MERRIMACK PHARMACEUTICALS INC - Quarter Report: 2013 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o         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)

 

 

 

(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 x No o

 

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 x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o No x

 

As of July 31, 2013, there were 102,209,629 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

			Page
	PART I
	FINANCIAL INFORMATION		3
Item 1.	Financial Statements.		3
	Condensed Consolidated Balance Sheets — December 31, 2012 and June 30, 2013 (unaudited)		3
	Condensed Consolidated Statements of Comprehensive Loss — Three and Six Months Ended June 30, 2012 and 2013 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2013 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		35
Item 4.	Controls and Procedures.		35

 

	PART II
	OTHER INFORMATION		37
Item 1.	Legal Proceedings.		37
Item 1A.	Risk Factors.		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		71
Item 6.	Exhibits.		72
Signatures			73
Exhibit Index			74

 

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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 most advanced product candidates and companion 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 collaborations with PharmaEngine, Inc. related to MM-398 and with Sanofi related to MM-121;

 

·                  our ability to establish and maintain additional collaborations;

 

·                  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 Network Biology approach to drug research and development;

 

·                  the potential use of our Network Biology approach in fields other than oncology; 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 or investments that we may make.

 

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You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the 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.

 

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PART I

 

FINANCIAL INFORMATION

 

Item 1.           Financial Statements.

 

Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

 

(in thousands, except par value) (unaudited)		December 31, 2012			June 30, 2013
Assets
Current assets:
Cash and cash equivalents		$	37,714		$	30,943
Available-for-sale securities		72,238			31,197
Restricted cash		100			100
Accounts receivable		9,267			14,537
Prepaid expenses and other current assets		8,982			9,170
Total current assets		128,301			85,947
Restricted cash		528			567
Property and equipment, net		6,297			8,155
Other assets		1,068			31
Intangible assets, net		2,165			2,005
In-process research and development		7,010			7,010
Goodwill		3,605			3,605
Total assets		$	148,974		$	107,320
Liabilities, Non-Controlling Interest (Deficit) and Stockholders’ Deficit
Current liabilities:
Accounts payable, accrued expenses and other		$	24,936		$	36,322
Deferred revenues		9,350			9,336
Loans payable		2,373			9,970
Other current liabilities		1,861			2,119
Total current liabilities		38,520			57,747
Deferred revenues		71,114			68,724
Loans payable		37,482			30,592
Accrued interest		1,200			1,200
Other liabilities		7,078			7,398
Total liabilities		155,394			165,661
Commitments and contingencies (Note 10)
Non-controlling interest (deficit)		97			(242		)
Stockholders’ deficit:
Preferred stock, $0.01 par value: 10,000 shares authorized at December 31, 2012 and June 30, 2013; no shares issued or outstanding at December 31, 2012 and June 30, 2013		—			—
Common stock, $0.01 par value: 200,000 shares authorized at December 31, 2012 and June 30, 2013; 95,825 and 96,360 shares issued and outstanding at December 31, 2012 and June 30, 2013, respectively		958			964
Additional paid-in capital		434,679			441,293
Accumulated other comprehensive loss		(38		)	(5		)
Accumulated deficit		(442,116		)	(500,351		)
Total stockholders’ deficit		(6,517		)	(58,099		)
Total liabilities, non-controlling interest (deficit) and stockholders’ deficit		$	148,974		$	107,320

 

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

 

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Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Loss

 

		Three months ended						Six months ended
(in thousands, except per share amounts)		June 30,						June 30,
(unaudited)		2012			2013			2012			2013
Collaboration revenues		$	12,063		18,452			$	23,407		33,107
Operating expenses:
Research and development		28,758			42,465			60,409			79,454
General and administrative		3,610			5,095			7,338			10,027
Total operating expenses		32,368			47,560			67,747			89,481
Loss from operations		(20,305		)	(29,108		)	(44,340		)	(56,374		)
Other income and expenses
Interest income		54			35			63			87
Interest expense		—			(1,293		)	—			(2,513		)
Other, net		112			115			736			226
Net loss		(20,139		)	(30,251		)	(43,541		)	(58,574		)
Less net loss attributable to non- controlling interest		(113		)	(169		)	(231		)	(339		)
Net loss attributable to Merrimack Pharmaceuticals, Inc.		(20,026		)	(30,082		)	(43,310		)	(58,235		)
Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale securities		(49		)	15			(49		)	33
Other comprehensive (loss) income		(49		)	15			(49		)	33
Comprehensive loss		(20,075		)	(30,067		)	(43,359		)	(58,202		)
Net loss per share available to common stockholders—basic and diluted		$	(0.22	)	$	(0.31	)	$	(0.89	)	$	(0.61	)
Weighted-average common shares used in computing net loss per share available to common stockholders—basic and diluted		90,581			96,170			51,214			96,025

 

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

 

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Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows

 

