UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35409
Merrimack Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
04-3210530 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
One Kendall Square, Suite B7201 Cambridge, MA |
02139 |
|
(Address of principal executive offices) |
(Zip Code) |
(617) 441-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
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Accelerated filer |
☒ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
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Emerging growth company |
☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2018, there were 13,342,784 shares of Common Stock, $0.01 par value per share, outstanding.
PART I
FINANCIAL INFORMATION
PART II
OTHER INFORMATION
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Item 1A. |
26 |
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Item 5. |
52 |
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Item 6. |
53 |
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54 |
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i
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
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• |
our plans to develop and commercialize our clinical stage product candidates and diagnostics; |
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• |
our ongoing and planned discovery programs, preclinical studies and clinical trials; |
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• |
the timing of the completion of our clinical trials and the availability of results from such trials; |
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• |
the anticipated cost savings in connection with our restructuring efforts; |
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• |
our ability to establish and maintain collaborations for our product candidates; |
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• |
our receipt of payments related to the milestone events under the asset purchase and sale agreement with Ipsen S.A. or under the license and collaboration agreement between Ipsen S.A. and Les Laboratoires Servier SAS (as assignee from Shire plc), when expected or at all; |
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• |
the timing of and our ability to obtain and maintain regulatory approvals for our product candidates; |
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• |
the rate and degree of market acceptance and clinical utility of our product candidates; |
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• |
our intellectual property position; |
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• |
our commercialization, marketing and manufacturing capabilities and strategy; |
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• |
the potential advantages of our approach to drug research and development; and |
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• |
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing. |
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments that we may make.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
NOTE REGARDING TRADEMARKS
ONIVYDE® is a trademark of Ipsen S.A. Any other trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.
1
FINANCIAL INFORMATION
Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
|
(in thousands, except per share amounts) |
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
49,794 |
|
|
$ |
93,441 |
|
|
Marketable securities |
|
|
35,052 |
|
|
|
— |
|
|
Restricted cash |
|
|
584 |
|
|
|
— |
|
|
Prepaid expenses and other current assets |
|
|
1,837 |
|
|
|
1,605 |
|
|
Total current assets |
|
|
87,267 |
|
|
|
95,046 |
|
|
Restricted cash |
|
|
— |
|
|
|
674 |
|
|
Property and equipment, net |
|
|
3,188 |
|
|
|
6,467 |
|
|
Equity method investment |
|
|
8,893 |
|
|
|
10,551 |
|
|
Other assets |
|
|
4,568 |
|
|
|
4,588 |
|
|
Total assets |
|
$ |
103,916 |
|
|
$ |
117,326 |
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
19,049 |
|
|
$ |
17,606 |
|
|
Accrued intraperiod tax allocation |
|
|
1,340 |
|
|
|
— |
|
|
Deferred rent |
|
|
1,676 |
|
|
|
2,171 |
|
|
Total current liabilities |
|
|
22,065 |
|
|
|
19,777 |
|
|
Deferred rent, net of current portion |
|
|
— |
|
|
|
1,209 |
|
|
Notes payable, net of discount |
|
|
14,752 |
|
|
|
— |
|
|
Other long-term liabilities |
|
|
56 |
|
|
|
56 |
|
|
Total liabilities |
|
|
36,873 |
|
|
|
21,042 |
|
|
