Mersana Therapeutics(MRSN) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, cash flows, and notes Condensed Consolidated Balance Sheets | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $228,430 | $255,094 | | Total current assets | $231,952 | $258,580 | | Total assets | $247,911 | $273,399 | | Total current liabilities | $34,919 | $30,003 | | Total liabilities | $49,973 | $45,312 | | Total stockholders' equity | $197,938 | $228,087 | Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Collaboration revenue | $11 | $11 | | Research and development | $27,415 | $12,219 | | General and administrative | $7,208 | $4,936 | | Total operating expenses | $34,623 | $17,155 | | Net loss | $(34,693) | $(16,926) | | Net loss per share (basic and diluted) | $(0.50) | $(0.35) | - The company's net loss significantly increased to $34.7 million for the three months ended March 31, 2021, compared to $16.9 million for the same period in 2020, primarily driven by increased research and development expenses[19][30] Condensed Consolidated Statement of Stockholders' Equity | Metric (in thousands) | Balance at December 31, 2020 | Balance at March 31, 2021 | | :-------------------- | :--------------------------- | :------------------------ | | Common Stock Shares | 68,841,288 | 69,051,438 | | Common Stock Amount | $7 | $7 | | Additional Paid-in Capital | $508,499 | $513,043 | | Accumulated Deficit | $(280,419) | $(315,112) | | Total Stockholders' Equity | $228,087 | $197,938 | - Stockholders' equity decreased from $228.1 million at December 31, 2020, to $197.9 million at March 31, 2021, primarily due to the net loss of $34.7 million, partially offset by stock-based compensation expense and proceeds from stock option exercises[22] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(27,022) | $(21,246) | | Net cash provided by (used in) investing activities | $(114) | $19,435 | | Net cash provided by (used in) financing activities | $472 | $(90) | | Decrease in cash, cash equivalents and restricted cash | $(26,664) | $(1,901) | | Cash, cash equivalents and restricted cash, end of period | $228,751 | $60,771 | - Net cash used in operating activities increased to $27.0 million in Q1 2021 from $21.2 million in Q1 2020, reflecting higher net losses. Investing activities shifted from a net cash inflow of $19.4 million in Q1 2020 (due to marketable securities maturities) to a net cash outflow of $0.1 million in Q1 2021 (due to equipment purchases)[25][149][151] Notes to Condensed Consolidated Financial Statements Note 1. Nature of business and basis of presentation - Mersana Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing antibody drug conjugates (ADCs) for cancer patients, utilizing proprietary platforms like Dolaflexin, Dolasynthen, and Immunosynthen. Key product candidates include upifitamab rilsodotin (UpRi, XMT-1536) and XMT-1592, both targeting NaPi2b, and early-stage programs like XMT-1660 and XMT-2056[27][28] - The company has incurred cumulative net losses since inception, with a net loss of $34.7 million for the three months ended March 31, 2021, and an accumulated deficit of $315.1 million. Management believes current funds are sufficient for operations through at least the next twelve months[30][31] Note 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP and SEC rules, consolidating Mersana Therapeutics, Inc. and its wholly-owned subsidiary. The company operates as a single segment focused on discovering and developing ADCs. Significant accounting policies are consistent with the 2020 Annual Report on Form 10-K, with fair value measurements categorized into a three-level hierarchy[32][36][38][39] Cash, Cash Equivalents and Restricted Cash (in thousands) | Cash, Cash Equivalents and Restricted Cash (in thousands) | Beginning of Period | End of Period | | :------------------------------------------------------- | :------------------ | :------------ | | March 31, 2021 | $255,415 | $228,751 | | March 31, 2020 | $62,672 | $60,771 | Note 3. Collaboration agreements - The company has a Collaboration and Commercial License Agreement with Merck KGaA, under which it receives reimbursement for research efforts and is eligible for development milestone payments. Revenue from this agreement is recognized over the estimated period of research and development services using a proportional performance model[52][53][57] Collaboration Revenue (in thousands) | Collaboration Revenue (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Collaboration revenue | $11 | $11 | - Deferred revenue related to the Merck KGaA Agreement and Supply Agreement was $3.976 million as of March 31, 2021. The company also has a collaboration with Asana BioSciences, with a potential $2.5 million milestone payment upon dosing the fifth patient in a Phase 1 clinical study, which