Merrimack
MERRIMACK PHARMACEUTICALS INC (Form: 10-Q, Received: 05/10/2017 16:56:51)

 

 

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 March 31, 2017

OR

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

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 May 9, 2017, there were 132,427,921 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

 

 

P age

Item 1.

Financial Statements.

2

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2017 and December 31, 2016 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss –Three Months Ended March 31, 2017 and 2016 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2017 and 2016 (unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

26

 

 

 

Item 4.

Controls and Procedures.

27

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

28

 

 

 

Item 1A.

Risk Factors.

29

 

 

 

Item 6.

Exhibits.

55

 

 

Signatures

56

 

 

Exhibit Index

57

 

 

 

i


 

FORWARD-LOOKING STATEMENTS

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:

 

our plans to develop and commercialize our clinical stage product candidates and diagnostics;

 

our ongoing and planned discovery programs, preclinical studies and clinical trials;

 

the timing of the completion of our clinical trials and the availability of results from such trials;

 

our ability to establish and maintain collaborations for our product candidates;

 

our receipt of payments related to the milestone events under the asset purchase and sale agreement, or the asset sale agreement, with Ipsen S.A, or Ipsen, or under the license and collaboration agreement between Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH, collectively Baxalta, and Ipsen, when expected or at all;

 

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

 

the rate and degree of market acceptance and clinical utility of our products;

 

our intellectual property position;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

the potential advantages of our systems biology approach to drug research and development;

 

the potential use of our systems biology approach in fields other than oncology;

 

the outcome of litigation against us; and

 

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. 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


 

PAR T I

FINANCIAL INFORMATION

Item 1. Financi al Statements.

Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

(unaudited)

 

(in thousands, except per share amounts)

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,155

 

 

$

21,524

 

Restricted cash

 

 

102

 

 

 

102

 

Accounts receivable, net

 

 

43

 

 

 

275

 

Prepaid expenses and other current assets

 

 

2,338

 

 

 

2,239

 

Assets held for sale

 

 

26,634

 

 

 

33,295

 

Total current assets

 

 

46,272

 

 

 

57,435

 

Restricted cash

 

 

674

 

 

 

674

 

Property and equipment, net

 

 

12,852

 

 

 

14,212

 

Other assets

 

 

27

 

 

 

27

 

Assets held for sale, net of current portion

 

 

8,814

 

 

 

9,135

 

Total assets

 

$

68,639

 

 

$

81,483

 

Liabilities, non-controlling interest and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

38,756

 

 

$

29,369

 

Deferred rent

 

 

2,054

 

 

 

2,014

 

Liabilities held for sale

 

 

67,187

 

 

 

56,839

 

Total current liabilities

 

 

107,997

 

 

 

88,222

 

Deferred rent, net of current portion

 

 

2,868

 

 

 

3,386

 

Long-term debt

 

 

218,041

 

 

 

216,861

 

Liabilities held for sale, net of current portion

 

 

16,877

 

 

 

25,673

 

Total liabilities

 

 

345,783

 

 

 

334,142

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

(1,406

)

 

 

(1,539

)

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000 shares authorized at March 31, 2017 and

   December 31, 2016; no shares issued or outstanding at March 31, 2017 or

   December 31, 2016

 

 

 

 

 

 

Common stock, $0.01 par value: 200,000 shares authorized at March 31, 2017 and

   December 31, 2016; 131,911 and 130,197 shares issued and outstanding at

   March 31, 2017 and December 31, 2016, respectively

 

 

1,319

 

 

 

1,302

 

Additional paid-in capital

 

 

707,428

 

 

 

702,377

 

Accumulated deficit

 

 

(984,485

)

 

 

(954,799

)

Total stockholders’ deficit

 

 

(275,738

)

 

 

(251,120

)

Total liabilities, non-controlling interest and stockholders’ deficit

 

$

68,639

 

 

$

81,483

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

Merrimack Pharmaceuticals, Inc.
Condensed Consolida
ted Statements of Operations and Comprehensive Loss

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(in thousands, except per share amounts)

 

2017

 

 

2016

 

Costs and expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

$

21,605

 

 

$

28,002

 

General and administrative expenses

 

 

5,634

 

 

 

6,452

 

Total costs and expenses

 

 

27,239

 

 

 

34,454

 

Loss from continuing operations

 

 

(27,239

)

 

 

(34,454

)

Other income and expenses:

 

 

 

 

 

 

 

 

Interest income

 

 

14

 

 

 

72

 

Interest expense

 

 

(1,979

)

 

 

(3,290

)

Other expense, net

 

 

(2

)

 

 

(43

)

Loss from continuing operations

 

 

(29,206

)

 

 

(37,715

)

Discontinued operations:

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

(947

)

 

 

(943

)

Net loss

 

 

(30,153

)

 

 

(38,658

)

Net loss attributable to non-controlling interest

 

 

(467

)

 

 

(185

)

Net loss attributable to Merrimack Pharmaceuticals, Inc.

 

$

(29,686

)

 

$

(38,473

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

(14

)

Other comprehensive loss

 

 

 

 

 

(14

)

Comprehensive loss

 

$

(29,686

)

 

$

(38,487

)

Amounts attributable to Merrimack Pharmaceuticals, Inc.:

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(28,739

)

 

$

(37,530

)

Loss from discontinued operations

 

 

(947

)

 

 

(943

)

Net loss attributable to Merrimack Pharmaceuticals, Inc.

 

$

(29,686

)

 

$

(38,473

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.22

)

 

$

(0.32

)

Loss from discontinued operations

 

 

(0.01

)

 

 

(0.01

)

Net loss per share

 

$

(0.23

)

 

$

(0.33

)

Weighted-average common shares used per share calculations—basic and

   diluted

 

 

130,588

 

 

 

116,064

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(30,153

)

 

$

(38,658

)

Less:

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(947

)

 

 

(943

)

Loss from continuing operations

 

 

(29,206

)

 

 

(37,715

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Non-cash interest expense

 

 

1,508

 

 

 

2,190

 

Depreciation and amortization expense

 

 

1,182

 

 

 

1,198

 

Stock-based compensation expense

 

 

796

 

 

 

2,510

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

232

 

 

 

11

 

Accounts payable, accrued expenses and other

 

 

8,054

 

 

 

(2,231

)

Other assets and liabilities, net

 

 

(690

)

 

 

1,324

 

Net cash used by continuing operations for operating activities

 

 

(18,124

)

 

 

(32,713

)

Net cash provided by (used in) discontinuing operations for operating activities

 

 

7,968

 

 

 

(20,810

)

Net cash used in operating activities

 

 

(10,156

)

 

 

(53,523

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

 

 

 

(84,262

)

Purchases of property and equipment

 

 

(290

)

 

 

(1,229

)

Net cash used in investing activities

 

 

(290

)

 

 

(85,491

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of options to purchase common stock

 

 

4,053

 

 

 

1,645

 

Proceeds from issuance of preferred stock by Silver Creek Pharmaceuticals, Inc.