(in thousands)		Six months ended June 30,
(unaudited)		2012			2013
Cash flows from operating activities
Net loss		$	(43,541	)	(58,574		)
Adjustments to reconcile net loss to net cash used in operating activities
Non-cash interest expense		—			470
Remeasurement of convertible preferred stock warrants		(587		)	—
Depreciation and amortization		2,263			1,319
Stock-based compensation		2,749			5,416
Changes in operating assets and liabilities
Purchased premiums and interest on available-for-sale securities		(1,760		)	(291		)
Accounts receivable		486			(5,270		)
Accounts payable, accrued expenses and other		(653		)	11,386
Deferred revenues		553			(2,404		)
Other assets and liabilities, net		48			2,518
Net cash used in operating activities		(40,442		)	(45,430		)
Cash flows from investing activities
Purchases of available-for-sale securities		(73,825		)	(8,290		)
Proceeds from sales and maturities of available-for-sale securities		—			49,010
Purchases of property and equipment		(891		)	(3,305		)
Other investing activities, net		(100		)	(39		)
Net cash (used in) provided by investing activities		(74,816		)	37,376
Cash flows from financing activities
Proceeds from initial public offering, net of issuance costs		100,025			—
Proceeds from issuance of common stock		873			1,204
Proceeds from convertible notes issued by majority owned subsidiary, net of issuance costs		—			274
Payment of dividends on Series B convertible preferred stock		(4,003		)	—
Other financing activities, net		(48		)	(195		)
Net cash provided by financing activities		96,847			1,283
Net decrease in cash and cash equivalents		(18,411		)	(6,771		)
Cash and cash equivalents, beginning of period		50,454			37,714
Cash and cash equivalents, end of period		32,043			30,943
Non-cash investing and financing activities
Conversion of convertible preferred stock to common stock		268,225			—
Conversion of convertible preferred stock warrants to common stock warrants		929			—
Reclassification of deferred financing costs to stockholders’ equity		2,748			—
Dividends on Series B convertible preferred stock declared but not paid		261			—
Issuance of derivative liability		—			35
Disposal of fully depreciated assets		—			77
Supplemental disclosure of cash flows
Cash paid for interest		$	—		$	2,076

 

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

 

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Merrimack Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Nature of the Business

 

Merrimack Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines consisting of novel therapeutics paired with companion diagnostics. The Company has six novel therapeutic oncology candidates in clinical development (MM-398, MM-121, MM-111, MM-302, MM-151 and MM-141), multiple product candidates in preclinical development and a discovery effort advancing additional candidate medicines. The Company’s discovery and development effort is driven by Network Biology, which is its proprietary systems biology-based approach to biomedical research.

 

The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, but not limited to, 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 additional capital, adequate personnel, infrastructure and extensive compliance reporting capabilities.

 

The Company has incurred significant losses and has not generated revenue from commercial sales. The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.

 

As of June 30, 2013, the Company had unrestricted cash and cash equivalents and available-for-sale securities of $62.1 million. As described in Note 11, in July 2013, the Company completed concurrent underwritten public offerings of 5.75 million shares of its common stock (the “Common Stock Offering”) and $125.0 million aggregate principal amount of 4.50% convertible senior notes due 2020 (the “Convertible Notes Offering”). The aggregate net proceeds from these concurrent offerings were approximately $147.4 million. The Company expects that its existing unrestricted cash and cash equivalents and available-for-sale securities on hand as of June 30, 2013, anticipated interest income and funding under its license and collaboration agreement with Sanofi related to MM-121, together with the net proceeds from the concurrent Common Stock Offering and Convertible Notes Offering, will enable the Company to fund its operating expenses and capital expenditure requirements into 2015.

 

The Company may seek additional funding through public or private debt or equity financings, or through existing or new collaboration arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into additional collaborative arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. Arrangements with collaborators or others may require the Company to relinquish rights to certain of its technologies or product candidates. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs or commercialization efforts, which could adversely affect its business prospects.

 

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2. Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The accompanying condensed consolidated financial statements as of June 30, 2013, and for the three and six months ended June 30, 2012 and 2013, 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, 2012 filed with the SEC on March 20, 2013.

 

The information presented in the condensed consolidated financial statements and related notes as of June 30, 2013, and for the three and six months ended June 30, 2012 and 2013, is unaudited. The December 31, 2012 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 and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013, or any future period.

 

These condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Merrimack Pharmaceuticals (Bermuda) Ltd. The Company also consolidates its 74% majority owned subsidiary Silver Creek Pharmaceuticals, Inc. (“Silver Creek”). All intercompany transactions and balances have been eliminated in consolidation.

 

The Company’s ownership of Silver Creek was 74% as of December 31, 2012 and June 30, 2013. The consolidated financial statement activity related to Silver Creek was as follows:

 

(in thousands)		Non-Controlling Interest
Balance at December 31, 2011		$	574
Net loss attributable to Silver Creek		(231		)
Balance at June 30, 2012		$	343

 

		Non-Controlling Interest (Deficit)
Balance at December 31, 2012		$	97
Net loss attributable to Silver Creek		(339		)
Balance at June 30, 2013		$	(242	)

 

Use of Estimates

 

GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. The significant estimates in these condensed consolidated financial statements include revenue recognition, periods of meaningful use of licensed products, useful lives with respect to long-lived assets and intangibles and the valuation of stock options, convertible preferred stock

 

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warrants, contingencies, accrued expenses, intangible assets, goodwill, in-process research and development, derivative liability and tax valuation reserves. The Company’s actual results may differ from these estimates under different assumptions or conditions. The Company evaluates its estimates on an ongoing basis. Changes in estimates are reflected in reported results in the period in which they become known by the Company’s management.

