OVERVIEW

Since our inception, we have been principally engaged in the development of novel, targeted therapeutics for the treatment of cancer using our expertise in cancer biology, monoclonal antibodies, and small-molecule cytotoxic, or cell-killing, agents. Our Tumor-Activated Prodrug, or TAP, technology uses antibodies to deliver a potent cytotoxic agent specifically to cancer targets, and consists of a monoclonal antibody that binds to a cancer target with one of our proprietary cell-killing agents attached. The antibody component enables a TAP compound to bind specifically to cancer cells that express a particular target antigen and the cytotoxic agent serves to kill the cancer cell. Our TAP technology is designed to enable the creation of highly effective, well-tolerated anticancer products. All of our and our collaborative partners' TAP compounds currently in preclinical and clinical testing contain either DM1 or DM4 as the cytotoxic agent. Both DM1 and DM4 are our proprietary derivatives of a naturally occurring substance called maytansine. We also use our expertise in antibodies and cancer biology to develop "naked," or non-conjugate, antibody anticancer product candidates.

We have entered into collaborative agreements that enable companies to use our TAP technology to develop commercial product candidates to specified targets. We have also used our proprietary TAP technology in conjunction with our in-house antibody expertise to develop our own anticancer product candidates. Under the terms of our collaborative agreements, we are generally entitled to upfront fees, milestone payments and royalties on any commercial product sales. In addition, under certain agreements we are entitled to research and development funding based on activities performed at our collaborative partner's request. We are reimbursed our direct and overhead costs to manufacture preclinical and clinical materials and, under certain collaborative agreements, the reimbursement includes a profit margin. Currently, our collaborative partners include Amgen Inc., Bayer HealthCare AG, Biogen Idec Inc., Biotest AG, Genentech (a wholly-owned member of the Roche Group) and sanofi-aventis. We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements.

sanofi-aventis-In July 2003, we entered into a discovery, development and commercialization collaboration with sanofi-aventis. The agreement included a research support funding commitment by sanofi-aventis for $50.7 million over the first three years of the agreement, and then for an additional $18.2 million when the agreement was extended for a fourth year, and then for an additional $10.4 million when the agreement was extended for a fifth year. The two companies subsequently agreed to extend the date of payment through October 31, 2008 to enable completion of previously agreed upon research. We earned $81.5 million of committed research funding for activities performed under the completed research term of this agreement, and are now compensated for research performed for sanofi-aventis on a mutually-agreed upon basis.

The collaboration agreement also provides for certain other payments based on the achievement of product candidate milestones and royalties on sales of any resulting products, if and when such sales commence. For the targets included in the collaboration at this time, we are entitled to milestone payments potentially totaling $21.5 million for each product candidate developed under this agreement. Through March 31, 2009, we have earned and received an aggregate of $10.5 million in milestone payments under this agreement.

Additionally, in October 2006, sanofi-aventis licensed non-exclusive rights to use our proprietary humanization technology, which enables antibodies of murine origin to avoid detection by the human immune system. Under the terms of the license, we received a $1 million license fee, half of which was paid upon contract signing and the second half was paid in August 2008.We have deferred the $1 million upfront payment and are recognizing this amount as revenue over the five-year term of the agreement.

In August 2008, sanofi-aventis exercised its option under a 2006 agreement for expanded access to our TAP technology. We received $3.5 million with the exercise of this option in August 2008, in addition to the $500,000 we received in December 2006 with the signing of the option agreement. The agreement has a three-year term from the date of the exercise of the option and can be renewed by sanofi-aventis for one additional three-year term by payment of a $2 million fee. We have deferred the $3.5 million exercise fee and are recognizing this amount as revenue over the initial three-year option term.

In October 2008, sanofi-aventis began Phase II evaluation of AVE1642, triggering a $4 million milestone payment to us. This milestone is included in license and milestone fee revenue for the nine months ended March 31, 2009. In April 2009, sanofi-aventis informed us that it planned to discontinue development of AVE1642 for commercial reasons.

