Earnings Transcript for MACK - Q4 Fiscal Year 2016

Executives: Geoffrey Grande - Investor Relations Gary Crocker - Chairman of the Board Richard Peters - President and Chief Executive Officer Yasir Al-Wakeel - Chief Financial Officer and Head of Corporate Development

Analysts: Kaitlin Sandor - Guggenheim Securities Eric Schmidt - Cowen & Company Eric Joseph - JPMorgan

Operator: Good day, ladies and gentlemen, and welcome to the Merrimack Pharmaceuticals’ Fourth Quarter 2016 Investor Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I’d now like to turn the conference over to Geoff Grande of Investor Relations. You may begin.

Geoffrey Grande: Thanks, Sonya. Good morning, everyone, and thank you for joining us on our call to discuss our fourth quarter and full-year 2016 financials and recent progress. My name is Geoff Grande, I’m the Director of Investor Relations here at Merrimack. A press release detailing our results issued a short while ago can be found in the Investor section of our website, merrimack.com, under the Press Releases heading. This call is being broadcast live and will be archived on our website for six weeks. Joining me on the call today are Gary Crocker, Chairman of the Board; Dr. Richard Peters, our President and Chief Executive Officer who joined Merrimack about a month ago; Dr. Yasir Al-Wakeel, CFO and Head of Corporate Development. We’ll end the formal portion of the call with time for Q&A. Before we begin, I need to remind you that during this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements about our future expectations and plans, including with respect to the confirmation of the asset sale with Ipsen, the potential success of our clinical development timeline and financial projections. These statements involve risks and uncertainties which are described in the Risk Factors section of our most recent Form 10-Q and the other reports we filed with the SEC, which are available online at sec.gov. While these forward-looking statements represent our views as of today, they should not be relied upon as representing our views in the future. We may update these statements in the future, but we are not taking on an obligation to do so. During this call, we will also be referencing non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release, which, as previously mentioned is on our website. And with that, I’ll turn it over to Gary.

Gary Crocker: Thank you, Geoff. It’s my real pleasure today to kick off our call and particular pleasure personally to introduce to you Richard Peters who’s joining us for his first call today as CEO of Merrimack. Before doing that, I’m going to be spending sometime reviewing, both the pending transaction with Ipsen and touching upon our new refocused targeted portfolio, both of which, of course, we announced in early January. First, an overview and an update on the transaction. As many of you know, Merrimack has entered into an agreement under which Ipsen will acquire ONIVYDE and our generic version of DOXIL. The transaction has a total value of up to $1.025 billion plus up to $33 million in net milestone payments retained by Merrimack pursuant to our exclusive licensing agreement with Shire for the ex-U.S. development and commercialization of ONIVYDE. Under the terms of the agreement, we will receive from Ipsen $575 million in cash at closing subject to a working capital adjustment, and up to $450 million, an additional regulatory approval-based milestone payments. As we announced previously, in conjunction with the transaction, we expect Merrimack shareholders to realize an immediate return of, at least, $200 million via special cash dividend. The Board anticipates approving the special cash dividend after the closing of the transaction and paying it soon thereafter. We also expect to pass-through to stockholders 100% of the proceeds received from the up to $450 million in milestone payments related to future ONIVYDE approvals, net of any taxes owed and subject to there being sufficient surplus at the time. Stockholder value will be further enhanced through our extinguishment of $175 million in outstanding senior secured notes due in 2022. As a result, in addition to significantly reducing our operating expense structure with this transaction, we are establishing a more appropriate capital structure for our development stage biopharmaceutical company. Taken together then, the stockholders will benefit from the upside potential of our new focus oncology pipeline, while owning a new Merrimack, refocused R&D company with a promising pipeline of clinical assets, and a more sustainable financial structure that will allow us to fund our long-term corporate objectives and strategies. In essence, the transaction allows us to return to our core strength in our original business mission, as we utilized a significant portion of the proceeds from this transaction to continue the development of our targeted clinical assets and our clinical portfolio, comprising several clinical and research stage assets. To that end, we plan to invest $175 million of the proceeds from the transaction to develop our pipeline, which we believe will enable us to support Merrimack’s refocus and fully fund these programs into the second-half of 2019. We’ve already identified achievable, near, and midterm value inflection points for our three targeted clinical asset projects and we expected to achieve well within our cash runway. And we filed our definitive proxy statement on February 14th of 2017, and plan to hold our special meeting of stockholders to vote on the transaction on May 30, 2017 – on March 30, 2017. We expect to close the transaction shortly after that special meeting. Now, as you know, this transaction marked the conclusion of a very comprehensive strategic pipeline review of all of our clinical and preclinical product candidates and assets in our portfolio, which was conducted by the Board with the input of several independent medical and financial advisors. In this review, we determined to focus our development efforts on MM-121, MM-141 and MM-310, in which we concluded represent the very best opportunities to optimize and extract value for shareholders, as well as for cancer patients worldwide. The entire Merrimack team is confident that our transaction with Ipsen combined with the refocusing of our portfolio on these high potential assets offers the best probability of success and optimize return on investment for our shareholders, and best positions Merrimack for the future and is in the best interest of Merrimack our shareholders and our cancer patients that we serve. Now, before turning it over to Dr. Peters, I want to reiterate how personally excited we are to have him on the Board at Merrimack and serving as our new CEO and President. As many of you know, he is a highly respected industry veteran and a thought leader with 25 years of biopharmaceutical industry experience and a proven record of building and leading organizations in diverse settings and lifecycle phases from development stage companies to large global pharmaceutical companies.