is currently constrained due to high uncertainty[59][63] Note 4. Fair value measurements - The carrying amounts of current assets and liabilities like prepaid expenses, accounts payable, and accrued expenses approximate their fair values due to their short-term nature. The fair value of the outstanding debt under the Amended Credit Facility also approximates its carrying value (Level 2 fair value measurement)[64][65] Note 5. Accrued expenses Accrued Expenses (in thousands) | Accrued Expenses (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------ | :------------- | :---------------- | | Accrued preclinical, manufacturing and clinical expenses | $13,399 | $9,902 | | Accrued payroll and related expenses | $2,972 | $5,412 | | Accrued professional fees and insurance | $993 | $757 | | Accrued other | $132 | $75 | | Total Accrued Expenses | $17,496 | $16,146 | - Total accrued expenses increased from $16.1 million at December 31, 2020, to $17.5 million at March 31, 2021, primarily due to a $3.5 million increase in accrued preclinical, manufacturing, and clinical expenses[66] Note 6. Debt - The company has a Credit Facility with Silicon Valley Bank, allowing for term loans up to $30.0 million. As of March 31, 2021, $5.2 million had been drawn, and the company was in compliance with all covenants[67][69] Estimated Future Principal Payments (in thousands) | Estimated Future Principal Payments (in thousands) | | :----------------------------------------------- | | 2021 (excluding Q1) | $0 | | 2022 | $1,213 | | 2023 | $2,080 | | 2024 | $1,907 | | Total debt | $5,200 | - Interest expense related to the credit facility was $88 thousand for the three months ended March 31, 2021, up from $51 thousand in the prior year period[70] Note 7. Stockholders' equity - As of March 31, 2021, the company had 25,000,000 authorized preferred stock shares (none issued) and 175,000,000 authorized common stock shares, with 69,051,438 shares issued and outstanding[17][71] - In April 2020, the company raised $63.0 million net proceeds from an at-the-market (ATM) equity offering program. In June 2020, a follow-on public offering generated $164.0 million net proceeds. A new ATM program was established in May 2020 for up to $100.0 million, with no shares sold under it as of March 31, 2021[72][73][75] Common Stock Reserved for Exercise (in shares) | Common Stock Reserved for Exercise (in shares) | March 31, 2021 | December 31, 2020 | | :--------------------------------------------- | :------------- | :---------------- | | Stock options | 7,478,289 | 6,112,948 | | Restricted stock units | 1,082,460 | 716,767 | | Warrants | 39,474 | 39,474 | | Total | 8,600,223 | 6,869,189 | Note 8. Stock options - The 2017 Stock Incentive Plan allows for grants of options, RSUs, or other stock-based awards, with 2,188,263 shares available for future issuance as of March 31, 2021. In Q1 2021, 2,051,293 RSUs and options were granted[83] Stock Option Activity (shares) | Stock Option Activity (shares) | Outstanding at Jan 1, 2021 | Granted | Exercised | Cancelled | Outstanding at Mar 31, 2021 | | :----------------------------- | :------------------------- | :---------- | :---------- | :---------- | :-------------------------- | | Number of Shares | 6,112,948 | 1,650,507 | (148,472) | (136,694) | 7,478,289 | | Weighted Average Exercise Price | $7.84 | $20.78 | $5.15 | $7.00 | $10.77 | Stock-based Compensation Expense (in thousands) | Stock-based Compensation Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Stock options | $3,114 | $1,233 | | Restricted stock units | $806 | $310 | | Employee stock purchase plan | $119 | $66 | | Total operating expenses | $4,039 | $1,609 | - Unrecognized stock compensation expense as of March 31, 2021, was $39.7 million for stock options (weighted-average period of 3.1 years) and $12.1 million for RSUs (weighted-average period of 3.5 years)[93] Note 9. Leases - The company has an operating lease for its Cambridge, MA office space through March 2026 and finance leases for equipment. A standby letter of credit of $321 thousand serves as a security deposit for the office lease[96][97] Future Lease Payments (in thousands) | Future Lease Payments (in thousands) | Operating Leases | Finance Leases | | :----------------------------------- | :--------------- | :------------- | | 2021 (excluding Q1) | $2,169 | $123 | | 2022 | $2,843 | $128 | | 2023 | $2,928 | $121 | | 2024 | $3,016 | $60 | | 2025 and thereafter | $3,889 | $56 | | Total lease payments | $14,845 | $488 | | Present value of lease liabilities | $11,296 | $452 | Note 10. Commitments - The company did not record any research and development expense related to non-refundable upfront payments or milestone payments during the three months ended March 31, 2021 or 2020[101] Note 11. Subsequent Events - On April 5, 