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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, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-38129
Mersana Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware04-3562403
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
840 Memorial Drive Cambridge, MA 02139
(Address of principal executive offices)
(Zip Code)
(617) 498-0020
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueMRSNThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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 97,169,348 shares of Common Stock ($0.0001 par value per share) outstanding as of August 4, 2022.



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REFERENCES TO MERSANA
Throughout this Quarterly Report on Form 10-Q, the “Company,” “Mersana,” “we,” “us,” and “our,” except where the context requires otherwise, refer to Mersana Therapeutics, Inc. and its consolidated subsidiary, and “our board of directors” refers to the board of directors of Mersana Therapeutics, Inc.
FORWARD LOOKING STATEMENTS AND INDUSTRY DATA
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 “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “on track,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” 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 adequacy of our inventory of upifitamab rilsodotin, or UpRi, XMT-1660, XMT-2056 and our other product candidates to support our ongoing and planned clinical trials, as well as the outcome of planned manufacturing runs;
the timing of, and our ability to obtain and maintain, regulatory approvals for our product candidates;
unmet needs in ovarian cancer, breast cancer and other cancer treatment;
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;
the potential benefits of strategic partnership agreements and our ability to enter into selective strategic partnerships;
our estimates regarding expenses, future revenues, capital requirements, the sufficiency of our current and expected cash resources and our need for additional financing; and
the potential impact of the ongoing COVID-19 pandemic.
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 for the quarterly period ended June 30, 2022, 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.
In addition, the ongoing COVID-19 pandemic could adversely affect our preclinical and clinical development efforts, business operations and financial results. The extent of the impact and the value of and market for our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, the emergence of new variants of the virus, travel restrictions, quarantines, physical distancing and business closure requirements in the United States and in other countries, and the effectiveness of actions taken globally to contain and treat the disease.
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The forward-looking statements contained herein represent our views as of the date of this Quarterly Report on Form 10-Q and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We anticipate that subsequent events and developments will cause our views to change. 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.
This Quarterly Report on Form 10-Q may include industry and market data, which we may obtain from our own internal estimates and research, as well as from industry and general publications and research, surveys, and studies conducted by third parties. Industry publications, studies, and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third‑party sources.
RISK FACTORS SUMMARY
Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q.
Our business is subject to the following principal risks and uncertainties:
We have incurred net losses since our inception, we have no products approved for commercial sale and we anticipate that we will continue to incur substantial operating losses for the foreseeable future.
We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.
We have a credit facility that requires us to meet certain affirmative and negative covenants and places restrictions on our operating and financial flexibility.
We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully than, we do.
We only have a limited number of product candidates in current or planned clinical trials. A failure of any of our current or future product candidates in clinical development could adversely affect our business and may require us to discontinue development of other product candidates based on the same technology.
We can provide no assurance that our product candidates will obtain regulatory approval or that the results of clinical trials will be favorable.
Drug discovery and development is a complex, time-consuming and expensive process that is fraught with risk and a high rate of failure. We can provide no assurance of the successful and timely development of new antibody-drug conjugate, or ADC, products.
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.
We may encounter difficulties in managing our growth and expanding our operations successfully.
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Our activities, including our interactions with healthcare providers, third party payors, patients and government officials, are, and will continue to be, subject to extensive regulation involving health care, anti-corruption, data privacy and security and consumer protection laws. Failure to comply with applicable laws could result in substantial penalties, contractual damages, reputational harm, diminished revenues and curtailment or restructuring of our operations.
We rely upon patents and other intellectual property rights to protect our technology. We may be unable to protect our intellectual property rights, and we may be liable for infringing the intellectual property rights of others.
Our business is subject to risks arising from the outbreaks of disease, such as epidemics or pandemics, including the ongoing COVID-19 pandemic.
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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Mersana Therapeutics, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
June 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$135,338 $177,947 
Short-term marketable securities89,790  
Prepaid expenses and other current assets11,951 10,951 
Total current assets237,079 188,898 
Property and equipment, net2,854 1,968 
Operating lease right-of-use assets11,694 12,889 
Other assets, noncurrent724 2,356 
Total assets$252,351 $206,111 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$8,158 $12,321 
Accrued expenses34,256 28,716 
Deferred revenue26,230 3,944 
Operating lease liabilities2,592 2,303 
Other current liabilities234 239 
Total current liabilities71,470 47,523 
Operating lease liabilities, noncurrent10,058 11,247 
Long-term debt, net24,777 24,626 
Deferred revenue, noncurrent11,684  
Other liabilities, noncurrent328 974 
Total liabilities118,317 84,370 
Commitments (Note 11)
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
  
Common stock, $0.0001 par value; 350,000,000 and 175,000,000 shares authorized at June 30, 2022 and December 31, 2021, respectively ; 97,166,354 and 73,709,056 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
10 7 
Additional paid-in capital684,106 572,213 
Accumulated other comprehensive (loss) income(126) 
Accumulated deficit(549,956)(450,479)
Total stockholders’ equity134,034 121,741 
Total liabilities and stockholders’ equity$252,351 $206,111 

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

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Mersana Therapeutics, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Collaboration revenue$4,284 $11 $6,320 $21 
Operating expenses:
Research and development41,231 31,955 77,037 59,370 
General and administrative14,803 8,883 27,585 16,090 
Total operating expenses56,034 40,838 104,622 75,460 
Other income (expense):
Interest income291 9 309 21 
Interest expense(760)(95)(1,484)(188)
Total other income (expense), net(469)(86)(1,175)(167)
Net loss(52,219)(40,913)(99,477)(75,606)
Other comprehensive loss
Unrealized loss on marketable securities(126) (126) 
Comprehensive loss$(52,345)$(40,913)$(99,603)$(75,606)
Net loss attributable to common stockholders — basic and diluted$(52,219)$(40,913)$(99,477)$(75,606)
Net loss per share attributable to common stockholders — basic and diluted$(0.55)$(0.59)$(1.13)$(1.09)
Weighted-average number of shares of common stock used in net loss per share attributable to common stockholders — basic and diluted95,756,782 69,616,467 87,886,411 69,303,899 

