluted net loss per share

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

	Three months ended		Six months ended
	June 30,		June 30,
	2018	2017	2018	2017
Series A-1 convertible preferred stock	—	5,574,467	—	5,574,467
Series B-1 convertible preferred stock	—	7,319,307	—	7,319,307
Series C-1 convertible preferred stock	—	3,260,897	—	3,260,897
Warrants	110,365	129,491	110,365	129,491
Stock options	3,635,541	3,177,630	3,635,541	3,177,630
	3,745,906	19,461,792	3,745,906	19,461,792

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Collaboration Agreements (Tables)

6 Months Ended

Jun. 30, 2018

Collaboration Agreements

Schedule of allocated transaction price of performance obligations

	Allocated
Performance obligations	Transaction Price
XMT-1522 license and research services	$	49,828
Joint research committee services for XMT-1522		449
Exclusive license to the first designated target and research services		6,611
Research license to the second designated target and research services		1,017
Material right related to the exclusive license to the second designated target		526
Exclusive license to the third designated target and research services		4,974
Exclusive license to the fourth designated target and research services		3,678
Material right related to the license to the fifth designated target and research services		3,506
Material right related to the license to the sixth designated target and research services		3,506
Material right to license to the seventh designated target and research services		3,506
Material right related to first replacement right for a designated target		3,506
Material right related to the second replacement right to a designated target		3,116
Rights to future technological improvements		1,750
Joint research committee services		150
	$	86,123

Schedule of changes in the balances of our contract assets and liabilities and recognized revenue

The following table presents changes in the balances of our contract assets and liabilities during the three and six months ended June 30, 2018:

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Three months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	50,462	$	437	$	2,691	$	48,208

	Balance at
	Beginning						Balance at
	of Period		Additions		Deductions		End of Period
Six months ended June 30, 2018
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	52,439	$	1,524	$	5,755	$	48,208

The impact of the adoption of the new revenue recognition guidance is reflected within the beginning of period balance.

During the three months and six months ended June 30, 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$	2,691	$	5,755
Performance obligations satisfied in previous periods	$	—	$	—

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Fair value measurements (Tables)

6 Months Ended

Jun. 30, 2018

Fair value measurements

Schedule of assets and liabilities measured and carried at fair value

					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
	Fair		Markets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2018
Cash and cash equivalents	$	51,142	$	51,142	$	—	$	—
Marketable securities:
U.S. Treasuries		45,367		45,367		—		—
	$	96,509	$	96,509	$	—	$	—

					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	$	—

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Marketable securities (Tables)

6 Months Ended

Jun. 30, 2018

Marketable securities

Schedule of reconciliation of marketable securities from cost basis to fair value

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2018
U.S. Treasuries	$	45,457	$	—	$	(90)	$	45,367
	$	45,457	$	—	$	(90)	$	45,367

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2017
U.S. Treasuries	$	62,777	$	—	$	(137)	$	62,640
Commercial paper		24,931		—		—		24,931
Corporate bonds		11,066		—		(12)		11,054
	$	98,774	$	—	$	(149)	$	98,625

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Accrued expenses (Tables)

6 Months Ended

Jun. 30, 2018

Accrued expenses

Schedule of accrued expenses

	June 30,		December 31,
	2018		2017
Accrued payroll and related expenses	$	1,996	$	3,041
Accrued preclinical, manufacturing and clinical expenses		5,558		3,183
Accrued professional fees		439		492
Accrued other		501		228
	$	8,494	$	6,944

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Stockholders' equity (deficit) (Tables)

6 Months Ended

Jun. 30, 2018

Stockholders' equity (deficit)

Schedule of stockholder's equity

				Additional		Accumulated				Stockholders’
	Common Stock			Paid-in		Other Comprehensive		Accumulated		Equity
	Shares	Amount		Capital		Income (Loss)		Deficit		(Deficit)
Balance at December 31, 2016	1,294,352	$	1	$	3,551	$	—	$	(59,171)	$	(55,619)
Change	21,470,665		2		164,467		(149)		(38,707)		125,613
Balance at December 31, 2017	22,765,017		3		168,018		(149)	$	(97,878)		69,994
Change	352,721		—		2,428		59		(26,788)		(24,301)
Balance at June 30, 2018	23,117,738	$	3	$	170,446	$	(90)	$	(124,666)	$	45,693