2021, the company amended its Office Lease for additional space, committing to $4.983 million in lease payments over five years starting July 1, 2021, and increasing the security deposit by $156 thousand[103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, results of operations, future outlook, and liquidity, including COVID-19 impact Overview - Mersana Therapeutics is a clinical-stage biopharmaceutical company developing Antibody Drug Conjugates (ADCs) for cancer, leveraging proprietary platforms like Dolaflexin, Dolasynthen, and Immunosynthen. Lead candidates include Upifitamab rilsodotin (UpRi, XMT-1536) and XMT-1592, both targeting NaPi2b, with UpRi in a single-arm registration strategy (UPLIFT) and a combination study (UPGRADE) planned[109][110][112][113] - The company has incurred significant cumulative operating losses, with a net loss of $34.7 million for Q1 2021, and expects continued losses as it advances clinical development, identifies new candidates, and expands operations[118][119] Impact of COVID-19 on Our Business - The company is monitoring the COVID-19 pandemic's impact, implementing remote work and staggered lab schedules. While Q1 2021 financial results were not materially affected, future impacts are uncertain, with potential risks including clinical study delays, supply chain disruptions, and slower regulatory review[119][121][333][334] - Mitigation efforts include initiating additional clinical sites globally to increase enrollment and monitoring contract manufacturing partners, who continue to operate near normal levels, though raw material sourcing for COVID-related vaccines and therapies poses an increasing challenge[119][126] Financial operations overview - All revenue to date has been from strategic partnerships, primarily with Merck KGaA, with immaterial amounts recognized in Q1 2021 and Q1 2020. The company expects future revenue to continue to be generated from collaborations, with uncertain timing and amount of milestone payments[122][124][125] - Research and development expenses are central to the business, including drug discovery, manufacturing, and clinical studies. These costs are expensed as incurred and are expected to increase significantly with the progression of product candidates[127][128] - General and administrative expenses are expected to increase to support continued R&D activities, including hiring additional personnel and increased consulting and patent costs[134] Results of Operations: Comparison of the three months ended March 31, 2021 and 2020 | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Dollar Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------ | | Collaboration revenue | $11 | $11 | $0 | | Research and development | $27,415 | $12,219 | $15,196 | | General and administrative | $7,208 | $4,936 | $2,272 | | Total operating expenses | $34,623 | $17,155 | $17,468 | | Interest income | $12 | $306 | $(294) | | Interest expense | $(93) | $(88) | $(5) | | Net loss | $(34,693) | $(16,926) | $(17,767) | - Research and development expense increased by $15.2 million (124%) to $27.4 million in Q1 2021, primarily due to increased manufacturing, clinical, and regulatory activities for UpRi ($7.1 million increase), preclinical/discovery programs ($2.9 million increase), and XMT-1592 ($1.5 million increase), along with higher employee compensation and stock-based compensation[139][140] - General and administrative expense increased by $2.3 million (46%) to $7.2 million in Q1 2021, driven by higher employee compensation ($0.6 million), consulting/professional fees ($0.8 million), and stock-based compensation ($0.9 million)[141] - Total other income shifted from a net income of $0.2 million in Q1 2020 to a net expense of $0.1 million in Q1 2021, mainly due to a decrease in interest income[143] Liquidity and Capital Resources - The company's operations are financed primarily through equity offerings and strategic partnerships. As of March 31, 2021, cash and cash equivalents totaled $228.4 million. A new ATM program established in May 2020 has $100.0 million of availability[144][145][147] Cash Flows (in thousands) | Cash Flows (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(27,022) | $(21,246) | | Net cash provided by (used in) investing activities | $(114) | $19,435 | | Net cash provided by (used in) financing activities | $472 | $(90) | - The company expects cash expenditures to increase with ongoing R&D and clinical activities. Current funds are projected to be sufficient for approximately the next two years, but additional financing may be required sooner due to various factors, including the uncertain nature of clinical development and regulatory approvals[153][154][215] Off-Balance Sheet Arrangements - The company did not have any off-balance sheet arrangements during the