Merrimack Pharmaceuticals Inc Annual Report 2015

Plain-text annual report

MERRIMACK PHARMACEUTICALS INC FORM 10-K (Annual Report) Filed 02/26/16 for the Period Ending 12/31/15 Address ONE KENDALL SQUARE SUITE B7201 CAMBRIDGE, MA 02139 617-441-1000 0001274792 Telephone CIK Symbol MACK SIC Code Industry 2834 - Pharmaceutical Preparations Biotechnology & Drugs Sector Healthcare Fiscal Year 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-35409 Merrimack Pharmaceuticals, Inc.(Exact name of registrant as specified in its charter) Delaware 04-3210530(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)One Kendall Square, Suite B7201Cambridge, MA 02139(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (617) 441-1000Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.01 par value NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. x Yes ¨ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). x Yes ¨ NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer ¨Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x NoAggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock onJune 30, 2015: $1,286,139,750.As of February 15, 2016, there were 116,060,572 shares of Common Stock, $0.01 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe registrant intends to file a definitive proxy statement pursuant to Regulation 14A in connection with its 2016 Annual Meeting of Stockholders. Portionsof such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART I Item 1. Business 3 Item 1A. Risk Factors 38 Item 1B. Unresolved Staff Comments 67 Item 2. Properties 67 Item 3. Legal Proceedings 68 Item 4. Mine Safety Disclosures 68 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 69 Item 6. Selected Financial Data 70 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 72 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 97 Item 8. Financial Statements and Supplementary Data 97 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 97 Item 9A. Controls and Procedures 97 Item 9B. Other Information 98 PART III Item 10. Directors, Executive Officers and Corporate Governance 99 Item 11. Executive Compensation 99 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 99 Item 13. Certain Relationships and Related Transactions, and Director Independence 99 Item 14. Principal Accounting Fees and Services 99 PART IV Item 15. Exhibits and Financial Statement Schedules 100 1Table of ContentsFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statementsof historical facts, contained in this Annual Report on Form 10-K, including statements regarding our strategy, future operations, future financial position, futurerevenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,”“intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identifyforward-looking statements, although not all forward-looking statements contain these identifying words.The forward-looking statements in this Annual Report on Form 10-K include, among other things, statements about: • the market potential and our commercialization efforts for MM-398, which is marketed by us in the United States under the brand name ONIVYDE ®; • our plans to develop and commercialize our clinical stage product candidates and diagnostics; • our ongoing and planned discovery programs, preclinical studies and clinical trials; • the timing of the completion of our clinical trials and the availability of results from such trials; • our collaborations with Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH, which we collectively refer to as Baxalta, and PharmaEngine, Inc.,or PharmaEngine, related to ONIVYDE; • our ability to establish and maintain additional collaborations; • the timing of and our ability to obtain and maintain regulatory approvals for our products and product candidates; • the rate and degree of market acceptance and clinical utility of our products; • our intellectual property position; • our commercialization, marketing and manufacturing capabilities and strategy; • the potential advantages of our systems biology approach to drug research and development; • the potential use of our systems biology approach in fields other than oncology; and • our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance onour forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-lookingstatements we make. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in Part I, Item 1A.Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements donot reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on Form 10-K completely andwith the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.NOTE REGARDING TRADEMARKSONIVYDE ® is a registered trademark of Merrimack Pharmaceuticals, Inc. Any other trademarks, trade names and service marks referred to in this AnnualReport on Form 10-K are the property of their respective owners. 2Table of ContentsPART IItem 1. BusinessOverviewWe are a biopharmaceutical company discovering, developing and commercializing innovative medicines consisting of novel therapeutics paired withdiagnostics for the treatment of cancer. We were founded by a team of scientists from The Massachusetts Institute of Technology and Harvard University whosought to develop a systems biology-based approach to biomedical research. The core of our approach to systems biology is to apply multidisciplinary andmultitechnology capabilities to build functional and predictive computational models of biological systems, such as cell signaling networks, that allow us toengineer treatments that are directed at the mechanisms of disease. We view cancer as a complex engineering challenge. Through systems biology, which bringstogether the fields of biology, computing and engineering, we aim to decrease uncertainty in drug development and clinical validation, and move discovery effortsbeyond trial and error. Our mission is to employ these insights to provide patients, physicians and the healthcare system with the medicines, tools and informationto deliver integrated healthcare solutions that improve both the quality of outcomes and the efficiency of care.We have one marketed therapeutic oncology product and multiple targeted therapeutic oncology candidates in clinical development. Our most advancedprogram is our therapeutic MM-398, which we market in the United States under the brand name ONIVYDE. On October 22, 2015, the U.S. Food and DrugAdministration, or FDA, and the Taiwan Food and Drug Administration, or TFDA, approved the use of ONIVYDE in combination with fluorouracil, or 5-FU, andleucovorin for the treatment of patients with metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy in theUnited States and Taiwan, respectively. In addition, the European Medicines Agency, or EMA, has accepted for review a Marketing Authorization Application, orMAA, filed by our collaboration partner Baxalta for ONIVYDE in combination with 5-FU and leucovorin for the treatment of adult patients with metastaticadenocarcinoma of the pancreas who have been previously treated with gemcitabine-based therapy.In addition to ONIVYDE and our product candidates in clinical development, we have multiple product candidates in preclinical development and adiscovery effort advancing additional candidate medicines. We have tailored ONIVYDE and our other product candidates to target specific disease mechanismsthat our research suggests are common across many solid tumor types. We believe that ONIVYDE and our other product candidates have the potential to addressmajor unmet medical needs.We are also developing in vitro and in vivo diagnostics for use with each of our oncology therapeutic product candidates. Our in vitro diagnostic agentsemploy biophysical or biochemical markers of cancer, or biomarkers, which we have identified using our systems biology approach. Our in vivo diagnostics takethe form of imaging agents that may help identify patients likely to benefit from our therapeutic products by measuring deposition of our products in the tumor. Webelieve that diagnostics will allow us to improve the efficiency and productivity of our clinical development and enhance the potential efficacy andpharmacoeconomic benefit of our therapeutics.We have also entered into an agreement to utilize our manufacturing expertise to develop, manufacture and exclusively supply bulk drug product to a thirdparty, who will in turn process the drug into finished product and commercialize it globally following regulatory approval.Our Most Advanced Product CandidatesThe table and descriptions below summarize key information about ONIVYDE (MM-398) and our other clinical stage product candidates, MM-302, MM-121, MM-141 and MM-151. Each of the product candidates described below is a targeted therapy, designed to efficiently act on selected cancer cells. Thesetargeted therapies are either designed to deliver cytotoxic therapies to the tumor tissue, such as ONIVYDE and MM-302, or are monoclonal antibodies ormonoclonal antibody-derived molecules that are designed to block oncogenic signaling pathways, such as MM-121, MM-141 and MM-151. Other than ONIVYDE,none of our product candidates are approved for any indication by the FDA or any other regulatory agency. 3Table of ContentsProgram Status Commercial Rights (Territory) ONIVYDE (MM-398)(irinotecan liposome injection) • Approved by the FDA and TFDA in combination with 5-FU andleucovorin for the treatment of patients with metastatic adenocarcinomaof the pancreas after disease progression following gemcitabine-basedtherapy in the United States and Taiwan, respectively • Launched commercially in the United States on October 26, 2015 • Pending EMA MAA (filed by Baxalta) for ONIVYDE in combinationwith 5-FU and leucovorin for the treatment of adult patients withmetastatic adenocarcinoma of the pancreas who have been previouslytreated with gemcitabine-based therapy • Conducting a Phase 2 clinical trial in combination with 5-FU andleucovorin in patients with previously untreated, metastatic pancreaticadenocarcinoma • Ongoing Phase 1 clinical trials: as a monotherapy in patients withglioma, in combination with cyclophosphamide in patients with pediatricsolid tumors and in combination with standard irinotecan ingastrointestinal tumors • Conducting a Phase 1 translational clinical trial in metastatic breastcancer designed to identify predictive biomarkers associated with MM-398 Merrimack (United States) PharmaEngine (Taiwan) Baxalta (rest of world outside ofUnited States and Taiwan)MM-302(ErbB2 (HER2) targeted antibody drugconjugated liposomal doxorubicin) • Conducting a Phase 2 clinical trial in combination with trastuzumab inpatients with ErbB2 (HER2) positive, locally advanced or metastaticbreast cancer • Announced final results for a Phase 1 clinical trial in April 2015 Merrimack (worldwide)MM-121(seribantumab) (ErbB3 targetedmonoclonal antibody) • Conducting a Phase 2 clinical trial in combination with docetaxel orpemetrexed in patients with heregulin positive, advanced non-small celllung cancer Merrimack (worldwide)MM-141(istiratumab) (IGF-1R and ErbB3targeted tetravalent bispecific antibody) • Conducting a Phase 2 clinical trial in combination with nab-paclitaxeland gemcitabine in previously untreated metastatic pancreatic cancerpatients who have high serum levels of free IGF-1 • Conducting a Phase 1 clinical trial as a monotherapy, in combinationwith everolimus and in combination with nab-paclitaxel and gemcitabinein patients with solid tumors Merrimack (worldwide)MM-151(EGFR (ErbB1) targeted oligoclonalantibody) • Completed a Phase 1 clinical trial as a monotherapy and in combinationwith irinotecan in patients with solid tumors Merrimack (worldwide) 4Table of ContentsONIVYDE ® (MM-398)ONIVYDE (MM-398) overviewONIVYDE (irinotecan liposome injection), also known as MM-398, is a novel encapsulation of the marketed chemotherapy drug irinotecan in a liposomalformulation. On October 22, 2015, the FDA and the TFDA approved the use of ONIVYDE in combination with 5-FU and leucovorin for the treatment of patientswith metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy in the United States and Taiwan, respectively.ONIVYDE is the first and only FDA-approved therapy in this setting. ONIVYDE is not indicated for use as a single agent. In addition, among other pendingapplications before regulatory authorities in foreign jurisdictions, the EMA has accepted for review an MAA filed by Baxalta for ONIVYDE in combination with5-FU and leucovorin for the treatment of adult patients with metastatic adenocarcinoma of the pancreas who have been previously treated with gemcitabine-basedtherapy.We hold development and commercialization rights for ONIVYDE in the United States. In September 2014, we established a collaboration with Baxalta forthe development and commercialization of ONIVYDE outside of the United States and Taiwan. PharmaEngine holds the development and commercializationrights to ONIVYDE in Taiwan. We believe that ONIVYDE may have potential uses in a number of other solid tumor indications beyond its currently approvedindication, and additional clinical trials of ONIVYDE are ongoing or in the planning stages.ONIVYDE has obtained orphan drug exclusivity in the United States from the FDA for the treatment of pancreatic cancer, and orphan medicinal productdesignation in the European Union from the EMA for the treatment of pancreatic cancer. In addition, ONIVYDE is covered by multiple patents and trademarksworldwide.ONIVYDE (MM-398) Phase 3 clinical trial for metastatic adenocarcinoma of the pancreasThe basis of the recent FDA and TFDA approvals of ONIVYDE in combination with 5-FU and leucovorin for the treatment of patients with metastaticadenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy was our randomized, open label Phase 3 clinical trial of MM-398 inpatients with metastatic adenocarcinoma of the pancreas who received prior gemcitabine-based therapy. We refer to this clinical trial as the NAPOLI-1 trial.Patients were enrolled at 76 sites in North America, South America, Europe, Asia and Oceania. The trial evaluated ONIVYDE in combination with 5-FU andleucovorin administered every two weeks and as a monotherapy administered every three weeks. Each ONIVYDE containing arm was compared to a control armof 5-FU and leucovorin. A total of 417 patients were randomized across the three arms. The primary endpoint of the trial was overall survival. Overall survival is ameasure of the time to death from treatment randomization. Primary survival analysis was based on 313 events and showed that ONIVYDE in combination with 5-FU and leucovorin significantly improved overall survival versus 5-FU and leucovorin alone: 6.1 months versus 4.2 months (p=0.012, unstratified hazardratio=0.67, 95% CI: [0.49-0.92]). The monotherapy regimen in this trial did not show improvement over the 5-FU and leucovorin arm: 4.9 months versus 4.2months (p=0.94, HR=0.99, 95% CI: [0.77-1.28]). A hazard ratio, or HR, is a measure of how often a particular event happens in one group compared to how oftenit happens in another group over time. In cancer research, hazard ratios are often used in clinical trials to measure survival at any point in time in a group of patientswho have been given a specific treatment compared to a control group given another treatment or a placebo. A hazard ratio of one means that there is no differencein survival between the two groups, while a hazard ratio of greater than one or less than one means that survival was better in one of the groups. The confidenceinterval, or CI, given after the HR reflects the amount of certainty in the estimate of the HR. An HR value that is not contained within a 95% CI is unlikely to be thetrue HR. ONIVYDE in combination with 5-FU and leucovorin also achieved a longer progression-free survival compared with the 5-FU and leucovorin arm (3.1months versus 1.5 months; unstratified HR=0.56). The most common non-hematologic grade 3 and higher adverse events in the ONIVYDE combination arm werefatigue (14%), diarrhea (13%) and vomiting (11.1%). Hematologic grade 3 and higher adverse events included neutropenia, which was observed in 20% of patientsas determined by objective laboratory values, and febrile neutropenia, which was observed in 2% of patients.In January 2016, we announced an updated overall survival analysis from our NAPOLI-1 clinical trial. The updated data analysis was based on 378 eventsand included data from all patients randomized across the three arms of the trial. Twelve-month survival estimates for ONIVYDE in combination with 5-FU andleucovorin were 26% (95% CI, 18-35%) compared to 16% (95% CI, 10-24%) for 5-FU and leucovorin alone. Six-month survival estimates were 53% (95% CI, 44-62%) for the ONIVYDE combination regimen versus 38% (95% CI, 29-47%) for 5-FU and leucovorin. No new safety or tolerability concerns were noted in theupdated data analysis. The most common grade 3 and higher adverse events occurring at a 2% or greater incidence in the ONIVYDE containing arms wereneutropenia (ONIVYDE monotherapy arm: 15%; ONIVYDE + 5-FU/LV arm: 28%), diarrhea (ONIVYDE monotherapy arm: 21%; ONIVYDE + 5-FU/LV arm:13%), vomiting (ONIVYDE monotherapy arm: 14%; ONIVYDE + 5-FU/LV arm: 12%) and fatigue (ONIVYDE monotherapy arm: 6%; ONIVYDE + 5-FU/LVarm: 14%).MM-398 Phase 2 clinical trial in front-line metastatic pancreatic cancerIn October 2015, we enrolled the first patient in a Phase 2 clinical trial of MM-398 in front-line metastatic pancreatic cancer. This trial is designed to assessthe safety and efficacy of the combination of MM-398 plus 5-FU and leucovorin, with or without the addition of oxaliplatin, versus nab-paclitaxel and gemcitabinein patients with previously untreated, metastatic pancreatic 5Table of Contentsadenocarcinoma. The trial will be conducted in two parts. In the first part of the trial, we expect to enroll approximately six to18 patients. The primary outcome forPart 1 of the trial is to evaluate the safety and tolerability of ONIVYDE in combination with 5-FU and leucovorin and oxaliplatin. In the second part of the trial, weexpect an additional 150 patients (50 patients per arm) with previously untreated, metastatic pancreatic adenocarcinoma will be enrolled and randomized to receiveONIVYDE in combination with 5-FU and leucovorin and oxaliplatin, ONIVYDE in combination with 5-FU and leucovorin or nab-paclitaxel and gemcitabine. InPart 2 of the trial, efficacy of the ONIVYDE containing regimens will be compared to the nab-paclitaxel and gemcitabine regimen, evaluating progression freesurvival, or PFS, at 24 weeks, as well as overall survival, objective response rate, tumor marker CA19-9 response, safety and tolerability. PFS is the time from theinitiation of treatment to tumor progression based on an increase of at least 20% in the sum of measured tumor diameters with no new tumors. The trial will beconducted at sites in the United States, Canada, Europe, Australia, New Zealand, Taiwan and South Korea.MM-398 other clinical trialsWe are also collaborating with several investigators to conduct additional trials of MM-398, including in a Phase 1 clinical trial in gastrointestinal tumors, aPhase 1 clinical trial utilizing a high concentration formulation of MM-398 in patients with glioma and a Phase 1 clinical trial in pediatric solid tumors.MM-398 diagnostic developmentWe believe that deposition of MM-398 in the tumor may be important to efficacy. We are exploring development of in vivo diagnostics that take the form ofimaging agents that may serve as surrogate biomarkers for estimating MM-398 deposition in patient tumors. The diagnostic may help identify patients most likelyto benefit from MM-398, and direct those patients with low deposition tumors towards alternate therapy strategies. We are currently evaluating various agentsimaged by MRI and other modalities to assess the potential for predicting drug deposition. We recently initiated an expansion of a Phase 1 translational studydesigned to assess the feasibility of using an MRI-based approach with a marketed iron supplement used off-label as an imaging agent to act as a marker for MM-398 tumor response prediction. The expansion phase of this study will enroll patients who have metastatic breast cancer that is hormone receptor positive, triplenegative or where active brain metastases are present. As part of our preclinical and clinical translational research, we are also investigating functional in vitrobiomarkers that may be predictive of efficacy in poorly vascularized tumors.MM-302MM-302 overviewMM-302 is an antibody drug conjugated liposomal doxorubicin that targets the ErbB2 (HER2) receptor. Doxorubicin is a marketed chemotherapy that is amember of the anthracycline class of chemotherapeutics. As a liposomal encapsulation of doxorubicin, MM-302 is designed to target and bind to cancer cells thatoverexpress ErbB2 (HER2) to allow for the selective uptake of drug into tumor cells while minimizing exposure to healthy tissues, such as those of the heart.Unlike other HER2 targeted agents, MM-302 is not designed to inhibit HER2 signaling pathways and relies on HER2 as a means to identify and gain access to thecancer cells.We believe that MM-302 may offer advantages in comparison with other forms of doxorubicin, namely free doxorubicin and liposomal doxorubicin. Ourclinical development strategy is to demonstrate that MM-302 has favorable efficacy and safety for the treatment of metastatic breast cancer where concerns overcardiac safety, particularly in combination with trastuzumab, have led to a decline in the use of anthracyclines despite proven efficacy.MM-302 Phase 2 clinical trial in metastatic breast cancerIn August 2014, we initiated a global, open-label, randomized Phase 2 clinical trial of MM-302 in combination with trastuzumab (Herceptin ® ) in patientswith ErbB2 (HER2) positive, locally advanced or metastatic breast cancer. The trial was designed with input from the FDA to support a potential acceleratedapproval application. The trial has also been reviewed by the EMA, and we intend to use data from the trial, if positive, to support conditional marketingauthorization in Europe. This clinical trial, which we refer to as the HERMIONE trial, is expected to enroll approximately 250 patients who will be randomized(1:1) to receive either MM-302 and trastuzumab or chemotherapy of their physician’s choice (capecitabine, gemcitabine or vinorelbine) and trastuzumab. Eligiblepatients for the HERMIONE trial must have received prior treatment with trastuzumab in any setting, and pertuzumab (Perjeta ® ) and ado-trastuzumab emtansine(T-DM1, Kadcyla ® ) in the locally advanced or metastatic setting, but have not been treated with an anthracycline-based regimen. The primary endpoint of the trialis PFS. Secondary endpoints include overall survival, objective response rate, safety and tolerability. The trial will be conducted at approximately 110 sites in theUnited States, Canada and Europe. 6Table of ContentsPrior to initiating the HERMIONE trial, we conducted a Phase 1 clinical trial of MM-302 in patients with advanced ErbB2 (HER2) positive breast cancer.The purpose of that Phase 1 clinical trial was to assess the safety of MM-302 and identify the maximum tolerated dose. In April 2015, we reported final resultsfrom this trial showing that the group of patients (n=62) treated with 30 mg/m2 or more of MM-302 alone, in combination with trastuzumab or with trastuzumaband cyclophosphamide, had a median progression free survival, or mPFS, of 7.6 months (95% CI: 3.6-10.9 months) and an overall response rate, or ORR, of 11%.Patients who had not been previously treated with anthracyclines (n=25) had an mPFS of 11 months (95% CI: 1.8-13.1 months) and an ORR of 24%. The mostfrequent adverse events occurring in greater than 20% of the population in this trial were constipation (29%), cough (25%), decreased appetite (29%), diarrhea(23%), dyspnea (20%), fatigue (49%), nausea (49%), neutropenia (22%), stomatitis (22%) and vomiting (26%). The most common grade 3/4 adverse event wasneutropenia, which was observed in eight patients. Six out of 69 patients (9%) had protocol-defined asymptomatic declines in left ventricular ejection fraction, fourof which had reversible declines consistent with trastuzumab-induced changes. One patient experienced two reversible asymptomatic left ventricular ejectionfraction declines (classified as a grade 1 cardiac failure) that resulted in treatment discontinuation after receiving 11 cycles of MM-302 in combination withtrastuzumab. Patients treated with MM-302 as a monotherapy showed no signs of protocol-defined decline in cardiac function.MM-302 diagnostic developmentWe believe that deposition of nanotherapeutics such as MM-302 in the tumor may be important to efficacy. We are exploring development of in vivodiagnostics that take the form of imaging agents that may help identify patients likely to benefit from nanotherapeutics by enabling the measurement of depositionin patient tumors and excluding those patients with low deposition whose tumors are therefore unlikely to respond to treatment with a nanotherapeutic. We arecurrently evaluating nanotherapeutic formulations of liposomal agents imaged by PET/CT scan and other modalities to assess the potential for measuringdeposition.MM-121 (seribantumab)MM-121 overviewMM-121 is a fully human monoclonal antibody that targets ErbB3, a cell surface receptor that is activated by its ligand heregulin. Heregulin-driven ErbB3signaling has been implicated as a mechanism of tumor growth and resistance to targeted, cytotoxic and anti-endocrine therapies. When used in combination withcytotoxic chemotherapeutics, MM-121 is designed to block ErbB3 signaling in order to restore or enhance the anti-tumor effect of a combination therapy partner.Based on the central role of heregulin and ErbB3 in cancer growth and survival, we believe that MM-121 may be applicable to a broad range of metastatictumors, including lung, prostate, breast, ovarian, colon and pancreatic cancers. Our preclinical studies of several hundred tumor samples and the analysis of tumorsamples from our Phase 2 clinical trials suggest that MM-121 may be able to target heregulin-dependent ErbB3 signaling that is relevant in approximately 35-50%or more of cancer patients with these types of tumors.MM-121 Phase 2 clinical trial in metastatic non-small cell lung cancerIn February 2015, we initiated a global, open-label, biomarker-selected, randomized Phase 2 clinical trial of MM-121 in combination with docetaxel orpemetrexed versus docetaxel or pemetrexed alone in patients with heregulin positive, locally advanced or metastatic non-small cell lung cancer. In December 2015,we announced an amendment to the trial, including a change in primary endpoint from PFS to overall survival. This trial is expected to enroll approximately 280heregulin positive patients who will be randomized (2:1) to receive MM-121 plus the investigator’s choice of docetaxel or pemetrexed, or the investigator’s choiceof docetaxel or pemetrexed alone, at sites in the United States, Canada, Asia and Europe. Eligible patients for the trial must have failed prior treatment with nomore than three lines of therapy for locally advanced or metastatic disease including, where applicable, with therapies directed against immune checkpoints, such asprogrammed death-ligand 1 (PD-L1) or its receptor, programmed death 1 (PD-1). The primary endpoint of the trial is overall survival. Secondary endpoints includePFS, objective response rate, safety and quality of life measures. 7Table of ContentsMM-121 previous clinical trialsWe have evaluated MM-121 in multiple Phase 1 and Phase 2 clinical trials in combination with both chemotherapies and other targeted agents across a widespectrum of solid tumor patient populations, including patients with ovarian, breast and lung cancers. The goal of our MM-121 clinical program is to explore theefficacy and safety of MM-121 in combination with other targeted ErbB agents and to establish and validate clinically meaningful biomarkers that were initiallyidentified using our systems biology approach to identify patients most likely to benefit from MM-121.Three such previous Phase 2 clinical trials of MM-121 in non-small cell lung cancer, ovarian cancer and breast cancer enrolled a total of 464 patients andevaluated whether MM-121 in combination with a standard of care therapy was more effective than the standard of care therapy alone in prolonging PFS. In thenon-small cell lung cancer trial, two of the three cohorts (Groups A and C) did not meet their primary endpoints, and the third cohort (Group B) did not pass itsplanned interim analysis and ceased enrolling patients. Additionally, we did not meet the primary endpoints in the clinical trials of MM-121 in patients with ovariancancer or in patients with breast cancer, although our biomarker analysis in each trial identified a potential subpopulation of patients benefiting from MM-121 incombination with either paclitaxel or exemestane, respectively. As ErbB3 signaling was expected to be active in only a subset of patients, pre-treatment biopsieswere collected from patients in the lung and ovarian studies and archived tumor tissue in all three studies to assess heregulin, along with four other pre-specifiedbiomarkers. Secondary analyses included evaluation of the pre-specified biomarkers, as well as overall survival and safety data. Across the trials, there was aconsistent but modest and tolerable increase in adverse events when MM-121 was combined with erlotinib, paclitaxel and exemestane. Most adverse events werereported as mild to moderate in severity and included diarrhea, fatigue, vomiting, rash, hypokalemia and stomatitis.MM-121 diagnostic developmentWe are developing a diagnostic that is focused on measuring certain mechanistically related biomarkers to determine whether a tumor is dependent on ErbB3signaling and therefore amenable to treatment with MM-121. In 2014, we announced updated biomarker results from a meta-analysis of three randomized clinicaltrials of MM-121 in patients with ovarian, breast and lung cancers. This analysis included biomarker and efficacy results that had previously been disclosed, as wellas additional biomarker data from the Phase 2 metastatic breast cancer trial that had not previously been reported. This meta-analysis highlighted heregulin as theprincipal biomarker for MM-121 efficacy. High levels of heregulin mRNA correlated with favorable hazard ratios in all three settings: in ovarian cancer, heregulin-high patients had a PFS HR of 0.37 (95% CI [0.18–0.76]) (57 of 151 evaluable patients; prevalence of 38%); in breast cancer, heregulin-high patients had a PFSHR of 0.26 (95% CI [0.11–0.63]) (34 of 76 evaluable patients; prevalence of 45%); in lung cancer, heregulin-high patients had a PFS HR of 0.35 (95% CI [0.16–0.76]) (37 of 69 evaluable patients; prevalence of 54%). In ovarian cancer, the definition of biomarker positive also required that patients have low ErbB2 (HER2)levels. In breast cancer, where only ErbB2 (HER2) negative patients were enrolled in the clinical trial, this requirement was not needed. In lung cancer, whereErbB2 (HER2) levels are naturally low, this requirement was also not needed.Heregulin mRNA was measured in two different ways in the Phase 2 clinical trials. For archived tissue samples obtained through surgical removal of tumortissue, which was the source of tissue in the breast cancer clinical trial, heregulin mRNA was measured by reverse transcriptase polymerase chain reaction (RT-PCR). This is a commonly used quantitative assay that provides a measure of the amount of heregulin mRNA in a block of tissue. In tissue samples obtainedthrough a biopsy procedure, which was the source of tissue in the ovarian and lung cancer studies, heregulin mRNA was measured by RNA in situ hybridization(RNA-ISH). This is an assay in which a section of tissue is stained for heregulin mRNA and scored by a certified pathologist, and we are using a qualified versionof this assay in our Phase 2 non-small cell lung cancer clinical trial.MM-141MM-141 overviewMM-141 is a fully human tetravalent bispecific antibody designed to block tumor survival signals by targeting receptor complexes containing the insulin-likegrowth factor 1 receptor, or IGF-1R, and ErbB3 (HER3) cell surface receptors. A tetravalent bispecific antibody is a single molecule that has four binding sites, twofor each of two different target cell surface receptors. IGF-1R and ErbB3 complexes both activate a major signaling pathway, PI3K/AKT/mTOR, that allows tumorcells to grow and develop resistance to chemotherapy. We designed MM-141 to suppress the PI3K/AKT/mTOR signaling pathway by reducing the levels of IGF-1R and ErbB3 receptor complexes that trigger the pathway. MM-141 is currently being tested in a Phase 2 clinical trial in combination with gemcitabine and nab-paclitaxel in front-line metastatic pancreatic cancer. In 2014, we obtained orphan drug designation in the United States for MM-141 for the treatment of pancreaticcancer. 8Table of ContentsMM-141 Phase 2 clinical trial in metastatic pancreatic cancerIn May 2015, we initiated a randomized, double-blinded, placebo-controlled Phase 2 clinical trial of MM-141 in combination with nab-paclitaxel andgemcitabine, versus nab-paclitaxel and gemcitabine alone in patients with newly diagnosed metastatic pancreatic cancer who have high serum levels of free IGF-1.As part of this trial, we expect that 146 front-line metastatic pancreatic cancer patients with high serum levels of free IGF-1 will be randomized (1:1) to receiveeither MM-141 plus nab-paclitaxel/gemcitabine or nab-paclitaxel/gemcitabine alone. Eligible patients for the trial must have received no prior radiotherapy,surgery, chemotherapy or investigational therapy for the treatment of metastatic disease. The primary endpoint of the trial is PFS. Secondary endpoints includeoverall survival, objective response rate, safety and tolerability.MM-141 Phase 1 clinical trialThe design of our Phase 2 clinical trial of MM-141 was informed by our multi-arm Phase 1 clinical trial evaluating the safety and tolerability of MM-141 asa monotherapy and in combination with everolimus or with nab-paclitaxel and gemcitabine in patients with advanced solid tumors. Patients in the Phase 1 trialwere enrolled in one of three arms: MM-141 as a monotherapy, MM-141 in combination with everolimus and MM-141 in combination with nab-paclitaxel andgemcitabine. Trial data showed common co-expression of IGF-1R and ErbB3 in solid tumors, and that the presence of this co-expression in metastatic pancreaticcancer was associated with decreased patient survival. An analysis of pre- and post-treatment biopsies confirmed that levels of IGF-1R and ErbB3 were decreasedfollowing MM-141 administration. Hyperglycemia was rare and was reported as an adverse event of Grade 3 or higher in one out of 38 patients in the trial (2.6%).The most common adverse events in the trial, of any grade, were nausea (50%), headache (47.4%) and vomiting (44.7%). MM-141 monotherapy was well toleratedwith no dose limiting toxicities. The observed safety profile of MM-141 in combination with nab-paclitaxel and gemcitabine was comparable to expected toxicitiesreported with the individual safety profiles of the chemotherapy agents.MM-141 diagnostic developmentWe are conducting research and development on an in vitro diagnostic for MM-141 that will help to determine which patients will derive benefits from thedrug alone or in combination with other therapies, while experiencing a satisfactory safety profile. This research is focused on identifying pathway-relevantbiomarkers and assessing their correlation with the magnitude of patient response to MM-141. Our Phase 2 clinical trial of MM-141 uses a proprietary, validatedtest to prospectively select patients with high serum-free IGF-1 levels for inclusion in the trial.MM-151MM-151 overviewMM-151 is an oligoclonal therapeutic consisting of a mixture of three fully human monoclonal antibodies designed to bind to non-overlapping epitopes ofEGFR (ErbB1). An oligoclonal therapeutic is a mixture of two or more distinct monoclonal antibodies. EGFR (ErbB1) has long been recognized as an importantdrug target in several malignancies, including lung, breast, colon, pancreatic and head and neck cancers. MM-151 is designed to block the signal amplification thatour research suggests occurs in the EGFR (ErbB1) pathway. We have completed a Phase 1 clinical trial of MM-151 in patients with refractory solid tumors.We believe that there may be the potential to expand MM-151 into indications in which targeted EGFR (ErbB1) therapies are not currently approved, butwhich our preclinical research indicates should contain patients who will respond to these therapies. Potential indications include colorectal cancer, lung cancer andtriple negative breast cancer.MM-151 Phase 1 clinical trialWe recently completed a Phase 1 clinical trial of MM-151 as a monotherapy and in combination with irinotecan in patients with solid tumors. The Phase 1clinical trial was designed to assess the safety of MM-151 and determine the recommended Phase 2 dose. Four sites are participating in this trial.MM-151 diagnostic developmentWe are focusing our diagnostic efforts for MM-151 on the identification of key biomarkers that will indicate which patient populations are likely to benefitfrom MM-151 treatment. 9Table of ContentsCombination TherapiesIn addition to the development described above, we are exploring combinations of our existing therapeutics that our systems biology approach suggests maybe clinically relevant.Preclinical Product CandidatesWe are developing our preclinical product candidates for a range of solid tumor indications. Our most advanced preclinical candidates are MM-310, atargeted nanotherapeutic, and MM-131, a multispecific antibody.Our Approach to Cancer ResearchWe view cancer as a complex engineering challenge. Through systems biology, which brings together the fields of biology, computing and engineering, weaim to decrease uncertainty in drug development and clinical validation, and move discovery efforts beyond trial and error. The goal of our systems biologyapproach is to understand how the complex molecular interactions that occur within cell signaling pathways, or networks, regulate cell decisions and how networkdysfunction leads to disease. Our platform utilizes proprietary, dynamic biological data generated in a high-throughput method in which we test multiple biologicalor chemical parameters using engineering, analytical and modeling expertise, and from which we build computational models of cell biology to further our drugdiscovery, design and predictive development. We have developed an expertise in generating kinetic data, describing molecular changes or interactions over time,to illuminate the dynamic interactions that occur within biological systems, and apply our insights throughout the research and development process, including fortarget identification, lead compound design and optimization, diagnostic discovery and the design of clinical trial protocols.Our models are constructed and validated using internally generated and proprietary data sets. Following the validation of a comprehensive model of a cellsignaling network, we are able to use the model for drug discovery. Contrary to traditional methods, a significant portion of our discovery work takes place in silico, or using the model for simulation. We believe that this approach is more efficient and productive for drug discovery and development than traditional approaches.As one example, we identified ErbB3, the target of MM-121, using our proprietary model of the ErbB signaling network after conducting a sensitivityanalysis on its signaling process. Although the ErbB pathway has been extensively targeted by cancer therapeutics, we believe that understanding the relativeimportance of the different components of the ErbB network is central to identifying an attractive drug target and a therapeutic directed at this target. In this case,we built a computational model of the ErbB signaling network that includes the most potent ErbB receptor ligands, as well as known and novel ErbB inhibitors. Wepopulated the model with proprietary dynamic data that we generated from our experiments. The model describes in mathematical equations 700 biochemicalreactions representing the ErbB signal transduction network, and identified ErbB3 as the key node in response to both ErbB3- and EGFR (ErbB1)-binding ligands.We then used this insight to develop MM-121.Ultimately, we believe that systems biology will result in better treatments for complex diseases by providing broader insight into disease and the potentialtherapeutic alternatives for physicians and patients. Using systems biology, we are incorporating the identification of biomarkers and the development ofdiagnostics into the drug development process. We believe that integrated medicines may enable physicians to deliver the right drug to the right set of patients atthe right time. This may improve patient outcomes by providing improved therapeutics along with the diagnostic information to guide physician treatmentdecisions, reduce the overall costs of treating and caring for cancer patients, and provide a basis for seeking favorable reimbursement of approved drugs frompayors because of the benefits to patients.In addition to improving patient care, we believe that systems biology can increase the productivity of biomedical research, increase the probability ofapproval for new drugs and produce more precisely targeted therapeutics as compared to a conventional drug development approach since systems biologyprovides us with: • a multidisciplinary, integrated approach to understanding complex biology; • simulation and modeling capabilities that aid in the efficiency and productivity of development; and • the capability to design and build a broad range of therapeutic product candidates without being limited to a particular drug design technology or targetclass.Although our initial focus is oncology, we believe that our systems biology approach is applicable to a broad range of therapeutic areas beyond cancer,including bone and joint conditions, infectious disease, inflammation, central nervous system disease and other areas of medicine with high unmet needs. While itis possible that we may pursue some of these disease areas directly 10Table of Contentsourselves, our plan is to pursue many or all of these other areas through collaborations, licenses and other arrangements with third parties. As an example, in 2010,we established Silver Creek Pharmaceuticals, Inc., or Silver Creek, to apply our systems biology approach to the research and development of regenerativemedicines to repair the heart. Silver Creek is currently a majority owned subsidiary.Therapeutic Design CapabilitiesWe believe that the best therapies for the oncology indications that we are pursuing are targeted therapies that, in contrast with conventional chemotherapies,are highly selective for the molecular mechanisms that we are seeking to affect and, as a result, offer the potential for significant efficacy and safety benefits. Twosuch therapeutic approaches are our nanotherapeutics platform and our human antibody platform.NanotherapeuticsOur nanotherapeutics platform enables us to create both passively targeted and actively targeted liposomes, each containing different chemotherapeuticagents. Our nanotherapeutics are lipidic particles constructed to encapsulate active drug payloads. Nanoscale objects typically, though not exclusively, havedimensions on the order of 100 nanometers or smaller. We believe that nanotherapeutics offer the following potentially favorable attributes: • The uniform sizing of our nanotherapeutics is intended to enable targeting and preferential deposition within tumors by taking advantage of theenhanced permeability and retention effect to selectively enter, and subsequently accumulate in, tumors with leaky vasculature. • We formulate our nanotherapeutics to minimize the leakage of active drug payload out of the particle before the nanotherapeutic has reached thetumor, with the goal of limiting systemic exposure, and the associated occurrence of adverse events, and maximizing the amount of active drug thatreaches the target. • Encapsulation is designed to protect the active drug payload as it passes through the circulation and organs of the body, such as the liver, preventingpremature clearance or metabolism of the active drug, and thereby extend the pharmacokinetic profile and enable more convenient dosing regimens. • We can efficiently create targeted nanotherapeutics using our technical expertise and know-how that enable insertion of targeting agents, such asantibodies, into our nanotherapeutics. • We can customize our nanotherapeutics for use with a variety of drug payloads, including chemotherapies, cytotoxics and nucleic acids, such assiRNA and genes.Human monoclonal antibodiesHuman antibodies are a key component of many of our targeted therapies based on their range of favorable attributes, including their significant targetspecificity and avidity relative to small molecules and their well understood pharmacokinetic properties. Our human monoclonal antibody engineering platformprovides us with the ability to create antibodies that are designed to inhibit specific nodes responsible for tumor growth and survival, or to address inherent drugresistance by simultaneously targeting redundant signaling pathways. We have designed antibodies for use as stand-alone therapeutics and have incorporatedantibodies into other therapeutics, such as targeted nanotherapeutics, as targeting or docking agents. We work with several antibody formats, including thefollowing: • Fully human recombinant monoclonal antibodies and fragments of fully human recombinant monoclonal antibodies that include the antibody bindingdomain. Monoclonal antibodies and antibody fragments are proteins that bind specifically to one defined site on a cell surface protein or receptor. • Multispecific antibody formats, which are comprised of two or more antibodies or antibody fragments linked to a common scaffold molecule toproduce a single molecule that specifically binds to distinct epitopes on two or more target cell surface proteins or receptors. • Oligoclonal antibody mixtures, which are comprised of defined ratios of two or more recombinant human monoclonal antibodies that target two ormore distinct epitopes on a single cell surface protein or receptor. 11Table of ContentsManufacturingWe manufacture bulk drug product for commercial use and for use in our clinical trials and research and development efforts using current goodmanufacturing practices, or cGMP, at our approximately 13,500 square foot multi-product facility located at our corporate headquarters in Cambridge,Massachusetts. We have the capabilities to manufacture antibodies, nanotherapeutics and antibody-targeted nanotherapeutics.Our manufacturing capabilities encompass the full manufacturing process through quality control and quality assurance and are integrated with our projectteams from discovery through development. This structure enables us to efficiently transfer research stage lead molecules into manufacturing. We have designedour manufacturing facility and processes to provide maximum flexibility and rapid changeover for the manufacture of different product candidates. We outsourcefill-finish, packaging, labeling and distribution. As of January 31, 2016, we employed approximately 129 employees in manufacturing activities. Our facilitiesconsist of two suites, one for nanoliposome manufacture and one for biologics manufacture.Our nanoliposome suite is comprised of multiple classified clean rooms and has been designed to comply with current FDA and EMA cGMP for themanufacture of clinical and commercial bulk drug product. The facility and processes have been designed to meet the global commercial and clinical needs ofONIVYDE and the other nanoliposomal products in our pipeline. In 2015, the FDA audited and approved our nanoliposome suite for the commercial supply ofbulk drug product for ONIVYDE, and in 2016, following inspection, the EMA found us to be in general compliance with the relevant EU manufacturing directives.Our biologic suite produces our antibody product candidates and is comprised of multiple independent clean rooms, includes single-use bioreactors, and issized to be able to produce sufficient material to meet the demands of our planned and ongoing clinical trials. We currently intend to continue to manufacture ourbulk antibody product candidates at our current facility, except for MM-121 which is manufactured by a contract manufacturing organization, or CMO.We believe that our strategic investment in manufacturing capabilities allows us to advance our product candidates more quickly and flexibly than would bepossible at a CMO and produce drug substance in a cost-effective manner while retaining control over the process and timing. Nonetheless, we may utilize CMOsfor our various manufacturing needs as we deem appropriate to meet our operational objectives.We are developing and testing diagnostic assays for predictive biomarkers in an internal laboratory under Good Clinical Laboratory Practices and throughcollaborations with third-party vendors. Upon completion of the development of the diagnostic tests, we plan to evaluate external as well as internal options formanufacturing and commercialization of the tests.We are leveraging our manufacturing capabilities to manufacture drug product on behalf of a third-party pharmaceutical company, and may enter intoadditional agreements to do so in the future. In 2013, we entered into an agreement with Watson Laboratories, Inc., or Actavis, as more fully described below,pursuant to which we will utilize our nanoliposomal manufacturing capabilities to develop, manufacture and exclusively supply the bulk form of doxorubicin HClliposome injection to Actavis. Under this agreement, we have also agreed to develop additional products for Actavis, the identities of which will be mutually agreedupon in the future.Commercial ActivitiesIn October 2015, following receipt from the FDA of marketing approval for ONIVYDE, we commenced ONIVYDE commercial activities in the UnitedStates through our focused field organization. Prior to commercial launch, we spent time and resources building our marketing, field, access and distribution teamsto provide healthcare education and reimbursement support as well as our product distribution infrastructure. We expect that our commercial infrastructure, whichis currently supporting ONIVYDE, will form the basis of the organization that we would use to commercially support our other products, subject to receivingmarketing approval for those other products. We believe that our commercial infrastructure provides the foundation to address the educational and supportive needsof oncologists who treat a broad array of tumor types, including lung, breast, ovarian, pancreatic, colorectal and gastric cancers. Outside the United States, weexpect to either enter into distribution and other marketing arrangements with third parties for any of our other product candidates that obtain marketing approval,or we may expand our commercial organization to support such territories ourselves.We plan to tightly integrate the marketing of our therapeutics and diagnostics, subject to receipt of marketing approval for any such future products beyondONIVYDE. As we expect to pair various types of diagnostics with our therapeutics, it is likely that the commercialization strategy and business model employedfor our various diagnostics may differ from one another. 12Table of ContentsOutside of the United States and Taiwan, Baxalta has exclusive commercialization rights for all potential indications of ONIVYDE worldwide.PharmaEngine has exclusive commercialization rights in Taiwan. We believe our commercialization partners for ONIVYDE possess the relevant expertise tosuccessfully commercialize ONIVYDE outside of the United States. For instance, Baxalta has previously demonstrated the ability to successfully launch innovativeproducts, penetrate markets and drive the growth of multiple brands in highly competitive markets.CompetitionThe biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis onproprietary products. While we believe that our systems biology technologies, integrated research, clinical and manufacturing capabilities, development experienceand scientific knowledge provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical,specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any productcandidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.Many of our competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical,biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors alsocompete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinicaltrials, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to be significantcompetitors, particularly through collaborative arrangements with large and established companies.The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience, price, theeffectiveness of diagnostics in guiding the use of related therapeutics, the level of generic competition and the availability of reimbursement from government andother third-party payors.