Commitments and contingencies (Note 5) |
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 10,000 shares authorized at September 30, 2018 and December 31, 2017; no shares issued or outstanding at September 30, 2018 or December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
Common stock, $0.01 par value: 30,000 shares authorized at September 30, 2018 and 20,000 shares authorized at December 31, 2017; 13,343 shares issued and outstanding at September 30, 2018 and December 31, 2017 |
|
|
1,334 |
|
|
|
1,334 |
|
|
Additional paid-in capital |
|
|
580,047 |
|
|
|
577,721 |
|
|
Accumulated deficit |
|
|
(514,333 |
) |
|
|
(482,771 |
) |
|
Accumulated other comprehensive loss |
|
|
(5 |
) |
|
|
— |
|
|
Total stockholders’ equity |
|
|
67,043 |
|
|
|
96,284 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
103,916 |
|
|
$ |
117,326 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
(in thousands, except per share amounts) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Research and development expenses |
|
$ |
12,959 |
|
|
$ |
13,598 |
|
|
$ |
39,743 |
|
|
$ |
54,954 |
|
|
General and administrative expenses |
|
|
3,777 |
|
|
|
3,366 |
|
|
|
11,560 |
|
|
|
23,798 |
|
|
Total operating expenses |
|
|
16,736 |
|
|
|
16,964 |
|
|
|
51,303 |
|
|
|
78,752 |
|
|
Loss from continuing operations |
|
|
(16,736 |
) |
|
|
(16,964 |
) |
|
|
(51,303 |
) |
|
|
(78,752 |
) |
|
Other income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
306 |
|
|
|
250 |
|
|
|
863 |
|
|
|
646 |
|
|
Interest expense |
|
|
(472 |
) |
|
|
(1,659 |
) |
|
|
(472 |
) |
|
|
(30,400 |
) |
|
Gain on deconsolidation of Silver Creek Pharmaceuticals, Inc. |
|
|
— |
|
|
|
10,848 |
|
|
|
— |
|
|
|
10,848 |
|
|
Gain on sale of asset |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,703 |
|
|
Other income (expense), net |
|
|
(237 |
) |
|
|
69 |
|
|
|
(1,778 |
) |
|
|
(592 |
) |
|
Total other income and expenses |
|
|
(403 |
) |
|
|
9,508 |
|
|
|
(1,387 |
) |
|
|
(17,795 |
) |
|
Net loss from continuing operations before income tax benefit |
|
|
(17,139 |
) |
|
|
(7,456 |
) |
|
|
(52,690 |
) |
|
|
(96,547 |
) |
|
Income tax benefit |
|
|
4,798 |
|
|
|
2,133 |
|
|
|
4,798 |
|
|
|
32,372 |
|
|
Net loss from continuing operations |
|
|
(12,341 |
) |
|
|
(5,323 |
) |
|
|
(47,892 |
) |
|
|
(64,175 |
) |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
|
16,330 |
|
|
|
8,456 |
|
|
|
16,330 |
|
|
|
547,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3,989 |
|
|
|
3,133 |
|
|
|
(31,562 |
) |
|
|
483,819 |
|
|
Net income (loss) attributable to non-controlling interest |
|
|
— |
|
|
|
31 |
|
|
|
— |
|
|
|
(1,160 |
) |
|
Net income (loss) attributable to Merrimack Pharmaceuticals, Inc. |
|
$ |
3,989 |
|
|
$ |
3,102 |
|
|
$ |
(31,562 |
) |
|
$ |
484,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities |
|
|
(4 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
Other comprehensive income (loss) |
|
|
(4 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
Comprehensive income (loss) |
|
$ |
3,985 |
|
|
$ |
3,102 |
|
|
$ |
(31,567 |
) |
|
$ |
484,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Merrimack Pharmaceuticals, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(12,341 |
) |
|
$ |
(5,354 |
) |
|
$ |
(47,892 |
) |
|
$ |
(63,015 |
) |
|
Income from discontinued operations, net of tax |
|
|
16,330 |
|
|
|
8,456 |
|
|
|
16,330 |
|
|
|
547,994 |
|
|
Income (loss) attributable to Merrimack Pharmaceuticals, Inc. |
|
$ |
3,989 |
|
|
$ |
3,102 |
|
|
$ |
(31,562 |
) |
|
$ |
484,979 |
|
|
Basic and dilutive net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(0.92 |
) |
|
$ |
(0.40 |
) |
|
$ |
(3.59 |
) |
|
$ |
(4.77 |
) |
|
Net income from discontinued operations, net of tax |
|
|
1.22 |
|
|
|
0.64 |
|
|
|
1.22 |
|
|
|
41.52 |
|
|
Net income (loss) per share |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
(2.37 |
) |
|
$ |
36.75 |
|
|
Weighted-average common shares used per share calculations—basic and diluted |
|
|
13,343 |
|
|
|
13,282 |
|
|
|
13,343 |
|
|
|
13,197 |
|
|
Cash dividend paid per common share |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10.55 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
|
Nine Months Ended September 30, |
|
|||||
|
(in thousands) |
|
2018 |
|
|
2017 |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(31,562 |
) |
|
$ |
483,819 |
|
|
Less: |
|
|
|
|
|
|
|
|
|
Gain from discontinued operations |
|
|
