Bispecifics Hold Promise, but Awaiting Initial Data; Initiate at Equal-weight

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1 February 25, 2016 MacroGenics Inc Bispecifics Hold Promise, but Awaiting Initial Data; Initiate at Equal-weight MORGAN STANLEY & CO. LLC Matthew Harrison David N Lebowitz, MPH, CFA David.Lebowitz@morganstanley.com Cyrus Amoozegar, M.D., Ph.D. Cyrus.Amoozegar@morganstanley.com Industry View In-Line Stock Rating Equal-weight Price Target $20.00 We initiate at EW with a $20 PT. DARTs represent the key upside driver, but we await initial derisking data in 2016/2017. While margetuximab offers downside support, it is likely limited to refractory breast cancer patients. B7-H3 remains intriguing, but initial data don't support significant value. Initiate at Equal-weight with a $20 PT: MacroGenics is one of the few pure play biotechs with a broad platform that can recruit immune cells in the body and send them to a target tissue using so-called bispecific antibodies, or DARTs. This platform can potentially achieve efficacy similar to cell based therapy without individualized manufacturing. That said, without initial clinical data we think it's too early to highly value the platform. MacroGenics has two other potential growth drivers with its breast cancer antibody, margetuximab, that targets the ~$7B global HER2+ market and enoblituzumab, a B7-H3 antibody potentially useful in I/O combinations. However, we see modest sales potential for margetuximab given the competitive HER2 market and initial data from B7-H3 as insufficient to value the asset. DARTs represent the potential major upside driver to our valuation: Mgt. has 5 DARTs currently in clinical testing, with initial data on at least two of the targets (and potentially three) in We see the CD3/CD19 DART, which has the same target as Amgen's Blincyto and CAR-T, and the CD3/CD123 DARTs as the most promising. Importantly, mgt. has improved upon prior bispecific platforms by increasing DART half-lives to prevent continuous infusions and improving manufacture. This being said, while initial data could offer a first look at safety and some efficacy, we may need to await more robust data in 2017 before the efficacy signal is known. Other assets provide downside support: Though we see modest commercial value in margetuximab, it is directed against a validated target in a large commercial opportunity. Thus, our peak sales of ~$150M represent downside support in the event that the DART platform is unsuccessful. As for B7-H3, either initial data from a PD-1 combination or from the DART/CD3 combination offer the most promise given the limited single agent activity. We need initial DART data to get more bullish: Core to our thesis is solid DART data that would allow us to value the opportunity across targets and diseases. Thus, while we remain optimistic on bispecifics as a therapeutic approach and believe that MacroGenics has developed a suitable platform for their development, initial data is key to our ability to value the program. We await clear efficacy data from the platform. MacroGenics Inc ( MGNX.O, MGNX US ) Biotechnology / United States of America Stock Rating Equal-weight Industry View In-Line Price target $20.00 Shr price, close (Feb 24, 2016) $15.74 Mkt cap, curr (mm) $ Week Range $ Fiscal Year Ending 12/14 12/15e 12/16e 12/17e ModelWare EPS ($) (1.40) (0.29) (2.29) (2.63) Prior ModelWare EPS ($) P/E NM NM NM NM Consensus EPS ($) Div yld (%) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates QUARTERLY MODELWARE EPS ($) 2015e 2015e 2016e 2016e Quarter 2014 Prior Current Prior Current Q1 (0.12) a - (0.51) Q2 (0.44) - (0.71)a - (0.56) Q3 (0.14) - (0.46)a - (0.63) Q4 (0.69) - (0.51) - (0.59) e = Morgan Stanley Research estimates, a = Actual Company reported data Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 Risk Reward Successful Data from Proprietary DART Bispecific Platform To Drive Value Source: Thomson Reuters, Morgan Stanley Price Target $20 Bull $57 DCF Base $20 DCF Bear $11 DCF (Cash-based Value) Our PT is derived from a DCF that uses a 15% discount rate and a 0% terminal growth rate beyond 2030E to value MacroGenics's most advanced therapeutics programs. Strong uptake for all three clinical programs. Our bull scenario assumes greater margetuximab uptake versus competing HER2 regimens, incorporating sales for the treatment of both breast and gastric cancers. It also assumes that MGD011 achieves profound clinical results that leads to significant uptake in a variety of hematologic cancers. This scenario also assumes that enoblituzumab achieves success in trials and is launched for the treatment of multiple solid tumors. $150M in margetuximab peak, DART supplies bulk of value. Margetuximab achieves modest success in studies and finds a place as a niche therapy in refractory breast cancer patients. MGD011 demonstrates benefit and achieves uptake for the treatment of hematologic cancers. Failure to commercialize proprietary and partnered programs. Cash-based value, as MacroGenics generates no product related revenues. Investment Thesis We are Equal-weight MacroGenics. MacroGenics is one of the few pure play biotechs that has a broad bispecific antibody platform. Though we believe the platform has substantial potential, we would like to see ample data before applying a higher valuation. DART bispecific antibodies could offer CAR-T like efficacy in the treatment of cancer but in a more manufacturable package. DARTs are broadly applicable and can be implemented beyond oncology, with efforts underway to treat both autoimmune and infectious diseases. Other programs offer support for valuation. Though we have modest expectations for margetuxemab, it is directed at a validated target and could yield ~$150M in sales, providing downside support. With respect to the B7-H3 targeted enoblituzumab, we think it could offer greatest utility in combination with other checkpoint inhibitors but would like to see more data before increasing our expectations. Key Value Drivers Clinical data from DART bispecific antibodies in 2016 and Updates for Phase III compound margetuximab should bolster downside support to valuation. Clinical updates to B7-H3, including potential PD-1 combination data. Potential Catalysts Dose expansion data from Phase I enoblituzumab monotherapy trial in 2H16 Data from multiple Phase I trials evaluating DART bispecific platform in 2H16 and 2017 Risks to Achieving Price Target Pipeline failure for partnered or proprietary programs Negative safety or efficacy data from any of the therapeutic programs under development Poor data from other bispecific programs that casts doubts on bispecifics as an overall approach 2

3 Investment Case Summary & Conclusions We are initiating coverage of MacroGenics with a $20 PT and an Equal-weight rating. MarcoGenics is focused on developing biologic therapies for both oncology and autoimmune diseases. The company's key technology involves optimizing the Fc-region of antibodies which potentially improves efficacy and the creation of antibodies which can both target and recruit cells, a so-called bispecific approach. Its lead program is margetuximab for HER2+ breast cancer and is in Phase III testing. Its bispecific platform is called DART, with lead candidates for oncology. Overall, we believe that MacroGenics could derive most of its value from its DART platform, but without initial derisking data, it is difficult for us to be more optimistic than our current estimates of $500M+ in peak sales potential. And while we agree that margetuximab represents a lower risk clinical asset, we remain less convinced that the peak opportunity is above $200M. Thus, with cash until 2018, there is plenty of runway to achieve key milestones, but we await those milestones before offering greater value to the platform. Exhibit 1: Valuation: Bear to Bull Bridge Source: Morgan Stanley Research Key Investment Points 1. DART platform the key upside driver, but we need initial data: Bispecifics are clearly a very interesting approach to attacking cancer and MacroGenics has one of the more robust platforms. On the positive side, we have some validation of the approach with Amgen's BiTE platform and its approved agent Blincyto. Further, MacroGenics has been able to improve upon Amgen's liabilities (including short half-live, tolerability and manufacturability) with much more usable DARTs. That said, the two most viable DARTs - MGD011 (a CD3/CD19 similar to Blincyto and CAR-T therapy) and MGD006 (CD3/CD123) - have yet to provide any initial data. Thus, while we believe those targets are likely to be active, it is hard for us to be more bullish ahead of initial data. Importantly, if MacroGenics can prove out its platform with initial data from these two key DARTs, the size of the overall opportunity is large. Thus even if we miss the initial upside from positive data, we believe there would likely be significantly more upside potential with a derisked platform. 3