 

Available-for-Sale Securities

 

The Company classifies marketable securities with a remaining maturity when purchased of greater than three months as available-for-sale. Available-for-sale securities may consist of U.S. government agencies securities, commercial paper, corporate notes and bonds and certificates of deposit, which are maintained by an investment manager. Available-for-sale securities are carried at fair value, with the unrealized gains and losses included in other comprehensive loss as a component of stockholders’ equity until realized. Realized gains and losses are recognized in interest income. Any premium or discount arising at purchase is amortized and/or accreted to interest income. There were no realized gains or losses recognized on the sale or maturity of securities during the three and six months ended June 30, 2013.

 

Available-for-sale securities, all of which have maturities of twelve months or less, as of June 30, 2013 consisted of the following:

 

		Amortized Cost			Unrealized Gains			Unrealized Losses			Fair Value
		(in thousands)
June 30, 2013:
Certificate of deposit		$	1,200		$	—		$	(1	)	$	1,199
Commercial paper		7,996			1			—			7,997
Corporate debt securities		22,006			—			(5		)	22,001
Total		$	31,202		$	1		$	(6	)	$	31,197

 

The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months as of June 30, 2013 was $19.2 million, representing 12 securities. To determine whether an other-than-temporary impairment exists, the Company performs an analysis to assess whether it intends to sell, or whether it would more likely than not be required to sell, the security before the expected recovery of the amortized cost basis. Where the Company intends to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recognized on the statement of comprehensive loss as an other-than-temporary impairment charge. When this is not the case, the Company performs additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where the Company does not expect to receive cash flows, based on using a single best estimate, sufficient to recover the amortized cost basis of a security and amount of the loss recognized in other income (expense).

 

Available-for-sale securities in an unrealized loss position as of June 30, 2013 consisted of the following:

 

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		Aggregate Fair Value			Unrealized Losses
		(in thousands)
June 30, 2013:
Certificate of deposit		$	1,199		$	(1	)
Corporate debt securities		17,992			(5		)
		$	19,191		$	(6	)

 

The Company does not intend to sell and it is not more likely than not that the Company will be required to sell the above investments before recovery of their amortized cost bases, which may be maturity. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary-impairment as of June 30, 2013.

 

Concentration of Credit Risk

 

Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, available-for-sale securities and accounts receivable. The Company places its cash deposits in accredited financial institutions and, therefore, the Company’s management believes these funds are subject to minimal credit risk. The Company invests cash equivalents and available-for-sale securities in money market funds, U.S. government agencies securities and various corporate debt securities. Credit risk in these securities is reduced as a result of the Company’s investment policy to limit the amount invested in any one issue or any single issuer and to only invest in high credit quality securities.

 

Derivative Liability

 

In December 2012, the Company’s majority owned subsidiary, Silver Creek, entered into a Note Purchase Agreement pursuant to which it issued convertible notes to various lenders in aggregate principal amounts of $1.6 million in December 2012 and $0.3 million in February 2013. The principal and accrued interest are convertible into Silver Creek’s next qualifying series of preferred stock at a discount or into Silver Creek’s existing preferred stock upon maturity of the notes on December 31, 2013, whichever occurs first. Upon issuance, the Company determined that the underlying convertible notes represented share-settled debt and the potential conversion of the convertible notes into Silver Creek’s next qualifying series of preferred stock at a discount met the definition of a derivative. The Company estimated the value of the derivative liability issued in connection with the convertible notes payable at $196,000 as of December 31, 2012 and $231,000 as of June 30, 2013. The derivatives are classified as a liability on the Company’s condensed consolidated balance sheet and are remeasured at each reporting period with changes in fair value being recognized in earnings.

 

Revenue Recognition

 

The Company enters into biopharmaceutical product development agreements with collaborative partners for the research and development of therapeutic and diagnostic products. The terms of the agreements may include nonrefundable signing and licensing fees, funding for research, development and manufacturing, milestone payments and royalties on any product sales derived from collaborations. These multiple element arrangements are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting.

 

In January 2011, the Company adopted new authoritative guidance on revenue recognition for multiple element arrangements. This guidance, which applies to multiple element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple element arrangement by modifying the fair value requirements for revenue

 

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recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a best estimate of selling price if vendor specific objective evidence and third party evidence are not available. Deliverables under the arrangement will be separate units of accounting provided that a delivered item has value to the customer on a stand-alone basis and if the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The Company also adopted guidance that permits the recognition of revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets certain criteria and is considered to be substantive. The Company did not enter into any significant multiple element arrangements or materially modify any of its existing multiple element arrangements during the year ended December 31, 2012 or the three and six months ended June 30, 2013. The Company’s existing license and collaboration agreements continue to be accounted for under previously issued revenue recognition guidance for multiple element arrangements and milestone revenue recognition, as described below.

