Merrimack Pharmaceuticals, Inc.

Thanks, Shannon. Good morning everyone and thank you for joining us on our call to discuss our first quarter 2017 financial results and recent progress.

A press release detailing our results became available at 7:00 a.m. Eastern Time today and can be found in the Investor section of our website at merrimack.com.

This call is being broadcast live and will be archived on our website for six weeks. Joining me on the call today are Dr.

Richard Peters, our President and Chief Executive Officer; and Dr. Yasir Al-Wakeel, our CFO and Head of Corporate Development.

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 product candidates, clinical development timelines and financial projections.

These statements involve risks and uncertainties, which are described in the Risk Factor section of our most recent Form 10-K and other reports we file 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're not taking an obligation to do so. And with that, I will turn the call over to Richard.

Thank you, Geoff, and thank you, everyone, for joining the call today. It is a pleasure to update you on our progress over the past few months, which has been significant.

As you know, I joined Merrimack in February, during what can only be considered a profoundly transformative time for the company. Over the past several months, we have refocused our strategy to become a well-capitalized research and clinical development company, dedicated to advancing a promising pipeline of oncology assets.

In being of the helm of the company during such a major shift, I recognize the importance of seamless execution, to make the transition as smooth as possible. I also recognize the work that had been done prior to my joining in Merrimack to develop and launch ONIVYDE and to make the difficulty of pragmatic decision to move forward in divesting both ONIVYDE and our generic version of DOXIL to Ipsen.

As I discussed on our last call, when coming onboard, I saw the inner potential within Merrimack, both in its deeply talented team and its pipeline assets. My goals on day one were as follows: to close the deal with Ipsen efficiently, to strengthen our management team and to advance our programs, so we can ultimately get these drugs to patients.

I can say today that we are well on our way to accomplishing these goals. We closed the Ipsen transaction following the stockholder approval last month and alongside this, declared a special cash dividend of $140 million.

We also made significant strides in streamlining our financial operations, which Yasir will talk about in a moment. We announced the appointment of a key member of our team, Dr.

Daryl Drummond to spearhead our important discovery work as Head of Research and with the completion of the transaction, we launched the new and realign Merrimack focused on driving forward our preclinical programs, each targeting key unmet needs for cancer patients. Clearly, it has been a very busy few months to start of 2017, so I would like to devote a little time to each of these accomplishments in more detail.

First, the successful close of the Ipsen transaction. We've worked through the details of the agreement during our last call, so I will just highlight the key terms as well as reiterate our rationales is well aligned with our newly focused R&D strategy.

In early January, we announced that we had entered into an agreement with Ipsen to divest and divide in our generic version of DOXIL. The transaction is valued at up to $1.025 billion, including $575 million in cash, that we received at closing and up to $460 million in potential regulatory approval-based milestone payments.

On top of the $1.025 billion, we have retained the right to receive up to $33 million in net milestone payments pursuant to our previous license agreement with Shire for the ex-U.S. development and commercialization rights to ONIVYDE.

Throughout the strategic pipeline review process that was conducted by our board last year and in developing the terms of the Ipsen transaction, the enhancement of shareholder value was a key driving factor. We sought to achieve this in many ways, some more immediate and some more long-term around corporate changes to drive our new strategy.

We announced a special cash dividend of $140 million on our common stock, that is payable on May 26, 2017. Based on our current number of shares outstanding, the special dividend will be approximately $1.06 per common share.

We also plan to return to our stockholders a 100% of the amounts we may receive of the up to $450 million in milestone payments for potential, additional regulatory approvals of ONIVYDE, including approvals in first-line pancreatic cancer, small cell lung cancer and one other unspecified indication, net of any taxes owed and subject to there being sufficient surplus at that time. We expect that stockholders will further benefit from the realignment of our financial structure, which includes paying down the full amount of our senior notes, totaling $175 million and a reduction of our operating structure to better align with the research and clinical development stage company.

Beyond the financial aspects of this transformation to our stockholders, as part of the strategic review process, we considered our long-term vision and sought to unleash the inherent value in our team and our assets. We determined that our portfolio of earlier stage, non-commercial assets, including engineered antibodies and antibody directed nanotherapeutics, was being under recognized.

We saw that in order to create an organization that could achieve our longer-term strategy, we needed to shift our structure to focus on our core capabilities in the development of our three most promising clinical stage programs. MM-121, MM-141 and MM-310.