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

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Mersana Therapeutics, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other Comprehensive
Income (Loss)
Accumulated
Deficit
Stockholders’
Equity
SharesAmount
Balance at December 31, 202068,841,288 $7 $508,499 $ $(280,419)$228,087 
Exercise of stock options148,472 — 764 — — 764 
Vesting of restricted stock units, net of employee tax obligations61,678 — (259)— — (259)
Stock-based compensation expense— — 4,039 — — 4,039 
Net loss— — — — (34,693)(34,693)
Balance at March 31, 202169,051,438 $7 $513,043 $ $(315,112)$197,938 
Issuance of common stock from at-the-market transactions, net of issuance costs of $746
2,271,074 — 33,287 — — 33,287 
Exercise of stock options42,506 — 202 — — 202 
Purchase of common stock under ESPP36,198 — 417 — — 417 
Stock-based compensation expense— — 4,582 — — 4,582 
Net loss— — — — (40,913)(40,913)
Balance at June 30, 202171,401,216 $7 $551,531 $ $(356,025)$195,513 
Balance at December 31, 202173,709,056 $7 $572,213 $— $(450,479)$121,741 
Issuance of common stock from at-the-market transactions, net of issuance costs of $1,322
13,169,903 2 60,460 — — 60,462 
Exercise of stock options26,951 — 96 — — 96 
Vesting of restricted stock units167,174 — — — — — 
Stock-based compensation expense— — 5,485 — — 5,485 
Net loss— — — — (47,258)(47,258)
Balance at March 31, 202287,073,084 $9 $638,254 $— $(497,737)$140,526 
Issuance of common stock from at-the-market transactions, net of issuance costs of $941
9,904,964 1 39,898 — — 39,899 
Exercise of common stock warrant16,654 — — — — — 
Vesting of restricted stock units17,417 — — — — — 
Purchase of common stock under ESPP154,235 — 606 — — 606 
Stock-based compensation expense— — 5,348 — — 5,348 
Other comprehensive loss— — — (126)— (126)
Net loss— — — — (52,219)(52,219)
Balance at June 30, 202297,166,354 $10 $684,106 $(126)$(549,956)$134,034 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Mersana Therapeutics, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
20222021
Cash flows from operating activities
Net loss$(99,477)$(75,606)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation432 432 
Net amortization of premiums and discounts on marketable securities(104) 
Stock-based compensation10,833 8,621 
Other non-cash items381 77 
Changes in operating assets and liabilities:
Prepaid expenses and other current assets419 (2,418)
Other assets (2,296)
Accounts payable(4,383)2,270 
Accrued expenses4,904 7,139 
Operating lease right-of-use assets1,493 972 
Operating lease liabilities(1,199)(660)
Deferred revenue33,970 (21)
Net cash used in operating activities(52,731)(61,490)
Cash flows from investing activities
Purchase of marketable securities(89,813) 
Purchase of property and equipment(986)(447)
Net cash used in investing activities(90,799)(447)
Cash flows from financing activities
Net proceeds from at-the-market facilities100,361 33,338 
Proceeds from exercise of stock options96 966 
Proceeds from purchases of common stock under ESPP606 417 
Payment of employee tax obligations related to vesting of restricted stock units (259)
Payments under finance lease obligations(142)(74)
Net cash provided by financing activities100,921 34,388 
Decrease in cash, cash equivalents and restricted cash(42,609)(27,549)
Cash, cash equivalents and restricted cash, beginning of period178,425 255,415 
Cash, cash equivalents and restricted cash, end of period$135,816 $227,866 
Supplemental disclosures of non-cash activities:
Purchases of property and equipment in accounts payable and accrued expenses$333 $46 
Equity issuance costs in accounts payable and accrued expenses$ $51 
Cash paid for interest$1,100 $122 
Right-of-use assets obtained in exchange for operating lease liabilities$298 $3,783 
Right-of-use assets obtained in exchange for financing lease liabilities$ $213 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements
(unaudited)

1. Nature of business and basis of presentation
Mersana Therapeutics, Inc. is 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. The Company has leveraged over 20 years of industry learning in the ADC field to develop proprietary and differentiated technology platforms that enable it to develop ADCs that are designed to have improved efficacy, safety and tolerability relative to existing ADC therapies. The Company’s innovative platforms include Dolaflexin and Dolasynthen, each of which deliver the DolaLock payload, as well as Immunosynthen, which delivers a novel stimulator of interferon genes ("STING") agonist ImmunoLock payload. The Company’s lead product candidates include upifitamab rilsodotin ("UpRi"), XMT-1660 and XMT-2056, and the Company is currently in the process of closing its company-sponsored clinical trial of XMT-1592 and transitioning any patient remaining on drug to an investigator-sponsored protocol.
The Company's lead product candidate, UpRi, is a first-in-class Dolaflexin ADC targeting NaPi2b, an antigen broadly expressed in ovarian cancer and other cancers with limited expression in healthy tissues. The Company is currently evaluating UpRi in platinum-resistant ovarian cancer in a single-arm registrational trial, referred to as UPLIFT. The Company is also conducting a placebo-controlled Phase 3 clinical trial, referred to as UP-NEXT, to investigate UpRi as a single-agent maintenance treatment in patients with platinum-sensitive ovarian cancer that have high NaPi2b expression. Additionally, the Company is conducting a Phase 1/2 umbrella combination trial, referred to as UPGRADE. Initially, the Company is exploring the combination of UpRi with carboplatin, a standard platinum chemotherapy broadly used in the treatment of platinum-sensitive ovarian cancer. The Company may explore other combinations in the future.
The Company is also developing XMT-1660, a B7-H4-directed Dolasynthen ADC, and XMT-2056, an Immunosynthen STING agonist ADC that targets a novel epitope of human epidermal growth factor receptor 2 ("HER2"). The Company also has two additional earlier stage preclinical candidates, XMT-2068 and XMT-2175, that leverage the Company's Immunosynthen platform and target tumor-associated antigens.
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, the need for additional capital, 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.
The Company has incurred cumulative net losses since inception. For the three months ended June 30, 2022, the net loss was $52.2 million, compared to $40.9 million in the three months ended June 30, 2021. For the six months ended June 30, 2022, the net loss was $99.5 million, compared to $75.6 million in the six months ended June 30, 2021. The Company expects to continue to incur operating losses for at least the next several years. As of June 30, 2022, the Company had an accumulated deficit of $550.0 million. The future success of the Company is dependent on, among other factors, 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. Net losses and negative operating cash flows have had, and will continue to have, an adverse effect on the Company’s stockholders' equity and working capital.
The Company believes that its currently available funds will be sufficient to fund the Company’s operations through at least the next twelve months from the issuance of this Quarterly Report on Form 10-Q. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
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 U.S. GAAP 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 annual 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, 2021 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.
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 that are necessary to present fairly the Company’s financial position as of June 30, 2022, the results of its operations for the three and six months ended June 30, 2022 and 2021, the statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and statements of cash flows for the six months ended June 30, 2022 and 2021. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022, or for any future period.

2. Summary of significant accounting policies
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include those of the Company and its wholly owned 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 identification of performance obligations and standalone selling prices of those performance obligations within its revenue arrangements, accrued preclinical, manufacturing and clinical expenses, valuation of stock-based awards and income taxes. Actual results could differ from those estimates.
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, or decision making group, in deciding how to allocate resources and assess performance. The Company views its operations and manages its business as a single operating segment, which is the business of discovering and developing ADCs.
Summary of Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2022 are consistent with those discussed in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
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 820, Fair Value Measurement, 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.
Concentration of Credit Risk and Off-balance Sheet Risk
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 does not believe that it is subject to any significant concentrations of credit risk from these financial instruments. The Company has no financial instruments with off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Marketable Securities
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. Short-term marketable securities consist of investments in debt securities with maturities greater than three months and less than one year from the balance sheet date. The Company classifies all of its marketable securities as available-for-sale. Accordingly, these investments are recorded at fair value. Fair value is determined based on quoted market prices. Amortization and accretion of discounts and premiums are recorded as interest income within other income (expense), net. Realized gains and losses are included in other income (expense), net.
The Company assesses its available-for-sale debt securities under the available-for-sale debt security impairment model in ASC 326, Financial Instruments - Credit Losses, as of each reporting date in order to determine if a portion of any decline in fair value below carrying value recognized on its available-for-sale debt securities is the result of a credit loss. The Company records credit losses in the consolidated statements of operations and comprehensive loss as a component of other income (expense), net, which is limited to the difference between the fair value and the amortized cost of the security. To date, the Company has not recorded any credit losses on its available-for-sale debt securities.
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.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on the Company's condensed consolidated financial statements or disclosures.