Genentech-In May 2000, we entered into a license agreement with Genentech that granted Genentech exclusive rights to use our maytansinoid TAP technology with antibodies that target HER2. In May 2006, we amended this agreement and this increased the potential milestone payments and certain royalties. Assuming all requirements are met under this agreement, we are to receive $44 million in milestone payments under this agreement in addition to royalties on sales, if any. In February 2009, Genentech began Phase III evaluation of T-DM1and we received a $6.5 million milestone payment with this event. This payment is included in license and milestone fees for the three and nine months ended March 31, 2009. Through March 31, 2009, we have received $13.5 million in milestone payments.

In December 2008, Genentech licensed the exclusive right to use our maytansinoid TAP technology with its therapeutic antibodies to an undisclosed target. This license was taken under an agreement entered into by the companies in 2000 that provided Genentech with the right to take exclusive licenses to use our maytansinoid TAP technology to develop products for individual targets on agreed upon terms. While the agreement expired in May 2008, a limited number of options to targets remain in place for a short period of time. This license was taken under one of these options. Under the terms of the license, we received a $1 million upfront payment and are entitled to receive up to $38 million in milestone payments plus royalties on the sales of any resulting products. Genentech is responsible for the development, manufacturing, and marketing of any products resulting from this license. We have deferred the $1 million upfront payment and are recognizing this amount as revenue over the estimated period of substantial involvement.

Biotest AG-In July 2006, Biotest licensed the exclusive right to use our TAP technology with its therapeutic antibodies to target a specific antigen that occurs on multiple myeloma cells. In September 2008, Biotest began Phase I evaluation of BT-062 which triggered a $500,000 milestone payment to us. This milestone is included in license and milestone fee revenue for the nine months ended March 31, 2009.

Bayer HealthCare AG-In October 2008, we entered into a development and license agreement with Bayer HealthCare AG. The agreement grants Bayer HealthCare exclusive rights to use our TAP technology to develop therapeutic compounds to a target found on solid tumors. We received a $4 million upfront payment upon execution of the agreement, and - for each compound developed and marketed by Bayer HealthCare under this collaboration - we could potentially receive up to $170.5 million in milestone payments; additionally, we receive royalties on the sales of any resulting products. We will be compensated by Bayer HealthCare at a stipulated rate for work performed on behalf of Bayer HealthCare under a mutually agreed upon research plan and budget which may be amended from time to time during the term of the agreement. We also will receive payments for manufacturing any preclinical and clinical materials made at the request of Bayer HealthCare as well as for any related process development activities. We have deferred the $4 million upfront payment and are recognizing this amount as revenue over the estimated period of substantial involvement.

Biogen Idec, Inc.-In October 2004, Biogen Idec licensed exclusive rights to use our TAP technology to develop and commercialize therapeutic compounds using antibodies to the tumor cell target Cripto. In January 2008, Biogen Idec submitted an Investigational New Drug (IND) application for BIIB015. This event triggered a $1.5 million milestone payment to us and this payment is included in license and milestone fee revenue for the three and nine months ended March 31, 2008.

To date, we have not generated revenues from commercial product sales and we expect to incur significant operating losses for the foreseeable future. As of March 31, 2009, we had approximately $43.4 million in cash and marketable securities compared to $47.9 million in cash and marketable securities as of June 30, 2008.

We anticipate that future cash expenditures will be partially offset by collaboration-derived proceeds, including milestone payments, clinical material reimbursements and upfront fees. Accordingly, period-to-period operational results may fluctuate dramatically based upon the timing of receipt of the proceeds. We believe that our established collaborative agreements, while subject to specified milestone achievements, will provide funding to assist us in meeting obligations under our collaborative agreements while also assisting in providing funding for the development of internal product candidates and technologies. However, we can give no assurances that such collaborative agreement funding will, in fact, be realized in the time frames we expect, or at all. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects. However, we cannot provide assurance that any such opportunities presented by additional strategic partners or alternative financing arrangements will be entirely available to us, if at all.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. Our financial results are affected by the selection and application of accounting policies and methods. As of July 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements. Refer to Note A - Fair Value of Financial Instrumentsto our unaudited consolidated financial statements included in Item 1 of the Quarterly Report for a discussion of our adoption of this standard.