4 Exhibit 2: MacroGenics's Clinical Stage Programs Source: Company reports and Morgan Stanley Research 2. Margetuximab has a validated target and is likely to offer some differentiation in late-line HER2+ Breast Cancer: Management has positioned margetuximab as a better HER2+ agent given its optimized Fc binding domain. Based on the data to date, we believe that potential exists, though the head-to-head Phase III study versus Herceptin will be key to proving that differential. However, given the dominance of Perjeta and Herceptin in earlier lines of therapy and the potential for Herceptin biosimilars over the next few years, given the data thus far, we think it is unlikely margetuximab could generate significant sales outside of the refractory setting. We do however acknowledge that if very strong data exists in the refractory setting, margetuximab could see use in earlier lines of therapy which offers the potential of $1B+ in sales, given that the US HER2+ market is ~$5B+ currently. We currently model ~$150M in margetuximab sales in our base case. Exhibit 3: Currently Approved HER2 Therapies Source: Company reports and Morgan Stanley Research 3. B7-H3 remains an interesting target, but we need more data before assigning value: B7-H3 remains interesting given that it could complement the efficacy seen across PD-1/PDL1 agents. That said, the initial data presented at SITC in 2015 were not compelling with low response rates and no clear indication of response in any one tumor type. For a traditional oncology agent, we would not hold out any hope with such low response rates, but we do remember that PD-1/PDL1 had low response rates in some of their initial studies, so we await 4

5 durability data before declaring this asset as unlikely to succeed as a monotherapy. Further, given the potential for synergistic (or at least additive) efficacy with PD-1, we think there is the possibility it could be used in combination. Nonetheless, given the initial data we do not include B7-H3 in our base case and only include it in our bull case. Exhibit 4: Waterfall Plot for Phase I Enoblituzumab Data Source: Company reports Key Catalysts MacroGenics has a host of upcoming catalysts in the near term from across its clinical programs. In 2016 there are multiple data updates including additional dose expansion data from the enoblituzumab Phase I trials and initial data from the MGD006 DART and AML/MDS. Also, there is the possibility to see data from MGD011, the CD19/CD3 DART partnered with J&J. Finally, initial data from MGD010 in healthy individuals for use in autoimmune diseases is likely in Data from other DARTS is likely to be presented as we move into Exhibit 5: MacroGenics Catalyst Calendar Source: Company reports and Morgan Stanley 5

6 Valuation Our $20 price target includes ~$300M+ in (2023E) global revenue. We derive our price target from a discounted cash flows (DCF) analysis that uses a WACC of 15% and 0% terminal growth. Valuation Methodology: We prefer the use of a DCF analysis to value biotechnology companies. Given the defined patent life for each product, we believe a DCF fully captures both the upfront investment period as well as the long-term earnings power. While investors do look at biotechnology on a multiples basis (P/E), we prefer a DCF as it is more rigorous and requires more explicit assumptions about the long-term prospects of a company. Discount Rate: We use a 10% discount rate for all commercial companies, a 12.5% rate for companies with randomized PhII data, and a 15% rate for all development stage companies. Terminal Growth Rate: We model explicit revenues through 2030E and assume 0% terminal growth from 2030E. Revenue: We model a launch for margetuximab for the treatment of 3rd and 4th line HER2+ metastatic breast cancer in 2019, achieving $27M in sales and growing to almost $150 million by We also incorporate revenue from MacroGenics's MGD-011, assuming a launch in 2021 with $169M in sales during the first year and growing to $945 million by We await additional data prior to including enoblituzumab and other DARTs in our numbers. Economics: MacroGenics's has several partnerships with pharmaceutical companies for which the company would ultimately receive royalties upon receipt of marketing approvals. Key partnerships include Janssen for MGD011, Takeda for MGD010, Servier for MGD006, MGD007 and a TBD third molecule and Boehringer Ingelheim for up to ten undisclosed DARTs. COGS: We model COGS as 30% of product revenue in the first year of product sales (2019E), gradually stepping down to 19% of product revenue by 2023E. Operating Expenses: We assume R&D of ~$92M in 2015E growing to $143M in 2023E. We assume SG&A of ~$21M in 2015E growing to $72M in 2023E. Key Risks To Our Price Target Include: The major risks are (1) pipeline failure for partnered or proprietary programs, (2) negative safety or efficacy data from any of the therapeutic programs under development. and (3) poor data from other bispecific programs that casts doubts on bispecifics as an overall approach. 6

7 Debate 1: What is margetuximab worth? Overview: Margetuximab, an anti-her2 monoclonal antibody (mab), is MacroGenics's most advanced clinical program. The company recently initiated the Phase III SOPHIA trial examining the drug used as a monotherapy in relapsed/refractory HER2+ metastatic breast cancer. It is also being studied in combination with Merck's KEYTRUDA (pembrolizumab) for the treatment of relapsed/refractory gastric cancer. Though the current focus is in later lines of therapy, positive data from these studies could allow MacroGenics to potentially push toward earlier line usage and a greater revenue opportunity. Street's take: Despite the crowded nature of the HER2+ space, the Street has shown a willingness to put a premium on development stage HER2+ targeted therapies, with Puma Biotechology's neratinib being a prime example. This is in large part due to the substantial multibillion market size. Nonetheless, with Roche the dominate player in the HER2+ market and other assets like Novartis' Tykerb only achieving ~$150M in peak sales, many see significant hurdles to achieving significant sales outside of the refractory setting. Our take: Although HER2+ is a validated target, it is a relatively crowded space that could pose a challenge for margetuximab to take share, offering little revenue upside unless the drug demonstrates a distinct advantage in either safety, tolerability and/or efficacy. We do believe the mechanism of action as well as the Phase I data are suggestive that margetuximab could demonstrate clinical benefit though with Roche having distinct advantages in the market and biosimilar Herceptin on the horizon, our expectations are modest. Margetuximab versus other HER2+ agents The human epidermal growth factor receptor 2 (HER2) pathway in cancer is associated with cell proliferation in a variety of tumors. Mutations that lead to over-expression of this receptor contribute to tumor growth in patients. With breast cancer, for example, it is estimated that between 10% and 34% of patients are considered HER2+. In these patients, a therapy that inhibits the function of the HER2 pathway is a well established approach for attacking the disease. Herceptin (trastuzumab) which was developed by Genentech (now owned by Roche) and initially won marketing approval in 1998 remains the therapy for cancer patients with HER2 overexpression. Over the years, other HER2 targeted therapies such as Novartis' Tykerb (lapatinib), Roche/Immunogen's Kadcyla (adotrastuzumab emtansine) and Roche's Perjeta (pertuzumab) have been added to the landscape (Exhibit 6). 6 MacroGenics is developing margetuximab as a potentially best-in-class anti-her2 monoclonal antibody. 7