periods presented[160] Critical accounting policies and significant judgments and estimates - The financial statements require management judgments and estimates, which are evaluated ongoingly. No material changes to critical accounting policies were reported compared to the 2020 Annual Report on Form 10-K[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's market risk exposure, primarily interest rate sensitivity, and current lack of foreign currency risk - The company's primary market risk exposure is interest rate sensitivity, as investments are in short-term, low-risk instruments like U.S. Treasury obligations, commercial paper, and corporate bonds. A 100 basis point change in interest rates is not expected to materially affect the fair market value of its investment portfolio[162][163] - Currently, the company is not exposed to foreign currency exchange rate risk, but this may change if it contracts with vendors in Asia and Europe[164] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021[166] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[167] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section states the company is not currently party to any legal proceedings or claims expected to have a material adverse effect on its business - As of the date of this report, Mersana Therapeutics is not involved in any legal proceedings or claims that, if determined adversely, would individually or in aggregate have a material adverse effect on its business[169] Item 1A. Risk Factors This section outlines various risks and uncertainties that could materially affect the company's business, financial condition, and future growth prospects Risks related to development and approval of our ADC product candidates - Early clinical results are not predictive of future success, and product candidates may fail at any stage of development. Clinical studies may not demonstrate sufficient efficacy and safety for regulatory approval, and serious adverse events (SAEs), including death, have been observed and are expected to continue[172][173][203][204] - Delays in clinical studies due to factors like regulatory consensus, patient enrollment, or manufacturing issues could increase costs and delay or prevent commercialization. The company currently has only two clinical-stage candidates (UpRi and XMT-1592), and failure of either could significantly impact the business[177][178][181][182] - Even with Fast Track Designation (granted for UpRi) or potential Breakthrough Therapy Designation, there is no guarantee of faster development or approval. Obtaining regulatory approval outside the U.S. requires separate processes and compliance, which may differ significantly from FDA requirements[186][187][199] Risks related to our financial position and need for additional capital - The company has incurred significant net losses since inception ($315.1 million accumulated deficit as of March 31, 2021) and expects to continue incurring substantial operating losses for the foreseeable future, with no product sales revenue to date[211][212] - Substantial additional financing will be required to achieve goals, and failure to obtain capital could force delays or termination of product development. Raising capital may dilute existing stockholders, and debt financing may impose restrictive covenants[215][217] - The company's credit facility with Silicon Valley Bank is secured by substantially all assets (excluding intellectual property) and includes customary covenants. An event of default could lead to increased interest rates, accelerated payments, and disposal of collateral[218][219] Risks related to our reliance on third parties - The company relies on third-party contract manufacturers for preclinical and clinical product supplies, lacking internal manufacturing capabilities. Failure of these manufacturers to meet specifications or regulatory requirements (cGMP) could lead to supply limitations, delays, or regulatory issues[221][223] - Scaling up manufacturing for commercial quantities poses challenges, and an inability to do so in a timely or cost-effective manner could delay development and commercialization[226] - Reliance on CROs and other third parties for clinical studies reduces direct control and introduces risks of delays, unsuccessful studies, or non-compliance with GCP. Strategic partnerships are crucial for R&D and commercialization, but partners may not perform as expected, terminate agreements, or pursue competing products[227][231][233][235] Risks related to commercialization of our ADC product candidates - Commercial success depends on significant market acceptance by physicians, patients, and healthcare payors, influenced by efficacy, safety, cost, and reimbursement. If market opportunities are smaller than estimated, revenue and profitability