Schedule for number of common stock reserved for conversion of outstanding Preferred Stock and for the exercise of outstanding stock options and warrants

	June 30,	December 31,
	2018	2017
Warrants	110,365	110,365
Stock options	3,635,541	3,205,485
	3,745,906	3,315,850

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Stock options (Tables)

6 Months Ended

Jun. 30, 2018

Stock options

Schedule of stock option activity under Plan

		Weighted-		Remaining
	Number	Average		Contractual Life	Aggregate
	of Shares	Exercise Price		(in years)	Intrinsic Value
Options outstanding at January 1, 2018	3,205,485	$	3.44	7.8	$	41,709
Granted	1,028,415		14.53
Exercised	(352,721)		2.06
Cancelled	(245,638)		7.63
Options outstanding at June 30, 2018	3,635,541	$	6.42	8.0	$	41,612
Options exercisable at June 30, 2018	1,647,661	$	2.82	7.0	$	24,786

Schedule of weighted average assumptions for estimating fair value of option awards

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Risk-free interest rate	2.8	%	1.9	%	2.7	%	2.2	%
Expected dividend yield	—	%	—	%	—	%	—	%
Expected term (years)	6.10		6.25		6.08		6.25
Expected stock price volatility	73	%	68	%	73	%	67	%

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Nature of business and basis of presentation - IPO (Details) $ / shares in Units, $ in Thousands	Aug. 02, 2017 USD ($) $ / shares shares	Jul. 03, 2017 USD ($) $ / shares shares	Jun. 15, 2017
Initial public offering
Reverse stock split			0.2222
IPO
Initial public offering
Issuance of stock (in shares) | shares		5,000,000
Share price (in dollars per share) | $ / shares		$ 15.00
Gross proceeds		$ 75,000
Net proceeds from issuance of stock		67,420
Underwriting discounts and commissions and other offering costs		$ 7,580
Over allotment option
Initial public offering
Issuance of stock (in shares) | shares	51,977
Share price (in dollars per share) | $ / shares	$ 15.00
Gross proceeds	$ 780
Net proceeds from issuance of stock	725
Underwriting discounts and commissions and other offering costs	$ 55

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Nature of business and basis of presentation - Liquidity (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Nature of business and basis of presentation
Net loss	$ (24,756)	$ (38,707)
Accumulated deficit	$ (124,666)	$ (97,878)
Substantial doubt about going concern, within twelve months	false

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Summary of significant accounting policies - Revenue Recognition (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Mar. 31, 2018	Jan. 01, 2018	Dec. 31, 2017
Collaboration agreements
Deferred revenue	$ 48,208		$ 48,208		$ 50,462		$ 52,439
Net income (loss)	$ (12,354)	$ (8,946)	$ (24,756)	$ (17,008)
Basic and diluted net income (loss) per share (in dollars per share)	$ (0.54)	$ (6.33)	$ (1.08)	$ (12.36)
Billing term			30 days
Difference between Revenue Guidance in Effect before and after Topic 606 | ASU 2014-09
Collaboration agreements
Deferred revenue						$ 2,031
Collaboration revenue	$ 326		$ (571)
Net income (loss)	$ 326		$ (571)
Basic and diluted net income (loss) per share (in dollars per share)	$ 0.01		$ (0.02)

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Summary of significant accounting policies - Cash and Cash Equivalents (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017	Dec. 31, 2016
Cash, cash equivalents and restricted cash
Cash and cash equivalents	$ 51,142	$ 26,591	$ 33,053	$ 100,297
Restricted cash included in other assets	371	371	371	371
Total cash, cash equivalents and restricted cash per statement of cash flows	$ 51,513	$ 26,962	$ 33,424	$ 100,668
Restricted cash, Balance Sheet Location	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent

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Summary of significant accounting policies - Other Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017	Dec. 31, 2016
Other Assets
Other assets	$ 1,970	$ 371
Restricted cash included in other assets	$ 371	$ 371	$ 371	$ 371
Restricted cash, Balance Sheet Location	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent	us-gaap:OtherAssetsNoncurrent
Held by service provider	$ 1,433
Deferred financing costs	$ 166