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have feweror less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or otherregulatory approval for their products more rapidly than we may obtain approval for ours. In addition, our ability to compete may be affected because in manycases insurers or other third-party payors seek to encourage the use of generic products. There are many generic products currently on the market for the indicationsthat we are pursuing, and additional products are expected to become available on a generic basis over the coming years. If our therapeutic product candidates areapproved, we expect that they will be priced at a significant premium over competitive generic products.The initial focus of our business is to develop therapeutics and diagnostics for the treatment of solid tumor cancers. Cancer is the second most common causeof death in the United States, exceeded only by heart disease, and accounts for almost one of every four deaths in the United States. There are a variety of availabledrug therapies marketed for solid tumors. In many cases, these drugs are administered in combination to enhance efficacy. Some of these drugs are branded andsubject to patent protection, and others are available on a generic basis, including the active ingredients in ONIVYDE and MM-302. Many of these approved drugsare well established therapies and are widely accepted by physicians, patients and third-party payors. In general, although there has been considerable progress overthe past few decades in the treatment of solid tumors and the currently marketed therapies provide benefits to many patients, these therapies all are limited to someextent in their efficacy and frequency of adverse events, and none of them are successful in treating all patients. As a result, the level of morbidity and mortalityfrom solid tumor cancers remains high. 13Table of ContentsThe following table sets forth information about the incidence and selected treatments for some of the solid tumor cancers for which we have developed andare developing therapeutic product candidates and diagnostics. The U.S. estimated annual incidence is based on information from the American Cancer Society,Cancer Fact & Figures 2016 . Tumor Type U.S. Annual Incidence Selected Marketed TherapiesBreast 249,260 trastuzumab (Herceptin ® ); docetaxel (Taxotere ® ); paclitaxel (Taxol ® , Abraxane ®); capecitabine (Xeloda ® ); tamoxifen (Nolvadex ® , Soltamox ® ); anastrazole(Arimidex ® ); letrozole (Femara ® ); exemestane (Aromasin ® ); ado-trastuzumabemtansine (Kadcyla ® ); pertuzumab (Perjeta ® ); everolimus (Afinitor ® ); palbociclib(Ibrance ® )Lung and bronchus 224,390 ceritinib (Zykadia™); crizotinib (Xalkori ® ); docetaxel (Taxotere); gemcitabine(Gemzar ® ); pemetrexed (Alimta ® ); gefitinib (Iressa ® ); erlotinib (Tarceva ® );bevacizumab (Avastin ® ); paclitaxel (Taxol, Abraxane); nivolumab (Opdivo ® );pembrolizumab (Keytruda ® )Colorectal 134,490 oxaliplatin (Eloxatin ® ); irinotecan (Camptosar ® ); bevacizumab (Avastin);cetuximab (Erbitux ® ); panitumumab (Vectibix ® ); ziv-aflibercept (Zaltrap ® );trifluridine/tipiracil (Lonsurf ® ); regorafenib (Stivarga ® )Pancreatic 53,070 nab-paclitaxel (Abraxane); gemcitabine (Gemzar); erlotinib (Tarceva)Liver 39,230 sorafenib (Nexavar ® )Brain and other nervous system cancers 23,770 temozolomide (Temodar ® ); carmustine (BiCNU ® ); polifeprosan 20 with carmustineimplant (Gliadel ® ); bevacizumab (Avastin)Gastric 26,370 ramucirumab (Cyramza ® ); capecitabine (Xeloda); trastuzumab (Herceptin);docetaxel (Taxotere); oxaliplatin (Eloxatin); epirubicin (Ellence ® )Ovarian 22,280 olaparib (Lynparza™); liposomal doxorubicin (Doxil ® ); bevacizumab (Avastin);paclitaxel (Taxol, Abraxane); gemcitabine (Gemzar)In addition to the marketed and generic therapies for solid tumors, there are also a number of products in late stage clinical development to treat solid tumors.These products in development may provide efficacy, safety, convenience and other benefits that are not provided by currently marketed therapies. As a result, theymay provide significant competition for any of our product candidates for which we obtain market approval.Pancreatic CancerThe only indication in the United States for which we have received marketing approval from the FDA is for ONIVYDE in combination with 5-FU andleucovorin for the treatment of patients with metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy. Pancreaticcancer is a rare and deadly disease. There are approximately 53,000 patients diagnosed with pancreatic cancer each year in the United States, the overwhelmingmajority of whom have adenocarcinoma. Globally there are approximately 338,000 new cases each year. Most patients receive gemcitabine-based therapy duringeither adjuvant/neoadjuvant treatment for locally advanced disease or during first- or second-line therapy for metastatic disease. 14Table of ContentsCollaboration and License AgreementsWe are party to a number of collaboration agreements for the development and commercialization of our product candidates and license agreements underwhich we license patents, patent applications and other intellectual property. We consider the following collaboration and license agreements to be material to ourbusiness.BaxaltaOn September 23, 2014, we entered into a license and collaboration agreement with Baxter International Inc., Baxter Healthcare Corporation and BaxterHealthcare SA, or the Baxalta agreement, for the development and commercialization of ONIVYDE outside of the United States and Taiwan, or the licensedterritory. In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta agreement was assigned to Baxalta during the second quarterof 2015. As part of the Baxalta agreement, we granted Baxalta an exclusive, royalty-bearing right and license under our patent rights and know-how to develop andcommercialize ONIVYDE in the licensed territory. Baxalta is responsible for using commercially reasonable efforts to develop, obtain regulatory approvals forand, following regulatory approval, commercialize ONIVYDE in the licensed territory. A joint steering committee comprised of an equal number of representativesfrom each of Baxalta and us is responsible for approving changes to the global development plan for ONIVYDE, including all budgets, and overseeing the parties’development and commercialization activities with respect to ONIVYDE. Unless otherwise agreed, we will be responsible for conducting all clinical trialscontemplated by the global development plan for ONIVYDE and manufacturing all clinical material needed for such trials.Under the terms of the Baxalta agreement, we received a $100.0 million upfront, nonrefundable cash payment in September 2014. In addition, we areeligible to receive from Baxalta (i) up to an aggregate of $100.0 million upon the achievement of specified research and development milestones, of which we havereceived $62.5 million from Baxalta as of December 31, 2015, (ii) up to an aggregate of $520.0 million upon the achievement of specified regulatory milestones, ofwhich we have received $20.0 million from Baxalta as of December 31, 2015, and (iii) up to an aggregate of $250.0 million upon the achievement of specifiedsales milestones. Under the terms of the Baxalta agreement, we will bear up to the first $98.8 million of costs related to the development of ONIVYDE forpancreatic cancer patients who have not previously received gemcitabine-based therapy; however, we expect most of these costs to be offset by payments receivedupon the achievement of clinical trial-related milestones. We will share equally with Baxalta all other clinical trial costs contemplated by the global developmentplan. We are also entitled to tiered, escalating royalties ranging from sub-teen double-digits to low twenties percentages of net sales of ONIVYDE in the licensedterritory.We expect to enter into a commercial supply agreement with Baxalta pursuant to which we will supply ONIVYDE bulk drug substance to Baxalta and, atBaxalta’s option, may manage fill and finish activities to be conducted by a third-party contract manufacturer for Baxalta. Baxalta also has the option tomanufacture ONIVYDE itself, in which case we will perform a technology transfer of our manufacturing process to Baxalta.If not terminated earlier by either party, the Baxalta agreement will expire upon expiration of all royalty and other payment obligations of Baxalta under theBaxalta agreement. Either party may terminate the Baxalta agreement in the event of an uncured material breach by the other party. Baxalta may also terminate theBaxalta agreement on a product-by-product, country-by-country or sub-territory-by-sub-territory basis or in its entirety, for its convenience, upon 180 days’ priorwritten notice. In addition, we may terminate the Baxalta agreement if Baxalta challenges or supports any challenge of our licensed patent rights.Under the Baxalta agreement, Baxalta has also agreed that, subject to limited exceptions, until September 23, 2017, neither Baxalta nor any of its affiliateswill (1) effect or seek, offer or propose to effect, or cause or participate in or in any way advise, assist or encourage any other person to effect or seek, offer orpropose to effect or cause or participate in, any acquisition of any of our securities or assets, any tender or exchange offer, merger or other business combinationinvolving us, any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to us, or any solicitation of proxies orconsents to vote any of our voting securities, (2) form, join or in any way participate in a group with respect to any of our securities, (3) otherwise act, alone or inconcert with others, to seek to control or influence our management, board of directors or policies, (4) take any action that might force us to make a publicannouncement regarding any of the foregoing or (5) enter into any agreements, discussions or arrangements with any third party with respect to any of theforegoing.PharmaEngineIn May 2011, we entered into an assignment, sublicense and collaboration agreement with PharmaEngine, or the PharmaEngine agreement. Under theagreement, PharmaEngine assigned to us its rights and obligations under a 2005 agreement with Hermes BioSciences, Inc., or Hermes, to develop andcommercialize MM-398 in Europe and certain countries in Asia. Through our acquisition of Hermes in 2009, we held the rights to MM-398 in North America andthe rest of the world. PharmaEngine also granted to us an exclusive right and license, with the right to sublicense, under PharmaEngine technology and rights todevelop and 15Table of Contentscommercialize MM-398 worldwide outside of Taiwan. We granted to PharmaEngine a paid-up, royalty free, exclusive right and license under our technology andrights to develop and commercialize MM-398 in Taiwan. Upon entering into the PharmaEngine agreement, we paid PharmaEngine a $10.0 million upfront licensefee. In addition, we made a milestone payment of $5.0 million to PharmaEngine in connection with dosing the first patient in our Phase 3 clinical trial of MM-398,which occurred and was paid in the first quarter of 2012.In September 2014, we amended the PharmaEngine agreement to redefine sublicense revenue and reduce the portion of sublicense revenue that we arerequired to pay to PharmaEngine. As a result of this amendment, we made a $7.0 million milestone payment to PharmaEngine in September 2014. Additionally, asa result of this amendment, a previously contingent $5.0 million milestone payment was paid to PharmaEngine in the second quarter of 2015. Prior to theamendment of the PharmaEngine agreement, this milestone payment was contingent upon the award of certain specified regulatory designations. In July 2015, wemade an $11.0 million milestone payment to PharmaEngine in connection with the EMA’s acceptance for review of an MAA for MM-398.Since entering into the PharmaEngine agreement, we have paid PharmaEngine an aggregate of $38.0 million in upfront license fees and milestone payments.In addition to these amounts, we could also be required to pay PharmaEngine up to an additional $60.0 million in aggregate regulatory milestones, $38.5 million insublicense fees and $130.0 million in aggregate sales milestones, in each case with respect to Europe and certain countries in Asia. Under the agreement,PharmaEngine is entitled to tiered royalties based on net sales of MM-398 in Europe and certain countries in Asia. The royalty rates under the agreement rangefrom high single digits up to the low teens as a percentage of our net sales of MM-398 in these territories. Our obligation to pay royalties to PharmaEnginecontinues on a country-by-country basis until ten years after the first commercial sale of MM-398 in such country. We are responsible for the development andcommercialization, and all related costs and expenses, of MM-398 in all countries except Taiwan, where PharmaEngine retains the right to develop andcommercialize MM-398 at its expense. Each party has agreed to use commercially reasonable efforts to develop, in accordance with a development plan, andcommercialize MM-398 in its respective territory.Multiple executive committees were formed under the PharmaEngine agreement, each comprised of an equal number of representatives from each party. Thesteering committee is responsible for reviewing and approving changes to the development plan, providing overall strategic direction with respect to developmentof MM-398 under the development plan and overseeing other committees. The steering committee is also responsible for resolving any disputes arising under theagreement at the steering committee or that are referred to it by any of the other committees. If a matter is unresolved by the steering committee, it may be referredfor resolution to executive officers from both companies. We have final decision making authority on any such matter not resolved by the executive officers thatrelates to the worldwide development of MM-398 or commercialization of MM-398 outside of Taiwan. The development committee is responsible forrecommending to the steering committee changes to the development plan and overseeing the progress of the development program and monitoring the parties’compliance with their respective obligations under the development plan.Upon expiration of all royalty and other payment obligations due to PharmaEngine under this agreement on a country-by-country basis, the licenses grantedunder the agreement will be deemed to be perpetual, fully paid-up and irrevocable with respect to the licensed product in such country. Either party may terminatethe agreement in the event of an uncured material breach by the other party. In addition, we may terminate the agreement for convenience upon 90 days’ priorwritten notice. If PharmaEngine terminates this agreement in its entirety or with respect to Europe or the Asian territories because of our material breach, or if weterminate the agreement for convenience with respect to Europe or the Asian territories, then we are required to grant PharmaEngine a license under our technologyand rights with respect to MM-398 in Europe or the Asian territories, as applicable, and PharmaEngine is required to pay us single-digit royalties for net sales ofMM-398 in such territories.ActavisIn November 2013, we entered into a development, license and supply agreement with Actavis, or the Actavis agreement, pursuant to which we will develop,manufacture and exclusively supply the bulk form of doxorubicin HCl liposome injection, or the initial product, to Actavis. The Actavis agreement wassubsequently amended in January 2015 to transfer certain responsibilities from us to Actavis in exchange for reducing the aggregate milestone payments that we areeligible to receive by $0.4 million. Under the Actavis agreement, Actavis is responsible for all costs related to finished product processing and globalcommercialization. Pursuant to the Actavis agreement, we have also agreed to develop additional products for Actavis in the future, the identities of which will bemutually agreed upon. We are eligible to receive up to $15.1 million under the Actavis agreement, of which $3.9 million has been received through December 31,2015, and the remainder is expected to be received in development funding and development, regulatory and commercial milestone payments related to the initialproduct. We will also receive a double digit percentage of net profits on global sales of the initial product and any additional products. We will manufacture andsupply the initial product to Actavis in bulk form at an agreed upon unit price. 16Table of ContentsThe Actavis agreement will expire with respect to the initial product and any additional products developed in the future ten years after Actavis’ first sale ofthe applicable product, unless terminated earlier, and will automatically renew for additional two year periods thereafter unless either party provides notice of non-renewal. Either party may terminate the Actavis agreement in the event of an uncured material breach or bankruptcy filing by the other party. Actavis may alsoterminate the agreement for convenience in specified circumstances upon 90 days’ prior written notice.DyaxIn January 2007, we entered into an amended and restated collaboration agreement with Dyax Corp., or Dyax, which superseded a prior collaborationagreement with Dyax that we entered into in December 2005. Under this collaboration agreement, Dyax uses its proprietary phage display technology to identifyantibodies that bind to targets of interest to us as therapeutics or diagnostics. Further, Dyax has granted to us a worldwide, non-exclusive, royalty free right to useand make any and all of the antibodies identified by Dyax for certain research purposes. In order to clinically develop or commercialize any such antibody,however, we must obtain an additional product license from Dyax on a target-by-target basis. We have the option to obtain one or more product licenses on termsset forth in the collaboration agreement, subject to limitations on the availability of each such product license under an agreement between Dyax and CambridgeAntibody Technologies, which has merged with MedImmune, LLC and is now owned by AstraZeneca PLC. In January 2016, Dyax was acquired by Shire plc.As consideration for the grant of the initial research license, we paid Dyax a research fee based on the total estimated full time equivalent researchers thatwere required to conduct the research plan and a fee for achieving certain technical milestones. If we elect to obtain a product license with respect to anytherapeutic or diagnostic target, we are required to pay to Dyax an additional upfront license fee for the applicable antibody. We also may be required to makeadditional maximum aggregate development and regulatory milestone payments of $16.2 million for therapeutic products and maximum aggregate regulatorymilestone payments of $1.0 million for diagnostic products directed to selected targets. In addition, Dyax is entitled to mid single digit royalties based on net salesof products covered by any product license that we obtain from Dyax. Our obligation to pay royalties to Dyax continues on a product-by-product and country-by-country basis until the later of a specified number of years after the first commercial sale of the product in such country and the expiration of the patent rightscovering the product in such country. MM-121 and a component of MM-141 were identified under this agreement, and we have obtained the required targetlicenses from Dyax by exercising our product license options and paying the applicable license fees. We are obligated to use commercially reasonable efforts todevelop and commercialize the antibodies for which we obtain a commercial license.This agreement will remain in effect, unless terminated earlier, for so long as we or any of our affiliates or sublicensees continue to develop orcommercialize products that remain royalty-bearing under the agreement. Either party may terminate the agreement in the event of an uncured material breach bythe other party. We also may terminate the agreement in its entirety or on a product-by-product basis at any time upon 90 days’ prior written notice.AdimabIn November 2009, we entered into a collaboration agreement with Adimab LLC, or Adimab, to allow us to evaluate the utility of using antibodies identifiedduring the collaboration as therapeutics or diagnostics. Under the agreement, Adimab granted to us a worldwide, non-exclusive, royalty free right to use materialsprovided by Adimab to perform non-clinical research during the evaluation term. Adimab also granted to us an option to obtain the assignment of specified patentrights claiming the selected antibodies and a license under Adimab’s background patent rights and know-how for the development and commercialization of theantibodies.As partial consideration for the research license grant, we paid Adimab a technology access fee at the time of grant, research fees based on the total estimatedfull time equivalent researchers that were required to conduct the research plan and a fee for achieving certain technical milestones. We have exercised ourassignment and license option by paying Adimab a fee of $1.0 million. In addition, we are required to pay Adimab up to an aggregate of $13.5 million pertherapeutic area, for the first four therapeutic areas, upon achievement of specified development and regulatory milestones, of which we have paid $1.5 millionwith respect to the first therapeutic area, and up to an aggregate of $500,000 per diagnostic product upon the achievement of specified regulatory milestones. Inaddition, Adimab is entitled to mid single digit royalty payments based on net sales of therapeutic products and diagnostic products arising from the collaboration.Our obligation to pay royalties to Adimab continues on a product-by-product and country-by-country basis until the later of a specified number of years after thefirst commercial sale of the product in such country and the expiration of the patent rights covering the product in such country, provided that the royalty term willnot extend beyond a specified number of years after the first commercial sale of the product in such country. We are obligated to use commercially reasonableefforts to develop and commercialize at least one product that incorporates the antibodies for which we exercised our assignment and license option in each of theUnited States, Europe and Japan. MM-151 was generated under this agreement. 17Table of ContentsThe term of the agreement expires on a country-by-country basis on the earliest date after which no payments are due to Adimab, unless earlier terminated.Either party may terminate the agreement in the event of an uncured material breach by the other party. In addition, we may terminate the agreement at any timeupon 90 days’ prior written notice.University of CaliforniaIn November 2000, we entered into a separate exclusive license agreement with The Regents of the University of California, or the Regents. Under theagreement, the Regents granted us a royalty-bearing world-wide right and license under certain patent rights for the development and commercialization ofproducts that are covered by the licensed patent rights, including MM-302. The agreement requires that we diligently pursue the development, manufacture andcommercialization of licensed products. In addition, we are required to meet specified development, regulatory and commercialization milestones withintimeframes specified in the agreement. We have the sole responsibility for the development and commercialization of products under the licensed technology.We are required to pay to the Regents an annual license maintenance fee of $95,000 until the first commercial sale of a licensed product. We also areresponsible for all development costs and have agreed to spend a minimum of $150,000 per year for such costs. In addition, we are responsible for up to anaggregate of $700,000 per product upon the achievement of specified development and regulatory milestones. The Regents are also entitled to royalties in the lowsingle digits based on net sales of products covered by the licensed technology. If we sublicense the rights granted to us under the licensed technology to a thirdparty, then we are also obligated to pay to the Regents a portion of the sublicensing income related to the licensed technology.If not terminated earlier, this agreement terminates upon the expiration or abandonment of all patents licensed under this agreement. The Regents mayterminate the agreement in the event of an uncured material breach by us. We may terminate the agreement on a country-by-country basis at any time upon 60days’ prior written notice.Intellectual PropertyOur success will significantly depend on our ability to obtain and maintain patent and other proprietary protection for our commercially importanttechnology, inventions and know-how, defend and enforce our patents, preserve the confidentiality of our trade secrets, establish and protect our commercial brandsand operate without infringing the valid and enforceable patents and proprietary rights of third parties. To accomplish this, we rely on a combination of intellectualproperty rights, including patents, trade secrets, copyrights and trademarks, as well as regulatory exclusivity and contractual protections. We aggressively strive toprotect the proprietary technology that we believe is important to our business, including seeking and maintaining patents intended to cover our products andcompositions, their methods of use and processes for their manufacture, as well as our diagnostic and drug discovery technologies and any other inventions that arecommercially important to the development of our business. In some circumstances, we also rely on trade secrets to protect aspects of our business that are notamenable to, or that we do not consider appropriate for, patent protection, such as our proprietary network modeling programs and large scale protein and liposomeproduction methods.We also rely on trademark protection of our corporate and product brands. We are the owner of multiple federal trademark registrations in the United Statesand outside the United States. ONIVYDE ® is a registered U.S. trademark of Merrimack Pharmaceuticals, Inc. In addition, we have multiple additional pendingtrademark registration applications in the United States and other countries covering the MERRIMACK TM and PROVYDE TM word marks and related logos intrademark classes relevant to our products and services.We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors andcontractors. We require each of our employees, consultants and advisors to execute a confidentiality and inventions assignment agreement before beginning theiremployment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to otherparties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. Theseagreements also generally provide that we will own all inventions conceived by the individual in the course of rendering services to us. We also seek to preservethe integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of ourinformation technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, andwe may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. Tothe extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights inrelated or resulting know-how and inventions. 18Table of ContentsOur commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of the use, formulation, manufactureand composition of our products and product candidates, as well as successfully asserting and/or defending these patents against third-party challenges. Our abilityto protect our products and product candidates from unauthorized making, using, selling, offering to sell or importing by third parties is dependent on the extent towhich we have rights under valid and enforceable patents that cover these activities.As of January 31, 2016, we owned or controlled a total of 21 issued U.S. patents and 119 corresponding issued foreign patents, in addition to 72 pendingU.S. patent applications and 167 pending patent applications in the rest of the world, covering our most advanced product candidates. We intend to continue toprotect our proprietary technology with additional filings as appropriate. We do not have patents or patent applications in every jurisdiction where there is apotential commercial market for our product candidates. We continually evaluate our patent portfolio and patent strategy and believe our owned and licensedpatents and patent applications, as well as applicable periods of regulatory exclusivity available after new product approval, provide us with a competitiveadvantage; however, if markets where we do not have patents or patent applications become commercially important, our business may be adversely affected.The latest patent expiration dates for issued patents covering the composition or use of each of our most advanced product candidates as of January 31, 2016are summarized below. As described in more detail below, the expiration dates in the table below refer to the latest-expiring granted patent covering the product,product candidate, technology or use thereof in the United States, and one or more countries outside of the United States, but do not account for any patent termextension or extended exclusivity terms, such as pediatric extensions, that may be available in the United States and certain foreign jurisdictions. Product Candidate/Technology Latest Year of Expiration of Current Patent Protection inthe United States Latest Year of Expiration ofCurrent Patent Protection outside the United StatesMM-398 2028 2025MM-302 2031 2019MM-121 2031 2031MM-141 2032 2032MM-151 2032 2032The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including the UnitedStates, the patent term is 20 years from the earliest filing date of a non-provisional patent application.In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S.Patent and Trademark Office in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent. In the future,if and when our product candidates receive approval by the FDA or foreign regulatory authorities, we expect to apply for patent term extensions on issued patentscovering those products, depending upon the length of the clinical trials for each drug and other factors, including those involved in the filing of a new drugapplication, or NDA, or a biologics license application, or BLA. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act,permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process,provided the total patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent termrestoration period is generally calculated as one-half the time between the effective date of an investigational new drug application, or IND, and the submissiondate of an NDA, plus the time between the submission date of an NDA and the FDA’s approval of that application. Only one patent applicable to each approveddrug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The U.S. Patent and Trademark Office, inconsultation with the FDA, reviews and approves the application for any patent term extension or restoration.Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. The stated patentexclusivity dates for patent exclusivity outside of the United States may also be eligible for further extension, and/or regulatory market and/or data exclusivity incertain countries, upon product approval in individual countries for various reasons, including supplemental protection certificate(s) after product approval ineligible countries outside the United States, and/or conducting certain investigations of pediatric exclusivity or use of products covered by the applicable patent. 19Table of ContentsONIVYDE (MM-398)ONIVYDE (irinotecan liposome injection) is covered by issued U.S. patents on the product composition through at least 2028, and corresponding issuedpatents in other countries through at least 2025, not including additional exclusivity upon product approval from patent term extension, supplemental protectioncertificates and/or pediatric exclusivity.In the United States, ONIVYDE is covered by multiple issued patents, including four U.S. patents listed in the FDA’s Approved Drug Products withTherapeutic Equivalence Evaluations publication, commonly known as the Orange Book, covering the ONIVYDE drug product and drug substance (through atleast 2028) or approved methods of using ONIVYDE (through at least 2025). We have applied for restoration of patent term, or patent term extension, for at leastone of our U.S. ONIVYDE patents listed in the Orange Book, to add patent life beyond the current expiration date. In addition, ONIVYDE may be eligible toreceive an additional six months of exclusivity added to the term of individual patents and any other marketing exclusivity covering ONIVYDE under the BestPharmaceuticals for Children Act, or BPCA, if we were to submit information which could be requested in writing by the FDA relating to the use of the activemoiety of the drug in children. We also own multiple pending patent applications covering the manufacture and use of ONIVYDE in various indications, includingpancreatic cancer, through at least 2033, if issued.Outside the United States, the ONIVYDE composition is covered by issued patents through 2025 in Japan and eight other countries, and pending patentapplications with the European Patent Office and 13 additional countries. In addition, we own multiple pending patent applications that, if issued, provideadditional patent coverage on the use of ONIVYDE for various indications, including pancreatic cancer, through at least 2033. We may apply for extendedexclusivity terms (supplemental protection certificates) for our other patents world-wide as appropriate, depending on the expected length of clinical trials and otherfactors involved in the submission of the relevant drug approval application.MM-302We own patent coverage on the use of the MM-302 composition in treating various forms of cancer (including breast cancer) through at least 2031 in theUnited States. In addition, we have an exclusive license to patents covering the MM-302 composition through at least 2019 in the United States and Europe. Ourpatent coverage does not include additional exclusivity available after product approval from patent term extension, supplemental protection certificates and/orpediatric exclusivity. In addition, we own multiple pending patent applications in the United States, Europe and other countries covering various related methods ofuse (expiring between 2031 and 2035, if issued) and/or related diagnostic tests and methods (expiring between 2033 and 2034, if issued).MM-121 (seribantumab)We own issued patents in the United States, Europe, Japan and nine other countries covering the MM-121 composition through at least 2028, not includingadditional exclusivity available after product approval from patent term extension, supplemental protection certificates and/or pediatric exclusivity. In addition, weown multiple pending patent applications in the United States, Europe and other countries covering various related methods of use, including the treatment ofpatients with heregulin positive forms of cancer (through 2034, if issued), treatment of patients with certain forms of breast cancer (expiring between 2031 and2032, if issued) and/or related diagnostic tests and methods (through 2029, if issued).MM-141 (istiratumab)We own issued patents in the United States and Japan, and pending patent applications in Europe and 10 other countries covering the MM-141 compositionthrough at least 2032, not including additional exclusivity available after product approval from patent term extension, supplemental protection certificates and/orpediatric exclusivity. In addition, we own multiple pending patent applications in the United States and the Patent Cooperation Treaty, or PCT, covering methods oftreating pancreatic cancer with MM-141 through 2035, if issued.MM-151We own issued patents in the United States, and pending patent applications in Europe, Japan and nine other countries covering the MM-151 compositionand related patient diagnostic technology through at least 2032, not including additional exclusivity available after product approval from patent term extension,supplemental protection certificates and/or pediatric exclusivity. In addition, we own multiple pending patent applications in the United States and the PCTcovering methods of treating colorectal cancer with MM-151 through 2035, if issued. 20Table of ContentsSilver CreekIn August 2010, we acquired 12,000,000 shares of Series A preferred stock of Silver Creek in exchange for our grant to Silver Creek of technology licenses.We granted to Silver Creek a royalty free license under certain antibody growth factor patent rights to develop and commercialize products covered by the licensedpatent rights. This license is exclusive to Silver Creek for therapeutic or diagnostic use in humans for the promotion of organ regeneration and co-exclusive with usfor all other uses. We also granted to Silver Creek royalty free, non-exclusive licenses under certain patent rights and know-how to use certain of our technologiesfor research and development purposes. Either party may terminate the agreement in the event of an uncured material breach by the other party.In August and December 2010, Silver Creek issued and sold an aggregate of 4,189,904 additional shares of its Series A preferred stock at a price per share of$1.00 to other investors for an aggregate purchase price of $4,189,904. In addition, on December 21, 2012, Silver Creek entered into a Note Purchase Agreementpursuant to which it issued convertible notes to various lenders, which did not include us, in aggregate principal amounts of $1.6 million in December 2012, $0.3million in February 2013 and $0.6 million in December 2013. The convertible notes bore interest at 6%. The notes matured and converted, along with animmaterial amount of accrued interest, into 2,603,281 shares of Silver Creek Series A preferred stock on December 31, 2013. During the year ended December 31,2014, Silver Creek issued convertible notes to various lenders, which did not include us, in aggregate principal amounts of an additional $1.0 million. Theconvertible notes bore interest at 6% and matured and converted, along with an immaterial amount of accrued interest, into approximately 1.0 million shares ofSilver Creek Series A preferred stock on December 31, 2014. During the year ended December 31, 2015, Silver Creek issued and sold a total of 1.6 million sharesof its Series B preferred stock at a price per share of $1.35 to investors and received net proceeds of $2.1 million, after deducting issuance costs. As ofDecember 31, 2015 and 2014, we owned approximately 56% and 60%, respectively, of the outstanding capital stock of Silver Creek, making Silver Creek amajority owned subsidiary.Silver Creek is applying our systems biology approach to the research and development of regenerative medicines to repair the heart. In the future, we mayconsider forming additional businesses or business units to apply our systems biology approach to multiple additional disease areas outside the oncology field. Weexpect to do so in some cases, as with Silver Creek, through the establishment of separately funded companies.Government RegulationGovernment authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research,development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution,marketing, post-approval monitoring and reporting, import and export of pharmaceutical products, biological products and medical devices, such as those we aredeveloping.United States drug and biological product approval processIn the United States, the FDA regulates drugs and biological products under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health ServiceAct, or PHSA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, localand foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable United Statesrequirements at any time during the product development process, approval process or after approval may subject an applicant to a variety of administrative orjudicial actions, including, among other things, the FDA’s refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold,issuance of untitled or warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals ofgovernment contracts, restitution, disgorgement of profits, civil penalties and criminal prosecution.Generally, the process required by the FDA before a drug or biological product may be marketed in the United States involves the following: • completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP,regulations; • submission to the FDA of an IND, which must become effective before human clinical trials may begin; • approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; • performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the safety andefficacy of the proposed drug or biological product for each indication; 21Table of Contents • submission to the FDA of an NDA or an abbreviated new drug application, or ANDA, for drug products or BLA for biological products, as applicable; • satisfactory completion of an FDA advisory committee review, if applicable; • satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance withcGMP requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and • FDA review and approval of the NDA or BLA.We expect that all of our clinical product candidates, other than ONIVYDE, will be subject to review as biological products under BLA standards. Weexpect that ONIVYDE will continue to be subject to review as a drug under NDA standards. MM-302 contains both drug and biological components. We believethat this combination product will be subject to review as a biological product, pursuant to a BLA.Preclinical studiesPreclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the potential foradverse events and in some cases to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements,including GLP regulations. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any availableclinical data or literature and a proposed protocol for clinical studies, among other things, to the FDA as part of an IND. Some long-term preclinical testing, such asanimal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomes effective 30 days afterreceipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the trial on clinical hold.In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may notnecessarily result in the FDA allowing clinical trials to commence.Clinical trialsClinical trials involve the administration of the investigational new drug to human subjects – healthy volunteers or patients – under the supervision ofqualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informedconsent in writing before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, theobjectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and anysubsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial mustreview and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study atleast annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. AnIRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may imposeother conditions. For clinical trials involving an IND, an IRB must operate in compliance with FDA regulations. Information about certain clinical trials must besubmitted within specific timeframes to the National Institutes of Health for public dissemination on their ClinicalTrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined: • Phase 1: The drug or biological product is initially introduced into healthy human subjects or patients with the target disease or condition and testedfor safety, side effects associated with increasing doses, pharmacological action, absorption, metabolism, distribution, excretion and, if possible, togain an early indication of its effectiveness. • Phase 2: The drug or biological product is administered to a limited patient population to identify common adverse effects and safety risks, topreliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. • Phase 3: The drug or biological product is administered to an expanded patient population in adequate and well-controlled clinical trials, typically atgeographically dispersed clinical trial sites, to generate sufficient data to statistically confirm the efficacy and safety of the product for approval, topermit the FDA to evaluate the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product. 22Table of ContentsProgress reports detailing the results of clinical trials involving an IND must be submitted at least annually to the FDA and more frequently if serious adverseevents occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or thesponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptablehealth risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with theIRB’s requirements or if the drug or biologic product has been associated with unexpected serious harm to patients.Disclosure of clinical trial informationSponsors of applicable clinical trials of FDA regulated products, including drugs, are required to register and disclose certain clinical trial information.Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made publicon the ClinicalTrials.gov website as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure ofthe results of these trials can be delayed until the new product or new indication being studied has been approved. Competitors may use this publicly availableinformation to gain knowledge regarding the progress of development programs.Marketing approvalAssuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relatingto the product’s pharmacology chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA or BLArequesting approval to market the product for one or more indications. FDA approval of the NDA or BLA is required before marketing of the product may begin inthe United States. Under federal law, the submission of most NDAs and BLAs is subject to a substantial application user fee, currently $2,374,200 for fiscal year2016, and the sponsor of an approved NDA or BLA is also subject to annual product and establishment user fees, currently $114,450 per product and $585,200 perestablishment. These fees are typically increased annually.The FDA conducts a preliminary review of all NDAs and BLAs within the first 60 days after receipt before accepting them for filing based on the agency’sthreshold determination that they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDAor BLA for filing. In this event, the application must be resubmitted with the additional information, which would also be subject to review before the FDA acceptsit for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in thereview of NDAs and BLAs. Most such applications for non-priority products are reviewed within ten to twelve months after filing, and most applications forpriority review products, that is, drugs and biologics that the FDA determines represent a significant improvement over existing therapy, are reviewed in six toeight months after filing. The review process may be extended by the FDA for three additional months to consider certain late-submitted information orclarification regarding information already provided in the submission. The FDA may also refer applications for novel drugs or biological products or products thatpresent difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and arecommendation as to whether the application should be approved. The FDA is not bound by the recommendations of an advisory committee, but it considers suchrecommendations carefully when making decisions.Before approving an NDA or BLA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve anapplication unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistentproduction of the product within required specifications. In addition, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites toassure compliance with GCP and integrity of the clinical data submitted.The testing and approval process requires substantial time, effort and financial resources, and each may take many years to complete. Data obtained fromclinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. We mayencounter difficulties or unanticipated costs in our efforts to develop our product candidates and secure necessary governmental approvals, which could delay orpreclude us from marketing our products.After the FDA’s evaluation of the NDA or BLA and inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete responseletter. An approval letter authorizes commercial marketing of the drug or biological product with specific prescribing information for specific indications. Acomplete response letter generally outlines the deficiencies in the 23Table of Contentssubmission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies havebeen addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing suchresubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately maydecide that the application does not satisfy the regulatory criteria for approval.Even if the FDA approves a product, the agency may limit the approved indications for use for the product, require that contraindications, warnings orprecautions be included in the product labeling, require that post-approval studies be conducted to further assess a drug’s safety after approval, require testing andsurveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions through a Risk Evaluation andMitigation Strategy or other risk management mechanisms, which can materially affect the potential market and profitability of the product. The FDA may preventor limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, some types of changes to the approvedproduct, such as changes in indications, manufacturing changes and labeling, are subject to further testing requirements and FDA review and approval.Fast track designationThe FDA is required to facilitate the development and expedite the review of drugs and biologics that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition.Under the fast track program, the sponsor of a new drug or biologic candidate may request the FDA to designate the product for a specific indication as a fast trackproduct concurrent with or after the filing of the IND for the product candidate. The FDA must determine if the product candidate qualifies for fast trackdesignation within 60 days after receipt of the sponsor’s request.In addition to other benefits, such as the ability to use surrogate endpoints and have more frequent interactions with the FDA, the FDA may initiate review ofsections of a fast track product’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides and the FDA approves aschedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing a fasttrack application does not begin until the last section of the NDA or BLA is submitted. In addition, the fast track designation may be withdrawn by the FDA if theFDA believes that the designation is no longer supported by data emerging in the clinical trial process.Priority reviewUnder FDA priority review guidelines, a product candidate may be eligible for review within a six to eight month time frame from the time a completeapplication is accepted for filing. Products regulated by the FDA’s Center for Drug Evaluation and Research, or CDER, are eligible for priority review if theyprovide a significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease. Products regulated by the FDA’s Centerfor Biologics Evaluation and Research are eligible for priority review if they provide a significant improvement in the safety or effectiveness of the treatment,diagnosis or prevention of a serious or life-threatening disease. A fast track designated product candidate would ordinarily meet the FDA’s criteria for priorityreview.Accelerated approvalUnder the FDA’s accelerated approval regulations, the FDA may approve a drug or biologic for a serious or life-threatening illness that provides meaningfultherapeutic benefit to patients over existing treatments based on a surrogate endpoint that is reasonably likely to predict clinical benefit. In clinical trials, a surrogateendpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions orsurvives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A product candidate approved on this basis is subject torigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint.Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug from themarket on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA. 24Table of ContentsBreakthrough therapy designationThe FDA is also required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies onone or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that the FDA designate thedrug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. The FDA must determine ifthe drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.Orphan drugsUnder the Orphan Drug Act, the FDA may grant orphan drug designation to drugs or biologics intended to treat a rare disease or condition, which isgenerally defined as a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested beforesubmitting an NDA or BLA. After the FDA grants orphan drug designation, the generic identity of the drug or biologic and its potential orphan use are disclosedpublicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The firstNDA or BLA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to aseven-year exclusive marketing period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approveany other applications to market the same drug or biologic for the same orphan indication, except in limited circumstances, such as a showing of clinical superiorityto the product with orphan drug exclusivity in that it is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug exclusivitydoes not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease orcondition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA or BLA application user fee.Pediatric informationUnder the Pediatric Research Equity Act of 2003, an NDA, BLA or supplement to an NDA or BLA must contain data from pediatric studies that areadequate to assess the safety and effectiveness of the drug or biological product for the claimed indications in all relevant pediatric subpopulations, and to supportdosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of theapplicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatricdata requirements. Under the Food and Drug Administration Safety and Innovation Act, or FDASIA, the FDA has additional authority to take action againstmanufacturers not adhering to pediatric study requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products withorphan drug designation.The Hatch-Waxman ActAbbreviated new drug applicationsIn seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent that claims to cover the applicant’s product. Uponapproval of a drug, each of the patents listed in the application for the drug is then published in the Orange Book. Drugs listed in the Orange Book can, in turn, becited by potential competitors in support of approval of an ANDA. Generally, an ANDA provides for marketing of a drug product that has the same activeingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listeddrug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct or submit results of preclinical or clinical tests to provethe safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often besubstituted by pharmacists under prescriptions written for the original listed drug.The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, theapplicant must certify that: • the required patent information has not been filed; • the listed patent has expired; • the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or • the listed patent is invalid or will not be infringed by the new product. 25Table of ContentsA certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid is called a Paragraph IVcertification. If the ANDA applicant does not challenge the listed patents, the ANDA will not be approved until all the listed patents claiming the referencedproduct have expired.If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to theNDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit inresponse to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certificationautomatically prevents the FDA from approving the ANDA until the earlier of a 30 month period, expiration of the patent, settlement of the lawsuit or a decision inthe infringement case that the patent involved is deemed invalid or not infringed.The ANDA also will not be approved until any applicable non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listedin the Orange Book for the referenced product has expired. Federal law provides a period of five years following approval of a drug containing no previouslyapproved active ingredients during which ANDAs for generic versions of those drugs cannot be received by the FDA, except that the application may be submittedin four years if it contains a Paragraph IV certification. If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification, and thus, noANDA may be filed before the expiration of the exclusivity period. Federal law provides for a period of three years of exclusivity following approval of a listeddrug that contains previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new use, theapproval of which was required to be supported by new clinical trials conducted by or for the sponsor, during which the FDA cannot grant effective approval of anANDA based on that listed drug. Under the BPCA, federal law also provides that periods of patent and non-patent marketing exclusivity listed in the Orange Bookfor a drug may be extended by six months if the NDA sponsor agrees to conduct and report on pediatric studies identified by the FDA in a written request withinthe statutory timeframes. Applications under the BPCA are treated as priority applications, with all the benefits that designation confers.Patent term extensionAfter NDA approval, owners of relevant drug patents may apply for up to a five year patent term extension. The allowable patent term extension iscalculated as half of the drug’s testing phase, based on the time between IND application and NDA submission, and all of the review phase, based on the timebetween NDA submission and approval up to a maximum of five years. The time can be shortened if the FDA determines that the applicant did not pursue approvalwith due diligence. The total patent term after the extension may not exceed 14 years.For patents that might expire during the application phase, the patent owner may request an interim patent term extension. An interim patent term extensionincreases the patent term by one year and may be renewed up to four times. For each interim patent term extension granted, the post-approval patent term extensionis reduced by one year. The director of the U.S. Patent and Trademark Office must determine that approval of the drug covered by the patent for which a patentterm extension is being sought is likely. Interim patent term extensions are not available for a drug for which an NDA has not been submitted.Section 505(b)(2) new drug applicationsMost drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referred to asa Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s previous approval of a similar product, or published literature, in support of itsapplication. Our NDA for ONIVYDE was submitted and reviewed under Section 505(b)(2).Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products.Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for theapplicant and for which the applicant has not obtained a right of reference. If the Section 505(b)(2) applicant can establish that reliance on the FDA’s previousapproval is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also requirecompanies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product for all orsome of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to theFDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of aSection 505(b)(2) NDA can be stalled until all the listed patents 26Table of Contentsclaiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in theOrange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of a30 month period, settlement of the lawsuit or a decision in the infringement case that the patent involved is deemed invalid or not infringed.Combination productsA combination product is a product comprised of (i) two or more regulated components (i.e., drug/device, biologic/device, drug/biologic ordrug/device/biologic) that are physically, chemically, or otherwise combined or mixed and produced as a single entity; (ii) two or more separate products packagedtogether in a single package or as a unit and comprised of drug and device products, device and biological products, or biological and drug products; (iii) a drug,device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approvedindividually specified drug, device, or biological product where both are required to achieve the intended use, indication, or effect and where, upon approval of theproposed product, the labeling of the approved product would need to be changed (e.g., to reflect a change in intended use, dosage form, strength, route ofadministration, or significant change in dose); or (iv) any investigational drug, device, or biological product packaged separately that according to its proposedlabeling is for use only with another individually specified investigational drug, device, or biological product where both are required to achieve the intended use,indication, or effect.The FDA is divided into various branches, or Centers, by product type. Different Centers typically review drug, biologic or device applications. In order toreview an application for a combination product, the FDA must decide which Center should be responsible for the review. FDA regulations require that the FDAdetermine the combination product’s primary mode of action, or PMOA, which is the single mode of a combination product that provides the most importanttherapeutic action of the combination product. The Center that regulates that portion of the product that generates the PMOA or that has expertise in the relevanttherapeutic area becomes the lead evaluator. If there are two independent modes of action, neither of which is subordinate to the other, the FDA makes adetermination as to which Center to assign the product based on consistency with other combination products raising similar types of safety and effectivenessquestions or to the Center with the most expertise in evaluating the most significant safety and effectiveness questions raised by the combination product. Whenevaluating an application, a lead Center may consult other Centers but still retain complete reviewing authority, or it may collaborate with another Center, by whichthe lead Center assigns review of a specific section of the application to another Center, delegating its review authority for that section. Typically, the FDA requiresa single marketing application submitted to the Center selected to be the lead evaluator, although the agency has the discretion to require separate applications tomore than one Center. One reason to submit multiple evaluations is if the applicant wishes to receive some benefit that accrues only from approval under aparticular type of application, like new drug product exclusivity. If multiple applications are submitted, each application may be evaluated by a different leadCenter.Biosimilars lawThe Biologics Price Competition and Innovation Act of 2009, or BPCIA, amended the PHSA to create a new licensure framework for biosimilar products,which could ultimately subject our biological products to competition. Under the BPCIA, a manufacturer may submit an application for licensure of a biologicproduct that is “biosimilar to” or “interchangeable with” a referenced, branded biologic product. Previously, there had been no licensure pathway for suchbiosimilar or interchangeable products. For purposes of the BPCIA, a reference product is defined as the single biological product licensed under a full BLAagainst which a biological product is evaluated in an application submitted under a follow-on BLA. Biosimilarity sufficient to reference a prior FDA-approvedproduct requires that there be no differences in conditions of use, route of administration, dosage form, and strength, and no clinically meaningful differencesbetween the biological product and the reference product in terms of safety, purity, and potency. Biosimilarity must be shown through analytical studies, animalstudies, and at least one clinical trial, absent a waiver by the Secretary of the U.S. Department of Health & Human Services. A biosimilar product may be deemedinterchangeable with a prior approved product if it meets the higher hurdle of demonstrating that it can be expected to produce the same clinical results as thereference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previouslyadministered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.The BPCIA also created a 12-year period of reference product exclusivity, which can be extended to 12 1 ⁄ 2 years with pediatric exclusivity. The 12-yearexclusivity period begins on the date of first licensure of the reference product under the PHSA and during which the licensure of a follow-on application for abiosimilar or interchangeable product cannot be made effective. During the first four years (or four and one-half years with pediatric exclusivity) of the 12-yearperiod, an application for a biosimilar or interchangeable version of the reference product cannot be submitted to the FDA. 27Table of ContentsThe BPCIA includes limits on obtaining 12-year reference product exclusivity for certain changes or modifications to the reference product. A separate 12-year reference product exclusivity period does not apply to: • a BLA supplement for the product that is the reference product; • a subsequent BLA filed by the same reference product sponsor or manufacturer (or a licensor, predecessor in interest, or other related entity) for achange (not including a modification to the structure of the biological product) that results in a new indication, route of administration, dosingschedule, dosage form, delivery system, delivery device or strength; or • a modification to the structure of the biological product that does not result in a change in safety, purity or potency.The FDA has not yet issued proposed regulations setting forth its interpretation of the BPCIA’s provisions but has issued guidance documents in 2015related to BPCIA implementation concerning biosimilarity and interchangeability, BLA submission requirements and exclusivity.In addition to creating a 12-year period of reference product exclusivity, the BPCIA clarifies the interaction of that exclusivity with orphan drug exclusivity,such that the licensure of a biosimilar or interchangeable version of a reference product that was designated and approved as an orphan drug may only occur afterthe later of the expiration of any applicable seven-year orphan drug exclusivity or the 12-year reference product exclusivity (or seven and one-half years and 12 1 ⁄2 years with pediatric exclusivity).Like pediatric exclusivity applicable to drug products approved under the FDCA, pediatric exclusivity applicable to biological reference products is subjectto an exception. Pediatric exclusivity will not apply to either the 12-year reference product or the seven-year orphan drug exclusivity periods if the FDA determineslater than nine months prior to the expiration of such period that the study reports a BLA sponsor submitted in response to a written request for pediatric studiesmet the terms of that request.Our investigational biological products, if approved, could be considered reference products entitled to 12-year exclusivity. Even if our products areconsidered to be reference products eligible for exclusivity, another company could market a competing version of any of our biological products if the FDAapproves a full BLA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate thesafety, purity and potency of their product.The BPCIA also sets forth a complex mechanism for resolving patent disputes that involves a step-wise exchange of information prior to the initiation of apatent infringement lawsuit against a biosimilar or interchangeable product sponsor. Unlike the Hatch-Waxman Act, the BPCIA provides no automatic stay onapproval of a biosimilar or interchangeable product application.Overview of FDA regulation of companion diagnosticsWe are developing in vitro and in vivo diagnostics for use in selecting the patients that we believe will respond to our cancer therapeutics.The FDA published final guidance in July 2014 that addresses issues critical to developing in vitro companion diagnostics. The guidance provides that invitro companion diagnostics that are essential for the safe and effective use of a corresponding therapeutic product must be approved contemporaneously with thattherapeutic in most circumstances. Based on the guidance and the FDA’s past treatment of companion diagnostics, we believe that the FDA will likely require oneor more of our in vitro diagnostics to obtain PMA in conjunction with approval of the associated therapeutic, which will involve coordination of review by CDERand by the FDA’s Center for Devices and Radiological Health Office of In Vitro Diagnostics and Radiological Health. Our in vivo diagnostics, which are in theform of imaging agents, are regulated as drugs by CDER for therapeutic uses. As such, they are generally subject to the regulatory requirements applicable to othernew drug candidates.Diagnostic tests determined by the FDA to be useful, but not essential, for the safe and effective use of a corresponding therapeutic product are also subjectto the same medical device pathways, but their clearance or approval would not be subject to a coordinated review of the diagnostic test and the therapeuticproduct.The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risk are placed in either Class I or II, which requires themanufacturer to submit to the FDA a premarket notification requesting permission for commercial distribution. Some low risk devices are exempt from thisrequirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed notsubstantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring a PMA. A medical device, including an in vitro diagnostic, or IVD,to be commercially distributed in the United States must receive either 510(k) clearance or PMA (or be a Class I exempt device that does not require pre-marketreview) from the FDA prior to marketing. 28Table of Contents510(k) clearance pathwayIf any of the diagnostic products under development were determined by FDA not to be essential to the safe and effective prescription of a correspondingtherapeutic product, it is possible that the diagnostic test could require 510(k) clearance. The FDA’s 510(k) clearance pathway usually takes from three to twelvemonths, but it can take significantly longer. The FDA may require additional information, including clinical data, to make a determination regarding substantialequivalence.After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or majorchange in its intended use, would require a new 510(k) clearance or, depending on the modification, a PMA. The FDA requires each manufacturer to determinewhether the proposed change requires submission of a 510(k) notice or a PMA, but the FDA can review any such decision and can disagree with a manufacturer’sdetermination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modifieddevice until 510(k) clearance or a PMA is obtained. If the FDA requires us to seek 510(k) clearance or a PMA for any modifications to a previously clearedproduct, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may besubject to significant regulatory fines or penalties.PMA pathwayDevices deemed by the FDA to pose the greatest risk, such as life-sustaining, life supporting or implantable devices, or devices deemed not substantiallyequivalent to a previously 510(k) cleared device or a preamendment Class III device for which PMA applications have not been called, are placed in Class IIIrequiring PMA. The PMA pathway requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA pathway generally takes fromone to three years or even longer from submission of the application. Most companion diagnostic tests have been classified as Class III devices subject to the PMApathway.A PMA application for an IVD must provide extensive preclinical and clinical trial data. Preclinical data for an IVD includes many different tests, includinghow reproducible the results are when the same sample is tested multiple times by multiple users at multiple laboratories. The clinical data need to establish that thetest is sufficiently safe, effective and reliable in the intended use population. In addition, the FDA must be convinced that a device has clinical utility, meaning thatan IVD provides information that is clinically meaningful. A biomarker’s clinical significance may be obvious, or the applicant may be able to rely upon publishedliterature or submit data to show clinical utility.A PMA application also must provide information about the device and its components regarding, among other things, device design, manufacturing andlabeling. The sponsor must pay an application fee.As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR,requirements, which impose elaborate design control, testing, manufacturing, control, documentation and other quality assurance procedures.Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the FDA accepts theapplication for filing. The FDA then commences an in-depth review of the PMA application. The entire process typically takes one to three years, but may takelonger. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. TheFDA also may respond with a not approvable determination based on deficiencies in the application and require additional clinical trials that are often expensiveand time-consuming and can substantially delay approval. During the review period, an FDA advisory committee, typically a panel of clinicians, likely will beconvened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not boundby the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an approvable letter requiring the applicant’s agreement to specificconditions, such as changes in labeling, or specific additional information, such as submission of final labeling, in order to secure final approval of the PMA. If theFDA concludes that the applicable criteria have been met, the FDA will issue a PMA for the approved indications, which can be more limited than those originallysought by the manufacturer. The PMA can include post-approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device,including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in materialadverse enforcement action, including the loss or withdrawal of the approval. 29Table of ContentsEven after approval of a PMA, a new PMA or PMA supplement may be required in the event of a modification to the device, its labeling or itsmanufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that thesupplement is generally limited to the information needed to support the proposed change from the product covered by the original PMA.Clinical trialsA clinical trial is almost always required to support a PMA application. All clinical trials of investigational devices must be conducted in compliance withthe FDA’s requirements. If an investigational device could pose a significant risk to patients pursuant to FDA regulations, the FDA must approve an InvestigationalDevice Exemption, or IDE, application prior to initiation of investigational use. IVD trials usually do not require an IDE, as the FDA does not judge them to be asignificant risk because the results do not affect the patients in the study. However, for a trial where the IVD result directs the therapeutic care of patients withcancer (companion diagnostics), we believe that the FDA would consider the investigation to present significant risk and require an IDE.An IDE application must be supported by appropriate data, such as laboratory test results, showing that it is safe to test the device in humans and that thetesting protocol is scientifically sound. The FDA typically grants IDE approval for a specified number of patients. A nonsignificant risk device does not requireFDA approval of an IDE. Both significant risk and nonsignificant risk investigational devices require approval from IRBs at the study centers where the device willbe used.During the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting and record keeping. Theinvestigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devicesand comply with all reporting and record keeping requirements. Prior to granting PMA, the FDA typically inspects the records relating to the conduct of the studyand the clinical data supporting the PMA application for compliance with applicable requirements.Although the QSR does not fully apply to investigational devices, the requirement for controls on design and development does apply. The sponsor also mustmanufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions of IDE approval that the FDAmay impose with respect to manufacturing.Post-marketAfter a device is on the market, numerous regulatory requirements apply. These requirements include: the QSR, labeling regulations, the FDA’s generalprohibition against promoting products for unapproved or “off label” uses, the Medical Device Reporting regulation, which requires that manufacturers report tothe FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death orserious injury if it were to recur, and the Reports of Corrections and Removals regulation, which requires manufacturers to report recalls and field actions to theFDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA.The FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcementactions, ranging from a public warning letter to more severe sanctions such as: fines, injunctions and civil penalties; recall or seizure of products; operatingrestrictions, partial suspension or total shutdown of production; refusing requests for PMA of new products; withdrawing PMAs already granted; and criminalprosecution.Other regulatory requirementsAny drug or biological products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA,including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion andreporting of adverse drug experiences. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject toprior FDA review and approval.The FDA may impose a number of post-approval requirements as a condition of approval of an NDA or BLA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to determine the overall survival benefit of thedrug or biologic. 30Table of ContentsIn addition, drug and biologic manufacturers and other entities involved in the manufacture and distribution of approved drugs and biological products arerequired to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agenciesfor compliance with cGMP requirements. The FDA was also granted new inspection authorities under FDASIA. Changes to the manufacturing process are strictlyregulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMPand impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers mustcontinue to expend time, money and effort in the areas of production and quality control to maintain cGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problemsoccur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity orfrequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safetyinformation, imposition of post-market studies or clinical trials to assess new safety risks or imposition of distribution or other restrictions under a Risk Evaluationand Mitigation Strategy program. Other potential consequences include, among other things: • restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; • fines, untitled and warning letters or holds on post-approval clinical trials; • refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals; • product seizure or detention, or refusal to permit the import or export of products; or • consent decrees, injunctions or the imposition of civil or criminal prosecution.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs and biologics may be promotedonly for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws andregulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may be subject to significantliability.Additional provisionsAnti-kickback and false claims lawsIn addition to FDA restrictions on marketing of pharmaceutical products, pharmaceutical companies that participate in federal healthcare programs likeMedicare or Medicaid are subject to various U.S. federal and state laws that may restrict certain marketing practices. These laws include but are not limited to anti-kickback statutes and false claims statutes. The federal anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting orreceiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or servicereimbursable under Medicare, Medicaid or other federally financed healthcare programs. The Patient Protection and Affordable Care Act as amended by the HealthCare Education and Reconciliation Act of 2010, collectively the Health Care Reform Laws, amended the intent element of the anti-kickback statute such thatliability under the statute can be proved even if a person or entity does not have actual knowledge of the statute or specific intent to violate it. This statute has beeninterpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other.Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federalhealthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution orother regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasesor recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. In addition to the federal anti-kickback statute, the federalHealth Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HIPAA,makes it a crime to knowingly and willfully execute or attempt to execute a scheme to defraud any healthcare benefit program 31Table of ContentsThe federal civil False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, or causing to be made, a false statement to have a false claim paid. Government enforcement agencies and privatewhistleblowers have initiated investigations or brought private lawsuits against pharmaceutical companies for a variety of allegedly improper promotional ormarketing activities, such as allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare andMedicaid reimbursement rates, for allegedly providing free product to customers with the expectation that the customers would bill federal programs for theproduct, or for engaging in promotion for “off-label” uses. Additionally, the Health Care Reform Laws amended the federal False Claims Act such that a violationof the federal anti-kickback statute can serve as a basis for liability under the False Claims Act. In addition to the federal civil False Claims Act, the federal falsestatements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially falsestatement in connection with the delivery of or payment for healthcare benefits, items or services.The majority of states also have statutes or regulations similar to the federal anti-kickback statute and/or False Claims Act, which apply to items and servicesreimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. In addition, the federal transparency law under the HealthCare Reform Laws, known as the Open Payments program, requires manufacturers of drugs, devices, biologics and medical supplies reimbursable under Medicareor Medicaid to report to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teachinghospitals, as well as physician ownership and investment interests, and provides for public reporting of the data reported by manufacturers.Government price reportingWe are required to report certain price data and pay certain rebates to the U.S. government as a condition of participation in federal healthcare programs.Medicaid is jointly administered by federal and state governments for the benefit of low income and certain disabled beneficiaries. Under the Medicaid DrugRebate Program, we are required to pay a rebate for each unit of product reimbursed by the state Medicaid programs. For most brand name drugs, includingONIVYDE, the total Medicaid rebate amount consists of the basic rebate and the additional rebate. The basic rebate is set by law as the greater of 23.1% of thedrug’s average manufacturer price, or AMP, or the difference between AMP and the best price for the drug available from us to any commercial customer (withlimited exceptions). The additional rebate is designed to capture price increases that outpace inflation (measured by the Consumer Price Index—Urban). The rebateamount is calculated each quarter based on our report of current AMP and best price figures for each of our products to the Centers for Medicare & MedicaidServices, or CMS, the federal agency that administers the Medicaid and Medicare programs. The requirements for calculating AMP and best price are complex. Weare required to report any revisions to AMP or best price previously reported within a certain period, which revisions could affect our Medicaid rebate liability forprior quarters. In addition, if we fail to provide information timely or we are found to have knowingly submitted false information to the government, the Medicaidstatute provides for civil monetary penalties.Medicare is a federal program that is administered by the federal government that covers individuals age 65 and over as well as those with certain disabilitiesor other conditions irrespective of age. Medicare Part B generally covers drugs that must be administered by physicians or other healthcare practitioners, areprovided in connection with certain durable medical equipment, or are certain oral anti-cancer drugs and certain oral immunosuppressive drugs. Medicare Part Bpays for such drugs furnished by physicians under a payment methodology based on the average sales price, or ASP, of the drugs. We report ASP for ONIVYDE.Manufacturers, including us, are required to provide ASP information to CMS on a quarterly basis. The manufacturer-submitted information is used to calculateMedicare payment rates. The payment rates for drugs in the hospital outpatient setting are also paid on a methodology based on ASP, although that could change ona calendar year basis. CMS also has the statutory authority to adjust payment rates for specific drugs outside the hospital outpatient setting based on a comparisonof ASP payment rates to widely available market prices or to AMP, which could decrease Medicare payment rates. If a manufacturer is found to have made amisrepresentation in the reporting of ASP, the governing statute provides for civil monetary penalties.Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s, or PHS’, 340Bdrug pricing discount program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B pricingprogram requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’scovered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from thePHS, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is basedon the AMP and Medicaid rebate amount for the covered outpatient drug, as calculated under the Medicaid Drug Rebate Program. 32Table of ContentsIn order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federalagencies and grantees, we participate in the Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program. As part of this program, weare obligated to make our products available for procurement on an FSS contract under which we must comply with standard government terms and conditions andcharge a price that is no higher than the statutory Federal Ceiling Price, or FCP, to the VA, Department of Defense, Coast Guard and the PHS. The FCP is based onthe non-federal average manufacturer price, or Non-FAMP, which we calculate and report to the VA on a quarterly and annual basis. Pursuant to applicable law,knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of falseinformation. These obligations also contain extensive disclosure and certification requirements.Under Section 703 of the National Defense Authorization Act for FY 2008, we are required to pay quarterly rebates on utilization of innovator products thatare dispensed through the Tricare retail pharmacy network to Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP andFCP. We are required to list our covered products on a Tricare Agreement in order for these products to be eligible for Department of Defense formulary inclusion.If we overcharge the government in connection with our FSS contract or the Tricare retail pharmacy program, whether due to a misstated FCP or otherwise,we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegationsagainst us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation orenforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operationsand growth prospects.Data ProtectionWe are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and data security). The legislative and regulatorylandscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues. In the United States,numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws and federal and state consumerprotection laws govern the collection, use, disclosure and protection of health-related and other personal information. Failure to comply with data protection lawsand regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity andcould negatively affect our operating results and business. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribeour products) that are subject to privacy and security requirements under HIPAA. We could be subject to criminal penalties if we knowingly obtain or discloseindividually identifiable health information in a manner that is not authorized or permitted.Foreign regulationIn order to market any therapeutic or diagnostic product outside of the United States, we need to comply with numerous and varying regulatory requirementsof other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of ourproducts. Whether or not we obtain FDA approval for a product, we need to obtain the necessary approvals by the comparable regulatory authorities of foreigncountries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and caninvolve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and belonger than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay inobtaining regulatory approval in one country may negatively impact the regulatory process in others.The EMA grants orphan medicinal product designation to promote the development of products that may offer therapeutic benefits for life-threatening orchronically debilitating conditions affecting not more than five in 10,000 people in the European Union. In addition, orphan medicinal product designation can begranted if the drug is intended for a life threatening, seriously debilitating or serious and chronic condition and without incentives it is unlikely that sales of the drugin the European Union would be sufficient to justify developing the drug. Orphan medicinal product designation is only available if there is no other satisfactorymethod approved in the European Union of diagnosing, preventing or treating the condition, or if such a method exists, the proposed orphan medicinal product willbe of significant benefit to patients. Orphan medicinal product designation provides opportunities for free protocol assistance and fee reductions for access to thecentralized regulatory procedures. Orphan medicinal product designation also provides ten years of market exclusivity following drug approval. The exclusivityperiod may be reduced to six years if the designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justifymaintenance of market exclusivity. 33Table of ContentsForeign Corrupt Practices ActVarious federal and foreign laws govern our international business practices with respect to payments to government officials. Those laws include the U.S.Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies and their representatives from paying, offering to pay, promising or authorizing thepayment of anything of value to any foreign government official, government staff member, political party or political candidate for the purpose of obtaining orretaining business or to otherwise obtain favorable treatment or influence a person working in an official capacity. In many countries, the healthcare professionalswe may interact with may meet the FCPA’s definition of a foreign government official. The FCPA also requires public companies to make and keep books andrecords that accurately and fairly reflect their transactions and to devise and maintain an adequate system of internal accounting controls.We are subject also to the U.K. Bribery Act 2010, or Bribery Act, which proscribes giving and receiving bribes in the public and private sectors, bribing aforeign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business inthe United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminalsanctions for corporate officers under certain circumstances. Other countries have enacted similar anti-corruption laws and/or regulations.New legislation and regulationsFrom time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing,approval, manufacturing and marketing of products regulated by the FDA.In addition to new legislation, FDA regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our businessand our products. It is impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies or interpretationschanged or what the effect of such changes, if any, may be.For example, the FDASIA, which was enacted in 2012, is a broad, sweeping law that establishes new user fee programs and provides the FDA with newauthority in the areas of drugs, biologics and medical devices. In particular, the FDASIA provides the FDA with new inspection authorities. A drug or biologic willbe considered adulterated, with possible resulting civil and criminal penalties, if the owner or operator of the establishment where it is made, processed, packed orheld delays, denies, limits or refuses inspection. The FDASIA also replaces the biennial inspection schedule for drugs and biologics with a risk-based inspectionschedule. The law grants the FDA authority to require a drug or biologics manufacturer to provide, in advance or instead of an inspection, and at the manufacturer’sexpense, any records or other information that the agency may otherwise inspect at the facility. The FDASIA also permits the FDA to share inspection informationwith foreign governments under certain circumstances. The FDASIA also provides the FDA with additional authority to exercise against manufacturers of drugs orbiologics that are not adhering to pediatric study requirements, which apply even if the manufacturer is not seeking to market the drug or biologic to pediatricpatients.In addition, the Health Care Reform Laws were enacted in the United States in March 2010 and contain provisions that may reduce the profitability of drugproducts, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans,mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs.Pharmaceutical coverage, pricing and reimbursementThe containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort.The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth ofgovernment-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for brandedprescription drugs. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limitpayments for ONIVYDE or any other drug products for which we obtain regulatory approval and could adversely affect our net revenue and results.Significant uncertainty exists as to the coverage and reimbursement status of ONIVYDE or any other drug products for which we obtain regulatory approval.Sales of ONIVYDE or any of our product candidates, if approved, depend in significant part on the availability of adequate financial coverage and reimbursementfrom third-party payors, including government health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. 34Table of ContentsPolitical, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and weexpect there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our productsprofitably. The Health Care Reform Laws expanded healthcare coverage within the United States, primarily through the imposition of health insurance mandates onemployers and individuals and expansion of the Medicaid program. This law substantially changes the way healthcare is financed by both governmental and privateinsurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Laws contain a number of provisions that may impact our business andoperations. On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid Drug Rebate program under the Healthcare Reform Laws.These regulations become effective, in general, on April 1, 2016. We are evaluating the impact of these regulations on our business and operations.The Healthcare Reform Laws also obligate the Health Resources and Services Administration, or HRSA, the agency which administers the 340B program, tocreate regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340Bprogram to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price andto report the ceiling prices for its drugs to the government. HRSA recently issued a proposed regulation regarding the calculation of the 340B ceiling price and theimposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, as well as proposed omnibus guidance thataddresses many aspects of the 340B program, including a proposed expansion of manufacturer recordkeeping requirements and 340B ceiling price restatement andrefund obligations. HRSA is currently expected to issue additional proposed regulations in 2016. Any final regulation could affect our obligations under the 340Bprogram in ways we cannot anticipate. Further, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entitiesor would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.In addition, beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under thesequestration required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. Subsequent legislation extended the 2%reduction, on average, to 2025. These cuts reduce reimbursement payments related to our products, which could potentially negatively impact our revenue.Medicare Part D provides coverage to enrolled Medicare patients for certain drugs, such as self-administered drugs (i.e., drugs that do not need to be injectedor otherwise administered by a physician). Medicare Part D is administered by private prescription drug plans approved by the U.S. government, and each drugplan establishes its own Medicare Part D formulary for prescription drug coverage and pricing, which the drug plan may modify from time to time. The prescriptiondrug plans negotiate pricing with manufacturers and may condition formulary placement on the availability of manufacturer discounts. Manufacturers, including us,are required to provide a 50% discount on brand name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries reach the coverage gapin their drug benefits.Third-party payors decide which drugs they will pay for and establish reimbursement and co-pay levels. The growing emphasis on managed care in theUnited States has increased and we expect will continue to increase the pressure on drug pricing. Third-party payors are increasingly challenging the prices chargedfor medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety andefficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products as abenefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit. In order to secure coverage andreimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medicalnecessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Even with clinical trials,our product candidates may be considered less safe, less effective or less cost-effective than other products, and third-party payors may not provide coverage andreimbursement for our products or any of our product candidates that we commercialize, in whole or in part.The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price orreimbursement rate that the payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on anapproved list, or formulary, which might not include all of the approved drugs for a particular indication, and a payor’s decision to provide coverage for a drugproduct does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to enable us to maintain price levelshigh enough to realize an appropriate return on our investment in product development. In addition, coverage policies, third-party reimbursement rates and drugpricing regulation may change at any time. Thus, even if favorable coverage and reimbursement status is attained for one or more products for which we receiveregulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future. The marketability of any products for which wereceive regulatory approval for commercial sale may also suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. 35Table of ContentsPayors also are increasingly considering new metrics as the basis for reimbursement rates, such as ASP, AMP and actual acquisition cost. The existing datafor reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaidreimbursement rates. CMS surveys and publishes retail community pharmacy acquisition cost information in the form of National Average Drug Acquisition Cost,or NADAC, files to provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates. It may bedifficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products.For Medicare and other health insurance programs in the United States, Healthcare Common Procedure Coding System codes, or HCPCS codes, are used toensure that claims for certain items and services (including most drugs) are submitted and adjudicated in an orderly and consistent manner. The HCPCS code set ismaintained by CMS and applications for HCPCS codes are submitted to CMS. Based primarily on the existence of an HCPCS code that appropriately describes aproduct, a new product may be assigned to a new or existing HCPCS code and may be the only product or one of several products described by that HCPCS code.For many drug HCPCS codes, CMS sets the Medicare payment rate for the code. Presently, HCPCS code J9206 described as “Irinotecan Injection” exists. IfONIVYDE were to be assigned to this HCPCS code, the payment rate for ONIVYDE would not be based exclusively on its own pricing information but on pricinginformation for all products assigned to that HCPCS code which, at present, includes both brand name and generic products. This payment rate may be insufficientto enable us to fully realize commercial success.Beyond the United States, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may bemarketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness ofa particular product candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drugproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Unionmember states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on the profitability of the companyplacing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits.The downward pressure on healthcare costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are beingerected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reducepricing within a country. There can be no assurance that any country that has price controls or reimbursement limitations for drug products will allow favorablereimbursement and pricing arrangements for any of our products.EmployeesAs of January 31, 2016, we had 426 full-time employees, including a total of 103 employees with M.D. or Ph.D. degrees. Of these full-time employees, 277employees are engaged in research, development and manufacturing. None of our employees is represented by a labor union or covered by collective bargainingagreements. We consider our relationship with our employees to be good.Segment, Geographic and Financial InformationOperating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available andregularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We view our operations and manageour business in one operating segment and we operate in only one geographic region.Financial information about (1) our net product revenues and other revenues, net loss per share available to common stockholders and our total assets isprovided in our consolidated financial statements included in this Annual Report on Form 10-K and (2) our research and development expenses in each of the lastthree fiscal years is provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Our Corporate InformationWe were originally incorporated in the Commonwealth of Massachusetts in 1993 and reincorporated under the laws of the State of Delaware in October2010. Our principal executive offices are located at One Kendall Square, Suite B7201, Cambridge, MA 02139, and our telephone number is (617) 441-1000. 36Table of ContentsInformation Available on the InternetWe maintain a website with the address www.merrimack.com . We are not including the information contained on our website as a part of, or incorporating itby reference into, this Annual Report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and allamendments to those reports, are available to you free of charge through the “SEC Filings” link in the “Investors” section of our website as soon as reasonablypracticable after those materials have been electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. We also make availableon our website our corporate governance guidelines, the charters for our audit committee, corporate governance and nominating committee, organization andcompensation committee and executive committee, and our code of business conduct and ethics, which applies to our directors, officers and employees, and suchinformation is available in print and free of charge to any of our stockholders who requests it. In addition, we intend to disclose on our website any amendments to,or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC. 37Table of ContentsItem 1A. Risk FactorsThe following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may alsoimpair our business operations. Please see page 2 of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that arequalified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could bematerially and adversely affected.Risks Related to Our Financial Position and Need for Additional CapitalWe have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.Since inception, we have incurred significant operating losses. Our net loss was $147.8 million for the year ended December 31, 2015, $83.6 million for theyear ended December 31, 2014 and $130.7 million for the year ended December 31, 2013. As of December 31, 2015, we had an accumulated deficit of $802.2million. To date, we have financed our operations primarily through private placements of our convertible preferred stock, collaborations, public offerings of oursecurities and secured debt financings. We have devoted substantially all of our efforts to research and development, including clinical trials, and recently tocommercialization of our first product, ONIVYDE (MM-398). We have not completed development of or commercialized any other therapeutic product candidatesor diagnostics other than ONIVYDE. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Weanticipate that our expenses will increase substantially as we: • initiate or continue clinical trials of our clinical stage product candidates; • continue the research and development of our other product candidates; • seek to discover additional product candidates; • seek regulatory approvals for our product candidates that successfully complete clinical trials, including ONIVYDE in additional indications; • continue to develop our sales, marketing and distribution infrastructure and scale up manufacturing capabilities to commercialize ONIVYDE and otherproducts for which we may seek regulatory approval; and • add operational, financial and management information systems and personnel, including personnel to support our product development andcommercialization efforts.To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to besuccessful in a range of challenging activities, including discovering product candidates, completing preclinical testing and clinical trials of our product candidates,obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may seek regulatory approval.We are only in the preliminary stages of some of these activities for most of our product candidates, and our commercial activities for ONIVYDE are nascent. Wemay never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability. Even if we do achieveprofitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress thevalue of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in thevalue of our company could also cause our stockholders to lose all or part of their investment.Our substantial indebtedness may limit cash flow available to invest in the ongoing needs of our business.We currently have, and will continue to have, a significant amount of indebtedness. In July 2013, we issued $125.0 million aggregate principal amount of4.50% convertible senior notes due 2020, or convertible notes, and in December 2015, we issued $175.0 million aggregate principal amount of 11.50% seniorsecured notes due 2022, or 2022 notes. We could in the future incur additional indebtedness beyond such amounts. 38Table of ContentsOur substantial debt combined with our other financial obligations and contractual commitments could have significant adverse consequences, including: • requiring us to dedicate a substantial portion of cash flow from operations to the payment of interest on, and principal of, our debt, which will reducethe amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes; • increasing our vulnerability to adverse changes in general economic, industry and market conditions; • obligating us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and • placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.We intend to satisfy our current and future debt service obligations with our existing cash and cash equivalents and marketable securities and funds fromexternal sources. However, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under our existing debt.Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply with the covenants under our existing debtinstruments could result in an event of default under those instruments. In the event of an acceleration of amounts due under our debt instruments as a result of anevent of default, including upon the occurrence of an event that would reasonably be expected to have a material adverse effect on our business, operations,properties, assets or condition or a failure to pay any amount due, we may not have sufficient funds or may be unable to arrange for additional financing to repayour indebtedness or to make any accelerated payments, and the lenders could seek to enforce security interests in the collateral securing such indebtedness. Inaddition, the covenants under our existing debt instruments and the pledge of our assets as collateral limit our ability to obtain additional debt financing.Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations.Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which issubject to economic, financial, competitive and other factors beyond our control. We currently do not generate cash flow from operations and, in the future, ourbusiness may not generate cash flow from operations sufficient to service our debt and make necessary capital expenditures. If we are unable to generate cash flow,we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity or debt financing on terms that may beunfavorable to us or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We maynot be able to engage in any of these activities at all or engage in these activities on desirable terms, which could result in a default on our debt obligations or futureindebtedness.We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our productdevelopment programs or commercialization efforts.We will need substantial additional funding in connection with our continuing operations. We expect our research and development expenses to continue toincrease in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, ourproduct candidates. In addition, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution related toONIVYDE and any other product for which we obtain regulatory approval in the future. If we are unable to raise capital when needed or on attractive terms, wewould be forced to delay, reduce or eliminate our research and development programs or commercialization efforts.At our currently planned spending rates, we believe that our existing financial resources, together with anticipated net product revenues and net royaltypayments from sales of ONIVYDE and the net milestone payments and reimbursements we expect to receive under our Baxalta collaboration, will be sufficient tofund our operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our availablecapital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of ourproduct candidates, and the extent to which we utilize collaborations with third parties to participate in their development and commercialization, we are unable toestimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capitalrequirements will depend on many factors, including: • the amount of net product revenues realized from ONIVYDE commercial sales 39Table of Contents • the progress and results of the clinical trials of our clinical stage product candidates; • the success of our collaborations with Baxalta and PharmaEngine related to ONIVYDE and any future collaborations with other parties that we mayenter into; • the timing and amount of anticipated milestone payments and cost sharing reimbursements related to ONIVYDE that we may receive from Baxalta; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates; • the costs, timing and outcome of regulatory review of our product candidates; • the costs of commercial activities, including product sales, marketing, manufacturing and distribution; • the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; • the extent to which we acquire or invest in businesses, products and technologies; • our ability to establish and maintain commercial manufacturing arrangements for the manufacture of drug product on behalf of third-partypharmaceutical companies; and • our ability to establish and maintain additional collaborations on favorable terms, particularly marketing and distribution arrangements for oncologyproduct candidates.Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may nevergenerate the necessary data required to obtain regulatory approval and, even if regulatory approval is obtained, achieve product sales of any of our productcandidates other than ONIVYDE. In addition, ONIVYDE or any of our other product candidates, if approved, may not achieve commercial success. We begancommercializing MM-398 under the brand name ONIVYDE in the United States in the fourth quarter of 2015. If we fail to generate sufficient revenues from thesale of ONIVYDE or the commercialization of any of our product candidates, we will need to continue to rely on additional financing to achieve our businessobjectives.Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies orproduct candidates.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debtfinancings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. We do not have any committed externalsource of funds, other than under our collaboration with Baxalta for the development and commercialization of ONIVYDE, which is terminable by Baxalta forconvenience upon 180 days’ prior written notice, and under our development, license and supply agreement with Actavis, which is terminable by Actavis forconvenience in specified circumstances upon 90 days’ prior written notice. Other sources of funds may not be available or, if available, may not be available onterms satisfactory to us and could result in significant stockholder dilution.To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing commonstockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders.Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurringadditional debt, making capital expenditures or declaring dividends, and these covenants may also require us to attain certain levels of financial performance andwe may not be able to do so; any such failure may result in the acceleration of such debt and the foreclosure by our creditors on the collateral we used to secure thedebt. The debt issued in a debt financing would also be senior to our outstanding shares of capital stock, and may rank equally with or senior to the convertiblenotes and the 2022 notes, upon our liquidation. Our existing indebtedness and the pledge of our assets as collateral limit our ability to obtain additional debtfinancing. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements withthird parties, we may have to relinquish 40Table of Contentsvaluable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Ifwe are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our productdevelopment or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and marketourselves.Our investments are subject to risks that could result in losses.We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporatebonds, including commercial paper, and money market instruments. All of these investments are subject to credit, liquidity, market and interest rate risk. Suchrisks, including the failure or severe financial distress of the financial institutions that hold our cash, cash equivalents and investments, may result in a loss ofliquidity, impairment to our investments, realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a materialadverse effect on our business, results of operations, liquidity and financial condition. In order to manage the risk to our investments, we maintain an investmentpolicy that, among other things, limits the amount that we may invest in any one issue or any single issuer and requires us to only invest in high credit qualitysecurities.Risks Related to the Development and Commercialization of Our Product CandidatesWe depend heavily on the successful commercialization of ONIVYDE and the success of our clinical stage product candidates. All of our product candidatesother than ONIVYDE are still in preclinical and clinical development. Clinical trials of our product candidates may not be successful. If we are unable tosuccessfully commercialize ONIVYDE or our other product candidates, or experience significant delays in doing so, our business will be materially harmed.We have invested a significant portion of our efforts and financial resources in the development of ONIVYDE and our other clinical stage product candidatesfor the treatment of various types of cancer. Although we have obtained FDA and TFDA approval for ONIVYDE in combination with 5-FU and leucovorin for thetreatment of patients with metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy in the United States andTaiwan, respectively, all of our product candidates, including MM-398 in additional indications, are still in preclinical and clinical development. Our ability togenerate meaningful product revenues will depend heavily on the successful commercialization of ONIVYDE and development of our product candidates. Thesuccess of ONIVYDE and other product candidates, which include both our therapeutic product candidates and diagnostic candidates, will depend on severalfactors, including the following: • successful enrollment in, and completion of, preclinical studies and clinical trials; • receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States for our product candidates, including ourdiagnostics; • establishing commercial manufacturing capabilities, either by building such facilities ourselves or making arrangements with third-partymanufacturers; • launching commercial sales of any approved products, whether alone or in collaboration with others; • acceptance of any approved products by patients, the medical community and third-party payors; • effectively competing with other therapies; • a continued acceptable safety profile of any products following approval; and • qualifying for, maintaining, enforcing and defending intellectual property rights and claims.If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfullycommercialize ONIVYDE and our other product candidates, which would materially harm our business. 41Table of ContentsEven though ONIVYDE has been approved for marketing in the United States and Taiwan, we or Baxalta may never receive approval to commercializeONIVYDE in other parts of the world.We have out-licensed the rights for the development and commercialization of ONIVYDE outside of the United States and Taiwan. In order to market ourproducts outside of the United States, we or our collaboration partners must comply with numerous and varying regulatory requirements of other jurisdictionsregarding safety and efficacy. Approval procedures vary among jurisdictions and can involve product testing and administrative review periods different from, andgreater than, those in the United States. Potential risks include that the regulatory authorities may not: • deem our products safe and effective; • find the data from clinical trials sufficient to support approval; • approve of manufacturing processes and facilities; • approve our products for any or all indications for which approval is sought.If ONIVYDE fails to receive marketing approval in other parts of the world, our business may be materially harmed.If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside theUnited States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable tocomplete, the development and commercialization of our product candidates.Even though ONIVYDE has been approved for marketing in the United States and Taiwan, we may never receive approval to commercialize our otherproduct candidates in the United States or other jurisdictions, or to commercialize MM-398 in other parts of the world. Before obtaining regulatory approval for thesale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testingis expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials canoccur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and successfulinterim results of a clinical trial do not necessarily predict successful final results.We may experience numerous unexpected events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approvalor commercialize our product candidates, including: • regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at aprospective trial site; • clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conductadditional clinical trials or abandon product development programs; • the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may beinsufficient or slower than we anticipate or patients may drop out of these clinical trials at a higher rate than we anticipate; • our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; • we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding of a lack of clinical response ora finding that the patients are being exposed to unacceptable health risks; • regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, includingnoncompliance with regulatory requirements; • the cost of clinical trials of our product candidates may be greater than we anticipate; • the supply or quality of our product candidates, diagnostics or other materials necessary to conduct clinical trials of our product candidates may beinsufficient or inadequate; and 42Table of Contents • our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to suspend or terminatethe trials.For example, in February 2015, we stopped enrolling patients in our Phase 2 clinical trial of MM-111, a bispecific antibody product candidate, for thetreatment of advanced gastric, esophageal and gastroesophageal junction cancers prior to full enrollment based on a recommendation from the Data SafetyMonitoring Board for that clinical trial, which cited shorter PFS on the treatment arm relative to the control arm in the overall patient population. We do not plan toinvest in additional development of MM-111 at this time. In our previous Phase 2 clinical trial of MM-121 in patients with non-small cell lung cancer, two of thethree cohorts (Groups A and C) failed to meet their primary endpoints, and the third cohort (Group B) did not pass its planned interim analysis and ceased enrollingpatients. Additionally, we did not meet the primary endpoints in our previous Phase 2 clinical trials of MM-121 in patients with ovarian cancer or in patients withbreast cancer, although our ongoing biomarker analysis in each trial identified a potential subpopulation of patients benefiting from MM-121 in combination witheither paclitaxel or exemestane, respectively.Preclinical and clinical data may not be predictive of the success of later clinical trials, and are often susceptible to varying interpretations and analyses.Many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtainmarketing approval of their products.If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unableto successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive orif there are safety concerns, we may: • be delayed in obtaining marketing approval for our product candidates; • not obtain marketing approval at all; • obtain approval for indications that are not as broad as intended; • have the product removed from the market after obtaining marketing approval; • be subject to additional post-marketing testing requirements; • be subject to restrictions on how the product is distributed or used; or • be unable to obtain reimbursement for use of the product.Delays in testing or approvals may result in increases to our product development costs. We do not know whether any clinical trials will begin as planned,will need to be restructured or will be completed on schedule, or at all.Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates orallow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business andresults of operations.If serious adverse or undesirable side effects are identified during the development of our product candidates or following their approval andcommercialization, we may need to modify or abandon our development or marketing of such product or product candidate.All of our product candidates, other than ONIVYDE in combination with 5-FU and leucovorin for the treatment of patients with metastatic adenocarcinomaof the pancreas after disease progression following gemcitabine-based therapy, are still in preclinical or clinical development and their risk of failure is high. It isimpossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval, and it is impossible toensure that safety or efficacy issues will not arise following regulatory approval. Currently marketed therapies for solid tumors are generally limited to some extentby their toxicity. Use of our product candidates as monotherapies in clinical trials also has resulted in adverse events consistent in nature with other marketedtherapies. When used in combination with other marketed or investigational therapies, our product candidates may exacerbate adverse events associated with theother therapy. If our products or product candidates, either alone or in combination with other therapies, result in undesirable side effects or have characteristics thatare unexpected, we may need to modify or abandon their development or marketing. For instance, the label for ONIVYDE contains a boxed warning with respectto severe neutropenia and severe diarrhea, which must be clearly conveyed in all marketing materials. Physicians’ perceptions of the risks conveyed by theONIVYDE boxed warning could impact their willingness to prescribe ONIVYDE. 43Table of ContentsIf we experience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligiblepatients to participate in these trials to obtain a statistically significant result as required by the FDA or other regulatory authorities. In addition, many of ourcompetitors have ongoing clinical trials for product candidates that could be competitive with our product candidates. Patients who would otherwise be eligible forour clinical trials may instead enroll in clinical trials of our competitors’ product candidates or rely upon treatment with existing therapies that may preclude themfrom eligibility for our clinical trials.Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of the company todecline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials wouldresult in significant delays or may require us to abandon one or more clinical trials altogether.In general, we forecast enrollment for our clinical trials based on experience from previous clinical trials and monitor enrollment to be able to makeadjustments to clinical trials when appropriate, including as a result of slower than expected enrollment that we experience from time to time in our clinical trials.For example, we experienced slower than expected enrollment in our Phase 2 clinical trial of MM-121 in combination with exemestane for hormone receptorpositive breast cancer. In response, we revised the entry criteria for the clinical trial to correspond with changes in clinical practice and also expanded the numberof sites and countries participating in the clinical trial. It is possible that slow enrollment in other clinical trials in the future could require us to make similaradjustments. If these adjustments do not overcome problems with slow enrollment, we could experience significant delays or abandon the applicable clinical trialaltogether.If we are unable to successfully develop diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not realize thefull commercial potential of our therapeutics.An important component of our business strategy is to develop, either alone or together with third parties, in vitro or in vivo diagnostics for each of ourtherapeutic product candidates. There has been limited success to date industry-wide in developing diagnostics, in particular in vitro diagnostics. To be successful,we will need to address a number of scientific, technical, regulatory and logistical challenges.Although we have developed prototype assays for some in vitro diagnostic candidates, all of our diagnostic candidates are in preclinical development orclinical feasibility testing. We have limited experience in the development of diagnostics and may not be successful in developing appropriate diagnostics to pairwith any of our therapeutic product candidates that receive marketing approval. The FDA and similar regulatory authorities outside the United States are generallyexpected to regulate in vitro companion diagnostics as medical devices and in vivo companion diagnostics as drugs. In each case, companion diagnostics requireseparate regulatory approval prior to commercialization. Given our limited experience in developing diagnostics, we expect to rely in part on third parties for theirdesign, development and manufacture. If we, or any third parties that we engage to assist us, are unable to successfully develop diagnostics for our therapeuticproduct candidates, or experience delays in doing so, the development of our therapeutic product candidates may be adversely affected, our therapeutic productcandidates may not receive marketing approval and we may not realize the full commercial potential of any therapeutics that receive marketing approval. As aresult, our business would be harmed, possibly materially.Any of our product candidates that receive regulatory approval may fail to achieve the degree of market acceptance by physicians, patients, healthcare payorsand others in the medical community necessary for commercial success.Even though ONIVYDE has received marketing approval, it, or any of our other product candidates that receive marketing approval, may nonetheless notgain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. If these products do not achieve an adequatelevel of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of ONIVYDE and ourother product candidates, if approved for commercial sale, will depend on a number of factors that may be uncertain or subjective, including: • the prevalence and severity of any side effects; 44Table of Contents • efficacy and potential advantages or disadvantages compared to alternative treatments; • the price we charge for our product candidates; • convenience and ease of administration compared to alternative treatments; • the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; • our ability to successfully develop diagnostics that effectively identify patient populations likely to benefit from treatment with our therapeuticproducts; • the strength of marketing and distribution support; and • sufficient third-party coverage or reimbursement.If we are unable to effectively educate healthcare professionals or enter into agreements with third parties to sell and market our product, we may not besuccessful in commercializing ONIVYDE or any other product candidates for which we receive marketing approval.ONIVYDE is the first product that we are commercializing. We have no prior experience in the sale, marketing or distribution of therapeutic products. Toachieve commercial success for any approved product, we must either build a field organization or outsource this function to third parties. We have established anorganization to educate healthcare professionals on ONIVYDE in the United States. We expect that Baxalta and PharmaEngine will market and sell ONIVYDE inthe rest of the world in the jurisdictions in which it receives marketing approvals. Our commercialization plans for our other therapeutic candidates will depend inpart on any future collaborations into which we may enter.There are risks involved with both establishing our own commercial capabilities and entering into arrangements with third parties to perform these services.For example, we have a small field force of clinically trained professionals who are charged with educating healthcare professionals about ONIVYDE andMerrimack. This differs from the traditional field model in that it is neither a traditional field sales force nor a traditional medical science liaison role. While webelieve that our field strategy will better meet the needs of our customers, this strategy may not be effective.We also may not be successful entering into arrangements with third parties to sell and market our product candidates or doing so on terms that are favorableto us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market ourproducts effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not besuccessful in commercializing our product candidates.We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.The development and commercialization of new therapeutic and diagnostic products is highly competitive. We face competition with respect to ONIVYDEand our other product candidates, and will face competition with respect to any products that we may seek to develop or commercialize in the future, from majorpharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Several large pharmaceutical and biotechnologycompanies currently market and sell products for the treatment of the solid tumor indications for which we are developing our product candidates. Potentialcompetitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patentprotection and establish collaborative arrangements for research, development, manufacturing and commercialization. Many of these competitors are attempting todevelop therapeutics for our target indications.We are developing our product candidates for the treatment of solid tumors. There are a variety of available therapies marketed for solid tumors. In manycases, these drugs are administered in combination to enhance efficacy. Some of these drugs are branded and subject to patent protection, and others are availableon a generic basis, including the active ingredients in ONIVYDE and MM-302. Many of these approved drugs are well established therapies and are widelyaccepted by physicians, patients and third-party payors. This may make it difficult for us to achieve our business strategy of replacing existing therapies with ourproduct candidates. 45Table of ContentsThere are also a number of products in late stage clinical development to treat solid tumors. Our competitors may develop products that are more effective,safer, more convenient or less costly than any that we are developing or that would render ONIVYDE or our other product candidates obsolete or non-competitive.Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours. In addition, our ability tocompete may be affected because in many cases insurers or other third-party payors seek to encourage the use of generic products. There are many generic productscurrently on the market for the indications that we are pursuing, and additional products are expected to become available on a generic basis over the coming years.Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical,biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stagecompanies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third partiescompete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials,as well as in acquiring technologies complementary to, or necessary for, our programs.ONIVYDE or any of our product candidates that we successfully commercialize may become subject to unfavorable pricing regulations, third-partyreimbursement practices or healthcare reform initiatives, which could harm our business.The regulations that govern marketing approvals, pricing and reimbursement for new therapeutic and diagnostic products, including ONIVYDE, vary widelyfrom country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review periodbegins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuinggovernmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then besubject to price regulations that delay our commercial launch of the product and negatively impact the revenues we are able to generate from the sale of the productin that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidatesobtain regulatory approval.Our ability to commercialize ONIVYDE and any other approved products successfully also will depend in part on the extent to which coverage andreimbursement for these products and related treatments will be available from third-party payors, including government payors such as Medicare and Medicaid,private health insurers and managed care organizations. There have been, and we expect there will continue to be, legislative and regulatory proposals to change thehealthcare system in ways that could impact our ability to sell our products profitably. A primary trend in the U.S. healthcare industry and elsewhere is costcontainment. The federal government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs tolimit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic productsfor branded prescription drugs. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures,could limit payments for pharmaceuticals such as ONIVYDE and the other product candidates that we are developing and could have a material adverse effect ournet revenue and results.Third-party payors decide which drugs they will pay for and establish reimbursement and co-pay levels. The growing emphasis on managed care in theUnited States has increased and we expect will continue to increase the pressure on drug pricing. Third-party payors are increasingly challenging the prices chargedfor medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety andefficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products afterapproval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit. In order to securecoverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order todemonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals.Even with clinical trials, our product candidates may be considered less safe, less effective, of less cost-effective than other products, and third-party payors maynot provide coverage and reimbursement for our products or any of our product candidates that we commercialize, in whole or in part.The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price orreimbursement rate that the payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on aformulary, which might not include all of the approved drugs for a particular indication, and a payor’s decision to provide coverage for a drug product does notimply that an adequate reimbursement rate will be approved. 46Table of ContentsWe cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level ofreimbursement will be. Reimbursement may impact the demand for, or the price of, ONIVYDE and any other product for which we obtain marketing approval.Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in productdevelopment. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products administeredunder the supervision of a physician. In addition, coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. Thus,even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policiesand reimbursement rates may be implemented in the future. The marketability of any products for which we receive regulatory approval for commercial sale mayalso suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. If reimbursement is not available or is available only tolimited levels, we may not be able to successfully commercialize ONIVYDE or any other product candidate that we successfully develop.We cannot be sure that ONIVYDE will be assigned to a unique HCPCS code that will result in Medicare payment. Presently, HCPCS code J9206 describedas “Irinotecan Injection” exists. If ONIVYDE were to be assigned to this HCPCS code, the payment rate for ONIVYDE would not be based exclusively on its ownpricing information but on pricing information for all products assigned to that HCPCS code which, at present, includes both brand name and generic products.This payment rate may be insufficient to enable us to fully realize commercial success.Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price, average manufacturer price and actualacquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost datafor the purpose of setting Medicaid reimbursement rates. CMS surveys and publishes retail community pharmacy acquisition cost information in the NADAC filesto provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates. Changes in these reimbursementmechanisms may have a material adverse effect on our revenue.Moreover, there may be significant delays in obtaining reimbursement for ONIVYDE and any other approved products, and coverage may be more limitedthan the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Eligibility for reimbursement does not imply that anyproduct will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for newproducts, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the productand the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed, and may be incorporated intoexisting payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs orprivate payors and by any future weakening of laws that presently restrict imports of products from countries where they may be sold at lower prices than in theUnited States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability topromptly obtain coverage and appropriate payment rates from both government-funded and private payors for new products that we develop could therefore have amaterial adverse effect on our operating results, our ability to raise capital needed to commercialize products, and our overall financial condition.Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of ONIVYDE and any other products that wemay develop.We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk relatedto the commercial sale of ONIVYDE and any other products that we may develop. If we cannot successfully defend ourselves against claims that ONIVYDE or ourother product candidates caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in: • decreased demand for ONIVYDE or any other products or product candidates that we may develop; • injury to our reputation and significant negative media attention; • withdrawal of patients from clinical trials; • significant costs to defend the related litigation; • substantial monetary awards to patients; 47Table of Contents • loss of revenue; and • the inability to commercialize any products that we may develop.We currently hold $10.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurancecoverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any or everyliability that may arise.We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that maybe more profitable or for which there is a greater likelihood of success.Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, wemay forego or delay pursuit of opportunities with other product candidates or other indications that later prove to have greater commercial potential. Our resourceallocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and futureresearch and development programs and product candidates for specific indications may not yield any commercially viable products.We have based our research and development efforts on our systems biology approach to biomedical research. Notwithstanding our large investment to dateand anticipated future expenditures in our proprietary approach to research and development, we may fail to address or develop product candidates or indicationsbased on other scientific approaches that may offer greater commercial potential or for which there is a greater likelihood of success.We also may not be successful in our efforts to identify or discover new or additional product candidates through our systems biology approach. Researchprograms to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise inidentifying potential product candidates, yet fail to yield product candidates for clinical development.If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to thatproduct candidate through collaboration, licensing or other royalty arrangements in cases in which it would have otherwise been more advantageous for us to retainsole development and commercialization rights.We plan to establish separately funded companies for the development of product candidates using our systems biology approach in some areas outside theoncology field. These companies may not be successful in the development and commercialization of any product candidates.We plan to apply our systems biology approach to multiple additional disease areas outside the oncology field. We expect to do so in some cases through theestablishment of separately funded companies. For example, we established Silver Creek to research and develop regenerative medicines to repair the heart usingour systems biology approach. Silver Creek has received separate funding from investors other than us. Although Silver Creek is currently majority owned by us, inthe future we may not be the majority owner of or control Silver Creek or other companies that we establish. If in the future we do not control Silver Creek or anyfuture similar company that we establish, Silver Creek or such other companies could take actions that we do not endorse or with which we disagree, such as usingour systems biology approach in a way that reflects adversely on us. In addition, these companies may have difficulty raising additional funds and could encounterany of the risks in developing and commercializing product candidates to which we are subject.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have amaterial adverse effect on the success of our business.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use,storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals andradioactive and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of thesematerials and wastes. We also store certain low level radioactive waste at our facilities until the materials can be properly disposed of. We cannot eliminate the riskof contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable forany resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties. 48Table of ContentsAlthough we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from theuse of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liabilityor toxic tort claims that may be asserted against us in connection with our storage, use or disposal of biological, hazardous or radioactive materials.In addition, we may be required to incur substantial costs to comply with current or future environmental, health and safety laws and regulations. Thesecurrent or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also mayresult in substantial fines, penalties or other sanctions.Fluctuations in foreign currency exchange rates could substantially increase the costs of our clinical trial programs.A significant portion of our clinical trial activities are conducted outside of the United States, and associated costs may be incurred in the local currency ofthe country in which the trial is being conducted, which costs could be subject to fluctuations in foreign exchange rates. At present, we do not engage in hedgingtransactions to protect against uncertainty in future exchange rates between particular foreign currencies and the U.S. dollar. A decline in the value of the U.S.dollar against currencies in geographies in which we conduct clinical trials could have a negative impact on our research and development costs. We cannot predictthe impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our development costs.Risks Related to Our Dependence on Third PartiesThe successful commercialization and continued development of MM-398 depends substantially on our collaboration with Baxalta. If Baxalta is unable orunwilling to commercialize or further develop MM-398, or experiences significant delays in doing so, our business will be materially harmed.In September 2014, we entered into a license and collaboration agreement with Baxalta for the development and commercialization of MM-398. Prior to thiscollaboration, we did not have a history of working with Baxalta. The collaboration involves a complex allocation of rights, provides for milestone payments to usbased on the achievement of specified development, regulatory and commercial sale milestones, and provides us with royalty-based revenue if ONIVYDE issuccessfully commercialized. We cannot predict the success of the collaboration.Under our license and collaboration agreement, Baxalta has significant control over the conduct and timing of development and commercialization effortswith respect to ONIVYDE outside of the United States. We have little control over the amount, timing and quality of resources that Baxalta devotes to thedevelopment or commercialization of ONIVYDE outside of the United States. If Baxalta fails to devote sufficient financial and other resources to the futuredevelopment or commercialization of ONIVYDE outside of the United States, the development and commercialization of ONIVYDE outside of the United Stateswould be delayed or could fail. This would result in a delay in our receiving milestone payments or royalties with respect to ONIVYDE outside of the United Statesor in our not receiving such milestone payments or royalties at all.If we lose Baxalta as a collaborator in the development or commercialization of ONIVYDE, our business will be materially harmed.Baxalta has the right to terminate our agreement for the development and commercialization of ONIVYDE, in whole or with respect to specified territories,at any time and for any reason, upon 180 days’ prior written notice. Baxalta also has the right to terminate our agreement if we fail to cure a material breach of ouragreement within a specified cure period, or fail to diligently pursue a cure if such a breach is not curable within such period.If Baxalta terminates our agreement at any time, whether on the basis of our uncured material breach or for any other reason, it would delay or prevent ourfurther development of MM-398 and materially harm our business and could accelerate our need for additional capital. In particular, we would have to fund thefuture clinical development and commercialization of ONIVYDE outside of the United States on our own, seek another collaborator or licensee for such clinicaldevelopment and commercialization, or abandon the future clinical development and commercialization of ONIVYDE outside of the United States.Additionally, if Baxalta undergoes a change in control or management, this may adversely affect our collaborative relationship or the commercialization ofONIVYDE in the partnered territories. Such a change in control may result in a reprioritization of ONIVYDE within Baxalta’s portfolio, or Baxalta failing tomaintain the financial or other resources necessary to continue supporting its commercialization of ONIVYDE. 49Table of ContentsWe may depend on collaborations with third parties for the development and commercialization of our product candidates. If those collaborations are notsuccessful, we may not be able to capitalize on the market potential of these product candidates.Depending on our capital requirements, development and commercialization costs, need for additional therapeutic expertise and other factors, it is possiblethat we will enter into additional development and commercialization arrangements with respect to either oncology product candidates or product candidates inother therapeutic areas. In particular, while we expect to apply our systems biology approach to other disease areas through arrangements similar to Silver Creek, itis also possible that we will seek to enter into licensing agreements or other types of collaborations for the application of our systems biology approach.Our likely collaborators for any distribution, marketing, licensing or broader collaboration arrangements include large and mid-size pharmaceuticalcompanies, regional and national pharmaceutical companies and biotechnology companies. We will have limited control over the amount and timing of resourcesthat our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements willdepend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.Collaborations involving our product candidates, including our collaboration with Baxalta, pose the following risks to us: • collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; • collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development orcommercialization programs based on clinical trial results, changes in their strategic focus or available funding, or external factors such as anacquisition that diverts resources or creates competing priorities; • collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate,repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; • collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or productcandidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under termsthat are more economically attractive; • a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to their marketing and distribution; • collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invitelitigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; • disputes may arise between us and the collaborators that result in the delay or termination of the research, development or commercialization of ourproduct candidates or that result in costly litigation or arbitration that diverts management attention and resources; and • collaborations may be terminated, such as the termination of our license and collaboration agreement with Sanofi effective December 17, 2014, and, ifterminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. In addition, therehave been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential futurecollaborators. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our productdevelopment or commercialization program could be delayed, diminished or terminated.If we are not able to establish additional collaborations, we may have to alter our development plans.Our product development programs and the commercialization of ONIVYDE, and the potential commercialization of any other approved product candidates,will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnologycompanies for the development and potential commercialization of those product candidates. 50Table of ContentsWe face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We mayalso be restricted under existing collaboration agreements from entering into agreements on certain terms with other potential collaborators. We may not be able tonegotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product candidate, reduce ordelay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales ormarketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase ourexpenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us onacceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for thecompletion of such trials.We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical datamanagement organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical developmentactivities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical trials isconducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA and other international regulatory agencies require usto comply with standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that adverseevent data are reported within required timeframes, that data and reported results are credible and accurate and that the rights, integrity and confidentiality ofpatients in clinical trials are protected. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. Ifthese third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatoryrequirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not beable to, or may be delayed in our efforts to, successfully commercialize our product candidates.We also rely on other third parties to store and distribute supplies for our clinical trials. Any performance failure on the part of our existing or futuredistributors could delay clinical development or regulatory approval of our product candidates or commercialization of our products or cause us to incur additionalcosts, producing additional losses and depriving us of potential product revenue.We also intend to utilize diagnostics in several of our current and planned clinical trials, including current clinical trials of MM-121 and MM-141, topreselect patients who will receive specified treatment regimens. We will rely on third-party laboratories to test patient samples in connection with suchdiagnostics. Any failure on the part of these laboratories to properly perform such testing could jeopardize those clinical trials and delay or prevent the approval ofthe associated therapeutic candidate.Risks Related to the Manufacturing of Our Product CandidatesWe have limited experience in manufacturing our product candidates. We will need to upgrade and expand our manufacturing facility and augment ourmanufacturing personnel and processes in order to meet our business plans. If we fail to do so, we may not have sufficient drug product to meet our clinicaldevelopment and commercial requirements.We have a manufacturing facility located at our corporate headquarters in Cambridge, Massachusetts. We manufacture drug substance at this facility that weuse for commercial sales of ONIVYDE, research and development purposes and for clinical trials of our product candidates. We have limited experience inmanufacturing products at a commercial scale. Our current facility may not be sufficient to permit expanded manufacture of ONIVYDE or our other productcandidates for Phase 3 clinical trials or commercial sale. In order to meet our business plan, which contemplates our internally manufacturing drug substance formost of our clinical trials for all or a significant portion of our commercial requirements, we will need to upgrade and expand our manufacturing facilities, addmanufacturing personnel and ensure that validated processes are consistently implemented in our facilities. The upgrade and expansion of our facilities will requireadditional regulatory approvals. In addition, it will be costly and time-consuming to expand our facilities and recruit necessary additional personnel. If we areunable to expand our facilities in compliance with regulatory requirements or to hire additional necessary manufacturing personnel, we may encounter delays oradditional costs in achieving our research, development and commercialization objectives, including in obtaining regulatory approvals of our product candidates,which could materially damage our business and financial position. 51Table of ContentsIf our manufacturing facility is damaged or destroyed or production at this facility is otherwise interrupted, our business and prospects would be negativelyaffected and our commercialization efforts may be materially harmed.If the manufacturing facility at our corporate headquarters or the equipment in it is damaged or destroyed, we may not be able to quickly or economicallyreplace our manufacturing capacity or replace it at all. If such an event occurs, the supply of ONIVYDE and our other product candidates would be interrupted. Inthe event of a temporary or protracted loss of this facility or equipment, we might not be able to transfer manufacturing to a third party and could lose potentialrevenue from the sales of ONIVYDE and any other products for which we obtain regulatory approval. Even if we could transfer manufacturing to a third party, theshift would likely be expensive and time-consuming, particularly since the new facility would need to comply with the necessary regulatory requirements and wewould need FDA approval before selling ONIVYDE or any other products manufactured at that facility. Such an event could delay our clinical trials or reduce ourproduct sales of ONIVYDE and any other products that are approved by the FDA.Currently, we maintain insurance coverage against damage to our property and equipment and to cover business interruption and research and developmentrestoration expenses. If we have underestimated our insurance needs with respect to an interruption in our clinical manufacturing of our product candidates, we maynot be able to cover our losses.Any other interruption of production at our manufacturing facility also could damage our business. For example, in 2009, we experienced a viralcontamination at this facility that required that we shut the facility entirely for decontamination. Because of this contamination, the FDA placed a partial clinicalhold on our IND for MM-121 until we submitted supporting documentation to the FDA regarding our decontamination procedures. Although we were able toresolve this issue, with the FDA lifting the partial clinical hold in April 2010, other companies have experienced similar contamination problems, and we couldexperience a similar problem in the future that is more difficult to resolve.We expect to continue to contract with third parties for at least some aspects of the production of ONIVYDE and our other product candidates for commercialsale and clinical trials. This increases the risk that we will not have sufficient quantities of ONIVYDE or our other product candidates at an acceptable cost,which could delay, prevent or impair our development or commercialization efforts.We currently rely on third-party manufacturers for some aspects of the production of ONIVYDE and our other product candidates, including the productionof MM-121 and fill-finish and labeling activities for ONIVYDE and our other product candidates. In addition, while we believe that our existing manufacturingfacility or additional facilities that we build will be sufficient to meet our requirements for manufacturing a significant portion of drug substance for our researchand development activities, we may need to rely on third-party manufacturers for some of these requirements, particularly later stage clinical trials of our antibodyproduct candidates, and, at least in the near term, for commercial supply of ONIVYDE and any other products for which we obtain marketing approval.In connection with the termination of our license and collaboration agreement with Sanofi for the development and commercialization of MM-121 in 2014,we assumed an agreement with a third-party manufacturer for the manufacture of MM-121. We do not have any other agreements with third-party manufacturersfor the clinical supply to us of MM-398 or commercial supply to us of ONIVYDE or any other product candidates, and we may be unable to conclude suchagreements or to do so on acceptable terms. Reliance on third-party manufacturers entails additional risks, including: • reliance on the third party for regulatory compliance and quality assurance; • the possible breach of the manufacturing agreement by the third party; and • the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.Third-party manufacturers may not be able to comply with cGMP, QSR or similar regulatory requirements outside the United States. Our failure, or thefailure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civilpenalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect supplies of our products.Any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. Because there are alimited number of manufacturers that operate under cGMP or QSR regulations and that might be capable of manufacturing for us, we may not have access to suchmanufacturers. 52Table of ContentsWe currently rely on single suppliers for the resins, media and filters that we use for our manufacturing process. We purchase these materials from oursuppliers on a purchase order basis and do not have long-term supply agreements in place. Any performance failure or refusal to supply on the part of our existingor future suppliers could delay clinical development, marketing approval or commercialization of our products. If our current suppliers cannot perform as agreed,we may be required to replace one or more of these suppliers. Although we believe that there may be a number of potential long-term replacements to eachsupplier, we may incur added costs and delays in identifying and qualifying any such replacements.We likely will rely upon third-party manufacturers to provide us with necessary reagents and instruments to develop, test and manufacture our in vitrodiagnostics. Currently, many reagents are marketed as Research Use Only products under FDA regulations.Our potential future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability tocommercialize any products that receive regulatory approval on a timely and competitive basis.We rely on third parties to perform various tasks related to the manufacturing of our product candidates. Compliance by such third parties with regulations ofthe FDA or other regulatory bodies cannot be assured, which could adversely impact our ability to supply our product candidates.Although we perform much of the bulk manufacturing for ONIVYDE and our other product candidates, we rely on third parties to perform the fill-finish andpackaging steps. If any of those third parties were to fail to be in compliance with regulations of the FDA or other regulatory bodies, our ability to supplyONIVYDE and our other product candidates could be adversely impacted.For instance, in 2010, a former fill-finish third-party contractor that we used to fill and package MM-121 experienced FDA inspection issues with its qualitycontrol processes that resulted in a formal warning letter from the FDA. As a result, we pulled some MM-121 from clinical trial sites and replaced it with MM-121that was filled by a different contractor. This restocking resulted in a few patients missing one or two doses of MM-121. It is possible that we could experiencesimilar issues with other contractors.Risks Related to Our Intellectual PropertyIf we fail to fulfill our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.We are a party to a number of intellectual property license agreements with third parties, including with respect to MM-302, MM-121, MM-141 and MM-151, and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreementswill impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors mayhave the right to terminate these agreements, in which event we might not be able to develop and market any product that is covered by these agreements.Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorableterms. The occurrence of such events could materially harm our business.If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintain patentprotection for the technology or products that we license from them, our competitors could develop and commercialize technology and products similar oridentical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.Our success depends in large part on our and our licensors’ ability to obtain and maintain patent protection in the United States and other countries withrespect to our proprietary technology and products. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patentapplications, or to maintain the patents, covering technology or products that we license from third parties. Therefore, we cannot be certain that these patents andapplications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us failto maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.We have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies andproducts that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirablepatent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and developmentoutput before it is too late to obtain patent protection. 53Table of ContentsThe patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has inrecent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors’ patentrights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents being issued that protect our technology orproducts or that effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of thepatent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreigncountries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind theactual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not atall. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned and licensed patents or pending patentapplications, or that we or our licensors were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, thefirst to file a patent application is entitled to the patent. Under the America Invents Act enacted in 2011, the United States moved to this first to file system in early2013 from the previous system under which the first to make the claimed invention was entitled to the patent. We may become involved in opposition, interferenceor derivation proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding could reduce the scope of, orinvalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in ourinability to manufacture or commercialize products without infringing third-party patent rights.Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, preventcompetitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensedpatents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validityor enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may resultin patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using orcommercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount oftime required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly aftersuch candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others fromcommercializing products similar or identical to ours.We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to initiate infringement lawsuits, which can beexpensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or may refuse tostop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigationproceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discoveryrequired in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during thistype of litigation.Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain andcould have a material adverse effect on the success of our business.Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates anduse our proprietary technologies without infringing the enforceable proprietary rights of third parties. We may become party to, or threatened with, futureadversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference or derivationproceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents or patents that may begranted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party tocontinue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms orat all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We couldbe forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. Afinding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materiallyharm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on ourbusiness. 54Table of ContentsWe may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors orpotential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may besubject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any suchemployee’s former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetarydamages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result insubstantial costs and be a distraction to management.Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, andcould distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results ofhearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce ourresources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Someof our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financialresources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability tocompete in the marketplace.If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.In addition to our patented technology and products, we rely on trade secrets, including unpatented know-how, technology and other proprietary information,to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties thathave access to them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants,advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. In addition,any of these parties may breach the agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches.Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. Inaddition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfullyobtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If anyof our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.We may not be able to obtain, maintain or protect proprietary rights necessary for the continued development and commercialization of our products, productcandidates and research technologies, including as a result of challenges from companies who seek to sell generic versions of ONIVYDE after expiration ofour orphan drug exclusivity but prior to our ONIVYDE patent expiration.Our commercial success depends in large part on obtaining and maintaining U.S. and foreign patent protection for our products, our product candidates andour research technologies and successfully enforcing and defending these patents against third-party challenges, including with respect to generic challenges. Thevalidity of our patents in one or more jurisdictions may be challenged by third parties, resulting in our patents being deemed invalid, unenforceable or narrowed inscope, which could compromise the scope or duration of our exclusive rights in the relevant product, product candidate or technology. For example, the validity ofa U.S. patent can be challenged in the U.S. Patent and Trademark Office (e.g., through an Inter Partes Review and/or Post Grant Review Proceeding) and/or in U.S.federal district court.In addition, our patents on ONIVYDE may also be challenged in a federal court in connection with a third party’s ANDA or a Section 505(b)(2) NDAseeking FDA approval to market a generic version of ONIVYDE, resulting in a patent challenge to one or more patents listed in the Orange Book for ONIVYDE.This patent challenge can result in one or more of those Orange Book patents for ONIVYDE being deemed uninfringed, invalid, unenforceable and/or narrowed inscope, which could compromise the scope or duration of our exclusive rights in the relevant product. An ANDA or Section 505(b)(2) NDA can be filed at any timeafter FDA approval of ONIVYDE. Other challenges to a patent may be mounted without regard to the date of an FDA approval. 55Table of ContentsOur patents as issued or as subsequently limited by any litigation might not contain claims that are sufficiently broad to prevent others from circumventingour patent protection and utilizing our technologies. For instance, the issued patents relating to ONIVYDE and our product candidates may be limited to aparticular indication and/or composition and may not cover similar compositions that have similar clinical properties. Consequently, our competitors mayindependently develop competing products that do not infringe our patents or other intellectual property. Also, our pending patent applications may not issue, andwe may not receive any additional patents. We cannot be sure that our patents and patent applications, including our own and those that we have rights to underlicenses from third parties, will adequately protect our intellectual property for a number of reasons, including, among other things, the following: (i) the patentpositions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions; (ii) the actual protectionafforded by a patent can vary from country to country and may depend upon the type of patent, the scope of its coverage and the availability of legal remedies inthe country; (iii) the laws of foreign countries in which we market our products may afford little or no effective protection to our intellectual property, therebyeasing our competitors’ ability to compete with us in such countries; (iv) intellectual property laws and regulations and legal standards relating to the validity, scopeand enforcement of patents covering pharmaceutical and biotechnological inventions are continually developing and changing, both in the United States and inother important markets outside the United States (v) third parties may challenge, infringe, circumvent or seek to invalidate existing or future patents owned by orlicensed to us; and (vi) the coverage claimed in a patent application can be significantly reduced before the patent is issued, and, as a consequence, our and ourpartners’ patent applications may result in patents with narrower coverage than we desire or have planned for.Risks Related to Regulatory Approval of Our Product CandidatesIf we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue willbe materially impaired.Our product candidates, including our clinical stage product candidates, and the activities associated with their development and commercialization,including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, import,export, sampling and marketing are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparableauthorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. OnOctober 22, 2015, we received approval from the FDA and the TFDA to market ONIVYDE in combination with 5-FU and leucovorin for the treatment of patientswith metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy in the United States and Taiwan, respectively,which is our first and only product candidate to receive regulatory approval. We have not received regulatory approval to market ONIVYDE in any jurisdictionother than the United States and Taiwan or for any other indications. We have only limited experience in filing and supporting the applications necessary to gainregulatory approvals and expect to rely on third-party contract research organizations to assist us in this process. Securing regulatory approval requires thesubmission of extensive preclinical and clinical data and supporting information to the FDA and other regulatory agencies for each therapeutic indication toestablish the product candidate’s safety and efficacy. Securing regulatory approval also requires the submission of information about the product manufacturingprocess to, and inspection of manufacturing facilities by, the FDA or other regulatory agencies. Our product candidates may not be effective, may be onlymoderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatoryapproval or prevent or limit commercial use.The process of obtaining regulatory approvals is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, andcan vary substantially based on a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in regulatory approvalpolicies during the development period, changes in or the enactment of additional statutes or regulations, changes in regulatory review for each submitted productapplication or approval of other products for the same indication may cause delays in the approval or rejection of an application. Regulatory agencies havesubstantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additionalpreclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or preventregulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitmentsthat render the approved product not commercially viable.If we pursue development of a diagnostic to identify patients who are likely to benefit from a therapeutic product, failure to obtain approval for the diagnosticmay prevent or delay approval of the therapeutic product.We are attempting to develop diagnostics to identify patients who are likely to benefit from our therapeutic product candidates. We currently rely on andexpect to continue to rely on third parties for much of the development, testing and manufacturing of our diagnostics. We will likely rely on such third parties toalso obtain any required regulatory approval for and then 56Table of Contentscommercially supply such diagnostics. All of our diagnostic candidates are in preclinical development or clinical feasibility testing. We have very limitedexperience in the development of diagnostics and, even with the help of third parties with greater experience, may fail to obtain the required diagnostic productmarketing approval, which could prevent or delay approval of the therapeutic product.In July 2014, the FDA issued final guidance that stated that if safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDAgenerally will not approve the therapeutic unless the FDA approves or clears this “ in vitro companion diagnostic device” at the same time that the FDA approvesthe therapeutic. The approval or clearance of the in vitro diagnostic most likely will occur through the FDA’s Center for Devices and Radiological Health Office ofIn Vitro Diagnostics and Radiological Health. Even with the issuance of the final guidance, the FDA’s expectations for in vitro companion diagnostics remainunclear in some respects. The FDA’s developing expectations will affect our in vitro diagnostics. In particular, the FDA may limit our ability to use retrospectivedata, otherwise disagree with our approaches to trial design, biomarker qualification, clinical and analytical validity and clinical utility, or make us repeat aspects ofthe trial or initiate new trials.Because our diagnostic candidates are at an early stage of development, we cannot yet know what the FDA will require for any of these tests. For several ofour clinical stage product candidates, namely MM-121, MM-141 and MM-151, we are attempting to develop an in vitro diagnostic that will help identify patientslikely to benefit from the therapy. Whether the FDA will consider these in vitro diagnostics to be “ in vitro companion diagnostic devices” that requiresimultaneous approval or clearance with the therapeutics will depend on whether the FDA views the diagnostics to be essential to the safety and efficacy of thesetherapeutics.Based on the FDA’s past practice with companion diagnostics, if we are successful in developing a diagnostic for any of our clinical stage productcandidates, we would expect that FDA approval of an in vitro companion diagnostic, and possibly an in vivo companion diagnostic, would be required for approvaland subsequent commercialization of each such therapeutic product candidate. We are not aware of any currently available diagnostics that, if necessary, wouldotherwise allow us to proceed with the approval and subsequent commercialization of our product candidates despite a delay in or failure of our attempts to developdiagnostics.For MM-398 and MM-302, although we are also investigating possible in vitro diagnostics, we are currently developing in vivo diagnostics in the form ofimaging agents that may help identify patients more likely to benefit from the therapy. Imaging agents for diagnostic use can be regulated as drugs by the FDA’sCenter for Drug Evaluation and Research and, as such, would be generally subject to the regulatory requirements applicable to other new drug candidates.Alternatively, several in vivo imaging agents have been regulated as medical devices by FDA’s Center for Devices and Radiological Health. Although the FDA hasnot issued guidance with respect to the simultaneous approval of in vivo diagnostics and therapeutics, it is possible that the FDA will apply a standard similar tothat for in vitro diagnostics.Because we expect to rely on third parties for various aspects of the development, testing and manufacture, as well as for regulatory approval for andcommercial supply, of our diagnostics, the commercial success of any of our product candidates that require a diagnostic will be tied to and dependent on thecontinued ability of such third parties to make the diagnostic commercially available on reasonable terms in the relevant geographies.If we fail to maintain orphan drug exclusivity or designation for ONIVYDE or MM-141, we will have to rely on other rights and protections for these productcandidates.We have obtained orphan drug exclusivity in the United States for ONIVYDE for the treatment of pancreatic cancer and orphan medicinal productdesignation in the European Union for MM-398 for the treatment of pancreatic cancer. In addition, we have obtained orphan drug designation in the United Statesfor MM-141 for the treatment of pancreatic cancer. In the United States, under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is adrug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States.In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphandrug marketing exclusivity for that drug for that indication for a period of seven years. This orphan drug exclusivity prevents the FDA from approving anotherapplication, including a full NDA, to market the same drug for the same orphan indication, except in limited circumstances. For purposes of small molecule drugs,the FDA defines the term “same drug” to mean a drug that contains the same active molecule and that is intended for the same use as the approved orphan drug.Orphan drug exclusivity may be lost if the FDA determines that the request for designation was materially defective or if the manufacturer is unable to assuresufficient quantity of the drug to meet the needs of patients with the rare disease or condition. 57Table of ContentsEven if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugscan be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if theFDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.The EMA grants orphan medicinal product designation to promote the development of products that may offer therapeutic benefits for life-threatening orchronically debilitating conditions affecting not more than five in 10,000 people in the European Union. Orphan medicinal product designation from the EMAprovides ten years of marketing exclusivity following drug approval, subject to reduction to six years if the designation criteria are no longer met.Our therapeutic product candidates for which we intend to seek approval as biological or drug products may face competition sooner than expected.With the enactment of the BPCIA as part of the Health Care and Education Reconciliation Act of 2010, or the Health Care Reform Law, an abbreviatedpathway for the approval of biosimilar and interchangeable biological products was created. The abbreviated regulatory pathway establishes legal authority for theFDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on their similarity to existing brandproduct. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product was approvedunder a BLA. The BPCIA is complex and has yet to be fully interpreted and implemented by the FDA. As a result, its ultimate impact, implementation andmeaning is subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a materialadverse effect on the future commercial prospects for our biological products.We believe that any of our products approved as a biological product under a BLA should qualify for the 12 year period of exclusivity. However: • a potential competitor could seek and obtain approval of its own BLA during our exclusivity period instead of seeking approval of a biosimilarversion; and • the FDA could consider a particular product candidate which contains both drug and biological product components to be a drug subject to reviewpursuant to an NDA, and therefore eligible for a significantly shorter marketing exclusivity period as provided under the Drug Price Competition andPatent Term Restoration Act of 1984.Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditionalgeneric substitution for non-biological products is not yet clear and will depend on a number of marketplace and regulatory factors that are still developing.In addition, a drug product approved under an NDA, such as ONIVYDE, could face generic competition earlier than expected. The enactment of the GenericDrug User Fee Amendments of 2012 as part of the FDASIA established a user fee program that will generate hundreds of millions of dollars in funding for theFDA’s generic drug review program. Funding from the user fee program, along with performance goals that the FDA negotiated with the generic drug industry,could significantly decrease the timeframe for FDA review and approval of generic drug applications.Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.We intend to market our products, including ONIVYDE, either ourselves or with commercialization partners, both within and outside the United States. Thismay increase the risks described below with respect to our compliance with foreign regulations.In order to market and sell ONIVYDE and our other products in the European Union and many other jurisdictions, we or our commercialization partnersmust obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and caninvolve additional testing, including sometimes additional testing in children. The time required to obtain approval in foreign countries may differ substantiallyfrom that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtainingFDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can besold in that country. We or our commercialization partners may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all.Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside theUnited States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We or our commercialization partners may not beable to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. 58Table of ContentsAny product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if wefail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.ONIVYDE and any other product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling,advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. Theserequirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP or QSR requirementsrelating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples tophysicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which theproduct may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety orefficacy of the product. Later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply withregulatory requirements, may result in actions such as: • restrictions on such products, manufacturers or manufacturing processes; • restrictions on the marketing of a product; • restrictions on product distribution; • requirements to conduct post-marketing clinical trials; • warning or untitled letters; • withdrawal of the products from the market; • refusal to approve pending applications or supplements to approved applications that we submit; • recall of products; • fines, restitution or disgorgement of profits or revenue; • suspension or withdrawal of regulatory approvals; • refusal to permit the import or export of our products; • product seizure; or • injunctions or the imposition of civil or criminal penalties.The FDASIA provides the FDA with new inspection authorities. A drug or biologic will be considered adulterated, with possible resulting civil and criminalpenalties, if the owner or operator of the establishment where it is made, processed, packed or held delays, denies, limits or refuses inspection. The FDASIA alsoreplaces the biennial inspection schedule for drugs and biologics with a risk-based inspection schedule. The law grants the FDA authority to require a drug orbiologics manufacturer to provide, in advance or instead of an inspection, and at the manufacturer’s expense, any records or other information that the agency mayotherwise inspect at the facility. The FDASIA also permits the FDA to share inspection information with foreign governments under certain circumstances. TheFDASIA is complex and has yet to be fully interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning are subject touncertainty.The FDASIA also provides the FDA with additional authority to exercise against manufacturers of drugs or biologics that are not adhering to pediatric studyrequirements, which apply even if the manufacturer is not seeking to market the drug or biologic to pediatric patients. As of April 2013, the FDA must issue non-compliance letters to companies who do not meet the pediatric study requirements. Any company receiving a non-compliance letter would have an opportunity torespond, and the non-compliance letter and company response would become publicly available. 59Table of ContentsFuture legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the priceswe may obtain.In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding thehealthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability toprofitably sell any products for which we obtain marketing approval.For example, in March 2010, President Obama signed into law the Health Care Reform Laws, which were intended to broaden access to health insurance,reduce or constrain the growth of healthcare spending, provide benefits for patients within a coverage gap in the Medicare Part D prescription drug program,implement rules regarding prescription drug benefits under the health insurance exchanges and changes to the Medicare Drug Rebate program, expand the PHS’340B drug pricing discount program, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries,impose new taxes and fees on the health industry and impose additional health policy reforms. These changes impact existing government healthcare programs andare resulting in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reportingsystem and feedback program. Further, the Health Care Reform Laws impose a significant annual fee on companies that manufacture or import brandedprescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcarepractitioners. In addition, effective October 1, 2010, the Health Care Reform Laws revised the definition of “average manufacturer price” for reporting purposes,which could increase the amount of Medicaid drug rebates to states.Some states have elected not to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level, as is permitted under theHealth Care Reform Laws. For each state that does not choose to expand its Medicaid program, there may be fewer insured patients overall, which could impactour sales, business and financial condition. Where Medicaid patients receive insurance coverage under any of the new options made available through the HealthCare Reform Laws, the possibility exists that manufacturers may be required to pay Medicaid rebates on drugs used under these circumstances, a decision thatcould impact manufacturer revenues. In addition, the federal government has also announced delays in the implementation of key provisions of the Health CareReform Laws, including the employer mandate. The implications of these delays for our sales, business and financial condition, if any, are not yet clear.The Health Care Reform Laws appear likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may alsoincrease our regulatory burdens and operating costs. Moreover, legislative changes to the Health Care Reform Laws remain possible. We expect that the HealthCare Reform Laws, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future, could havea material adverse effect on our industry generally and on our ability to maintain or increase sales of our existing products or to successfully commercialize ourproduct candidates.If we fail to comply with our reporting and payment obligations under U.S. governmental pricing programs, we could be required to reimburse governmentprograms for underpayments and could pay penalties, sanctions and fines which could have a material adverse effect on our business, financial condition andresults of operations.As a condition of reimbursement for ONIVYDE and any other product approved by the FDA, various U.S. federal and state healthcare programs require thatwe calculate and report certain pricing information to U.S. federal and state healthcare agencies. For example, we are required to provide average selling priceinformation to CMS on a quarterly basis in order to compute Medicare Part B payment rates. Price reporting and payment obligations are highly complex and varyamong products and programs. The calculation of average selling price includes a number of inputs from contracts with wholesalers, specialty distributors, grouppurchasing organizations and other customers. We are also required to make an assessment of whether these agreements are deemed to be for bona fide servicesand that the services are deemed to be at fair market value in our industry and for our products. Our processes for estimating amounts due under these governmentalpricing programs involve subjective decisions. As a result, our price reporting calculations are subject to the risk of errors and our methodologies for calculatingthese prices could be challenged under the federal False Claims Act or other laws. In addition, the Health Care Reform Laws modified the rules related to certainprice reports and expanded the scope of pharmaceutical product sales to which Medicaid rebates apply, among other things. Uncertainty exists currently, as manyof the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. This uncertainty in theinterpretation of the legislation increases the chances of an error in price reporting, which could in turn lead to a legal challenge, restatement or investigation. If webecome subject to investigations, restatements or other inquiries concerning our compliance with price reporting laws and regulations, we could be required to payor be subject to additional reimbursements, penalties, sanctions or fines, which could have a material adverse effect on our business, financial condition and resultsof operations. 60Table of ContentsWe participate in and have certain price reporting obligations to the Medicaid Drug Rebate program and other governmental pricing programs, and we haveobligations to report average sales price under the Medicare program. Pricing and rebate calculations vary among products and programs. The calculations arecomplex and are often subject to interpretation by governmental or regulatory agencies and the courts. For example, the Medicaid rebate amount is computed eachquarter based on our submission to the CMS of our AMP and best price for the quarter. If we become aware that our reporting for prior quarters was incorrect, orhas changed as a result of recalculation of the pricing data, we will be obligated to resubmit the corrected data for a period not to exceed twelve quarters from thequarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with the laws and regulationsgoverning the Medicaid rebate program. Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters,depending on the nature of the correction. Price recalculations also may affect the price that we will be required to charge certain safety net providers under thePHS 340B drug discount program.We are liable for errors associated with our submission of pricing data and for overcharging government payers. For example, in addition to retroactiverebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP or best price information to the government, we maybe liable for civil monetary penalties in the amount of $100,000 per item of false information. Our failure to submit monthly/quarterly AMP and best price data ona timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In the event that CMS were toterminate our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our products. In addition, if we overcharge thegovernment in connection with our FSS contract or under any other government program, we will be required to refund the difference to the government. Failure tomake necessary disclosures and/or to identify contract overcharges could result in allegations against us under the federal civil false claims act and other laws andregulations.CMS and the Office of Inspector General of the U.S. Department of Health and Human Services have pursued manufacturers that were alleged to have failedto report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions ofparticipation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be found byCMS to be incomplete or incorrect.If we overcharge the government in connection with our FSS contract or the Tricare retail pharmacy program, whether due to a misstated FCP or otherwise,we would be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result inallegations against us under the false claims act and other laws and regulations.Unexpected refunds to the federal government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.Risks Related to Commercialization of Our Product CandidatesThe FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. If we are found to haveimproperly promoted off-label uses, we may become subject to significant fines and other liability.The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. In particular, a product maynot be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. ONIVYDE is onlyapproved by the FDA and the TFDA for use in combination with 5-FU and leucovorin for the treatment of patients with metastatic adenocarcinoma of the pancreasafter disease progression following gemcitabine-based therapy in the United States and Taiwan, respectively, and we may only promote ONIVYDE for such use. Ifwe are found to have promoted for off-label uses, we may become subject to significant government fines and other related liability. For example, the U.S.government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The government has also required companies to enter into complex multi-year corporate integrity agreements and/or non-prosecution agreementsthat can impose significant restrictions and other burdens on the affected companies.In addition, incentives under applicable U.S. laws encourage employees and physicians to report violations of rules governing promotional activities forpharmaceutical products. These incentives could lead to so called whistleblower lawsuits as part of which such persons seek to collect a portion of moneysallegedly overbilled to government agencies due to, for example, promotion of pharmaceutical products beyond labeled claims. Such lawsuits, whether with orwithout merit, are typically time consuming and costly to defend. Such suits may also result in related stockholder lawsuits, which are also costly to defend. 61Table of ContentsOur relationships with customers and payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, whichcould expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.Healthcare providers, physicians and others play a primary role in the recommendation and prescription of ONIVYDE and any other products for which weobtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and otherhealthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distributeONIVYDE and any other products for which we obtain marketing approval. Restrictions under applicable federal, state and foreign healthcare laws and regulationsinclude the following: • the federal healthcare anti-kickback statute prohibits, among other things, knowingly and willfully soliciting, offering, receiving or providingremuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for the purchase, order orrecommendation of any item or service reimbursable under Medicare, Medicaid, or other federal healthcare programs. This statute has been interpretedto apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other, andviolations are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs.Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or otherregulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing,purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor; • the federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, or causing to be made, a false statement to have a false claim paid. Government enforcement agencies and privatewhistleblowers have initiated investigations or brought private lawsuits against pharmaceutical companies for a variety of allegedly improperpromotional or marketing activities, such as allegedly inflating drug prices they report to pricing services, which in turn were used by the governmentto set Medicare and Medicaid reimbursement rates; allegedly providing free product to customers with the expectation that the customers would billfederal programs for the product; or engaging in promotion for “off-label” uses. Additionally, the Health Care Reform Laws amended the federal FalseClaims Act such that a violation of the federal anti-kickback statute can serve as a basis for liability under the False Claims Act; • HIPAA makes it a crime to knowingly and willfully execute or attempt to execute a scheme to defraud any healthcare benefit program and alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information; • the federal false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact ormaking any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Open Payments program requires manufacturers of drugs, devices, biologics and medical supplies reimbursable under Medicare and Medicaid toreport to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teachinghospitals, as well as physician ownership and investment interests, and provides for public reporting of the data reported by manufacturers; • the FCPA prohibits U.S. companies and their representatives from paying, offering to pay, promising or authorizing the payment of anything of valueto any foreign government official, government staff member, political party or political candidate for the purpose of obtaining or retaining business orto otherwise obtain favorable treatment or influence a person working in an official capacity, and encompasses many healthcare professionals in manycountries under the definition of a foreign government official; • the Bribery Act, which applies to U.S. companies such as ourselves that conduct business in the United Kingdom, proscribes giving and receivingbribes in the public and private sectors, bribing a foreign public official and failing to have adequate procedures to prevent employees and other agentsfrom giving bribes; and • analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claimsinvolving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers. In addition, some state lawsrequire pharmaceutical companies to comply with the 62Table of Contents pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government. Other statesrequire pharmaceutical manufacturers to report information related to payments to physicians and other healthcare providers or marketingexpenditures, or prohibit certain marketing-related activities including the provision of gifts, meals or other items to certain healthcare providers.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs.It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion fromgovernment funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or otherproviders or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrativesanctions, including exclusions from government funded healthcare programs. Even if we are not determined to have violated these laws, governmentinvestigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could also harm our financialcondition. Responding to government investigations or whistleblower lawsuits, defending any claims raised, and any resulting fines, damages, penalties, settlementpayments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation,business and financial condition and divert the attention of our management from operating our business.Our corporate compliance efforts cannot guarantee that we are in compliance with all potentially applicable regulations.The development, manufacturing, pricing, sales, coverage and reimbursement of our products, together with our general operations, are and will be subject toextensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. While we have implementeda corporate compliance program based on what we believe are the current best practices, we cannot provide any assurance that governmental authorities will findthat our business practices comply with current or future administrative or judicial interpretations of potentially applicable laws and regulations. If we fail tocomply with any of these laws and regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, the failureto approve a product candidate, restrictions on our products or manufacturing processes, withdrawal of ONIVYDE or other products from the market, significantfines, disqualification or debarment from participation in federally-funded healthcare programs or other sanctions or litigation, any of which events may have asignificant adverse impact on our business.Risks Related to Data Protection and CybersecurityOur failure to comply with data protection laws and regulations could lead to government enforcement actions, private litigation and/or adverse publicity andcould negatively affect our operating results and business.We are subject to data protection laws and regulations that address privacy and data security. The legislative and regulatory landscape for data protectioncontinues to evolve, and in recent years there has been an increasing focus on privacy and data security issues. In the United States, numerous federal and state lawsand regulations, including state data breach notification laws, state health information privacy laws and federal and state consumer protection laws govern thecollection, use, disclosure and protection of health-related and other personal information. Failure to comply with data protection laws and regulations could resultin government enforcement actions, which could include civil or criminal penalties, private litigation and/or adverse publicity and could negatively affect ouroperating results and business. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribe our products) that aresubject to privacy and security requirements under HIPAA. We could be subject to criminal penalties if we knowingly obtain or disclose individually identifiablehealth information in a manner that is not authorized or permitted.Significant disruptions of information technology systems or security breaches could adversely affect our business.We are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary course of business, wecollect, store and transmit large amounts of confidential information (including, among other things, trade secrets or other intellectual property, proprietary businessinformation and personal information). It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information.We also have outsourced elements of our operations to third parties, and as a result we manage a number of third-party vendors who may or could have access toour confidential information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, and thelarge amounts of confidential information stored on those systems, make such systems vulnerable to service interruptions or to security breaches from inadvertentor intentional actions by our employees, third-party vendors, and/or business 63Table of Contentspartners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have becomeincreasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means toaffect service reliability and threaten the confidentiality, integrity and availability of information.Significant disruptions of our information technology systems or security breaches could adversely affect our business operations and/or result in the loss,misappropriation and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information, including, among other things, tradesecrets or other intellectual property, proprietary business information and personal information, and could result in financial, legal, business and reputational harmto us. For example, any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding ourpatients or employees, could harm our reputation, require us to comply with federal and/or state breach notification laws and foreign law equivalents, and otherwisesubject us to liability under laws and regulations that protect the privacy and security of personal information. Security breaches and other inappropriate access canbe difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures toprotect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breachesthat could adversely affect our business.Risks Related to Employee Matters and Managing GrowthOur future success depends on our ability to retain our Chief Executive Officer and other key executives and to attract, retain and motivate qualified personnel.We are highly dependent on Robert J. Mulroy, our President and Chief Executive Officer, and the other principal members of our executive and scientificteams. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminatingtheir employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any ofthese persons could impede the achievement of our research, development and commercialization objectives.Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not beable to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similarpersonnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely onconsultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Ourconsultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities thatmay limit their availability to us.We have expanded, and expect to continue to expand, our development, manufacturing, regulatory and sales and marketing capabilities, and as a result, wemay encounter difficulties in managing our growth, which could disrupt our operations.We have grown significantly in the number of our employees and the scope of our operations, particularly in the areas of drug development, manufacturing,regulatory affairs and sales and marketing, and we expect to continue to grow in these areas. To manage our anticipated future growth, we must continue toimplement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel.Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not beable to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead tosignificant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our businessplans or disrupt our operations.We have entered into and may continue to enter into or seek to enter into business combinations and acquisitions which may be difficult to integrate, disruptour business, divert management attention or dilute stockholder value.As part of our business strategy, we may enter into business combinations and acquisitions. Although we acquired Hermes in October 2009, we have limitedexperience in making acquisitions. In addition, acquisitions are typically accompanied by a number of risks, including: • the difficulty of integrating the operations and personnel of the acquired companies; 64Table of Contents • the potential disruption of our ongoing business and distraction of management; • potential unknown liabilities and expenses; • the failure to achieve the expected benefits of the combination or acquisition; • the maintenance of acceptable standards, controls, procedures and policies; and • the impairment of relationships with employees as a result of any integration of new management and other personnel.If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our business strategy and we mayhave incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, with futureacquisitions, we could use substantial portions of our available cash as all or a portion of the purchase price. As we did for the acquisition of Hermes, we could alsoissue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.Risks Related to Our Common StockOur executive officers, directors and principal stockholders maintain the ability to significantly influence all matters submitted to stockholders for approval.Our executive officers, directors and stockholders who own more than 5% of our outstanding common stock, in the aggregate, beneficially own a largeportion of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted toour stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would significantly influence theelection of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could allow, delayor prevent an acquisition of our company on terms that other stockholders may desire.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, moredifficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholdersmay consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions could also limit theprice that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition,these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team,these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions: • allow the authorized number of our directors to be changed only by resolution of our board of directors; • establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board ofdirectors; • require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent; • limit who may call stockholder meetings; • authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would workto dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors;and • require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisionsof our charter or bylaws. 65Table of ContentsMoreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, whichprohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of thetransaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.Further, the repurchase right under the convertible notes in connection with a fundamental change (as defined therein) and any increase in the conversion ratein connection with a make-whole fundamental change could also discourage a potential acquirer.Our stock price has been and may in the future be volatile, which could cause holders of our common stock to incur substantial losses.Our stock price has been and in the future may be subject to substantial price volatility. The stock market in general and the market for biotechnologycompanies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of thisvolatility, our stockholders could incur substantial losses. The market price for our common stock may be influenced by many factors, including: • our ability to successfully commercialize ONIVYDE in combination with 5-FU and leucovorin for the treatment of patients with metastaticadenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy; • the success of competitive products or technologies; • results of clinical trials of our product candidates or those of our competitors; • regulatory or legal developments in the United States and other countries; • developments or disputes concerning patents or other proprietary rights; • the recruitment or departure of key personnel; • variations in our financial results or those of companies that are perceived to be similar to us; • changes in the structure of healthcare payment systems; • market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations; • activism by any single large stockholder or combination of stockholders; • general economic, industry and market conditions; and • the other factors described in this “Risk Factors” section.The indenture governing our 11.5% senior secured notes due 2022 imposes significant operating and financial restrictions on us and our subsidiaries that mayprevent us from pursuing certain business opportunities and restrict our ability to operate our business.On December 22, 2015, we issued $175.0 million in aggregate principal amount of 11.5% senior secured notes due 2022. The indenture governing the 2022notes contains covenants that restrict our and our subsidiaries’ ability to take various actions, including, among other things: • the incurrence of debt; • the issuance of our preferred stock; • the payment of dividends, the repurchase of shares and making certain other restricted payments; • the prepayment, redemption or repurchase of subordinated debt; 66Table of Contents • the sale, lease or transfer of property and assets; • engaging in transactions with affiliates; and • the making of investments other than those permitted by the indenture.The indenture specifies a number of events of default, some of which are subject to applicable grace or cure periods, including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and non-payment of material judgments.Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy thoserequirements. Our failure to comply with our obligations could result in an event of default under our other indebtedness and the acceleration of our otherindebtedness, in whole or in part, could result in an event of default under the indenture governing the 2022 notes.The restrictions contained in the indenture governing the 2022 notes could also limit our ability to plan for or react to market conditions, meet capital needsor otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other businessactivities that would be in our interest.Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be the sole source ofgain for holders of our common stock.We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growthand development of our business. In addition, the terms of our existing debt agreements limit our ability to pay dividends, and the terms of any future debtagreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for holders of ourcommon stock for the foreseeable future.Future sales of shares of our common stock, including by us or our directors and executive officers or shares issued upon the exercise of currently outstandingoptions and warrants, or upon conversion of our outstanding convertible notes, could cause the market price of our common stock to drop significantly, even ifour business is doing well.A substantial portion of our outstanding common stock can be traded without restriction at any time. In addition, a portion of our outstanding common stockis currently restricted as a result of federal securities laws, but can be sold at any time subject to applicable volume limitations. As such, sales of a substantialnumber of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large numberof shares intend to sell shares, by us or others, could reduce the market price of our common stock. In addition, we have a significant number of shares that aresubject to outstanding options and warrants, and we may issue shares of our common stock upon conversion of our outstanding convertible notes. The exercise ofthese options and warrants or the issuance of shares of our common stock upon conversion of our outstanding convertible notes and the subsequent sale of theunderlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at atime and at a price that we deem appropriate. We cannot predict the size of future issuances or the effect, if any, that any future issuances may have on the marketprice for our common stock.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur principal facilities consist of approximately 167,000 square feet of research, manufacturing and office space located at One Kendall Square inCambridge, Massachusetts. The lease on our principal facilities expires in June 2019. We retain an option to renew the lease on all of our current space for anadditional period of either one or five years.The facilities of our Silver Creek subsidiary consist of approximately 1,878 square feet of research and office space located in San Francisco, California. Thelease on this space expires in December 2016, subject to an option to extend the lease for six additional months. 