Earnings Transcript for MACK - Q1 Fiscal Year 2017

Operator: Good morning and welcome to the Merrimack Pharmaceuticals First Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open up the call for your questions. I would now like to introduce you to your host for today's call Geoff Grande, Senior Director of Communications at Merrimack.

Geoff Grande: Thanks, Shannon. Good morning everyone and thank you for joining us on our call to discuss our first quarter 2017 financial results and recent progress. A press release detailing our results became available at 7

Dr. Richard Peters: Thank you, Geoff, and thank you, everyone, for joining the call today. It is a pleasure to update you on our progress over the past few months, which has been significant. As you know, I joined Merrimack in February, during what can only be considered a profoundly transformative time for the company. Over the past several months, we have refocused our strategy to become a well-capitalized research and clinical development company, dedicated to advancing a promising pipeline of oncology assets. In being of the helm of the company during such a major shift, I recognize the importance of seamless execution, to make the transition as smooth as possible. I also recognize the work that had been done prior to my joining in Merrimack to develop and launch ONIVYDE and to make the difficulty of pragmatic decision to move forward in divesting both ONIVYDE and our generic version of DOXIL to Ipsen. As I discussed on our last call, when coming onboard, I saw the inner potential within Merrimack, both in its deeply talented team and its pipeline assets. My goals on day one were as follows

Dr. Yasir Al-Wakeel: Thank you, Richard. With the sale of the commercial business at Ipsen, this quarter's financials are somewhat unique. I'll spend a little time at the beginning of the discussion, highlighting some of these accounting treatments, related to the commercial sale, before focusing on our core business and outlook going forward. Just a recap, the shareholder approval to sell the commercial business to Ipsen occurred on March 30th, that is during the first quarter. On the other hand, the actual closing of the transaction occurred on April 3, that was during the second quarter and as such, this has a significant impact on the presentation of the financials. To help orient you, the key accounting treatments pertaining to the transaction in the first quarter, as you will see in the financial statements, are twofold. First, we have a section on discontinued operations, within the income statement. This includes all revenues and expenses that are directly linked to the commercial business, but does not include any fixed overhead. This is unlike the carve-out financials provided in the proxy, where we will require to a portion, fixed overhead to the commercial business. Second, on the balance sheet, you'll see line items for assets and liabilities, held-for-sale, respectively. This treatment is necessary given the shareholder vote had been completed in the first quarter. With all that said, the actual gain from the sale of the asset will be reported in the second quarter financials, where assets held-for-sale will no longer be relevant. ONIVYDE sales were $16.1 million for the first quarter of 2017 compared to $15.8 million, during the fourth quarter of 2016. This is the last time we are reporting ONIVYDE sales, as we will focus on our continuing operations from hereon out. With that, let me briefly walk you through the financials pertaining to our continuing operations. Research and development expenses were $21.6 million for the first quarter of 2017 compared to $28 million for the first quarter of 2016, a decrease of $6.4 million or 23%. This decrease was primarily attributable to the shift to being a more focused, clinical development company. Similarly, general and administrative expenses were $5.6 million for the first quarter of 2017 compared to $6.5 million for the first quarter of 2016, a decrease of $0.9 million or 14%. This decrease was primarily attributable to lower headcount related to the restructuring activities, that occurred in the fourth quarter of 2016. From a balance sheet perspective, we ended the first quarter of 2017 with approximately $17.2 million in cash on hand. Of course, the Ipsen transaction has brought with a significant cash infusion, allowing us to not only return cash to shareholders in the form of a special dividend and restructure our balance sheet, but also to provide the company with what we believe to be sufficient runway to realize multiple potential value inflection points. With the aforementioned changes to our expenses and the net milestones we expect to receive from Shire, I would like to reiterate the cash runway guidance we provided in our press release, to fund our operations into the second half of 2019. I will now hand the call back to Richard for concluding remarks and the highlight our upcoming milestones.

Dr. Richard Peters: Thank you, Yasir. The last few months have been incredibly busy, but also incredibly rewarding, as I believe we have created a corporate structure and a development plan that is built for success. I want to quickly layout some key upcoming milestones that will drive value for our stockholders. We have declared a special dividend of approximately $1.06 per share, based on our current number of shares outstanding, which is payable on May 26, 2017. For MM-121, we expect to initiate Sarbox study in breast cancer patients this year and to have top line data from the Sarbox study in non-small lung cancer in 2018. For MM-141, we expect top line results from the CARRIE study in front-line pancreatic cancer in 2018. And for MM-310, we expect to have data for our recently initiated Phase 1 study in solid tumors in 2018. I would like to close by thanking our employees for making my first few months as CEO, so fulfilling. I'm very fortunate to have such a talented team and believe that our path is forward looking from here. As we focus on our vision of being a dedicated research and clinical development organization. And with that, I would like to thank you, everyone, for being here and we will now open the line to any questions. Operator?