. : Since joining, Richard has brought an extraordinary additional new perspectives and insights, and he has the vision and experience necessary to oversee the critical task of advancing our streamlined clinical stage assets, as well as managing our preclinical research portfolios. We are tremendously confident that he will work well with the rest of our talented management team to drive future success here at Merrimack in this new chapter of our corporate history. And with that, I’ll turn it over to Richard.

Richard Peters: Thank you, Gary. Hello, everyone. Let me begin by saying how excited I’m to be leading Merrimack as the company sharpens its focus concentrating on several compelling molecules, which due to the Board’s efforts and the near-term infusion of capital, I believe are truly primed to realize their full potential. Since I started a little less than one-month ago, I had immersed myself in the business and I’m extremely encouraged with all I’ve seen. I’m fortunate to join a strong management team and a dedicated and highly talented team of employees who are as passionate as I’m about the assets we’ll be focusing on MM-121, MM-141 and MM-310. I’m very familiar with these molecules through my work at Sanofi and my diligence reviewing the company’s pipeline and engaging in the analytical process prior to joining Merrimack. I’m excited about the promise they hold for patients and for the company moving forward. For those of you who aren’t familiar with these three molecules, let me provide a brief overview. MM-121 is a first-in-class fully human monoclonal antibody targeting the HER3 receptor, a member of the epidermal growth factor receptor family that has been identified by us and others as an important cancer pathway. Our experience in over 700 patients in earlier trials suggest that heregulin, the natural ligand of the HER3 receptor maybe a predictor of clinical benefit from MM-121. We’re therefore leveraging heregulin as a biomarker to test MM-121 in more homogeneous patient populations in non-small cell lung cancer and breast cancer. Our non-small cell lung cancer trial is already ongoing and is currently being retooled into a simpler more focused proof-of-concept study with top line data readout expected by the end of 2018. We also plan to launch a Phase II clinical study in HER2 negative hormone receptor and heregulin positive breast cancer patients this year. Our second molecule MM-141 is a monoclonal by specific antibody that targets both the HER3 and the IGF-1 receptors. Both of these signaling pathways converge on the master control cancer pathway; PI-3 kinase, AKT, mTOR. Therefore, our hypothesis is that blocking two upstream redundant pathways that drive a master control might result in improved clinical benefit. We are testing the drug in pancreatic cancer patients with increased levels of the IGF-1 biomarker. We have retooled the ongoing Phase II study into a proof-of-concept trial and anticipate top line data in 2018. Finally, MM-310 builds on our nanoliposomal expertise that we have demonstrated through the ONIVYDE transaction. MM-310 is an antibody directed nanoliposome or AND for antibody directed nanoliposome and is differentiated in several key ways. The antibody targets the ephrin A2 receptor that is over-expressed in multiple tumors. The payload is a modified proprietary formulation of docetaxel and the nanoparticle is our most stable one to-date. MM-310 will enter the clinic in Q1 of this year and we expect to report the recommended phase to dose in 2018. I’d like to point out that the strategy underlying these assets have interesting similarities with my prior experience in rare diseases, where the focus of clinical development is on homogenous biomarker-driven patient populations. This approach results in accelerated timelines and translates into higher value for the patient population served. Therefore, our strategy moving forward at Merrimack will be to apply this similar approach to oncology and Merrimack is already well primed to be the leader here. First, our assets have been developed with a keen understanding of the biology and the problem we’re trying to solve. Second, we designed specific solutions that target the very problem we are looking to solve. And third, the development of each asset leverages the extensive use of biomarker enriched patient populations. With this in mind, we have already started to retool our clinical programs into smaller proof-of-concept studies ensuring the acceleration of the time to clinically meaningful data, while optimizing the use of available resources. We plan to drive an approach consisting of stepwise thoughtful steps in each program with an eye towards early data results and with a demonstration of clinical value we plan to seek partners to complete the assets, development, registration and commercialization in the future. I’m really excited to be working with the rest of the team to realize the potential of MM-121, MM-141 and MM-310. I see tremendous opportunities for success in our focus pipeline. Finally, for those listening today, I look forward to talking to many of you in the coming months about our progress. And with that, I will turn it over to Yasir.