67Table of ContentsItem 3. Legal ProceedingsNone.Item 4. Mine Safety DisclosuresNot applicable. 68Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is publicly traded on the NASDAQ Global Market under the symbol “MACK”. The following table sets forth, for the quarterly periodsindicated, the high and low sales prices of our common stock as reported on the NASDAQ Global Market for each quarter in the years ended December 31, 2014and 2015. High Low Year ended December 31, 2014 First Quarter $6.46 $4.51 Second Quarter $8.25 $4.13 Third Quarter $8.99 $5.53 Fourth Quarter $11.47 $7.36 Year ended December 31, 2015 First Quarter $12.50 $8.37 Second Quarter $13.84 $10.50 Third Quarter $12.59 $7.57 Fourth Quarter $10.85 $7.21 HoldersAs of January 31, 2016, there were approximately 179 holders of record of our common stock. This number does not include beneficial owners whose sharesare held by nominees in street name.DividendsWe have never declared or paid cash dividends on our common stock, and we do not expect to pay any cash dividends on our common stock in theforeseeable future. In addition, the terms of our existing debt agreements limit our ability to pay dividends. See Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and Capital Resources – Borrowings for more information regarding our debt agreements.Corporate Performance GraphThe following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC for purposes ofSection 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, nor shall such information be incorporated by reference into any future filingunder the Exchange Act or Securities Act of 1933, as amended, or the Securities Act, except to the extent that we specifically incorporate it by reference into suchfiling.The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQ Biotechnology Index fromMarch 29, 2012 (the first date that shares of our common stock were publicly traded) through December 31, 2015. The comparison assumes $100 was investedafter the market closed on March 29, 2012 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any. The stockprice performance included in this graph is not necessarily indicative of future stock price performance. 69Table of ContentsCOMPARISON CUMULATIVE TOTAL RETURNAmong the NASDAQ Composite Index, the NASDAQ Biotechnology Index and Merrimack Pharmaceuticals, Inc. Recent Sales of Unregistered SecuritiesOn December 22, 2015, we closed a private placement of $175.0 million aggregate principal amount of 2022 notes and entered into an indenture with U.S.Bank National Association, as trustee and collateral agent, governing the 2022 notes. The 2022 notes were sold directly only to qualified institutional buyers withinthe meaning of Rule 144A under the Securities Act in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof relative to transactions by an issuer not involving any public offering. No underwriters were involved in the sales of the 2022 notes. All purchasers ofthe 2022 notes represented to us in connection with their purchase that they were qualified institutional buyers and were acquiring the shares for their own accountfor investment purposes and not with a view to resale or distribution thereof in contravention of the Securities Act and that they were capable of evaluating themerits and risks of purchasing the 2022 notes and could bear the economic risks of investing in the 2022 notes for an indefinite period of time, including thecomplete loss of their investment. The purchasers received written disclosures that the 2022 notes had not been registered under the Securities Act and that anyresale must be made pursuant to a registration statement or an available exemption from such registration requirements. We received net proceeds from the privateplacement of approximately $168.5 million, after deducting private placement and offering expenses payable by us.Item 6. Selected Financial DataYou should read the following selected consolidated financial data together with our consolidated financial statements and the related notes appearing at theend of this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this AnnualReport on Form 10-K. We have derived the consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidatedbalance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements included in this Annual Report on Form 10-K. We havederived the consolidated statements of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31,2013, 2012 and 2011 from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results for any priorperiod are not necessarily indicative of results to be expected in any future period. 70Table of Contents Years ended December 31, (in thousands, except per share amounts) 2015 2014 2013 2012 2011 Consolidated statements of operations data Revenues: Product revenues, net $4,328 $— $— $— $— License and collaboration revenues 84,930 102,756 47,786 48,921 34,215 Total revenues 89,258 102,756 47,786 48,921 34,215 Costs and expenses: Cost of product revenues 46 — — — — Research and development expenses 160,988 138,495 147,139 125,858 100,630 Selling, general and administrative expenses 57,795 30,517 21,187 15,805 14,454 Total costs and expenses 218,829 169,012 168,326 141,663 115,084 Loss from operations (129,571) (66,256) (120,540) (92,742) (80,869) Other income and expenses: Interest income 99 114 166 184 56 Interest expense (1) (19,232) (18,230) (10,938) (553) (13) Other income, net 917 813 627 1,357 1,150 Net loss (147,787) (83,559) (130,685) (91,754) (79,676) Less net income (loss) attributable to non-controlling interest 170 (268) 240 (477) (453) Net loss attributable to Merrimack Pharmaceuticals, Inc. $(147,957) $(83,291) $(130,925) $(91,277) $(79,223) Net loss per share available to common stockholders—basic and diluted (2) $(1.33) $(0.80) $(1.32) $(1.28) $(7.67) Weighted-average common shares used in computing net loss per share available to commonstockholders—basic and diluted (3) 111,356 104,410 98,919 72,831 11,343 (1)In July 2013, we issued $125.0 million aggregate principal amount of 4.50% convertible notes due 2020 in an underwritten public offering. In November andDecember 2012, we borrowed an aggregate principal amount of $40.0 million under a loan agreement with Hercules Technology Growth Capital, Inc., orHercules. These loans with Hercules were repaid in full in December 2015. In December 2015, we issued $175.0 million aggregate principal amount of11.50% senior secured notes due 2022 through a private placement.(2)The numerator in the calculation of net loss per share available to common stockholders—basic and diluted for the years ended December 31, 2012 and 2011includes unaccreted dividends on our convertible preferred stock. Upon closing of our initial public offering in April 2012, all outstanding shares of ourconvertible preferred stock were converted into 66.3 million shares of common stock.(3)In April 2012, we closed our initial public offering, which resulted in the sale of approximately 15.0 million shares of common stock and the conversion ofall shares of outstanding convertible preferred stock into approximately 66.3 million shares of common stock. In July 2013, we closed an underwritten publicoffering of common stock, which resulted in the sale of approximately 5.8 million shares of common stock. In July 2015, we entered into an agreement tosell shares of our common stock through an “at the market offering” program. We concluded sales under this program in September 2015, having soldapproximately 3.8 million shares of common stock. 71Table of Contents As of December 31, (in thousands) 2015 2014 2013 2012 (1) 2011 Consolidated balance sheet data Cash and cash equivalents $185,606 $35,688 $65,086 $37,714 $50,454 Marketable securities — 88,340 90,116 72,238 — Total assets 234,880 158,506 192,233 148,949 85,299 Loans payable (2) — 39,550 39,082 39,830 — Capital lease obligations — — — — 48 Derivative liability — — — 196 — 4.50% convertible notes (3) 88,495 80,452 72,409 — — 11.50% senior secured notes (4) 169,160 — — — — Deferred revenues 101,334 94,957 75,475 80,464 85,745 Convertible preferred stock warrants — — — — 1,516 Total liabilities 418,569 260,577 235,361 155,369 106,990 Non-controlling interest 239 69 337 97 574 Convertible preferred stock — — — — 268,225 Total stockholders’ deficit (183,928) (102,140) (43,465) (6,517) (290,490) (1)Upon closing of our initial public offering in April 2012, all outstanding shares of our convertible preferred stock were converted into 66.3 million shares ofcommon stock, all outstanding warrants to purchase shares of convertible preferred stock were converted into warrants to purchase shares of common stockand approximately $4.3 million of cash dividends became payable to the holders of Series B convertible preferred stock.(2)In November and December 2012, we borrowed an aggregate principal amount of $40.0 million under a loan agreement with Hercules. These loans wererepaid in full in December 2015.(3)In July 2013, we sold an aggregate of 5.8 million shares of our common stock at a price to the public of $5.00 per share and issued $125.0 million aggregateprincipal amount of convertible notes in concurrent underwritten public offerings, in which we received aggregate net proceeds of approximately $147.3million, after deducting underwriting discounts and commissions and offering expenses payable by us. $51.9 million net of issuance costs of the aggregateprincipal amount of the convertible notes is considered a conversion feature and is included as a component of stockholders’ deficit.(4)In December 2015, we closed a private placement of $175.0 million aggregate principal amount of 11.50% senior secured notes due 2022 and received netproceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by us.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes tothose financial statements appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significantrisks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, which areincorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements. 72Table of ContentsOverviewWe are a biopharmaceutical company discovering, developing and commercializing innovative medicines consisting of novel therapeutics paired withdiagnostics for the treatment of cancer. We were founded by a team of scientists from The Massachusetts Institute of Technology and Harvard University whosought to develop a systems biology-based approach to biomedical research. The core of our approach to systems biology is to apply multidisciplinary andmultitechnology capabilities to build functional and predictive computational models of biological systems, such as cell signaling networks, that allow us toengineer treatments that are directed at the mechanisms of disease. We view cancer as a complex engineering challenge. Through systems biology, which bringstogether the fields of biology, computing and engineering, we aim to decrease uncertainty in drug development and clinical validation, and move discovery effortsbeyond trial and error. Our mission is to employ these insights to provide patients, physicians and the healthcare system with the medicines, tools and informationto deliver integrated healthcare solutions that improve both the quality of outcomes and the efficiency of care.We have one marketed therapeutic oncology product and multiple targeted therapeutic oncology candidates in clinical development. Our most advancedprogram is our therapeutic MM-398, which we market in the United States under the brand name ONIVYDE. On October 22, 2015, the U.S. Food and DrugAdministration, or FDA, and the Taiwan Food and Drug Administration, or TFDA, approved the use of ONIVYDE in combination with fluorouracil, or 5-FU, andleucovorin for the treatment of patients with metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy in theUnited States and Taiwan, respectively. In addition, the European Medicines Agency, or EMA, has accepted for review a Marketing Authorization Application, orMAA, filed by our collaboration partner Baxalta for ONIVYDE in combination with 5-FU and leucovorin for the treatment of adult patients with metastaticadenocarcinoma of the pancreas who have been previously treated with gemcitabine-based therapy.In addition to ONIVYDE and our product candidates in clinical development, we have multiple product candidates in preclinical development and adiscovery effort advancing additional candidate medicines. We have tailored ONIVYDE and our other product candidates to target specific disease mechanismsthat our research suggests are common across many solid tumor types. We believe that ONIVYDE and our other product candidates have the potential to addressmajor unmet medical needs.We have devoted substantially all of our resources to our drug discovery and development efforts, including advancing our systems biology approach,conducting clinical trials for our product candidates, protecting our intellectual property, preparing for commercial launch of ONIVYDE and providing general andadministrative support for these operations. We began to generate revenue from product sales for the first time in the fourth quarter of 2015 and, to date, havefinanced our operations primarily through private placements of our convertible preferred stock, collaborations, public offerings of our securities and secured debtfinancings. Through December 31, 2015, we have received $268.2 million from the sale of convertible preferred stock and warrants, $126.7 million of net proceedsfrom the sale of common stock during our April 2012 initial public offering and July 2013 follow-on underwritten public offering, $38.6 million of net proceedsfrom our 2015 “at the market offering” program, or the ATM offering, $39.6 million of net proceeds from a secured debt financing, $120.6 million of net proceedsfrom the issuance of 4.50% convertible notes due 2020, or the convertible notes, in our July 2013 underwritten public offering, $168.5 million of net proceeds fromthe issuance of 11.50% senior secured notes due 2022, or the 2022 notes, and $434.6 million of upfront license fees, milestone payments, reimbursement ofresearch and development costs and manufacturing services and other payments from our collaborations. We have also entered into an arrangement to use ourmanufacturing capabilities to manufacture drug product on behalf of a third-party pharmaceutical company, for which we have received $3.9 million in upfront feesand reimbursements as of December 31, 2015. As of December 31, 2015, we had unrestricted cash and cash equivalents and marketable securities of $185.6million.At our currently planned spending rates, we believe that our existing financial resources, together with anticipated net product revenues and net royaltypayments from sales of ONIVYDE and the net milestone payments and reimbursements we expect to receive under our Baxalta collaboration, will be sufficient tofund our operations for at least the next twelve months.On July 13, 2015, we entered into a sales agreement with Cowen and Company, LLC, or Cowen, to sell, from time to time, shares of our common stockhaving an aggregate sales price of up to $40.0 million through the ATM offering under which Cowen acted as sales agent. We concluded sales under the ATMoffering in September 2015, having sold approximately 3.8 million shares of common stock and generating approximately $38.6 million in net proceeds, afterdeducting commissions and offering expenses.On December 22, 2015, we closed a private placement of $175.0 million aggregate principal amount of 11.50% 2022 notes, and entered into an indenturewith U.S. Bank National Association as trustee and collateral agent. As a result of the 2022 notes, we received net proceeds of approximately $168.5 million, afterdeducting private placement and offering expenses payable by us.We have never been profitable and, as of December 31, 2015, we had an accumulated deficit of $802.2 million. Our net loss was $147.8 million for the yearended December 31, 2015, $83.6 million for the year ended December 31, 2014 and $130.7 million for the year ended December 31, 2013. We expect to continueto incur significant expenses and operating losses for at least the next several years. We expect to continue to incur significant research and development expensesin connection with our ongoing activities, 73Table of Contentsparticularly as we continue the research, development and clinical trials of our product candidates, including multiple simultaneous clinical trials for certain productcandidates, some of which have entered or we expect will be entering late stage clinical development. In addition, in connection with supporting commercial salesof ONIVYDE and with seeking and possibly obtaining regulatory approval of any of our other product candidates, we expect to incur significant commercializationexpenses for product sales, marketing, manufacturing and distribution. Until such time, if ever, as we can generate substantial product revenues, we expect tofinance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketingand distribution arrangements. We may be unable to raise capital when needed or on attractive terms, which would force us to delay, limit, reduce or terminate ourresearch and development programs or commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.Strategic Partnerships, Licenses and CollaborationsBaxaltaOn September 23, 2014, we entered into a license and collaboration agreement with Baxter International Inc., Baxter Healthcare Corporation and BaxterHealthcare SA, which we refer to as the Baxalta agreement, for the development and commercialization of MM-398 outside of the United States and Taiwan, or thelicensed territory. In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta agreement was assigned to Baxalta during thesecond quarter of 2015. As part of the Baxalta agreement, we granted Baxalta an exclusive, royalty-bearing right and license under our patent rights and know-howto develop and commercialize MM-398 in the licensed territory. Baxalta is responsible for using commercially reasonable efforts to develop, obtain regulatoryapprovals for and, following regulatory approval, commercializing ONIVYDE in the licensed territory. A joint steering committee comprised of an equal numberof representatives from each of Baxalta and us is responsible for approving changes to the global development plan for ONIVYDE, including all budgets, andoverseeing the parties’ development and commercialization activities with respect to ONIVYDE. Unless otherwise agreed, we will be responsible for conductingall clinical trials contemplated by the global development plan for ONIVYDE and manufacturing all clinical material needed for such trials.Under the terms of the Baxalta agreement, we received a $100.0 million upfront, nonrefundable cash payment in September 2014. In addition, we areeligible to receive from Baxalta (i) up to an aggregate of $100.0 million upon the achievement of specified research and development milestones, of which we havereceived $62.5 million from Baxalta through December 31, 2015, (ii) up to an aggregate of $520.0 million upon the achievement of specified regulatory milestones,of which we have received $20.0 million from Baxalta as of December 31, 2015, and (iii) up to an aggregate of $250.0 million upon the achievement of specifiedsales milestones. Under the terms of the Baxalta agreement, we will bear up to the first $98.8 million of costs related to the development of ONIVYDE forpancreatic cancer patients who have not previously received gemcitabine-based therapy; however, we expect most of these costs to be offset by payments receivedupon the achievement of clinical trial-related milestones. We will share equally with Baxalta all other clinical trial costs contemplated by the global developmentplan. We are also entitled to tiered, escalating royalties ranging from sub-teen double-digits to low twenties percentages of net sales of MM-398 in the licensedterritory.We expect to enter into a commercial supply agreement with Baxalta pursuant to which we will supply ONIVYDE bulk drug substance to Baxalta and, atBaxalta’s option, may manage fill and finish activities to be conducted by a third-party contract manufacturer for Baxalta. Baxalta also has the option tomanufacture ONIVYDE itself, in which case we will perform a technology transfer of our manufacturing process to Baxalta.If not terminated earlier by either party, the Baxalta agreement will expire upon expiration of all royalty and other payment obligations of Baxalta under theBaxalta agreement. Either party may terminate the Baxalta agreement in the event of an uncured material breach by the other party. Baxalta may also terminate theBaxalta agreement on a product-by-product, country-by-country or sub-territory-by-sub-territory basis or in its entirety, for its convenience, upon 180 days’ priorwritten notice. In addition, we may terminate the Baxalta agreement if Baxalta challenges or supports any challenge of our licensed patent rights.Under the Baxalta agreement, Baxalta has also agreed that, subject to limited exceptions, until September 23, 2017, neither Baxalta nor any of its affiliateswill (i) effect or seek, offer or propose to effect, or cause or participate in or in any way advise, assist or encourage any other person to effect or seek, offer orpropose to effect or cause or participate in, any acquisition of any of our securities or assets, any tender or exchange offer, merger or other business combinationinvolving us, any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to us, or any solicitation of proxies orconsents to vote any of our voting securities, (ii) form, join or in any way participate in a group with respect to any of our securities, (iii) otherwise act, alone or inconcert with others, to seek to control or influence our management, board of directors or policies, (iv) take any action that might force us to make a publicannouncement regarding any of the foregoing or (v) enter into any agreements, discussions or arrangements with any third party with respect to any of theforegoing. 74Table of ContentsAt the inception of the collaboration, we identified the following deliverables as part of the Baxalta agreement: (i) license to develop and commercializeMM-398 in Baxalta’s territories, (ii) discovery, research, development and manufacturing services required to complete ongoing clinical trials related to MM-398,(iii) discovery, research, development and manufacturing services needed to complete future clinical trials in further indications related to MM-398, (iv) the optionto perform a technology transfer of our manufacturing process related to the production of MM-398 to Baxalta and (v) participation on the joint steering committee.We concluded that none of the deliverables identified at the inception of the collaboration has standalone value from the other undelivered elements. Assuch, all deliverables represent a single unit of accounting.We have determined that the collaboration represents a services agreement and, as such, have estimated the level of effort expected to be completed as aresult of providing the identified deliverables. We will recognize revenue from the nonrefundable upfront payment, forecasted non-substantive milestone paymentsand estimated payments related to discovery, research, development and technology transfer services based on proportional performance as effort is completed overthe expected services period, which is estimated to be substantially complete by June 30, 2020. We will periodically review and, if necessary, revise the estimatedservice period related to our collaboration with Baxalta.Research, development and regulatory milestones that are considered substantive on the basis of the contingent nature of the milestone will be recognized asrevenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All sales milestones will beaccounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.During the second quarter of 2015, the EMA accepted for review an MAA filed by Baxalta for MM-398. As a result of this acceptance, we recognized $20.0million of revenue related to a substantive milestone payment owed from Baxalta. In August 2015, we achieved a $15.0 million milestone related to the submissionof the protocol for our Phase 2 clinical trial of MM-398 in front-line metastatic pancreatic cancer. This milestone is a non-substantive milestone, and revenuerelated to the achievement of this milestone will be recognized through the proportional performance revenue recognition model. In October 2015, we achieved anadditional $47.5 million milestone related to the enrollment of the first patient in a Phase 2 clinical trial of MM-398 in front-line pancreatic cancer. This milestoneis also a non-substantive milestone, and revenue related to the achievement of this milestone will be recognized through the proportional performance revenuerecognition model. During the years ended December 31, 2015 and 2014, we recognized revenue based on the following components of the Baxalta agreement: Year Ended December 31, Year Ended December 31, (in thousands) 2015 2014 Proportional performance revenue recognition model $64,930 $10,460 Substantive milestones 20,000 — Total $84,930 $10,460 As of December 31, 2015 and 2014, we maintained the following assets and liabilities related to the Baxalta agreement: (in thousands) December 31,2015 December 31,2014 Accounts receivable, billed $1,336 $— Accounts receivable, unbilled 626 1,615 Deferred revenue 97,365 91,156 Of the $97.4 million of deferred revenue related to the Baxalta agreement as of December 31, 2015, $50.1 million is classified as current in the consolidatedbalance sheets based upon our estimate of revenue that will be recognized under the proportional performance revenue recognition model as a result of effortexpected to be completed within the next twelve months. 75Table of ContentsSanofiIn September 2009, we entered into a license and collaboration agreement with Sanofi, which we refer to as the Sanofi agreement, for the development andcommercialization of MM-121. In June 2014, we agreed with Sanofi to terminate the Sanofi agreement effective December 17, 2014. In connection with theagreement to terminate the Sanofi agreement, among other things, Sanofi transferred ownership of the investigational new drug application for MM-121 back to usin July 2014, and we waived Sanofi’s obligation to reimburse us for MM-121 development costs incurred after the effective termination date. As a result of thetermination of the Sanofi agreement, we are not entitled to receive any additional fees, milestone payments or reimbursements from the collaboration.We received total milestone payments of $25.0 million pursuant to the Sanofi agreement. Under the Sanofi agreement, Sanofi was responsible for all MM-121 development and manufacturing costs. Sanofi reimbursed us for internal time at a designated full-time equivalent rate per year and reimbursed us for directcosts and services related to the development and manufacturing of MM-121.We recognized cost reimbursements for MM-121 development services within the period they were incurred and billable. Billable expenses were definedduring each specified budget period. In the event that total development services expense incurred and expected to be incurred during any particular budget periodexceeded the total contractually allowed billable amount for development services during that period, we recognized only a percentage of the development servicesincurred as revenue during that period.At the inception of the collaboration, we determined that the license, the right to future technology, back-up compounds, participation on steering committeesand manufacturing services performance obligations comprising the Sanofi agreement represented a single unit of accounting. As we could not reasonably estimateour level of effort over the collaboration, we recognized revenue from the upfront payment, milestone payment and manufacturing services payments using thecontingency-adjusted performance model over the expected development period, which was initially estimated to be 12 years from the effective date of the Sanofiagreement.As a result of the agreement to terminate the Sanofi agreement, the development period was revised to end as of December 17, 2014 and the balance ofdeferred revenue remaining as of April 1, 2014 was recognized prospectively on a straight-line basis over the remaining development period, ending onDecember 17, 2014.We recognized no revenue under the Sanofi agreement during the year ended December 31, 2015. During the years ended December 31, 2014 and 2013, werecognized revenue based on the following components of the Sanofi agreement: Years ended December 31, (in thousands) 2014 2013 Upfront payment $39,306 $5,000 Milestone payment 16,377 2,083 Development services 18,904 36,283 Manufacturing services and other 17,709 3,867 Total $92,296 $47,233 We performed development services for which revenue was recognized under the Sanofi agreement in accordance with the specified budget period. Duringthe year and specified budget periods ended December 31, 2013, we performed $10.1 million of development services in excess of recognized revenue. Of thisamount, approximately $5.8 million was recognized as increased revenue in the year ended December 31, 2014 related to expenses incurred prior to December 31,2013 upon receiving budget approval for these overruns. 76Table of ContentsAs of December 31, 2015, we maintained no assets or liabilities related to the Sanofi agreement. As of December 31, 2014, we maintained the followingassets and liabilities related to the Sanofi agreement: (in thousands) December 31,2014 Accounts receivable, billed $369 Accounts receivable, unbilled 1,282 Deferred revenues — ActavisIn November 2013, we entered into a development, license and supply agreement with Watson Laboratories, Inc., or Actavis, which we refer to as theActavis agreement, pursuant to which we will develop, manufacture and exclusively supply the bulk form of doxorubicin HCl liposome injection, or the initialproduct, to Actavis. The Actavis agreement was subsequently amended in January 2015 to transfer certain responsibilities from us to Actavis in exchange forreducing the aggregate milestone payments that we are eligible to receive by $0.4 million. Under the Actavis agreement, Actavis is responsible for all costs relatedto finished product processing and global commercialization. Pursuant to the Actavis agreement, we have also agreed to develop additional products for Actavis inthe future, the identities of which will be mutually agreed upon. We are eligible to receive up to $15.1 million, of which $3.9 million has been received throughDecember 31, 2015, and the remainder is expected to be received in development funding and development, regulatory and commercial milestone payments relatedto the initial product. We will also receive a double digit percentage of net profits on global sales of the initial product and any additional products. We willmanufacture and supply the initial product to Actavis in bulk form at an agreed upon unit price.The Actavis agreement will expire with respect to the initial product and any additional products developed in the future ten years after Actavis’ first sale ofthe applicable product, unless terminated earlier, and will automatically renew for additional two year periods thereafter unless either party provides notice of non-renewal. Either party may terminate the Actavis agreement in the event of an uncured material breach or bankruptcy filing by the other party. Actavis may alsoterminate the agreement for convenience in specified circumstances upon 90 days’ prior written notice.We applied revenue recognition guidance to determine whether the performance obligations under this collaboration, including the license, participation onsteering committees, development services, and manufacturing and supply services, could be accounted for separately or as a single unit of accounting. Wedetermined that these obligations represent a single unit of accounting and will recognize revenue as product is supplied to Actavis. Therefore, we have recorded$4.0 million and $3.8 million of total billed and billable milestones and development expenses related to the Actavis agreement as deferred revenue as ofDecember 31, 2015 and December 31, 2014, respectively. We expect to recognize this revenue over the ten year period that begins after Actavis’ first sale ofapplicable product under the Actavis agreement.Silver Creek Pharmaceuticals, Inc.In 2010, we established Silver Creek Pharmaceuticals, Inc., or Silver Creek, as a subsidiary. Silver Creek’s mission is to apply our systems biology approachto the research and development of regenerative medicines to repair the heart. On December 31, 2014 and December 31, 2013, $1.0 million and $2.6 million,respectively, of convertible notes and related accrued interest converted to shares of Series A preferred stock of Silver Creek. During the year ended December 31,2015, Silver Creek issued and sold a total of 1.6 million shares of its Series B preferred stock at a price per share of $1.35 to investors and received net proceeds of$2.1 million, after deducting issuance costs. As of December 31, 2015 and 2014, we owned approximately 56% and 60%, respectively, of the outstanding preferredstock of Silver Creek. We concluded that Silver Creek is a variable interest entity and that we are the primary beneficiary. We have the ability to direct theactivities of Silver Creek through our ownership percentage and through the board of directors seats controlled by us and our de facto agents, and therefore, weconsolidate Silver Creek for financial reporting purposes.In the future, we may consider forming additional businesses or business units to apply our systems biology approach to multiple additional disease areasoutside the oncology field. We expect to do so in some cases, as with Silver Creek, through the establishment of separately funded companies.Financial Obligations Related to the License and Development of MM-398In September 2005, Hermes BioSciences, Inc., or Hermes, which we acquired in October 2009, entered into a license agreement with PharmaEngine underwhich PharmaEngine received an exclusive license to research, develop, manufacture and commercialize MM-398 in Europe and certain countries in Asia. In May2011, we entered into a new agreement with PharmaEngine under which we reacquired all previously licensed rights for MM-398, other than rights tocommercialize MM-398 in Taiwan. As a 77Table of Contentsresult, we had the exclusive right to commercialize MM-398 in all territories in the world, except for Taiwan, where PharmaEngine has an exclusivecommercialization right. Upon entering into the May 2011 agreement with PharmaEngine, we paid PharmaEngine a $10.0 million upfront license fee. In addition,we made a milestone payment of $5.0 million to PharmaEngine in connection with dosing the first patient in our Phase 3 clinical trial of MM-398, which occurredand was paid in the first quarter of 2012.On September 22, 2014, we amended the PharmaEngine agreement to redefine sublicense revenue and reduce the portion of sublicense revenue that we arerequired to pay to PharmaEngine. As a result of this amendment, we made a $7.0 million milestone payment to PharmaEngine. Additionally, as a result of thisamendment, a previously contingent $5.0 million milestone payment was paid in the second quarter of 2015. Prior to the amendment of the PharmaEngineagreement, this milestone payment was contingent upon the award of certain specified regulatory designations. These milestone payments were recognized asresearch and development expense during the year ended December 31, 2014.Since entering into the PharmaEngine agreement, we have paid PharmaEngine an aggregate of $38.0 million in upfront license fees and milestone payments,including an $11.0 million milestone payment made in July 2015 in connection with the EMA’s acceptance for review of an MAA for MM-398, which occurred,and was recognized as research and development expense, in the second quarter of 2015. In addition to these amounts, we could also be required to payPharmaEngine up to an additional $60.0 million in aggregate regulatory milestones, $38.5 million in sublicense fees and $130.0 million in aggregate salesmilestones, in each case with respect to Europe and certain countries in Asia. PharmaEngine is also entitled to tiered royalties on net sales of MM-398 in Europeand certain countries in Asia. The royalty rates under the PharmaEngine agreement range from high single digits up to the low teens as a percentage of our net salesof MM-398 in these territories. Under the PharmaEngine agreement, we are responsible for all future development costs of MM-398 except those requiredspecifically for regulatory approval in Taiwan. During the years ended December 31, 2015, 2014 and 2013, we recognized research and development expenses of$11.4 million, $12.6 million and $1.5 million, respectively, related to the PharmaEngine agreement, which included $11.0 million of expenses related to milestonepayments in 2015 and $12.0 million of expenses related to milestone payments in 2014. Our financial obligations under other license and development agreementare summarized below under “–Liquidity and Capital Resources–Contractual obligations and commitments.”Financial Operations OverviewRevenuesThe majority of our revenue to date has been derived from license fees, milestone payments and research, development, manufacturing and other paymentsreceived from collaborations, and, to a lesser extent, from grant payments received from the National Cancer Institute as well sales of ONIVYDE. In the future, wemay generate revenue from a combination of product sales, license fees, milestone payments and research, development and manufacturing payments fromcollaborations and royalties from the sales of products developed under licenses of our intellectual property.Upon the FDA’s approval of ONIVYDE in the fourth quarter of 2015, we began commercially selling ONIVYDE within the United States. For the yearended December 31, 2015, we recognized net product revenues of $4.3 million. As described in further detail below, we estimate our net product revenues bydeducting from our gross product revenues trade allowances, estimated rebates and chargeback discounts, estimated reserves for product returns and estimatedcosts of other incentives offered to patients. We expect such net product revenues to increase in 2016 as compared to 2015 as ONIVYDE continues to gain marketpenetration.License and collaboration revenues in 2015 under the Baxalta agreement increased as compared to 2014, as we have performed a full year of services underthe Baxalta agreement. As a result, we recognized additional revenue under our proportional performance revenue recognition model. An additional increase in2015 revenue occurred as a result of achieving a $20.0 million substantive regulatory milestone in the second quarter of 2015 related to the EMA’s acceptance forreview of an MAA for MM-398. There was not a one-time increase in revenue related to either the $15.0 million research and development milestone or the $47.5million research and development milestone that were achieved under the Baxalta agreement in the third and fourth quarters of 2015, respectively. Thesemilestones were considered non-substantive milestones and as such were included as part of our proportional performance revenue recognition model and revenuerelated to them will be recognized as effort is completed over the expected services period of the Baxalta collaboration. We expect that revenues recognized in2016 under the Baxalta agreement will exceed revenues recognized in 2015, as we expect to achieve additional substantive regulatory milestones in 2016 that willresult in one time increases to license and collaboration revenues.We did not recognize any revenue related to the Sanofi agreement during the year ended December 31, 2015, nor do we anticipate recording any revenuesrelated to the Sanofi agreement in the future, due to the termination of the Sanofi agreement effective December 17, 2014. 78Table of ContentsCost of product revenuesCost of product revenues consists of manufacturing costs of product sold, including shipping and handling costs, as well as costs associated with inventoryreserves or write-downs. We began to capitalize costs associated with the production of ONIVYDE upon receipt of FDA approval on October 22, 2015. Costsincurred prior to receipt of marketing approval of ONIVYDE were expensed as research and development expense.As we expensed manufacturing costs related to ONIVYDE prior to receiving FDA approval, we expect that our cost of product revenues as a percentage ofnet product revenues will increase in future periods as product manufactured prior to FDA approval is consumed. This cost benefit will vary in future periods basedon when the components of the specific ONIVYDE lots sold were produced and this benefit is expected to continue to some extent for at least the next twelvemonths; however, the time period over which this reduced-cost inventory is consumed will depend on a number of factors, including the amount of futureONIVYDE sales, the ultimate use of this inventory in either commercial sales, clinical development or other research activities, and the ability to utilize inventoryprior to its expiration date. Additionally, we also expect that costs of revenues as a percentage of net product revenues will increase in the future as we begin tosupply ONIVYDE to Baxalta and PharmaEngine to support their sales outside of the United States.Research and development expensesResearch and development expenses consist of the costs associated with our research and discovery activities, including investment in our systems biologyapproach, conduct of preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research anddevelopment expenses consist of: • employee salaries and related expenses, which include stock-based compensation and benefits for the personnel involved in our drug discovery anddevelopment activities; • external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites; • manufacturing material expense for in-house manufacturing and third-party manufacturing organizations and consultants, including costs associatedwith manufacturing product prior to product approval; • license fees for and milestone payments related to in-licensed products and technologies; and • facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation ofleasehold improvements and equipment, and laboratory and other supplies.We expense research and development costs as incurred. Conducting a significant amount of research and development is central to our business model.Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarilydue to the increased size and duration of late stage clinical trials. We expect to maintain or increase our research and development expenses for the foreseeablefuture as we continue to develop our clinical stage product candidates and further advance our preclinical products and earlier stage research and developmentprojects. However, we do not plan to invest in additional development of MM-111 at this time. Such future research and development expenses will includeadditional regulatory milestone payments that we are required to make under the PharmaEngine agreement.We use our employee and infrastructure resources across multiple research and development programs. We track expenses related to our most advancedproduct candidates on a per project basis. Accordingly, we allocate internal employee-related and infrastructure costs, as well as third-party costs, to each of theseprograms. We do not allocate to particular development programs either stock-based compensation expense or expenses related to preclinical programs. Costs thatare not directly attributable to specific clinical programs, such as wages related to shared laboratory services, travel and employee training and development, are notallocated and are considered general research and discovery expenses. 79Table of ContentsThe following table summarizes our principal product development programs, including the research and development expenses allocated to each clinicalproduct candidate, for the years ended December 31, 2015, 2014 and 2013: Years ended December 31, (in thousands) 2015 2014 2013 MM-398 $38,644 $31,792 $28,135 MM-302 17,595 13,982 7,906 MM-121 17,829 10,707 45,144 MM-141 12,236 14,611 6,758 MM-151 5,329 9,038 6,909 MM-111 5,097 14,437 16,251 Preclinical, general research and discovery 55,982 37,045 30,082 Stock-based compensation 8,276 6,883 5,954 Total research and development expense $160,988 $138,495 $147,139 The development, regulatory and clinical expenses related to the Actavis agreement are included within our preclinical, general research and discoveryexpenses for the years ended December 31, 2015, 2014 and 2013.The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, other than as discussed below, we cannotreasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our preclinical orclinical product candidates or the period, if any, in which material net cash flows from these product candidates may commence. This is due to the numerous risksand uncertainties associated with developing drugs, including the uncertainty of: • the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; • the potential benefits of our product candidates over other therapies; • our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in thefuture; • future clinical trial results; • the terms and timing of regulatory approvals; and • the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs andtiming associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinicaltrials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significantdelays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinicaldevelopment.ONIVYDE (MM-398)We have received FDA and TFDA approvals of ONIVYDE in combination with 5-FU and leucovorin for the treatment of patients with metastaticadenocarcinoma of the pancreas after disease progression following gemcitabine-based therapy. In October 2015, we enrolled the first patient in a Phase 2 clinicaltrial of MM-398 in front-line metastatic pancreatic cancer. This trial is designed to assess the safety and efficacy of the combination of MM-398 plus 5-FU andleucovorin, with or without the addition of oxaliplatin, versus nab-paclitaxel and gemcitabine in patients with previously untreated, metastatic pancreaticadenocarcinoma. We are also collaborating with several investigators to conduct additional trials of MM-398, including in a Phase 1 clinical trial utilizing a highconcentration formulation of MM-398 in patients with glioma and a Phase 1 clinical trial in pediatric solid tumors. 80Table of ContentsAs described above, we have paid PharmaEngine upfront license fees and milestone payments under the PharmaEngine agreement. We have recordedresearch and development expenses related to these upfront license fees and milestone payments to PharmaEngine of $11.0 million and $12.0 million during theyears ended December 31, 2015 and 2014, respectively. There were no research and development expenses related to upfront license fees or milestone payments toPharmaEngine during the year ended December 31, 2013.MM-302In August 2014, we initiated a global, open-label, randomized Phase 2 clinical trial of MM-302 in combination with trastuzumab (Herceptin ® ) in patientswith ErbB2 (HER2) positive, locally advanced or metastatic breast cancer. Prior to initiating the Phase 2 clinical trial of MM-302, we conducted a Phase 1 clinicaltrial of MM-302 in patients with advanced ErbB2 (HER2) positive breast cancer. We reported final results from this trial in April 2015.MM-121In September 2009, we entered into the Sanofi agreement related to MM-121. On June 17, 2014, we agreed with Sanofi that the Sanofi agreement wouldterminate effective December 17, 2014. Under the terms of the agreement, we were responsible for executing clinical trials through the development period thatended December 17, 2014. We separately recorded revenue and expenses on a gross basis under this arrangement. Sanofi remained responsible for all developmentand manufacturing costs of MM-121 through December 17, 2014, subsequent to which we became fully responsible for development and manufacturing costs ofMM-121.In February 2015, we initiated a global, open-label, biomarker-selected, randomized Phase 2 clinical trial of MM-121 in combination with docetaxel orpemetrexed versus docetaxel or pemetrexed alone in patients with heregulin positive, locally advanced or metastatic non-small cell lung cancer. In December 2015,we announced an amendment to the trial, including a change in primary endpoint from PFS to overall survival.MM-141In May 2015, we initiated a randomized, double-blinded, placebo-controlled Phase 2 clinical trial of MM-141 in combination with nab-paclitaxel andgemcitabine, versus nab-paclitaxel and gemcitabine alone in patients with newly diagnosed metastatic pancreatic cancer who have high serum levels of free IGF-1.Our Phase 2 clinical trial of MM-141 was informed by a multi-arm Phase 1 clinical trial evaluating the safety and tolerability of MM-141 as a monotherapy and incombination with everolimus or with nab-paclitaxel and gemcitabine in patients with advanced solid tumors.MM-151We have completed a Phase 1 clinical trial of MM-151 as a monotherapy and in combination with irinotecan in patients with solid tumors.MM-111We have concluded our Phase 2 clinical trial of MM-111 in gastric, esophageal and gastroesophageal cancers. In February 2015, we stopped enrollingpatients in this clinical trial prior to full enrollment based on a recommendation from the Data Safety Monitoring Board for the clinical trial, which cited shorterprogression free survival on the treatment arm relative to the control arm in the overall patient population. We do not plan to invest in additional development ofMM-111 at this time.Selling, general and administrative expensesSelling, general and administrative expenses consist primarily of salaries and other related costs for personnel, including stock-based compensation expenses andbenefits, in our commercial, legal, intellectual property, business development, finance, information technology, corporate communications, investor relations andhuman resources departments. Other selling, general and administrative expenses include costs to support commercial sales, employee training and development,board of directors costs, depreciation, insurance expenses, facility-related costs not otherwise included in research and development expense, professional fees forlegal services, including patent-related expenses, and accounting and information technology services. We expect that selling, general and administrative expenseswill increase in 2016 as we incur a full year of expenses related to commercial activities. We expect to maintain or increase selling, general and administrativeexpense in future periods as a result of increased payroll, expanded infrastructure, increased consulting, legal, accounting and investor relations expenses and costsincurred to develop and commercialize our clinical products. 81Table of ContentsInterest expenseInterest expense consists primarily of cash and non-cash interest recorded on our loans payable that were repaid in full during December 2015, ourconvertible notes and our 2022 notes. We expect that 2016 interest expense will increase as compared to 2015 primarily due to interest expense related to our 2022notes issued in December 2015, offset by a decrease in interest expense related to our loans payable that were repaid in full during December 2015.Other incomeOther income consists primarily of the recognition of tax incentives and other income or expense-related items.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which wehave prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, and generally accepted accounting principlesin the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues andexpenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Estimates include revenue recognition, including theestimated percentage of billable expenses in any particular budget period, periods of meaningful use of licensed products, estimated service periods and services tobe completed under a collaboration, estimates used in accounting for revenue separability and recognition, estimates of discounts and allowances related tocommercial sales of ONIVYDE, estimates utilized in the valuation of inventory, useful lives with respect to long-lived assets and intangible assets, accounting forstock-based compensation, contingencies, intangible assets, goodwill, in-process research and development, tax valuation reserves and accrued expenses. We baseour estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from theseestimates under different assumptions or conditions.While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing at the end of this AnnualReport on Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financialcondition and results of operations.Revenue recognitionWe recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have beenrendered; the price to the customer is fixed or determinable; and collectability is reasonably assured.Product revenues, netWe sell ONIVYDE to a limited number of specialty pharmaceutical distributors, or distributors, in the United States. Our distributors subsequently resell theproducts to healthcare providers. We recognize 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, we must be able to reasonably estimate our net product revenues upon delivery to ourdistributors. As such, we estimate our net product revenues by deducting from our 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. Our estimates take into consideration ourhistorical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted distributor buying andpayment patterns. Actual amounts may ultimately differ from our estimates. If actual results vary, we will adjust these estimates, which could have an effect onearnings in the period of adjustment. 