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Summary of significant accounting policies - Antidilutive securities (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Anti-dilutive securities
Anti-dilutive securities	3,745,906	19,461,792	3,745,906	19,461,792
Series A-1 convertible preferred stock
Anti-dilutive securities
Anti-dilutive securities		5,574,467		5,574,467
Series B-1 convertible preferred stock
Anti-dilutive securities
Anti-dilutive securities		7,319,307		7,319,307
Series C-1 convertible preferred stock
Anti-dilutive securities
Anti-dilutive securities		3,260,897		3,260,897
Warrants
Anti-dilutive securities
Anti-dilutive securities	110,365	129,491	110,365	129,491
Stock options.
Anti-dilutive securities
Anti-dilutive securities	3,635,541	3,177,630	3,635,541	3,177,630

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Summary of significant accounting policies - Risks (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($)
Concentration of Credit Risk and Off-balance Sheet Risk
Financial instruments with off-balance sheet risk	$ 0

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Collaboration agreements - XMT-1522 Agreement (Details) - XMT-1522 Agreement $ in Thousands	1 Months Ended
	Jan. 31, 2016 USD ($) item	Jun. 30, 2018 USD ($)
Collaboration agreements
Upfront payment received | $	$ 26,500
Milestone payment upon achievement of IND Clearance Date | $	20,000
Aggregate milestones, excluding milestone payment upon achievement of IND Clearance Date | $	288,000
Development milestones | $	87,000
Regulatory milestones | $	128,000
Commercial milestones | $	$ 73,000
Number of separate events to be achieved | item	9
Number of separate specified patient populations | item	4
Number of additional unspecified patient populations | item	1
Number of individual commercial milestones | item	3
Next potential development milestone payment eligible to receive | $		$ 12,000
Prior written notice for termination, before initiation of clinical study	30 days
Prior written notice for termination, after initiation of clinical study	90 days
United States, European Union and Japan
Collaboration agreements
Number of regulatory milestones | item	14
Locations other than United States, European Union and Japan
Collaboration agreements
Number of specified markets in which regulatory milestone is payable | item	2
Maximum | United States, European Union and Japan
Collaboration agreements
Number of separate patient populations, regulatory milestone | item	4

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Collaboration agreements - Takeda partnership (Details) $ in Thousands		1 Months Ended	49 Months Ended
	Jan. 31, 2016 USD ($) item	Jan. 31, 2016 USD ($) item	Mar. 31, 2018 USD ($)	Jun. 30, 2018 USD ($) item	Mar. 31, 2014 USD ($) item
2014, 2015 and 2016 Takeda Agreements
Collaboration agreements
Number of targets	7	7
Fee payments received | $			$ 24,800
Number of targets designated				4
Number of targets for which Tokeda has limited replacement rights				2
Amount to be received for second limited replacement right | $				$ 500
Aggregate milestones | $				474,750
Development milestones | $				50,250
Regulatory milestones | $				153,000
Commercial milestones | $				$ 271,500
Number of remaining eligible targets				3
Milestone payable on each of the remaining eligible targets | $				$ 158,250
Number of individual development milestones per target				4
Number of individual commercial milestones				6
Number of thresholds for annual net sales				3
Next potential development milestone payment eligible to receive | $				$ 750
2014, 2015 and 2016 Takeda Agreements | Maximum
Collaboration agreements
Number of individual regulatory milestones per target				8
2015 and 2016 Takeda Agreements
Collaboration agreements
Number of targets	5	5
2014 Tokeda Agreement
Collaboration agreements
Number of targets					2
Amount of option exercise fee for designated targets | $					$ 1,300
2016 Restated Tokeda Agreement
Collaboration agreements
Number of products entity may elect to co-develop and co-commercialize	1	1
Payment for option to co-develop and co-commercialize product | $	$ 15,000	$ 15,000
Share of profit related to United States (as a percent)	50.00%	50.00%
Costs incurred in United States (as a percent)	50.00%	50.00%
Global development costs (as a percent)	30.00%	30.00%
Costs incurred specifically for a foreign country borne by Takeda (as a percent)	100.00%	100.00%
Prior written notice for termination period		45 days
Number of targets with respect to breach	1