There were no other significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

RESULTS OF OPERATIONS

Comparison of Three Months ended March 31, 2009 and 2008

Revenues

Our total revenues for the three months ended March 31, 2009 and 2008 were $8.2 million and $14.6 million, respectively. The $6.4 million decrease in revenues in the three months ended March 31, 2009 from the same period in the prior year is attributable to a decrease in research and development support revenue and clinical materials reimbursement revenue, partially offset by an increase in license and milestone fees, all of which are discussed below.

Research and development support was $908,000 for the three months ended March 31, 2009 compared with $3.5 million for the three months ended March 31, 2008. These amounts primarily represent research funding earned based on actual resources utilized under our agreements with sanofi-aventis, Bayer HealthCare, Biogen Idec, Biotest, and Genentech. Under the terms of the sanofi-aventis agreement, we were entitled to receive committed research funding totaling not less than $79.3 million over the five years of the research collaboration, which included the initial three-year term of the research program ending August 31, 2006 plus the two 12-month extensions beginning September 1, 2006. The two companies subsequently agreed to extend the date of payment through October 31, 2008 to enable completion of previously agreed upon research. Through the end of the research program, we earned $81.5 million of committed funding. Subsequent to October 31, 2008, we have performed, and will continue to perform, research on behalf of sanofi-aventis as mutually agreed upon. Also included in research and development support revenue are development fees charged for reimbursement of our direct and overhead costs incurred in producing and delivering research-grade materials to our collaborators and for developing antibody-specific conjugation processes on behalf of our collaborators and potential collaborators during the early evaluation and preclinical testing stages of drug development. The amount of development fees we earn is directly related to the number of our collaborators and potential collaborators, the stage of development of our collaborators' product candidates and the resources our collaborators allocate to the development effort. As such, the amount of development fees may vary widely from quarter to quarter and year to year. Total revenue recognized from research and development support from each of our collaborative partners in the three-month periods ended March 31, 2009 and 2008 is included in the following table (in thousands):

                                      Three months ended March 31,
Research and Development Support       2009               2008
Collaborative Partner:
Bayer HealthCare                   $         99     $               -
Biogen Idec                                  83                    90
Biotest                                     201                   340
Centocor                                      -                    30
Genentech                                    55                   328
sanofi-aventis                              364                 2,654
Other                                       106                    74
Total                              $        908     $           3,516

Revenues from license and milestone fees for the three months ended March 31, 2009 increased $2.1 million to $7.3 million from $5.2 million in the same period ended March 31, 2008. Included in license and milestone fees for the three months ended March 31, 2009 was a $6.5 million milestone related to the initiation of Phase III clinical testing of T-DM1 by Genentech. Included in license and milestone fees for the three months ended March 31, 2008 was $2 million of the $5 million milestone payment that we received with the initiation of Phase II clinical testing of T-DM1 by Genentech, $1.5 million related to the achievement of a milestone under the Biogen Idec agreement from the submission of the IND application for BIIB015 and $500,000 related to an additional preclinical development milestone achieved under the collaboration agreement with sanofi-aventis. Total revenue from license and milestone fees recognized from each of our collaborative partners in the three-month periods ended March 31, 2009 and 2008 is included in the following table (in thousands):

                                Three months ended March 31,
License and Milestone Fees        2009                2008
Collaborative Partner:
Amgen                        $           129     $           108
Bayer HealthCare                         154                   -
Biogen Idec                               57               1,551
Biotest                                   42                  42
Centocor                                  35                  35
Genentech                              6,538               2,291
sanofi-aventis                           359               1,201
Total                        $         7,314     $         5,228

Deferred revenue of $13.6 million as of March 31, 2009 primarily represents payments received from our collaborators pursuant to our license agreements, which we have yet to earn pursuant to our revenue recognition policy.

