Merrimack Pharmaceuticals, Inc.

Geoff Grande - IR Gary Crocker - Chairman of the Board, Interim President, CEO Tad Stewart - Head of Commercial Yasir Al-Wakeel - CFO and Head of Corporate Development Peter Laivins - Head of Development

Kaitlin Sandor - Guggenheim Securities Eric Joseph - JPMorgan Jeff Chen - Cowen and Company Ling Wang - BTIG

Thanks, Vince. Good afternoon, everyone, and thank you for joining us on our call to discuss our third quarter 2016 financials and recent progress.

A press release detailing this information issued a short while ago can be found in the Investors section of our Web site, merrimack.com under the Press Releases heading. This call is being broadcast live and will be archived on our Web site for six weeks.

Joining me on the call today are Gary Crocker, Chairman of the Board and Interim President and CEO; Tad Stewart, Head of Commercial; and Yasir Al-Wakeel, CFO and Head of Corporate Development. We’ll end the formal portion of the call with time for Q&A.

Before we begin, I need to remind you that during this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements about our future expectations and plans, the potential success of our products and product candidates, clinical development timelines, and financial projections.

These statements involve risks and uncertainties which are described in the Risk Factors section of our most recent Form 10-Q and the other reports we filed with the SEC, which are available online at sec.gov. While these forward-looking statements represent our views as of today, they should not be relied upon as representing our views in the future.

We may update these statements in the future, but we are not taking on an obligation to do so. During this call, we will also be referring to non-GAAP financial measures.

These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release that we issued a short while ago, which is on our Web site as previously mentioned.

And with that, I’ll turn the call over to Bob.

Thank you, Geoff. Just over a month ago now I took the helm here at Merrimack and it's been a remarkably intense month of action and very deliberate refocusing with the entire Company working around the clock with a renewed sense of direction, a commitment to spending discipline and project prioritization.

On a personal noise, that I’m extraordinarily proud of the remarkable team of people here at Merrimack, who have shown amazing diligence and resilience in a time of change as we work together to realize the vision we announced at the beginning of October. Let me restate that vision, the core message is exceedingly simple.

The Board, the management team, and all of the team here at Merrimack are extremely committed to prioritizing and focusing our resources in order to realize and optimize shareholder value. Indeed the realization of shareholder value is now culturally as intensive focus for Merrimack as our strength in innovation and development.

Having spent a very significant amount of time hear in Cambridge the last month or so, I remain confident that there is a tremendous inherent value within Merrimack is to be unlocked as we implement a disciplined regime of project refocusing and spending discipline. Let me now turn to tactics and the question of how precisely we attend to achieve this vision?

First, we are in the process of focusing in on and defining and assessing our core capabilities and are in the midst of a comprehensive pipeline review. As we announced on October 3, this strategic pipeline review is a focused and disciplined effort companywide to optimize and extract the value in our pipeline for shareholders and for patients worldwide.

This patient -- this pipeline review includes all clinical and preclinical product candidates in our portfolio and we expect to complete this comprehensive process and report our findings prior to the end of the year. Having said that, however, it's important to note that in the absence of clinical trial amendments that we believe that as currently designed, the timing to data readout for several of our lead candidates including MM-302, MM-121 and ONIVYDE in front-line metastatic pancreatic cancer will likely extend beyond our previously issued guidance.

As part of this pipeline review, we will continue to carefully assess these data timelines and potential impacts of any such clinical trial amendments that may be considered. and as I said, we will report these findings to the market and internally within the Company for implementation by year end.

Second, in the midst of this pipeline review process, we recognize that we have a very scarce and valuable resource in today's biotech environment. That is an approved oncology product with a multitude of promising additional indications.

The ONIVYDE franchise has recently emerged as intrinsically even more attractive with the identification of a tolerable dose regimen containing ONIVYDE, 5-FU leucovorin and oxaliplatin for development in the front-line pancreatic cancer indication as I will speak to in more detail shortly. Third, through our online -- through our ongoing pipeline prioritization effort, we are making and we will be institutionalizing significant strides towards financial sustainability.