 

 

2,024

 

 

 

 

Net cash provided by financing activities

 

 

6,077

 

 

 

1,645

 

Net decrease in cash and cash equivalents

 

 

(4,369

)

 

 

(137,369

)

Cash and cash equivalents, beginning of period

 

 

21,524

 

 

 

185,606

 

Cash and cash equivalents, end of period

 

$

17,155

 

 

$

48,237

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable, accrued expenses and other

 

$

34

 

 

$

388

 

Receivables related to stock option exercises in prepaid expenses and other current assets

 

 

76

 

 

 

53

 

Supplemental disclosure of cash flows

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,368

 

 

$

2,813

 

 

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 biopharmaceutical company based in Cambridge, Massachusetts that is outthinking cancer to ensure that 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 product candidates, including three in clinical studies and several others in preclinical development, fit into the Company’s strategy of (1) understanding the biological problems the Company is trying to solve, (2) designing specific solutions and (3) developing those solutions for biomarker-selected patients. This three-pronged strategy seeks to ensure optimal patient outcomes.

On April 3, 2017, the Company announced that it commenced operating as a new, refocused research and clinical development company in connection with the completion of its previously announced transaction (the “Asset Sale”) with Ipsen S.A. (“Ipsen”). Pursuant to the Asset Purchase and Sale Agreement, dated as of January 7, 2017 (the “Asset Sale Agreement”), between the Company and Ipsen, the Company sold to Ipsen its right, title and interest in the non-cash assets, equipment, inventory, contracts and intellectual property primarily related to or used in the Company’s business operations and activities involving or relating to developing, manufacturing and commercializing ONIVYDE, the Company’s first commercial product, and MM-436 (the “Commercial Business”). The Company received $575.0 million in cash (subject to a working capital adjustment) upon the closing of the Asset Sale and is eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. The Company also retained the rights to receive net milestone payments of up to $33.0 million that may become payable pursuant to the license and collaboration agreement with Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH (collectively, “Baxalta”) for the ex-U.S. development and commercialization of ONIVYDE.

The Company’s non-commercial assets, including its clinical and preclinical development programs (the “Pipeline Business”), were not included in the Asset Sale and remain assets of the Company. As of the closing of the Asset Sale, the Company’s most advanced programs are as follows:

 

MM-121 (seribantumab), a fully human monoclonal antibody that binds to the ErbB3 (HER3) receptor and targets heregulin positive cancers. The Company is currently conducting the Phase 2 randomized SHERLOC clinical trial evaluating MM-121 in heregulin positive non-small cell lung cancer patients and plans to initiate another Phase 2 randomized clinical trial in 2017 in heregulin positive, hormone receptor positive, ErbB2 (HER2) negative, metastatic breast cancer patients;

 

MM-141 (istiratumab), a fully human bispecific tetravalent monoclonal antibody designed to block tumor survival signals by targeting receptor complexes containing the insulin-like growth factor 1 (“IGF-1”) receptor and ErbB3 (HER3) cell surface receptors. The Company is currently conducting the Phase 2 randomized CARRIE clinical trial evaluating MM-141 in previously untreated metastatic pancreatic cancer patients with high levels of free IGF-1 in combination with nab-paclitaxel and gemcitabine; and

 

MM-310, an antibody-directed nanotherapeutic (“ADN”) that contains a novel prodrug of the highly potent chemotherapy docetaxel and targets the ephrin receptor A2 (“EphA2”) receptor, which is highly expressed in most solid tumor types. MM-310 was designed to improve the therapeutic window of docetaxel in major oncology indications, such as prostate, ovarian, bladder, gastric, pancreatic and lung cancers. The Company initiated a Phase 1 clinical trial to evaluate safety and preliminary activity of MM-310 in the first quarter of 2017.

In addition to its clinical-stage programs, the Company has several product candidates in preclinical development and a discovery effort advancing additional candidate medicines.

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.

5


 

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and whic h contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Until such time, if ever, as the Company can generate sufficient product revenues, the Company expects to finance its cash needs thro ugh a combination of equity offerings, debt financings, collaborations, licensing arrangements and other marketing and distribution arrangements. The Company could also engage in discussions with third parties regarding partnerships, joint ventures, combin ations or divestitures of one or more of its businesses as it seeks to further the development of its research programs, improve its cash position and maximize stockholder value.

 

 

2. Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements as of March 31, 2017 and December 31, 2016, and for the three months ended March 31, 2017 and 2016, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.

The information presented in the condensed consolidated financial statements and related notes as of March 31, 2017, and for the three months ended March 31, 2017 and 2016, is unaudited. The December 31, 2016 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Interim results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017, or any future period.

As of March 31, 2017, the Commercial Business met all the conditions to be classified as held-for-sale and represents a discontinued operation since the disposal of the Commercial Business is a strategic shift that will have a major effect on the Company’s operations and financial results. The Company will not have further significant involvement in the operations of the discontinued Commercial Business. 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 for all periods presented. In addition, in the condensed consolidated balance sheet as of March 31, 2017 and December 31, 2016, the assets and liabilities held for sale have been presented separately. For additional information, see Note 3, “Sale of Commercial Business.”

These condensed consolidated financial statements include the accounts of the Company and Silver Creek Pharmaceuticals, Inc. (“Silver Creek”), representing a variable interest entity that the Company is required to consolidate. All intercompany transactions and balances have been eliminated in consolidation.

As of March 31, 2017, the Company’s unrestricted cash and cash equivalents includes $2.8 million of cash and cash equivalents held by Silver Creek. This $2.8 million held by Silver Creek is designated for the operations of Silver Creek.

In the first quarter of 2017, Silver Creek entered into a Series C preferred stock financing, issuing 1.4 million shares of Series C preferred stock at $1.50 per share for proceeds of $2.0 million. In conjunction with this sale in the first quarter of 2017, Silver Creek also issued warrants to purchase 1.8 million shares of Silver Creek Series C preferred stock to investors. As of March 31, 2017, the Company held a 52% ownership interest in Silver Creek and maintained control over the Silver Creek Board of Directors through its voting rights. As such, the Company remains the primary beneficiary of Silver Creek.