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Collaboration agreements - 2016 Takeda and XMT-1522 Agreements - Accounting (Details)	6 Months Ended
	Jun. 30, 2018 item
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Revenue, Practical Expedient, Initial Application and Transition, Nonrestatement of Modified Contract	true
2016 Restated Tokeda Agreement and XMT-1522 Agreement
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Number of arrangements	1

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Collaboration agreements - 2016 Takeda and XMT-1522 Agreements - Performance obligations (Details) - 2016 Restated Tokeda Agreement and XMT-1522 Agreement - USD ($) $ in Thousands	Jun. 30, 2018	Jan. 01, 2018
Performance obligations
Allocated Transaction Price	$ 86,123	$ 86,123
XMT-1522 license and research services
Performance obligations
Allocated Transaction Price	49,828
Joint research committee services for XMT-1522
Performance obligations
Allocated Transaction Price	449
Exclusive license to the first designated target and research services
Performance obligations
Allocated Transaction Price	6,611
Research license to the second designated target and research services
Performance obligations
Allocated Transaction Price	1,017
Material right related to the exclusive license to the second designated target
Performance obligations
Allocated Transaction Price	526
Exclusive license to the third designated target and research services
Performance obligations
Allocated Transaction Price	4,974
Exclusive license to the fourth designated target and research services
Performance obligations
Allocated Transaction Price	3,678
Material right related to the license to the fifth designated target and research services
Performance obligations
Allocated Transaction Price	3,506
Material right related to the license to the sixth designated target and research services
Performance obligations
Allocated Transaction Price	3,506
Material right to license to the seventh designated target and research services
Performance obligations
Allocated Transaction Price	3,506
Material right related to first replacement right for a designated target
Performance obligations
Allocated Transaction Price	3,506
Material right related to the second replacement right to a designated target
Performance obligations
Allocated Transaction Price	3,116
Rights to future technological improvements
Performance obligations
Allocated Transaction Price	1,750
Joint research committee services
Performance obligations
Allocated Transaction Price	$ 150

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Collaboration agreements - 2016 Takeda and XMT-1522 Agreements - Additional Accounting (Details) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2018 USD ($) item	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) item	Jun. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)	Mar. 31, 2018 USD ($)	Jan. 01, 2018 USD ($)
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Research and development	$ 12,663	$ 10,627	$ 24,919	$ 20,733
Accounts receivable	1,681		1,681		$ 784
Accounts payable	4,158		4,158		3,070
Deferred revenue	$ 48,208		$ 48,208		52,439	$ 50,462
License and related research and development services, including Phase 1 development and transfer certain materials and know how
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Number of performance obligations | item	1		1
2016 Restated Tokeda Agreement and XMT-1522 Agreement
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Allocated Transaction Price	$ 86,123		$ 86,123				$ 86,123
Estimated amount of research and development fees received or expected to be received included in transaction price							14,023
Amount of milestone payments, which had not been received, included in the estimated transaction price							$ 0
Increase (decrease) in transaction price	0		0
Collaboration revenue	2,079		4,616
2016 Restated Tokeda Agreement and XMT-1522 Agreement | Calculated under Revenue Guidance in Effect before Topic 606
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Collaboration revenue		2,754		6,284
2016 Restated Tokeda Agreement and XMT-1522 Agreement | Rights to future technological improvements
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Allocated Transaction Price	1,750		1,750
2016 Restated Tokeda Agreement and XMT-1522 Agreement | Joint research committee services
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Allocated Transaction Price	150		150
2016 Restated Tokeda Agreement and XMT-1522 Agreement | XMT-1522 license and research services
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Allocated Transaction Price	49,828		49,828
2016 Restated Tokeda Agreement and XMT-1522 Agreement | Joint research committee services for XMT-1522
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Allocated Transaction Price	449		449
2014, 2015 and 2016 Takeda Agreements
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Accounts receivable	2		2		454
Deferred revenue	41,056		41,056
XMT-1522 Agreement
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Research and development	1,080	501	2,803	795
ASC 808 costs billed to Takeda	$ 1,054	$ 0	$ 1,794	$ 0
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2018-01-01 | 2016 Restated Tokeda Agreement and XMT-1522 Agreement | XMT-1522 license and research services
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Expected recognition period			10 years
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2018-01-01 | 2016 Restated Tokeda Agreement and XMT-1522 Agreement | Joint research committee services for XMT-1522
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Expected recognition period			6 years
Takeda
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Proceeds from IPO					$ 10,000