will be adversely affected[239][240][241] - The company lacks a sales and marketing infrastructure and will need to build one or rely on third parties, which involves significant costs and risks. Failure to establish effective capabilities could lead to lower product revenues and profitability[242][243][246][247] - Reimbursement for products may be limited or unavailable, hindering profitable sales. Government and private payors are focused on cost containment, potentially leading to price controls and reduced demand, especially in foreign markets[248][252][253][254] Risks related to our intellectual property - The company's success depends on obtaining and protecting intellectual property (IP) rights, primarily through patents, trade secrets, and confidentiality agreements. Patent issuance, scope, validity, and enforceability are highly uncertain and subject to challenges, potentially leading to loss of exclusivity or narrowed protection[265][266][267] - Legal proceedings to enforce or defend IP rights can be expensive and time-consuming, diverting management resources. Third-party claims of infringement or misappropriation could prevent or delay development and commercialization, potentially requiring substantial damages or licenses on unfavorable terms[280][282][285][286] - Protecting IP rights globally is challenging and expensive, as foreign laws may not offer the same protection as U.S. laws. Confidentiality agreements may not prevent unauthorized disclosure of trade secrets, and the company may face claims of misappropriation from former employers of its personnel[288][289][292][294] Risks related to our business and industry - Failure to attract and retain senior management and key scientific personnel could impede R&D and commercialization objectives, given intense competition for skilled talent in the biotechnology industry[300][301] - Managing growth and expanding operations successfully will be challenging, requiring effective management of development efforts, clinical studies, and hiring/training additional personnel[302] - The company's activities are subject to extensive healthcare, anti-corruption, data privacy, and consumer protection laws. Non-compliance could result in substantial penalties, reputational harm, and operational restructuring. Employee misconduct also poses risks of regulatory sanctions and financial impact[303][307][308][309] - Product liability lawsuits could result in substantial liabilities and limit commercialization. The company's current insurance coverage may not be sufficient for all potential claims[310][311][312] Risks related to our common stock - The company's stock price has been and may continue to be volatile due to various factors, including clinical study results, regulatory developments, financial performance, and general market conditions, potentially leading to substantial losses for stockholders[321][323] - Principal stockholders and management own a significant percentage of the stock, allowing them to exercise substantial influence over matters requiring stockholder approval, which could entrench management or discourage acquisitions[324] - The company does not expect to pay cash dividends in the foreseeable future, requiring investors to rely on stock price appreciation for returns. Anti-takeover provisions in corporate documents and Delaware law could discourage acquisitions, even if beneficial to stockholders[325][326][329] General risk factors - The ongoing COVID-19 pandemic poses significant risks, including potential delays in clinical studies, disruptions to the supply chain, impacts on employee productivity, and slower regulatory review. The ultimate impact remains highly uncertain[332][333][334] - The business is vulnerable to serious disasters (e.g., floods, fires, epidemics) that could disrupt operations and lead to increased costs or liabilities, potentially exceeding insurance coverage[335][336] - Unfavorable global economic conditions could adversely affect the business by weakening demand for products, impacting the ability to raise capital, and straining suppliers[337] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, agreements, certifications, and iXBRL financial information - Exhibits include the Fifth Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Eighth Lease Modification Agreement, Offer Letters, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and financial information in iXBRL format[339] Signatures This section contains the signatures of authorized representatives of Mersana Therapeutics, Inc., certifying the report's filing - The report is duly signed on behalf of Mersana Therapeutics, Inc. by Anna Protopapas, President and Chief Executive Officer, and Brian DeSchuytner, Senior Vice President, Finance & Product Strategy, on May 10, 2021[341][343]