16,330 |
|
|
|
547,994 |
|
|
Loss from continuing operations |
|
|
(47,892 |
) |
|
|
(64,175 |
) |
|
Adjustments to reconcile net (loss) income to net cash used in operating activities |
|
|
|
|
|
|
|
|
|
Non-cash interest expense |
|
|
121 |
|
|
|
3,352 |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
25,011 |
|
|
Benefit from intraperiod tax allocation |
|
|
(4,798 |
) |
|
|
(32,372 |
) |
|
Depreciation and amortization expense |
|
|
3,211 |
|
|
|
2,813 |
|
|
Non-cash activity related to discontinued operations |
|
|
(532 |
) |
|
|
10,241 |
|
|
Gain on deconsolidation of Silver Creek Pharmaceuticals, Inc. |
|
|
— |
|
|
|
(10,848 |
) |
|
Loss (gain) on sale of property and equipment |
|
|
184 |
|
|
|
(439 |
) |
|
Premiums paid on marketable securities |
|
|
(2 |
) |
|
|
— |
|
|
Amortization and accretion on marketable securities |
|
|
(398 |
) |
|
|
— |
|
|
Stock-based compensation expense |
|
|
2,326 |
|
|
|
11,110 |
|
|
Loss on equity method investment |
|
|
1,658 |
|
|
|
— |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
(314 |
) |
|
|
(6,120 |
) |
|
Income taxes payable |
|
|
361 |
|
|
|
1,844 |
|
|
Accounts payable, accrued expenses and other |
|
|
1,083 |
|
|
|
(3,140 |
) |
|
Deferred rent |
|
|
(1,704 |
) |
|
|
(334 |
) |
|
Net cash used in continuing operations for operating activities |
|
|
(46,696 |
) |
|
|
(63,057 |
) |
|
Net cash used in discontinuing operations for operating activities |
|
|
— |
|
|
|
(37,964 |
) |
|
Net cash used in operating activities |
|
|
(46,696 |
) |
|
|
(101,021 |
) |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(118 |
) |
|
|
(729 |
) |
|
Deconsolidation of Silver Creek Pharmaceuticals, Inc. |
|
|
— |
|
|
|
(4,002 |
) |
|
Proceeds on sale of property and equipment |
|
|
— |
|
|
|
1,094 |
|
|
Proceeds from sale of business |
|
|
23,000 |
|
|
|
575,000 |
|
|
Proceeds from maturities and sales of marketable securities |
|
|
42,200 |
|
|
|
— |
|
|
Purchases of marketable securities |
|
|
(76,857 |
) |
|
|
— |
|
|
Net cash (used in) provided by investing activities |
|
|
(11,775 |
) |
|
|
571,363 |
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Payment of debt extinguishment costs |
|
|
— |
|
|
|
(20,124 |
) |
|
Proceeds from issuance of notes payable, net of issuance costs |
|
|
14,632 |
|
|
|
— |
|
|
Proceeds from exercise of options to purchase common stock |
|
|
— |
|
|
|
6,517 |
|
|
Proceeds from issuance of Series C preferred stock by Silver Creek Pharmaceuticals, Inc., net of issuance costs |
|
|
— |
|
|
|
3,994 |
|
|
Repayment of debt |
|
|
— |
|
|
|
(175,000 |
) |
|
Payment of dividend |
|
|
— |
|
|
|
(140,000 |
) |
|
Net cash provided by (used in) financing activities |
|
|
14,632 |
|
|
|
(324,613 |
) |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
(43,839 |
) |
|
|
145,729 |
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
94,217 |
|
|
|
22,300 |
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
50,378 |
|
|
$ |
168,029 |
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment in accounts payable, accrued expenses and other |
|
$ |
— |
|
|
$ |
159 |
|
|
Receivables related to property and equipment sale in other current assets |
|
|
— |
|
|
|
145 |
|
|
Supplemental disclosure of cash flows |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
|
— |
|
|
|
6,122 |
|
|
Cash paid for interest |
|
|
235 |
|
|
|
30,250 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Merrimack Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of the Business
Merrimack Pharmaceuticals, Inc. (the “Company”) is a clinical stage biopharmaceutical company based in Cambridge, Massachusetts that is outthinking cancer by targeting biomarker-defined cancers. The Company’s vision is to ensure that cancer patients and their families live fulfilling lives. The Company’s mission is to transform cancer care through the smart design and development of targeted solutions based on a deep understanding of cancer pathways and biological markers. All of the Company’s development programs fit into the Company’s strategy of (1) understanding the biological problems it is trying to solve, (2) designing specific solutions against the problems it is trying to solve and (3) developing those solutions for biomarker-selected patients. This three-pronged strategy seeks to ensure optimal patient outcomes. The Company owns worldwide development and commercial rights to all of its clinical and preclinical programs.