With the elimination of approximately $200 million and anticipated costs over the next two years, we are systematically pivoting towards a more prudent and sustainable business model. As Yasir will explain in further detail in a moment, our expected cash runway now extends into 2018.

Let me highlight the Merrimack's past to unlocking value is passed to sustaining financial stability and the pipeline portfolio review are not in any way predicated upon a new CEO starting here with the Company. These actions under my stewardship are well underway and will report out before year-end.

Nevertheless the search is in fact ongoing for a new CEO and significant progress is being made in that search, with a team led by John Dineen, former CEO of GE Healthcare and the Chair of our organization and Compensation Committee. Let’s turn now to the significant progress we've made over the last several months.

While we are sharing these updates with you, I will remind you that we are as I've noted in the midst of the portfolio strategic prioritization process, and as such we will not be providing additional clinical information at this time beyond the updates provided during this call. First, our partner Shire received marketing authorization for ONIVYDE with orphan status in the European Union.

We're very pleased with the significant step towards building a global commercial access for the thousands of metastatic pancreatic cancer patients who have experienced disease progression on gemcitabine. Notably from a Merrimack shareholder perspective this moves us towards our goal of financial sustainability.

With time we anticipate that royalties received from Shire sales will become increasingly significant. In addition, as outlined in our press release today, we expect to trigger two significant milestones on sales in the first and third major EU country, respectively.

The first these milestones is anticipated in the next few weeks and the second is expected in the first half of 2017. As we have assessed these milestone triggers carefully, these events are unfortunately occurring later than expected, primarily due to the time required for an unanticipated additional EMA Committee for Orphan Medicinal Products Review that was generated by the request for the orphan drug status.

As a result, this has impacted the timing of our milestone payments and with that our guidance for the year. While we take full responsibility for missing on this element of guidance, we are nevertheless confident that the payments have been significantly derisked, given the EMA's approval, and the commercially beneficial impact of the orphan drug status going forward.

Furthermore, as we noted earlier, we now expect our cash runway to extend since 2018. Turning now to the ONIVYDE clinical development front, and in particular I'd like to focus on two very important value drivers going forward.

First I may say, I believe most significantly we are in a position to provide previously undisclosed updates on our front-line metastatic pancreatic cancer trial. As you'll know, front-line pancreatic cancer is a key expansion opportunity for ONIVYDE and one that addresses not only a significant unmet medical need, but also represents a highly profitable commercial opportunity that is entirely overlapping with and synergistic with our existing field for its deployment.

Just to underscore the clinical and commercial significance of the front-line PANC indication, it represents an estimated 46,000 patients diagnosed annually in the U.S., patients who are healthy enough to be treated twice as long as those in later stages of the disease in which are therefore the potential to generate approximately 4 times the commercial opportunity of our initial indication in post-gemcitabine metastatic disease. During this year, we have been working diligently on developing a new drug regimen consisting of ONIVYDE, plus 5-FU with leucovorin and oxaliplatin.

We call the regimen NAPOX and it was designed to match or exceed the efficacy of an older regimen called FOLFIRINOX, but without the burdens and toxicity which significantly limited issues to only the healthiest of patients seen at academic oncology institutions. Given that we have a high degree of confidence with our NAPOX regimen and that it is clinically active, the key hypothesis being tested in this Phase 2 trial is whether we could actually design a regimen that is less toxic than FOLFIRINOX and therefore suitable for a broad -- for use in a broader range of patients across both community and academic oncology practices to become the standard of care in front-line pancreatic cancer by displacing both gem ABRAXANE and FOLFIRINOX usage.

With all that being said, I'm very, very pleased today to announce that we have established an initial tolerable dose in this trial, which is extremely significant for the commercial reasons I just outlined above. Our commercial team is encouraged with the observed tolerability profile of the regimen and we have seen tremendous clinical interest in this trial with over 70 sites already confirmed to participate in part two.

Beyond pancreatic cancer, the next most important value driver for ONIVYDE is our clinical development program in lung cancer. While irinotecan has shown evidence of clinical activity in both non-small cell lung cancer and small cell lung cancer, it has been traditionally plagued by poor pharmacokinetics and was never adequately developed in these indications in the U.S and Europe.