The change in the non-controlling interest related to Silver Creek was as follows:

 

(in thousands)

 

Non-

Controlling

Interest

 

Balance at December 31, 2016

 

$

(1,539

)

Net loss attributable to Silver Creek

 

 

(467

)

Issuance of Silver Creek Series C preferred stock

 

 

600

 

Balance at March 31, 2017

 

$

(1,406

)

6


 

 

(in thousands)

 

Non-

Controlling

Interest

 

Balance at December 31, 2015

 

$

239

 

Net loss attributable to Silver Creek

 

 

(185

)

Balance at March 31, 2016

 

$

54

 

 

 

3. Sale of Commercial Business

Ipsen

On April 3, 2017, the Company completed the sale of the Commercial Business to Ipsen. Pursuant to the Asset Sale Agreement, the Company may be entitled to up to $450.0 million in additional payments based on the achievement by or on behalf of Ipsen of certain milestone events if the U.S. Food and Drug Administration (the “FDA”) approves ONIVYDE for certain indications as follows: (i) $225.0 million upon the regulatory approval by the FDA of ONIVYDE for the first-line treatment of metastatic adenocarcinoma of the pancreas (a) in combination with fluorouracil and leucovorin (with or without oxaliplatin), (b) in combination with gemcitabine and abraxane or (c) following submission and filing of regulatory approval by Ipsen for purposes of commercialization by Ipsen; (ii) $150.0 million upon the regulatory approval by the FDA of ONIVYDE for the treatment of small cell lung cancer after failure of first-line chemotherapy; and (iii) $75.0 million upon the regulatory approval by the FDA of ONIVYDE for an additional indication unrelated to those described above.

In connection with the sale of the Commercial Business, on April 3, 2017, the Company entered into a transition services agreement, a sublease agreement and an intellectual property license agreement with Ipsen, among others, as further described in Note 13, “Subsequent Events.” Pursuant to the transition services agreement, the Company and Ipsen are providing certain services to each other for a period of 24 months following the closing, including Ipsen’s agreement to manufacture MM-310 and to perform certain quality related services.

 

Discontinued Operations and Assets Held for Sale

The condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 reflect the operations of the Commercial Business as a discontinued operation. Discontinued operations for the three months ended March 31, 2017 and 2016 includes the following:

 

(in thousands)

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Product revenues, net

 

$

16,135

 

 

$

9,968

 

License and collaboration revenues

 

 

7,797

 

 

 

11,313

 

Other revenues

 

 

1,973

 

 

 

 

Total revenues

 

 

25,905

 

 

 

21,281

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,890

 

 

 

711

 

Research and development expenses

 

 

3,730

 

 

 

4,880

 

Selling, general and administrative expenses

 

 

8,733

 

 

 

11,343

 

Restructuring expenses

 

 

5,265

 

 

 

 

Total costs and expenses

 

 

21,618

 

 

 

16,934

 

Other income and expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

(5,234

)

 

 

(5,290

)

Loss from discontinued operations

 

 

(947

)

 

 

(943

)

 

7


 

The carrying value of the assets and liabilities of the Commercial Business classified as “Assets held for sale” in the condensed consolidated balance sheets are as follows:

 

(in thousands)

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

8,985

 

 

$

17,194

 

Inventory

 

 

15,532

 

 

 

14,554

 

Prepaid expenses and other current assets

 

 

2,117

 

 

 

1,547

 

Total current assets held for sale

 

 

26,634

 

 

 

33,295

 

Property and equipment, net

 

 

1,376

 

 

 

1,553

 

Intangible assets, net

 

 

3,833

 

 

 

3,977

 

Goodwill

 

 

3,605

 

 

 

3,605

 

Total long-term assets held for sale

 

 

8,814

 

 

 

9,135

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

 

28,563

 

 

 

20,613

 

Deferred revenues

 

 

38,624

 

 

 

36,226

 

Total current liabilities held for sale

 

 

67,187

 

 

 

56,839

 

Deferred revenues, net of current portion

 

 

16,877

 

 

 

25,673

 

Total liabilities held for sale

 

 

16,877

 

 

 

25,673

 

 

Inventory

Inventory of the Commercial Business as of March 31, 2017 and December 31, 2016 consisted of the following:

 

(in thousands)

 

March 31,

2017

 

 

December 31,

2016

 

Raw materials

 

$

4,246

 

 

$

4,483

 

Work in process

 

 

9,053

 

 

 

8,651

 

Finished goods

 

 

2,233

 

 

 

1,420

 

Total inventory

 

$

15,532

 

 

$

14,554

 

 

Restructuring Activities

On January 8, 2017, the Company announced a reduction in headcount by approximately 30% in connection with the Asset Sale and the completion of its strategic pipeline review. Upon the closing of the Asset Sale and the completion of its strategic pipeline review, the Company had approximately 80 employees.

Under this corporate restructuring, for the three months ended March 31, 2017, the Company recognized total restructuring expenses of $5.3 million, which was related to contractual termination benefits for employees with pre-existing severance arrangements. These one-time employee termination benefits are comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures. The Company anticipates that the majority of these payments will be made during the second quarter of 2017. The expense of $5.3 million was included in discontinued operations, as the costs are directly associated with the sale of the Commercial Business.

The following table summarizes the charges related to the restructuring activities as of March 31, 2017:

 

(in thousands)

 

Accrued Restructuring Expenses at

December 31, 2016

 

 

Expenses

 

 

Less: Payments

 

 

Accrued Restructuring Expenses at

March 31, 2017

 

Severance, benefits and related costs

 

$

 

 

$

5,265

 

 

$

 

 

$

5,265

 

Totals

 

$

 

 

$

5,265

 

 

$

 

 

$

5,265

 

 

See Note 13, “Subsequent Events,” in the accompanying notes to the condensed consolidated financial statements for additional information.

8


 

 

License and Collaboration Agreements Related to the Asset Sale

Baxalta

On September 23, 2014, the Company and Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA entered into a license and collaboration agreement (the “Baxalta Agreement”) for the development and commercialization of ONIVYDE outside of the United States and Taiwan (the “Licensed Territory”). In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta Agreement was assigned to Baxalta during the second quarter of 2015. As part of the Baxalta Agreement, the Company granted Baxalta an exclusive, royalty-bearing right and license under the Company’s patent rights and know-how to develop and commercialize ONIVYDE in the Licensed Territory.

On April 3, 2017, the Baxalta Agreement and all related agreements, including the Company’s agreement related to the commercial supply of ONIVYDE, were assigned to Ipsen in connection with the Asset Sale. Pursuant to the Asset Sale Agreement, the Company retained the rights to receive net milestone payments of up to $33.0 million that may become payable pursuant to the Baxalta Agreement for the ex-U.S. development and commercialization of ONIVYDE, which is comprised of potential payments of $18.0 million from the sale of ONIVYDE in two additional major European countries, $5.0 million related to the sale of ONIVYDE in the first major non-European, non-Asian country and $10.0 million for the first patient dosed in the planned small cell lung cancer trial.