3. Collaboration agreements
Janssen Biotech Inc.
In February 2022, the Company entered into a research collaboration and license agreement with Janssen Biotech Inc. ("Janssen" and such agreement, the "Janssen Agreement") focused on the research, development and commercialization of novel ADCs for three oncology targets by leveraging Mersana’s ADC expertise and Dolasynthen platform with Janssen’s proprietary antibodies. Upon execution of the Janssen Agreement, the Company received a non-refundable upfront payment of $40.0 million from Janssen. Pursuant to the Janssen Agreement, the Company granted Janssen two exclusive, non-transferrable, worldwide licenses - the Research License and the Commercialization License (together, the "Licenses"). The Research License provides Janssen, on a target-by-target basis, rights under the Company’s technology and the Company’s interest in the technology developed jointly through the collaboration solely to conduct Janssen’s activities under the research and Chemistry, Manufacturing and Controls ("CMC") plans with respect to each target. The Commercialization License is a royalty-bearing license granted on a target-by-target basis under the Company’s technology and the Company’s interest in the technology developed jointly through the collaboration to develop, manufacture, commercialize and otherwise exploit licensed ADCs and any licensed products containing licensed ADCs directed toward a target. Janssen may select up to three targets and may substitute each target once prior to a substitution deadline. Janssen is not required to pay a fee for its first substitution right, but must pay a one-time fee for access to the subsequent substitution rights following its exercise of its second substitution right.
Pursuant to mutually agreed research and CMC plans, the Company will perform bioconjugation, production development, preclinical manufacturing, and certain related research and preclinical development activities, in order to progress the targets through investigational new drug application ("IND") submission for further development, manufacture and commercialization by Janssen. Janssen will have sole responsibility for IND-enabling studies, IND submission, clinical development, regulatory activities and commercialization of the licensed ADCs. Both the Company and Janssen will have equal representation on a Joint Research Committee and Joint Manufacturing Committee to oversee the research and CMC activities. The Company estimates that its activities under the research plans for the targets will be performed through 2024.
The Company's CMC activities will be compensated by Janssen at agreed upon rates. Assuming successful development and commercialization of all three targets by Janssen, the Company could receive up to an additional $505 million in development and regulatory milestones and $530 million in sales milestones as well as tiered mid single-digit to low double-digit royalties on aggregate net sales of the ADC products. To date, the Company has not achieved any of the specified milestones.
Unless earlier terminated, the Janssen Agreement will expire upon the expiration of the last royalty term for a product under the Janssen Agreement. The Janssen Agreement contains customary provisions for termination by either party, including in the event of breach of the Janssen Agreement, subject to cure, by Janssen for convenience and by Mersana upon a challenge of the licensed patents, and customary provisions regarding the effects of termination.
Janssen may request that the Company perform clinical manufacturing services under a separate clinical supply agreement. Janssen may also request that the Company perform a technology transfer of bioconjugation and manufacturing process technology, at Janssen's cost, at an agreed upon rate.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Accounting Analysis
The Company assessed the Janssen Agreement in accordance with ASC 606, Revenue from Contracts with Customers, and concluded that the contract counter party, Janssen, is a customer. The Company identified the following seven material performance obligations under the Janssen Agreement: (i) exclusive Licenses and research activities for each of the three designated targets, (ii) CMC activities for each of the three designated targets and (iii) the first target substitution right.
The Company concluded that the Licenses and research activities are one combined performance obligation for each target as the Licenses are not capable of being distinct from the research activities given their proprietary nature. The CMC activities are considered a distinct performance obligation for each target as the activities could be performed by a third-party provider. The first target substitution right is considered a material right as there is no option exercise fee and, as such, is a distinct performance obligation.
In accordance with ASC 606, the Company determined that the initial transaction price under the Janssen Agreement equals $40.0 million, consisting of the upfront, non-refundable and non-creditable payment. None of the development and the regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including stage of development and the remaining risks associated with the development required to achieve the milestones, as well as whether the achievement of the milestones is outside the control of the Company or Janssen. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as such milestones were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint and, if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the reported amount of revenues in the period of adjustment.
The Company determined that the consideration for CMC activities represents variable consideration. The Company has not included potential cost reimbursements within the transaction price as no CMC activities for any of the three targets have been initiated. The Company elected to apply the Right to Invoice practical expedient under ASC 606. As such, the Company will recognize revenue related to the CMC activities when the services are performed.
Consistent with the allocation objective under ASC 606, the Company allocated the $40.0 million fixed upfront payment in the transaction price to the Licenses and research activities and first substitution right based on each performance obligation’s relative standalone selling price. Each of the standalone selling prices for the Licenses and research activities and for the first substitution right were estimated utilizing an income approach, along with the likelihood of exercise for the substitution right and included the following key assumptions: the development timeline, revenue forecast, discount rate and probabilities of technical and regulatory success.
The Company is recognizing revenue related to the Licenses and research services performance obligation over the estimated period of the research 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.
The Company will recognize revenue related to the first target substitution right over time in congruence with the Licenses and research activities, upon the exercise of the option. If the first target substitution option is not exercised, the Company will recognize the entirety of the revenue in the period when the option expires.
During the three and six months ended June 30, 2022, the Company recorded collaboration revenue of $4.3 million and $6.0 million, respectively, related to its efforts under the Janssen Agreement. As of June 30, 2022, the Company had recorded $34.0 million in deferred revenue related to the Janssen Agreement that will be recognized over the remaining performance period and classified as current or noncurrent on the accompanying consolidated balance sheets based upon the expected timing of satisfaction of respective performance obligations. The aggregate amount of the transaction price allocated to unsatisfied performance obligations was $34.0 million as of June 30, 2022, which is expected to be recognized over the period the associated research activities are performed for each target.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Summary of Contract Assets and Liabilities
The Company did not record any contract assets as of June 30, 2022 related to the Janssen Agreement. The following table presents changes in the balances of the Company's contract liabilities related to the Janssen Agreement during the six months ended June 30, 2022:
(in thousands)Balance at
Beginning
of Period
AdditionsDeductionsBalance at
End of Period
Six months ended June 30, 2022
Contract liabilities:
Deferred revenue$ $40,000 $6,009 $33,991 
During the three and six months ended June 30, 2022, the Company recognized the following revenues related to the Janssen Agreement as a result of changes in the contract liability balances in the respective periods:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)20222022
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period$4,273 $ 
Performance obligations satisfied in previous periods$ $ 
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 Merck KGaA Agreement, Merck KGaA paid the Company a non-refundable technology access fee of $12.0 million 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. 
Under the terms of the Merck KGaA 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 reimbursement 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.
All six targets were designated prior to 2018. The next potential milestone payment that the Company is eligible to receive is a development milestone of $0.5 million on Merck KGaA’s designation of a preclinical development candidate for a target. Revenue will be recognized when achievement of the milestone is considered probable.
In May 2018, the Company entered into a supply agreement with Merck KGaA (the "Merck KGaA Supply Agreement"). Under the terms of the Merck KGaA Supply Agreement, the Company will provide Merck KGaA preclinical non-good manufacturing practice ("GMP") ADC drug substance and clinical GMP drug substance for use in clinical trials associated with one of the antibodies designated under the Merck KGaA Agreement. The Company receives fees for its efforts under the Merck KGaA Supply Agreement and reimbursement equal to the supply cost. The Company may also enter into future supply agreements to provide clinical supply material should Merck KGaA pursue clinical development of any other candidates nominated under the Merck KGaA Agreement.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Accounting Analysis
The Company concluded that Merck KGaA is a customer and accounted for the Merck KGaA Agreement in accordance with ASC 606. The Company identified the following performance obligations under the Merck KGaA 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 is recognizing revenue related to the exclusive license and research and development services performance obligations 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 performed, these amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the respective 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.
As of June 30, 2022, the Company had completed its research service obligations associated with four of the six designated targets. The Company did not recognize any corresponding research and development expense related to the Merck KGaA Supply Agreement during the three and six months ended June 30, 2022 and 2021.
As of June 30, 2022 and December 31, 2021, the Company had $3.9 million in deferred revenue related to the Merck KGaA Agreement and Merck KGaA Supply Agreement. Such amounts will be recognized over the remaining performance period.
Summary of Contract Assets and Liabilities
The Company did not record any contract assets as of June 30, 2022 and December 31, 2021. The following table presents changes in the balances of the Company's contract liabilities related to the Merck KGaA Agreement and Merck KGaA Supply Agreement during the six months ended June 30, 2022 and 2021:
(in thousands)Balance at
Beginning
of Period
AdditionsDeductionsBalance at
End of Period
Six months ended June 30, 2022
Contract liabilities:
Deferred revenue$3,944 $ $21 $3,923 
(in thousands)Balance at
Beginning
of Period
AdditionsDeductionsBalance at
End of Period
Six months ended June 30, 2021
Contract liabilities:
Deferred revenue$3,987 $ $21 $3,966 
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
During the three and six months ended June 30, 2022 and 2021, the Company recognized the following revenues related to the Merck KGaA Agreement and Merck KGaA Supply Agreement as a result of changes in the contract liability balances in the respective periods:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2022202120222021
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period$11 $11 $21 $21 
Performance obligations satisfied in previous periods$ $ $ $ 
Other Revenue
The Company has provided limited services for a collaboration partner, Asana BioSciences, LLC ("Asana Biosciences"). During the six months ended June 30, 2022, the Company recognized revenue of $0.3 million related to these services and did not recognize revenue related to these services during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021. The next potential milestone the Company is eligible to receive is $2.5 million upon dosing the fifth patient in a Phase 1 clinical trial by Asana BioSciences. While the first patient was dosed in April 2022, as of June 30, 2022, the Company considers this next milestone to be fully constrained as there is considerable judgment involved in determining whether it is probable that a significant revenue reversal would occur. As part of its evaluation of the constraint, the Company considered numerous factors, including the fact that achievement of the milestone is outside the control of the Company and there is a high level of uncertainty in achieving this milestone, as the collaboration partner continues to evaluate its candidate in the phase 1 trial. The Company reevaluates the probability of achievement of a milestone subject to constraint at each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
4. Fair value measurements
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the level within fair value hierarchy of the valuation techniques utilized to determine such value. The Company had no marketable securities as of December 31, 2021.
June 30, 2022
(in thousands)TotalQuoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
Money market funds$45,267 $45,267 $ $ 
Marketable securities
U.S. treasury securities$89,790 $89,790 $ $ 
The money market funds noted above are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. There were no changes in valuation techniques or transfers between fair value measurement levels during the six months ended June 30, 2022.
Marketable securities classified as Level 1 within the valuation hierarchy generally consists of U.S. treasury securities, as the fair value of these marketable securities is readily determinable based on active daily markets for such securities. The Company estimates the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources.
The carrying amounts reflected in the consolidated balance sheets for prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
As of June 30, 2022 and December 31, 2021, the carrying value of the Company’s outstanding borrowing under the New Credit Facility (as defined in Note 7) approximated fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company. The New Credit Facility is discussed in more detail in Note 7, Debt.

