| Nature of the Business and Summary of Significant Accounting Policies | 1. Nature of the Business and Summary of Significant Accounting
Policies
Nature of the Business
Merrimack Pharmaceuticals, Inc. (the “Company”) is a
biopharmaceutical company discovering, developing and
commercializing innovative medicines consisting of novel
therapeutics paired with diagnostics for the treatment of cancer.
The Company has one marketed therapeutic oncology product and
multiple targeted therapeutic oncology candidates in clinical
development. The Company’s most advanced program is its
therapeutic MM-398, which the Company markets in the United States
under the brand name ONIVYDE. In addition to ONIVYDE and its
product candidates in clinical development, the Company has
multiple product candidates in preclinical development and a
discovery effort advancing additional candidate medicines. The
Company has tailored ONIVYDE and its other product candidates to
target specific disease mechanisms that its research suggests are
common across many solid tumor types. The Company believes that
ONIVYDE and its other product candidates have the potential to
address major unmet medical needs. The Company also has an
agreement to utilize its manufacturing expertise to develop,
manufacture and exclusively supply bulk drug product to a third
party, who will in turn process the drug into a finished product
and commercialize it globally following regulatory approval. The
Company was incorporated in the Commonwealth of Massachusetts in
1993 and reincorporated in the State of Delaware in October
2010.
The Company is subject to risks and uncertainties common to
companies in the biopharmaceutical industry, including, among other
things, its ability to secure additional capital to fund
operations, success of clinical trials, development by competitors
of new technological innovations, dependence on collaborative
arrangements, protection of proprietary technology, compliance with
government regulations and dependence on key personnel. Product
candidates currently under development will require significant
additional research and development efforts, including extensive
preclinical and clinical testing and regulatory approval prior to
commercialization. These efforts require significant amounts of
additional capital, adequate personnel, infrastructure and
extensive compliance reporting capabilities.
The Company has incurred significant losses and has not generated
significant revenue from commercial sales. The accompanying
consolidated financial statements have been prepared on a basis
which assumes that the Company will continue as a going concern and
which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business.
The Company may seek additional funding through public or private
debt or equity financings, or through existing or new collaboration
arrangements. The Company may not be able to obtain financing on
acceptable terms, or at all, and the Company may not be able to
enter into additional collaborative arrangements. The terms of any
financing may adversely affect the holdings or the rights of the
Company’s stockholders. Arrangements with collaborators or
others may require the Company to relinquish rights to certain of
its technologies or product candidates. If the Company is unable to
obtain funding, the Company could be forced to delay, reduce or
eliminate its research and development programs or
commercialization efforts, which could adversely affect its
business prospects.
Summary of Significant Accounting Policies
Segment Information
Operating segments are defined as components of an enterprise
engaging in business activities for which discrete financial
information is available and regularly reviewed by the chief
operating decision maker in deciding how to allocate resources and
in assessing performance. The Company views its operations and
manages its business in one operating segment and the Company
operates in only one geographic region.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been
prepared under U.S. generally accepted accounting principles
(“GAAP”) and include the accounts of the Company and
its wholly owned subsidiary, Merrimack Pharmaceuticals (Bermuda)
Ltd., which was merged with and into the Company during the third
quarter of 2014. The Company also consolidates its majority owned
subsidiary, Silver Creek Pharmaceuticals, Inc. (“Silver
Creek”). All intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
GAAP requires the Company’s management to make estimates and
judgments that may affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. The
Company bases estimates and judgments on historical experience and
on various other factors that it believes to be reasonable under
the circumstances. The most significant estimates in these
consolidated financial statements include, but may not be limited
to, revenue recognition, including the estimated percentage of
billable expenses in any particular budget period, periods of
meaningful use of licensed products, estimated service periods and
services to be completed under a collaboration, estimates used in
accounting for revenue separability and recognition, estimates of
discounts and allowances related to commercial sales of ONIVYDE,
estimates utilized in the valuation of inventory, useful lives with
respect to long-lived assets and intangible assets, accounting for
stock-based compensation, contingencies, intangible assets,
goodwill, in-process research and development, tax valuation
reserves and accrued expenses. The Company’s actual results
may differ from these estimates under different assumptions or
conditions. The Company evaluates its estimates on an ongoing
basis. Changes in estimates are reflected in reported results in
the period in which they become known by the Company’s
management.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are short-term, highly liquid investments
with original maturities of three months or less at the date of
purchase. Investments qualifying as cash equivalents primarily
consist of money market funds, commercial paper, corporate notes
and bonds and certificates of deposit.