PharmaEngine, Inc.

On May 5, 2011, the Company and PharmaEngine, Inc. (“PharmaEngine”) entered into an assignment, sublicense and collaboration agreement (the “PharmaEngine Agreement”) under which the Company reacquired rights in Europe and certain countries in Asia to ONIVYDE. In exchange, the Company agreed to pay PharmaEngine a nonrefundable, noncreditable upfront payment of $10.0 million and up to an additional $80.0 million in aggregate development and regulatory milestones and $130.0 million in aggregate sales milestones.

On April 3, 2017, the PharmaEngine Agreement and all related agreements, including the Company’s agreement related to its commercial supply of ONIVYDE, were assigned to Ipsen in connection with the Asset Sale.

 

 

4. Going Concern

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 December 31, 2016, the Company had $21.5 million in unrestricted cash and cash equivalents, had suffered recurring losses from operations and had negative working capital and cash outflows from operating activities. Based on the evaluation completed in connection with the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, including consideration of management’s plans, the Company previously concluded that there was substantial doubt as to its ability to continue as a going concern within one year after March 1, 2017, the date that the consolidated financial statements were issued.

On April 3, 2017, the Company closed the Asset Sale with Ipsen and received a $575.0 million upfront cash payment (subject to a working capital adjustment). The Company used a portion of the cash payment to redeem the $175.0 million outstanding aggregate principal amount of 11.50% senior secured notes due 2022 (the “2022 Notes”), which also required an additional make-whole premium payment of approximately $20.1 million, and deposited $60.0 million into an escrow account in response to a lawsuit filed by the trustee and certain holders of its 4.50% convertible notes due 2020 (the “Convertible Notes”). The escrow and the lawsuit are described in more detail in Note 13, “Subsequent Events.” The Company also plans to distribute $140.0 million of the upfront cash payment in the form of a special cash dividend to stockholders. After consideration of the Company’s cash and cash equivalents balance at March 31, 2017 of $17.2 million and the net proceeds from the Asset Sale, the Company has concluded that the previous conditions and events that raised substantial doubt about its ability to continue as a going concern have been alleviated.

 

 

5. Income Taxes

Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted tax rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

 

9


 

For the three months ended March 31, 2017 and 2016 , the Company did not recognize any tax expense or benefit due to its loss position. In the second quarter of 2017, when the sale of the Commercial Business closed, the Company will record a pre-tax gain on the sale of the Commercial Business. The Company expects to use a portion of its net operating losses to offset the taxable gain generated by the sale, which will result in a partial release of the Company’s valuation allowance in the second quarter of 2017. As of March 31, 2017, the sale of the Commerci al Business had not been finalized, as all of the closing conditions had not been met and substantial uncertainty existed as to if the sale would be finalized. Therefore, as of March 31, 2017, after considering all available evidence, the Company concluded that it should maintain its valuation allowance.

 

6. Net Loss Per Common Share

Basic net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss available to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

As discussed in Note 10, “Borrowings,” in July 2013, the Company issued $125.0 million aggregate principal amount of Convertible Notes in an underwritten public offering. Following the repayment and satisfaction in full of the Company’s obligations to Hercules Technology Growth Capital, Inc. (“Hercules”) under its Loan and Security Agreement with Hercules (the “Loan Agreement”), which occurred in December 2015, upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the conversion premium will be settled in common stock, inclusive of a contractual make-whole provision resulting from a fundamental change, and the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. As of March 31, 2017, $60.8 million aggregate principal amount of the Convertible Notes remained outstanding.

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 months ended March 31, 2017 and 2016 causes such securities to be anti-dilutive. Outstanding securities excluded from the calculation of diluted loss per share for the three months ended March 31, 2017 and 2016 are shown in the chart below:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2017

 

 

2016

 

Outstanding options to purchase common stock

 

 

16,523

 

 

 

21,647

 

Conversion of the Convertible Notes

 

 

12,158

 

 

 

25,000

 

 

 

7. 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.

Recurring Fair Value Measurements

The carrying values of cash, restricted cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, and other short-term assets and liabilities approximate their respective fair values due to the short-term maturities of these assets and liabilities.

10


 

The following tables show assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

7,386

 

 

$

 

 

$

 

Totals

 

$

7,386

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Silver Creek warrant liability

 

$

 

 

$

 

 

$

2,926

 

Totals

 

$

 

 

$

 

 

$

2,926

 

 

 

 

December 31, 2016

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,373

 

 

$

 

 

$

 

Totals

 

$

12,373

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Silver Creek warrant liability

 

$

 

 

$

 

 

$

1,499

 

Totals

 

$

 

 

$

 

 

$

1,499

 

 

In December 2016, Silver Creek issued warrants to purchase an aggregate of 1.9 million shares of Silver Creek Series C preferred stock (the “Silver Creek warrants”). During the first quarter of 2017, Silver Creek issued additional Silver Creek warrants to purchase an aggregate of 1.8 million shares of Silver Creek Series C preferred stock. The Silver Creek warrants were valued at $2.9 million and $1.5 million as of March 31, 2017 and December 31, 2016, respectively, using a Black-Scholes option pricing model, probability-weighted for different exercise scenarios. The key assumptions utilized in the Black-Scholes option pricing model as of March 31, 2017 were a risk-free interest rate of 2.2%, expected dividend yield of 0.0%, expected volatility of 62.2% and expected term of 6.9 years. The key assumptions utilized in the Black-Scholes option pricing model as of December 31, 2016 were a risk-free interest rate of 2.3%, expected dividend yield of 0.0%, expected volatility of 61.7% and expected term of 6.9 years. Changes in the fair value of the Silver Creek warrants are recognized as a component of “Other income, net” in the consolidated statements of operations and comprehensive loss.

There were no changes in valuation techniques or transfers between the fair value measurement levels during the three months ended March 31, 2017 or during the year ended December 31, 2016.

Other Fair Value Measurements

The estimated fair value of the Convertible Notes was $51.3 million as of March 31, 2017. The Company estimated the fair value of the Convertible Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input. The carrying value of the Convertible Notes was $47.9 million as of March 31, 2017 due to the bifurcation of the conversion feature of the Convertible Notes as described more fully in Note 10, “Borrowings.”

As discussed in Note 10, “Borrowings,” in December 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 2022 Notes. The Company estimated the fair value of the 2022 Notes by using publicly-available information related to one of the 2022 Notes borrower’s portfolio of debt investments based on unobservable inputs, which is classified as a Level 3 input. The estimated fair value of the 2022 Notes was $172.7 million as of March 31, 2017. The carrying value of the 2022 Notes was $170.1 million as of March 31, 2017.