 

The Company recognized upfront license payments as revenue upon delivery of the license only if the license had stand-alone value and the fair value of the undelivered performance obligations could be determined. If the fair value of the undelivered performance obligations could be determined, such obligations were accounted for separately as the obligations were fulfilled. If the license was considered to either not have stand-alone value or have stand-alone value but the fair value of any of the undelivered performance obligations could not be determined, the arrangement was accounted for as a single unit of accounting and the license payments and payments for performance obligations were recognized as revenue over the estimated period of when the performance obligations would be performed.

 

Whenever the Company determined that an arrangement should be accounted for as a single unit of accounting, it determined the period over which the performance obligations would be performed and revenue would be recognized. If the Company could not reasonably estimate the timing and the level of effort to complete its performance obligations under the arrangement, then revenue under the arrangement was recognized on a straight-line basis over the period the Company expected to complete its performance obligations, which is reassessed at each subsequent reporting period.

 

The Company’s collaboration agreements may include additional payments upon the achievement of performance-based milestones. As milestones are achieved, a portion of the milestone payment, equal to the percentage of the total time that the Company has performed the performance obligations to date over the total estimated time to complete the performance obligations, multiplied by the amount of the milestone payment, will be recognized as revenue upon achievement of such milestone. The remaining portion of the milestone will be recognized over the remaining performance period. Milestones that are tied to regulatory approvals are not considered probable of being achieved until such approval is received. Milestones tied to counter-party performance are not included in the Company’s revenue model until the performance conditions are met.

 

Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.

 

Stock-Based Compensation

 

The Company expenses the fair value of employee stock options over the vesting period. Compensation expense is measured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted annually to reflect actual forfeitures. The fair value of each stock-based award is estimated using the Black-Scholes option valuation model and is expensed straight-line over the vesting period.

 

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The Company records stock options issued to nonemployees at fair value, periodically remeasures to reflect the current fair value at each reporting period, and recognizes expense over the related service period. When applicable, these equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

Other Income and Expense

 

The Company records gains and losses on the remeasurement of fair value of convertible preferred stock warrants, the recognition of federal and state sponsored tax incentives and other one-time income or expense-related items in other income (expense).

 

In April 2013, the Company received an award of $0.5 million of tax incentives from the Massachusetts Life Sciences Center, which allows the Company to monetize approximately $0.4 million of state research and development tax credits. In exchange for these incentives, the Company pledged to hire an incremental 20 employees and to maintain the additional headcount through at least December 31, 2017. Failure to do so could result in the Company being required to repay some or all of these incentives. The Company has deferred and will amortize the benefit of this monetization on a straight-line basis over the five-year performance period, commencing with a cumulative catch-up when the pledge is achieved.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective prospectively for reporting periods beginning after December 15, 2012. There were no amounts reclassified out of accumulated other comprehensive income during the three and six months ended June 30, 2013.

 

3. 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.

 

The following table presents the computation of basic and diluted net loss per share available to common stockholders for the three and six months ended June 30, 2012 and 2013:

 

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		Three months ended June 30,						Six months ended June 30,
(in thousands, except per share amount)		2012			2013			2012			2013
Net Loss Per Share:
Numerator:
Net loss attributable to Merrimack Pharmaceuticals, Inc.		$	(20,026	)	$	(30,082	)	$	(43,310	)	$	(58,235	)
Plus: Unaccreted dividends on convertible preferred stock		(67		)	—			(2,107		)	—
Net loss available to common stockholders—basic and diluted		(20,093		)	(30,082		)	(45,417		)	(58,235		)
Denominator:
Weighted-average common shares—basic and diluted		90,581			96,170			51,214			96,025
Net loss per share available to common stockholders—basic and diluted		$	(0.22	)	$	(0.31	)	$	(0.89	)	$	(0.61	)

 

The following common stock equivalents of potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as of June 30, 2012 and 2013, as the Company recorded a net loss in all periods and, therefore, they would be anti-dilutive:

 

		As of June 30,
(in thousands)		2012		2013
Options to purchase common stock		17,455		20,447
Common stock warrants		2,905		2,777

 

Also excluded from the computation of diluted weighted average shares outstanding as of June 30, 2012 as anti-dilutive were 66,256,000 common stock equivalents of convertible preferred stock and 302,000 common stock equivalents of convertible preferred stock warrants that converted to common stock and common warrants, respectively, upon the closing of our initial public offering in April 2012.

 

4. License and Collaboration Agreements

 

Sanofi

 

On September 30, 2009, the Company entered into a license and collaboration agreement with Sanofi for the development and commercialization of a drug candidate being developed by the Company under the name MM-121. The agreement became effective on November 10, 2009 and Sanofi paid the Company a nonrefundable, noncreditable upfront license fee of $60.0 million. During the years ended 2010 and 2011, the Company received a total of $20.0 million in milestone payments associated with dosing the first patients in Phase 2 clinical trials in breast cancer and non-small cell lung cancer. During the first quarter of 2012, the Company received an additional milestone payment of $5.0 million associated with dosing the first patient in a Phase 2 clinical trial in ovarian cancer. The Company is eligible to receive additional future development, regulatory and sales milestone payments as well as future royalty payments depending on the success of MM-121.