Therefore together with our partners at Shire, we are now moving forward to launch a registration directed clinical program for ONIVYDE as a single agent versus topotecan with second line treatment of small cell lung cancer patients. Small cell lung cancer with approximately 29,000 patients diagnosed annually is another example of an important tumor type where there has been little clinical progress and yet where there is the need of a new and more effective and better tolerated therapy.

The current standard of care topotecan is widely viewed as marginally effective, toxic, poorly tolerated and beset with poor pharmacokinetics and yet it is still the only FDA approved drug in second line treatment. Clinical investigators from the lung cancer community across the U.S and EU are anxious for a better alternative than topotecan in our market research shows that is successful unlike to rapidly displace it for most patients in this setting.

So preparation for this study launch is well underway. What we had hoped that this trial would have started before year-end, the transition from Baxalta to Shire has resulted in a minor delay and we now anticipate the first patient in this potentially pivotal study in the first quarter of 2017 triggering a $10 million non-substantive R&D milestone.

Let me take just a moment as a necessity [ph] to underscore that even in light of this minor delay, Shire's cooperation and dedication to the ONIVYDE development program has been significant. I’d also like to add that Shire brings to the table tremendous clinical and commercial experience that provides an additional level of rigor as we drive this clinical development plan forward.

And through their own diligence process, Shire has reaffirmed their commitment to a robust global development program for ONIVYDE. We're very, very pleased with the productivity and professionalism of our partnership with Shire.

On the commercial -- on the ONIVYDE commercialization front, while we are not yet where we want to be in terms of revenue, we continue to make significant progress. Quarter-on-quarter we saw an 18% growth in the end-user patient demand and more importantly we are seeing two very important trends that we believe should positively impact revenue growth over the next several quarters.

First we're seeing an increase in patients being treated in earlier line of therapy with a percentage of second and third line patients increasing from 16% to 18% since our launch and as an interrelated trend we are seeing an increase in the length of time or duration the patients were staying on therapy. Together we believe these trends will result in future sales growth for ONIVYDE.

Now forging away into a new indication is never easy, but based on the metrics we're seeing, the feedback from key stakeholders and the active measures we're implementing in the field, we remain convinced that the peak sales opportunity for ONIVYDE in the post-gem setting is undiminished. Finally, let me turn your attention to last week's announcement regarding the generic DOXIL program that we've partnered with Teva.

I'm extremely pleased that the FDA has accepted for reviewing the ANDA filing by our partner Teva for generic DOXIL which represents a very productive and fruitful collaborative effort over the last several years. Very, very few companies in the world have the expertise to develop and commercially manufacture complex nanoparticles, as such the ANDA acceptance further validates Merrimack's global leadership position in the field of nanotherapeutics.

In addition, it also takes us a step further towards realizing our goal of financial sustainability before being placed on the FDA's global shortage list DOXIL generated approximately $600 million annually in global revenue. So if approved, Merrimack would be eligible to receive a share of net profits on U.S sales in the mid-20% range, which could meaningfully contribute to our revenues in the years ahead.

With those comments and summaries, let me now turn the call over to Tad Steward, our Head of Commercial to report on our lunch progress. Tad?

Thanks, Gary, and good afternoon everyone. Happy to speak with you today about our commercial progress with ONIVYDE and provide some new insights into the trends we're seeing, particularly in terms of patient starts and duration of therapy and why we remain positive on the ONIVYDE launch in our trajectory going forward.

First let me start with the high-level results for the third quarter of 2016. Gross revenue for the quarter was $16.8 million, net revenue for the quarter was $14.5 million, which reflects a gross to net discount of approximately [technical difficulty] and revenue growth of approximately 13% compared to Q2.

Revenue was booked on an ex-factory basis or when product is shipped from our warehouse to our specialty distributors. Significantly from an underlying growth perspective, we also track actual demand shipments, which are shipments made from our specialty distributors to individual accounts and facilities and it's worth noting that on a demand basis vial shipped in Q3 grew 18% relative to vial shipped in Q2.

As Gary stated earlier, I want to acknowledge that we're not satisfied with where we are in terms of revenue, but I believe we're in a good position to see continued revenue growth over the next several quarters. Revenue of course is driven by two things.