5. Cash, cash equivalents, and short-term marketable securities
Cash and cash equivalents
The following table summarizes the Company's cash, cash equivalents, and restricted cash as of June 30, 2022 and 2021.
Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
(in thousands)Beginning
of period
End
of period
Beginning
of period
End
of period
Cash and cash equivalents$177,947 $135,338 $255,094 $227,388 
Restricted cash included in other assets, noncurrent478 478 321 478 
Total cash, cash equivalents and restricted cash per statement of cash flows$178,425 $135,816 $255,415 $227,866 
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Marketable securities
The following table summarizes the Company's marketable securities held at June 30, 2022. The Company had no marketable securities as of December 31, 2021.
June 30, 2022
(in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Marketable securities
U.S. treasury securities$89,916 $ $(126)$89,790 
All of the Company's available-for-sale debt securities are due within one year or less. The Company did not realize any gains or losses recognized on the sale or maturity of available-for-sale debt securities during the six months ended June 30, 2022, and, as a result, the Company did not reclassify any amounts out of accumulated comprehensive loss.
As of June 30, 2022, the Company's debt security portfolio consisted of 20 securities that were in an unrealized loss position and had an aggregate fair value of $89.8 million. There were no securities in an unrealized loss position for greater than 12 months as of June 30, 2022. The unrealized losses on the Company's available-for-sale securities were caused by market interest rate increases. The Company has the intent and ability to hold such securities until recovery. As a result, the Company did not record any charges for credit-related impairments for its marketable debt securities for the six months ended as of June 30, 2022.

6. Accrued expenses
Accrued expenses consisted of the following as of June 30, 2022 and December 31, 2021:
(in thousands)June 30,
2022
December 31,
2021
Accrued manufacturing expenses$12,884 $8,476 
Accrued clinical expenses9,529 7,879 
Accrued preclinical expenses4,367 3,848 
Accrued payroll and related expenses5,854 7,319 
Accrued professional fees1,368 909 
Accrued other254 285 
$34,256 $28,716 