 

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Under the agreement, Sanofi is responsible for all MM-121 development and manufacturing costs. The Company has the right, but not the obligation, to co-promote MM-121 in the United States and to participate in the development of MM-121 through Phase 2 proof of concept trials. Sanofi reimburses the Company for direct costs incurred in development and compensates the Company for its internal development efforts based on a full time equivalent (“FTE”) rate. Also as part of the agreement, the Company was required to manufacture certain quantities of MM-121 and, at Sanofi’s and the Company’s option, may continue to manufacture additional quantities of MM-121 in the future. Sanofi reimburses the Company for direct costs incurred in manufacturing and compensates the Company for its internal manufacturing efforts based on an FTE rate. The Company has satisfied its manufacturing obligations under the agreement as of June 30, 2013.

 

The Company applied revenue recognition guidance to determine whether the performance obligations under this collaboration, including the license, the right to future technology, back-up compounds, participation on steering committees, development services and manufacturing services, could be accounted for separately or as a single unit of accounting. The Company determined that its development services performance obligation is considered a separate unit of accounting, as it is set at the Company’s option, has stand-alone value and the FTE rate is considered fair value. Therefore, the Company recognizes cost reimbursements for MM-121 development services as incurred. The Company determined that the license, the right to future technology, back-up compounds, participation on steering committees and manufacturing services performance obligations represented a single unit of accounting. As the Company cannot reasonably estimate its level of effort over the collaboration, the Company recognizes revenue from the upfront payment, milestone payment and manufacturing services payments using the contingency-adjusted performance model over the expected development period, which is currently estimated to be 12 years from the effective date of the agreement. Under this model, when a milestone is earned or manufacturing services are rendered and product is delivered, revenue is immediately recognized on a pro-rata basis in the period the milestone was achieved or product was delivered based on the time elapsed from the effective date of the agreement. Thereafter, the remaining portion is recognized on a straight-line basis over the remaining development period.

 

During the three and six months ended June 30, 2012 and 2013, the Company recognized revenue based on the following components of the Sanofi agreement:

 

		Three months ended June 30,						Six months ended June 30,
(in thousands)		2012			2013			2012			2013
Upfront payment		$	1,250		$	1,250		$	2,500		$	2,500
Milestone payments		521			521			1,933			1,042
Development services		9,160			14,682			17,302			26,272
Manufacturing services and other		1,106			1,999			1,627			2,740
Total		$	12,037		$	18,452		$	23,362		$	32,554

 

As of December 31, 2012 and June 30, 2013, the Company maintained the following assets and liabilities related to the Sanofi agreement:

 

(in thousands)		December 31, 2012			June 30, 2013
Accounts receivable, billed		$	1,577		1,789
Accounts receivable, unbilled		7,690			12,746
Deferred revenue		79,913			78,060

 

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GTC Biotherapeutics, Inc.

 

In July 2009, the Company entered into a license agreement with GTC Biotherapeutics, Inc. (“GTC”) for the development of MM-093 by GTC. On March 19, 2013, GTC terminated the license agreement. As a result, the Company recognized the remaining $0.6 million of deferred revenue related to this license agreement during the first quarter of 2013.

 

PharmaEngine, Inc.

 

On May 5, 2011, the Company entered into an assignment, sublicense and collaboration agreement with PharmaEngine, Inc. (“PharmaEngine”) under which the Company reacquired rights in Europe and certain countries in Asia to a drug being developed under the name MM-398. In exchange, the Company agreed to pay PharmaEngine a nonrefundable, noncreditable upfront payment of $10.0 million and will be required to make up to an aggregate of $80.0 million in development and regulatory milestone payments and $130.0 million in sales milestone payments upon the achievement of specified development, regulatory and annual net sales milestones. During the first quarter of 2012, the Company paid a milestone of $5.0 million under the collaboration agreement with PharmaEngine in connection with dosing the first patient in a Phase 3 clinical trial of MM-398 in pancreatic cancer. PharmaEngine is also entitled to tiered royalties on net sales of MM-398 in Europe and certain countries in Asia. The Company is responsible for all future development costs of MM-398 except those required specifically for regulatory approval in Taiwan.

 

During the three months ended June 30, 2012 and 2013, the Company recognized research and development expenses of $0.3 million and $0.2 million, respectively, and during the six months ended June 30, 2012 and 2013, the Company recognized research and development expenses of $5.6 million and $0.5 million, respectively, related to the agreement with PharmaEngine. These amounts included a $5.0 million milestone payment expensed in the first quarter of 2012.

 

5. Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, available-for-sale securities, prepaid expenses, accounts receivable, accounts payable and accrued expenses and other short-term assets and liabilities approximate fair value due to the short-term nature of these instruments. The derivative liability is also carried at fair value.