8 Exhibit 6: Approved & Late Stage HER2 Targeted Therapies Source: Company reports & Morgan Stanley Research Margetuximab is an anti-her2 antibody that was developed with Fc optimization to be a more potent therapeutic than currently approved drugs in this drug class. The hypothesis is that the Fc optimization applied to margetuximab could allow it to be more effective in HER2+ patients than current therapies, especially those who have either failed prior HER2 targeted treatment or due to low expression are not eligible for currently approved drugs in the first place. HER2 monoclonal antibodies help mediate antibody dependent cellular cytotoxicity (ADCC). It is within the ADCC that a HER2 inhibitor binds to the Fc region of the IgG receptor (FcγR) in order to increase control over immune function and to potentially more effectively target the cancer. Roche's Herceptin remains the most used HER2 therapy (US $6.8B sales 2015) and is dominant in the marketplace, being the drug of choice in first line therapy. However, the therapy is more effective in some patients than others. It is estimated that ~15-20% of patients express a CD16A receptor that has a higher-affinity FcγR. Such patients seem to gain greater benefit from Herceptin as measured by progression-free survival (PFS) than the ~80-85% that have the lower binding form of the receptor (Exhibit 7). 7 Exhibit 7: PFS Of Herceptin Patients Dependent Upon FcγR Region Binding Affinity Sou rce: Mu solin o, et al., J Clin O n c, 2008 & Compan y reports MacroGenics designed margetuximab to have a crystallizable fragment (Fc) that is optimized to enhance binding with key immune effector cell receptors. Specifically, the Fc region on the antibody is enhanced so that there is increased binding affinity to activating receptors (CD16A) of immune effector cells and decreased affinity to inhibitory receptors (CD32B). It is hoped that such modification would allow margetuximab to potentially 8

9 become a best-in-class therapy that could be effective in patients who do not initially respond to other anti- HER2 agents or to patients who develop resistance as they progress on other therapies. Margetuximab Clinical Program Margetuximab is being investigated in HER2+ cancers. Specifically, the drug is being studied in metastatic breast cancer as well as gastric cancer. MacroGenics completed a Phase I dose escalating trial that examined margetuximab in several HER2-expressing cancers. The Phase III SOPHIA study, which is studying margetuximab in 3rd/4th line therapy is underway. A Phase I/II program in combination with the anti-pd-1 inhibitor KEYTRUDA (pembrolizumab) in relapsed/refractory gastric cancer is on track to initiate in 1Q16. There is also a Phase IIa trial that is examining margetuximab in patients with lower overall HER2 expression patients that initiated in This trial has proceeded slowly and timing for a readout has not been disclosed. Phase I trial in HER2 expressing cancers. The margetuximab Phase I trial was specifically designed to demonstrate proof of concept (PoC) by 1) assessing safety, 2) determining maximum tolerated dose (MTD), 3) characterizing pharmacokinetics (PK) and 4) determining if the drug is able to offer evidence of anti-tumor activity in a variety of different cancers. The study was a dose escalating trial that assessed doses ranging from 0.1mg/kg weekly (qw) up to 6mg/kg as well as alternate dosing regimens of 10mg/kg every three weeks (q3w) up to 18mg/kg q3w in refractory who were unresponsive to current therapies. Importantly, the study was inclusive of patients that had HER+ expression based on immunohistochemistry (IHC) tests of 2/3+. IHC test. An IHC test is utilized to determine the extent of HER2 expression. An IHC test score of 0 represents no HER2 expression, while a 3+ score indicates a high concentration of HER2 DNA in the cell. As a frame of reference, Herceptin is approved for use in patients who score 2+ and 3+, although, it is more effective in the 3+ population. Both Perjeta and Kadcyla, on the other hand, are approved for patients who are either IHC 3+ or FISH+ patients. FISH test. A fluorescence in situ hybridization (FISH) test is used to map genetic material within a sample of cells. Such tests can also be utilized to determine the level of HER2 expression. Overall the Phase I data demonstrated that margetuximab is active in a heavily pretreated population. Not surprisingly, the greatest activity was seen in the breast cancer population, with the majority of patients demonstrating some level of tumor shrinkage (Exhibit 8). 8 Also, the data suggests durability for margetuximab as the trial achieved a median progression-free survival (PFS) of 24.1 weeks. As a comparison, the physician's arm of the Phase III TH3RESA trial which examined Kadcyla versus physician's choice in breast cancer patients who have failed 2 or more prior therapies achieved a 14.1 weeks PFS (Exhibit 9). 9 A more apt comparison for later line HER2 therapy might be Kadcyla, which achieved a PFS of ~41 weeks in its Phase III, although, this was in a predominantly 2nd line population (Exhibit 10). With respect to safety and tolerability, margetuximab has a strong safety and tolerability profile. The bulk of adverse events were Grade 1 or 2, with infusion-related reactions, lymphopenia and fatigue being the most common (Exhibit 11). 9

10 Exhibit 8: Phase I Margituximab Single Agent Activity Source: Company reports Exhibit 9: Phase I Durable Responses In Breast Cancer Source: Company reports 10

11 Exhibit 10: PFS Data For Other Refractory HER2 Therapies Source: Company reports and Morgan Stanley Exhibit 11: Margetuximab Adverse Events from Phase I Source: Company reports Another Phase Ib/II trial will examine margetuximab in even lower HER2 expessing patients. It will include those who are IHC 1-2+ patients who are FISH-nonamplified. Beyond the breast cancer studies, MacroGenics is also looking at the use of margetuximab in other HER2 expressing cancers. A Phase I/II that combines margetuximab with Merck's PD-1 inhibitor KEYTRUDA for the treatment of gastric cancer would not only provide insight into applicability into these patients but also it would help inform MacroGenic's decision on how they might try to push margetuximab earlier in the treatment paradigm. Phase III SOPHIA trial for MBC. Based on the activity in the margetuximab Phase I trial, MacroGenics elected to initiate the pivotal Phase III SOPHIA trial. This trial, which began enrolling patients in 3Q15, is examining margetuximab for the treatment of 3rd and 4th line relapsed/refractory metastatic breast cancer patients who have HER2 amplification at either the 2+ or 3+ levels. The study will enroll 530 patients randomized on a 1:1 basis to take either margetuximab + chemotherapy or trastuzumab + chemotherapy. There are sequential primary endpoints, with the first being PFS and the latter being overall survival (OS). Specifically, with respect to PFS the trial is being powered at the 90% level to achieve a hazard ratio (HR) of 0.67 at 257 events. On the OS endpoint, the study is powered to the 80% level to achieve an HR of 0.75 at 358 events (Exhibit 12). There will be a futility analysis in 2017 with final data expected in Positive data from this trial would lead to regulatory submissions in 2018 and potentially a 2019 FDA approval. We assume a European approval and launch would lag by a year. 11