7. Debt
On May 8, 2019, the Company entered into a loan and security agreement (the "Prior Credit Facility") with Silicon Valley Bank ("SVB"), which was subsequently amended on June 29, 2019, August 28, 2020, and August 27, 2021. Refer to Note 7, Debt, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information regarding the Prior Credit Facility.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
On October 29, 2021, the Company entered into a loan and security agreement (the "New Credit Facility") with SVB and Oxford Finance, LLC ("Oxford" and, together with SVB, the "Lenders"). Pursuant to the New Credit Facility, as amended on February 17, 2022, the Company can borrow term loans in an aggregate amount of $100.0 million, which includes (i) $60.0 million in up to three principal advances through December 31, 2022, (ii) an additional $20.0 million in one principal advance, if the Company reaches certain development milestone events through June 30, 2023, (iii) and an additional tranche of $20.0 million, subject to conditional approval from the Lenders. The New Credit Facility is secured by substantially all of the Company's personal property owned or later acquired, excluding intellectual property (but including the rights to payments and proceeds from intellectual property), and a negative pledge on intellectual property. The Company drew $25.0 million upon execution of the New Credit Facility, of which $5.5 million of the proceeds was used to repay the existing balance under the Prior Credit Facility and satisfy its obligations to SVB. Upon entering into the New Credit Facility, the Company terminated all commitments by SVB to extend further credit under the Prior Credit Facility and all guarantees and security interests granted by the Company to SVB under the Prior Credit Facility.
Refer to Note 7, Debt, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information regarding the New Credit Facility. As of June 30, 2022, the Company was in compliance with all covenants under the New Credit Facility. There are no events of default as of June 30, 2022.
Unamortized debt financing costs are recorded as a reduction of the carrying amount on the term loan and amortized as interest expense using the effective-interest method. Unamortized deferred financing costs of $0.2 million were recorded in other assets as of June 30, 2022 related to the Company's right to borrow additional amounts from the Lenders in the future and amortized to interest expense over the relevant draw period on a straight-line basis.
The following is a summary of obligations under the term loan as of June 30, 2022:
(in thousands)June 30,
2022
Total debt$25,000 
Less: Current portion of long-term debt 
Total debt, net of current portion25,000 
Debt financing costs, net of accretion(367)
Accretion related to final payment144 
Long-term debt, net$24,777 
Interest expense related to the New Credit Facility for the three and six months ended June 30, 2022 was $0.8 million and $1.5 million, respectively. The Company did not recognize any interest expense related to the New Credit Facility during the three or six months ended June 30, 2021. Interest expense related to the Prior Credit Facility for the three and six months ended June 30, 2021 was $0.1 million and $0.2 million, respectively. The Company did not recognize any interest expense related to the Prior Credit Facility during the three or six months ended June 30, 2022.

8. Stockholders’ equity
Preferred stock
As of June 30, 2022, the Company had 25,000,000 shares of authorized preferred stock. No shares of preferred stock have been issued.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
At-the-market ("ATM") equity offering program
In May 2020, the Company established an ATM equity offering program (the "2020 ATM"), pursuant to which it was able to offer and sell up to $100.0 million of its common stock from time to time at prevailing market prices. During the first quarter of 2022, the Company sold 11,740,210 shares of common stock and received net proceeds of $54.8 million under the 2020 ATM. As of March 31, 2022, the 2020 ATM had been fully utilized.
In February 2022, the Company established a new ATM equity offering program (the "2022 ATM"), pursuant to which it is able to offer and sell up to $100.0 million of its common stock from time to time at prevailing market prices. During the six months ended June 30, 2022, the Company sold approximately 11,334,657 shares of common stock and received net proceeds of $45.8 million under the 2022 ATM.. As of June 30, 2022, approximately $53.3 million remains unsold and available for sale under the 2022 ATM.
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, 2022, there were warrants to purchase 22,590 shares of common stock outstanding. During the six months ended June 30, 2022, the Company issued 16,654 shares of common stock upon the exercise of warrants.
Common stock
At the 2022 Annual Meeting of Stockholders on June 9, 2022, the Company's stockholders approved an amendment to the Company’s Fifth Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock, $0.0001 par value per share, from 175,000,000 to 350,000,000. This increase became effective upon filing of a Certificate of Amendment with the Secretary of State of Delaware on June 9, 2022.
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").
As of June 30, 2022 and December 31, 2021, there were 12,241,188 and 9,199,512, respectively, shares of common stock reserved for the exercise of outstanding stock options, restricted stock units ("RSUs") and warrants.
June 30,
2022
December 31,
2021
Stock options10,511,694 8,342,429 
Restricted stock units1,706,904 817,609 
Warrants22,590 39,474 
12,241,188 9,199,512 

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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
9. Stock-based compensation
Stock incentive plans
As of June 30, 2017, there were 3,141,625 stock options outstanding under the Company’s 2007 Stock Incentive Plan (the "2007 Plan"). The 2007 Plan expired in June 2017. Any cancellations or forfeitures of options granted under the 2007 Plan will increase the options available under the 2017 Stock Incentive Plan (the "2017 Plan"), as described below.
In June 2017, the Company’s stockholders approved the 2017 Plan. Under the 2017 Plan initially, up to 2,255,000 shares of common stock could be granted to the Company's employees, officers, directors, consultants and advisors in the form of options, RSUs or other stock-based awards. The number of shares of common stock issuable under the 2017 Plan will be cumulatively increased annually on January 1 by the lesser of (a) 4% of the outstanding shares on the immediately preceding December 31 or (b) such other amount specified by the Board. The terms of the awards are determined by the Board, subject to the provisions of the 2017 Plan. Any cancellations or forfeitures of options granted under the 2007 Plan, which expired in June 2017, would increase the number of shares that could be granted under the 2017 Plan. On January 1, 2022, the number of shares of common stock issuable under the 2017 Plan was increased by 2,948,362 shares. As of June 30, 2022, there were 1,373,824 shares available for future issuance under the 2017 Plan. During the six months ended June 30, 2022, the Company granted 3,447,233 RSUs and options to purchase shares of common stock to employees and non-employee directors under the 2017 Plan.
Under the 2017 Plan, both with respect to incentive stock options and nonqualified stock options, the exercise price per share will not be less than the fair market value of the common stock on the date of grant and the vesting period is generally four years. Options granted under the 2017 Plan expire no later than 10 years from the date of grant. Options under the 2007 Plan were granted at an exercise price established by the Board (or a committee thereof) that was not less than the fair market value of the underlying common stock on the date of grant and subject to such vesting provisions determined by the Board (or a committee thereof). The Board may accelerate vesting or otherwise adjust the terms of granted options in the case of a merger, consolidation, dissolution, or liquidation of the Company.
Inducement awards
From time to time, the Company grants to its employees, upon approval by the Board or an authorized committee thereof, options to purchase shares of common stock as an inducement to employment in accordance with Nasdaq Listing Rule 5635(c)(4). Prior to February 2022, these options were granted outside of an existing equity incentive plan. These options are subject to terms substantially the same as the 2017 Plan.
In February 2022, the Board adopted the Company's 2022 Inducement Stock Incentive Plan (the "Inducement Plan"), which provides for the grant of nonstatutory options, stock appreciation rights, restricted stock, RSUs and other stock-based awards, with respect to an aggregate of 2,000,000 shares of the Company's common stock (subject to adjustment as provided in the Inducement Plan). During the six months ended June 30, 2022, the Company granted 390,375 RSUs and options to purchase shares of common stock to employees under the Inducement Plan. As of June 30, 2022, there were 1,609,625 shares available for future issuance under the Inducement Plan.
As of June 30, 2022, there were 757,500 options to purchase shares of common stock outstanding which were granted as inducement awards prior to the establishment of the Inducement Plan.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Stock option activity
A summary of stock option activity is as follows:
Number
of Shares
Weighted-
Average
Exercise Price
Outstanding at January 1, 20228,342,429 $11.25 
Granted2,647,384 5.41 
Exercised(29,945)3.57 
Cancelled(448,174)13.18 
Outstanding at June 30, 202210,511,694 $9.72 
Vested and expected to vest at June 30, 202210,511,694 $9.72 
Exercisable at June 30, 20224,866,425 $8.71 
The weighted-average grant date fair value of options granted during the six months ended June 30, 2022 and 2021, was $3.95 and $13.45 per share, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2022 and 2021, was $0.1 million and $2.8 million, respectively. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period.
Cash received from the exercise of stock options was $0.1 million and $1.0 million for the six months ended June 30, 2022 and 2021, respectively.
Restricted stock units
The Company periodically issues RSUs with a service condition to certain officers and other employees that typically vest between one year and four years from the grant date.
A summary of the RSU activity is as follows:
Number of Shares
Unvested at January 1, 2022817,609 
Granted1,190,224 
Vested(184,591)
Forfeited(116,338)
Unvested at June 30, 20221,706,904 
Stock-based compensation expense
The Company uses the provisions of ASC 718, Stock Compensation, to account for all stock-based awards to employees and non-employees.
Stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period, using the straight-line method.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
The following table presents stock-based compensation expense by award type included within the Company’s condensed consolidated statements of operations and comprehensive loss:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Stock options$3,933 $3,514 $8,051 $6,631 
Restricted stock units1,258 949 2,467 1,755 
Employee stock purchase plan157 119 315 235 
Stock-based compensation expense included in total operating expenses$5,348 $4,582 $10,833 $8,621 
The following table presents stock-based compensation expense as reflected in the Company’s condensed consolidated statements of operations and comprehensive loss:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Research and development$2,746 $2,502 $5,679 $4,803 
General and administrative2,602 2,080 5,154 3,818 
Stock-based compensation expense included in total operating expenses$5,348 $4,582 $10,833 $8,621 
As of June 30, 2022, there was $38.2 million and $12.9 million of unrecognized stock-based compensation expense related to unvested stock options and unvested RSUs, respectively, that is expected to be recognized over a weighted-average period of 2.4 years and 2.9 years, respectively.
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
June 30,
Six Months Ended June 30,
2022202120222021
Risk-free interest rate2.9 %1.0 %2.0 %0.8 %
Expected dividend yield % % % %
Expected term (years)5.845.975.996.04
Expected stock price volatility90 %83 %87 %83 %
Expected volatility for the Company’s common stock is determined based on the historical volatility of comparable publicly traded companies. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent with the expected term of the option. No dividend yield was assumed as the Company has not historically and does not expect to pay dividends on its common stock. The expected term of the options granted is based on the use of the simplified method, in which the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.
The fair value of RSUs is determined based on the closing price of the Company’s common stock on the date of grant.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
Employee stock purchase plan
During the year ended December 31, 2017, the Board adopted, and the Company’s stockholders approved the 2017 employee stock purchase plan (the "2017 ESPP"). The Company issued 154,235 shares under the 2017 ESPP during each of the three and six months ended June 30, 2022, and issued 36,198 shares under the 2017 ESPP during each of the three and six months ended June 30, 2021. As of June 30, 2022, there were 412,330 shares available for issuance under the 2017 ESPP.