The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, among other things, its ability to secure additional capital to fund operations, success of clinical trials, development by competitors of new technological innovations, dependence on collaborative arrangements, protection of proprietary technology, compliance with government regulations and dependence on key personnel. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of capital, adequate personnel, infrastructure and extensive compliance reporting capabilities.
The Company’s product candidates are in development, and none are approved for any indication by the U.S. Food and Drug Administration (“FDA”) or any other regulatory agency. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies, among others. In addition, the Company is dependent upon the services of its employees and consultants.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As of September 30, 2018, the Company had an accumulated deficit of $514.3 million. During the nine months ended September 30, 2018, the Company incurred a net loss from continuing operations before income tax benefit of $52.7 million and used $46.7 million of cash in continuing operations for operating activities. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash, cash equivalents and marketable securities of $84.8 million at September 30, 2018, in addition to a $5.0 million ONIVYDE milestone payment received in October 2018 (see Note 12, “Subsequent Events”), will be sufficient to fund its operating expenses, debt service obligations and capital expenditure requirements for at least the next 12 months from issuance of the financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. The Company may receive additional milestone payments under existing agreements and will ultimately need to seek additional funding through public or private financings, debt financing, collaboration agreements or government grants. The inability to obtain funding, as and when needed, would have a negative impact on the Company’s financial condition and ability to pursue its business strategies.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements reflect the operations of Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated.
The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Certain reclassifications have been made to the prior year’s condensed consolidated balance sheet and condensed consolidated statement of cash flows to enhance comparability with the current year’s condensed consolidated financial statements presentation.
5
These reclassifications had no effect on previously reported net income within the condensed consolidated statement of operations and comprehensive (loss) income.
Consolidation
The accompanying condensed consolidated financial statements reflect Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiary. For the three and six months ended June 30, 2017, the condensed consolidated financial statements also include the accounts of Silver Creek Pharmaceuticals, Inc. (“Silver Creek”). For the three and six months ended June 30, 2017, Silver Creek represented a variable interest entity that the Company consolidated as the primary beneficiary. In the third quarter of 2017, the Company deconsolidated Silver Creek from its financial statements since the Company was no longer the primary beneficiary of Silver Creek. The Company’s ownership percentage decreased to less than 50% and the Company no longer controlled Silver Creek’s board of directors or directed the activities that had the most significant impact on Silver Creek’s economic performance. The Company accounts for its investment in Silver Creek under the equity method of accounting.
On April 3, 2017, the Company completed the sale of its right, title and interest in the non-cash assets, equipment, inventory, contracts and intellectual property primarily related to developing, manufacturing and commercializing ONIVYDE and MM-436 (the “Commercial Business”). As of March 31, 2017, the Commercial Business met all the conditions to be classified as a discontinued operation since the disposal of the Commercial Business represented a strategic shift that had a major effect on the Company’s operations and financial results. Therefore, the operating results of the Commercial Business are reported as a loss from discontinued operations, net of tax in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017.
Unaudited Interim Financial Information
The condensed consolidated balance sheet as of December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017, and its statements of cash flows for the nine months ended September 30, 2018 and 2017. The financial data and other information disclosed in the notes related to the three and nine months ended September 30, 2018 and 2017 are unaudited. The results for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period.
The unaudited interim financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 12, 2018.