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Collaboration agreements - Merck KGaA Agreement (Details) - Merck KGaA $ in Thousands	1 Months Ended	6 Months Ended	36 Months Ended
	Jun. 30, 2014 USD ($) item	Jun. 30, 2018 USD ($) item	Dec. 31, 2017 USD ($) item
Collaboration agreements
Upfront payment received	$ 12,000
Number of targets | item	6
Number of targets designated | item		6	6
Aggregate milestones	$ 780,000
Development milestones	84,000
Regulatory milestones	264,000
Sales milestones	$ 432,000
Number of individual development milestones per target | item	6
Number of individual regulatory milestones per target | item	5
Number of individual commercial milestones | item	3
Amount of development milestone payment received		$ 0	$ 3,000
Next potential development milestone payment eligible to receive		$ 500
Prior written notice for termination period		60 days

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Collaboration agreements - Merck KGaA Agreement - Accounting (Details) $ in Thousands	3 Months Ended		6 Months Ended		36 Months Ended
	Jun. 30, 2018 USD ($) item	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) item	Jun. 30, 2017 USD ($)	Dec. 31, 2017 USD ($) item	Mar. 31, 2018 USD ($)	Jan. 01, 2018 USD ($)
Collaboration agreements
Revenue, Practical Expedient, Initial Application and Transition, Nonrestatement of Modified Contract			true
Accounts receivable	$ 1,681		$ 1,681		$ 784
Deferred revenue	$ 48,208		$ 48,208		$ 52,439	$ 50,462
Merck KGaA
Collaboration agreements
Number of targets designated | item	6		6		6
Allocated Transaction Price							$ 22,875
Estimated amount of research and development fees received or expected to be received included in transaction price							7,875
Amount of milestone payment earned					$ 3,000
Amount of milestone payments, which had not been received, included in the estimated transaction price							0
Increase (decrease) in transaction price	$ 0		$ 0
Collaboration revenue	612		944
Accounts receivable	180		180		$ 330
Deferred revenue	$ 6,957		$ 6,957
License and corresponding research and development services, First and second targets | Merck KGaA
Collaboration agreements
Allocated Transaction Price							4,226
License and corresponding research and development services, Third target
Collaboration agreements
Allocated Transaction Price							3,439
License and corresponding research and development services, Fourth target
Collaboration agreements
Allocated Transaction Price							3,439
License and corresponding research and development services, Fifth target
Collaboration agreements
Allocated Transaction Price							3,439
License and corresponding research and development services, Sixth target
Collaboration agreements
Allocated Transaction Price							3,439
Rights to future technological improvements | Merck KGaA
Collaboration agreements
Allocated Transaction Price							425
Joint research committee services | Merck KGaA
Collaboration agreements
Allocated Transaction Price							$ 242
Calculated under Revenue Guidance in Effect before Topic 606 | Merck KGaA
Collaboration agreements
Collaboration revenue		$ 910		$ 1,607
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2018-01-01 | Rights to future technological improvements | Merck KGaA
Collaboration agreements
Expected recognition period			10 years
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2018-01-01 | Joint research committee services | Merck KGaA
Collaboration agreements
Expected recognition period			5 years

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Collaboration Agreements - Contract Assets and Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2018
Contract liabilities
Deferred revenue, Balance at Beginning of Period	$ 50,462	$ 52,439
Deferred revenue, Additions	437	1,524
Deferred revenue, Deductions	2,691	5,755
Deferred revenue, Balance at End of Period	48,208	48,208
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$ 2,691	$ 5,755