Cash accounts with any type of restriction are classified as
restricted cash. If restrictions are expected to be lifted in the
next twelve months, the restricted cash account is classified as
current. As of both December 31, 2015 and 2014, the Company
recorded restricted cash of $685,000, which was primarily related
to the Company’s facility lease.
Marketable Securities
The Company classifies marketable securities with a remaining
maturity when purchased of greater than three months as
available-for-sale. Available-for-sale securities may consist of
U.S. government agencies securities, commercial paper, corporate
notes and bonds and certificates of deposit, which are maintained
by an investment manager. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses included in
other comprehensive income (loss) as a component of
stockholders’ deficit until realized. To determine whether an
other-than-temporary impairment exists, the Company performs an
analysis to assess whether it intends to sell, or whether it would
more likely than not be required to sell, the security before the
expected recovery of the amortized cost basis. Where the Company
intends to sell a security, or may be required to do so, the
security’s decline in fair value is deemed to be
other-than-temporary and the full amount of the unrealized loss is
recognized on the statement of operations and comprehensive loss as
an other-than-temporary impairment charge. When this is not the
case, the Company performs additional analysis on all securities
with unrealized losses to evaluate losses associated with the
creditworthiness of the security. Credit losses are identified
where the Company does not expect to receive cash flows, based on
using a single best estimate, sufficient to recover the amortized
cost basis of a security and amount of the loss recognized in other
income (expense). Realized gains and losses are recognized in
interest income. Any premium or discount arising at purchase is
amortized and/or accreted to interest income.
Inventory
The Company values its inventories at the lower of cost or net
realizable value. The Company determines the cost of its
inventories, which includes amounts related to materials and
manufacturing overhead, on a first-in, first-out basis. The Company
performs an assessment of the recoverability of capitalized
inventory during each reporting period, and it writes down any
excess and obsolete inventories to their realizable value in the
period in which the impairment is first identified. Such impairment
charges, should they occur, are recorded within cost of product
revenues.
The Company capitalizes inventory costs associated with the
Company’s products after regulatory approval when, based on
management’s judgment, future commercialization is considered
probable and the future economic benefit is expected to be
realized. Inventory acquired prior to receipt of marketing approval
of a product candidate is expensed as research and development
expense as incurred. Inventory that can be used in either the
production of clinical or commercial product is expensed as
research and development expense when selected for use in a
clinical manufacturing campaign.
Shipping and handling costs for product shipments are recorded as
incurred in cost of product revenues along with costs associated
with manufacturing the product and any inventory reserves or
write-downs.
Property and Equipment
Property and equipment, including leasehold improvements, are
recorded at cost and depreciated when placed into service using the
straight-line method, based on their estimated useful lives as
follows:
Asset classification
Estimated useful life
Lab equipment 3 - 7
IT equipment 3 - 7
Leaseholds improvements Lesser of useful life or lease
term
Furniture and fixtures 3 - 7
Costs for capital assets not yet placed into service have been
capitalized as construction-in-progress and will be depreciated in
accordance with the above guidelines once placed into service.
Costs for repairs and maintenance are expensed as incurred, while
major betterments are capitalized. The Company capitalizes interest
cost incurred on funds used to construct property and equipment.
