| 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 clinical stage biopharmaceutical company based in Cambridge, Massachusetts that is outthinking cancer by targeting biomarker-defined cancers. The Company’s vision is to ensure that cancer patients and their families live fulfilling lives. The Company’s mission is to transform cancer care through the smart design and development of targeted solutions based on a deep understanding of cancer pathways and biological markers. The Company’s strategy is to (1) understand the biological problems it is trying to solve, (2) design specific solutions against the problems it is trying to solve and (3) develop those solutions for biomarker-selected patients. This three-pronged strategy seeks to ensure optimal patient outcomes. The Company owns worldwide development and commercial rights to all of its clinical and preclinical programs. On April 3, 2017, The Company’s only clinical stage asset in active development is MM-310. MM-310 is an antibody-directed nanotherapeutic that targets the ephrin receptor A2 (“EphA2”) receptor and contains a novel cytotoxic taxane. The EphA2 receptor is highly expressed in most solid tumor types, such as prostate, ovarian, bladder, gastric, pancreatic and lung cancers. The Company is conducting a Phase 1 clinical trial to evaluate safety and preliminary activity of MM-310 in patients with solid tumors and to identify the maximum tolerated dose. The Company’s two most promising preclinical programs are MM-401, an agonistic antibody targeting a novel immuno-oncology target, TNFR2, and MM-201, a highly stabilized agonist-Fc fusion protein targeting death receptors 4 and 5. 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 capital, adequate personnel, infrastructure and extensive compliance reporting capabilities. The Company’s product candidates are in development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies, among others. In addition, the Company is dependent upon the services of its employees and consultants. In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern The Company will ultimately need to seek additional funding through public or private equity or debt financings, through existing or new collaboration arrangements, or through divestitures of its assets. 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 or divest its assets. 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 as one operating segment and the Company operates in only one geographic region (the United States). 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 subsidiaries. As of March 31, 2017, the Commercial Business met all the conditions to be classified as held-for-sale and represents a discontinued operation since the disposal of the Commercial Business is a strategic shift that will have a major effect on the Company’s operations and financial results. The Company will not have further significant involvement in the operations of the discontinued Commercial Business. The operating results of the Commercial Business are reported as discontinued operations, net of tax in the consolidated statements of operations and comprehensive loss for all periods presented. For additional information, see Note 2, “Discontinued Operations – Sale of Commercial Business.” The consolidated financial statements have historically included the accounts of the Company and Silver Creek Pharmaceuticals, Inc. (“Silver Creek”) with all intercompany transactions and balances eliminated in consolidation. Silver Creek represented a variable interest entity that the Company consolidated as the primary beneficiary. As discussed in Note 3, “Investment in Silver Creek,” Silver Creek completed a preferred stock financing in the third quarter of 2017, which reduced the Company’s ownership percentage in Silver Creek below 50% and resulted in the Company no longer controlling the Silver Creek board of directors. The Company determined that it is no longer the primary beneficiary of Silver Creek since the Company does not control the board of directors and does not direct the activities that have the most significant impact on Silver Creek’s economic performance. Therefore, the Company deconsolidated Silver Creek from its financial statements in the third quarter of 2017 in accordance with ASC 810, Consolidation The Company’s consolidated balance sheet as of December 31, 2017 does not include the assets and liabilities of Silver Creek since the Company deconsolidated Silver Creek in the third quarter of 2017. The Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2017 include Silver Creek’s results for the period through July 13, 2017, the day immediately preceding the deconsolidation of Silver Creek. On August 11, 2017, the Company’s stockholders approved an amendment to the Company's certificate of incorporation to effect a one-for-ten reverse stock split of its issued and outstanding common stock (the “Reverse Split”). On September 5, 2017, the Company filed an amendment to its certificate of incorporation to effect the Reverse Split, and on September 6, 2017, the Reverse Split was effective for trading purposes. As a result of the Reverse Split, every ten shares of common stock issued and outstanding was converted into one share of common stock, reducing the number of issued and outstanding shares of common stock from approximately 132.8 million shares to approximately 13.28 million shares. No fractional shares were issued in connection with the Reverse Split. The amendment to the certificate of incorporation also proportionately reduced the number of authorized shares of common stock from 200 million to 20 million. The Reverse Split did not change the par value of the common stock. The Reverse Split did not change the number of authorized shares or par value of the Company’s preferred stock, of which there are no shares issued or outstanding. All outstanding stock options and convertible notes entitling their holders to purchase shares of common stock or acquire shares of common stock upon conversion, as the case may be, were adjusted as a result of the Reverse Split, as required by the terms of these securities. This change is reflected throughout the financial statements as appropriate. As a result, all share and per share amounts have been adjusted retroactively to reflect the Reverse Split for all periods. For additional information, see Note 14, “Stock-Based Compensation.” Consolidated Statements of Cash Flows The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:
(in thousands)
December 31, 2018
December 31, 2017
Cash and cash equivalents
$
20,079
$
93,441
Restricted cash (short-term)
584
102
Restricted cash (long-term)
—
674
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
$
20,663
$
94,217
Restricted cash on the statement of financial position for 2018 and 2017 primarily represents amounts pledged as collateral for operating lease obligations as contractually required. 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, accounting for stock-based compensation and the accrual of research and development 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. Certain estimates, such as revenue recognition, estimates of discounts and allowances related to commercial sales of ONIVYDE, estimates utilized in the valuation of inventory and useful lives with respect to long-lived assets and intangible assets, related specifically to the Commercial Business, which has been reclassified under discontinued operations. 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 December 31, 2018 and 2017, the Company’s restricted cash of $0.6 million and $0.8 million, respectively, represents amounts pledged as collateral for operating lease obligations as contractually required. Marketable Securities Marketable debt securities consist of investments with original maturities greater than 90 days at their acquisition date. The Company classifies all of its marketable debt securities as available-for-sale securities. The Company’s marketable debt securities are measured and reported at fair value using quoted prices in active markets for similar securities. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive loss, which is a separate component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income and expenses, net in the consolidated statements of operations and comprehensive loss. The Company evaluates its marketable debt securities with unrealized losses for other-than-temporary impairment. When assessing marketable debt securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair value through a charge to the statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented. 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 (in years)
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. 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. Revenue Recognition In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers 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 Prior to the Asset Sale, the Company sold ONIVYDE to a limited number of specialty pharmaceutical distributors in the United States (collectively, its “Distributors”). The Company’s Distributors subsequently resold the products to healthcare providers. The Company recognized revenue on product sales when title and risk of loss had passed to the Distributor, which was typically upon delivery. Product revenues were recorded net of applicable reserves for discounts and allowances. As a result of the Asset Sale, all product revenues relate to the Commercial Business and have been reclassified under discontinued operations. 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 estimated 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 were based on estimates of the amounts earned or to be claimed on the related sales. The Company’s estimates took 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 varied, the Company would 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: The Company paid fees to its Distributors for providing certain data to the Company as well as for maintaining contractual inventory and service levels. These trade allowances were recorded as a reduction to accounts receivable on the consolidated balance sheet at the time revenue is recognized. Rebates and Chargeback Discounts: The Company was subject to discount obligations under state Medicaid programs and the Public Health Service 340B Drug Pricing Program, contracts with Federal government entities purchasing via the Federal Supply Schedule and various private organizations, such as group purchasing organizations (collectively, its “Third-party Payors”). The Company estimated the rebates and chargeback discounts it provided to Third-party Payors, based upon its estimated payor mix, and deducted these estimated amounts from its gross product revenues at the time revenue was recognized. Chargeback discounts were processed when the Third-party Payor purchased the product at a discount from the Distributor, who then in turn charged back to the Company the difference between the price initially paid by the Distributor and the discounted price paid by the Third-party Payor. These chargeback discounts were recorded as a reduction to accounts receivable on the consolidated balance sheet at the time revenue was recognized. Rebates that were invoiced directly to the Company were recorded as accrued liabilities on the consolidated balance sheet at the time revenue was recognized. Product Returns: An allowance for product returns was established for returns expected to be made by Distributors and was recorded at the time revenue was recognized, resulting in a reduction to product sales. In accordance with contractual terms, Distributors had the right to return unopened and undamaged product that was within a permissible number of months before and after the product’s expiration date, subject to contractual limitations. The Company had the ability to monitor inventory levels and the shelf life of product at Distributors and could contractually control the amount of inventory that was sold to Distributors. Based on inventory levels held by Distributors and the structure of the Company’s distribution model, the Company concluded that it had the ability to reasonably estimate product returns at the time revenue was recognized. The Company’s estimated rate of return was based on historical rates of return for