Condensed Consolidated Statements of Cash Flows
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:
|
(in thousands) |
|
September 30, 2018 |
|
|
September 30, 2017 |
|
||
|
Cash and cash equivalents |
|
$ |
49,794 |
|
|
$ |
107,245 |
|
|
Restricted cash (short-term) |
|
|
584 |
|
|
|
102 |
|
|
Restricted cash (long-term) |
|
|
— |
|
|
|
60,682 |
|
|
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows |
|
$ |
50,378 |
|
|
$ |
168,029 |
|
Restricted cash on the statement of financial position for 2018 represents amounts pledged as collateral for operating lease obligations as contractually required. Restricted cash long-term on the statement of financial position for 2017 represents amounts
6
pledged for the settlement of the Company’s 4.50% convertible notes due 2020 (the “Convertible Notes”) as well as collateral for operating lease obligations as contractually required. These restrictions will lapse when the arrangements expire.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates, assumptions and judgments reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.
Marketable Securities
Marketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturities beyond one year as short term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of marketable debt securities as available-for-sale. Accordingly, these marketable debt securities are recorded at fair value and unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis.
3. Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: Level 1 observable inputs such as quoted prices in active markets for identical assets; Level 2 inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3 unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The following tables show assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
|
|
|
September 30, 2018 |
|
|||||||||
|
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
37,708 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Commercial paper |
|
|
— |
|
|
|
1,299 |
|
|
|
— |
|
|
Totals |
|
$ |
37,708 |
|
|
$ |
1,299 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
— |
|
|
$ |
3,986 |
|
|
$ |
— |
|
|
Commercial paper |
|
|
— |
|
|
|
19,151 |
|
|
|
— |
|
|
Government securities |
|
|
— |
|
|
|
11,915 |
|
|
|
— |
|
|
Totals |
|
$ |
— |
|
|
$ |
35,052 |
|
|
$ |
— |
|
|
|
|
December 31, 2017 |
|
|||||||||
|
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
89,310 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Totals |
|
$ |
89,310 |
|
|
$ |
— |
|
|
$ |
— |
|
7
During the nine months ended September 30, 2018 and the year ended December 31, 2017, there were no transfers between Level 1 and Level 2. The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities were determined through third-party pricing services.
The carrying amounts reflected in the condensed consolidated balance sheets for accounts payable, accrued expenses and other liabilities approximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a level 2 fair value measurement), reflecting interest rates currently available to the Company.
4. Marketable Securities and Cash Equivalents
The following table summarizes the Company’s marketable securities and cash equivalents as of September 30, 2018. The Company did not hold any marketable securities as of December 31, 2017.
|
|
|
September 30, 2018 |
|
|||||||||||||
|
(in thousands) |
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
37,708 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
37,708 |
|
|
Commercial paper |
|
|
1,299 |
|
|
|
— |
|
|
|
— |
|
|
|
1,299 |
|
|
Total cash equivalents |
|
$ |
39,007 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
39,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
3,987 |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
3,986 |
|
|
Commercial paper |
|
|
19,151 |
|
|
|
— |
|
|
|
— |
|
|
|
19,151 |
|
|
Government securities |
|
|
11,919 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
11,915 |
|
|
Total marketable securities |
|
$ |
35,057 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
35,052 |
|
|
Total cash equivalents and marketable securities |
|
$ |
74,064 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
74,059 |
|
5. Notes Payable
On July 2, 2018, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and among the Company, certain subsidiaries of the Company from time to time party thereto, the several banks and other financial institutions or entities from time to time parties thereto (collectively referred to as “Lender”) and Hercules Capital, Inc., in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, “Agent”) pursuant to which a term loan of up to an aggregate principal amount of $25.0 million is available to the Company. The Loan Agreement provides for an initial term loan advance of $15.0 million, which closed on July 2, 2018, and, at the Company’s option, two additional term loan advances of $5.0 million each upon the occurrence of certain funding conditions prior to December 31, 2018 and December 31, 2019, respectively (see Note 12, “Subsequent Events”).