Yasir Al-Wakeel: Thanks, Richard. During today’s call, I will walk through the economics behind the Ipsen asset sale shed important light on our cash runway going forward and briefly provide some color on our financial results. So before I get to that, as Head of Corporate Development, I want to begin by providing some context around our strategic thinking here at Merrimack. With any business, it’s critically important to constantly reassess the company’s strategic direction in light of new information. Over the past year, we have implemented a comprehensive review of both our rate of cash burn, as well as the model of being a fully integrated oncology company to ensure that we were acting in the best interests of stockholders, employees, and patients alike. With respect to cash burn, during the course of 2016, I’m happy to say our focus increasingly turned towards fiscal discipline. Our aggregate research and development and SG&A spend guidance, excluding one-time payments to PharmaEngine decreased from $225 million to $235 million, down to a range of $200 million to $210 million over the year, and we ultimately met that guidance with aggregate spend of $206.1 million. Furthermore, with the reduction in force, we implemented in October last year and the additional reduction that we announced in January to be implemented at closing, we hope to realize the full effect of those cost-cutting measures in 2017. Further, as outlined in our proxy statement, given the significant infrastructure costs associated with both selling and manufacturing a commercial product. And the fact that ONIVYDE would be our only commercial asset in a single indication for, at least, the next few years selling it makes sense both financially under the deal terms I’m about to review and strategically. The asset sale removes a significant fixed cost base that leaves a more streamlined company. Indeed as a more nimble and focused company, I’m confident that the new Merrimack management team will be better equipped to realize stockholder value. Importantly, this management team shares the vision that this is best achieved through targeted investments in a portfolio that we believe has significant upside potential. With that, let me shift the discussion to the ONIVYDE asset sale. As we have previously discussed, in January, we reached an agreement with Ipsen to sell ONIVYDE and our version of generic DOXIL for up to $1.025 billion. Additionally, under this agreement, Merrimack retained $33 million in net milestone payments pursuant to our exclusive licensing agreement with Shire. Under the terms of the agreement, we will receive from Ipsen $575 million in cash at closing, up to $450 million in additional regulatory approval-based milestone payments. Gross proceeds from these additional milestone payments include; $225 million for FDA approval in first-line treatment of pancreatic cancer, $150 million for FDA approval in small cell lung cancer, and $75 million for FDA approval in any third indication. The $33 million of net milestone payments includes the following payments related to ONIVYDE. $18 million from the sale of ONIVYDE in two additional major European countries, $5 million related to the sale of ONIVYDE in the first major non-European non-Asian country, and $10 million related to the first patient dosed in the planned small cell lung cancer trial. Upon receipt of the $575 million upfront payment from Ipsen, we plan to first invest $125 million to develop our streamlined oncology pipeline supporting and sustaining our strategic shift to a development stage by a pharmaceutical company. In our view, this targeted reinvestment is potentially the most compelling source of enhanced stockholder value going forward. Secondly, we will also extinguish $175 million in outstanding senior secured notes due in 2022, which will require an additional $20 million of funds in order to retire these notes. As a result, in addition to significantly reducing our operating expense structure with this transaction, we are establishing a more appropriate capital structure for a development stage biopharmaceutical company. Third, we expect to return, at least, $200 million to our stockholders through a special cash dividend. Our Board of Directors plans to approve the special cash dividend after closing the transaction and we expect it will be paid soon thereafter. We will announce a record date and x dividend date in due course. Finally, as mentioned previously, the Board also expects to return to stockholders 100% of the amounts received from the up to $450 million in additional regulatory approval-based milestone payments for ONIVYDE net of any taxes owed and subject to their being sufficient surplus at the time. The remaining proceeds will be reserved to pay transaction and restructuring costs, settle existing liabilities, and settle potential tax liabilities arising from the transaction. Finally, let me briefly highlight some of our financial results and outlook that we were – that we included in our press release this morning. We ended the year with approximately $21.5 million of cash on hand. With the expected closing of the assets sale with Ipsen, the receipt of up to $33 million in net milestone payments from Shire in 2017 and the completion of the headcount reduction and refocused R&D efforts that we announced in January and following both dividend and debt redemption as discussed, we expect to have financial resources sufficient to fund our operations into the second-half of 2019. Importantly, assuming we are able to close the asset sale with Ipsen shortly after our special meeting on March 30. We do not expect to need to nor intend to drawdown on our $25 million line of credit. Net revenue from ONIVYDE sales was $53 million for the year, or $15.8 million in the fourth quarter, representing an 8.7% increase over third quarter net sales of $14.5 million. We also recognized $87.1 million of license and collaborate – collaboration revenue for the year, $40 million of which was related to substantive milestones that were achieved under our collaboration with Shire. As I mentioned before, we met our previously provided guidance in regard to aggregate R&D and SG&A spend, which was $241.6 million inclusive of the $31.5 million of milestone obligations to PharmaEngine that we paid during the year. These items were the primary contributors to the $151.7 million of net loss attributable to Merrimack during 2016. I look forward to providing some more insight into the structure and financial aspects of our refocus operations and strategy once the transaction has closed. With that, let me hand the call back over to Gary for his concluding remarks.