As the first order of business to accomplish this, we allocated a $125 million of the proceeds from the Ipsen deal directly to our pipeline. We also have developed a very disciplined plan around our three pipeline programs that have defined very clear value inflexion points that we expect to achieve within our current cash runway, which as we have said previously, takes us to the second half of 2019.

We also made a key hire or rather a key promotion within our research team and announced Daryl Drummond's appointment as Head of Research. Daryl was integral in the invention and the development of ONIVYDE and is experienced moving discoveries into therapeutics is precisely the type of leadership that our research organization needs at this time.

In addition, we expect to add other executives to our management team in the future, including a Chief Medical Officer. So with that, I want to move on to talk in more detail about our clinical programs.

With the new Merrimack, we have refined our strategy to focus on R&D and to take our wholly owned programs through clinical proof-of-concept. We feel confident that we can achieve our clinical milestones, because we have the systematic and hopefully, accelerated approach to development of our molecules.

We intend to focus on well-defined biomarker in rich patient populations, which will allow us design and enroll more efficient proof-of-concept studies. We are able to focus on these distinct patient populations, because we design our pipeline solutions, to target specific problems and we developed our assets, with a deep understanding of the biology and the causes for the problem that we are looking to solve, do much in part to the work being done by Daryl and his team.

We feel the step-wise and thoughtful approach to drug development will utilize our resources more efficiently and get us to clinically meaningful data readouts earlier. Now let me talk a bit about our lead product candidates.

Within our 3 prioritized clinical programs, we have 2 engineered antibody assets, MM-121 and MM-141 and 1 antibody directed nanotherapeutics MM-310. MM-121, or seribantumab is in first-in-class fully human monoclonal antibody, targeting the HER3 receptor, which has been demonstrated by our own preclinical work and in the literature to be an important cancer pathway.

In keeping with our biomarker driven approach, MM-121 is currently being studied in patients with non-small cell lung cancer and we plan to begin later this year in breast cancer. With both studies enrolling only those patients who test positive for the biomarker heregulin, which bias to the HER3 receptor.

Let me first to review the ongoing Phase II Sarbox study in non-small cell lung cancer. Patients in the Sarbox study are randomized to 221 to receive either MM-121-plus docetaxel or docetaxel alone.

We simplified the design by removing the option to receive [docetaxel] another chemotherapy agent and limited the histology to adenocarcinoma. We also reduced enrollment numbers to 80 patients and reduced the number of prior therapies to no more than 2.

The study requires prior exposure to a platinum-containing regimen and allows for previous exposure to checkpoint inhibitors. In returning the study into a proof-of-concept study, we also changed the primary endpoint to progression-free survival.

Secondary endpoints are objective response rate, time to progression and overall survival. These changes align with our strategy is to test our product candidates in well-defined patient populations.

With all these changes, we expect that we will have an accelerated data readout and anticipate having top line results in 2018. The second Phase II proof-of-concept study for MM-121, the Sarbox study is expected to begin later this year.

With this study, we are focused on postmenopausal metastatic breast cancer patients, who are hormone receptor positive, HER2-negative and as mentioned, also have sufficient expression of the biomarker heregulin. This study will enroll patients who have failed up to 2 prior lines of therapies, including CDKs or cyclin-dependent kinase inhibitors.

Following a biomarker stream, we expect that approximately 80 heregulin-positive pressures will be randomized one to one to receive either MM-121 and fulvestrant or placebo and fulvestrant to maintain the blind. And just as with the [SHERBOUX] study, the primary endpoint will be progression-free survival, secondary endpoints will be objective response rate, time to progression and overall survival.

We will update you on the anticipated timing of the top line data for the Sarbox Study once it has started later this year. By establishing benefits in these 2 key oncology indications, lung and breast cancer, we expect to fully validate heregulin as a biomarker and MM-121 as a clinically meaningful therapeutic in this biomarker in rich population.

Turning now to MM-141, which is our second antibody asset and is a bispecific tetravalent monoclonal antibody that targets both the HER3 and the IGF-1 receptors. The rationale behind these bispecific approach is that the HER3 and the IGF-1 pathways converge at the PI3 kinase/AKT/mTOR pathway, a very well validated pathway for cancer therapies, given its role in regulating cell ptosis and proliferation.

By blocking these pathways upstream, the expectation is that we will see improve clinical benefit. We are sitting at MM-141 in the Phase 2 carry study in patients with front-line metastatic pancreatic cancer.

We addressed the design of the carry study to align it with our accelerated by biomarker-driven approach and more efficient enrollment numbers. As a reminder, we are screening for high levels of the IGF-1 protein, patients with high levels, are randomized one-to-one to received either MM-141 plus nab-paclitaxel and gemcitabine chemotherapy or placebo-plus chemotherapy.