10. Net loss per share
Basic net loss per share of common stock is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without further 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 shares of common stock and potentially dilutive securities outstanding for the period determined using the treasury stock method.
For purposes of the diluted net loss per share calculation, stock options, unvested RSUs and warrants 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 and Six Months Ended
June 30, 2022
Three and Six Months Ended
June 30, 2021
Stock options10,511,694 7,977,545 
Unvested restricted stock units1,706,904 1,070,311 
Warrants22,590 39,474 
12,241,188 9,087,330 
11. Commitments
License agreements
During the three months ended June 30, 2022 and the three and six months ended June 30, 2021, the Company did not record research and development expense related to non-refundable license payments. During the six months ended June 30, 2022, the Company recorded research and development expense related to non-refundable license payments of $1.5 million.
The Company did not record research and development expense related to development milestones during the three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, the Company recorded research and development expense related to a development milestone payment of $0.9 million for the dosing of the first patient in UPLIFT.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(unaudited)
12. Subsequent Events
Collaboration, Option and License Agreement
On August 6, 2022, the Company entered into a Collaboration, Option and License Agreement (the "GSK Agreement") with GlaxoSmithKline Intellectual Property (No. 4) Limited ("GSK"), pursuant to which the Company granted GSK an exclusive option to obtain an exclusive license (the “Option”) to co-develop and to commercialize products containing XMT-2056 (the "Licensed Products"), exercisable within a specified time period (the “Option Period”) after the Company delivers to GSK data resulting from completion of dose escalation with enrichment for breast cancer patients in a Phase 1 single-agent clinical trial of XMT-2056. GSK’s exercise of the Option may require clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Clearance” and GSK’s exercise of the Option following any applicable HSR Clearance, the “GSK Option Exercise”), Prior to the GSK Option Exercise, the Company will lead and will be responsible for the costs of manufacturing, research, and early clinical development related to its XMT-2056 program. After the GSK Option Exercise, if any, GSK may elect to manufacture XMT-2056, and GSK and the Company will co-develop XMT-2056 aimed at the approval of Licensed Product(s) in the United States and the European Union, with GSK being responsible for the majority of the development costs. GSK will be responsible for all development costs aimed solely at gaining approval outside the United States and European Union.
Pursuant to the GSK Agreement, following the GSK Option Exercise and subject to certain exceptions and specified payment obligations, the Company’s aggregate shared development costs are capped at a fixed amount, with any amounts in excess to be borne by GSK unless and until the Company exercises its option to receive (or bear) a specified share of U.S. profits (or losses) for any Licensed Products (“Profit Share Election”). The excess development costs will accrue interest as specified in the GSK Agreement and will later either be repaid by the Company or offset against future regulatory and sales milestones or royalty payments that may become due to the Company. If the Company exercises its Profit Share Election, the cap on the Company’s share of development costs shall no longer apply, and the Company must pay any then-outstanding excess plus accrued interest costs. Additionally, if the Company exercises its Profit Share Election, it may also simultaneously elect to co-promote any Licensed Products in the United States.
GSK is obligated to make a $100.0 million up-front payment within 10 business days of executing the GSK Agreement. Following the GSK Option Exercise, if any, GSK is obligated to pay the Company an option exercise payment of $90.0 million. The Company is eligible to receive future development, regulatory, and commercial milestone payments up to approximately $1.3 billion and tiered royalties up to the mid-twenty percent range based on global sales of Licensed Products. If the Company exercises its Profit Share Election, the Company will be eligible to receive reduced development, regulatory, and commercial milestone payments and reduced royalty rates on sales outside of the United States. Whether or not the Company exercises its Profit Share Election, GSK will be responsible for certain milestone payments or royalties due to specified third parties with which the Company currently has agreements that relate to the XMT-2056 program.
The GSK Agreement will terminate at the end of the Option Period if GSK does not exercise its Option. In the event of the GSK Option Exercise, unless earlier terminated, the GSK Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all Licensed Products in all countries have expired.

