Earnings Transcript for MACK - Q3 Fiscal Year 2017

Executives: Geoff Grande - Senior Director of Communications Richard Peters - President and CEO Jean Franchi - CFO

Analysts: Eric Schmidt - Cowen and Company

Operator: Good morning and welcome to the Merrimack Pharmaceuticals Third 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 your host for today's conference Geoff Grande, Senior Director of Communications at Merrimack.

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

Richard Peters: Thanks Geoff, and thank you all for joining today's call. This quarter's progress marched continued execution of our 2017 goals delivering on the promise of the new Merrimack. Since announcing the asset sale to Ipsen at the beginning of the year, our priorities shifted towards rebuilding Merrimack's infrastructure around our revised corporate strategy. With our sharpened focus on research and clinical development, we are advancing our wholly-owned programs and driving forward our mission to transform cancer care. In just a few short months, we have rapidly assembled a team built to deliver on this approach. In April, Dr. Daryl Drummond was promoted to Head of Research. In this role he is tasked with utilizing our efficient biomarker driven approach to target selection and trial design as a way to enhance our discovery efforts and prepare our homegrown assets for the clinic. We also expanded the responsibilities of our General Counsel, Jeff Munsie to include corporate operations. In June, we hired Dr. Sergio Santillana as Chief Medical Officer to oversee our clinical programs and shepherd assets through proof-of-concept studies in well defined biomarker enriched populations. We also hired Ellen Forest to lead our talent and recruitment strategy as Head of Human Resources. In July, we announced the addition of Tom Needham as Chief Business Officer to drive value from our 10 clinical and preclinical programs in the form of partnerships and licensing agreements. Lastly in August, Jean Franchi rounded out the executive team as Merrimack's new Chief Financial Officer. In conjunction we have taken swift action to simplify Merrimack's capital structure through the settlement agreement with select convertible noteholders and subsequent tender offer to remaining noteholders both announced last month. Should all outstanding noteholders participate, this action has the potential to eliminate all of Merrimack's remaining debt at a discount offering our new leadership, a clean balance sheet and clearing the way for a fresh start. We will introduce Jean a little later before she takes us through the financials. In navigating to today's webcast, we also hope you took notice of our updated website which outlines the Merrimack brand with a new corporate strategy as we are rapidly approaching a Catalyst Rich 2018. I would now like to offer an update on our three clinical assets MM-12, MM-141 and MM-310 each of which we anticipate we report data in the year ahead. MM-121 our first in class fully human monoclonal antibody targeting the HER3 receptor is currently being evaluated in two randomized Phase 2 trials in non-small cell lung cancer and breast cancer respectively. These indications are important for several reasons including the prevalence of the biomarker heregulin that we have seen in prior MM-121 studies which approximates 50% in each, as well as the high unmet patient needs in the indications. The SHERBOC trial is an ongoing open label randomized Phase 2 study in combination with docetaxel versus docetaxel alone in prospectively selected heregulin positive patients with non-small cell adenocarcinoma of the lung that has progressed on a platinum containing regimen. Topline data I expected from this trial in the second half of 2018. We are also pleased to announced last week that MM-121 was granted orphan drug designation by the FDA for the treatment of heregulin positive non-small cell lung cancer which would potentially provide Merrimack with up to seven years of market exclusivity in this indication among other benefits if approved. As orphan drug designation is reserved for drugs targeting indications affecting fewer than 200,000 patients in the U.S., our biomarker driven strategy focused on niche patient subgroups paved away for this benefit. Moreover, this orphan designation is for heregulin positive non-small cell lung cancer regardless of line of therapy or histology potentially setting the stage for a broad lifecycle management in this indication. The SHERBOC trial is a second Phase 2 study of MM-121 for which the first clinical sites have already been opened and patient screening has recently begun. This trial is a randomized double-blind placebo-controlled study of MM-121 in combination with fulvestrant versus fulvestrant alone. It is evaluating prospectively selected heregulin positive, hormone receptor positive and HER2 negative postmenopausal metastatic breast cancer patients, who have progressed on a prior cyclin-dependent kinase inhibitor. We plan to offer guidance on timing of the data for SHERBOC once we have a sense of how patient enrollment is progressing. We continue to anticipate that the first patient would be dosed before year-end. Our next clinical asset MM-141 is a bispecific antibody targeting the IGF-1 and HER3 receptors. It is currently being evaluated in the CARRIE study a randomized Phase 2 trial that has completed enrollment in patients with front-line metastatic pancreatic cancer and high levels of free serum IGF-1 biomarker. The CARRIE study is expected to readout topline data in the first half of 2018 with a primary endpoint of progression free survival. Finally, our third clinical candidate MM-310 is an antibody directed nanotherapeutic that contains a novel prodrug of docetaxel encapsulated in a nanoliposome and targets the EphA2 receptor which is overexpressed in solid tumors. MM-310 is currently being studied in a Phase 1 open label dose escalation trial for which we expect safety data and recommended Phase 2 dose in the second half of 2018. On the surface, Merrimack's R&D strategy taps into a formula known to work. As clinical candidates mature to the point where they can be leveraged into value, the research engine repopulate's with promising new programs creating a pipeline with multiple shots on goal. However, at the very core of our disciplined corporate strategy is an efficient biomarker driven approach to development. It goes beyond the more common R&D strategy and it starts well before the clinic. Our process begins with a fundamental understanding of how cancer pathways and drug metabolism affect the problem we're trying to solve. Then we engineer antibodies and antibody directed nanotherapeutics designed to fit our understanding of the target. Ultimately, we test our candidates in biomarker defined more homogeneous patient populations. This results in smaller, shorter, more personalized studies, lowering developing costs and potentially accelerating the timeframe to clinically meaningful data. Currently our robust research engine boost six preclinical programs to complement our four clinical studies all of which rely on this biomarker driven approach. We look forward to the opportunity to provide potential clinical validation to this personalized approach with our preclinical data readout expected in 2018, the timing of which I will recap after we walk through the financials. I’ll now turn the call over to Jean Franchi our Chief Financial Officer. We are thrilled to welcome Jean who joins us most recently from Dimension Therapeutics where she served as Chief Financial Officer. Prior to the Dimension, she served as CFO at Good Start Genetics and spent 16 years at Genzyme including as Senior Vice President of Corporate Finance. Jean?