 

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

 

The following tables show assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and June 30, 2013 and the input categories associated with those assets and liabilities:

 

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As of December 31, 2012 (in thousands)		Level 1			Level 2			Level 3
Assets:
Cash equivalents — money market funds		$	25,668		$	—		$	—
Cash equivalents — certificates of deposit		—			480			—
Cash equivalents — corporate debt securities		—			5,017			—
Investments — certificates of deposit		—			240			—
Investments — commercial paper		—			12,465			—
Investments — corporate debt securities		—			59,533			—
Liabilities:
Derivative liability		$	—		$	—		$	196

 

As of June 30, 2013 (in thousands)		Level 1			Level 2			Level 3
Assets:
Cash equivalents — money market funds		$	18,496		$	—		$	—
Investments — certificates of deposit		—			1,199			—
Investments — commercial paper		—			7,997			—
Investments — corporate debt securities		—			22,001			—
Liabilities:
Derivative liability		$	—		$	—		$	231

 

The Company’s investment portfolio consists of investments classified as cash equivalents and available-for-sale securities. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. The Company’s cash and cash equivalents are invested in U.S. treasury and various corporate debt securities that approximate their face value. All marketable securities with an original maturity when purchased of greater than three months are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive loss. The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. The fair value of the derivative liability as of December 31, 2012 and June 30, 2013 was determined using a probability-weighted valuation model based upon the likelihood of Silver Creek achieving a qualified financing.

 

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs:

 

		Fair Value as of June 30, 2013			Valuation Technique		Unobservable Input		Point Estimate
		(in thousands)
Derivative Liability		$	231		Probability-weighted		Estimated probability of Silver Creek qualified financing(s) prior to December 31, 2013		50	%

 

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The significant unobservable input used in the fair value measurement of the Company’s derivative liability is the probability of Silver Creek’s successful achievement of aggregate financings of at least $4.0 million of gross proceeds prior to December 31, 2013.

 

The following table provides a roll-forward of the fair value of the derivative liability categorized as Level 3 instruments, for the six months ended June 30, 2013:

 

(in thousands)		Derivative Liability
Balance, December 31, 2012		$	196
Portion of convertible notes issued in February 2013 allocated to derivative		35
Balance, June 30, 2013		$	231

 

6. Accounts Payable, Accrued Expenses and Other

 

Accounts payable, accrued expenses and other as of December 31, 2012 and June 30, 2013 consisted of the following:

 

(in thousands)		December 31, 2012			June 30, 2013
Accounts payable		$	283		$	4,727
Accrued goods and services		17,615			24,713
Accrued payroll and related benefits		5,853			6,200
Accrued interest		306			406
Accrued dividends payable		28			28
Contractual liability		851			248
Total accounts payable, accrued expenses and other		$	24,936		$	36,322

 

7. Debt

 

In November 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”) pursuant to which the Company received loans in the aggregate principal amount of $40.0 million in 2012. The Company’s obligations associated with the Loan Agreement are secured by a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property but including the proceeds from the sale, if any, of intellectual property, and a negative pledge on intellectual property.

 

The Loan Agreement provides for interest-only payments for twelve months and repayment of the aggregate outstanding principal balance of the loans in monthly installments starting on December 1, 2013 and continuing through May 1, 2016. However, if the Company receives aggregate gross proceeds of at least $75 million in one or more transactions prior to December 1, 2013, the Company may elect to extend the interest-only period by six months so that the aggregate outstanding principal balance of the

 

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loans would be repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016.

 

For the three and six months ended June 30, 2013, interest expense related to the outstanding principal balance of the loans was $1.0 million and $2.1 million, respectively. Upon full repayment or maturity of the loans, the Company is required to pay a fee of $1.2 million, which is recorded as a non-current liability on the condensed consolidated balance sheets.

 

As of June 30, 2013, the Company had outstanding borrowings of $38.8 million, net of debt discounts of $1.2 million. Amortization of the debt discounts, which are recorded as interest expense, was $0.2 million and $0.3 million for the three and six months ended June 30, 2013, respectively.

 

In December 2012, as described in Note 2 “—Derivative Liability,” the Company’s majority owned subsidiary, Silver Creek, entered into a Note Purchase Agreement pursuant to which it issued convertible notes to various lenders in aggregate principal amounts of $1.6 million in December 2012 and $0.3 million in February 2013. As of June 30, 2013, Silver Creek had outstanding borrowings of $1.7 million, net of debt discounts of $0.1 million. Amortization of the debt discounts, which are recorded as interest expense, was $0.1 million for both the three and six month periods ended June 30, 2013.

 

As described in Note 11, in July 2013, the Company completed a concurrent Common Stock Offering and Convertible Notes Offering.

 

8. Common Stock

 

As of December 31, 2012 and June 30, 2013, the Company had 200.0 million shares of $0.01 par value common stock authorized. There were 95,825,000 and 96,360,000 shares of common stock issued and outstanding as of December 31, 2012 and June 30, 2013, respectively. The shares reserved for future issuance as of December 31, 2012 and June 30, 2013 consisted of the following:

 

(in thousands)		December 31, 2012		June 30, 2013
Common stock warrants		2,842		2,777
Options to purchase common stock		18,066		20,447
		20,908		23,224

 

As described in Note 11, in July 2013, the Company completed a concurrent Common Stock Offering and Convertible Notes Offering.

