[May 15, 2012] MERRIMACK PHARMACEUTICALS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 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 17 -------------------------------------------------------------------------------- Table of Contents 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 five programs 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 and, to a lesser extent, through government grants, the monetization of tax credits and equipment lease financings. Through March 31, 2012, we have received $268.2 million from the sale of convertible preferred stock and warrants and $150.5 million of upfront license fees, milestone payments, reimbursement of development and manufacturing services and other payments from our collaborations. In April 2012, we closed the initial public offering of our common stock pursuant to a registration statement on Form S-1, as amended. We sold an aggregate of 15,042,459 shares of common stock under the registration statement at a public offering price of $7.00 per share, including 742,459 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $100.5 million, after deducting underwriting discounts and commissions but prior to the payment of remaining offering expenses payable by us and accrued dividends on our Series B convertible preferred stock. As of March 31, 2012, we had cash and cash equivalents of $30.6 million. We expect our existing cash and cash equivalents on hand as of March 31, 2012, together with the net proceeds from the initial public offering, to be sufficient to fund operations into the second half of 2013. We have never been profitable and, as of March 31, 2012, we had an accumulated deficit of $374.1 million. Our net loss was $23.4 million for the three months ended March 31, 2012 and $13.5 million for the three months ended March 31, 2011. 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, subject to 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. 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 18 -------------------------------------------------------------------------------- Table of Contents 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. Of the $25.0 million in development and regulatory milestone payments received, $5.0 million was earned and received in the first quarter of 2012. 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. Although Sanofi will ultimately be responsible for manufacturing MM-121 under the agreement, we are currently manufacturing MM-121 for use in ongoing clinical trials. Sanofi will assume responsibility for all manufacturing of MM-121 at such time as material is needed for Phase 3 clinical trials. 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 months ended March 31, 2011 and 2012, we recognized revenue based on the following components of the Sanofi agreement: Three months ended March 31, (in thousands) 2011 2012 Upfront payment $ 1,250 $ 1,250 Milestone payments 208 1,412 Development services 4,705 8,142 Manufacturing services and other 255 521 Total $ 6,418 $ 11,325 Financial Obligations Related to the License and Development of MM-398 In September 2005, Hermes BioSciences, Inc., or Hermes, which we acquired in October 2009, entered into a license agreement with PharmaEngine, Inc., or PharmaEngine, under which PharmaEngine received an exclusive license to research, develop, manufacture and commercialize MM-398 in Europe and certain countries in Asia. In May 2011, we entered into a new agreement with PharmaEngine under which we reacquired all previously licensed rights for MM-398, other than rights to commercialize MM-398 in Taiwan. As a result, we now have the exclusive right to commercialize MM-398 in all territories in the world, except for Taiwan, where PharmaEngine has an exclusive commercialization right. Upon 19 -------------------------------------------------------------------------------- Table of Contents entering into the May 2011 agreement with PharmaEngine, we paid PharmaEngine a $10.0 million upfront license fee. In addition, we made a milestone payment of $5.0 million to PharmaEngine during the first quarter of 2012 in connection with dosing the first patient in our Phase 3 clinical trial of MM-398. We may be required to make up to an aggregate of $75.0 million in additional development and regulatory milestone payments and $130.0 million in additional sales milestone payments to PharmaEngine upon the achievement of specified development, regulatory and annual net sales milestones. PharmaEngine is also entitled to tiered royalties on net sales of MM-398 in Europe and certain countries in Asia. The royalty rates under the agreement range from high single digits up to the low teens as a percentage of our net sales of MM-398 in these territories. Under the May 2011 agreement, we are responsible for all future development costs of MM-398 except those required specifically for regulatory approval in Taiwan. During the three months ended March 31, 2012, we recognized research and development expense of $5.3 million under the May 2011 agreement with PharmaEngine, which consisted of the $5.0 million milestone payment and $0.3 million of research and development reimbursement. Financial Operations Overview Revenues We have not yet generated any revenue from product sales. All of our revenue to date has been derived from license fees, milestone payments and development and manufacturing services and other payments received from collaborations, primarily with Sanofi, and grant payments received from the National Cancer Institute. In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research, development and manufacturing payments from collaborations and royalties from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research, development and manufacturing reimbursements, milestone