The capitalized interest is recorded as part of the asset to which
it relates and is depreciated over the asset’s estimated
useful life. Upon retirement or sale, the cost of assets disposed
of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in
earnings.
The Company reviews its long-lived assets for impairment whenever
events or changes in business circumstances indicate that the
carrying amount of assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. Each
impairment test is based on a comparison of the undiscounted cash
flow to the recorded value of the asset. If impairment is
indicated, the asset will be written down to its estimated fair
value on a discounted cash flow basis.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets, including
in-process research and development (“IPR&D”), are
evaluated for impairment on an annual basis or more frequently if
an indicator of impairment is present. No impairment of goodwill
resulted from the Company’s most recent evaluation, which
occurred in the third quarter of 2015. The Company’s next
annual impairment evaluation will be made in the third quarter of
2016 unless indicators arise that would require the Company to
evaluate at an earlier date.
When performing an evaluation of goodwill impairment, the Company
has the option to first assess qualitative factors to determine
whether it is necessary to perform the quantitative two-step
impairment test. If the Company elects this option and finds, as a
result of the qualitative assessment, that it is more likely than
not that the fair value of the reporting unit is less than its
carrying amount, the quantitative two-step impairment test is
required; otherwise, further testing is not required. This requires
the Company to assess the impact of significant events, milestones
and changes to expectations and activities that may have occurred
since the last impairment evaluation. Significant changes to these
estimates, judgments and assumptions could materially change the
outcome of the impairment assessment. Alternatively, the Company
may elect to not first assess qualitative factors and immediately
perform the quantitative two-step impairment test. If such an
election occurs, in the first step, the fair value of the
Company’s reporting unit is compared to the carrying value.
If the carrying value of the net assets assigned to the reporting
unit exceeds the fair value of the reporting unit, then the second
step of the impairment test is performed in order to determine the
implied fair value of the reporting unit’s goodwill. If the
carrying value of the reporting unit’s goodwill exceeds the
implied fair value, then the Company would record an impairment
loss equal to the difference. As described above, the Company
operates in one operating segment, which is considered the only
reporting unit.
The Company’s evaluation of IPR&D impairment in the third
quarter of 2015 included a qualitative assessment to determine
whether further impairment testing of indefinite-lived intangible
assets was necessary. It was determined that it was not more likely
than not that an impairment existed as of the third quarter of 2015
and, therefore, quantitative impairment evaluations were not
performed.
The Company commences amortization of indefinite-lived intangible
assets, such as IPR&D, once the associated research and
development efforts have been completed and amortizes the assets
over their estimated future lives. Definite-lived intangible
assets, such as core technology and product-related intangibles,
are evaluated for impairment whenever events or circumstances
indicate that the carrying value may not be fully recoverable.
Definite-lived intangible assets are separate from goodwill and
indefinite-lived intangible assets and are deemed to have a
definite life. The Company amortizes these assets over their
estimated useful lives. The Company has not recorded any impairment
charges related to definite-lived intangible assets during the
years ended December 31, 2015, 2014 or 2013.
Accrued Expenses
As part of the process of preparing financial statements, the
Company is required to estimate accrued expenses. This process
involves identifying services that have been performed on the
Company’s behalf and estimating the level of services
performed and the associated costs incurred for such services where
the Company has not yet been invoiced or otherwise notified of
actual cost. The Company records these estimates in its
consolidated financial statements as of each balance sheet date.
Examples of estimated accrued expenses include:
• fees due to contract research
organizations in connection with preclinical and toxicology studies
and clinical trials;
• fees paid to investigative sites in
connection with clinical trials; and
• professional service fees.
In accruing service fees, the Company estimates the time period
over which services will be provided and the level of effort in
each period. If the actual timing of the provision of services or
the level of effort varies from the estimate, the Company adjusts
the accrual accordingly. In the event that the Company does not
identify costs that have been incurred or it under or overestimates
the level of services performed or the costs of such services, its
actual expenses could differ from such estimates. The date on which
some services commence, the level of services performed on or
before a given date and the cost of such services are often
subjective determinations. The Company prepares its estimates based
on the facts and circumstances known to it at the time and in
accordance with GAAP. There have been no material changes in
estimates for the periods presented.