 

9. Stock-Based Compensation

 

As of December 31, 2012, there were 1.3 million shares of common stock available to be issued under the 2011 Stock Incentive Plan, (the “2011 Plan”). The 2011 Plan is administered by the Board of Directors of the Company 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 January 2013, 3.4 million shares of common stock became available for grant to employees, officers, directors and consultants under the 2011 Plan. During the six months ended June 30, 2012 and 2013, the Company issued options to purchase 0.3 million and 3.0 million shares of common stock,

 

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respectively. At June 30, 2013, there were 1.7 million shares remaining available for grant under the 2011 Plan.

 

The range of assumptions used to estimate the fair value of options granted to employees and directors at the date of grant for the three and six months ended 2013 were as follows:

 

		Three months ended June 30,				Six months ended June 30,
		2012		2013		2012		2013
Risk-free interest rate		0.9-1.1%		0.1-1.4%		0.9-1.1%		0.1-1.4%
Expected dividend yield		0%		0%		0%		0%
Expected term		5.8-5.9 years		5.3-5.9 years		5.8-5.9 years		5.3-5.9 years
Expected volatility		71-72%		67-68%		71-72%		67-68%

 

These options generally vest over a three-year period for employees. The Company recognized stock-based compensation expense as follows for the three and six months ended June 30, 2012 and 2013:

 

		Three months ended June 30,						Six months ended June 30,
(in thousands)		2012			2013			2012			2013
Employee awards:
Research and development		$	945		$	1,651		$	1,853		$	2,935
General and administrative		432			1,307			862			2,397
Stock-based compensation for employee awards		1,377			2,958			2,715			5,332
Stock-based compensation for non-employee awards		33			72			34			84
Total stock-based compensation		$	1,410		$	3,030		$	2,749		$	5,416

 

The following table summarizes stock option activity during the six months ended June 30, 2013:

 

							Weighted
							Average
		Number		Weighted			Remaining		Aggregate
		of		Average			Contractual		Intrinsic
(in thousands, except per share amounts)		Shares		Exercise Price			Term		Value
Outstanding, December 31, 2012		18,066		$	3.50		6.54		$	51,486
Granted		3,076		$	6.24
Exercised		(499	)	$	2.41
Forfeited		(196	)	$	5.94
Outstanding, June 30, 2013		20,447		$	3.91		6.59		$	60,107
Exercisable, June 30, 2013		14,560		$	2.85		5.53		$	57,350
Vested and expected to vest, June 30, 2013		20,026		$	3.85		6.53		$	59,982

 

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The aggregate intrinsic value was calculated as the difference between the exercise price of the stock options and the fair value of the underlying common stock as of the respective balance sheet date.

 

10. Commitments and Contingencies

 

Operating leases

 

The Company leases its office, laboratory and manufacturing space under non-cancellable operating leases. During March 2013, the Company entered into a facility lease amendment to further expand its office, laboratory and manufacturing space. The amendment leased additional space effective March 2013 and is co-terminus with the existing lease. The aggregate additional rent due over the term of the lease amendment is approximately $2.6 million. As part of this amendment, the landlord agreed to reimburse the Company for an additional portion of tenant improvements made to the facility, up to a total of $0.6 million. Aggregate landlord reimbursable tenant improvements outstanding under the existing lease and the lease amendment as of June 30, 2013 is $4.8 million, which are recorded within other current assets on the condensed consolidated balance sheets.

 

11. Subsequent Events

 

On July 17, 2013, the Company sold an aggregate of 5,750,000 shares of its common stock at a price to the public of $5.00 per share and issued $125.0 million aggregate principal amount of 4.50% convertible senior notes due 2020 in concurrent underwritten public offerings. As a result of the concurrent Common Stock Offering and Convertible Notes Offering, the Company received net proceeds of approximately $147.4 million, including the net proceeds from the exercise in full by the underwriters in the Common Stock Offering of an option to purchase additional shares of common stock and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

 

The Company issued the 4.50% convertible senior notes due 2020 under an indenture dated as of July 17, 2013 between the Company and Wells Fargo Bank, National Association, as trustee (the “Trustee”), as supplemented by the supplemental indenture dated as of July 17, 2013 between the Company and the Trustee.

 

As a result of the completion of the concurrent Common Stock Offering and Convertible Notes Offering and the Company receiving aggregate gross proceeds of at least $75 million in one or more transactions prior to December 1, 2013, the Company may elect to extend the interest-only period under the Loan Agreement with Hercules by six months so that the aggregate outstanding principal balance of the loans issued pursuant to the Loan Agreement would be repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016.

 

On July 10, 2013, in connection with the Convertible Notes Offering, the Company and Hercules entered into an amendment, consent and waiver to the Loan Agreement that permitted the Convertible Notes Offering and the issuance of the 4.50% convertible senior notes due 2020.

