Mersana Therapeutics(MRSN) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents unaudited financial statements, management's discussion and analysis, market risk, and internal controls Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, showing increased cash and a wider net loss due to higher R&D and G&A expenses, with key details in the notes Condensed Consolidated Financial Statements The financial statements show increased cash to $230.1 million and a wider net loss of $47.3 million due to higher R&D and G&A expenses Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $230,057 | $177,947 | | Total current assets | $241,470 | $188,898 | | Total assets | $258,267 | $206,111 | | Liabilities & Equity | | | | Total current liabilities | $56,463 | $47,523 | | Deferred revenue, noncurrent | $25,620 | $— | | Total liabilities | $117,741 | $84,370 | | Total stockholders' equity | $140,526 | $121,741 | Condensed Consolidated Statement of Operations (in thousands) | Account | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Collaboration revenue | $2,036 | $11 | | Research and development | $35,806 | $27,415 | | General and administrative | $12,782 | $7,208 | | Net loss | $(47,258) | $(34,693) | | Net loss per share | $(0.59) | $(0.50) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Account | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,955) | $(27,022) | | Net cash used in investing activities | $(329) | $(114) | | Net cash provided by financing activities | $60,394 | $472 | | Increase (decrease) in cash | $52,110 | $(26,664) | Notes to Condensed Consolidated Financial Statements These notes detail the company's ADC focus, the Janssen collaboration, ATM equity financing, debt facilities, and stock-based compensation - The company's lead product candidate, upifitamab rilsodotin (UpRi), is a first-in-class ADC targeting NaPi2b for ovarian cancer, currently in a registrational trial (UPLIFT) and a combination trial (UPGRADE)[30] - In February 2022, the company entered a research collaboration with Janssen, receiving a $40.0 million upfront payment, and recognized $1.7 million in collaboration revenue for the quarter[52][65] - During Q1 2022, the company sold 11.7 million shares for $54.8 million net proceeds, fully utilizing its 2020 ATM program, and established a new $100.0 million 2022 ATM program, selling 1.4 million shares for $5.8 million net proceeds[92][93] - The company's New Credit Facility provides for up to $100.0 million in term loans, with $25.0 million outstanding as of March 31, 2022[86] Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Research and development | $2,933 | $2,301 | | General and administrative | $2,552 | $1,738 | | Total | $5,485 | $4,039 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q1 2022 net loss increase to $47.3 million due to higher R&D and G&A, strong liquidity, and the discontinuation of XMT-1592 development Overview This overview details Mersana's ADC strategy, focusing on UpRi's registrational trial, advancing early-stage pipeline, and discontinuing XMT-1592 development - The company's lead ADC, UpRi, is in a single-arm registrational trial (UPLIFT) for platinum-resistant ovarian cancer, with enrollment expected in Q3 2022[130] - In May 2022, the company decided to discontinue the development of its second clinical candidate, XMT-1592[131] - Mersana plans to initiate Phase 1 clinical trials for XMT-1660 (B7-H4 target) and XMT-2056 (HER2 target) in mid-2022[132] Results of Operations This section analyzes Q1 2022 financial results, showing increased collaboration revenue, an $8.4 million rise in R&D, and a $5.6 million rise in G&A expenses Comparison of Results of Operations (in thousands) | Account | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Dollar Change | | :--- | :--- | :--- | :--- | | Collaboration revenue | $2,036 | $11 | $2,025 | | Research and development | $35,806 | $27,415 | $8,391 | | General and administrative | $12,782 | $7,208 | $5,574 | | Net loss | $(47,258) | $(34,693) | $(12,565) | - The $8.4 million increase in R&D expense was primarily due to a $3.3 million rise in employee compensation, a $2.0 million increase in manufacturing for preclinical programs, and a $1.8 million increase in UpRi activities[157][158] - The $5.6 million increase in G&A expense was mainly driven by a $2.8 million rise in consulting and professional fees and a $1.6 million increase in employee compensation[159] Liquidity and Capital Resources Mersana held $230.1 million in cash as of March 31, 2022, bolstered by $60.6 million from ATM programs, with funds projected to last into H2 2023 - The company held $230.1 million in cash and cash equivalents as of March 31, 2022[166] - During Q1 2022, the company raised $54.8 million from its 2020 ATM and $5.8 million from its new 2022 ATM, with an additional $40.0 million raised post-quarter end through May 5, 2022[163][164] - Net cash used in operating activities decreased to $8.0 million for Q1 2022 from $27.0 million in Q1 2021, primarily due to $38.3 million in deferred revenue from the Janssen Agreement[169] - Management believes current cash and cash equivalents, plus $35 million available borrowings, will fund operations into the second half of 2023[174] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity affecting its cash equivalents and its floating-rate credit facility - The company faces interest rate risk on cash equivalents and its floating-rate New Credit Facility, though a 100 basis point change is not expected to have a material effect[180][181] - The company is not currently exposed to material foreign currency exchange rate risks, but this may change with increased international vendor contracts[182] Item 4. Controls and Procedures Based on an evaluation as of March 31, 2022, the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022[184] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[185] PART II - OTHER INFORMATION This section covers legal proceedings, comprehensive risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings The company reports that it is not currently a party to any material legal proceedings that would be expected to have a material adverse effect on its business - As of the report date, the company is not party to any material legal proceedings[187] Item 1A. Risk Factors This section details significant risks including clinical development failure, reliance on UpRi, financial