82Table of ContentsProduct revenue reserves and allowances that reduce gross revenue are categorized as follows:Trade Allowances: We pay fees to our distributors for providing certain data to us as well as for maintaining contractual inventory and service levels. Thesetrade allowances are recorded as a reduction to accounts receivable on the consolidated balance sheet at the time revenue is recognized.Rebates and Chargeback Discounts: We are subject to discount obligations under state Medicaid programs and the Public Health Service 340B Drug PricingProgram, contracts with Federal government entities purchasing via the Federal Supply Schedule and various private organizations, such as group purchasingorganizations (which we collectively refer to as third-party payors). We estimate the rebates and chargeback discounts we will provide to third-party payors, basedupon our expected payor mix, and deduct these estimated amounts from our gross product revenues at the time revenue is recognized. Chargeback discounts areprocessed when the third-party payor purchases the product at a discount from the distributor, who then in turn charges back to us the difference between the priceinitially paid by the distributor and the discounted price paid by the third-party payor. These chargeback discounts are recorded as a reduction to accountsreceivable on the consolidated balance sheet at the time revenue is recognized. Rebates that are invoiced directly to us are recorded as accrued liabilities on theconsolidated balance sheet at the time revenue is recognized.Product Returns: An allowance for product returns is established for returns expected to be made by distributors and is recorded at the time revenue isrecognized, resulting in a reduction to product sales. In accordance with contractual terms, distributors have the right to return unopened and undamaged productthat is within a permissible number of months before and after the product’s expiration date, subject to contractual limitations. We have the ability to monitorinventory levels and the shelf life of product at distributors and can contractually control the amount of inventory that is sold to distributors. Based on inventorylevels held by distributors and the structure of our distribution model, we have concluded that we have the ability to reasonably estimate product returns at the timerevenue is recognized. Our estimated rate of return is based on historical rates of return for comparable oncology products.Other Incentives: We offer co-pay mitigation support to commercially insured patients. Our co-pay mitigation program is intended to reduce eachparticipating patient’s portion of the financial responsibility for a product’s purchase price to a specified dollar amount. Based upon the terms of the our co-paymitigation program, we estimate average co-pay mitigation amounts in order to establish a reserve for co-pay mitigation claims and deduct these estimated amountsfrom our gross product revenues at the later of the date that (i) the revenues are recognized or (ii) the incentive is offered. Claims under our co-pay mitigationprogram are subject to expiration.License and collaboration revenuesWe enter into biopharmaceutical product development agreements with collaborative partners for the research and development of therapeutic and diagnosticproducts. The terms of these agreements may include nonrefundable signing and licensing fees, funding for research, development and manufacturing, milestonepayments and royalties or profit-sharing on any product sales derived from collaborations. These multiple-element arrangements are analyzed to determine whetherthe 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-elementarrangement according to the relative selling price of each deliverable. The fair value of deliverables under the arrangement may be derived using a best estimate ofselling price if vendor specific objective evidence and third-party evidence are not available. Deliverables under the arrangement will be separate units ofaccounting 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 relativeto the delivered item and delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.We entered into the Baxalta agreement in September 2014, which was evaluated under the accounting guidance on revenue recognition for multiple-elementarrangements. We determined that the obligations under this agreement represent a single unit of accounting and that the agreement represents a servicesagreement. As a result, we have estimated the level of effort expected to be completed and the consideration expected to be received from Baxalta as a result ofproviding the identified deliverables and will recognize revenue related to the agreement based on proportional performance as effort is completed over theexpected services period. 83Table of ContentsWe entered into the Actavis agreement in November 2013, which was evaluated under the accounting guidance on revenue recognition for multiple-elementarrangements. We determined that the obligations represent a single unit of accounting and will recognize revenue as product is supplied to Actavis. Therefore, wehave deferred total billed and billable milestones and development expenses related to this agreement. All milestone payments received and development expensesreimbursed until the period of commercialization will be deferred, and upon commercialization will be recognized over the delivery period of the bulk drug productto Actavis.Whenever we determine that an arrangement should be accounted for as a single unit of accounting, we determine the period over which the performanceobligations would be performed and revenue would be recognized. If we cannot reasonably estimate the timing and the level of effort to complete our performanceobligations under the arrangement, then revenue under the arrangement is recognized on a straight-line basis over the period we expect to complete ourperformance obligations.Our collaboration agreements may include additional payments upon the achievement of performance-based milestones. As milestones are achieved, aportion of the milestone payment, equal to the percentage of the total time that we have performed the performance obligations to date divided by the totalestimated time to complete the performance obligations, multiplied by the amount of the milestone payment, will be recognized as revenue upon achievement ofsuch milestone. The remaining portion of the milestone will be recognized over the remaining performance period. Milestones that are tied to regulatory approvalsare not considered probable of being achieved until such approval is received. Milestones tied to counterparty performance are not included in our revenue modeluntil the performance conditions are met.Royalty revenue will be recognized upon the sale of the related products provided we have no remaining performance obligations under the arrangement.InventoryWe value our inventories at the lower of cost or net realizable value. We determine the cost of our inventories, which includes amounts related to materialsand manufacturing overhead, on a first-in, first-out basis. We perform an assessment of the recoverability of capitalized inventory during each reporting period, andwe write 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.We capitalize inventory costs associated with our products after regulatory approval when, based on our judgment, future commercialization is consideredprobable and the future economic benefit is expected to be realized. Inventory acquired prior to receipt of marketing approval of a product candidate is expensed asresearch and development expense as incurred. Inventory that can be used in either the production of clinical or commercial product is expensed as research anddevelopment 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 theproduct and any inventory reserves or write-downs.Goodwill and intangible assetsGoodwill and indefinite-lived intangible assets, including in-process research and development, or IPR&D, are evaluated for impairment on an annual basisor more frequently if an indicator of impairment is present. No impairment of goodwill resulted from our most recent evaluation, which occurred in the thirdquarter of 2015. Our next annual impairment evaluation will be made in the third quarter of 2016 unless indicators arise that would require us to evaluate at anearlier date.When performing an evaluation of goodwill impairment, we have the option to first assess qualitative factors to determine whether it is necessary to performthe quantitative two-step impairment test. If we elect this option and find, as a result of the qualitative assessment, that it is more likely than not that the fair valueof 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 usto 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, we may electto 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 ofour 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 thereporting unit’s goodwill exceeds the implied fair value, we would record an impairment loss equal to the difference. We operate in one operating segment, whichis considered the only reporting unit. 84Table of ContentsOur evaluation of IPR&D impairment in the third quarter of 2015 included a qualitative assessment to determine whether further impairment testing ofindefinite-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 2015and, therefore, quantitative impairment evaluations were not performed.We commence amortization of indefinite-lived intangible assets, such as IPR&D, once the associated research and development efforts have been completedand amortize the assets over their estimated future lives. Definite-lived intangible assets, such as core technology and product-related intangibles, are evaluated forimpairment whenever events or circumstances indicate that the carrying value may not be fully recoverable. Definite-lived intangible assets are separate fromgoodwill and indefinite-lived intangible assets and are deemed to have a definite life. We amortize these assets over their estimated useful lives. We have notrecorded any impairment charges related to definite-lived intangible assets during the years ended December 31, 2015, 2014 or 2013.Accrued expensesAs part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that havebeen performed on our behalf and estimating the level of services performed and the associated costs incurred for such services where we have not yet beeninvoiced or otherwise notified of actual cost. We record these estimates in our consolidated financial statements as of each balance sheet date. Examples ofestimated 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, we estimate the time period over which services will be provided and the level of effort in each period. If the actual timing of theprovision of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. In the event that we do not identify costs that have beenincurred or we under or overestimate the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date onwhich some services commence, the level of services performed on or before a given date and the cost of such services are often subjective determinations. Wemake estimates based on the facts and circumstances known to us at the time and in accordance with GAAP. There have been no material changes in estimates forthe periods presented.Stock-based compensationWe account for stock-based compensation by measuring and recognizing compensation expense for all stock-based awards made to employees, includingstock options, based on the estimated grant date fair values. For employees, we use the straight-line method to allocate compensation expense to reporting periodsover each optionee’s requisite service period, which is generally the vesting period. For non-employees, we record awards at fair value, remeasure awards to reflectthe current fair value at each reporting period and recognize expense over the related service period. When applicable, we account for these equity instrumentsbased on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.We estimate the fair value of stock-based awards to employees and non-employees using the Black-Scholes option valuation model. Determining the fairvalue of stock-based awards requires the use of highly subjective assumptions, including volatility, the calculation of expected term, risk free interest rate and thefair value of the underlying common stock on the date of grant, among other inputs. The assumptions used in determining the fair value of stock-based awardsrepresent our best estimates, which involve inherent uncertainties and the application of judgment. As a result, if factors change, and different assumptions areused, our level of stock-based compensation could be materially different in the future.We recognize compensation expense for only the portion of options that are expected to vest. Accordingly, expected future forfeiture rates of stock optionshave been estimated based on our historical forfeiture rate, as adjusted for known trends. Forfeitures are estimated at the time of grant. If actual forfeiture rates varyfrom historical rates and estimates, additional adjustments to compensation expense may be required in future periods. 85Table of ContentsResults of OperationsComparison of the years ended December 31, 2015 and 2014 Years ended December 31, (in thousands) 2015 2014 Product revenues, net $4,328 $— License and collaboration revenues 84,930 102,756 Cost of product revenues (46) — Research and development expenses (160,988) (138,495) Selling, general and administrative expenses (57,795) (30,517) Loss from operations (129,571) (66,256) Interest income 99 114 Interest expense (19,232) (18,230) Other income, net 917 813 Net loss $(147,787) $(83,559) Product revenues, netWe commenced product sales of ONIVYDE in the fourth quarter of 2015 subsequent to approval by the FDA. For the year ended December 31, 2015, werecognized net product revenues of $4.3 million. No net product revenues were recognized during 2014.License and collaboration revenuesLicense and collaboration revenues were $84.9 million for 2015 compared to $102.8 million for 2014, a decrease of $17.8 million, or 17%. The decrease wasprimarily attributable to the reassessment of the development period of our collaboration with Sanofi during 2014 based on the decision to terminate thearrangement effective December 17, 2014. As a result, no revenues related to our collaboration with Sanofi were recognized during 2015. We recognized $92.3million of license and collaboration revenues under our collaboration with Sanofi during 2014. License and collaboration revenues recognized during 2015 wereexclusively related to our collaboration with Baxalta and were comprised of a $20.0 million substantive milestone recognized and $64.9 million of revenuerecognized under our proportional performance revenue recognition model. We recognized $10.5 million of license and collaboration revenues under ourcollaboration with Baxalta during 2014.Cost of product revenuesWe recognized less than $0.1 million of cost of product revenues during 2015. We began recognizing cost of product revenues for the first time in the fourthquarter of 2015 subsequent to the approval of ONIVYDE by the FDA. No cost of product revenues was recognized prior to 2015. 86Table of ContentsResearch and development expensesResearch and development expenses were $161.0 million for 2015, compared to $138.5 million for 2014, an increase of $22.5 million, or 16%. This increasewas primarily attributable to: • $18.9 million of increased expenses related to preclinical studies, general research and discovery primarily due to an increased number of preclinicalprograms in our pipeline, increased headcount and increased size and frequency of manufacturing runs; • $7.1 million of increased MM-121 expenses primarily due to manufacturing costs incurred related to the initiation of our Phase 2 clinical trial inmetastatic non-small cell lung cancer; • $6.9 million of increased MM-398 expenses primarily due to $3.3 million of additional manufacturing costs incurred in anticipation of ONIVYDEcommercial sales and preparation for our Phase 2 clinical trial in front-line metastatic pancreatic cancer; • $3.6 million of increased MM-302 expenses as a result of the initiation of our Phase 2 clinical trial of MM-302 in breast cancer in August 2014; and • $1.4 million of increased stock-based compensation expenses primarily due to the annual grant of stock options to employees as well as increasedemployee headcount.These increases were partially offset by: • $9.3 million of decreased MM-111 expenses primarily due to the conclusion of the MM-111 clinical trial; • $3.7 million of decreased MM-151 expenses primarily due to the timing of costs associated with our Phase 1 clinical trial, diagnostic efforts and amanufacturing campaign; and • $2.4 million of decreased MM-141 expenses primarily due to the completion of our Phase 1 trial and timing of costs associated with our ongoingPhase 2 clinical trial which was initiated in May 2015.Selling, general and administrative expensesSelling, general and administrative expenses were $57.8 million for 2015, compared to $30.5 million for 2014, an increase of $27.3 million, or 89%. Thisincrease was primarily attributable to $21.3 million of increased expenses to support commercial sales of ONIVYDE as well as increased labor and labor-relatedexpenses required to support our overall growth.Interest expenseInterest expense for was $19.2 million for 2015, compared to $18.2 million for 2014. This increase was primarily attributable to interest expense related toour 2022 notes that were issued in December 2015.Other income, netOther income, net was $0.9 million and $0.8 million for 2015 and 2014, respectively, which was primarily related to the amortization of Massachusetts LifeSciences Center, or MLSC, tax incentives. 87Table of ContentsComparison of the years ended December 31, 2014 and 2013 Years ended December 31, (in thousands) 2014 2013 License and collaboration revenues $102,756 $47,786 Research and development expenses (138,495) (147,139) Selling, general and administrative expenses (30,517) (21,187) Loss from operations (66,256) (120,540) Interest income 114 166 Interest expense (18,230) (10,938) Other income, net 813 627 Net loss $(83,559) $(130,685) License and collaboration revenuesLicense and collaboration revenues were $102.8 million for 2014, compared to $47.8 million for 2013, an increase of $55.0 million, or 115%. The increasewas primarily attributable to the reassessment of the development period of our collaboration with Sanofi based on the decision to terminate the arrangementeffective December 17, 2014. Additionally, revenues increased as a result of the recognition of $10.5 million of revenue related to our collaboration with Baxalta.Research and development expensesResearch and development expenses were $138.5 million for 2014, compared to $147.1 million for 2013, a decrease of $8.6 million, or 6%. This decreasewas primarily attributable to $34.4 million of decreased MM-121 spending primarily due to costs associated with analyzing and concluding ongoing and completedclinical trials. Additionally, there were $1.8 million of decreased MM-111 expenses associated with ongoing efforts related to our Phase 2 clinical trial. Thesedecreases were partially offset by: • $7.9 million of increased MM-141 expenses primarily due to costs associated with a manufacturing campaign as well as ongoing clinical trials anddiagnostic efforts; • $7.0 million of increased spending on preclinical, general research and discovery primarily due to an increased number of preclinical programs in ourpipeline and increased costs associated with each preclinical program as these programs approach clinical development; • $6.1 million of increased MM-302 expenses primarily due to costs associated with our ongoing clinical trials as well as the timing of manufacturingcampaigns; • $3.7 million of increased MM-398 expenses primarily due to $12.0 million of non-recurring milestone payment obligations incurred as a result of theamendment of the PharmaEngine agreement, partially offset by decreased costs associated with analyzing and concluding ongoing and completedclinical trials in metastatic pancreatic cancer; • $2.1 million of increased MM-151 expenses associated with a manufacturing campaign as well as ongoing clinical trials and diagnostic efforts; and • $0.9 million of increased stock-based compensation expense due the annual grant of stock options to employees;Selling, general and administrative expensesSelling, general and administrative expenses were $30.5 million for 2014, compared to $21.2 million for 2013, an increase of $9.3 million, or 44%. Thisincrease was primarily attributable to increases in labor and labor-related costs, efforts to prepare for potential commercialization of our product candidates andincreased facility-related costs. 88Table of ContentsInterest expense Interest expense was $18.2 million for 2014, compared to $10.9 million for 2013. This increase was primarily attributable to a full year ofinterest expense being recorded related to the convertible notes issued in July 2013.Other income, netOther income, net was $0.8 million and $0.6 million for 2014 and 2013, respectively, which was primarily related to the amortization of MLSC taxincentives.Liquidity and Capital ResourcesSources of liquidityWe have financed our operations to date primarily through private placements of our convertible preferred stock, collaborations, public offerings of oursecurities and secured debt financings. Through December 31, 2015, we have received $268.2 million from the sale of convertible preferred stock and warrants,$126.7 million of net proceeds from the sale of common stock in our initial public offering and July 2013 follow-on underwritten public offering, $38.6 million ofnet proceeds from the ATM offering, $39.6 million of net proceeds from a secured debt financing, $120.6 million of net proceeds from the issuance of theconvertible notes in our July 2013 underwritten public offering, $168.5 million of net proceeds from the issuance of the 2022 notes and $434.6 million of upfrontlicense fees, milestone payments, reimbursement of research and development costs and manufacturing services and other payments from our collaborations. Wehave also entered into an arrangement to use our manufacturing capabilities to manufacture drug product on behalf of Actavis, for which we have received $3.9million in upfront fees and reimbursements as of December 31, 2015. As of December 31, 2015, we had unrestricted cash and cash equivalents and marketablesecurities of $185.6 million.In April 2012, we closed our initial public offering pursuant to a registration statement on Form S-1, as amended. We sold an aggregate of 15,042,459 sharesof common stock under the registration statement at a public offering price of $7.00 per share, including 742,459 shares pursuant to the exercise by theunderwriters of an over-allotment option. Net proceeds were approximately $98.1 million, after deducting underwriting discounts and commissions and otheroffering expenses but prior to the payment of dividends on our Series B convertible preferred stock. At the time of our initial public offering, our convertiblepreferred stock and warrants to purchase convertible preferred stock automatically converted to common stock and warrants to purchase common stock.On November 8, 2012, we entered into a Loan and Security Agreement, or the Loan Agreement, with Hercules Technology Growth Capital, Inc., orHercules. The Loan Agreement provided for an initial term loan advance of $25.0 million, which closed on November 8, 2012, and an additional term loan advanceof $15.0 million, which closed on December 14, 2012 and resulted in aggregate net proceeds of $39.6 million. During the fourth quarter of 2015, we repaid theloans in full in conjunction with the issuance of the 2022 notes. We also paid an additional fee of $1.2 million that was due upon full repayment of the loans, aswell as interest accrued through the repayment date.On July 17, 2013, we sold an aggregate of 5,750,000 shares of our common stock at a price to the public of $5.00 per share and issued $125.0 millionaggregate principal amount of 4.50% convertible notes in concurrent underwritten public offerings. As a result of the concurrent common stock offering andconvertible notes offering, we received aggregate net proceeds of approximately $147.3 million, after deducting underwriting discounts and commissions andoffering expenses payable by us.On July 13, 2015, we entered into a sales agreement with Cowen to sell, from time to time, shares of our common stock having an aggregate sales price of upto $40.0 million through the ATM offering under which Cowen acted as sales agent. We concluded sales under the ATM offering in September 2015, having soldapproximately 3.8 million shares of common stock and generating approximately $38.6 million in net proceeds, after deducting commissions and offeringexpenses.On December 22, 2015, we closed a private placement of $175.0 million aggregate principal amount of 11.50% 2022 notes. As a result of the 2022 notes, wereceived net proceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by us.As of December 31, 2015, within our unrestricted cash and cash equivalents, $0.7 million was cash and cash equivalents held by our majority ownedsubsidiary, Silver Creek, which is consolidated for financial reporting purposes. This $0.7 million held by Silver Creek is designated for the operations of SilverCreek. 89Table of ContentsCash flowsThe following table provides information regarding our cash flows for the years ended December 31, 2015, 2014 and 2013. Years ended December 31, (in thousands) 2015 2014 2013 Cash (used in) operating activities $(105,356) $(34,808) $(95,175) Cash provided by (used in) investing activities 75,110 (6,011) (27,739) Cash provided by financing activities 180,164 11,421 150,286 Net increase (decrease) in cash and cash equivalents $149,918 $(29,398) $27,372 Operating activitiesCash used in operating activities of $95.2 million during the year ended December 31, 2013 was primarily a result of our $130.7 million net loss, partiallyoffset by non-cash items of $18.4 million, including $10.7 million of stock-based compensation expense, and changes in operating assets and liabilities of $17.1million. Cash used in operating activities of $34.8 million during the year ended December 31, 2014 was primarily a result of our $83.6 million net loss, partiallyoffset by non-cash items of $24.9 million, including $13.2 million of stock-based compensation expense, and changes in operating assets and liabilities of $23.9million. Cash used in operating activities of $105.4 million during the year ended December 31, 2015 was primarily a result of our $147.8 million net loss, partiallyoffset by non-cash items of $27.9 million, including $15.4 million of stock-based compensation expense, and changes in operating assets and liabilities of $14.6million.Investing activitiesCash used in investing activities of $27.7 million for the year ended December 31, 2013 was primarily due to purchases of marketable securities net ofproceeds from sales and maturities of $17.8 million, as well as $9.9 million of property and equipment purchases. Cash used in investing activities of $6.0 millionfor the year ended December 31, 2014 was primarily due to $6.0 million of property and equipment purchases. Cash provided by investing activities of $75.1million for the year ended December 31, 2015 was primarily a result of proceeds from sales and maturities of marketable securities of $87.9 million, offset by$12.8 million of property and equipment purchases.Financing activitiesCash provided by financing activities of $150.3 million for the year ended December 31, 2013 was primarily a result of $26.7 million of net proceeds fromour follow-on underwritten offering of common stock in July 2013, $120.6 million of net proceeds from our underwritten convertible senior notes offering in July2013, $2.0 million of proceeds from the exercise of common stock options and $0.9 million of net proceeds from the convertible notes offered by Silver Creek.Cash provided by financing activities of $11.4 million for the year ended December 31, 2014 was primarily a result of $10.4 million of proceeds from the exerciseof common stock options and warrants and $1.0 million of net proceeds from the convertible notes offered by Silver Creek. Cash provided by financing activities of$180.2 million for the year ended December 31, 2015 was primarily a result of $38.6 million of net proceeds from our ATM offering, $10.1 million of proceedsfrom the exercise of common stock options and warrants, $169.4 million in net proceeds from the issuance of our 2022 notes, after considering the accountingtreatment of $0.9 million of issuance costs that were allocated to the associated debt modification, and $2.1 million in net proceeds from Series B preferred stock bySilver Creek. These cash proceeds were offset by the repayment of our $40.0 million in loans payable under the Loan Agreement with Hercules.Funding requirementsWe have not yet generated significant cash flows from the commercial sale of ONIVYDE. We expect to continue to incur significant expenses and operatinglosses for at least the next several years. We anticipate that we will continue to incur significant expenses as we: • initiate or continue clinical trials of our most advanced product candidates; • continue the research and development of our other product candidates; 90Table of Contents • seek to discover additional product candidates; • seek regulatory approvals for our product candidates that successfully complete clinical trials; • continue to support our sales, marketing and distribution infrastructure and scale up manufacturing capabilities to meet commercial demand forONIVYDE and other products for which we may seek regulatory approval; and • continue to provide the operational, financial and management information systems and personnel to support our product development and continuedcommercialization.At our currently planned spending rates, we believe that our existing financial resources, together with anticipated net product revenues and net royaltypayments from sales of ONIVYDE and the net milestone payments and reimbursements we expect to receive under our Baxalta collaboration, will be sufficient tofund our operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our availablecapital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of ourproduct candidates, and the extent to which we utilize collaborations with third parties to participate in their development and commercialization, we are unable toestimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capitalrequirements will depend on many factors, including: • the amount of net product revenues realized from ONIVYDE commercial sales; • the amount of royalty and profit sharing revenue from our collaboration partners; • the progress and results of the clinical trials of our most advanced product candidates; • the success of our collaborations with Baxalta and PharmaEngine related to MM-398 and any future collaborations with other parties that we mayenter into; • the timing and amount of anticipated milestone payments and cost sharing reimbursements related to MM-398 that we may receive from Baxalta; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates; • the costs, timing and outcome of regulatory review of our current and future product candidates; • the costs of commercial activities, including product sales, marketing, manufacturing and distribution; • the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; • the extent to which we acquire or invest in businesses, products and technologies; • our ability to establish and maintain commercial manufacturing arrangements for the manufacture of drug product on behalf of third-partypharmaceutical companies; and • our ability to establish and maintain additional collaborations on favorable terms, particularly marketing and distribution arrangements for oncologyproduct candidates outside the United States and Europe.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debtfinancings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. We do not have any committed externalsources of funds, other than our collaboration with Baxalta for the development and commercialization of MM-398, which is terminable by Baxalta forconvenience upon 180 days’ prior written notice, and under our development, license and supply agreement with Actavis, which is terminable by Actavis forconvenience in specified circumstances upon 90 days’ prior written notice. To the extent that we raise additional capital through the sale of equity or convertibledebt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences thatadversely affect the rights of our stockholders. Debt financing, if available, may involve 91Table of Contentsagreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures ordeclaring dividends. For example, if we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances orlicensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or productcandidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed,we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market productcandidates that we would otherwise prefer to develop and market ourselves.Borrowings11.50% Senior Secured Notes Due 2022On December 22, 2015, we closed a private placement of $175.0 million aggregate principal amount of 2022 notes and entered into an indenture, or the U.S.Bank indenture, with U.S. Bank National Association as trustee and collateral agent, or the 2022 note trustee. As a result of this placement, we received netproceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by us. The private placement and offering expensesincluded $0.9 million of transaction costs that were expensed in accordance with the debt modification guidance per Accounting Standards Codification, or ASC,480. The 2022 notes bear interest at a rate of 11.50% per year, payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2016. Wewill pay semi-annual installments of principal on the 2022 notes of $21,875,000 each, subject to adjustment as provided in the 2022 notes, on June 15 andDecember 15 of each year, beginning on June 15, 2019. The 2022 notes will mature on December 15, 2022, unless earlier redeemed or repurchased in accordancewith their terms prior to such date.We may redeem the 2022 notes at our option, in whole or in part from time to time at a price equal to the principal amount plus accrued interest and aspecified make-whole premium. If we experience certain change of control events as defined in the U.S. Bank indenture, the holders of the 2022 notes will have theright to require us to purchase all or a portion of the 2022 notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaidinterest to the date of purchase. In addition, upon certain asset sale events as defined in the U.S. Bank indenture, we may be required to offer to use the net proceedsthereof to purchase all or a portion of the 2022 notes at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase.The 2022 notes are senior secured obligations of ours and are equal in right of payment to all existing and future pari passu indebtedness of ours (includingour outstanding convertible notes), will be senior in right of payment to all existing and future subordinated indebtedness of ours, will have the benefit of a securityinterest in the 2022 notes collateral and will be junior in lien priority in respect of any asset-based lending collateral that secures any first priority lien obligationsfrom time to time. The 2022 notes contain customary covenants, including covenants that limit or restrict our ability to incur liens; incur indebtedness; paydividends, repurchase shares and make certain other restricted payments; prepay, redeem or repurchase subordinated debt; and sell, lease or transfer certainproperty and assets, but do not contain covenants related to future financial performance. The 2022 notes are secured by a first priority lien on substantially all ofour assets.The 2022 notes contain customary events of default. Upon certain events of default occurring, the 2022 notes trustee may declare 100% of the principal ofand accrued and unpaid interest, if any, on all the 2022 notes to be due and payable. In the case of certain events of bankruptcy, insolvency or reorganizationinvolving us or a restricted subsidiary, 100% of the principal of, and accrued and unpaid interest, if any, on, the 2022 notes will automatically become due andpayable.4.50% Convertible Notes Due 2020In July 2013, we issued $125.0 million aggregate principal amount of 4.50% convertible notes. We issued the convertible notes under a base indenturebetween us and Wells Fargo Bank, National Association, as trustee, as supplemented by a supplemental indenture between us and the trustee. As a result of theconvertible notes offering, we received net proceeds of approximately $120.6 million, after deducting underwriting discounts and commissions and offeringexpenses payable by us.The convertible notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning onJanuary 15, 2014. The convertible notes are general unsecured senior obligations of ours and rank (i) pari passu in seniority with respect to the 2022 notes,(ii) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the convertible notes, (iii) equal in right of paymentto any of our unsecured indebtedness that is not so subordinated, (iv) effectively junior in right of payment to any of our secured indebtedness to the extent of thevalue of the assets securing such indebtedness, and (v) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. 92Table of ContentsThe convertible notes will mature on July 15, 2020, or the maturity date, unless earlier repurchased by us or converted at the option of holders. Holders mayconvert their convertible notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2020 only under thefollowing circumstances: • during any calendar quarter commencing after September 30, 2013 (and only during such calendar quarter), if the last reported sale price of ourcommon stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day ofthe immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; • during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price (as defined inthe convertible senior notes) per $1,000 principal amount of convertible senior notes for each trading day of the measurement period was less than98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or • upon the occurrence of specified corporate events set forth in the indenture.During the fourth quarter of 2015, the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the periodof 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2015 was greater than 130% of the conversion price forthe convertible notes on each applicable trading day. As a result, holders may convert their convertible notes, at their option, at any time from January 1, 2016through March 31, 2016.On or after April 15, 2020 until the close of business on the business day immediately preceding the maturity date, holders may convert their convertiblenotes at any time, regardless of the foregoing circumstances. Following the repayment and satisfaction in full of our obligations to Hercules under the LoanAgreement, which occurred in December 2015, upon any conversion of the convertible notes, the convertible notes may be settled, at our election, in cash, sharesof our common stock or a combination of cash and shares of our common stock.The initial conversion rate of the convertible notes is 160 shares of our common stock per $1,000 principal amount of convertible notes, which is equivalentto an initial conversion price of $6.25 per share of common stock. The initial conversion price represents a premium of 25% over the public offering price per shareof $5.00 in our concurrent underwritten public offering of common stock. The conversion rate will be subject to adjustment in some events, but will not be adjustedfor any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for aholder who elects to convert its convertible notes in connection with such a corporate event in certain circumstances.Upon the occurrence of a fundamental change (as defined in the indenture) involving us, holders of the convertible notes may require us to repurchase all ora portion of their convertible notes for cash at a price equal to 100% of the principal amount of the convertible notes to be purchased, plus accrued and unpaidinterest to, but excluding, the fundamental change repurchase date.The indenture contains customary terms and covenants and events of default with respect to the convertible notes. If an event of default (as defined in theindenture) occurs and is continuing, the trustee by written notice to us, or the holders of at least 25% in aggregate principal amount of the convertible notes thenoutstanding by written notice to us and the trustee, may, and the trustee at the request of such holders will, declare 100% of the principal of and accrued and unpaidinterest on the convertible notes to be due and payable. In the case of an event of default arising out of certain events of bankruptcy, insolvency or reorganizationinvolving us or a significant subsidiary (as set forth in the indenture), 100% of the principal of and accrued and unpaid interest on the convertible notes willautomatically become due and payable.Loan AgreementIn November 2012, we entered into the Loan Agreement with Hercules pursuant to which we received loans in the aggregate principal amount of $40.0million. As permitted under the Loan Agreement, we had previously extended the interest-only payment period with the aggregate principal balance of the loans tobe repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016. On June 25, 2014, we entered into an amendment to the LoanAgreement whereby the period during which we make interest-only payments was extended until October 1, 2014. On November 6, 2014, we entered into a furtheramendment to the Loan Agreement, whereby the period during which we make interest-only payments was extended until February 1, 93Table of Contents2015. On February 25, 2015, we entered into a fourth amendment to the Loan Agreement pursuant to which the maturity date and the period during which we makeinterest-only payments on our current loans in the aggregate principal amount of $40.0 million was extended. As a result of this amendment, we were required torepay the outstanding aggregate principal balance of the loan beginning on June 1, 2016 and continuing through November 1, 2018. As a result of the FDA’sapproval of our NDA for ONIVYDE, which occurred on October 22, 2015, we elected to extend the interest-only period by an additional six months so that wewould repay the outstanding aggregate principal balance of the loans beginning on December 1, 2016 and continuing through November 1, 2018. In addition, as aresult of the FDA’s approval of our NDA for MM-398, we could elect to draw, at any time until August 1, 2016, an additional term loan advance of up to $15.0million. Principal and interest payments on the additional term loan advance would be made in the same manner as our current term loan in the aggregate principalamount of $40.0 million. We did not borrow against the additional term loan advance. Upon the earlier of full repayment of the loans or November 1, 2016, wewere required to pay Hercules a fee of $1.2 million.In connection with the Loan Agreement, we granted Hercules a security interest in all of our personal property now owned or hereafter acquired, excludingintellectual property but including the proceeds from the sale, if any, of intellectual property, and a negative pledge on intellectual property. The Loan Agreementalso contained certain representations, warranties and non-financial covenants.During the fourth quarter of 2015, we repaid the loans in full in conjunction with the issuance of the 2022 notes. The total repayment amount included the$40.0 million in outstanding principal, the $1.2 million fee discussed above and interest accrued up through the repayment date.Contractual obligations and commitmentsThe following table summarizes our contractual obligations as of December 31, 2015: Payments Due by Period (in thousands) Total Less than1 year 1 to 3 years 3 to 5 years More than 5 years 2022 notes (1) $280,265 $19,734 $40,250 $120,203 $100,078 Convertible notes (1) 153,125 5,625 11,250 136,250 — Operating lease obligations 27,032 7,543 15,536 3,953 — Antibody and technology licensing costs (2) 1,680 336 672 672 — Total contractual cash obligations $462,102 $33,238 $67,708 $261,078 $100,078 (1)Payments are inclusive of interest and principal payments.(2)Antibody and technology licensing costs include annual license maintenance fee and annual minimum royalty payments. We have not included annuallicense maintenance fees or annual minimum royalty payments after December 31, 2020, as we cannot estimate if they will occur.Expenditures to contract research organizations represent a significant cost in clinical development. However, our contracts with these research organizationsare cancellable at our option upon short notice and do not have cancellation penalties. Therefore, payments to contract research organizations have not beenincluded in the above table.In January 2013, the MLSC awarded us an additional $0.5 million of tax incentives under its Life Science Tax Incentive Program, which allows us tomonetize approximately $0.4 million of state research and development tax credits. We received this payment in the fourth quarter of 2013. In exchange for theseincentives, we pledged to hire an incremental 20 employees and to maintain the additional headcount through at least December 31, 2017. Failure to do so couldresult in us being required to repay some or all of these incentives. This contingent obligation has not been included in the above table as we cannot estimate if orwhen it will become payable. 94Table of ContentsIn May 2014, the MLSC awarded us an additional $0.6 million of tax incentives under its Life Science Tax Incentive Program, which allows us to monetizeapproximately $0.6 million of state research and development tax credits. In exchange for these incentives, we pledged to hire an incremental 31 employees and tomaintain the additional headcount through at least December 31, 2018. Failure to do so could result in us being required to repay some or all of these incentives.This contingent obligation has not been included in the above table as we cannot estimate if or when it will become payable.In March 2015, the MLSC awarded us an additional $1.4 million of tax incentives under its Life Science Tax Incentive Program, which allows us tomonetize approximately $1.2 million of state research and development tax credits. In exchange for these incentives, we pledged to hire an incremental 75employees and to maintain the additional headcount through at least December 31, 2019. We achieved this pledge in the third quarter of 2015 and recognizedincome related to this award; however, failure to maintain this commitment could result in us being required to repay some or all of these incentives. Thiscontingent obligation has not been included in the above table as we cannot estimate if or when it will become payable.Other than the specific payments noted in the table and as described above, milestone and royalty payments associated with antibody licensing,manufacturing technology licensing costs and other in-licensed collaboration payments have not been included in the above table as management cannot reasonablyestimate if or when they will occur. These arrangements include the following: • Under a collaboration agreement with Dyax Corp. related to antibody identification and evaluation, we may be required to make aggregatedevelopment and regulatory milestone payments of up to $16.2 million for therapeutic products and aggregate regulatory milestone payments of up$1.0 million for diagnostic products directed to selected targets associated with MM-121 and MM-141. We also are required to pay mid single digitroyalties on net sales of licensed products. • Under license agreements with The Regents of the University of California, we may be required to make aggregate development and regulatorymilestone payments of up to $0.7 million associated with MM-302 and pay royalties in the low single digits on net sales of licensed products. • Under an agreement with Adimab LLC, we may be required to make aggregate development and regulatory milestone payments of up to $52.5 millionrelated to therapeutic antibody licensing costs associated with MM-151 and pay mid single digit royalties on net sales of licensed products.As of December 31, 2015, there here have been no other material changes to our contractual obligations and commitments outside the ordinary course ofbusiness.Off-Balance Sheet ArrangementsWe did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.Tax Loss CarryforwardsAt December 31, 2015, we had net operating loss carryforwards for federal and state income tax purposes of $509.8 million and $356.9 million, respectively.Included in the federal and state net operating loss carryforwards is approximately $36.5 million and $24.7 million, respectively, of deduction related to theexercise of stock options. This amount represents an excess tax benefit, which will be realized when it results in reduction of cash taxes in accordance with ASC718. This excess tax benefit will be directly credited to additional paid-in capital when it is realized. Our existing federal and state net operating loss carryforwardswill expire in years through 2035. We also have available research and development credits for federal and state income tax purposes of approximately $23.7million and $9.6 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2026, respectively. As ofDecember 31, 2015, we also have available investment tax credits for state income tax purposes of $0.8 million, which will expire in years through 2018 if notused. In addition we have federal orphan drug credits of $62.7 million that begin to expire in 2031. We have evaluated the positive and negative evidence bearingupon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards, deferred revenue and capitalized research anddevelopment expenses. Under the applicable accounting standards, we have considered our history of losses and concluded that it is more likely than not that wewill not recognize the benefits of federal and state deferred tax assets. Accordingly, we have established a full valuation allowance against the deferred tax assets. 95Table of ContentsUtilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 ofthe Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, due to ownership change limitations that have occurred previously or that couldoccur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilizedannually to offset future taxable income and tax. We have not currently completed an evaluation of ownership changes through December 31, 2015 to assesswhether utilization of our net operating loss or research and development credit carryforwards would be subject to an annual limitation under Section 382 of theInternal Revenue Code. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject to limitation.We have not yet conducted a study of our domestic research and development credit carryforwards and orphan drug credits. This study may result in anincrease or decrease to our credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertaintax position. A full valuation allowance has been provided against the credits, and if an adjustment is required, this adjustment would be offset by an adjustment tothe valuation allowance. As a result, there would be no impact to the statement of comprehensive loss or cash flows if an adjustment were required.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts withCustomers (Topic 606),” which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires acompany to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive forthose goods or services. This guidance was originally effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using afull 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 byone 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, beginningafter December 15, 2017, and early adoption is now permitted for annual periods beginning after December 15, 2016, including interim periods within that annualperiod. We are currently evaluating the potential impact that the adoption of this guidance and the related transition guidance may have on our consolidatedfinancial 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 Uncertaintiesabout an Entity’s Ability to Continue as a Going Concern,” outlining management’s responsibility to perform interim and annual assessments of an entity’s abilityto 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 disclosegoing 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. We do not anticipate a material impact to our 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 thatdebt liability, consistent with debt discounts. This update is effective for annual reporting periods beginning after December 15, 2015, including interim periodswithin those annual periods, and early adoption is permitted. Accordingly, we elected to early adopt ASU 2015-03 for the year ended December 31, 2015. As aresult, 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, currentportion” 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” onour consolidated balance sheet as of December 31, 2014. This early adoption had no impact on our consolidated statements of operations and comprehensive lossfor any period presented.In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” to simplify the subsequent measurementof inventory. Entities are now required to subsequently measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Thisupdate is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, and early adoption ispermitted. Accordingly, we elected to early adopt ASU 2015-11 for the year ended December 31, 2015. There was no impact to our consolidated financialstatements as a result of this change. 96Table of ContentsIn November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify thepresentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This update is effectivefor annual reporting periods beginning after December 31, 2016, including interim periods within those annual periods, and early adoption is permitted.Accordingly, we elected to early adopt ASU 2015-17 for the year ended December 31, 2015. There was no impact to our consolidated financial statements as aresult of this change.Item 7A. Quantitative and Qualitative Disclosures About Market RiskWe invest in a variety of financial instruments, principally cash deposits, money market funds, securities issued by the U.S. government and its agencies andcorporate debt securities. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments.We also seek to maximize income from our investments without assuming significant risk.Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates, particularly because ourinvestments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, animmediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability and intention to hold ourinvestments until maturity, and therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a suddenchange in market interest rates on our investment portfolio.We do not currently have any auction rate or mortgage-backed securities. We do not believe our cash, cash equivalents and marketable securities havesignificant risk of default or illiquidity, however we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes inmarket value.The convertible notes bear interest at a fixed rate of 4.50% per year, payable semi-annually in arrears on January 15 and July 15 of each year, beginning onJanuary 15, 2014. As a result, we are not subject to interest rate risk with respect to the convertible notes.The 2022 notes bear interest at a fixed rate of 11.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning onJune 15, 2016. As a result, we are not subject to interest rate risk with respect to the 2022 notes.Item 8. Financial Statements and Supplementary DataOur consolidated financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 through F-33 ofthis Annual Report on Form 10-K.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financialofficer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensurethat information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regardingrequired disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Basedon the evaluation of our disclosure controls and procedures as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at the reasonable assurance level. 