Non-Controlling Interest
Non-controlling interest represents the non-controlling
stockholders’ proportionate share of preferred stock and net
loss of the Company’s majority owned consolidated subsidiary,
Silver Creek. The non-controlling stockholders’ proportionate
share of the preferred stock in Silver Creek is reflected as
non-controlling interest in the Company’s consolidated
balance sheets as a component of mezzanine equity.
Revenue Recognition
The Company recognizes revenue when all of the following criteria
are met: persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the price to the customer
is fixed or determinable; and collectability is reasonably
assured.
Product Revenues, Net
The Company sells ONIVYDE to a limited number of specialty
pharmaceutical distributors in the United States (collectively, its
“Distributors”). The Company’s Distributors
subsequently resell the products to healthcare providers. The
Company recognizes revenue on product sales when title and risk of
loss have passed to the Distributor, which is typically upon
delivery. Product revenues are recorded net of applicable reserves
for discounts and allowances.
In order to conclude that the price is fixed or determinable, the
Company must be able to reasonably estimate its net product
revenues upon delivery to its Distributors. As such, the Company
estimates its net product revenues by deducting from its gross
product revenues trade allowances, estimated contractual discounts,
estimated Medicaid rebates, estimated reserves for product returns
and estimated costs of other incentives offered to patients.
These discounts and allowances are based on estimates of the
amounts earned or to be claimed on the related sales. The
Company’s estimates take into consideration its historical
experience, current contractual and statutory requirements,
specific known market events and trends, industry data and
forecasted Distributor buying and payment patterns. Actual amounts
may ultimately differ from the Company’s estimates. If actual
results vary, the Company will adjust these estimates, which could
have an effect on earnings in the period of adjustment.
Product revenue reserves and allowances that reduce gross revenue
are categorized as follows:
Trade Allowances:
Rebates and Chargeback Discounts:
Product Returns:
Other Incentives:
License and Collaboration Revenues
The Company enters into biopharmaceutical product development
agreements with collaborative partners for the research and
development of therapeutic and diagnostic products. The terms of
the agreements may include nonrefundable signing and licensing
fees, funding for research, development and manufacturing,
milestone payments and royalties or profit-sharing on any product
sales derived from collaborations. These multiple-element
arrangements are analyzed to determine whether the deliverables can
be separated or whether they must be accounted for as a single unit
of accounting.
The revenue recognition guidance related to multiple-element
arrangements requires entities to separate and allocate
consideration in a multiple-element arrangement according to the
relative selling price of each deliverable. The fair value of
deliverables under the arrangement may be derived using a best
estimate of selling price if vendor specific objective evidence and
third-party evidence are not available. Deliverables under the
arrangement will be separate units of accounting provided that a
delivered item has value to the customer on a stand-alone basis and
if the arrangement does not include a general right of return
relative to the delivered item and delivery or performance of the
undelivered item is considered probable and substantially in the
control of the vendor.
The Company entered into a license and collaboration agreement with
Baxter International Inc., Baxter Healthcare Corporation and Baxter
Healthcare SA in September 2014, which was evaluated under the
accounting guidance on revenue recognition for multiple-element
arrangements. The Company determined that the obligations under
this agreement represent a single unit of accounting and that the
agreement represents a services agreement. As a result, the Company
has estimated the level of effort expected to be completed as a
result of providing the identified deliverables and will recognize
revenue related to the agreement based on proportional performance
as effort is completed over the expected services period.
The Company also entered into a collaboration agreement with Watson
Laboratories, Inc. (“Actavis”) in November 2013, which
was evaluated under the accounting guidance on revenue recognition
for multiple-element arrangements. See Note 5, “License and
Collaboration Agreements,” for additional information.