losses, need for capital, third-party dependence, commercialization hurdles, IP challenges, regulatory uncertainty, and broader business risks Risks Related to Development and Approval This subsection highlights inherent uncertainties in drug development, including high failure risk, potential for serious adverse events, and the critical dependence on UpRi's success - The company's early-stage product candidates face a high risk of failure, and positive early results do not guarantee future success[189][190] - With a concentrated pipeline, failure of the lead candidate, UpRi, would significantly harm the business and may lead to discontinuing other related candidates[195] - Patients in clinical trials have experienced serious adverse events (SAEs), including death, which could halt development, prevent approval, or limit commercial potential[191][202] Risks Related to Financial Position and Need for Capital This subsection details Mersana's financial vulnerabilities, including a history of net losses, the need for substantial additional capital, and restrictive covenants from its credit facility - The company has incurred net losses since inception, with a $47.3 million net loss for Q1 2022 and an accumulated deficit of $497.7 million as of March 31, 2022, anticipating continued substantial losses[208] - Substantial additional financing is required to achieve company goals; failure to obtain it could lead to delays, limitations, or termination of product development and commercialization efforts[216] - The company's credit facility imposes restrictive covenants that limit operating and financial flexibility, affecting its ability to incur debt, grant liens, make investments, and sell assets[214][215] Risks Related to Reliance on Third Parties Mersana's business heavily relies on third-party CMOs for manufacturing, CROs for clinical trials, and strategic partners, exposing it to significant operational and financial risks - The company relies entirely on third-party contract manufacturers for all product supplies, lacking internal capabilities, which poses risks to supply, quality, and regulatory compliance[223] - Reliance on CROs and other third parties for clinical trials results in less direct control over timing, completion, and data quality[228] - Dependence on strategic partnerships, such as with Janssen or Merck KGaA, means partner non-performance or termination could reduce revenue and harm development efforts[232][234] Risks Related to Commercialization This subsection outlines significant commercialization hurdles, including market acceptance, lack of sales infrastructure, reimbursement challenges, and intense competition from larger companies - Future commercial success depends on achieving significant market acceptance among physicians, patients, and healthcare payors, which remains uncertain[240] - The company lacks sales, marketing, and distribution infrastructure, and building or outsourcing these capabilities involves significant risks, costs, and potential launch delays[244][246] - Profitable product sales depend on obtaining adequate coverage and reimbursement from third-party payors, who are increasingly focused on cost containment and may impose adverse pricing limitations[249] - The company faces substantial competition from large pharmaceutical and biotechnology companies possessing greater financial resources and expertise across R&D, manufacturing, and marketing[254][256] Risks Related to Intellectual Property This subsection details IP risks, including challenges in obtaining and defending patents, reliance on in-licensed IP, and potential for expensive infringement litigation - The company's success relies on obtaining and maintaining patent protection for its technology and product candidates, though the biopharmaceutical patent landscape is highly uncertain[259] - The company relies on third-party licenses, such as from Recepta for the NaPi2b antibody, and breaching these agreements could result in loss of IP rights and halted product development[267][268] - The company may face expensive and time-consuming IP lawsuits to protect its rights or defend against infringement claims, potentially leading to loss of patent protection or inability to commercialize products[275][278] Risks Related to Regulatory Approval and Other Legal Compliance This subsection describes the extensive and uncertain regulatory approval process, ongoing compliance requirements, and the complex healthcare laws that govern the company's operations - The regulatory approval process is expensive, time-consuming, and uncertain, and the company, lacking prior experience, may never obtain approval for its candidates[297] - Any approved product will be subject to extensive ongoing regulation, including cGMP, marketing, and safety reporting, with non-compliance risking approval withdrawal or penalties[304][307] - The company's activities are subject to extensive healthcare laws, including anti-kickback, false claims, HIPAA, and GDPR, where violations can lead to substantial penalties and reputational harm[333][335][354] General and Business Risks This subsection covers broader operational risks, including attracting talent, managing growth, product liability, and impacts from the COVID-19 pandemic and geopolitical instability - The company's success depends on attracting and retaining highly qualified senior management and scientific personnel in a competitive market[365] - The business faces risks from the COVID-19 pandemic, potentially disrupting clinical trials, manufacturing, supply chains, and regulatory processes[391][392] - Unfavorable global economic conditions, including inflation, and geopolitical events like the Russia-Ukraine conflict could adversely affect operations, financial condition, and capital access[398][399] - The company faces an inherent risk of product liability lawsuits from clinical testing, potentially resulting in substantial liabilities[369] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q. Key documents include the Sales Agreement for the 2022 ATM program, the Research Collaboration and License Agreement with Janssen Biotech, Inc., an amendment to the loan and security agreement, and various officer certifications - This section lists all exhibits filed with the Form 10-Q, including key agreements like the Janssen collaboration (10.2), the 2022 ATM Sales Agreement (10.1), and credit facility amendments (10.4)[401]