 

 

8. Marketable Securities

As of both March 31, 2017 and December 31, 2016, the Company maintained only cash equivalents comprised of money market funds. As of March 31, 2017, the Company did not hold any securities that were in an unrealized loss position. There were no realized gains or losses on available-for-sale securities for the three months ended March 31, 2017 or 2016.

 

 

11


 

9. Accounts Payable, Accrued Expenses and Other

Accounts payable, accrued expenses and other as of March 31, 2017 and December 31, 2016 consisted of the following:

 

(in thousands)

 

March 31,

2017

 

 

December 31,

2016

 

Accounts payable

 

$

7,502

 

 

$

2,692

 

Accrued goods and services

 

 

6,180

 

 

 

8,233

 

Accrued clinical trial costs

 

 

10,390

 

 

 

8,776

 

Accrued drug purchase costs

 

 

 

 

 

480

 

Accrued payroll and related benefits

 

 

3,308

 

 

 

3,394

 

Accrued restructuring expenses

 

 

581

 

 

 

774

 

Accrued interest

 

 

6,448

 

 

 

2,100

 

Accrued dividends payable

 

 

19

 

 

 

19

 

Silver Creek warrant liability

 

 

2,926

 

 

 

1,499

 

Deferred tax incentives

 

 

1,402

 

 

 

1,402

 

Total accounts payable, accrued expenses and other

 

$

38,756

 

 

$

29,369

 

 

 

10. Borrowings

2022 Notes

On December 22, 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 2022 Notes. As a result of this placement, the Company received net proceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by the Company. The 2022 Notes bear interest at a rate of 11.50% per year, payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2016. The Company will pay semi-annual installments of principal on the 2022 Notes of $21.9 million each on June 15 and December 15 of each year, beginning on June 15, 2019. The 2022 Notes will mature on December 15, 2022, unless earlier redeemed or repurchased in accordance with their terms prior to such date.

The 2022 Notes are senior secured obligations of the Company and will be equal in right of payment to all existing and future pari passu indebtedness of the Company (including the Company’s outstanding Convertible Notes), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, will have the benefit of a security interest in the 2022 Notes collateral and will be junior in lien priority in respect of any asset-based lending collateral that secures any first priority lien obligations from time to time. The 2022 Notes contain customary covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness and make certain restricted payments, but do not contain covenants related to future financial performance. The 2022 Notes are secured by a first priority lien on substantially all of the Company’s assets.

The Company assessed the 2022 Notes pursuant to ASC 815, Derivatives and Hedging , to determine if any features necessitated bifurcation from the host instrument. The Company concluded that none of the embedded redemption features within the 2022 Notes require bifurcation, as these features are clearly and closely related to the host instrument.

Debt issuance costs incurred by the Company are accounted for as a direct deduction to the carrying value of the 2022 Notes and are amortized to interest expense using the effective interest method over the life of the 2022 Notes. For the three months ended March 31, 2017 and 2016, interest expense related to the 2022 Notes was $5.2 million and $5.2 million, respectively, and was included in discontinued operations.

The Company used a portion of the proceeds from the Asset Sale to extinguish the 2022 Notes. See Note 13, “Subsequent Events.”

Convertible Notes

In July 2013, the Company issued $125.0 million aggregate principal amount of Convertible Notes in an underwritten public offering. As a result of the Convertible Notes offering, the Company received net proceeds of approximately $120.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

The Convertible Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2014. The Convertible Notes are general unsecured senior obligations of the Company and rank (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes, (ii) equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated, (iii)

12


 

effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Company separately accounted for the liability and equity components of the Convertible Notes by bifurcating gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rate as of the date of issuance for similar notes which do not contain an embedded conversion option. The gross proceeds received from the issuance of the Convertible Notes less the initial amount allocated to the indebtedness resulted in a $53.8 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ deficit and as debt discount, to be subsequently amortized as interest expense over the term of the Convertible Notes. Underwriting discounts and commissions and offering expenses totaled $4.4 million and were allocated to the indebtedness and the embedded conversion option based on their relative values.

On April 13, 2016, the Company entered into separate, privately-negotiated conversion agreements (the “Conversion Agreements”) with certain holders of the Convertible Notes. Under the Conversion Agreements, such holders agreed to convert an aggregate principal amount of $64.2 million of Convertible Notes held by them. The Company initially settled each $1,000 principal amount of Convertible Notes surrendered for conversion by delivering 136 shares of the Company’s common stock on April 18, 2016. In total, the Company issued an aggregate of 8,732,152 shares of its common stock on this initial closing date. In addition, pursuant to the Conversion Agreements, at the additional closings (as defined in the Conversion Agreements), the Company issued an aggregate of 3,635,511 shares of the Company’s common stock representing an aggregate of $27.7 million as additional payments in respect of the conversion of the Convertible Notes. The number of additional shares was determined based on the daily VWAP (as defined in the Conversion Agreements) of the Company’s common stock for each of the trading days in the 10-day trading period following the date of the Conversion Agreements. The issuance of 12,367,663 total shares of the Company’s common stock pursuant to the Conversion Agreements resulted in an increase to common stock and additional paid-in capital of $101.0 million.

As a result of the conversion, the Company recognized an overall loss on extinguishment of $14.6 million representing the difference between the total settlement consideration transferred to the holders that was attributed to the liability component of the Convertible Notes, based on the fair value of that component at the time of conversion, and the net carrying value of the liability. The loss on extinguishment was recorded as interest expense during the second quarter of 2016. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a $39.8 million reduction of additional paid-in capital. Transaction costs incurred with third parties related to the conversion were allocated to the liability and equity components and resulted in an additional $0.2 million of interest expense and a $0.2 million reduction of additional paid-in capital.

The outstanding Convertible Notes will mature on July 15, 2020 (the “Maturity Date”), unless earlier repurchased by the Company or converted at the option of holders. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2020 only under the following circumstances:

 

during any calendar quarter commencing after September 30, 2013 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Convertible Notes) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

 

upon the occurrence of specified corporate events set forth in the indenture governing the Convertible Notes.

On or after April 15, 2020 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.

Following the repayment and satisfaction in full of the Company’s obligations to Hercules under the Loan Agreement, which occurred in December 2015, upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The initial conversion rate of the Convertible Notes is 160 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $6.25 per share of common stock. The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain

13


 

corporate events that occur prior to the Maturity Date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances.

For the three months ended March 31, 2017 and 2016, interest expense related to the Convertible Notes was $1.7 million and $3.4 million, respectively. The decrease was primarily attributable to interest expense related to a reduction in the principal based on the conversion of some of the Convertible Notes that occurred in April 2016.