Jean Franchi: Thank you, Richard and good morning everyone. I'd like to add that I am truly honored to join this well respected team and our work to transform cancer care. As Richard discussed at the top of the call, in October we reached agreement with a group of convertible noteholders who claimed that we were obligated to offer to repurchase the outstanding 4.5% convertible notes due in 2020 as a result of our asset sale to Ipsen. Under the terms of the agreement, we agreed to paying-out for the plaintiffs $0.90 per dollar of convertible notes plus accrued interest and in amount towards the plaintiffs legal fees. In conjunction with this settlement we commenced a tender offer which is set to expire in November 10, 2017 to purchase all remaining convertible notes at the same way of $0.90 per dollar of converted notes plus accrued interest. In total the amount we expect to pay will require all convertible notes pursuant to the agreement and tender offer including expenses will approximate the 60 million reported as restricted cash in our financial statements as security to the plaintiffs' claims. Should all outstanding noteholders participate this action has a potential to eliminate all of our remaining debt and interest payments and allows the company to move forward with a clean balance sheet. Now on to the financials. As noted in our earnings release, research and development expenses for three months ended September 30, 2017 from continuing operations were $13.6 million compared to $28.2 million for the three months ended September 30, 2016. This represents a decrease of $14.6 million primarily due to Merrimack's refocus clinical and pre-clinical pipeline which Richard overviewed. Our general and administrative expenses for three months ended September 30, 2017 from continuing operations were $3.4 million. Compared to $6.4 million for the three months ended September 30, 2016 this represents a decrease of $3 million primarily due to the transition following the asset sale which led to decrease corporate expenses related to headcount and stock based compensation. During the quarter Silver Creek Pharmaceuticals' our previously majority owned subsidiary got Merrimack controlled and consolidated into our financial statements raised additional capital. This resulted in Merrimack no longer controlling Silver Creek. As a result we deconsolidated Silver Creek for Merrimack's consolidated financial statements effective July 14, 2017 and recognized a non-cash gain of approximately $10.8 million which is included in our net loss attributable to Merrimack's continuing operation. We ended the quarter with approximately $107.2 million of unrestricted cash and cash equivalents on hand. This represents a decrease of $28.3 million compared to balance of $135.5 million as of June 30, 2017. This is primarily due to tax payments related to the gain on the asset sales and the removal of Silver Creek's cash balance that was previously consolidated. It is important to note given the nature of these items we do not expect our cash balance to continue at this rate. As a result we believe our cash position along with the potential net milestone payments anticipated from Shire will provide the company with sufficient runway to fund our planned operations into the second half of 2019. With that, I'll now hand the call back to Richard for concluding remarks and to highlight our upcoming milestones.