First, the number of new patient starting treatment with ONIVYDE. And second, treatment duration, which is how long patients stay on therapy.

We believe there is great opportunity for growth in both of these parameters going forward. First, I'll talk about the patient starts.

Based on our analysis, ONIVYDE shipments for the year-to-date represent approximately 2,400 patient starts through the first three quarters of 2016. This is well ahead of our initial projections and by our calculation translates to a market share of just under 20%, which also corresponds fairly closely with the share estimates we're seeing in the quarterly ATU market research we conduct with treating oncologists.

This initial uptake in the first year is very strong and is a testament to several things, including the way that the NAPOLI data is resonating with oncologists, the confidence that physicians have in the endorsement by NCCN, as well as ASMO and ASCO, and the way that discussions of sequencing gem ABRAXANE and ONIVYDE, the two approved regimens in pancreatic cancer are gaining traction in the medical community. So while patient share thus far has been strong, we certainly expected to grow and we very clearly see room for growth.

Through Q3 we shipped ONIVYDE to 1,030 unique facilities and we're seeing growth coming from both depth of use in academic centers, as well as new trial of ONIVYDE in the community setting. We’ve prioritized just under 600 key accounts across the US and we’ve currently received orders from approximately two-thirds of those priority accounts.

With the remaining third of those priority and high-impact facilities having yet to order, there's clearly significant additional potential for ONIVYDE patient growth. We've added territories, refined our field team objectives, and developed detailed account plans to ensure that our field team is maximizing time spent on gaining access to those priority accounts, so that we're able to continue to grow the number of patients who have access to and are starting on ONIVYDE.

So the quick summary on patient starts, we're exceeding our goals to date, we have substantial market share at about one-year on the market, we’ve significant additional opportunities to tap into, and we've implemented the plans and the tactics that we believe will allow us to realize that potential. So back to the second part of the story, which is duration or how long patients are staying on therapy.

Duration has been continually growing or not yet where we want to be, but there are several reasons to believe that over the next several quarters it will continue to grow towards the overall meantime on therapy of 15 weeks or approximately 8 cycles that was observed in the NAPOLI-1 trial. Time on therapy is a key metric for us and we track it in several different ways.

Before I discuss that, I want to say that I'm going to get into a bit of depth, depth which we would not typically provide, but I think it's useful to get into some detail there. The key takeaway though is that no matter how we look at it, time on therapy has been growing with each additional months that ONIVYDE is on the market.

So for the overall patient population, that's all ONIVYDE patients regardless of when they started therapy, the current average duration of therapy is 3.75 cycles of treatment. If we get more granular and evaluate just the cohort of patients that started on therapy in Q4 of 2015, are very earliest ONIVYDE patients.

Our latest analysis show that the average duration of therapy is 5.1 cycles per patient and when we look at the subset of those Q4 2015 patients that started ONIVYDE therapy in the second or third line, rather than in the very late fourth or fifth line, we see that the average duration of therapy is over 6 cycles per patient. Importantly, these averages are still growing, because we're still tracking patients in our analyses who started ONIVYDE in Q4 of last year and remain on therapy.

With each passing month, they drive the average higher and in fact we're still tracking patients who started on therapy in Q4 of last year received and have received upwards of 19 cycles. The reason that we follow patients by cohort is because the earlier cohorts give you the best sense of what the overall average will grow to.

Over time as cohorts of patients mature and you get to a peak equilibrium, the overall average number of cycle should continue to grow towards the mean duration that was observed in the NAPOLI study of almost 8 cycles. However, this will take some time and with patients for even our very early cohort still on therapy, this data is still a long way from fully maturing and we expect that growth in the average number of cycles will continue over the next several quarters.

Another important metric that we follow is line of therapy, because we know it can have a significant impact on the time that patients remain on therapy and receive benefit. In general, patients in earlier lines of therapy tend to be in better shape and have better performance status and they tend to be able to stay on therapy longer and experience better outcomes.

Initially ONIVYDE was used in a large proportion of very late line patients. During Q4 2015, approximately 40% of patients received ONIVYDE in the fourth or fifth line.