 

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

 

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thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2012 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 discovering, developing and preparing to commercialize innovative medicines consisting of novel therapeutics paired with companion diagnostics. Our mission is to provide patients, physicians and the healthcare system with the medicines, tools and information to transform the approach to care from one based on the identification and treatment of symptoms to one focused on the diagnosis and treatment of illness through a more precise mechanistic understanding of disease. We seek to accomplish our mission by applying our proprietary systems-based approach to biomedical research, which we call Network Biology. Our initial focus is in the field of oncology. We have six novel therapeutics in clinical development. In our most advanced program, we are conducting a Phase 3 clinical trial.

 

We have devoted substantially all of our resources to our drug discovery and development efforts, including advancing our Network Biology approach, conducting clinical trials for our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have financed our operations primarily through private placements of our convertible preferred stock, collaborations, public offerings of our securities and a secured debt financing. Through June 30, 2013, we have received $268.2 million from the sale of convertible preferred stock and warrants, $98.1 million of net proceeds from the sale of common stock during our initial public offering, $39.6 million of net proceeds from a secured debt financing and $202.4 million of upfront license fees, milestone payments, reimbursement of research and development costs and manufacturing services and other payments from our collaborations.

 

In July 2013, we sold an aggregate of 5,750,000 shares of our common stock at a price to the public of $5.00 per share and issued $125.0 million aggregate principal amount of 4.50% convertible senior notes due 2020 in concurrent underwritten public offerings. As a result of the concurrent common stock offering and convertible notes offering, we received net proceeds of approximately $147.4 million, including the net proceeds from the exercise in full by the underwriters in the common stock offering of an option to purchase additional shares of common stock and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

As of June 30, 2013, we had unrestricted cash and cash equivalents and available-for-sale securities of $62.1 million, which, together with anticipated interest income, funding under our license and collaboration agreement with Sanofi related to MM-121, and net proceeds from the concurrent common stock offering and convertible notes offering in July 2013, we expect will enable us to fund our operating expenses and capital expenditure requirements into 2015.

 

We have never been profitable and, as of June 30, 2013, we had an accumulated deficit of $500.4 million. Our net loss was $30.3 million and $58.6 million for the three and six months ended June 30, 2013, respectively, and $20.1 million and $43.5 million for the three and six months ended June 30, 2012, respectively. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our research and development expenses to increase 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, some of which we expect will be entering late stage clinical development. In addition, in connection with

 

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seeking and possibly obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. 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 or commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.

 

We are also pursuing arrangements to use our manufacturing capabilities to manufacture drug product on behalf of third party pharmaceutical companies. We have no current agreements or commitments for any such arrangements.

 

Strategic Partnerships, Licenses and Collaborations

 

Sanofi

 

In September 2009, we entered into a license and collaboration agreement with Sanofi for the development and commercialization of MM-121. Under this agreement, we granted Sanofi an exclusive, royalty-bearing, worldwide right and license to develop and commercialize MM-121 in exchange for payment by Sanofi of an upfront license fee of $60.0 million, up to $410.0 million in potential development and regulatory milestone payments, of which we have already received $25.0 million, up to $60.0 million in potential sales milestone payments and tiered, escalating royalties beginning in the sub-teen double digits based on net sales of MM-121 in the United States and beginning in the high single digits based on net sales of MM-121 outside the United States. We have the right, but not the obligation, to co-promote and commercialize MM-121 in the United States and to participate in the development of MM-121 through Phase 2 proof of concept trials, which we are currently conducting. If we co-promote MM-121 in the United States, we will be responsible for paying our sales force costs and a specified percentage of direct medical affairs, marketing and promotion costs for MM-121 in the United States and will be eligible to receive tiered, escalating royalties beginning in the high teens based on net sales of MM-121 in the United States. We are also entitled to an increase in the royalty rate if a diagnostic product is actually used with MM-121 in the treatment of solid tumor indications. Sanofi is responsible for all development and manufacturing costs for MM-121. We have completed our manufacturing obligations under the agreement, and Sanofi has assumed responsibility for all manufacturing of MM-121. Sanofi reimburses us for internal time at a designated full-time equivalent rate per year and reimburses us for direct costs and services related to the development and manufacturing of MM-121.

 

The timing of cash received from Sanofi differs from revenue recognized for financial statement purposes. We recognize revenue for development services as incurred and recognize revenue for the upfront payment, milestone payments and manufacturing services using the contingency-adjusted performance model over the expected development period, which is currently estimated to be 12 years from the effective date of our agreement with Sanofi. During the three and six months ended June 30, 2012 and 2013, we recognized revenue based on the following components of the Sanofi agreement:

 

		Three months ended June 30,						Six months ended June 30,
(in thousands)		2012			2013			2012			2013
Upfront payment		$	1,250		$	1,250		$	2,500		$	2,500
Milestone payment		521			521			1,933			1,042
Development services		9,160			14,682			17,302			26,272
Manufacturing services and other		1,106			1,999			1,627			2,740
Total		$	12,037		$	18,452		$	23,362		$	32,554

 

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