comparable oncology products. Other Incentives: The Company offered co-pay mitigation support to commercially insured patients. The Company’s co-pay mitigation program was intended to reduce each participating patient’s portion of the financial responsibility for a product’s purchase price to a specified dollar amount. Based upon the terms of the Company’s co-pay mitigation program, the Company estimated average co-pay mitigation amounts in order to establish a reserve for co-pay mitigation claims and deducted these estimated amounts from its gross product revenues at the later of the date that (i) the revenues were recognized or (ii) the incentive was offered. Claims under the Company’s co-pay mitigation program were subject to expiration. All product revenue recognized relates to the Commercial Business and is presented as income from discontinued operations, net of tax in the consolidated statements of operations and comprehensive loss for all periods presented. 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. In September 2014, the Company entered into the Servier Agreement for the development and commercialization of ONIVYDE outside of the United States and Taiwan (the “Licensed Territory”). The Servier Agreement 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 development, license and supply agreement (the “Actavis Agreement”) with Watson Laboratories, Inc. (“Actavis”) in November 2013, which was evaluated under the accounting guidance on revenue recognition for multiple-element arrangements. All operating results recognized related to the Servier Agreement and Actavis Agreement are presented as income from discontinued operations, net of tax in the consolidated statements of operations and comprehensive loss for all periods presented. Both the Servier Agreement and Actavis Agreement were assigned to Ipsen in connection with the completion of the Asset Sale. 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. Other Revenues Prior to the Asset Sale, the Company was a party to separate commercial supply agreements with Servier and PharmaEngine, Inc. (“PharmaEngine”) pursuant to which the Company supplied ONIVYDE to these entities. Revenue was recognized under these commercial supply arrangements when the counterparty took delivery of the commercial supply product and when the other general revenue recognition criteria outlined above were met. The Servier and PharmaEngine supply agreements were assigned to Ipsen in connection with the completion of the Asset Sale. The Company was also eligible to receive royalty revenues on Servier’s net sales of ONIVYDE in the Licensed Territory. The Company recognizes royalty revenues in the period that the related sales occur. All other revenue recognized relates to the Commercial Business and is presented as income from discontinued operations, net of tax in the consolidated statements of operations and comprehensive loss for all periods presented. Research and Development Expenses Research and development expenses are charged to expense as incurred. Research and development expenses are comprised of 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. General and Administrative Expenses General and administrative expenses are comprised of salaries and other related costs for personnel, including stock-based compensation expenses and benefits, in the Company’s commercial, legal, intellectual property, business development, finance, information technology, corporate communications, investor relations and human resources departments. Other general and administrative expenses include costs for employee training and development, board of directors costs, depreciation, insurance expenses, facility-related costs not otherwise included in research and development expenses, professional fees for legal services, including patent-related expenses, and accounting and information technology services. Stock-Based Compensation Expense The Company accounts for its stock-based compensation awards in accordance with ASC 718, Compensation – Stock Compensation The Company measures stock-based awards granted to non-employee consultants based on the fair value of the award on the date on which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option pricing model. Comprehensive Loss Comprehensive loss consists of net loss and unrealized losses on available-for-sale marketable debt securities. Other (Expense) Income, Net The Company records other income or expense related to the Company’s proportionate share of losses from its equity investment in Silver Creek, and other income or expense-related items as components of “Other (expense) income, net” within the consolidated statements of operations and comprehensive loss. The Company recognized expenses of $3.2 million and $1.4 million in other (expense) income primarily related to the Company’s proportionate share of losses from its equity investment in Silver Creek during the years ended December 31, 2018 and 2017, 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, cash equivalents and marketable securities. 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 in money market funds. The Company has no significant off-balance sheet concentrations of credit risk such as foreign currency exchange contracts, option contracts or other hedging arrangements. Recent Accounting Pronouncements The FASB issued the following new ASUs, which the Company adopted on January 1, 2018:
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ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related amendments;
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ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities”;
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ASU 2016-18, “Statement of Cash Flows - Restricted Cash (a consensus of the FASB Emerging Issues Task Force)”; and
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ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The adoption of these standards did not have a material impact on the Company’s financial position, results of operations or statement of cash flows. In January 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments using a retrospective |