Since that time, we've seen the number of patients starting on ONIVYDE in the fourth or fifth line dropped by almost half and the proportion of patients starting in second and third line grow to nearly 80%. In fact, we’ve even begun to see evidence of patients being started in the first-line setting.

Thus, we’d expect that patients in our more recent cohorts those starting during Q1, Q2, or Q3 of this year, will ultimately achieve even longer duration of therapy than the Q4 of 2015 cohort. This change in line of therapy is a function of several things, including oncologists continuing to become familiar and comfortable with ONIVYDE and our targeted efforts to educate physicians on the most appropriate patients for ONIVYDE therapy consistent with what was observed in the NAPOLI study, the majority of which were second line patients.

Additionally, we're actively educating on side effect management and dose modification to ensure that physicians are well-equipped to be able to maintain patients on therapy and ultimately receive maximum benefits. So just to recap quickly, we see positives in both patient starts and in duration of therapy that should lead to revenue growth over the next several quarters.

Here is the summary on patients starts. ONIVYDE and the NAPOLI data are resonating well with oncologists, uptake is high, patient starts and the share to date are exceeding expectations, and there is a clear opportunity to grow as we focus on accessing patients and physicians in the remaining 30% of priority accounts that have yet to order ONIVYDE.

Additionally, we're well-positioned from the field prioritization standpoint to be able to focus significant effort on converting those remaining priority facilities and realize continued growth in patient starts. And the summary with regards to duration is this: average time on therapy has been growing each month and should continue to grow for the next several quarters.

Duration of therapy for patients receiving ONIVYDE in earlier lines is growing towards the mean duration that was observed in the NAPOLI study, and the percentage of patients receiving ONIVYDE in extremely late lines has dropped significantly, meaning more earlier line patients, which should translate into additional time on therapy. Lastly, we're taking very focused actions from a marketing and education perspective to continue helping physicians understand who are the most appropriate patients for treatment, how to handle dose modifications to support longer duration of therapy, and most importantly improved therapeutic outcomes.

With that, I will turn it over to Yasir Al-Wakeel, our CFO and Head of Corporate Development.

Thanks, Tad. On today's call I'd like to cover our balance sheet, speak to upcoming guidance and milestones, and finally discuss efforts being made in the ongoing prioritization review.

The details of our earnings were contained within the press release, so I will not touch upon them on this call. So firstly, from a balance sheet and cash run way perspective, we ended Q3 with $48.5 million of cash, as well as $22 million of accounts receivable.

It's important to note that this $22 million of accounts receivable is largely due to the extended payment terms offered to our specialty distributors during the launch period. We’ve been actively managing these payment terms over the past couple of quarters from a 120 days downwards and will be at 30 days effective January the first.

As Gary noted earlier, the delay in milestone payments on account of the orphan review process has resulted in most of the previously guided $46.5 million of net milestone guidance slipping into the first half of 2017. The detailed breakdown of these payments has been provided in the press release.

Given the EMA approval and Shire's commitment to the clinical development plan, we view these payments as substantially derisked. Following receipt of these milestones, there remains $428 million of non-sales related milestones with only minimal related obligations to PharmaEngine.

With regards to the remainder of this year, early benefits from our cost management steps have resulted in us further reducing and refining our operating expense guidance for 2016. We now expect aggregate R&D and SG&A expenses, excluding milestone obligations to PharmaEngine to be in the range of $200 million to $210 million for the year.

Furthermore, having committed to considerable steps to remove in excess of $200 million of expected costs over the next two years, our cash position when factoring in expected inflows, as well as access to a $25 million credit facility, extended our cash runway into 2018. These inflows are comprised of four categories.

One, expected cash collections from ONIVYDE sales. Two, milestone payments as mentioned.

Three, cost-sharing reimbursements from Shire related to ONIVYDE development costs and fourth, manufacturing revenue from the sale of bulk ONIVYDE to both Shire and PharmaEngine, respectively. Let’s turn now to the ongoing prioritization.

As we mentioned in our October 3 press release, we have taken active measures to unlock shareholder value and align our resources with our core capabilities by focusing on the programs that have the greatest potential for disruptive change in the diagnosis and treatment of cancer. We have multiple options ahead of us.