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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 related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission, or SEC, on February 28, 2022.
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. 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, 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, or ADCs, that offer a clinically meaningful benefit for cancer patients with significant unmet need. We have leveraged over 20 years of industry learning in the ADC field to develop proprietary and differentiated technology platforms that enable us to develop ADCs designed to have improved efficacy, safety and tolerability relative to existing ADC therapies.
We believe that our innovative platforms, including Dolaflexin and Dolasynthen, which deliver our proprietary auristatin DolaLock payload, as well as Immunosynthen, which delivers our propriety stimulator of interferon genes, or STING, agonist Immunolock payload, comprise a product engine that has enabled a robust discovery pipeline for us and our partners. Our ADCs in preclinical studies and clinical trials include first-in-class molecules that target multiple tumor types with high unmet medical need. Our belief is that our novel ADCs may have more favorable safety and efficacy compared to more traditional ADCs developed using first-generation technology.
Our goal is to become a leading oncology company by leveraging the potential of our innovative and differentiated ADC technologies and the experience and competencies of our management team to identify, acquire and develop promising ADC product candidates and to commercialize cancer therapeutics that are improvements over existing treatments.
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Upifitamab rilsodotin, or UpRi, our first-in-class ADC targeting the sodium-dependent phosphate transport protein NaPi2b, utilizes the Dolaflexin platform to deliver approximately 10 DolaLock payload molecules per antibody. We believe the NaPi2b antigen is broadly expressed in ovarian cancer and other cancers with limited expression in healthy tissue. We are currently evaluating a 36 mg/m2 dose of UpRi in platinum-resistant ovarian cancer in a single-arm registrational trial, which we refer to as UPLIFT. We expect to complete enrollment in UPLIFT around the end of the third quarter of 2022, which we anticipate would position us to report top-line data from UPLIFT and to submit a biologics licensing application, or BLA, in this indication to the U.S. Food and Drug Administration, or FDA, in 2023. We are also screening patients for a placebo-controlled Phase 3 clinical trial, referred to as UP-NEXT, to investigate a 30 mg/m2 dose of UpRi as a single-agent maintenance treatment in patients with recurrent platinum-sensitive ovarian cancer that have high NaPi2b expression. We believe the UP-NEXT trial, if successful, could serve as a post-approval confirmatory trial in the United States, support one or more applications for marketing approval outside of the United States, and support UpRi's expansion into earlier lines of therapy. Additionally, we are conducting a Phase 1/2 umbrella combination trial, which we refer to as UPGRADE. Initially, we are exploring the combination of UpRi with carboplatin, a standard platinum chemotherapy broadly used in the treatment of platinum-sensitive ovarian cancer. We may explore other combinations in the future. We expect to report initial interim data from UPGRADE in the fourth quarter of 2022. Together, data from these trials have the potential to establish the safety and efficacy of UpRi across a wide range of ovarian cancer patients, from those who are platinum-resistant and heavily pre-treated to those in earlier lines of the disease.
We are also developing XMT-1660, a B7-H4-directed Dolasynthen ADC with a precise, target-optimized drug-to-antibody ratio, or DAR, of six and our clinically validated DolaLock microtubule inhibitor payload with controlled bystander effect. B7-H4 is overexpressed in a range of cancers, including breast, endometrial and ovarian cancers. In preclinical studies, XMT-1660 demonstrated robust anti-tumor activity after a single dose in multiple patient-derived tumor xenografts.
The FDA has cleared our investigational new drug, or IND, application related to XMT-1660, and we expect to commence dosing patients imminently in a Phase 1 clinical trial investigating the safety, tolerability and anti-tumor activity of XMT-1660 in patients with solid tumors, including breast, endometrial and ovarian cancers. The initial dose escalation portion of this trial will evaluate the safety and tolerability of XMT-1660 as a single agent. The dose expansion portion of the trial will evaluate the safety, tolerability and efficacy of XMT-1660 as a single agent with primary efficacy-related endpoints of investigator-assessed objective response rate and duration of response.
The third product candidate we are advancing into clinical development is XMT-2056, an Immunosynthen STING agonist ADC (DAR 8) that targets a novel human epidermal growth factor receptor 2, or HER2, epitope. In preclinical models, XMT-2056 demonstrated robust anti-tumor activity as a monotherapy in both HER2-high and HER2-low expressing models, and enhanced efficacy has been shown when used in combination with multiple approved agents, including trastuzumab, pertuzumab, anti-PD-1, or trastuzumab deruxtecan. Preclinical data also suggest that XMT-2056 has the potential to enable immunological memory for prolonged anti-tumor activity. The FDA has cleared our IND application related to XMT-2056, and we expect to initiate a Phase 1 clinical trial of XMT-2056 in HER2-expressing tumors such as breast cancer, gastric cancer, and non-small cell lung cancer, or NSCLC, in the second half of 2022.
We also have two earlier stage preclinical candidates, which we refer to as XMT-2068 and XMT-2175, that leverage our Immunosynthen platform and target tumor-associated antigens.
In May 2022, we made the decision to discontinue the development of XMT-1592, a Dolasynthen ADC that had been in a Phase 1 dose exploration trial in patients with ovarian cancer and NSCLC, and to close this company-sponsored trial; we are working to transition any patient remaining on drug to an investigator-sponsored protocol.
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In addition, we have established strategic research and development partnerships with Janssen Biotech, Inc., or Janssen, and Merck KGaA for the development and commercialization of additional ADC product candidates leveraging our proprietary Dolasynthen and Dolaflexin platforms against a limited number of targets selected by our partners. We believe the potential of our ADC technologies, supported by our scientific and technical expertise and enabled by our intellectual property strategy, all support our independent and collaborative efforts to discover and develop life-changing ADCs for patients fighting cancer.
Since inception, our operations have focused on building our platforms, identifying potential product candidates, producing drug substance and drug product material for use in preclinical studies, conducting preclinical and 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 public offerings of our common stock, including through our at-the-market, or ATM, equity offering programs.
Since inception, we have incurred significant cumulative operating losses. For the six months ended June 30, 2022, the net loss was $99.5 million, compared to $75.6 million in the six months ended June 30, 2021. As of June 30, 2022, we had an accumulated deficit of $550.0 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 UpRi, XMT-1660 and XMT-2056;
prepare for a potential BLA submission for UpRi in 2023;
continue diagnostic development efforts with respect to the NaPi2b biomarker;
continue activities to discover, validate and develop additional product candidates, including XMT-2068 and XMT-2175;
maintain, expand and protect our intellectual property portfolio; and
hire additional research, development, general and administrative and commercial personnel.
Impact of COVID-19 on Our Business
We are continuing to monitor the impact of the ongoing COVID-19 pandemic on our operations and ongoing clinical and preclinical development, as well as discovery efforts. Mitigation activities to minimize COVID-19-related operational disruptions are ongoing and include:
We are currently enrolling patients at clinical sites in different geographic areas around the world in our ongoing clinical trials, though staffing constraints have been an increasing challenge for the clinical sites with which we work. If staffing challenges persist, we may experience associated delays in trial enrollment. We are in the process of initiating additional clinical sites both inside and outside the United States to increase enrollment that we believe could also mitigate this potential risk. Consistent with FDA guidance, we allow for remote patient monitoring and remote testing, when reasonably possible.
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To the best of our knowledge, our contract research and manufacturing partners continue to operate their facilities at or near normal levels, though staffing constraints and sourcing of raw and other materials have been an increasing challenge for our vendors. If staffing and/or material sourcing challenges continue, we may experience associated delays in our laboratory, clinical or manufacturing services. We believe we currently have appropriate service support and sufficient inventory of UpRi, XMT-1660 and XMT-2056 to support our ongoing and planned clinical trials. We have planned research, clinical and manufacturing activities to address all currently anticipated future needs. We continue to monitor the research, clinical and manufacturing operations of our vendors.