Operator: [Operator Instructions] Our first question comes from Anupam Rama with JPMorgan. You may begin.

Eric Joseph: This is Eric on for Anupam this morning. Thanks for taking the question. Just a couple on MM-121 on lung cancer. I'm wondering if you could give a little bit more -- if you're able to be a little more specific on timing of the Phase 2 readouts in 2018 or at least provide a little color on in terms of how far along you are towards target enrollment? And how are you thinking about the thresholds for moving that program forward? Thanks.

Dr. Richard Peters: It's Richard. So I'll take that question. With regard to the study, I say, as I mentioned in my introductory comments, it's a proof-of-concept study. It's a robust proof-of-concept study because it's a Phase 2 randomized double-blind trial. Now as you are well aware, this study has had a number of stop-and-goes, right. The original design was the primary endpoint of progression free survival, then it was moved to an survival primary endpoint and then more recently, we went back to a progression free survival or primary endpoint with it much newer patient population. And every time, we do that, with this stop-and-goes, time lines can be a bit challenging because clinical sites when the amendment gets rollout and to sometimes slow down the enrollment, but they continue to enroll patients into the study and the feedback we have received from the investigators is that, they are very excited with this late final amendment, which is much more specific in terms of narrowing down the patient population and will give us the best chance of showing the clinical benefit of blocking their HER3 pathway in tumors that are addicted, so to speak, to the HER3 pathway by having a high heregulin levels. And then, we're adding, of course, MM-121, to the standard of care -- chemotherapy standard of care, which is docetaxel in that -- in second and third line. And so the investigators are very pleased with this amendment and exited. As I said, this really continues to accrue and we've reconfirmed that we expect top-level results in 2018. I'm not prepared to give more regularity on exactly during -- when during the year, but we'll reconfirm either in 2018. With regard to the threshold for the study, the study was designed, again, a primary endpoint of progression-free arrival, with the 3 months PFS, which is for the docetaxel arm made in PFS and approximately 5 months progression-free survival for the combination with MM-121. That is a significant clinical benefit, that gives you a hazard ratio of about 0.6, which means that patients who are in the control arm has a 40% more chance of progressing than patients who are in the investigational arm. That's a significant improvement. So that's the threshold that we are putting on our drug through, through, again, a robust Phase II randomized trial, that is double blind. So we expect the data when they come out, will be very clean and will be the best way can we can answer that hypothesis. Can we, if we block with the powerful antibody, MM-121, the HER3 receptor in patients with high expression of in their tumors of heregulin, can we provide additional clinical benefit to standard chemotherapy.

Operator: Our next question comes from Mike Ulz with Robert W. Baird. Your may begin.

Mike Ulz: Just with respect to the 310 in the Phase I study, I noticed there is an expansion phase, you are testing combination. Just wonder if you can clarify, what drove combinations you plan to test there? And then, secondly, that studies also targeting multiple solid tumor types, just curious at this point if you have a sense of what tumor types, you plan to prioritize? Or alternatively, what tumor types you think have the best chances for success?

Dr. Richard Peters: Yes, Mike, this is Richard. I'll take this question, again. So with regard to 310, first of all, we're very happy that we had been announced that we will start the Phase I study in Q1 and in March. We actually initiated the first site and dosed the first patient successfully. So we're very pleased with that trial moving forward. This is first for the Phase I. So we will first establish the safety and of course the recommended maximum tolerated dose and we expect to do that, again in 2018. As far as then moving to expansion cohort, cohorts, we certainly can do this as a single agent because, of course, docetaxel is that single agent and we would expect that MM-310, which is the pro-drug for docetaxel and embedded in the nanoparticle with a slower and more sustained release as well as decorated with the FNA2 antibody that recognizes the FNA2 receptor in tumors will allow us to deliver more specifically to tumor sites. So certainly, as a single agent, we can do special cohorts, but we can also do special cohorts in combination with other agents. We would like to see the results of the Phase I study, before we commit to any kind of combination partners, so to speak, because we need to really be driven by the data and follow the data. Secondly, as far as the [natural] supplies to the kinds of tumors, of course, as you know, docetaxel is a broadly used taxane in oncology, in multiple tumors and our hope is that, we are developing a next-generation taxane with this antibody directed nanotherapeutics that will have a higher therapeutic index, which means more and more efficacy and more safety. And so we could take it in multiple tumors, and once again, we will wait for the results of the Phase 1 and see since we are enrolling diversity of tumors in the Phase 1, see where we might get maybe the best signal and maybe take that forward in the expansion cohorts.