Clinical materials reimbursement decreased by approximately $5.8 million in the three months ended March 31, 2009, to $4,000 from $5.8 million in the three months ended March 31, 2008. The decrease in clinical materials reimbursement in the current period is primarily related to lower revenue recognized on shipments of DMx to collaborators during the current period, as well as no batches released during the current period. We are reimbursed for certain of our direct and overhead costs to produce clinical materials plus, for certain programs, a profit margin. The amount of clinical materials reimbursement we earn, and the related cost of clinical materials charged to research and development expense, is directly related to the number of clinical trials our collaborators are preparing or have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period, if any, during which patients in the trial receive clinical benefit from the clinical materials, and the supply of clinical-grade material to our collaborators for process development and analytical purposes. As such, the amount of clinical materials reimbursement revenue and the related cost of clinical materials charged to research and development expense may vary significantly from quarter to quarter and year to year.

Research and Development Expenses

Our net research and development expenses relate to (i) research to evaluate new targets and to develop and evaluate new antibodies, linkers and cytotoxic agents, (ii) preclinical testing of our own and, in certain instances, our collaborators' product candidates, and the cost of our own clinical trials,
(iii) development related to clinical and commercial manufacturing processes and
(iv) manufacturing operations. Our research and development efforts have been primarily focused in the following areas:

† activities pursuant to our discovery, development and commercialization agreement with sanofi-aventis;

†

† activities pursuant to our development and license agreements with various other collaborators;

†

† activities related to the preclinical and clinical development of IMGN901, IMGN242 and IMGN388;

† process development related to production of the huN901 antibody and IMGN901 conjugate for clinical materials;

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† process development related to production of the huC242 antibody and IMGN242 conjugate for clinical materials;

†

† process improvements related to the production of DM1, DM4 and strain development of their precursor, ansamitocin P3;

†

† funded development activities with contract manufacturers for the huN901 antibody, the huC242 antibody, and DM1, DM4 and their precursor, ansamitocin P3;

†

† production costs for the supply of the huN901 antibody and the huC242 antibody;

†

† production costs for the supply of DMx for our and our partners' preclinical and clinical activities;

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† operation and maintenance of our conjugate manufacturing facility, including production of our own and our collaborators' clinical materials;

†

† process improvements to our TAP technology;

†

† evaluation of potential antigen targets;

†

† evaluation of internally developed and/or in-licensed product candidates and technologies; and

†

† development and evaluation of additional cytotoxic agents and linkers.

Research and development expense for the three months ended March 31, 2009 decreased $13.8 million to $9.5 million from $23.3 million for the three months ended March 31, 2008. The decrease was primarily due to lower cost of clinical materials reimbursed , decreased antibody development and supply costs, decreased contract service expense and higher overhead utilization, partially offset by increased salaries and related expenses and greater clinical trial costs. The average number of our research and development personnel increased to 174 at March 31, 2009 compared to 169 at March 31, 2008. Research and development salaries and related expenses increased by $225,000 in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