Whenever the Company determines that an arrangement should be
accounted for as a single unit of accounting, it determines the
period over which the performance obligations would be performed
and revenue would be recognized. If the Company cannot reasonably
estimate the timing and the level of effort to complete its
performance obligations under the arrangement, then revenue under
the arrangement is recognized on a straight-line basis over the
period the Company expects to complete its performance
obligations.
The Company’s collaboration agreements may include additional
payments upon the achievement of performance-based milestones. As
milestones are achieved, a portion of the milestone payment, equal
to the percentage of the total time that the Company has performed
the performance obligations to date divided by the total estimated
time to complete the performance obligations, multiplied by the
amount of the milestone payment, will be recognized as revenue upon
achievement of such milestone. The remaining portion of the
milestone will be recognized over the remaining performance period.
Milestones that are tied to regulatory approvals are not considered
probable of being achieved until such approval is received.
Milestones tied to counterparty performance are not included in the
Company’s revenue model until the performance conditions are
met.
Royalty revenue will be recognized upon the sale of the related
products provided the Company has no remaining performance
obligations under the arrangement.
Research and Development Expenses
Research and development expenses are charged to expense as
incurred. Research and development expenses comprise costs incurred
in performing research and development activities, including
personnel-related costs, stock-based compensation, facilities,
research-related overhead, clinical trial costs, contracted
services, research-related manufacturing, license fees and other
external costs. The Company accounts for nonrefundable advance
payments for goods and services that will be used in future
research and development activities as expenses when the services
have been performed or when the goods have been received rather
than when the payment is made.
Advertising Expenses
In connection with the commercial launch of ONIVYDE on
October 22, 2015, the Company began incurring advertising
expenses. Advertising expenses are expensed as incurred. For the
year ended December 31, 2015, advertising expenses totaled
$1.0 million.
Stock-Based Compensation
Stock-based compensation expense related to employee stock options
is measured using the fair value of the award at the grant date,
net of estimated forfeitures, and is adjusted annually to reflect
actual forfeitures. The fair value of each stock-based award is
estimated using the Black-Scholes option valuation model, and
stock-based compensation expense is recognized on a straight-line
over the vesting period, which is also the requisite service
period.
The Company records stock options issued to non-employees at fair
value, remeasures to reflect the current fair value at each
reporting period and recognizes expense over the related service
period. When applicable, these equity instruments are accounted for
based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably
measurable.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions, and other
events and circumstances, from non-owner sources and currently
consists of net loss and changes in unrealized gains and losses on
available-for-sale securities.
Other Income and Expense
The Company records gains and losses on federal and state sponsored
tax incentives and other income or expense-related items in other
income and expense.
The Company has been awarded tax incentives by the Massachusetts
Life Sciences Center (“MLSC”), an independent agency of
the Commonwealth of Massachusetts. These tax incentives require
that the Company achieve certain hiring targets. Failure to
maintain the additional headcount in subsequent periods could
require the Company to repay some or all of the incentives. The
Company recognizes the benefit of these incentives on a
straight-line basis over the five-year performance period of each
award, beginning when the Company achieves the hiring goal target,
with a cumulative catch-up recognized in the period that the hiring
goal target is achieved. The Company has received MLSC tax
incentives in 2011, 2013, 2014 and 2015 totaling $3.8 million in
the aggregate, allowing the Company to monetize approximately $3.4
million of state research and development tax credits. The Company
has recognized $0.7 million, $0.4 million and $0.3 million in
income related to these tax incentives for the years ended
December 31, 2015, 2014 and 2013, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable
to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which these temporary differences
are expected to be recovered or settled. Valuation allowances are
provided if based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
The Company provides reserves for potential payments of tax to
various tax authorities related to uncertain tax positions and
other issues. Reserves are based on a determination of whether and
how much of a tax benefit taken by the Company in its tax filing is
more likely than not to be realized following resolution of any
potential contingencies present related to the tax benefit.