12 Exhibit 12: Phase III SOPHIA Margetuximab Plus Chemo Trial In Breast Cancer Source: Company reports & Morgan Stanley Research Phase Ib/II study in combo with KEYTRUDA for relapsed/refractory gastric cancer. MacroGenics is planning to initiate a Phase I/II study to evaluate margetuximab in combination with Merck's KEYTRUDA for the treatment of relapsed/refractory gastric cancer. This trial is being conducted in collaboration, with drug being supplied by Merck. It is estimated that 20% of gastric cancer patients are HER2+. In the Phase I margetuximab trial of which 30% of the enrolled patients had gastroesophageal cancer and have completed a median of two prior therapies anti-tumor activity was seen in approximately 9 of 20 patients (Exhibit 13) with a 10% response rate (2 partial responses). Various studies in animal models seem to suggest that there could be synergy between anti-her2 activity and the innate immune system. Coupling this with the fact that KEYTRUDA has demonstrated activity in gastric cancer, with the KEYNOTE-012 trial having enrolled 39 HER2- patients achieving a 22% response rate, the margetuximab/keytruda combo could offer utility in these patients. Exhibit 13: Phase I Single Agent Margetuximab Activity In Pretreated Gastric Cancer Source: Company reports The Phase Ib portion of the trial will be a dose escalation study that will examine 10-15mg/kg q3w margetuximab in combination with KEYTRUDA, with between 3 and 6 patients in each cohort. The dose expansion portion of the trial, will examine the combination of the therapies utilizing the maximum tolerated dose of margetuximab. Patients in the trial will have to have failed prior Herceptin therapy as well as at least one round of chemo and be IHC Her2 2+/3+ or FISH+ amplified. Patients must be immunotherapy naïve. The primary endpoints are safety and tolerability as well as overall response rate (ORR). Secondary endpoints will include PFS and OS as well as immunogenicity. 12

13 Exhibit 14: Phase Ib/II Margetuximab/KEYTRUDA Combo Trial In Gastric Carcinoma Source: Company reports and Morgan Stanley Research Phase IIa MBC trial in low-expressing HER2 patients. Recall that one of the potential competitive advantages of margetuximab versus other HER2 inhibitors is that Fc optimization could enable margetuximab to have utility in patients with low HER2 expression levels. This could enable the therapy to have effectiveness in patients in which earlier line HER targeted therapies have failed or in whom their use was contraindicated in the first place. For example, Herceptin is indicated for use in IHC 2/3+ patients; although, it is less effective in 2+ patients. Perjeta and Kadcyla are only indicated to be used in high expressing IHC 3+ or FISH+ patients. This Phase IIa trial, on the other hand, is examining the drug in IHC 1/2+/FISH-nonamplified patients. Results from such a study could be intriguing as it could allow margetuximab to be used in a population not addressed by any of the currently approved anti-her2 therapies. Despite the intrigue of data in the low HER2 expression population, this trial has proceeded slowly and has not been a point of emphasis for MacroGenics. The trial began in 2013 and was to enroll 41 patients. The primary challenge to this study has been slow enrollment, seemingly linked to strict inclusion criteria. IHC tests for low expression HER2 are not as reliable. This issue is accentuated by the fact that IHC testing in this study is on a localized level. This differs from the Phase III SOPHIA study that uses centralized testing, making the results more reliable. Margetuximab value Based on the data we have seen to date, margetuximab would appear to be an active therapy with potential to be sucessful as a refractory agent. HER2 is a proven target that has been the target for an array of approved cancer therapies. Margetuximab has also demonstrated activity in its Phase I clinical trial. Together these facts would suggest that margetuximab has a good chance at finding a place in the treatment paradigm. The Phase III SOPHIA trial is investigating the drug in a 3rd/4th line population. Such patients would have failed at least two prior lines of therapies, with patients failing Herceptin/Perjeta/taxane in the first line and Kadcyla in second line. This is a challenging population with a poor overall prognosis. Considering these patients have no other approved treatment options, such patients could offer a niche opportunity and we believe approval in this population is attainable. Ultimately, although approval for 3rd/4th line disease offers a ~$150M revenue opportunity, the full potential of margetuximab would be determined by 3 key items including (1) how early in the treatment paradigm is it ultimately going to be used; (2) can margetuximab demonstrate incremental benefit versus current options in low Her2 expressing patients, and (3) whether or not a material benefit can be provided for patients with tumors other than breast cancer. In our margetuximab projections, we have elected to take a conservative overall approach. To date, we believe there is enough clinical benefit in relapsed/refractory HER2 breast cancer patients to believe that the Phase III SOPHIA trial has a reasonable chance for success. Given that the SOPHIA data is to be released in 2018, we would expect FDA approval and first revenues to occur in the U.S. in Our model assumes that Europe would follow a year later. 13

14 Beyond the 3rd/4th line HER2 metastatic breast cancer population, we are taking a wait an see approach before we determine how early and how broad the treatment opportunity will be. We include gastric cancer in our bull case projections, but do not include low HER2 expressors or early lines of breast cancer therapy in our model. We will await initial data from both the PhII and PhIII studies before valuing further opportunities. In our margetuximab sales model (Exhibit 15 & Exhibit 16), we assume the drug is launched for 3rd and 4th line metastatic breast cancer in the US in With $10,000/year pricing assumption, we model $27M in sales during its first year. It should achieve steady growth to $110M in sales by In Europe, we expect margetuximab would enter the market one year later. At an estimated ~ $6,000/year price point with modest share gains, we forecast $11M in 2020 growing to $37M by Peak sales for margetuximab in our base scenario in 2025 would be ~$150M. Although we do not include gastric cancer in our base scenario, we have presented this model in the bull case scenario for reference (Exhibit 17). Exhibit 15: Margetuximab US Breast Cancer sales Source: Morgan Stanley Research 14

15 Exhibit 16: Margetuximab EU Breast Cancer Sales Source: Morgan Stanley Research 15

16 Exhibit 17: Margetuximab Gastric Cancer Sales - Bull Scenario Source: Morgan Stanley Research 16

17 Debate 2: How much value should we assign to enoblituzumab? Overview: Checkpoint inhibitors are viewed as one of the most exciting areas in cancer therapy. It is a commonly held view that utilizing an individual's own immune system offers a compelling approach to targeting the disease. Checkpoint inhibitors offer the potential to modulate the immune system for this purpose. Although PD-1 and CTLA-4 inhibitors lead the way with Merck's KEYTRUDA (a PD-1 inhibitor approved in 2014), Bristol-Myers Squibb's Yervoy (a CTLA-4 inhibitor approved in 2015) and Bristol's Opdivo (a PD-1 inhibitor also approved in 2015), a variety of other targets that could lead to effective therapies are under investigation including B7-H3. MacroGenics is the only company currently pursuing B7-H3. The company is pursuing this target in a variety of tumors both as a monotherapy as well as in combination with either KEYTRUDA or Yervoy. Recently, MacroGenics partner Servier elected to not exercise its option with respect to enoblituzumab, making it a wholy owned molecule for the company. Street's take: Investors has a great appetite for I/O driven targets. Indeed, investors have viewed targets which could complement or imrpove I/O responses as great interest. Examples, include IDO inhibitors and other checkpoint targets. B7-H3 is a checkpoint inhibitor and as such could have potential to approach the success of other checkpoints such as PD-1s and CTLA-4s. Nonetheless, given the mixed Phase I data, we think consensus is taking a wait and see approach with B7-H3. Our take: Though B7-H3 offers potential utility as a target for immunotherapies, we would like to see more data from the evolving Phase I/II clinical program prior to including the target in our revenue forecast. The SITC data presented in November did demonstrate activity; however, we need more evidence before being convinced of B7-H3 as a viable monotherapy. A B7-H3 inhibitor in combination with either a PD-1 inhibitor or a CTLA-4 inhibitor is an intriguing combination but there is no clinical experience to determine if the potential for synergy will ultimately provide material benefit. Also, such combinations are likely to be associated with increased toxicity, the extent of which to this point is unknown. Further, although Servier's decision to not exercise its option on the drug could create additional upside for MacroGenics, the decision was made post SITC data and likely points toward some doubts regarding the therapy. Enoblituzumab and its mechanism Enoblituzumab is a B7-H3 inhibitor that is currently being investigated as a potential treatment for a variety of cancers. The drug targets the B7-H3 receptor, which is one of many checkpoint inhibitors that offer potential utility as an immuno-oncology therapy for the treatment of cancer. Though PD-1/PDL1 inhibitors and CTLA-4 inhibitors have led the way in immuno-oncology, with multiple approvals to date (Merck's KEYTRUDA and Bristol's Yervoy & Opdivo), there are a host of other drugs in development that targeting the immune system (Exhibit 18). With enoblituzumab, MacroGenics is targeting B7-H3. The company has two other B7-H3 targeted therapies in development including the DART bispecific MGD009 (B7-H3 and CD3) as well as a B7-H3 antibody drug conjugate (ADC). It is hoped that targeting B7-H3 could offer similar anti-cancer benefits as other checkpoints as well as providing a molecule that is potentially synergistic with other checkpoint inhibitor treatments. 17