Gary Crocker: Thanks, Yasir. We are very much excited about the opportunities ahead as a more efficient, well-capitalized, and tightly targeted and focused by our biopharmaceutical company. With our new capital structure, we expect to be able to seamlessly support and sustain this new strategic direction, including fully funding all of our multiple asset programs into the second-half of 2019. With Richard as CEO supported by our strong management team, the company has the leadership in place necessary to advance our objectives to drive value for our shareholders and to advance treatments for cancer patients. On behalf of our entire Board, I want to thank all of our driven and dedicated employees for their unwavering commitment to enhancing patient and shareholder value, particularly during these last several months. Merrimack’s strong positioning and value potential are a direct result of their persistence, their diligence, dedication and hard work. And I’m confident that we will build on this strong foundation in the coming years. Thank you all for listening today and for your continued support. And with that, I will open it up to questions.

Operator: Thank you [Operator Instructions] And our first question comes from Kaitlin Sandor of Guggenheim. Your line is now open.

Kaitlin Sandor: Hi, guys, thanks for the refresh on your kind reprioritization what you’re planning going forward. I just had a few quick clinical questions for MM-141, how is the enrollment progressing? Is it still on track to be complete in June the reduced 80 patients? And then for MM-310, I know you said you’ve planned on initiating first quarter. I didn’t see it on clinical trials earlier, can you give us a little more detail on where you’re adding the initiation process? Thanks so much.

Richard Peters: Hey, Kaitlin, thank you. This is Richard Peters. Thank you for both questions. We don’t comment specifically on the enrollment of active trials. What I would reiterate is that for MM-141, we are we have retooled a study into a proof-of-concept study that is a smaller study and we expect top line data readout in 2018, and so that’s – we’re reconfirming that. As far as the MM-121, I mentioned that we have a breast cancer study that is under development as per my introductory remarks and we expect to initiate a trial this year.

Kaitlin Sandor: I’m sorry, I had asked about MM-310, sorry. Phase 1?

Richard Peters: So 310, again, we expect due to start of the trial in Q1 of this year for 310.

Kaitlin Sandor: Yes, it just wasn’t on clinicaltrials.gov yet, so I was wondering if there’s any more detail on where you’re at in setting that up?

Richard Peters: We’re tracking along to a start for Q1.