and other payments from collaborations, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. We do not expect to generate revenue from product sales until 2014, at the earliest. If we or our collaborators fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected. Research and development expense The following table summarizes our principal product development programs, including the related stages of development for each product candidate in development and the research and development expenses allocated to each clinical product candidate. Prior to May 2011, our collaborator, PharmaEngine, led the clinical development of MM-398 with minimal investment by us. 20 -------------------------------------------------------------------------------- Table of Contents Current Three months ended March (in stage of 31, thousands) Indication development 2011 2012 MM-398 Cancer Phase 3 $ 447 $ 7,794 MM-121 Cancer Phase 2 5,992 8,193 MM-111 Cancer Phase 1/Phase 2 planned 2,262 1,903 MM-302 Cancer Phase 1 1,345 1,529 MM-151 Cancer Phase 1 3,265 2,816 Preclinical, general research and discovery 3,990 8,507 Stock compensation 700 909 Total research and development expense $ 18,001 $ 31,651 MM-398 MM-398 is currently being evaluated in a Phase 2 clinical trial in pancreatic cancer and in a Phase 3 clinical trial as a therapy in metastatic pancreatic cancer for patients who have failed treatment with gemcitabine. Our current estimate for the external costs associated with completing the Phase 3 clinical trial is between $17.0 million and $22.0 million. In May 2011, we made an upfront license payment of $10.0 million to PharmaEngine. In the first quarter of 2012, we made a milestone payment of $5.0 million to PharmaEngine in connection with dosing the first patient in our Phase 3 trial. We may be required to make up to an aggregate of $75.0 million in additional development and regulatory milestone payments and $130.0 million in additional sales milestone payments to PharmaEngine upon the achievement of specified development, regulatory and annual net sales milestones. PharmaEngine is also entitled to tiered royalties based on net sales of MM-398 in Europe and certain countries in Asia. The royalty rates range from high single digits up to the low teens as a percentage of our net sales of MM-398 in these territories. In addition, several investigator sponsored trials are ongoing in which the majority of the total clinical trial costs are paid by the investigators. Investigator sponsored trials include a Phase 2 clinical trial in colorectal cancer, a Phase 1 clinical trial in colorectal cancer and a Phase 1 clinical trial in glioma. MM-121 We have entered into a license and collaboration agreement with Sanofi related to MM-121. Under the terms of the agreement, we are responsible for leading clinical development through Phase 2 proof of concept trials for each indication. Although Sanofi will ultimately be responsible for manufacturing MM-121 under the license and collaboration agreement, we are currently manufacturing MM-121 for use in ongoing clinical trials. Sanofi will assume responsibility for all manufacturing of MM-121 at such time as material is needed for Phase 3 clinical trials. All expenses related to manufacturing are required to be reimbursed by Sanofi. Sanofi pays a portion of the estimated manufacturing campaign costs upfront and the remainder during and upon completion of the manufacturing campaign in accordance with an agreed upon budget. We separately record revenue and expenses on a gross basis under this arrangement. Sanofi is responsible for all development and manufacturing costs of MM-121. We are currently conducting three Phase 2 clinical trials, one Phase 1/2 clinical trial and four Phase 1 clinical trials of MM-121 in multiple cancer types. During the third quarter 21 -------------------------------------------------------------------------------- Table of Contents of 2010, we received a $10.0 million milestone payment from Sanofi for dosing the first patient in a proof of concept Phase 2 clinical trial of MM-121 in breast cancer. During the fourth quarter of 2011, we received a $10.0 million milestone payment from Sanofi for dosing the first patient in a proof of concept Phase 2 clinical trial of MM-121 in non-small cell lung cancer. During the first quarter of 2012, we received a $5.0 million milestone payment from Sanofi for dosing the first patient in a proof of concept Phase 2 clinical trial of MM-121 in ovarian cancer. MM-111 We are currently conducting two Phase 1 clinical trials of MM-111 in multiple cancer types. MM-302 We are currently conducting one Phase 1 clinical trial of MM-302 in breast cancer. MM-151 We are currently conducting one Phase 1 clinical trial of MM-151 in solid tumors. During the first quarter of 2012, we made a $1.5 million payment under our collaboration agreement with Adimab LLC. General and administrative expense General and administrative expense consists primarily of salaries and other related costs for personnel, including stock-based compensation expenses and benefits, in our executive, legal, intellectual property, business development, finance, purchasing, accounting, information technology, corporate communications, investor relations and human resources departments. Other general and administrative expenses include employee training and development, board of directors costs, depreciation, insurance expenses, facility-related costs not otherwise included in research and development expense, and professional fees for legal services, including patent-related expenses, pre-commercial consulting costs, and accounting and information technology services. We expect that general and administrative expense will increase in future periods in proportion to increases in research and development and as a result of increased payroll, expanded infrastructure, increased consulting, legal, accounting and investor relations expenses associated with being a public company and costs incurred to develop and commercialize our clinical products. Other income (expense) Other income and other expense primarily consist of gains and losses on the change in value and time to expiration of convertible preferred stock warrants, the recognition of federal and state sponsored tax incentives and other one-time income or expense-related items. Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited interim condensed consolidated financial statements, which we have prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, and generally accepted accounting principles in the United States for condensed consolidated information. The preparation of these interim condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and 22 -------------------------------------------------------------------------------- Table of Contents expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Estimates include revenue recognition, useful lives with respect to long-lived assets and intangibles, valuation of stock options, convertible preferred stock warrants, contingencies, accrued expenses and other, intangible assets, goodwill, in-process research and development and tax valuation reserves. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. Revenue recognition We enter into biopharmaceutical product development agreements with collaborators for the research and development of therapeutic and diagnostic products. The terms of these 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. We assess these multiple elements in accordance with the Financial Accounting Standards Board Accounting Standards Codification 605, Revenue Recognition, in order to determine whether particular components of the arrangement represent separate units of accounting. In January 2011, we 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 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. We 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. We did not enter into any significant multiple element arrangements or materially modify any of our existing multiple element arrangements during the year ended December 31, 2011 or the three months ended March 31, 2012. Our existing collaboration agreements continue to be accounted for under previously issued revenue recognition guidance for multiple element arrangements and milestone revenue recognition, as described below. We 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 we determined that an arrangement should be accounted for as a single unit of accounting, we determined the period over which the performance obligations would be performed and revenue would be recognized. If we could not reasonably estimate the timing and the level of effort to 23 -------------------------------------------------------------------------------- Table of Contents complete our performance obligations under the arrangement, then we recognized revenue under the arrangement on a straight-line basis over the period that we expected to complete our performance obligations, which is reassessed at each subsequent reporting period. Our 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 we have performed the performance obligations to date over the total estimated time to complete the performance obligations, multiplied by the amount of the milestone payment, is 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 approval are not considered probable of being achieved until such approval is received. Milestones tied to counterparty performance are not included in our revenue model until the performance conditions are met. To date, we have not received any royalty payments or recognized any royalty revenue. We will recognize royalty revenue upon the sale of the related products, provided we have no remaining performance obligations under the arrangement. We record deferred revenue when payments are received in advance of the culmination of the earnings process. This revenue is recognized in future periods when the applicable revenue recognition criteria have been met. Contractual matter We manufacture MM-121 under a license and collaboration agreement with Sanofi. Under this agreement, Sanofi reimburses us for direct costs incurred in manufacturing. During 2009 and 2010, we utilized a third party contractor to perform fill-finish manufacturing services. This third party contractor experienced U.S. Food and Drug Administration, or FDA, inspection issues with its quality control process that resulted in a formal warning letter from the FDA. Following a review by Sanofi and us, some MM-121 was pulled from clinical trial sites and replaced with MM-121 that was filled by a different contractor. Sanofi had requested that we assume financial responsibility for the MM-121 material that was pulled from clinical trial sites. We and Sanofi have since agreed that, during 2012 and 2013, we will reimburse Sanofi approximately $1.2 million of previously billed amounts. We have recorded a contractual liability of $1.2 million in accrued expenses and other on the accompanying condensed consolidated balance sheets as of March 31, 2012. Our revenue recognition model for manufacturing services performed under the license and collaboration agreement with Sanofi is to recognize these services over the period of performance, which is currently estimated to be 12 years from the effective date of the agreement. Removal of these previously billed amounts from our revenue recognition model and establishing this contractual liability resulted in an earnings reduction of $0.2 million for the three months ended March 31, 2012. JOBS Act On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. Among other provisions, the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. Additionally, we are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. 