18 Exhibit 18: Immune Regulators Source: Company reports, adapted from Pardoll, et al., Nature, April 2012 There are a variety of studies that suggest that B7-H3 plays a role in immune system inhibition. An in vivo mouse study published in Nature Immunology in 2003 suggests that B7-H3 is a negative regulator of T-cell proliferation that had preference for Th1. In this study, mice that were B7-H3 deficient had greater inflammation, implying increased immune activity. A more recent study published in blood in 2015 suggested that B7-H3's function as a negative immune regulator might reduce the risk of graft-versus-host disease (GvHD) in a mismatched bone marrow transplantation model. This study also suggested a negative correlation for T-cell response. Though the bulk of the data is suggestive that B7-H3 is a negative immune system regulator, the discussion is not entirely without controversy. Some earlier studies had indicated that B7-H3 could potentially have a costimulatory role with respect to the pathway. It should be noted that this effect was mostly seen in murine models. If these studies held true, a stimulatory effect would counter the target's potential as a therapy. An article printed in the European Journal of Immunology in 2009 entitled "B7-H3 is a potent inhibitor of human T- cell activation: No evidence for B7-H3 and TREML2 interaction specifically addressed this potential issue, dispelling the notion that B7-H3 has a stimulatory effect in human cells. Based on the full body of evidence, it would appear that the target is viable; although, clearly some risks remain. B7-H3 is expressed on both primary and metastatic tumors. It is also expressed on the cancer stem cells and 18

19 within the tumor vasculature (Exhibit 19). This could allow it to directly kill tumor cells and kill cancer stem cells which could reduce the risk for cancer regrowth. It would also suggest interference with the tumor's vasculature, essentially choking the tumor of its oxygen supply. Exhibit 19: Potential Features to Exploit B7-H3 Therapeutically Source: Company reports Of course, having a potentially effective mechanism for targeting the pathway is only relevant in diseases in which the receptor is expressed to a high enough level. An IHC test was applied across a wide range of cancers to explicitly determine if B7-H3 expression is high enough to make this a relevant target (Exhibit 20). B7-H3 is expressed in a broad array of cancers, with the bulk of IHC tests pointing toward 2+ or 3+ levels, again suggestive that it is a viable target. 19

20 Exhibit 20: Cancers That Express B7-H3 Source: Company reports Initial data offers some responses but efficacy sign not clear MacroGenics is pursuing a clinical program for enoblituzumab, an Fc optimised anti-b7-h3 monoclonal antibody. MacroGenics has initiated a Phase I/II study of enoblituzumab to determine its activity in several cancers, specifically melanoma, prostate and other tumors. The first part of the trial was a dose escalation study, before progressing into three expansion cohorts of 15 patients. In 4Q14, the company modified this trial. The modified protocol specified a host of other cancers to be included in the study including head and neck cancer, triple-negative breast cancer, renal cell carcinoma, melanoma and either non-small cell lung cancer or bladder cancer, with each cohort including 16 patients. The protocol modification also tweaked the dosing schedule with respect to enoblituzumab. In the new study, it would be continuous weekly dosing as opposed to the 3 weeks on 1 off approach used when the trial started. A 4-week gap during cycle 1 was also eliminated. Further, there were some modifications to the assessment. Now, new lesions would not automatically be deemed as progression. Also, once progression is seen the new protocol has patients maintained on therapy until after a confirmation scan. Lastly, the new protocol reduced the level of steroid pre-medication. This past November, MacroGenics presented data from this trial at the Society for Immunotherapy of Cancer (SITC) meeting. The data included response data for each of the specific cancers. It also included tumor responses for patients, stratified between both the newer and older study protocols (Exhibit 21). In examining the data, it does appear to support the contention that enoblituzumab triggers anti-tumor activity. However, in our view, to this point the benefit would appear modest, even in the patients that were enrolled under the modified protocol. When drilling into the specific cancers, we see some activity across the full range of cancers a positive that points to the broad expression of B7-H3 in tumors. However, in each of the cancers the activity seen seems modest. Melanoma had the best response, 5 of 18 of the heavily pretreated patients demonstrating some tumor shrinkage. However, only 1/20 or 5% had an ORR (1 partial response). The drug appears to be safe and well tolerated, with few grade 3/4 adverse events and only one episode of cytokine release syndrome (CRS) (Exhibit 22). Given this data, we are cautious on the potential of enoblituzumab. 20

21 Exhibit 21: SITC Phase I Data for Enoblituzumab Source: Company reports Exhibit 22: Adverse Events From Phase I Enoblituzumab Trial Source: Company reports Looking forward, MacroGenics is going to continue assessing enoblituzumab as a monotherapy. However, we ultimately believe that the drug's most promising trials could be those that are in combination with other checkpoint inhibitors. Both PD-1 and CTLA-4 have an inhibitory effect on T-cell activation. Inhibiting these pathways with drugs such as KEYTRUDA, Opdivo or Yervoy, allow for increased T-cell activity, which in turn contributes to better outcomes for cancer patients. As B7-H3 inhibition should also lead to increased T-cell activity, it can be hypothesized that such drugs would be complementary, leading to an even more pronounced level of T-cell activation and better tumor fighting. Overall, we believe the combination of B7-H3 inhibitors with either PD-1 or CTLA-4 inhibitors is intriguing, though there are some key caveats. First, activity of a therapy is correlated to the expression levels of the various 21

22 receptors and are not beneficial to all patients.though the expression of these receptors is higher in a variety of cancers, their expression must overlap in patients to become additive. The other issue that could be a challenge is with respect to safety and tolerability. Toxicities such as cytokine release syndrome which is associated with immunotherapies are challenging. Combining two immunotherapies could not only be additive for efficacy but also additive with respect to the frequency and severity of adverse events. MacroGenics is conducting two combination studies evaluating enoblituzumab in combination with other checkpoint inhibitors. One trial will examine the drug in combination with the CTLA-4 inhibitor Yervoy (Bristol) and the other with the PD-1 inhibitor KEYTRUDA (Merck) (Exhibit 23). The company is likely to complete the dose escalation for both of these trials in We expect data from these studies is likely in It should be noted that although Merck is supplying KEYTRUDA for MacroGenics's margetuximab study, neither Merck nor Bristol are supplying drug for these studies. Comparator drugs need to be bought on the market for these trials. Exhibit 23: Enoblituzumab Phase I Trials Source: Company reports & Morgan Stanley Waiting on data before valuing B7-H3 While B7-H3 has significant scientific evidence to supports its potential as a therapeutic target, the current clinical data are not impressive. Ultimately, scientific rationale needs to be supported by the data. Though the monotherapy trials demonstrated activity for enoblituzumab, the responses were modest, with very few partial responses generated. Though we do NOT include enoblituzumab in our base case assumption, we have displayed our bull case scenario for the drug for illustrative purposes (Exhibit 24 & Exhibit 25). In our bull scenario, we assume that enoblituzumab generates the bulk its sales as a combination therapy with anti-pd-1 checkpoint inhibitors. We assume the drug could be approved for non-small cell lung cancer (NSCLC), melanoma, and head & neck in combo and as a monotherapy for prostate cancer. We assume US launch would occur in 2021 and in Europe in At $10,000/year pricing in the US and ~$7000 in Europe, this would yield $107M in sales during year 1 (2021), growing in excess of $1B by