Patients with low-level of IGF-1 continue to be observed to better understand the biomarker profile. The primary endpoint is progression-free survival, while objective response rate, duration of response and overall survival are the secondary measures.

As retool of proof-of-concept study, we lower the enrollment target to 80 patients in total. We are progressing well with enrollment for the carry study and we continue to expect to have top line results in 2018.

The final program, I want to discuss today is MM-310, for which we initiated a Phase 1 study in March. MM-310 is an antibody-directed nanotherapeutic, using similar technology to ONIVYDE, but much more advanced.

It is differentiated in that targets the EphA2 receptor and markers shown to be over expressed in multiple tumors and because its payload is a proprietary pro-drug formulation of the docetaxel. By encapsulating the docetaxel pro-drug, MM-310 maximizes the exposure of the drug in the tumor to allow for a slow and sustained release.

Based on earlier studies, we also believe this is our most stable nanoparticle to date and that this characteristic should reduce its stannic exposure of the active drug and reduced toxicity. Back in January, we said, we plan to initiate our Phase 1 study of MM-310 in solid tumors in the first quarter.

We did initiate the first site and also dosed the first patient in March. We are enrolling patients with a range of cancers, including prostate, ovarian, bladder, gastric and lung to better understand where our molecule has the most potential.

The Phase 1 study is a dose escalation, designed to determine the recommended Phase 2 dose, after which we plan to move the drug into more targeted expansion cohorts. We continue to expect to report safety data and a recommended Phase 2 dose for the study in 2018.

To summarize, we are really excited about these three pipeline programs. We believe, we have constructed a development plan that will accelerate our time lines and get these drugs to patients as quickly as possible.

But also, one that is most efficient enrooted in biology by identifying those patients most likely to benefit from each drug. And with that, I would like to turn over the call to Yasir to walk through our financials.

Thank you, Richard. With the sale of the commercial business at Ipsen, this quarter's financials are somewhat unique.

I'll spend a little time at the beginning of the discussion, highlighting some of these accounting treatments, related to the commercial sale, before focusing on our core business and outlook going forward. Just a recap, the shareholder approval to sell the commercial business to Ipsen occurred on March 30th, that is during the first quarter.

On the other hand, the actual closing of the transaction occurred on April 3, that was during the second quarter and as such, this has a significant impact on the presentation of the financials. To help orient you, the key accounting treatments pertaining to the transaction in the first quarter, as you will see in the financial statements, are twofold.

First, we have a section on discontinued operations, within the income statement. This includes all revenues and expenses that are directly linked to the commercial business, but does not include any fixed overhead.

This is unlike the carve-out financials provided in the proxy, where we will require to a portion, fixed overhead to the commercial business. Second, on the balance sheet, you'll see line items for assets and liabilities, held-for-sale, respectively.

This treatment is necessary given the shareholder vote had been completed in the first quarter. With all that said, the actual gain from the sale of the asset will be reported in the second quarter financials, where assets held-for-sale will no longer be relevant.

ONIVYDE sales were $16.1 million for the first quarter of 2017 compared to $15.8 million, during the fourth quarter of 2016. This is the last time we are reporting ONIVYDE sales, as we will focus on our continuing operations from hereon out.

With that, let me briefly walk you through the financials pertaining to our continuing operations. Research and development expenses were $21.6 million for the first quarter of 2017 compared to $28 million for the first quarter of 2016, a decrease of $6.4 million or 23%.

This decrease was primarily attributable to the shift to being a more focused, clinical development company. Similarly, general and administrative expenses were $5.6 million for the first quarter of 2017 compared to $6.5 million for the first quarter of 2016, a decrease of $0.9 million or 14%.

This decrease was primarily attributable to lower headcount related to the restructuring activities, that occurred in the fourth quarter of 2016. From a balance sheet perspective, we ended the first quarter of 2017 with approximately $17.2 million in cash on hand.

Of course, the Ipsen transaction has brought with a significant cash infusion, allowing us to not only return cash to shareholders in the form of a special dividend and restructure our balance sheet, but also to provide the company with what we believe to be sufficient runway to realize multiple potential value inflection points. With the aforementioned changes to our expenses and the net milestones we expect to receive from Shire, I would like to reiterate the cash runway guidance we provided in our press release, to fund our operations into the second half of 2019.

I will now hand the call back to Richard for concluding remarks and the highlight our upcoming milestones.