Kaitlin Sandor: Okay. Thanks.

Operator: Thank you. And our next question comes from Eric Schmidt of Cowen & Company. Your line is now open.

Eric Schmidt: Good morning and thanks for taking my questions. Gary, in your overview, you talked about the pipeline having some near-term value inflection points, as well as intermediate longer-term inflection points. Is there a readout in 2017, or a particular milestone in 2017 that you would provide us with this meaningful near-term trigger?

Gary Crocker: Eric, I appreciate your question. Let me defer that to Richard, who is little closer to the ground on these studies.

Richard Peters: Yes, thank you, Eric. Again, it’s Richard. The readout of the clinical trials are expected to appear in 2018. So that’s for 121 lung by the end of 2018 for 141 in pancreatic cancers during the year of 2018. And also in 2018 by then, we should have the Phase I completed for 310 and have a dose that we can then take into Phase II. In terms of earlier value creating events, we can look at. First, frankly, the ONIVYDE transaction with Ipsen. And of course, this year, as I mentioned to Kaitlin, we will initiate in this quarter the 310 trial, as well as later in the year the Phase II randomized proof-of-concept study in breast cancer for MM-121.

Eric Schmidt: Okay. Thank you. And Richard, you also cited your familiarity, excuse me, with MM-121 is something that attracted you to the Merrimack team. Yet I guess I find it a little ironic that Sanofi obviously opted to not develop MM-121 further. So when you were at Sanofi, did you disagree with that decision, or could you provide some background for how and why that decision was made? Thanks.

Richard Peters: Thank you for the provocative question, Eric. So I was very well aware of Merrimack as a whole company the entire pipeline, of course, because I was at Sanofi oncology and I was part of the team there. And then after that I moved into the rare disease space for few years. What I can say is that, I voted with my feet. I’m here as a new CEO for Merrimack, and I’m very excited to be able to work on MM-121, as well as the other pipeline agents. One of the thing that I really want to emphasize is that, the approach that we’re taking, which is to really understand the problem that we’re trying to solve right the cancer pathways through network biology and 121 is a perfect example of that understanding the importance of the ErbB3 pathway and how cells use that as a survival pathway. Then designing a specific solution against the problem that one is trying to solve, so here a monoclonal antibody blocking that pathway. But importantly, thirdly, testing it in more homogenous patient populations of biomarker enriched and that three-pronged approach I think is frankly the way that oncology should be moving forward. Certainly, we’re doing it in the rare disease space and I intend to make sure that we drive this consistently across our portfolio here in oncology at Merrimack.

Eric Schmidt: Great. Thanks and good luck in your tenure at the company.

Richard Peters: Thank you so much.

Operator: Thank you. And our next question comes from Anupam Rama of JPMorgan. Your line is now open.

Eric Joseph: Hey, guys, it’s Eric in for Anupam. Thanks for taking the question. Just a quick clinical one on 310 from us here. Just wondering how you’re thinking about kind of establishing initial proof-of-concept and the criteria for Phase II dose selection, and maybe how you’re thinking about differentiating, restoring differentiation from docetaxel with return and also statistically whether you’re being incorporating tumor biopsy biomarker analysis as part of the Phase I protocol? Thanks.

Richard Peters: Thank you for the great question, Anupam, this is Richard again. So for 310, we’re right now at the stage where we’re going to start the Phase I study and that’s really to find the maximum tolerated dose. And as I said, we’ll start the study in Q1 of this year. So I’m not ready to comment more in terms of how we’re going to be designing a Phase II trial. What I can tell you is that, 310 is a very interesting molecule, because it’s an antibody directed nanoparticle. So you compared to docetere docetaxel, but it has really three components and I call this a solution not a drug, right. It has the antibody that targets the ephrin A2 receptorthat is over expressed in the number of tumors to directly to the nanoliposome, then it has inside a payload, which is a proprietary formulation of docetaxel. And then thirdly, we have this nanoliposome layer – the lipid layer that is actually the more stable that we have to-date. So this combination of these three factors makes us very excited about developing 310 and we’d be glad to provide more information in the future as we move forward.

Eric Joseph: Got it. Thanks for taking my question.

Operator: Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to management for any further remarks.

Geoffrey Grande: Great. Well, thank you everyone for joining us. We look forward to updating you again next quarter.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.