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Collaboration Agreements - Other Revenue (Details) - Asana BioSciences - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Collaboration agreements
Revenue recognized related to milestone achieved upon completion of GLP toxicology study	$ 1,500
Next potential milestone payment eligible to receive	2,500		$ 2,500
Limited services
Collaboration agreements
Collaboration revenue	$ 0		$ 195
Calculated under Revenue Guidance in Effect before Topic 606 | Limited services
Collaboration agreements
Collaboration revenue		$ 63		$ 125

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Fair value measurements (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017
Fair value measurements
Marketable securities	$ 45,367	$ 98,625
Transfers between fair value measurement level 1 to level 2	0		$ 0
Transfers between fair value measurement level 2 to level 1	0		$ 0
Recurring basis
Fair value measurements
Cash and cash equivalents	51,142	26,591
Total assets	96,509	125,216
U.S. Treasuries | Recurring basis
Fair value measurements
Marketable securities	45,367	62,640
Commercial paper | Recurring basis
Fair value measurements
Marketable securities		24,931
Corporate bonds | Recurring basis
Fair value measurements
Marketable securities		11,054
Quoted Prices in Active Markets (Level 1) | Recurring basis
Fair value measurements
Cash and cash equivalents	51,142	26,591
Total assets	96,509	89,231
Quoted Prices in Active Markets (Level 1) | U.S. Treasuries | Recurring basis
Fair value measurements
Marketable securities	$ 45,367	62,640
Significant Other Observable Inputs (Level 2) | Recurring basis
Fair value measurements
Total assets		35,985
Significant Other Observable Inputs (Level 2) | Commercial paper | Recurring basis
Fair value measurements
Marketable securities		24,931
Significant Other Observable Inputs (Level 2) | Corporate bonds | Recurring basis
Fair value measurements
Marketable securities		$ 11,054

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Marketable securities (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($) security	Jun. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Marketable securities
Amortized Cost	$ 45,457		$ 98,774
Gross Unrealized Losses	(90)		(149)
Marketable securities	$ 45,367		98,625
Number of securities in an unrealized loss position | security	13
Aggregate fair value of securities in an unrealized loss position for less than 12 months	$ 45,367
Securities in an unrealized loss position for more than 12 months	0
Realized gains on available-for-sale securities	0	$ 0
Realized losses on available-for-sale securities	0	$ 0
U.S. Treasuries
Marketable securities
Amortized Cost	45,457		62,777
Gross Unrealized Losses	(90)		(137)
Marketable securities	$ 45,367		62,640
Commercial paper
Marketable securities
Amortized Cost			24,931
Marketable securities			24,931
Corporate bonds
Marketable securities
Amortized Cost			11,066
Gross Unrealized Losses			(12)
Marketable securities			$ 11,054

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Accrued expenses (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Accrued expenses
Accrued payroll and related expenses	$ 1,996	$ 3,041
Accrued preclinical, manufacturing and clinical expenses	5,558	3,183
Accrued professional fees	439	492
Accrued other	501	228
Total	$ 8,494	$ 6,944

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Stockholders' Equity - Statement (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Increase (Decrease) in Stockholders' Equity
Balance at beginning of period	$ 69,994	$ (55,619)
Change	(24,301)	125,613
Balance at end of period	$ 45,693	$ 69,994
Common Stock
Increase (Decrease) in Stockholders' Equity
Balance at beginning of period (in shares)	22,765,017	1,294,352
Balance at beginning of period	$ 3	$ 1
Change (in shares)	352,721	21,470,665
Change		$ 2
Balance at end of period (in shares)	23,117,738	22,765,017
Balance at end of period	$ 3	$ 3
Additional paid-in capital
Increase (Decrease) in Stockholders' Equity
Balance at beginning of period	168,018	3,551
Change	2,428	164,467
Balance at end of period	170,446	168,018
Accumulated Other Comprehensive Income (Loss)
Increase (Decrease) in Stockholders' Equity
Balance at beginning of period	(149)
Change	59	(149)
Balance at end of period	(90)	(149)
Accumulated deficit
Increase (Decrease) in Stockholders' Equity
Balance at beginning of period	(97,878)	(59,171)
Change	(26,788)	(38,707)
Balance at end of period	$ (124,666)	$ (97,878)