Thank you, Yasir. The last few months have been incredibly busy, but also incredibly rewarding, as I believe we have created a corporate structure and a development plan that is built for success.

I want to quickly layout some key upcoming milestones that will drive value for our stockholders. We have declared a special dividend of approximately $1.06 per share, based on our current number of shares outstanding, which is payable on May 26, 2017.

For MM-121, we expect to initiate Sarbox study in breast cancer patients this year and to have top line data from the Sarbox study in non-small lung cancer in 2018. For MM-141, we expect top line results from the CARRIE study in front-line pancreatic cancer in 2018.

And for MM-310, we expect to have data for our recently initiated Phase 1 study in solid tumors in 2018. I would like to close by thanking our employees for making my first few months as CEO, so fulfilling.

I'm very fortunate to have such a talented team and believe that our path is forward looking from here. As we focus on our vision of being a dedicated research and clinical development organization.

And with that, I would like to thank you, everyone, for being here and we will now open the line to any questions. Operator?

This is Eric on for Anupam this morning. Thanks for taking the question.

Just a couple on MM-121 on lung cancer. I'm wondering if you could give a little bit more -- if you're able to be a little more specific on timing of the Phase 2 readouts in 2018 or at least provide a little color on in terms of how far along you are towards target enrollment?

And how are you thinking about the thresholds for moving that program forward? Thanks.

It's Richard. So I'll take that question.

With regard to the study, I say, as I mentioned in my introductory comments, it's a proof-of-concept study. It's a robust proof-of-concept study because it's a Phase 2 randomized double-blind trial.

Now as you are well aware, this study has had a number of stop-and-goes, right. The original design was the primary endpoint of progression free survival, then it was moved to an survival primary endpoint and then more recently, we went back to a progression free survival or primary endpoint with it much newer patient population.

And every time, we do that, with this stop-and-goes, time lines can be a bit challenging because clinical sites when the amendment gets rollout and to sometimes slow down the enrollment, but they continue to enroll patients into the study and the feedback we have received from the investigators is that, they are very excited with this late final amendment, which is much more specific in terms of narrowing down the patient population and will give us the best chance of showing the clinical benefit of blocking their HER3 pathway in tumors that are addicted, so to speak, to the HER3 pathway by having a high heregulin levels. And then, we're adding, of course, MM-121, to the standard of care -- chemotherapy standard of care, which is docetaxel in that -- in second and third line.

And so the investigators are very pleased with this amendment and exited. As I said, this really continues to accrue and we've reconfirmed that we expect top-level results in 2018.

I'm not prepared to give more regularity on exactly during -- when during the year, but we'll reconfirm either in 2018. With regard to the threshold for the study, the study was designed, again, a primary endpoint of progression-free arrival, with the 3 months PFS, which is for the docetaxel arm made in PFS and approximately 5 months progression-free survival for the combination with MM-121.

That is a significant clinical benefit, that gives you a hazard ratio of about 0.6, which means that patients who are in the control arm has a 40% more chance of progressing than patients who are in the investigational arm. That's a significant improvement.

So that's the threshold that we are putting on our drug through, through, again, a robust Phase II randomized trial, that is double blind. So we expect the data when they come out, will be very clean and will be the best way can we can answer that hypothesis.

Can we, if we block with the powerful antibody, MM-121, the HER3 receptor in patients with high expression of in their tumors of heregulin, can we provide additional clinical benefit to standard chemotherapy.

Just with respect to the 310 in the Phase I study, I noticed there is an expansion phase, you are testing combination. Just wonder if you can clarify, what drove combinations you plan to test there?

And then, secondly, that studies also targeting multiple solid tumor types, just curious at this point if you have a sense of what tumor types, you plan to prioritize? Or alternatively, what tumor types you think have the best chances for success?

Yes, Mike, this is Richard. I'll take this question, again.

So with regard to 310, first of all, we're very happy that we had been announced that we will start the Phase I study in Q1 and in March. We actually initiated the first site and dosed the first patient successfully.

So we're very pleased with that trial moving forward. This is first for the Phase I.

So we will first establish the safety and of course the recommended maximum tolerated dose and we expect to do that, again in 2018. As far as then moving to expansion cohort, cohorts, we certainly can do this as a single agent because, of course, docetaxel is that single agent and we would expect that MM-310, which is the pro-drug for docetaxel and embedded in the nanoparticle with a slower and more sustained release as well as decorated with the FNA2 antibody that recognizes the FNA2 receptor in tumors will allow us to deliver more specifically to tumor sites.