Potential interest and penalties associated with such uncertain tax
positions are recorded as components of income tax expense. To
date, the Company has not taken any uncertain tax positions or
recorded any reserves, interest or penalties.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents, marketable
securities and accounts receivable. The Company places its cash
deposits in accredited financial institutions and, therefore, the
Company’s management believes these funds are subject to
minimal credit risk. The Company invests cash equivalents and
marketable securities in money market funds, U.S. government
agencies securities and various corporate debt securities. Credit
risk in these securities is reduced as a result of the
Company’s investment policy to limit the amount invested in
any one issue or any single issuer and to only invest in high
credit quality securities. The Company has no significant
off-balance sheet concentrations of credit risk such as foreign
currency exchange contracts, option contracts or other hedging
arrangements. The Company also is subject to credit risk from its
accounts receivable related to its product sales and collaborators.
The Company evaluates the creditworthiness of each of its customers
and has determined that all of its customers are creditworthy. To
date, the Company has not experienced significant losses with
respect to the collection of its accounts receivable.
Gross revenues from each of the Company’s customers who
individually accounted for 10% or more of total gross revenues for
the years ended December 31, 2015, 2014 and 2013 consisted of
the following:
Years Ended December 31,
2015 2014 2013
Baxalta 93% 10%
—
Sanofi
— 90% 98%
Gross accounts receivable related to each of the Company’s
customers who individually accounted for 10% or more of total gross
accounts receivable as of December 31, 2015 and 2014 consisted
of the following:
December 31,
2015 2014
Baxalta 29% 49%
Sanofi
— 50%
AmerisourceBergen Corporation 29%
—
McKesson Corporation 25%
—
Cardinal Health, Inc. 16%
—
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, “Revenue from Contracts with
Customers (Topic 606),” which supersedes all existing revenue
recognition requirements, including most industry-specific
guidance. The new standard requires a company to recognize revenue
when it transfers goods or services to customers in an amount that
reflects the consideration that the company expects to receive for
those goods or services. This guidance was originally effective for
interim and annual periods beginning after December 15, 2016
and allows for adoption using a full retrospective method, or a
modified retrospective method. Early adoption was originally not
permitted. In August 2015, the FASB issued ASU 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date,” whereby the effective date for the
new revenue standard was deferred by one year. As a result of ASU
2015-14, the new revenue standard is now effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2017, and early adoption is now permitted
for annual periods beginning after December 15, 2016,
including interim periods within that annual period. The Company is
currently evaluating the potential impact that the adoption of this
guidance and the related transition guidance may have on the
consolidated financial statements, including the adoption method to
be utilized.
In August 2014, the FASB issued ASU 2014-15, “Presentation of
Financial Statements – Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern,” outlining management’s
responsibility to perform interim and annual assessments of an
entity’s ability to continue as a going concern within one
year of the date the financial statements are issued and providing
guidance on determining when and how to disclose going concern
uncertainties in the financial statements. This guidance will be
effective for annual and interim reporting periods ending after
December 15, 2016, and early adoption is permitted. The
Company does not anticipate a material impact to the consolidated
financial statements as a result of this change.
In April 2015, the FASB issued ASU 2015-03, “Interest -
Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs,” which requires that
debt issuance costs related to a recognized debt liability be
presented on the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts. This update is effective for annual reporting periods
beginning after December 15, 2015, including interim periods
within those annual periods, and early adoption is permitted.
Accordingly, the Company elected to early adopt ASU 2015-03 for the
year ended December 31, 2015. As a result, less than $0.1
million of short-term debt issuance costs have been reclassified
from “Prepaid expenses and other current assets” to
“Long-term debt, current portion” and approximately
$0.1 million of long-term debt issuance costs have been
reclassified from “Other assets” to “Long-term
debt, net of current portion” on the Company’s
consolidated balance sheet as of December 31, 2014. This early
adoption had no impact on the Company’s consolidated
statements of operations and comprehensive loss for any |