Let me speak at a high level, so as not to bias the outcome of the review that is expected before year end. Firstly, we are fortunate to have in ONIVYDE, a highly coveted marketed asset with multiple expansion indications.

We see this as a real source of unlocked value for Merrimack. And as Tad noted, our confidence in ONIVYDE's peak sales potential in the post-Gem setting is undiminished.

With respect to our pipeline, in order to dawn [ph] of the $200 million of expected cost savings, we have multiple levers at our disposal. As you know, we have already instituted a reduction in force of 22% with a concomitant reduction in expenses related to their activities.

From a pipeline perspective, we fully understand the value of our late stage pipeline and with highlights that there are multiple ways of realizing cost savings, besides simply terminating ongoing trials. In the context of our prioritization review, we're taking not only a cost-bearing, but strategic approach to evaluating our highest probability of success opportunities.

Firstly, there are pure efficiencies that are being realized through strict cost control. Secondly, we are identifying earlier stage programs that can be ceased or postponed to help us realize significant cost savings.

Finally, there are new and novel cost-bearing trial designs that can generate unambiguous robust data quicker and at a lower cost. Our ongoing pipeline review is taking all of these options and more into consideration, and we look forward to discussing the results of this review with you later this year.

With that, let me hand the call back over to Gary for his concluding remarks.

Thank you very much, Yasir. Let me conclude by reiterating my commitment on a personal level to realizing shareholder value for Merrimack.

And in doing so, it's my personal philosophy that there cannot be anything, but the highest possible degree of transparency. As part of that commitment to date of transparency, we have provided a detailed breakdown of patient starts by line of therapy, duration of treatment, as well as the detail behind our milestone payments for the first time, We plan to provide a similar degree of transparency on our clinical development programs, once the pipeline portfolio review is completed.

That said, given the prioritization process, we will not be taking further clinical questions on today's call as we have referenced earlier and was noted in our October 3 press release, we are right now in the midst of that comprehensive pipeline review and we do not want to in anyway preempt that process and in order to maintain the integrity of that process we expect to report the outcome of those results by the end of the year. Finally, I like to reiterate how proud I am of the extraordinary Merrimack organization and the employees and personalities that constitute this firm.

And I want to thank everyone publicly for coming together so tremendously, effectively, during this period of change and challenge in this transition. Having now been in the trenches here as CEO at Merrimack, I'm very, very, very encouraged by what I've seen and I'm happy to say as a shareholder in Merrimack myself that my confidence in Merrimack's remarkable people and potential is higher to date than it's ever been before.

I really appreciate all of your time for listening today and for your continued support. And with that, we will open it up -- open-up the line for the questions.

Geoff?

And Vince, we’re ready to take questions.

So, Kaitlin I appreciate your question. This is Gary.

Let me note that as we referred to earlier and as was noted on that October 3 press release, we are right now in the midst of our pipeline review and we really don't want to preempt that process. I must add just parenthetically that I have been so impressed by the buy-in from the employees into this pipeline review process, how much people I think intuitively realized that we needed to prioritize and focus down on a subset of projects that we could implement more efficiently and financially responsibly.

But in order to maintain the integrity of that process we're going to defer any comments -- any further comments at this point in time and report the final results by year end.

Okay, but you already said that there was going to be a push back in timeline for basically all the programs, even before the review. So, there is not -- I mean, there has to be a reason even now, if it's a general, broad, almost platform push back, I guess, if that makes sense?

Hey, Jeff. This is Tad.

The pricing in Europe is a Shire decision, they’re responsible for all of the activities ex-U.S, regulatory, commercialization and everything else. So not something that we can really comment on.

I think we can say that we know they’re working as diligently as possible to make sure they’re commercializing as soon as they can, given -- they’ve gotten the approval. But really not much more detail that we could provide to you on the pricing discussions that they’ve had.

Okay, thanks. And on your strategic review, is it safe -- I mean, everything you’ve said is actually based on, sort of, the clinical development and pipeline.

So is it safe to say that ONIVYDE is off the table in terms of any type of deals or licensing potentials that you are looking at?

Great. Well, thank you everyone for joining us.

We look forward to updating you again soon.