23 Exhibit 24: Enoblituzumab US Sales- Bull Scenario Source: Morgan Stanley Research 23

24 Exhibit 25: Enoblituzumab EU Sales - Bull Scenario Source: Morgan Stanley Research 24

25 Debate 3: DART in early stages, but what is the potential? Overview: Bispecifics are a therapeutic class of drugs which are able to target two (or in the case of multi-specifics, more) receptors concurrently, potentially eliciting a therapeutic response. The class of therapies has burgeoned in recent years, with historical challenges surrounding molecule stability, halflife and manufacturing being solved. While bispecifics have applicability across a wide variety of disease, those targeting cancer and autoimmune diseases are most common. MacroGenics has developed DARTs, a proprietary bispecific (and multispecific) platform that could allow the company to become a leader in this class of drugs. Management has 5 DART drugs currently in clinical testing, with data from at least two (and potentially three) in Street's take: We believe consensus is most focused on the DART platform out of MacroGenics entire portfolio of drugs. In particular, the DART platform has the biggest breakout potential of any of the core development areas and could, if successful, achieve similar efficacy to that seen with T-cell therapy. While there are many consensus views on the ability of bispecifics to achieve a therapeutic response, there is at least some validation of the approach with Amgen's BiTE platform and its recent approval of Blincyto. Our take: Bispecifics is a highly competitive field, yet the clinical data for the class are very nascent. In particular, with the exception of Amgen, there is very little public data available for any other bispecifics. This being said, the DART program appears to be one of the more promising platforms. DARTs potentially offer flexibility of targeting, a long half life (with the more recently developed DARTs), and improved manufacturability. Also with many DARTs set to enter the clinic, the platform offers MacroGenics a wide variety of targets to interrogate given both target selection and drugs properties could be key to eliciting a therapeutic response. Currently, we see MGD011 (the CD19/CD3 bispecific) as the most interesting given the results generated with CAR-T therapies with the same targets. How does DART compare to other bispecific platforms? A bispecific (or multi-specific) monoclonal antibody (BsMAb) is a customized protein that essentially combines two (or more) distinct antibodies, enabling the molecule to bind concurrently to two cellular receptors. Bispecifics have the potential for broad applicability, though many of the initial targets are oncology related. Bispecifics could be applied to treat a host of other disorders such as rheumatoid arthritis, age-related macular degeneration or osteoarthritis. In oncology the typical approach is to design the bispecifics as immunotherapies in which the molecule concurrently targets one receptor on the cancer cell and another receptor on a cytotoxic cell (such as a T-cell, an NK cell or a macrophage) thus engaging the immune system to target the tumor. MacroGenics has 5 DARTs currently in Phase I testing with another 2 DARTs nearing the clinic. Of the 5 currently in Phase I testing, we are most interested in MGD006, a combination of CD123 and CD3 for AML/MDS patients and MGD011, a combination of CD19 and CD3 for various blood cancers. While both these agents are partnered, the former with Servier and the latter with J&J, MacroGenics retains significant commercial rights, including North America in the Servier partnership and a US co-promote with J&J. For MGD006 we would expect an initial clinical update in 2016 and for MGD011, while J&J is responsible for clinical disclosures, we wouldn't be surprised to also see some initial data in

26 Exhibit 26: MacroGenic's Clinical Stage DARTs Source: Company reports and Morgan Stanley DARTs MacroGenics's Dual-Affinity Re-Targeting (DART) platform offers a highly versatile approach to developing bispecific molecules. DARTs utilize a proprietary covalent linkage technology that addresses some of the key concerns with respect to bispecific molecules. A typical DART bispecific is composed of two variable fragments (Fv). Each Fv combines a VL (light chain) and a VH (heavy chain) domain pair, each with affinities that vary from one side of the DART to the other, For example, in one terminus VL might have affinity for one receptor (receptor Y) while VH might have affinity for another (receptor Z); however, the other terminus would be alternated making a configuration of VL Y - VH Z and VL Z - VH Y. The two chains are covalently linked, which MacroGenics believes is a more natural and comparable with the IgG molecule. Management expects this linkage would create a bispecific where: (1) the potency of the bispecific is higher; (2) the potential for immunogenicity is reduced and (3) there would be a reduced frequency of unwanted 'domain exchange' with other molecules. There are a variety of different types of DART structures (Exhibit 27). The evolution of DARTs has focused on increasing stability, increasing flexibility, reducing risks safety and tolerability risks and increasing half life. As an example, MGD006 (CD123 x CD3), an earlier generation 'simple' bivalent DART for AML/MDS utilizes a redirected T-cell killing modality and has a half life on the order of hours. MGD011 (CD19 x CD3) on the other hand is a bivalent MP3-DART that also utilizes T-cell directed killing when targeting B-cell lymphomas; however, it has a half life on the order of days to weeks. This boost in half life can be the difference between requiring continuous infusion or less frequent dosing. 26

27 Exhibit 27: Differences in DART structures Source: Company reports The DART program is also quite flexible in that it has multiple modalities (Exhibit 28). It can be utilized as an immunotherapy by redirecting the actions of cytotoxic cells. Examples of this include MGD011 (CD19 x CD3) for B-cell malignancies, MGD006 (CD123 x CD3) for AML/MDS, MGD007 (gpa33 x CD3) for colorectal cancer and MGD009 (B7-H3 x CD3) for solid tumors, all of which are in Phase I studies. Another example is MGD014, an HIV x CD3 DART, which was recently funded by the National Institute of Allergy and Infectious Disease (NIAID). MGD014 is set to enter the clinic in DARTs can also be engineered to be potentially effective autoimmune disease treatments by targeting the cytokine blockade or B-cell signaling modulation. MGD010 (CD32B x CD79B) is one example which is in Phase Ia testing in healthy volunteers. A third, modality is the potential to target more than one checkpoint inhibitor at a time. Examples include DARTs in preclinical development for PD- L1 and B7-H3. Another and more unique application is to use the platform to target epitopes on a pathogen such as a Dengue DART. 27

28 Exhibit 28: Examples of DART Targeting Approaches and Clinical Applications Source: Company reports DARTs versus other competitive approaches Bispecifics are currently a very competitive development field given their potential applications. Based on our research, there are at least 36 separate bispecific molecules that have (or are about to) enter clinical testing (Exhibit 30 & Exhibit 31). Further, there are a multitude of distinct platforms (Exhibit 29 ). We also count over at least 60 distinct clinical trials, despite many other candidates still being in preclinical development. The bispecifics currently in development also offer a wide variety of therapeutic targets from oncology to eye diseases. 28