Future Minimum Payments under Outstanding Borrowings

Future minimum payments under outstanding borrowings as of March 31, 2017 are as follows:

 

(in thousands)

 

Convertible

Notes

 

Remainder of 2017

 

$

1,368

 

2018

 

 

2,736

 

2019

 

 

2,736

 

2020 and thereafter

 

 

63,527

 

Total

 

 

70,367

 

Less interest

 

 

(9,576

)

Less unamortized discount

 

 

(12,863

)

Less current portion

 

 

 

Long-term debt

 

$

47,928

 

 

 

11. Stock-Based Compensation

As of December 31, 2015, there were 2.5 million shares of common stock available to be granted under the Company’s 2011 Stock Incentive Plan (the “2011 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.

In February 2016, 4.1 million additional shares of common stock became available for grant to employees, officers, directors and consultants under the 2011 Plan. At March 31, 2017, there were 5.5 million shares remaining available for grant under the 2011 Plan.

During the three months ended March 31, 2017 and 2016, the Company issued options to purchase 0.0 million and 3.1 million shares of common stock, respectively. These options generally vest over a three-year period for employees. Options granted to directors vest immediately.

The fair value of stock options granted to employees during the three months ended March 31, 2017 and 2016 was estimated at the date of grant using the following assumptions:

 

 

 

Three Months Ended

March 31,

 

 

2017

 

2016

Risk-free interest rate

 

2.10%

 

1.3-1.5%

Expected dividend yield

 

0%

 

0%

Expected term

 

5.8 years

 

5.8 years

Expected volatility

 

67-68%

 

67-68%

 

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 estimates expected forfeitures based on historical experience and recognizes compensation costs only for those equity awards expected to vest.

14


 

The Company recognized stock-based compensation expense during the three months ended March 31, 2017 and 2016 as follows:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2017

 

 

2016

 

Employee awards:

 

 

 

 

 

 

 

 

Research and development expense

 

$

468

 

 

$

1,525

 

Selling, general and administrative expense

 

 

328

 

 

 

985

 

Total stock-based compensation expense

 

$

796

 

 

$

2,510

 

 

The following table summarizes stock option activity during the three months ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

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, 2016

 

 

19,024

 

 

$

5.77

 

 

 

5.97

 

 

$

7,564

 

Granted

 

 

3

 

 

$

4.00

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,714

)

 

$

2.27

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(790

)

 

$

6.49

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

 

16,523

 

 

$

6.10

 

 

 

2.34

 

 

$

1,989

 

Vested and expected to vest at March 31, 2017

 

 

16,367

 

 

$

6.10

 

 

 

2.34

 

 

$

1,989

 

Exercisable at March 31, 2017

 

 

13,827

 

 

$

5.96

 

 

 

2.25

 

 

$

1,989

 

 

The weighted-average grant date fair value per share of stock options granted during the three months ended March 31, 2017 and 2016 was $2.43 and $3.27, 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 months ended March 31, 2017 and 2016 was $1.4 million and $2.1 million, respectively.

As of March 31, 2017, there was $3.0 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 1.6 years.

 

 

12. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. This guidance was originally effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. Early adoption was originally not permitted. Subsequent to the issuance of ASU 2014-09, the FASB also issued the following updates related to ASC 606, Revenue from Contracts with Customers :

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” whereby the effective date for the new revenue standard was deferred by one year. As a result of ASU 2015-14, the new revenue standard is now effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is now permitted for annual periods beginning after December 15, 2016, including interim periods within that annual period.

 

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” to clarify the implementation guidance on principal versus agent considerations.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” to clarify the principle for determining whether a good or service is “separately identifiable” from other promises in the contract and to clarify the categorization of licenses of intellectual property.

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In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Technical Expedients,” to clarify guidance on transition, determining collectability, non-cash consideration and the presentation of sales and other similar taxes.

The Company is currently evaluating the potential impact that the adoption of this guidance may have on the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Statements – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities,” which contains a number of provisions related to the measurement, presentation and disclosure of financial instruments. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption of this guidance is not permitted with the exception of certain specific presentation requirements that are not currently applicable to the Company. The Company does not anticipate a material impact to the consolidated financial statements as a result of the adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes all existing lease accounting guidance within ASC 840, Leases . The new standard requires that lease assets and lease liabilities be recognized by lessees for those leases previously classified as operating leases under ASC 840, with limited exceptions. This update also creates a new definition of a lease and provides guidance as to whether a contract is or contains a lease. This guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments,” which clarifies the requirements for assessing whether contingent call or put options that can accelerate the repayment of principal on debt instruments are clearly and closely related to their debt hosts. This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, and early adoption is permitted. The Company adopted the guidance and it did not have an impact on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several areas of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either liabilities or equity and classification of excess tax benefits on the statement of cash flows. This guidance also permits a new entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted the guidance and it did not have an impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in practice in how entities present certain types of cash transactions in the statement of cash flows. This guidance also clarifies how the predominance principle should be applied when classifying cash receipts and cash payments that have attributes of more than one class of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company does not anticipate a material impact to the consolidated financial statements as a result of the adoption of this guidance.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

 

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13. Subsequent Events

 

On April 3, 2017, the Company completed the sale of the Commercial Business to Ipsen, which is outlined more fully in Note 3, “Sale of Commercial Business.”

In connection with the closing of the Asset Sale, on April 3, 2017, the Company entered into a transition services agreement with Ipsen pursuant to which the Company and Ipsen are providing certain services to each other for a period of 24 months following the closing, including Ipsen’s agreement to manufacture MM-310 and to perform certain quality related services in accordance with a manufacturing services agreement being negotiated by the parties.

In connection with the completion of the Asset Sale, on April 3, 2017, the Company irrevocably deposited the redemption price of the 2022 Notes of $175.0 million outstanding aggregate principal amount, interest through the redemption date and an additional make-whole premium payment of approximately $20.1 million with U.S. Bank National Association as trustee (the “Trustee”) under the Indenture dated as of December 22, 2015 (the “Indenture”) and irrevocably instructed the Trustee to apply such amount to the redemption in full of the 2022 Notes on the redemption date of April 27, 2017. The Indenture was satisfied and discharged on April 3, 2017.

In connection with the completion of the Asset Sale, on April 3, 2017, the Company entered into a sublease with Ipsen, pursuant to which Ipsen is subleasing from the Company approximately 70,237 square feet of leased space in the Company’s Cambridge, Massachusetts facility through the end of the term of the lease on June 30, 2019.

In connection with the completion of the Asset Sale, on April 3, 2017, the Company entered into an intellectual property license agreement with Ipsen, pursuant to which Ipsen granted to the Company a perpetual, worldwide, non-exclusive, royalty-free, fully paid-up license in and to all patents included in the transferred intellectual property, other than certain patents relating to generic liposomal technology, with respect to which the license will be exclusive, in each case for use outside of the Commercial Business. The Company granted to Ipsen a non-exclusive, royalty-free, fully paid up, perpetual, irrevocable and worldwide license to all patents it owned at the time of the closing of the transaction contemplated by the Asset Sale Agreement for use in connection with the Commercial Business.