The term loan bears interest at an annual rate equal to the greater of 9.25% and 9.25% plus the prime rate of interest minus 5.25%. The Loan Agreement provides for interest-only payments for eighteen months and repayment of the aggregate outstanding principal balance of the term loan in monthly installments starting on February 1, 2020 and continuing through August 1, 2021 (the “Maturity Date”). In addition, the Company paid a fee of $0.3 million upon closing and is required to pay a fee of 5.55% of the aggregate amount of advances under the Loan Agreement at maturity. At the Company’s option, the Company may elect to prepay all, but not less than all, of the outstanding term loan by paying the entire principal balance and all accrued and unpaid interest thereon plus a prepayment charge equal to the following percentage of the principal amount being prepaid: 3% if the term loan is prepaid during the first 12 months following the initial closing and 1% if the term loan is prepaid any time thereafter but prior to the Maturity Date.
In connection with the Loan Agreement, the Company granted Agent a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property but including licenses of and the proceeds from the sale, if any, of intellectual property, and a negative pledge on intellectual property. The Loan Agreement also contains certain events of default, representations, warranties and non-financial covenants of the Company. In addition, the Loan Agreement grants Lender an option to purchase up to an aggregate of $1.0 million of the Company’s equity securities, or instruments exercisable for or convertible into equity securities, sold to investors in any private financing within one year after the initial closing under the Loan Agreement upon the same terms and conditions afforded to such other investors.
8
Through September 30, 2018, the Company borrowed $15.0 million under the Loan Agreement and incurred $0.4 million of related debt discount and issuance costs, inclusive of the $0.3 million fee paid upon closing. The debt discount and issuance costs are being accreted to the principal amount of debt and being amortized from the date of issuance through the Maturity Date to interest expense using the effective-interest method. In addition, the Company accrues the related 5.55% final fee payment of $0.8 million due at maturity to outstanding debt by charges to interest expense using the effective-interest method over the same period. The effective interest rate of the outstanding debt under the Loan Agreement is approximately 12.5%.
As of September 30, 2018 notes payable consist of the following:
|
(in thousands) |
|
September 30, 2018 |
|
|
|
Notes payable |
|
$ |
15,000 |
|
|
Less: current portion |
|
|
— |
|
|
Notes payable, net of current portion |
|
|
15,000 |
|
|
Debt discount, net of accretion |
|
|
(331 |
) |
|
Accretion related to final payment |
|
|
83 |
|
|
Notes payable net of discount, long-term |
|
$ |
14,752 |
|
During the three and nine months ended September 30, 2018, the Company recognized $0.5 million of interest expense related to the Loan Agreement. No interest expense was associated with the Loan Agreement for the three and nine months ended September 30, 2017.
Estimated future principal payments due under the Loan Agreement are as follows as of September 30, 2018:
|
(in thousands) |
|
Note Principal Payments |
|
|
|
Remainder of 2018 |
|
$ |
— |
|
|
2019 |
|
|
— |
|
|
2020 |
|
|
8,402 |
|
|
2021 |
|
|
6,598 |
|
|
Total minimum note principal payments |
|
$ |
15,000 |
|
6. Accounts Payable, Accrued Expenses and Other
Accounts payable, accrued expenses and other as of September 30, 2018 and December 31, 2017 consisted of the following:
|
(in thousands) |
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||
|
Accounts payable |
|
$ |
953 |
|
|
$ |
2,887 |
|
|
Accrued goods and services |
|
|
2,404 |
|
|
|
5,682 |
|
|
Accrued clinical trial costs |
|
|
3,093 |
|
|
|
3,901 |
|
|
Accrued drug purchase costs |
|
|
8,185 |
|
|
|
222 |
|
|
Accrued payroll and related benefits |
|
|
2,651 |
|
|
|
2,884 |
|
|
Accrued restructuring expenses |
|
|
— |
|
|
|
628 |
|
|
Income taxes payable, discontinued operations |
|
|
361 |
|
|
|
— |
|
|
Deferred tax incentives |
|
|
1,402 |
|
|
|
1,402 |
|
|
Total accounts payable, accrued expenses and other |
|
$ |
19,049 |
|
|
$ |
17,606 |
|
7. Stock-Based Compensation
The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) is administered by the Company’s Board of Directors and permits the Company to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.
At September 30, 2018, there were 0.7 million shares remaining available for grant under the 2011 Plan.