29 Exhibit 29: Known Bispecific Platforms Source: Company reports & Morgan Stanley Research Key Bispecific statistics ~40 distinct bispecifics in development ~28 Phase I trials ongoing ~35 Phase II trials ongoing ~15 trials with primary completion dates in 2016 ~23 distinct bispecific combos for oncology ~10 distinct bispecific combos for non-oncology 29

30 Most unique target and indication: ABT-981 targeting IL-1α x IL-1β by Abbvie for osteoarthritis Exhibit 30: Bispecifics in Clinical Testing (Part 1) Source: Company reports, Morgan Stanley Research 30

31 Exhibit 31: Bispecifics in Clinical Testing (Part 2) Source: Company reports, Morgan Stanley Research History and Challenges with Bispecifics Despite the excitement, bispecifics are not new. In fact, this approach has been under investigation for over 30 years. In 2001, Medarex became the first company to put a bispecific into Phase III trials. In 2009, privately held Trion Pharma became the first company to obtain regulatory approval for a bispecific, with Removab 31

32 (catumaxumab targeting CD3 x EpCAM x FcyRs) gaining European approval for malignant ascites. In 2014, Amgen and its BiTE program obtained FDA approval for BLYNCYTO (blinatumomab targetting CD19 x CD3) for Acute Lymphoblastic Leukemia (ALL). In other words, despite the substantial interest and potential of bispecifics, successes have thus far been limited. Although the potential is substantial, there are inherent challenges in bispecific development that have limited the clinical success with this class of molecules. One of the key reasons we see promise in the MarcoGenics platform is that we believe it has the potential to overcome many of the historical hurdles in the class. Key Milestones In Bispecific Development Medarex starts first Phase III study with a bispecific targeting HER2 (MDX-210) Trion Pharmaceutics receives the first regulatory approval for a bispecific with EU approval of Removab Amgen receives the first US approval for a bispecific with its approval of Blincyto Historically, bispecifics have had several challenges that have prevented them from realizing their ultimate potential. Bispecifics have tended toward being larger, more complex and somewhat unwieldy molecules relative to typical antibodies. Other issues surrounding bispecifics include general instability, lack of solubility and low expression. These factors have led to challenges with half life and administration. The bispecific universe can be roughly divided into two overall categories, those with a crystallizable fragment (Fc) and those without. Amgen's BiTE, platform lacks an Fc region. Though this characteristic has benefits such as being a smaller molecule that can more easily penetrate a tumor, it also is associated with challenges. Amgen's BLYNCYTO, for example, has a very short half life and needs to be administered via continuous infusion from a portable mini-pump that must be carried for 28 straight days. MacroGenics's MGD006 lacks an Fc region and similarly has a short half life. Subsequent DARTs have managed to push the half life from the order of hours to days and weeks. Other challenges associated with bispecifics include a toxicity profile common with immunotherapies, including cytokine release syndrome and neurotoxicity. The propensity for such a toxicity could be magnified, especially as combinations of immunotherapies are attempted. Also important is that bispecifics have been historically hard to manufacture. Purity of the yield product has been a challenge, with inefficient manufacture contributing to unwanted clinical effects. Many of the characteristics of DARTs have been specifically tailored to increase potency, stability, manufacturability and half life while not sacrificing safety. It would appear that DARTs represent a compelling option based on the science; although, we await data from the clinic to validate this contention. DARTs versus CAR-T Given that most of the oncology bispecifics target similar surface antigens as CAR-T treatments, bispecifics are viewed as a potential way to achieve the benefits of CAR-T without the unique manufacturing required with the competing approach. Both bispecifics and chimeric antigen receptor (CAR) technology as applied in cancer therapy are what would be termed as active immunotherapies. An active immunotherapy takes a cytotoxic cell and redirects it to fight a tumor. This differs from a passive immunotherapy such as a checkpoint inhibitor, an antibody or a cytokine that triggers the immune system but does not directly play a role in the immune response. As discussed earlier, bispecifics in cancer therapy engage a cancer cell and a cytotoxic cell (often a T lymphocyte) in order to bring the two together and harness the cancer killing strength of the immune cell. With CAR-T, the specificity of an antibody is engineered into a receptor which is then grafted onto the surface of a T-cell. These 32

33 cells are then introduced to the patient, thereby leading to adoptive T-cell therapy. Major players in the CAR space include Juno Therapeutics, Kite Pharma, Bluebird Bio, Cellectis and Bellicum Pharmaceuticals. Both bispecific and CAR-T approaches stimulate and guide the immune system to specifically target tumor cells. Clinical and preclinical studies to date suggest that both approaches are highly sensitive and can successfully treat tumors. To date, there is not enough information available to determine which technology is preferred over the other. In particular, the approved bispecific from Amgen has major limitations with dosing which currently make CAR-T more attractive. However, if DARTs could achieve more favorable dosing with similar efficacy to CAR-T, DARTs would obviously become more attractive. However, as there is currently only clinical data on CAR-T, a conclusion will have to wait for initial DART data. Potentially both approaches will find a place in the treatment paradigm. A journal article entitled, "A sensitivity scale for targeting T cells with chimeric antigen receptors (CARs) and bispecific T-cell engagers (BiTEs)," published in OncoImmunology in September, 2012 attempts to examine both approaches in order to provide some insight into this topic by conducting a preclinical analysis where both approaches were assessed versus a tumor-specific glycopeptide isoptope. While both CAR T and bispecifics were highly sensitive in the analysis, CAR technology was overall considered more sensitive to low concentrations of tumor epitopes. The authors contend that CAR T lends itself to be most effective when targeting tumors with low concentration. Amgen's BiTE technology, on the other hand, might be a better choice when a tumor epitope is over expressed as compared with normal tissue. Clearly, this analysis was somewhat limited in that it is not in a clinical setting and also that there are many distinct approaches to CAR and bispecifics that would lead to variability in results. For example, BiTEs are one of many different bispecific platforms and might not be representative of other technologies. Also, there will be differences in safety and tolerability and administration profiles between CAR T and bispecifics that would impact utilization. This being said, it would appear that both approaches will have a place in the therapeutic landscape and it would be too simplistic to view the competition as a zero-sum game. DART has a plethora of targets As we have previously discussed there are many potential bispecific targets. As such, MacroGenics is pursing many targets with management publicly highlighting seven DARTs targets on which it has at least filed an IND on five of the targets (Exhibit 32). These DARTs pursue a variety of different indications by targeting a multitude of targets. Exhibit 32: Publicly Available DART Targets Source: Company reports MGD011 (JNJ ) This DART is partnered with Janssen (a subsidiary of J&J) and targets CD19 on the surface of B-cells for treating malignancies and the CD3 receptor on the T-lymphocyte. Given the precedent provided by CAR-T with the same targets, this is potentially the least risky and most interesting of the DARTs. Further, the targets are the same as 33