The ultimate impact of the COVID-19 pandemic on our business operations is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. While the pandemic did not materially affect our financial results and business operations in the second quarter ended June 30, 2022, we are unable to predict the impact that COVID-19 will have on our financial position and operating results in future periods due to numerous uncertainties. Management continues to actively monitor the situation and the possible effects on our financial condition, operations, suppliers, vendors, our workforce and the overall industry. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see Part II, Item 1A. Risk Factors below.
Recent Developments
On August 6, 2022, we entered into a Collaboration, Option and License Agreement, or the GSK Agreement, with GlaxoSmithKline Intellectual Property (No. 4) Limited, or GSK, pursuant to which we granted GSK an exclusive option to obtain an exclusive license, or the Option, to co-develop and to commercialize products containing XMT-2056, or the Licensed Products, exercisable within a specified time period, or the Option Period, after we deliver to GSK data resulting from completion of dose escalation with enrichment for breast cancer patients in a Phase 1 single-agent clinical trial of XMT-2056. GSK’s exercise of the Option may require clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Clearance (and GSK’s exercise of the Option following any applicable HSR Clearance, the GSK Option Exercise), Prior to the GSK Option Exercise, we will lead and will be responsible for the costs of manufacturing, research, and early clinical development related to our XMT-2056 program. After the GSK Option Exercise, if any, GSK may elect to manufacture XMT-2056, and we and GSK will co-develop XMT-2056 aimed at the approval of Licensed Product(s) in the United States and the European Union, with GSK being responsible for the majority of the development costs. GSK will be responsible for all development costs aimed solely at gaining approval outside the United States and European Union.
Pursuant to the GSK Agreement, following the GSK Option Exercise and subject to certain exceptions and specified payment obligations, our aggregate shared development costs are capped at a fixed amount, with any amounts in excess to be borne by GSK unless and until we exercise our option to receive (or bear) a specified share of U.S. profits (or losses) for any Licensed Products, or the Profit Share Election. The excess development costs will accrue interest as specified in the GSK Agreement and will later either be repaid by us or offset against future regulatory and sales milestones or royalty payments that may become due to us. If we exercise our Profit Share Election, the cap on our share of development costs shall no longer apply, and we must pay any then-outstanding excess plus accrued interest costs. Additionally, if we exercise our Profit Share Election, we may also simultaneously elect to co-promote any Licensed Products in the United States.
GSK is obligated to make a $100.0 million up-front payment to us within 10 business days of executing the GSK Agreement. Following the GSK Option Exercise, if any, GSK is obligated to pay us an option exercise payment of $90.0 million. We are eligible to receive future development, regulatory, and commercial milestone payments up to approximately $1.3 billion and tiered royalties up to the mid-twenty percent range based on global sales of Licensed Products. If we exercise our Profit Share Election, we will be eligible to receive reduced development, regulatory, and commercial milestone payments and reduced royalty rates on sales outside of the United States. Whether or not we exercise our Profit Share Election, GSK will be responsible for certain milestone payments or royalties due to specified third parties with which we currently have agreements that relate to the XMT-2056 program.
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The GSK Agreement will terminate at the end of the Option Period if GSK does not exercise its Option. In the event of the GSK Option Exercise, unless earlier terminated, the Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all Licensed Products in all countries have expired.
Financial Operations Overview
Revenue
To date, we have not generated any revenue from the sale of products. All of our revenue has been generated from strategic partnerships.
In February 2022, we entered into an agreement with Janssen, or the Janssen Agreement, for the development and commercialization of ADC product candidates utilizing our Dolasynthen platform for up to three target antigens. Janssen is responsible for generating antibodies against the target antigens, and we are responsible for performing bioconjugation activities to create ADCs as well as certain chemistry, manufacturing and controls development and early-stage manufacturing activities. Janssen has the exclusive right to and is responsible for the further development and commercialization of these ADC product candidates.
In June 2014, we entered into an agreement with Merck KGaA, or the Merck KGaA Agreement, for the development and commercialization of ADC product candidates utilizing Fleximer for up to six target antigens. Merck KGaA is responsible for generating antibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADC product candidates. Merck KGaA has the exclusive right to and is responsible for the further development and commercialization of these ADC product candidates. In May 2018, we entered into a supply agreement with Merck KGaA for the supply of materials that could be used for investigational new drug, or IND, -enabling studies and clinical trials.
During the three and six months ended June 30, 2022, we recognized $4.3 million and $6.0 million, respectively, of collaboration revenue related to the Janssen Agreement. For each of the three and six months ended June 30, 2022 and 2021, we recognized an immaterial amount of revenue related to the Merck KGaA Agreements. During the six months ended June 30, 2022, we recognized $0.3 million of revenue related to services provided to Asana BioSciences, LLC, or Asana Biosciences. We did not recognize revenue related to Asana Biosciences during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021.
For the foreseeable future, we expect substantially all of our revenue to be generated from our collaboration agreements with Janssen, Merck KGaA and Asana BioSciences. Given 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.
Expenses
Research and development expenses
Research and development expenses include our drug discovery efforts, manufacturing, and the development of our product candidates, which consist of:
employee-related expenses, including salaries, benefits and stock-based compensation expense;
costs of funding research and development performed by third parties that conduct research, preclinical activities, manufacturing and clinical trials on our behalf;
laboratory supplies;
facility costs, including rent, depreciation and maintenance expenses; and
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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. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and information provided to us by the third parties with whom we contract.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs. We expect that our future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs. 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.
We have not historically allocated all of our internal research and development expenses on a program-by-program basis as our employees and other resources are deployed across multiple projects under development. Internal research and development expenses are presented as one total. Our internal research and development costs are primarily personnel-related costs, stock-based compensation costs, and facility costs, including depreciation and lab consumables.
We incur significant external costs for manufacturing our product candidates and platforms and for clinical research organizations that conduct clinical trials on our behalf. We capture these external expenses for each product candidate in clinical development. Costs for our platforms with an associated product candidate in clinical development are typically allocated to our most clinically advanced product candidate based on that platform. In light of our decision to discontinue further clinical development of XMT-1592 in the second quarter of 2022, all costs associated with our Dolasynthen platform have been re-allocated to XMT-1660, which is now our lead Dolasynthen-based product candidate. All external research and development expenses not attributable to our product candidates in clinical development are captured within preclinical and discovery costs. These costs relate to our product candidates XMT-2056, XMT-2068 and XMT-2175 and additional earlier discovery stage programs and certain unallocated costs. The following table summarizes our external research and development expenses, presented by program as described above, for each of the three and six month periods ended June 30, 2022 and 2021.
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2022202120222021
UpRi external costs$13,881 $10,671 $24,024 $20,049 
XMT-1592 external costs363 1,676 2,789 4,144 
XMT-1660 external costs6,721 — 6,721 — 
Preclinical and discovery costs3,730 7,346 11,225 11,859 
Internal research and development costs16,536 12,262 32,278 23,318 
Total research and development costs$41,231 $31,955 $77,037