So certainly, as a single agent, we can do special cohorts, but we can also do special cohorts in combination with other agents. We would like to see the results of the Phase I study, before we commit to any kind of combination partners, so to speak, because we need to really be driven by the data and follow the data.

Secondly, as far as the [natural] supplies to the kinds of tumors, of course, as you know, docetaxel is a broadly used taxane in oncology, in multiple tumors and our hope is that, we are developing a next-generation taxane with this antibody directed nanotherapeutics that will have a higher therapeutic index, which means more and more efficacy and more safety. And so we could take it in multiple tumors, and once again, we will wait for the results of the Phase 1 and see since we are enrolling diversity of tumors in the Phase 1, see where we might get maybe the best signal and maybe take that forward in the expansion cohorts.

Great, thanks guys.

Maybe a first one on MM-121 in lung cancer. Can you give us a little bit sense of how dynamic HER expression is in lung cancer?

Yes. So going back to 121 in lung cancer, the HER -- so we're targeting the HER3 receptor, which we intend to block.

But we do this in patients, who have high heregulin expressions. And so in that case, we are selecting the patients whose tumors were that have the most addictive, so to speak to, to the HER3 pathway.

The reason we're doing that, we've been informed by our prior trials, we've done other files in Phase 2 randomized trials in lung cancer, in breast cancer, in ovarian cancer with 121, and if you recall by retrospectively looking at data set, we found that there was a strong signal of clinical benefit if the drug was added to patients, whose tumors have high heregulin level. And so, this biomarker and this enrichment of the patient population has been really validated from prior studies and we have experiencing, I think, over 700 patients within MM-121.

So we're very comfortable with we're testing the drug in non-small cell lung cancer. In this case, we have never done the patient populations to adenocarcinoma.

Great. That's very helpful thanks.

And maybe just the second question on the up to $33 million in net milestone from Shire. When -- do you have an expectation of when that might occur or a little more refined time line on that?

With regards to the $33 million, which as we previously disclosed in net milestones as composed of $23 million, that relate to marketing approval in European countries and $10 million for the first patient dosing in another indication. So that's the background on the $33 million.

Specifically, with regards to your question, as we stated in the press release, we continue to anticipate that those payments will be made within our cash runway. In addition, I would add that given where ONIVYDE is with regards to already being sold in Europe as well as the plans developed in additional indications, we have a very high level of confidence that we will be achieving those milestones.

Thank you.

It's around 121 or even on the biospecific and the use of heregulin as a biomarker. And I'm just curious in the adenocarcinomas, first of all, and you may have said this and in response to previous question, I apologize, but if I missed it.

But what percentage of those adenocarcinomas are positive for heregulin? And when you use the test, obviously, there is a gradient of outcomes, high and you haven't spoken in a while, but could you remind us what's the cutoff, what's the most optimal cutoff to actually see the response with 121 or even in the bispecific, which you haven't moved in the clinic yet, but more importantly, you probably have some preclinical data point?

Thanks very much.

Thank you Tony, so with regard to heregulin or heregulin high we're targeting really patients whose tumors have high expression of heregulin. What we're doing is, getting the key [emphasize] the key strategy here at Merrimack, which I highlighted in the prior call is that, we really and we refine the strategy.

We are really focusing on trying to really understand the problem we are trying to solve and that's through a very deep understanding of the cancer pathways. That's why having Daryl Drummond, as I mentioned in my introductory statements, appointed as Head of Research is very important.

So really understanding the cancer pathway and here, we really understood the cancer pathway, where HER3 was very important, but more importantly, we design the specific solution against the problem we're trying to solve, which is a powerful monoclocal antibody that blocks the receptor. And the third part of that, 3-pronged strategy is to test these solutions in biomarker in rich patient populations.

So they are much better defined and here, again, we're using heregulin, but more importantly, we're testing heregulin inside the tumor cells. And so the way that we are defining patients about high heregulin level is to inside of [irradiation] assay and looking at expression of heregulin in the tumor cells in the biopsy sample.

And biopsy sample that have positive expression of heregulin are the ones that are declared as high heregulin. This is how we define high heregulin levels.

Now when we do this, going back to your questions about what percentage of patients have high heregulin levels in several of our studies both this one as well as prior studies, we are seeing approximately a 50% rate, in other words, about half of the patients that seem to have high expression of heregulin in their tumor cells.

Great, well, thank you, everyone, for joining us. We look forward to updating you, again, next quarter.