During the nine months ended September 30, 2018 and 2017, the Company issued options to purchase 0.7 million and 2.1 million shares of common stock, respectively. Stock options granted to employees vest over a three-year period. Stock options granted to non-employee directors prior to 2018 generally vested immediately. Stock options granted to non-employee directors in 2018 vest
9
over a one-year period, ending on the earlier of the one-year anniversary of the grant date or the day prior to the Company’s next annual meeting of stockholders after the grant date.
The fair value of stock options granted to employees during the nine months ended September 30, 2018 and 2017 was estimated at the date of grant using the following assumptions:
|
|
|
Nine Months Ended September 30, |
||
|
|
|
2018 |
|
2017 |
|
Risk-free interest rate |
|
2.3 – 2.9% |
|
1.7 – 2.1% |
|
Expected dividend yield |
|
0% |
|
0% |
|
Expected term |
|
5.3 – 5.8 years |
|
5.0 – 6.1 years |
|
Expected volatility |
|
62 – 64% |
|
64 – 68% |
The Company uses the simplified method to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The computation of expected volatility is based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Management’s assumptions do not include an estimated forfeiture rate.
The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2018 and 2017 as follows:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
(in thousands) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
|
Employee awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
$ |
256 |
|
|
$ |
734 |
|
|
$ |
870 |
|
|
$ |
6,118 |
|
|
General and administrative expense |
|
|
526 |
|
|
|
846 |
|
|
|
1,456 |
|
|
|
4,992 |
|
|
Total stock-based compensation expense |
|
$ |
782 |
|
|
$ |
1,580 |
|
|
$ |
2,326 |
|
|
$ |
11,110 |
|
The following table summarizes stock option activity during the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Remaining |
|
|
Aggregate |
|
||
|
(in thousands, except per share amounts) |
|
Options |
|
|
Weighted-Average Exercise Price |
|
|
Contractual Term (in years) |
|
|
Intrinsic Value |
|
||||
|
Outstanding at December 31, 2017 |
|
|
1,616 |
|
|
$ |
22.07 |
|
|
|
6.65 |
|
|
$ |
60,031 |
|
|
Granted |
|
|
667 |
|
|
$ |
10.31 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(477 |
) |
|
$ |
21.58 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018 |
|
|
1,806 |
|
|
$ |
17.86 |
|
|
|
7.24 |
|
|
$ |
— |
|
|
Vested and expected to vest at September 30, 2018 |
|
|
1,806 |
|
|
$ |
17.86 |
|
|
|
7.24 |
|
|
$ |
— |
|
|
Exercisable at September 30, 2018 |
|
|
966 |
|
|
$ |
23.01 |
|
|
|
5.81 |
|
|
$ |
— |
|
The weighted-average grant date fair value per share of stock options granted during the nine months ended September 30, 2018 and 2017 was $6.18 and $4.06, respectively.
The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the fair value of the underlying common stock. The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2017 was $0.0 million and $2.3 million, respectively. There were no options exercised during the three and nine months ended September 30, 2018.
As of September 30, 2018, there was $5.5 million of total unrecognized stock-based compensation expense related to unvested employee stock awards. The Company expects to recognize this expense over a weighted-average period of approximately 2.38 years.
10
8. Net Income (Loss) Per Common Share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of dilutive common shares outstanding during the period. Dilutive shares outstanding is calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock from outstanding stock options based on the treasury stock method. In a period when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods where a loss is reported, there is no difference in basic and dilutive loss per share.
The Company follows the two-class method when computing net income (loss) per share when it has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participating rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends, as if all income for the period has been distributed or losses to be allocated if they are contractually required to fund losses. There were no amounts allocated to participating securities for the three and nine months ended September 30, 2018 and 2017, as the Company was in a loss position and had no shares that met the definition of participating securities outstanding as of September 30, 2018 and 2017.
The stock options and conversion premium on the Convertible Notes are excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2017 causes such securities to be anti-dilutive. Outstanding securities excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2018 and 2017 are shown in the chart below:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(in thousands) |
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2018 |
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2017 |
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2018 |
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2017 |
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Outstanding options to purchase common stock |
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1,806 |
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1,824 |
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1,806 |
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1,824 |
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Conversion of the Convertible Notes |
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— |
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1,216 |
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— |
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1,216 |
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9. Discontinued Operations
On April 3, 2017, the Company completed the sale of the Commercial Business. As of March