34 Amgen's BLYNCYTO, which has already received FDA approval thereby offering some level of validation. This molecule is in a Phase I dose escalation trial which began in mid The trial begins with accelerated titration using a single subject cohort before moving to a 3+3 design after the first 2 related Grade 2 adverse events or one Grade 3 AE. Dose limiting toxicity will be assessed on day 28. We believe it is possible to see some interim data from this dose escalation study in 2016, but acknowledge it could take until 2017 to see final data. Though MacroGenics out-licensed this product to Janssen (who controls the development and thus the lack of clarity on when we could see initial data) the company has the option to fund a portion of late stage clinical in exchange for a profit share in the US. Ex-US, MacroGenics receives double-digit royalties on net sales. Considering that Amgen's Blyncyto has the same targets and is targeted toward the same indications as MGD011, a comparison between the two molecules as well as a comparison of DARTs versus BiTEs is useful. Blyncyto (blinatumomab) was developed utilizing the Bi-specific T- cell Engager (BiTE) platform by Micromet, which was acquired by Amgen in BiTEs essentially string together four chains (2 VL and 2 VH) in order to give it the specificity required to bind to two separate antigen receptors. BiTE technology offers several attractive characteristics including (1) their small size brings the effector cell closer to the target; and (2) its structure prevents unwanted systematic activation of the effector cells. MGD011 places the 2 VL and VH chains with differing binding affinities on two separate polypeptide changes, with a disulfide bridge connecting them. Aside from having a longer half life and less arduous administration as compared to Blyncyto, which has 28-day continuous infusion, preclinical data suggests that DARTs could ultimately be more effective. DARTs seem to be able to more efficiently cross-link the CD19 B-cell receptor with the CD3 T-cell receptor. This could lead to greater cytotoxicity, making the DART potentially more effective as a tumor therapy. As Exhibit 33 demonstrates, a preclinical study published by Moor et al in the April 28, 2011 edition of blood demonstrates increased cytotoxicity for the DART versus the BiTE. Exhibit 33: Preclinical Comparison of DART vs BiTE Platforms Source: Company reports MGD006 This DART targets CD123 and CD3 and is partnered with Servier who exercised its option in September This molecule was designed with a simple DART format and is being developed to treat hematologic malignancies including acute myeloid leukemia (AML) and myelodysplastic syndromes (MDS). MGD006 is in a Phase I dose escalation trial. The study will dose escalate a single patient cohort with 4 week cycles before moving to a second dose escalation stage that takes a 3+3 interpatient format, also using 4-week cycles. The third stage of the study will contain two expansion cohorts of 24-patients, with one looking at the drug in relapsed/refractory AML and the other in int-2/high risk MDS. Given that this molecule has a simple DART 34

35 format, it should be noted that it has a considerably shorter half life than other prominent DARTs. As such, the drug is administered with continuous intravenous infusion (IV) four days on followed by 3 days off. The trial, which will look at safety and tolerability, determine a MTD, characterize PK as well as looking for early evidence of efficacy, should have data in Upon receiving approvals, Servier would be responsible for paying low double-digit to mid-teen royalties on its territories, which includes all territories not assigned to MacroGenics. MacroGenics maintains rights in the US, Canada, Mexico, Japan, Korea and India. MGD007 This DART targets gpa33 and CD3 and is currently in development for the treatment of colorectal cancer. Servier maintains an option on this drug for all territories except US, Canada, Mexico, Japan, Korea and India. A decision on whether or not to opt in would likely occur at some point after data from the Phase I trial are released. Payout for MGD007 payout parallels that for MGD006. The Phase I trial for MGD007 examines two dose escalating intravenous infusion dose groups with a design, with one using weekly dosing and the other using tri-weekly dosing. These will be followed by expansion cohorts. The trial's objective is to examine safety and tolerability, determine MTD, characterize PK and look for evidence of activity (using the RECIST or irrecist criteria) for MGD007 for the treatment of relapsed/refractory metastatic colorectal cancer. We expect to see initial data from this study in 2016 with an update in MGD010 This DART targets CD32B and CD79B for the treatment of autoimmune diseases. Takeda has an option to opt into this drug following a Phase Ia trial. The structure is similar to the Janssen deal with MacroGenics maintaining a double digit royalty on global net sales and maintaining a right to opt into a co-promote in the US. MGD010 is initially being investigated in a Phase Ia trial in healthy volunteers. The study will enroll eight patients in several dose cohorts (6 on drug, 2 on placebo). This trial will be examining MGD010 for its potential application for signal modulation. We would expect to see data from this study in 2016 with next steps likely in MGD009 This is the fifth DART being investigated in a Phase I trial. This molecule targets B7-H3 and CD3 and is wholly owned by MacroGenics. It is currently being investigated in a Phase I dose escalating trial in a variety of solid tumors including NSCLC, bladder cancer, squamous cell carcinoma head & neck cancer, mesothelioma, and melanoma (16 patients per cohort). The trial uses a dose escalating design. This is an intriguing molecule in that it specifically targets B7-H3, an area of emphasis for MacroGenics with enoblituzumab. While we acknowledge our optimism on B7-H3 is limited given the initial single agent activity, given that this agent also recruits T-cells it will allow an inherent test of a potential combination with a PD-1 type combination. Preclinical data does point toward potential activity, with cytotoxic activity for MGD009 being higher than a control dart in several cancers (Exhibit 34) 35

36 Exhibit 34: Preclinical Data on MGD009 Source: Company reports Other DARTs There are several other DARTS of interest that are not yet in the clinic. MGD013 is MacroGenics's first bispecific molecule that specifically targets two checkpoint inhibitors: PD-1 and LAG3. Given the already aggressive plays being made by pharmaceutical players to combine immunotherapy drugs, it is natural for bispecific companies to implement the same approach but using one molecule. This molecule will enter the clinic in Also entering the clinic in 2017 is another unique DART, MDG014. MGD014 is being developed to treat HIV, targeting both the HIV virus and the CD3 receptor on T-cells. How much is it worth? We view the DART platform as potentially generating the most value for MacroGenics. This bispecific platform has the potential to target an array of billion-plus opportunities. The challenge when assessing the franchise, is to determine the value of something that has yet to be validated with clinical data. With this in mind, we have decided to value the DART platform by assessing what we consider to be the least risky asset: MGD011. This molecule was selected as it targets CD3 and CD19, like Blyncyto and CAR-T therapy. With the targets validated by a currently marketed therapy, we see MGD011 having a reasonable chance to succeed. Also given that this molecule has superior characteristics (i.e., easier administration given its longer half-life) versus Amgen's drug, MGD011 would likely be more successful if it were to be launched. We model FDA approval and launch for MGD011 in 2021 in the US and 2022 in Europe. We assume the drug is approved for use in multiple hematologic malignancies including acute lymphoblastic lymphoma (ALL), diffuse large B-cell lymphoma (DLCBC), follicular lymphoma (FL) and chronic lymphocytic leukemia (CLL). We assume pricing of $10,000/year in the US and $7,000/year in Europe similar to the assumptions we applied for margetuximab and enoblituzumab; although, this might be conservative given that MGD011 is a bispecific and could command higher reimbursement. In the first year of launch, we model $170M in sales growing to $945M in sales by MGD011 is partnered with J&J's Janssen, with MacroGenics receiving a double digit royalty. We apply a 20% royalty to these sales estimates, yielding royalty revenue of $34M in 2021, growing to almost $190M in

37 Exhibit 35: MGD011 US ALL Sales Source: Morgan Stanley 37

38 Exhibit 36: MGD011 EU ALL Sales Source: Morgan Stanley 38

39 Exhibit 37: MGD011 US DLCBC Sales Source: Morgan Stanley Exhibit 38: MGD011 EU DLCBC Sales Source: Morgan Stanley 39

40 Exhibit 39: MGD011 US FL Sales Source: Morgan Stanley 40

41 Exhibit 40: MGD011 EU FL Sales Source: Morgan Stanley 41

42 Exhibit 41: MGD011 US CLL Sales Source: Morgan Stanley Exhibit 42: MGD011 EU Cll Sales Source: Morgan Stanley 42