On April 3, 2017, the Company entered into an amendment to its facility lease. This lease amendment reduces the final date of the term for approximately 29,157 square feet of leased space at the Company’s current facility in Cambridge, Massachusetts from June 30, 2019 to May 15, 2018 or earlier upon landlord’s election. As a result of this amendment, the Company’s lease payments through 2019 will be reduced by approximately $1.7 million.

In connection with the completion of the Asset Sale and the completion of our strategic pipeline review , on April 3, 2017, the Company reduced its headcount by approximately 30%. Upon the closing of the Asset Sale, the Company had approximately 80 employees.

On April 5, 2017, the Company’s board of directors authorized and declared a special cash dividend of $140.0 million on the Company's common stock. The special dividend is payable on May 26, 2017 to stockholders of record as of the close of business on May 17, 2017. The ex-dividend date for the special dividend will be May 30, 2017, the first trading day following the payment date.

On April 7, 2017, the previously disclosed Loan and Security Agreement (the “Credit Agreement”) between the Company and BioPharma Credit Investments IV Sub, LP expired. No amounts were borrowed under the Credit Agreement.

In connection with a lawsuit filed by the trustee and certain holders of the Convertible Notes in the Court of Chancery in the State of Delaware, captioned Wells Fargo Bank, National Association, Wolverine Flagship Fund Trading Limited, Highbridge International LLC, and Highbridge Tactical Credit & Convertibles Master Fund, L.P. v. Merrimack Pharmaceuticals, Inc. (the “Delaware Action”), the Company has agreed to deposit, and in April 2017 did deposit, $60.0 million in proceeds from the Asset Sale into an escrow account. The funds will remain in escrow for the duration of the Delaware Action in order to provide security to the plaintiffs for their claims in the Delaware Action.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2016 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company based in Cambridge, Massachusetts that is outthinking cancer to ensure that patients and their families live fulfilling lives. Our 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 our product candidates, including three in clinical studies and several others in preclinical development, fit into our strategy of (1) understanding the biological problems we are trying to solve, (2) designing specific solutions and (3) developing those solutions for biomarker-selected patients. This three-pronged strategy seeks to ensure optimal patient outcomes.

On April 3, 2017, we announced that we commenced operating as a new, refocused research and clinical development company in connection with the completion of our previously announced transaction, or the asset sale, with Ipsen S.A., or Ipsen. Pursuant to the Asset Purchase and Sale Agreement, dated as of January 7, 2017, or the asset sale agreement, between us and Ipsen, Ipsen acquired our right, title and interest in the non-cash assets, equipment, inventory, contracts and intellectual property primarily related to or used in our business operations and activities involving or relating to developing, manufacturing and commercializing ONIVYDE, our first commercial product, and MM-436, or the commercial business. We received $575.0 million in cash (subject to a working capital adjustment) upon the closing of the asset sale and are eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. We also retained the rights to receive net milestone payments of up to $33.0 million that may become payable pursuant to the license and collaboration agreement with Baxalta, which we refer to as the Baxalta agreement, for the ex-U.S. development and commercialization of ONIVYDE. As of March 31, 2017, all historical transactions impacting the consolidated statements of operations and comprehensive loss related to the asset sale have been reclassified under discontinued operations. All assets and liabilities related to the asset sale have been recorded under assets and liabilities held for sale as of March 31, 2017.

With the completion of the asset sale, we are prioritizing three clinical-stage programs:

 

MM-121 (seribantumab), a fully human monoclonal antibody that binds to the ErbB3 (HER3) receptor and targets heregulin positive cancers. We are currently conducting the Phase 2 randomized SHERLOC clinical trial evaluating MM-121 in heregulin positive non-small cell lung cancer patients in combination with docetaxel or pemetrexed and plans to initiate another Phase 2 randomized clinical trial in 2017 in heregulin positive, hormone receptor positive, ErbB2 (HER2) negative, metastatic breast cancer patients;

 

MM-141 (istiratumab), a fully human bispecific tetravalent monoclonal antibody designed to block tumor survival signals by targeting receptor complexes containing the insulin-like growth factor 1, or IGF-1, receptor and ErbB3 (HER3) cell surface receptors. We are currently conducting the Phase 2 randomized CARRIE clinical trial evaluating MM-141 in previously untreated metastatic pancreatic cancer patients with high levels of free IGF-1 in combination with nab-paclitaxel and gemcitabine; and

 

MM-310, an antibody-directed nanotherapeutic, or ADN, that contains a novel prodrug of the highly potent chemotherapy docetaxel and targets the ephrin receptor A2, or EphA2, receptor, which is highly expressed in most solid tumor types. MM-310 was designed to improve the therapeutic window of docetaxel in major oncology indications, such as prostate, ovarian, bladder, gastric, pancreatic and lung cancers. We initiated a Phase 1 clinical trial to evaluate safety and preliminary activity of MM-310 in the first quarter of 2017.

In addition to our clinical-stage programs, we have several product candidates in preclinical development and a discovery effort advancing additional candidate medicines.

On January 8, 2017, we announced a planned reduction in our headcount by approximately 30% in connection with the closing of the asset sale and the completion of our strategic pipeline review, and upon the closing of the asset sale we had approximately 80 employees.

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We have devoted substantially all of our resources to our drug discovery and development efforts, including advancing our systems biology approach, conducting clinical trial s for our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We currently have no products approved for sale and all of our revenue to date has been collaboration revenue and thro ugh sales of ONIVYDE and, to date, we have financed our operations primarily through private placements of our convertible preferred stock, collaborations, public offerings of our securities, secured debt financings, sales of ONIVYDE and the asset sale of ONIVYDE.

As of March 31, 2017, we had unrestricted cash and cash equivalents and marketable securities of $17.2 million. We believe that at our currently forecasted spending rates, our financial resources existing immediately following the completion of the asset sale, together with the net milestone payments we expect to receive under the Baxalta agreement, assuming certain milestones under such agreement are met, will be sufficient to fund our operations into the second half of 2019.