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Stockholders' Equity - Stock and warrants (Details)	6 Months Ended	12 Months Ended
	Jun. 30, 2018 Vote $ / shares shares	Dec. 31, 2013 shares	Dec. 31, 2017 shares
Preferred stock
Preferred stock, shares authorized	25,000,000		25,000,000
Preferred stock, shares issued	0		0
Common stock
Number of votes for each shares held | Vote	1
Warrants
Number of shares into which warrant issued during period may be converted		129,491
Warrant exercise price per share (in dollars per share) | $ / shares	$ 0.05
Contractual life of warrants	10 years
Number of shares of common stock into which warrants may be converted	110,365
Stock options.
Common stock
Number of shares reserved for future issuance	3,635,541		3,205,485
Warrants
Common stock
Number of shares reserved for future issuance	110,365		110,365
Warrants and options
Common stock
Number of shares reserved for future issuance	3,745,906		3,315,850

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Stock options - Plans (Details) - shares		1 Months Ended	6 Months Ended
	Jan. 01, 2018	Jun. 30, 2017	Jun. 30, 2018	Dec. 31, 2017
Stock options
Number of shares outstanding			3,635,541	3,205,485
2007 Plan
Stock options
Number of shares outstanding		3,141,625
2017 Plan
Stock options
Number of shares authorized		2,255,000
Cumulative increase in number of shares issuable (as a percent)		4.00%
Additional shares authorized	910,600
Number of shares available for future issuance			1,366,503
Vesting period (in years)			4 years
2017 Plan | Maximum
Stock options
Expiration period			10 years

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Stock options - Activity under stock option plan (Details) - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Number of Shares
Outstanding at beginning of period (in shares)	3,205,485
Granted (in shares)	1,028,415
Exercised (in shares)	(352,721)
Cancelled (in shares)	(245,638)
Outstanding at end of period (in shares)	3,635,541		3,205,485
Options exercisable, at end of period (in shares)	1,647,661
Weighted- Average Exercise Price
Outstanding at beginning of period (in dollars per share)	$ 3.44
Granted (in dollars per share)	14.53
Exercised (in dollars per share)	2.06
Cancelled (in dollars per share)	7.63
Outstanding at end of period (in dollars per share)	6.42		$ 3.44
Options exercisable, at end of period (in dollars per share)	$ 2.82
Additional Disclosures
Remaining Contractual Life, Options outstanding	8 years		7 years 9 months 18 days
Remaining Contractual Life, Options exercisable	7 years
Aggregate Intrinsic Value, Options outstanding (in dollars)	$ 41,612		$ 41,709
Aggregate Intrinsic Value, Options exercisable (in dollars)	$ 24,786
Weighted-average grant date fair value of options granted (in dollars per share)	$ 9.56	$ 4.61
Cash received from the exercise of stock options (in dollars)	$ 725	$ 364

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Stock options - Stock based compensation (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Stock options
Share-based compensation charge	$ 958	$ 352	$ 1,703	$ 617
Unrecognized stock compensation cost	$ 11,461		$ 11,461
Weighted-average amortization period of unrecognized stock compensation cost			3 years 2 months 12 days

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Stock options - Fair value of each option award (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Weighted average fair value assumptions
Risk-free interest rate (as a percent)	2.80%	1.90%	2.70%	2.20%
Expected term	6 years 1 month 6 days	6 years 3 months	6 years 29 days	6 years 3 months
Expected stock price volatility (as a percent)	73.00%	68.00%	73.00%	67.00%

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Stock options - Employee Stock Purchase Plan (Details)	Jun. 30, 2018 shares
Employee Stock Purchase Plan
Employee Stock Purchase Plan
Number of shares reserved for future issuance	225,000

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Commitments - Operating leases (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Operating leases
Letter of credit for security deposit	$ 321		$ 321		$ 321
Rent expense	497	$ 419	978	$ 838
Maximum
Operating leases
Tenant improvement allowance	$ 356		$ 356

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Commitments - License agreements (Details) - License agreements $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($) item	Jun. 30, 2017 USD ($)
License Agreements
Number of biotechnology companies where Company has licensed intellectual property | item	2
Milestone payments | $	$ 0	$ 1,500