Richard Peters: Thank you, Jean. We are excited to have you on the team. As we turn our attention towards 2018, we're propelled by our passion for outthinking cancer and our focused on milestones expected through the end of the next year. Namely before the end of this year, we expect to dose our first patient in the randomized Phase 2 SHERBOC study evaluating MM-121 in heregulin positive metastatic breast cancer patients. In the first half of 2018, we expect to report topline data from the randomized Phase 2 CARRIE study evaluating MM-141 in frontline metastatic pancreatic cancer. In the second half of next year, we anticipate reporting topline data for the randomized Phase 2 SHERLOC study of MM-121 in non-small cell lung cancer and also in the second half of next year, we expect to have safety data from our Phase 1 study of MM-310 in solid tumors. And with that, I'd like to thank you all for being here and we will now open up the line to any questions. Operator?

Operator: [Operator Instructions] And the first question will come from Eric Schmidt of Cowen and Company. Your line is open.

Eric Schmidt: Thanks for the update. Maybe for Jean just could you remind us what the next Shire milestones are and which milestones are in your assumption for the cash burn lasting through H2 of 2019?

Jean Franchi: Thank you Eric, an important question for Shire. The net milestones let me just outline them first for you the company has disclosed them before but just for the callers. 18 million from the sale of ONIVYDE and two additional major European countries is the first one outlined. 5 million related to the sale of ONIVYDE in the first major non-European, non-Asian countries and 10 million for the first patient dosing of pivotal clinical indication other than pancreatic cancer. So that’s kind of outlines the 33 million. In terms of how we thought about it in our runway as you know we think about our runway to propel the company through these key data inflection points into the second half of 2019 so to be prudent obviously we have the 107.2 million in cash but to be prudent we have not included all of the milestones we’ve included a portion of the milestones but we have not disclosed that portion of what milestones were included but not the full 33 million.

Eric Schmidt: So some risk-adjusted proportion perhaps?

Jean Franchi: Yes, that's right.

Eric Schmidt: And then on discontinued operations it looks like they are also a bit of a drag on your cash burn correct if I'm wrong about that but what efforts are you taking either Jean or Richard to bring those down?

Jean Franchi: Yes that's an excellent question Eric, I am glad you’re highlighting that because in the quarter here there are still some what I would call items that are not the nature of our operating business and they're truly related to two items that are critically important we have some estimated tax payments that we have paid out in the quarter, quarter three and just as a reminder we burned about 28 million in the quarter. But those estimated tax payments are basically the materiality of them as almost fully complete in the period. Secondly, due the deconsolidation of Silver Creek there is a portion there of having to deconsolidate that cash. So this is not reflective of our ongoing run rate due to the nature of these items.

Eric Schmidt: Any guidance on what the future of discontinued operations might look like very modest I assume or…?

Jean Franchi: Definitely Eric great question very modest - basically through that.

Operator: And the next question is from Anupam Rama of JPMorgan. Your line is now open.

Unidentified Analyst: This is [Tessa] filling in for Anupam this morning. Thank very much for taking my question. So maybe question on MM-310. Anything more you can tell us about the specifics of the safety data set we can expect to see and any additional color on what differentiating features that you are looking for here in this data set? Thanks very much.

Richard Peters: So we are currently going to the Phase 1 study, it's a multiple ascending dose so we're looking for the maximum tolerated dose and patients are being enrolled in different cohorts. Those studies progressing as planned. So that's what we're running right it's a Phase 1 study, we expect the results of the safety as well as the recommended Phase 2 dose to be unveiled in the second half of next year. As far as differentiation, the reason that MM-310 was developed by the team is of course docetaxel Taxotere as a very important chemotherapy but it does have significant problems in terms of toxicities right. And this is why we have to dose a drug maybe every three weeks to allow the bone morrow to recover. What are our scientist did is that they've developed a pro drug of docetaxel that is encapsulated in the nanoliposome to allow for a more steady release of the drug over time so changing the pharmacokinetics and pharmacodynamics and that’s been very well documented in preclinical models. And then on top of that the nonoliposome has been decorated with an antibody to the FNA2 receptor which is over expressed in tumors with the idea that you can then deliver these nanoliposome payload more specifically to tumor sites. And so we hope that this solution which is composed of a prodrug and nanoliposome plus of course the antibody on the nanoliposome will deliver not only improve safety but also efficacy.

Operator: Thank you. This concludes our Q&A session. I will now turn the call back to Geoff Grande for closing remarks.

Geoff Grande: Great, thank you everyone for joining us. The quick commercial will be at the Mizuho Conference in New York on December 5 and the JPMorgan Conference in San Francisco in January we hope to see you in one of those events. Have a great day.

Operator: Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect. Good day everyone.