We are unable to accurately estimate which potential product candidates, if any, will eventually move into our internal preclinical research program. We are unable to reliably estimate the costs to develop these products as a result of the uncertainties related to discovery research efforts as well as preclinical and clinical testing. Our decision to move a product candidate into the clinical development phase is predicated upon the results of preclinical tests. We cannot accurately predict which, if any, of the discovery stage product candidates will advance from preclinical testing and move into our internal clinical development program. The clinical trial and regulatory approval processes for our product candidates that have advanced or that we intend to advance to clinical testing are lengthy, expensive and uncertain in both timing and outcome. As a result, the pace and timing of the clinical development of our product candidates is highly uncertain and may not ever result in approved products. Completion dates and development costs will vary significantly for each product candidate and are difficult to predict. A variety of factors, many of which are outside our control, could cause or contribute to the prevention or delay of the successful completion of our clinical trials, or delay or prevent our obtaining necessary regulatory approvals. The costs to take a product through clinical trials are dependent upon, among other factors, the clinical indications, the timing, size and design of each clinical trial, the number of patients enrolled in each trial, and the speed at which patients are enrolled and treated. Product candidates may be found to be ineffective or to cause unacceptable side effects during clinical trials, may take longer to progress through clinical trials than anticipated, may fail to receive necessary regulatory approvals or may prove impracticable to manufacture in commercial quantities at reasonable cost or with acceptable quality.

The lengthy process of securing FDA approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate, with any degree of certainty, the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of our clinical trials, we are currently unable to estimate when, if ever, our product candidates that have advanced into clinical testing will generate revenues and cash flows.

We do not track our research and development costs by project. Since we use our research and development resources across multiple research and development projects, we manage our research and development expenses within each of the categories listed in the following table and described in more detail below (in thousands):

                                           Three Months Ended March 31,
Research and Development Expense             2009              2008
Research                                 $       3,491    $         3,912
Preclinical and Clinical Testing                 2,492              1,694
Process and Product Development                  1,456              1,420
Manufacturing Operations                         2,054             16,256
Total Research and Development Expense   $       9,493    $        23,282

Research: Research includes expenses associated with activities to identify and evaluate new targets and to develop and evaluate new antibodies, linkers and cytotoxic agents for our products and in support of our collaborators. Such expenses primarily include personnel, fees to in-license certain technology, facilities and lab supplies. Research expenses for the three months ended March 31, 2009 decreased $421,000 to $3.5 million from $3.9 million for the three months ended March 31, 2008. The decrease in research expenses was primarily the result of a decrease in salaries and related expenses due to a reorganization of departments in March 2008 and July 2008, resulting in lower personnel costs included in research expense for the current period.

Preclinical and Clinical Testing: Preclinical and clinical testing includes expenses related to preclinical testing of our own and, in certain instances, our collaborators' product candidates, and the cost of our own clinical trials. Such expenses include personnel, patient enrollment at our clinical testing sites, consultant fees, contract services, and facility expenses. Preclinical and clinical testing expenses for the three months ended March 31, 2009 increased $798,000 to $2.5 million compared to $1.7 million for the three months ended March 31, 2008. This increase is primarily the result of an increase in salaries and related expenses due to a reorganization of departments in March 2008 and July 2008, as well as an increase in clinical trial costs.

Process and Product Development: Process and product development expenses include costs for development of clinical and commercial manufacturing processes for our own and collaborator compounds. Such expenses include the costs of personnel, contract services and facility expenses. For the three months ended March 31, 2009, total development expenses increased $36,000 to $1.5 million, compared to $1.4 million for the three months ended March 31, 2008.

Manufacturing Operations: Manufacturing operations expense includes costs to manufacture preclinical and clinical materials for our own and our collaborator's product candidates, and quality control and quality assurance activities and costs to support the operation and maintenance of our conjugate manufacturing facility. Such expenses include personnel, raw materials for our and our collaborators' preclinical studies and clinical trials, development costs with contract manufacturing organizations, manufacturing supplies, and facilities expense. For the three months ended March 31, 2009, manufacturing operations expense decreased $14.2 million to $2.1 million compared to $16.3 million in the same period last year. The decrease in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 was primarily the result of (i) a decrease in cost of clinical materials reimbursed due to lower costs recognized on shipments of DMx to collaborators and no batches released during the current period, as well as significant write downs of inventory recorded during the prior period; (ii) an increase in overhead utilization from the manufacture of clinical materials on behalf of our collaborators; (iii) a decrease in contract service expense; and (iv) a decrease . . .