24 -------------------------------------------------------------------------------- Table of Contents Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including not being required to provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements. We may remain an emerging growth company for up to five years, until December 31, 2017, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. Results of Operations Comparison of the three months ended March 31, 2011 and 2012 Three months ended March 31, (in thousands) 2011 2012 Collaboration revenues $ 6,461 $ 11,344 Research and development expenses 18,001 31,651 General and administrative expenses 3,101 3,728 Loss from operations (14,641 ) (24,035 ) Interest income 14 9 Interest expense (6 ) (1 ) Other income 1,098 625 Net loss $ (13,535 ) $ (23,402 ) Collaboration revenues Collaboration revenues for the three months ended March 31, 2012 were $11.3 million, compared to $6.5 million for the three months ended March 31, 2011, an increase of $4.8 million, or 74%. This increase resulted from increases in development services, milestone and manufacturing revenues recognized under the license and collaboration agreement with Sanofi. 25 -------------------------------------------------------------------------------- Table of Contents Research and development expenses Research and development expenses for the three months ended March 31, 2012 were $31.7 million, compared to $18.0 million for the three months ended March 31, 2011, an increase of $13.7 million, or 76%. This increase was primarily attributable to: † $7.3 million of increased MM-398 spending due primarily to a $5.0 million milestone payment made to PharmaEngine in the first quarter of 2012 and increased costs associated with our Phase 3 clinical trial; † $4.5 million of increased spending on preclinical, general research and discovery due to an increase in the number of preclinical programs in our pipeline, the timing of material and supply purchases and an antibody discovery related payment of $0.4 million made in the first quarter of 2012; † $2.2 million of increased MM-121 spending due to initiation of four new clinical trials and increased spending on ongoing clinical trials; † $0.2 million of increased MM-302 spending due to increased preclinical and clinical costs; and † $0.2 million of increased stock compensation expense due to increased headcount. These increases were partially offset by the following decreases: † $0.4 million of decreased MM-151 spending primarily due to a $1.9 million decrease in manufacturing costs due to the timing of manufacturing activities, partially offset by a $1.5 million collaboration payment made during the first quarter of 2012; and † $0.4 million of decreased MM-111 spending due to the timing of clinical trial activities. General and administrative expenses General and administrative expenses for the three months ended March 31, 2012 were $3.7 million, compared to $3.1 million for the three months ended March 31, 2011, an increase of $0.6 million, or 19%. This increase was primarily attributable to an increase in labor and labor-related costs and an increase in costs related to our initial public offering, which closed in April 2012. Other income Other income for the three months ended March 31, 2012 was $0.6 million, compared to $1.1 million for the three months ended March 31, 2011, a decrease of $0.5 million, or 45%. This decrease was primarily due to the absence of a $1.8 million cash settlement from a former service provider recognized in the first quarter of 2011, partially offset by a $1.3 million quarter-over-quarter benefit from the remeasurement of fair value of our convertible preferred stock warrants. 26 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of liquidity We have financed our operations to date primarily through private placements of our convertible preferred stock, collaborations, an initial public offering of our common stock and, to a lesser extent, through government grants, the monetization of tax credits and equipment lease financings. Through March 31, 2012, we have received $268.2 million from the sale of convertible preferred stock and warrants and $150.5 million of upfront license fees, milestone payments, reimbursement of development and manufacturing services and other payments from our collaborations. In April 2012, we closed the initial public offering of our common stock pursuant to a registration statement on Form S-1, as amended. We sold an aggregate of 15,042,459 shares of common stock under the registration statement at a public offering price of $7.00 per share, including 742,459 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $100.5 million, after deducting underwriting discounts and commissions but prior to the payment of remaining offering expenses payable by us and accrued dividends on our Series B convertible preferred stock. As of March 31, 2012, we had cash and cash equivalents of approximately $30.6 million, of which $1.6 million related to the cash and cash equivalents held by our majority owned subsidiary Silver Creek Pharmaceuticals, Inc., or Silver Creek, which is consolidated for financial reporting purposes. This $1.6 million is designated for the operations of Silver Creek. We made a $1.5 million payment under our collaboration agreement with Adimab LLC and an antibody discovery related payment of $0.4 million during the first quarter of 2012. Cash flows The following table provides information regarding our cash flows for the three months ended March 31, 2011 and 2012. Three months ended