We have never been profitable and, as of March 31, 2017, we had an accumulated deficit of $984.5 million. Our loss from continuing operations was $29.2 million and $37.7 million for the three months ended March 31, 2017 and 2016, respectively. We expect to continue to incur significant expenses and operating losses for at least the next several years. We expect to continue to incur significant research and development expenses in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of our product candidates, including multiple simultaneous clinical trials for certain product candidates. Until such time, if ever, as we can generate sufficient product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, licensing arrangements and other marketing and distribution arrangements. We also could engage in discussions with third parties regarding partnerships, joint ventures, combinations or divestitures of one or more of our businesses as we seek to further the development of our research programs, improve our cash position and maximize stockholder value. There can be no assurance as to the timing, terms or consummation of any financing, collaboration, licensing arrangement or other marketing and distribution arrangement, partnership, joint venture, combination or divestiture. We may be unable to raise capital when needed or on attractive terms, which would force us to delay, limit, reduce or terminate our research and development programs. We will need to generate significant revenues to achieve profitability, and we may never do so.

Strategic Partnerships, Licenses and Collaborations

Ipsen

Pursuant to the asset sale agreement, we are eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. We also retained the rights to receive net milestone payments that may become payable pursuant to the Baxalta agreement for the ex-U.S. development and commercialization of ONIVYDE for up to $33.0 million.

In connection with the asset sale, we entered into a transition services agreement with Ipsen, pursuant to which we and Ipsen provide certain services to each other for a period of 24 months, including Ipsen’s agreement to manufacture MM-310 and to perform certain quality related services in accordance with a manufacturing services agreement being negotiated by us and Ipsen. Additionally, we entered into a sublease agreement with Ipsen under which Ipsen is subleasing approximately 70,237 square feet of our leased space in Cambridge, Massachusetts through the end of our lease term on June 30, 2019.

Baxalta

On September 23, 2014, we entered into the Baxalta agreement for the development and commercialization of ONIVYDE outside of the United States and Taiwan, or the licensed territory. In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta agreement was assigned to Baxalta during the second quarter of 2015. As part of the Baxalta agreement, we granted Baxalta an exclusive, royalty-bearing right and license under our patent rights and know-how to develop and commercialize ONIVYDE in the licensed territory.

On April 3, 2017, the Baxalta agreement was assigned to Ipsen in connection with the completion of the sale of the commercial business. We retained the rights to receive net milestone payments that may become payable pursuant to the Baxalta agreement for the ex-U.S. development and commercialization of ONIVYDE for up to $33.0 million, which is comprised of potential payments of $18.0 million from the sale of ONIVYDE in two additional major European countries, $5.0 million related to the sale of ONIVYDE in the first major non-European, non-Asian country and $10.0 million for the first patient dosed in the planned small cell lung cancer trial.

On April 3, 2017, in connection with the asset sale, all agreements related to our collaboration with Baxalta and any associated obligations, including our agreement related to commercial supply of ONIVYDE, were assigned to Ipsen.

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Actavis

In November 2013, we entered into a development, license and supply agreement with Watson Laboratories, Inc., or Actavis, which we refer to as the Actavis agreement, pursuant to which we agreed to develop, manufacture and exclusively supply the bulk form of doxorubicin hydrochloride (HCl) liposome injection to Actavis. On April 3, 2017, the Actavis agreement was assigned to Ipsen in connection with the completion of the asset sale.

Financial Obligations Related to the License and Development of ONIVYDE

In September 2005, Hermes BioSciences, Inc., or Hermes, which we acquired in October 2009, entered into a license agreement with PharmaEngine, Inc., or PharmaEngine, under which PharmaEngine received an exclusive license to research, develop, manufacture and commercialize ONIVYDE in Europe and certain countries in Asia. In May 2011, we entered into a new agreement with PharmaEngine, which we refer to as the PharmaEngine agreement, under which we reacquired all previously licensed rights for ONIVYDE, other than rights to commercialize ONIVYDE in Taiwan. As a result, we had the exclusive right to commercialize ONIVYDE in all territories in the world, except for Taiwan, where PharmaEngine has an exclusive commercialization right.

On April 3, 2017, in connection with the asset sale, the PharmaEngine agreement and all related agreements and any associated obligations, including our agreement related to our commercial supply of ONIVYDE to PharmaEngine, were assigned to Ipsen.

Financial Operations Overview

Revenues

As a result of the asset sale, all revenue related to the Commercial Business has been reclassified under discontinued operations.

In the future, we may generate revenue from a combination of research and development payments, license fees and other upfront payments, milestone payments, product sales and royalties in connection with future collaborations and licenses. We expect that any revenue we generate will fluctuate in future periods as a result of the timing of our or a collaborator’s achievement of preclinical, clinical, regulatory and commercialization milestones, if at all, the timing and amount of any payments to us relating to such milestones and the extent to which any of our product candidates are approved and successfully commercialized by us or a collaborator. If we fail, or any future collaborator fails, to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and development expenses

Research and development expenses consist of the costs associated with our research and discovery activities, including investment in our systems biology approach, conduct of preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

 

employee salaries and related expenses, which include stock-based compensation and benefits for the personnel involved in our drug discovery and development activities;

 

external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites;

 

manufacturing material expense for third-party manufacturing organizations and consultants, including costs associated with manufacturing product prior to product approval;

 

license fees for and milestone payments related to in-licensed products and technologies; and

 

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

We expense research and development costs as incurred. Conducting a significant amount of research and development is central to our business model. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of late stage clinical trials. We expect to maintain or increase our research and development expenses for the foreseeable future as we continue to develop our clinical stage product candidates and further advance our preclinical products and earlier stage research and development projects.

We use our employee and infrastructure resources across multiple research and development programs. We track expenses related to our most advanced product candidates on a per project basis. Accordingly, we allocate internal employee-related and

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infrastructure costs , as well as third-party costs, to each of these programs. We do not allocate to particular development programs either stock-based compensation expense or expenses related to preclinical programs. Costs that are not directly attributable to specific clini cal programs, such as wages related to shared laboratory services, travel and employee training and development, are not allocated and are considered general research and discovery expenses.

The following table summarizes our principal product development programs, including the research and development expenses allocated to each clinical product candidate, for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2017

 

 

2016

 

MM-121

 

$

3,595

 

 

$

4,478

 

MM-141

 

 

2,787

 

 

 

2,344

 

MM-310

 

 

1,300

 

 

 

1,197

 

Preclinical, general research and discovery

 

 

8,986

 

 

 

10,666

 

Legacy programs (MM-302, MM-151, MM-131)

 

 

4,469

 

 

 

7,792

 

Stock-based compensation

 

 

468

 

 

 

1,525

 

Total research and development expenses

 

$

21,605

 

 

$

28,002

 

 

In connection with the asset sale, all expenses related to the Commercial Business have been reclassified under discontinued operations.

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, other than as discussed below, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our preclinical or clinical product candidates or the period, if any, in which material net cash flows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;

 

the potential benefits of our product candidates over other therapies;

 

our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;

 

future clinical trial results;

 

the terms and timing of regulatory approvals; and

 

the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

MM-121 (seribantumab)