Mike Ulz: Great, thanks guys.

Operator: Thank you. Our next question comes from Jeff Chen with Cowen and Company. You may begin.

Jeff Chen: Maybe a first one on MM-121 in lung cancer. Can you give us a little bit sense of how dynamic HER expression is in lung cancer?

Dr. Richard Peters: Yes. So going back to 121 in lung cancer, the HER -- so we're targeting the HER3 receptor, which we intend to block. But we do this in patients, who have high heregulin expressions. And so in that case, we are selecting the patients whose tumors were that have the most addictive, so to speak to, to the HER3 pathway. The reason we're doing that, we've been informed by our prior trials, we've done other files in Phase 2 randomized trials in lung cancer, in breast cancer, in ovarian cancer with 121, and if you recall by retrospectively looking at data set, we found that there was a strong signal of clinical benefit if the drug was added to patients, whose tumors have high heregulin level. And so, this biomarker and this enrichment of the patient population has been really validated from prior studies and we have experiencing, I think, over 700 patients within MM-121. So we're very comfortable with we're testing the drug in non-small cell lung cancer. In this case, we have never done the patient populations to adenocarcinoma.

Jeff Chen: Great. That's very helpful thanks. And maybe just the second question on the up to $33 million in net milestone from Shire. When -- do you have an expectation of when that might occur or a little more refined time line on that?

Dr. Richard Peters: With regards to the $33 million, which as we previously disclosed in net milestones as composed of $23 million, that relate to marketing approval in European countries and $10 million for the first patient dosing in another indication. So that's the background on the $33 million. Specifically, with regards to your question, as we stated in the press release, we continue to anticipate that those payments will be made within our cash runway. In addition, I would add that given where ONIVYDE is with regards to already being sold in Europe as well as the plans developed in additional indications, we have a very high level of confidence that we will be achieving those milestones.

Jeff Chen: Thank you.

Operator: Thank you. Our next question comes from Tony Butler with Guggenheim Securities.

Tony Butler: It's around 121 or even on the biospecific and the use of heregulin as a biomarker. And I'm just curious in the adenocarcinomas, first of all, and you may have said this and in response to previous question, I apologize, but if I missed it. But what percentage of those adenocarcinomas are positive for heregulin? And when you use the test, obviously, there is a gradient of outcomes, high and you haven't spoken in a while, but could you remind us what's the cutoff, what's the most optimal cutoff to actually see the response with 121 or even in the bispecific, which you haven't moved in the clinic yet, but more importantly, you probably have some preclinical data point? Thanks very much.

Dr. Richard Peters: Thank you Tony, so with regard to heregulin or heregulin high we're targeting really patients whose tumors have high expression of heregulin. What we're doing is, getting the key [emphasize] the key strategy here at Merrimack, which I highlighted in the prior call is that, we really and we refine the strategy. We are really focusing on trying to really understand the problem we are trying to solve and that's through a very deep understanding of the cancer pathways. That's why having Daryl Drummond, as I mentioned in my introductory statements, appointed as Head of Research is very important. So really understanding the cancer pathway and here, we really understood the cancer pathway, where HER3 was very important, but more importantly, we design the specific solution against the problem we're trying to solve, which is a powerful monoclocal antibody that blocks the receptor. And the third part of that, 3-pronged strategy is to test these solutions in biomarker in rich patient populations. So they are much better defined and here, again, we're using heregulin, but more importantly, we're testing heregulin inside the tumor cells. And so the way that we are defining patients about high heregulin level is to inside of [irradiation] assay and looking at expression of heregulin in the tumor cells in the biopsy sample. And biopsy sample that have positive expression of heregulin are the ones that are declared as high heregulin. This is how we define high heregulin levels. Now when we do this, going back to your questions about what percentage of patients have high heregulin levels in several of our studies both this one as well as prior studies, we are seeing approximately a 50% rate, in other words, about half of the patients that seem to have high expression of heregulin in their tumor cells.

Operator: Thank you. That concludes the Q&A session. I would like to turn the call back over to management for closing remarks.

Dr. Richard Peters: Great, well, thank you, everyone, for joining us. We look forward to updating you, again, next quarter.

Operator: Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.