March 31, (in thousands) 2011 2012 Cash used in operating activities $ (9,944 ) $ (19,403 ) Cash used in investing activities (561 ) (426 ) Cash provided by (used in) financing activities 12,387 (70 ) Net increase (decrease) in cash and cash equivalents $ 1,882 $ (19,899 ) Operating activities Cash used in operating activities of $9.9 million during the three months ended March 31, 2011 was primarily a result of our $13.5 million net loss, partially offset by non-cash items of $2.9 million and changes in operating assets and liabilities of $0.7 million. Cash used in operating activities of $19.4 27 -------------------------------------------------------------------------------- Table of Contents million during the three months ended March 31, 2012 was primarily a result of our net loss of $23.4 million, partially offset by non-cash items of $2.0 million and changes in operating assets and liabilities of $2.0 million, which includes receipt of a $5.0 million milestone payment under our license and collaboration agreement with Sanofi. Investing activities Cash used in investing activities during the three months ended March 31, 2011 and 2012 was primarily due to the purchase of property and equipment. Financing activities Cash provided by financing activities of $12.4 million for the three months ended March 31, 2011 was primarily a result of proceeds of $12.5 million received for our Series G convertible preferred stock financing received in advance of the closing in April 2011. Cash used in financing activities of $0.1 million during the three months ended March 31, 2012 was primarily a result of deferred financing costs related to the initial public offering which closed in April 2012 of $0.2 million, partially offset by proceeds from the issuance of common stock of $0.1 million. Funding requirements As of March 31, 2012, we had cash and cash equivalents of $30.6 million. In April 2012, we closed the initial public offering of our common stock pursuant to a registration statement on Form S-1, as amended. We sold an aggregate of 15,042,459 shares of common stock under the registration statement at a public offering price of $7.00 per share, including 742,459 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $100.5 million, after deducting underwriting discounts and commissions but prior to the payment of remaining offering expenses payable by us and accrued dividends on our Series B convertible preferred stock. We have not completed development of any therapeutic products or companion diagnostics. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we: † initiate or continue clinical trials of our five most advanced product candidates; † continue the research and development of our other product candidates; † seek to discover additional product candidates; † seek regulatory approvals for our product candidates that successfully complete clinical trials; † establish a sales, marketing and distribution infrastructure and scale up manufacturing capabilities to commercialize products for which we may obtain regulatory approval; and † add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts. We expect that the net proceeds from our initial public offering, together with our existing cash and cash equivalents, anticipated interest income and anticipated milestone payments and development and manufacturing funding under our collaboration with Sanofi related to MM-121, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2013. We have based 28 -------------------------------------------------------------------------------- Table of Contents this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including: † the progress and results of the clinical trials of our five most advanced product candidates; † the success of our collaborations with Sanofi related to MM-121 and PharmaEngine related to MM-398; † the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates; † the costs, timing and outcome of regulatory review of our product candidates; † the costs of commercialization activities, including product sales, marketing, manufacturing and distribution; † the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; † the extent to which we acquire or invest in businesses, products and technologies; and † our ability to establish and maintain additional collaborations on favorable terms, particularly marketing and distribution arrangements for oncology product candidates outside the United States and Europe. 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 do not have any committed external sources of funds, other than our collaboration with Sanofi, which is terminable by Sanofi for convenience upon 180 days' prior written notice. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. 29 -------------------------------------------------------------------------------- Table of Contents Contractual obligations and commitments On April 3, 2012, upon the closing of our initial public offering, we became required to pay the former holders of Series B convertible preferred stock cash dividends of approximately $4.3 million. We expect these dividend payments will be made in the second quarter of 2012. During the first quarter of 2012, we entered into a lease amendment to further expand our office, laboratory and manufacturing space. The amendment leases additional space for a seven year term effective March 2012. The aggregate rent due over the seven year term of the lease amendment is approximately $2.7 million. We and Sanofi have agreed that, during 2012 and 2013, we will reimburse Sanofi approximately $1.2 million of previously billed amounts. There have been no other material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments" in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. [ Back To TMCnet.com's Homepage ]