97Table of ContentsInternal Control Over Financial ReportingManagement’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control overfinancial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, thecompany’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP andincludes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of thecompany; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, andthat receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets thatcould have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework(2013). Based on its assessment, management concluded that, as of December 31, 2015, our internal control over financial reporting is effective based on thosecriteria.The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report, which appears herein.Changes in Internal Control Over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the threemonths ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone. 98Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item 10 will be included under the captions “Executive Officers,” “Director Nomination Process,” “Board Policies,” “Codeof Business Conduct and Ethics,” “Board Meetings and Attendance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxystatement to be filed with the SEC with respect to our 2016 Annual Meeting of Stockholders and is incorporated herein by reference.Item 11. Executive CompensationThe information required by this Item 11 will be included under the captions “Executive and Director Compensation Processes,” “Compensation Discussionand Analysis,” “Summary Compensation Table,” “2015 Grants of Plan-Based Awards Table,” “2015 Option Exercises and Stock Vested Table,” “EmploymentAgreements,” “Potential Payments Upon Termination or Change in Control” and “Compensation Committee Interlocks and Insider Participation” in our definitiveproxy statement to be filed with the SEC with respect to our 2016 Annual Meeting of Stockholders and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item 12 will be included under the captions “Security Ownership of Certain Beneficial Owners and Management” and“Securities Authorized for Issuance under Equity Compensation Plans” in our definitive proxy statement to be filed with the SEC with respect to our 2016 AnnualMeeting of Stockholders and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item 13 will be included, as applicable, under the captions “Employment Agreements,” “Potential Payments UponTermination or Change in Control,” “Board Determination of Independence” and “Related Person Transactions” in our definitive proxy statement to be filed withthe SEC with respect to our 2016 Annual Meeting of Stockholders and is incorporated herein by reference.Item 14. Principal Accounting Fees and ServicesThe information required by this Item 14 will be included under the captions “Audit Fees and Services” and “Pre-Approval Policies and Procedures” in ourdefinitive proxy statement to be filed with the SEC with respect to our 2016 Annual Meeting of Stockholders and is incorporated herein by reference. 99Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules (1)Financial StatementsOur consolidated financial statements are set forth on pages F-1 through F-33 of this Annual Report on Form 10-K and are incorporated herein by reference. (2)Financial Statement SchedulesSchedules have been omitted since they are either not required or not applicable or the information is otherwise included herein. (3)ExhibitsThe exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, which Exhibit Index isincorporated herein by reference. 100Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. MERRIMACK PHARMACEUTICALS, INC.Date: February 26, 2016 By: /s/ Robert J. Mulroy Robert J. Mulroy President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Signature Title Date/s/ Robert J. MulroyRobert J. Mulroy President, Chief Executive Officer and Director(Principal Executive Officer) February 26, 2016/s/ Yasir B. Al-WakeelYasir B. Al-Wakeel Chief Financial Officer and Head of CorporateDevelopment (Principal Financial Officer) February 26, 2016/s/ William A. SullivanWilliam A. Sullivan Principal Accounting Officer and Treasurer(Principal Accounting Officer) February 26, 2016/s/ Gary L. CrockerGary L. Crocker Chairman of the Board February 26, 2016/s/ John M. DineenJohn M. Dineen Director February 26, 2016/s/ Vivian S. Lee, M.D., Ph.D.Vivian S. Lee, M.D., Ph.D. Director February 26, 2016/s/ John Mendelsohn, M.D.John Mendelsohn, M.D. Director February 26, 2016/s/ Ulrik B. Nielsen, Ph.D.Ulrik B. Nielsen, Ph.D. Director February 26, 2016/s/ Michael E. Porter, Ph.D.Michael E. Porter, Ph.D. Director February 26, 2016/s/ James H. QuigleyJames H. Quigley Director February 26, 2016/s/ Russell T. RayRussell T. Ray Director February 26, 2016Table of ContentsMERRIMACK PHARMACEUTICALS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations and Comprehensive Loss F-4 Consolidated Statements of Non-Controlling Interest and Stockholders’ Deficit F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofMerrimack Pharmaceuticals, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, statements of non-controlling interest and stockholders’ deficit, and statements of cash flows present fairly, in all material respects, the financial position of MerrimackPharmaceuticals, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in ouropinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria establishedin Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’smanagement is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reportingappearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reportingbased on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatementand whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, ona test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understandingof internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPBoston, MassachusettsFebruary 26, 2016 F-2Table of ContentsMerrimack Pharmaceuticals, Inc.Consolidated Balance Sheets December 31, (in thousands, except per share amounts) 2015 2014 Assets Current assets: Cash and cash equivalents $185,606 $35,688 Marketable securities — 88,340 Restricted cash 101 101 Accounts receivable, net 6,483 3,313 Inventory 3,717 — Prepaid expenses and other current assets 5,487 4,623 Total current assets 201,394 132,065 Restricted cash 584 584 Property and equipment, net 21,915 14,502 Other assets 27 25 Intangible assets, net 7,355 7,725 Goodwill 3,605 3,605 Total assets $234,880 $158,506 Liabilities, non-controlling interest and stockholders’ deficit Current liabilities: Accounts payable, accrued expenses and other $52,082 $37,236 Deferred revenues 50,137 59,275 Deferred rent 1,527 1,285 Long-term debt, current portion — 13,315 Total current liabilities 103,746 111,111 Deferred revenues, net of current portion 51,197 35,682 Deferred rent, net of current portion 4,926 5,401 Deferred tax incentives, net of current portion 1,045 496 Long-term debt, net of current portion 257,655 106,687 Accrued interest — 1,200 Total liabilities $418,569 $260,577 Commitments and contingencies Non-controlling interest 239 69 Stockholders’ deficit: Preferred stock, $0.01 par value: 10,000 shares authorized at December 31, 2015 and 2014; no shares issued or outstanding atDecember 31, 2015 or 2014 — — Common stock, $0.01 par value: 200,000 shares authorized at December 31, 2015 and 2014, 115,871 and 106,697 issued andoutstanding at December 31, 2015 and 2014, respectively 1,159 1,067 Additional paid-in capital 617,145 552,037 Accumulated other comprehensive loss — (74) Accumulated deficit (802,232) (655,170) Total stockholders’ deficit $(183,928) $(102,140) Total liabilities, non-controlling interest and stockholders’ deficit $234,880 $158,506 The accompanying notes are an integral part of these consolidated financial statements. F-3Table of ContentsMerrimack Pharmaceuticals, Inc.Consolidated Statements of Operations and Comprehensive Loss Years ended December 31, (in thousands, except per share amounts) 2015 2014 2013 Revenues: Product revenues, net $4,328 $— $— License and collaboration revenues 84,930 102,756 47,786 Total revenues 89,258 102,756 47,786 Costs and expenses: Cost of product revenues 46 — — Research and development expenses 160,988 138,495 147,139 Selling, general and administrative expenses 57,795 30,517 21,187 Total costs and expenses 218,829 169,012 168,326 Loss from operations (129,571) (66,256) (120,540) Other income and expenses Interest income 99 114 166 Interest expense (19,232) (18,230) (10,938) Other income, net 917 813 627 Net loss (147,787) (83,559) (130,685) Less net income (loss) attributable to non-controlling interest 170 (268) 240 Net loss attributable to Merrimack Pharmaceuticals, Inc. $(147,957) $(83,291) $(130,925) Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities 74 (50) 14 Other comprehensive income (loss) 74 (50) 14 Comprehensive loss $(147,883) $(83,341) $(130,911) Net loss per share available to common stockholders—basic and diluted $(1.33) $(0.80) $(1.32) Weighted-average common shares used in computing net loss per share available to common stockholders—basic anddiluted 111,356 104,410 98,919 The accompanying notes are an integral part of these consolidated financial statements. F-4Table of ContentsMerrimack Pharmaceuticals, Inc.Consolidated Statements of Non-Controlling Interestand Stockholders’ Deficit Common stock (in thousands) Non- controllinginterest Shares Amount Additionalpaid-in capital Accumulated other comprehensiveloss Accumulateddeficit Total stockholders’deficit Balance at December 31, 2012 $97 95,825 $958 $434,679 $(38) $(442,116) $(6,517) Exercise of stock options and common stock warrants — 948 9 2,027 — — 2,036 Stock-based compensation — — — 10,733 — — 10,733 Issuance of common stock in a public offering, net ofissuance costs — 5,750 58 26,658 — — 26,716 Conversion option of convertible senior notes — — — 51,875 — — 51,875 Conversion of Silver Creek Pharmaceuticals, Inc.convertible notes payable 796 — — 1,807 — — 1,807 Other comprehensive income — — — — 14 — 14 Loss attributable to non-controlling interest (556) — — — — 556 556 Net loss — — — — — (130,685) (130,685) Balance at December 31, 2013 $337 102,523 $1,025 $527,779 $(24) $(572,245) $(43,465) Exercise of stock options and common stock warrants — 4,174 42 10,383 — — 10,425 Stock-based compensation — — — 13,197 — — 13,197 Conversion of Silver Creek Pharmaceuticals, Inc.convertible notes payable 366 — — 678 — — 678 Other comprehensive income — — — — (50) — (50) Loss attributable to non-controlling interest (634) — — — — 634 634 Net loss — — — — — (83,559) (83,559) Balance at December 31, 2014 $69 106,697 $1,067 $552,037 $(74) $(655,170) $(102,140) Exercise of stock options and common stock warrants — 5,360 54 10,047 — — 10,101 Issuance of common stock in at the market offering, net ofissuance costs — 3,814 38 38,522 — — 38,560 Stock-based compensation — — — 15,351 — — 15,351 Other comprehensive income — — — — 74 — 74 Loss attributable to non-controlling interest (725) — — — — 725 725 Issuance of Series B preferred stock by Silver CreekPharmaceuticals, Inc. 895 — — 1,188 — — 1,188 Net loss — — — — — (147,787) (147,787) Balance at December 31, 2015 $239 115,871 $1,159 $617,145 $— $(802,232) $(183,928) The accompanying notes are an integral part of these consolidated financial statements. F-5Table of ContentsMerrimack Pharmaceuticals, Inc.Consolidated Statements of Cash Flows Years ended December 31, (in thousands) 2015 2014 2013 Cash flows from operating activities Net loss $(147,787) $(83,559) $(130,685) Adjustments to reconcile net loss to net cash used in operating activities Non-cash interest expense 8,217 8,511 4,548 Depreciation and amortization 4,288 3,223 2,589 Stock-based compensation 15,351 13,197 10,733 Purchased premiums and interest on marketable securities — 858 (1,809) Other non-cash items 4 — 579 Changes in operating assets and liabilities: Accounts receivable (3,170) 2,587 3,410 Prepaid expenses and other current assets (850) 827 4,037 Inventory (3,717) — — Accounts payable, accrued expenses and other 13,557 (646) 13,304 Deferred revenues 6,377 19,482 (4,989) Deferred rent and tax incentives 2,374 712 2,076 Other assets and liabilities, net — — 1,032 Net cash (used in) operating activities (105,356) (34,808) (95,175) Cash flows from investing activities Purchase of marketable securities — (111,832) (112,923) Proceeds from sales and maturities of marketable securities 87,899 111,858 95,100 Purchase of property and equipment (12,789) (6,035) (9,857) Assignment of restricted cash — — (57) Other investing activities, net — (2) (2) Net cash provided by (used in) investing activities 75,110 (6,011) (27,739) Cash flows from financing activities Proceeds from public offerings, net of issuance costs 38,560 — 26,716 Proceeds from exercise of options and warrants to purchase common stock 10,087 10,384 2,036 Proceeds from issuance of senior secured notes due 2022, net of issuance costs 169,434 — — Proceeds from issuance of preferred stock by Silver Creek Pharmaceuticals, Inc. 2,083 — — Proceeds from convertible notes issued by Silver Creek Pharmaceuticals, Inc., net of issuance costs — 1,044 121,537 Repayment of loans payable to Hercules Technology Growth Capital, Inc. (40,000) — — Payments of dividends on Series B convertible preferred stock — (7) (3) Net cash provided by financing activities 180,164 11,421 150,286 Net increase (decrease) in cash and cash equivalents 149,918 (29,398) 27,372 Cash and cash equivalents, beginning of period 35,688 65,086 37,714 Cash and cash equivalents, end of period $185,606 $35,688 $65,086 Non-cash investing and financing activities Issuance of derivative liability $— $— $35 Value of conversion feature of convertible senior notes, classified in Stockholders’ Deficit — — 51,876 Property, plant and equipment in accounts payable and accrued expenses 816 704 — Receivables related to stock option exercises in prepaid expenses and other current assets 14 — — Disposals of fully-depreciated property and equipment 303 1,603 210 Reclassification of deferred financing costs to stockholders’ deficit — — 278 Conversion of Silver Creek Pharmaceuticals, Inc. convertible notes — 1,044 2,603 Supplemental disclosure of cash flows Cash paid for interest $10,087 $9,510 $3,915 The accompanying notes are an integral part of these consolidated financial statements. F-6Table of ContentsMerrimack Pharmaceuticals, Inc.Notes to Consolidated Financial Statements1. Nature of the Business and Summary of Significant Accounting PoliciesNature of the BusinessMerrimack Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company discovering, developing and commercializing innovative medicinesconsisting of novel therapeutics paired with diagnostics for the treatment of cancer. The Company has one marketed therapeutic oncology product and multipletargeted therapeutic oncology candidates in clinical development. The Company’s most advanced program is its therapeutic MM-398, which the Company marketsin the United States under the brand name ONIVYDE. In addition to ONIVYDE and its product candidates in clinical development, the Company has multipleproduct candidates in preclinical development and a discovery effort advancing additional candidate medicines. The Company has tailored ONIVYDE and its otherproduct candidates to target specific disease mechanisms that its research suggests are common across many solid tumor types. The Company believes thatONIVYDE and its other product candidates have the potential to address major unmet medical needs. The Company also has an agreement to utilize itsmanufacturing expertise to develop, manufacture and exclusively supply bulk drug product to a third party, who will in turn process the drug into a finished productand commercialize it globally following regulatory approval. The Company was incorporated in the Commonwealth of Massachusetts in 1993 and reincorporatedin 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 tosecure additional capital to fund operations, success of clinical trials, development by competitors of new technological innovations, dependence on collaborativearrangements, protection of proprietary technology, compliance with government regulations and dependence on key personnel. Product candidates currently underdevelopment will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval priorto commercialization. These efforts require significant amounts of additional capital, adequate personnel, infrastructure and extensive compliance reportingcapabilities.The Company has incurred significant losses and has not generated significant revenue from commercial sales. The accompanying consolidated financialstatements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets andsatisfaction 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. TheCompany 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 requirethe 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 todelay, reduce or eliminate its research and development programs or commercialization efforts, which could adversely affect its business prospects.Summary of Significant Accounting PoliciesSegment InformationOperating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available andregularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operationsand manages its business in one operating segment and the Company operates in only one geographic region.Basis of Presentation and ConsolidationThe accompanying consolidated financial statements have been prepared under U.S. generally accepted accounting principles (“GAAP”) and include theaccounts of the Company and its wholly owned subsidiary, Merrimack Pharmaceuticals (Bermuda) Ltd., which was merged with and into the Company during thethird quarter of 2014. The Company also consolidates its majority owned subsidiary, Silver Creek Pharmaceuticals, Inc. (“Silver Creek”). All intercompanytransactions and balances have been eliminated in consolidation. F-7Table of ContentsUse of EstimatesGAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expensesand related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable underthe circumstances. The most significant estimates in these consolidated financial statements include, but may not be limited to, revenue recognition, including theestimated percentage of billable expenses in any particular budget period, periods of meaningful use of licensed products, estimated service periods and services tobe completed under a collaboration, estimates used in accounting for revenue separability and recognition, estimates of discounts and allowances related tocommercial sales of ONIVYDE, estimates utilized in the valuation of inventory, useful lives with respect to long-lived assets and intangible assets, accounting forstock-based compensation, contingencies, intangible assets, goodwill, in-process research and development, tax valuation reserves and accrued expenses. TheCompany’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 CashCash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less at the date of purchase. Investmentsqualifying 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 restrictedcash 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 tothe Company’s facility lease.Marketable SecuritiesThe 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 maintainedby 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 analysisto 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 costbasis. 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 thefull amount of the unrealized loss is recognized on the statement of operations and comprehensive loss as an other-than-temporary impairment charge. When this isnot the case, the Company performs additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of thesecurity. Credit losses are identified where the Company does not expect to receive cash flows, based on using a single best estimate, sufficient to recover theamortized cost basis of a security and amount of the loss recognized in other income (expense). Realized gains and losses are recognized in interest income. Anypremium or discount arising at purchase is amortized and/or accreted to interest income.InventoryThe Company values its inventories at the lower of cost or net realizable value. The Company determines the cost of its inventories, which includes amountsrelated to materials and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventoryduring each reporting period, and it writes down any excess and obsolete inventories to their realizable value in the period in which the impairment is firstidentified. 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, futurecommercialization is considered probable and the future economic benefit is expected to be realized. Inventory acquired prior to receipt of marketing approval of aproduct candidate is expensed as research and development expense as incurred. Inventory that can be used in either the production of clinical or commercialproduct is expensed as research and development expense when selected for use in a clinical manufacturing campaign. F-8Table of ContentsShipping and handling costs for product shipments are recorded as incurred in cost of product revenues along with costs associated with manufacturing theproduct and any inventory reserves or write-downs.Property and EquipmentProperty 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 - 7IT equipment 3 - 7Leaseholds improvements Lesser of useful life or lease termFurniture and fixtures 3 - 7Costs for capital assets not yet placed into service have been capitalized as construction-in-progress and will be depreciated in accordance with the aboveguidelines once placed into service. Costs for repairs and maintenance are expensed as incurred, while major betterments are capitalized. The Company capitalizesinterest 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 isdepreciated over the asset’s estimated useful life. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed fromthe 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 assetsmay 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 undiscountedcash 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 AssetsGoodwill and indefinite-lived intangible assets, including in-process research and development (“IPR&D”), are evaluated for impairment on an annual basisor more frequently if an indicator of impairment is present. No impairment of goodwill resulted from the Company’s most recent evaluation, which occurred in thethird 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 theCompany 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 toperform 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 thannot 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 notrequired. This requires the Company to assess the impact of significant events, milestones and changes to expectations and activities that may have occurred sincethe last impairment evaluation. Significant changes to these estimates, judgments and assumptions could materially change the outcome of the impairmentassessment. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. If suchan 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 assignedto 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 valueof 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 impairmentloss 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 impairmenttesting 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 of2015 and, therefore, quantitative impairment evaluations were not performed. F-9Table of ContentsThe Company commences amortization of indefinite-lived intangible assets, such as IPR&D, once the associated research and development efforts have beencompleted and amortizes the assets over their estimated future lives. Definite-lived intangible assets, such as core technology and product-related intangibles, areevaluated for impairment whenever events or circumstances indicate that the carrying value may not be fully recoverable. Definite-lived intangible assets areseparate from goodwill and indefinite-lived intangible assets and are deemed to have a definite life. The Company amortizes these assets over their estimated usefullives. 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 ExpensesAs part of the process of preparing financial statements, the Company is required to estimate accrued expenses. This process involves identifying servicesthat have been performed on the Company’s behalf and estimating the level of services performed and the associated costs incurred for such services where theCompany has not yet been invoiced or otherwise notified of actual cost. The Company records these estimates in its consolidated financial statements as of eachbalance 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 actualtiming 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 doesnot 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 differfrom 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 oftensubjective determinations. The Company prepares its estimates based on the facts and circumstances known to it at the time and in accordance with GAAP. Therehave been no material changes in estimates for the periods presented.Non-Controlling InterestNon-controlling interest represents the non-controlling stockholders’ proportionate share of preferred stock and net loss of the Company’s majority ownedconsolidated subsidiary, Silver Creek. The non-controlling stockholders’ proportionate share of the preferred stock in Silver Creek is reflected as non-controllinginterest in the Company’s consolidated balance sheets as a component of mezzanine equity.Revenue RecognitionThe Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or serviceshave been rendered; the price to the customer is fixed or determinable; and collectability is reasonably assured.Product Revenues, NetThe Company sells ONIVYDE to a limited number of specialty pharmaceutical distributors in the United States (collectively, its “Distributors”). TheCompany’s Distributors subsequently resell the products to healthcare providers. The Company recognizes revenue on product sales when title and risk of loss havepassed 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 itsDistributors. As such, the Company estimates its net product revenues by deducting from its gross product revenues trade allowances, estimated contractualdiscounts, estimated Medicaid rebates, estimated reserves for product returns and estimated costs of other incentives offered to patients. F-10Table of ContentsThese discounts and allowances are based on estimates of the amounts earned or to be claimed on the related sales. The Company’s estimates take intoconsideration its historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecastedDistributor buying and payment patterns. Actual amounts may ultimately differ from the Company’s estimates. If actual results vary, the Company will adjust theseestimates, 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 pays fees to its Distributors for providing certain data to the Company as well as for maintaining contractual inventory andservice levels. These trade allowances are recorded as a reduction to accounts receivable on the consolidated balance sheet at the time revenue is recognized.Rebates and Chargeback Discounts: The Company is subject to discount obligations under state Medicaid programs and the Public Health Service 340BDrug Pricing Program, contracts with Federal government entities purchasing via the Federal Supply Schedule and various private organizations, such as grouppurchasing organizations (collectively, its “Third-party Payors”). The Company estimates the rebates and chargeback discounts it will provide to Third-partyPayors, based upon its estimated payor mix, and deducts these estimated amounts from its gross product revenues at the time revenue is recognized. Chargebackdiscounts are processed when the Third-party Payor purchases the product at a discount from the Distributor, who then in turn charges back to the Company thedifference between the price initially paid by the Distributor and the discounted price paid by the Third-party Payor. These chargeback discounts are recorded as areduction to accounts receivable on the consolidated balance sheet at the time revenue is recognized. Rebates that are invoiced directly to the Company arerecorded as accrued liabilities on the consolidated balance sheet at the time revenue is recognized.Product Returns: An allowance for product returns is established for returns expected to be made by Distributors and is recorded at the time revenue isrecognized, resulting in a reduction to product sales. In accordance with contractual terms, Distributors have the right to return unopened and undamaged productthat is within a permissible number of months before and after the product’s expiration date, subject to contractual limitations. The Company has the ability tomonitor inventory levels and the shelf life of product at Distributors and can contractually control the amount of inventory that is sold to Distributors. Based oninventory levels held by Distributors and the structure of the Company’s distribution model, the Company has concluded that it has the ability to reasonablyestimate product returns at the time revenue is recognized. The Company’s estimated rate of return is based on historical rates of return for comparable oncologyproducts.Other Incentives: The Company offers co-pay mitigation support to commercially insured patients. The Company’s co-pay mitigation program is intended toreduce 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 theCompany’s co-pay mitigation program, the Company estimates average co-pay mitigation amounts in order to establish a reserve for co-pay mitigation claims anddeducts these estimated amounts from its gross product revenues at the later of the date that (i) the revenues are recognized or (ii) the incentive is offered. Claimsunder the Company’s co-pay mitigation program are subject to expiration.License and Collaboration RevenuesThe Company enters into biopharmaceutical product development agreements with collaborative partners for the research and development of therapeuticand 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 todetermine 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-elementarrangement according to the relative selling price of each deliverable. The fair value of deliverables under the arrangement may be derived using a best estimate ofselling price if vendor specific objective evidence and third-party evidence are not available. Deliverables under the arrangement will be separate units ofaccounting 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 relativeto 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 inSeptember 2014, which was evaluated under the accounting guidance on revenue recognition for multiple-element arrangements. The Company determined that theobligations under this agreement represent a single unit of accounting and that the agreement represents a services agreement. As a result, the Company hasestimated the level of effort expected to be completed as a result of providing the identified deliverables and will recognize revenue related to the agreement basedon proportional performance as effort is completed over the expected services period. F-11Table of ContentsThe Company also entered into a collaboration agreement with Watson Laboratories, Inc. (“Actavis”) in November 2013, which was evaluated under theaccounting 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 theperformance obligations would be performed and revenue would be recognized. If the Company cannot reasonably estimate the timing and the level of effort tocomplete its performance obligations under the arrangement, then revenue under the arrangement is recognized on a straight-line basis over the period theCompany expects to complete its performance obligations.The Company’s collaboration agreements may include additional payments upon the achievement of performance-based milestones. As milestones areachieved, a portion of the milestone payment, equal to the percentage of the total time that the Company has performed the performance obligations to date dividedby the total estimated time to complete the performance obligations, multiplied by the amount of the milestone payment, will be recognized as revenue uponachievement of such milestone. The remaining portion of the milestone will be recognized over the remaining performance period. Milestones that are tied toregulatory approvals are not considered probable of being achieved until such approval is received. Milestones tied to counterparty performance are not included inthe 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 thearrangement.Research and Development ExpensesResearch and development expenses are charged to expense as incurred. Research and development expenses comprise costs incurred in performing researchand development activities, including personnel-related costs, stock-based compensation, facilities, research-related overhead, clinical trial costs, contractedservices, research-related manufacturing, license fees and other external costs. The Company accounts for nonrefundable advance payments for goods and servicesthat will be used in future research and development activities as expenses when the services have been performed or when the goods have been received ratherthan when the payment is made.Advertising ExpensesIn connection with the commercial launch of ONIVYDE on October 22, 2015, the Company began incurring advertising expenses. Advertising expenses areexpensed as incurred. For the year ended December 31, 2015, advertising expenses totaled $1.0 million.Stock-Based CompensationStock-based compensation expense related to employee stock options is measured using the fair value of the award at the grant date, net of estimatedforfeitures, and is adjusted annually to reflect actual forfeitures. The fair value of each stock-based award is estimated using the Black-Scholes option valuationmodel, 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 recognizesexpense over the related service period. When applicable, these equity instruments are accounted for based on the fair value of the consideration received or the fairvalue 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 andcircumstances, from non-owner sources and currently consists of net loss and changes in unrealized gains and losses on available-for-sale securities. F-12Table of ContentsOther Income and ExpenseThe 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 ofMassachusetts. These tax incentives require that the Company achieve certain hiring targets. Failure to maintain the additional headcount in subsequent periodscould 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-yearperformance period of each award, beginning when the Company achieves the hiring goal target, with a cumulative catch-up recognized in the period that the hiringgoal target is achieved. The Company has received MLSC tax incentives in 2011, 2013, 2014 and 2015 totaling $3.8 million in the aggregate, allowing theCompany to monetize approximately $3.4 million of state research and development tax credits. The Company has recognized $0.7 million, $0.4 million and $0.3million in income related to these tax incentives for the years ended December 31, 2015, 2014 and 2013, respectively.Income TaxesThe Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for theestimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective taxbases. 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 orsettled. 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 notbe realized.The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves are basedon 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 ofany potential contingencies present related to the tax benefit. Potential interest and penalties associated with such uncertain tax positions are recorded ascomponents 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 RiskFinancial 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 minimalcredit risk. The Company invests cash equivalents and marketable securities in money market funds, U.S. government agencies securities and various corporatedebt 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 singleissuer and to only invest in high credit quality securities. The Company has no significant off-balance sheet concentrations of credit risk such as foreign currencyexchange contracts, option contracts or other hedging arrangements. The Company also is subject to credit risk from its accounts receivable related to its productsales 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 endedDecember 31, 2015, 2014 and 2013 consisted of the following: Years Ended December 31, 2015 2014 2013Baxalta 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 ofDecember 31, 2015 and 2014 consisted of the following: December 31, 2015 2014Baxalta 29% 49%Sanofi — 50%AmerisourceBergen Corporation 29% — McKesson Corporation 25% — Cardinal Health, Inc. 16% — F-13Table of ContentsRecent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts withCustomers (Topic 606),” which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires acompany to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive forthose goods or services. This guidance was originally effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using afull 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 byone 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, beginningafter December 15, 2017, and early adoption is now permitted for annual periods beginning after December 15, 2016, including interim periods within that annualperiod. The Company is currently evaluating the potential impact that the adoption of this guidance and the related transition guidance may have on theconsolidated 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 Uncertaintiesabout an Entity’s Ability to Continue as a Going Concern,” outlining management’s responsibility to perform interim and annual assessments of an entity’s abilityto 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 disclosegoing 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 thatdebt liability, consistent with debt discounts. This update is effective for annual reporting periods beginning after December 15, 2015, including interim periodswithin 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-termdebt, current portion” and approximately $0.1 million of long-term debt issuance costs have been reclassified from “Other assets” to “Long-term debt, net ofcurrent portion” on the Company’s consolidated balance sheet as of December 31, 2014. This early adoption had no impact on the Company’s consolidatedstatements of operations and comprehensive loss for any period presented.In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” to simplify the subsequent measurementof inventory. Entities are now required to subsequently measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Thisupdate is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, and early adoption ispermitted. Accordingly, the Company elected to early adopt ASU 2015-11 for the year ended December 31, 2015. There was no impact to the consolidatedfinancial statements as a result of this change.In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify thepresentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This update is effectivefor annual reporting periods beginning after December 31, 2016, including interim periods within those annual periods, and early adoption is permitted.Accordingly, the Company elected to early adopt ASU 2015-17 for the year ended December 31, 2015. There was no impact to the consolidated financialstatements as a result of this change. F-14Table of Contents2. Marketable SecuritiesAs of December 31, 2015, the Company maintained no marketable securities. Marketable securities as of December 31, 2014 consisted of the following, allof which were classified as available-for-sale: AmortizedCost UnrealizedGains UnrealizedLosses Fair Value (in thousands) December 31, 2014: Commercial paper $6,493 $— $(2) $6,491 Corporate debt securities 81,921 — (72) 81,849 Total $88,414 $— $(74) $88,340 The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months as of December 31, 2014 was $88.4million, representing 35 securities. As of December 31, 2014, the Company did not intend to sell, and it was not more likely than not that the Company would berequired to sell, the investments in an unrealized loss position before recovery of their amortized cost bases. The Company determined that there was no materialchange in the credit risk of the investments. As a result, the Company determined it did not hold any investments with an other-than-temporary-impairment as ofDecember 31, 2014.There were no realized gains or losses recognized on the sale or maturity of marketable securities during the years ended December 31, 2015, 2014 or 2013.3. Net Loss Per Common ShareBasic net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of common sharesoutstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss available tocommon stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Forpurposes of this calculation, convertible preferred stock, stock options and warrants are considered to be common stock equivalents and are only included in thecalculation of diluted net loss per share when their effect is dilutive.As discussed in Note 11, “Borrowings,” in July 2013, the Company issued $125.0 million aggregate principal amount of 4.50% convertible senior notes due2020 (the “Convertible Notes”) in an underwritten public offering. Following the repayment and satisfaction in full of the Company’s obligations to HerculesTechnology Growth Capital, Inc. (“Hercules”) under its Loan and Security Agreement with Hercules (the “Loan Agreement”), which occurred in December 2015,upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock ora combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the conversionpremium will be settled in common stock, inclusive of a contractual make-whole provision resulting from a fundamental change, and the resulting potentialcommon shares included in diluted earnings per share if the effect is more dilutive.The stock options, warrants and conversion premium on the Convertible Notes are excluded from the calculation of diluted loss per share because the netloss for the years ended December 31, 2015, 2014 and 2013 causes such securities to be anti-dilutive. Securities excluded from the calculation of diluted loss pershare are shown in the chart below: Years ended December 31, (in thousands) 2015 2014 2013 Common stock warrants — 2,381 2,777 Outstanding options to purchase common stock 19,211 19,567 20,107 Conversion of the Convertible Notes 25,000 25,000 25,000 F-15Table of Contents4. Product Revenue Reserves and AllowancesThe following table summarizes activity in each of the product revenue reserve and allowance categories for the year ended December 31, 2015: (in thousands) Trade Allowances Rebates andChargebackDiscounts ProductReturns Other Incentives Total Beginning balance $— $— $— $— $— Provisions related to sales in the current year 153 456 32 8 649 Adjustments related to sales in the prior year — — — — — Credits and payments made (15) (94) — — (109) Ending balance $138 $362 $32 $8 $540 5. License and Collaboration AgreementsBaxaltaOn September 23, 2014, the Company and Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA entered into a license andcollaboration agreement (the “Baxalta Agreement”) for the development and commercialization of MM-398 outside of the United States and Taiwan (the“Licensed Territory”). In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta Agreement was assigned to Baxalta during thesecond quarter of 2015. As part of the Baxalta Agreement, the Company granted Baxalta an exclusive, royalty-bearing right and license under the Company’spatent rights and know-how to develop and commercialize MM-398 in the Licensed Territory. Baxalta is responsible for using commercially reasonable efforts todevelop, obtain regulatory approvals for and, following regulatory approval, commercializing MM-398 in the Licensed Territory. A joint steering committeecomprised of an equal number of representatives from each of Baxalta and the Company is responsible for approving changes to the global development plan forMM-398, including all budgets, and overseeing the parties’ development and commercialization activities with respect to MM-398. Unless otherwise agreed, theCompany will be responsible for conducting all clinical trials contemplated by the global development plan for MM-398 and manufacturing all clinical materialneeded for such trials.Under the terms of the Baxalta Agreement, the Company received a $100.0 million upfront, nonrefundable cash payment in September 2014. In addition, theCompany is eligible to receive from Baxalta (i) up to an aggregate of $100.0 million upon the achievement of specified research and development milestones, ofwhich the Company has received $62.5 million from Baxalta through December 31, 2015, (ii) up to an aggregate of $520.0 million upon the achievement ofspecified regulatory milestones, of which the Company has received $20.0 million from Baxalta as of December 31, 2015, and (iii) up to an aggregate of $250.0million upon the achievement of specified sales milestones. Under the terms of the Baxalta Agreement, the Company will bear up to the first $98.8 million of costsrelated to the development of MM-398 for pancreatic cancer patients who have not previously received gemcitabine-based therapy; however, the Company expectsmost of these costs to be offset by payments received upon the achievement of clinical trial-related milestones. The Company and Baxalta will share equally allother clinical trial costs contemplated by the global development plan. The Company is also entitled to tiered, escalating royalties ranging from sub-teen double-digits to low twenties percentages of net sales of MM-398 in the Licensed Territory.The Company and Baxalta expect to enter into a commercial supply agreement pursuant to which the Company will supply MM-398 bulk drug substance toBaxalta and, at Baxalta’s option, may manage fill and finish activities to be conducted by a third-party contract manufacturer for Baxalta. Baxalta also has theoption to manufacture MM-398 itself, in which case the Company will perform a technology transfer of its manufacturing process to Baxalta.If not terminated earlier by either party, the Baxalta Agreement will expire upon expiration of all royalty and other payment obligations of Baxalta under theBaxalta Agreement. Either party may terminate the Baxalta Agreement in the event of an uncured material breach by the other party. Baxalta may also terminatethe Baxalta Agreement on a product-by-product, country-by-country or sub-territory-by-sub-territory basis or in its entirety, for its convenience, upon 180 days’prior written notice. In addition, the Company may terminate the Baxalta Agreement if Baxalta challenges or supports any challenge of the Company’s licensedpatent rights. F-16Table of ContentsAt the inception of the collaboration, the Company identified the following deliverables as part of the Baxalta Agreement: (i) license to develop andcommercialize MM-398 in Baxalta’s territories, (ii) discovery, research, development and manufacturing services required to complete ongoing clinical trialsrelated to MM-398, (iii) discovery, research, development and manufacturing services needed to complete future clinical trials in further indications related to MM-398, (iv) the option to perform a technology transfer of the Company’s manufacturing process related to the production of MM-398 to Baxalta and (v) participationon the joint steering committee.The Company concluded that none of the deliverables identified at the inception of the collaboration has standalone value from the other undeliveredelements. As such, all deliverables represent a single unit of accounting.The Company has determined that the collaboration represents a services agreement and as such has estimated the level of effort expected to be completed asa result of providing the identified deliverables. The Company will recognize revenue from the non-refundable upfront payment, forecasted non-substantivemilestone payments and estimated payments related to discovery, research, development and technology transfer services based on proportional performance aseffort is completed over the expected services period, which is estimated to be substantially complete by June 30, 2020. The Company will periodically review and,if necessary, revise the estimated service period related to its collaboration with Baxalta. As of December, 31, 2015, the Company has achieved $62.5 million of the$90.0 million of forecasted non-substantive milestones milestones that are included in the Company’s proportional performance revenue recognition model and$20.0 million of the $530.0 million of substantive milestones included in the Baxalta Agreement.Research, development and regulatory milestones that are considered substantive on the basis of the contingent nature of the milestone will be recognized asrevenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All sales milestones will beaccounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.During the second quarter of 2015, the European Medicines Agency (“EMA”) accepted for review a Marketing Authorization Application (“MAA”) filed byBaxalta for MM-398. As a result of this acceptance, the Company recognized $20.0 million of revenue related to a substantive milestone payment owed fromBaxalta. In August 2015, the Company achieved a $15.0 million milestone related to the submission of the protocol for the Company’s Phase 2 clinical trial ofMM-398 in front-line metastatic pancreatic cancer. This milestone is a non-substantive milestone, and revenue related to the achievement of this milestone will berecognized through the proportional performance revenue recognition model. In October 2015, the Company achieved an additional $47.5 million milestone relatedto the enrollment of the first patient in a Phase 2 clinical trial of MM-398 in front-line pancreatic cancer. This milestone is also a non-substantive milestone, andrevenue related to the achievement of this milestone will be recognized through the proportional performance revenue recognition model. During the years endedDecember 31, 2015 and 2014, the Company recognized revenue based on the following components of the Baxalta Agreement: Year Ended December 31, Year Ended December 31, (in thousands) 2015 2014 Proportional performance revenue recognition model $64,930 $10,460 Substantive milestones 20,000 — Total $84,930 $10,460 As of December 31, 2015 and 2014, the Company maintained the following assets and liabilities related to the Baxalta Agreement: (in thousands) December 31, 2015 December 31, 2014 Accounts receivable, billed $1,336 $— Accounts receivable, unbilled 626 1,615 Deferred revenue 97,365 91,156 F-17Table of ContentsOf the $97.4 million of deferred revenue related to the Baxalta Agreement as of December 31, 2015, $50.1 million is classified as current in the consolidatedbalance sheets based upon the Company’s estimate of revenue that will be recognized under the proportional performance revenue recognition model as a result ofeffort expected to be completed within the next twelve months.SanofiOn September 30, 2009, the Company and Sanofi entered into a license and collaboration agreement (the “Sanofi Agreement”) for the development andcommercialization of MM-121. The Sanofi Agreement became effective on November 10, 2009, and Sanofi paid the Company a nonrefundable, noncreditableupfront license fee of $60.0 million. On June 17, 2014, the Company and Sanofi agreed to terminate the Sanofi Agreement effective December 17, 2014. Inconnection with the agreement to terminate the Sanofi Agreement, among other things, Sanofi transferred ownership of the investigational new drug application forMM-121 back to the Company in July 2014, and the Company waived Sanofi’s obligation to reimburse the Company for MM-121 development costs incurred afterthe effective termination date. Following the termination of the Sanofi Agreement, the Company is not entitled to receive any additional fees, milestone paymentsor reimbursements from the collaboration.The Company received total milestone payments of $25.0 million pursuant to the Sanofi Agreement. Under the Sanofi Agreement, Sanofi was responsiblefor all MM-121 development and manufacturing costs. Sanofi reimbursed the Company for direct costs incurred in both development and manufacturing andcompensated the Company for its internal development efforts based on a full time equivalent rate.The Company recognized cost reimbursements for MM-121 development services within the period they were incurred and billable. Billable expenses wereidentified during each specified budget period. In the event that total development services expense incurred and expected to be incurred during the same periodexceeded the total contractually allowed billable amount for development services during that period, the Company recognized only a percentage of thedevelopment services incurred as revenue during that period.At the inception of the collaboration, the Company determined that the license, the right to future technology, back-up compounds, participation on steeringcommittees and manufacturing services performance obligations comprising the Sanofi Agreement represented a single unit of accounting. As the Company couldnot reasonably estimate its level of effort over the collaboration, the Company recognized revenue from the upfront payment, milestone payment andmanufacturing services payments using the contingency-adjusted performance model over the expected development period, which was initially estimated at 12years from the effective date of the Sanofi Agreement.As a result of the Company and Sanofi agreeing to terminate the Sanofi Agreement, the development period was revised to end as of December 17, 2014.Accordingly, the balance of the deferred revenue remaining on April 1, 2014 was recognized prospectively on a straight-line basis over the remaining developmentperiod, ending on December 17, 2014, in accordance with current generally accepted principles on revenue recognition.The Company recognized no revenue under the Sanofi agreement during the year ended December 31, 2015. During the years ended December 31, 2014 and2013, the Company recognized revenue based on the following components of the Sanofi agreement: Years ended December 31, (in thousands) 2014 2013 Upfront payment $39,306 $5,000 Milestone payment 16,377 2,083 Development services 18,904 36,283 Manufacturing services and other 17,709 3,867 Total $92,296 $47,233 F-18Table of ContentsThe Company performed development services for which revenue was recognized under the Sanofi Agreement in accordance with the specified budgetperiod. During the year and specified budget periods ended December 31, 2013, the Company performed $10.1 million of development services in excess ofrecognized revenue. Of this amount, approximately $5.8 million was recognized as increased revenue in the year ended December 31, 2014 related to expensesincurred prior to December 31, 2013 upon the Company receiving budget approval for these overruns.As of December 31, 2015, the Company maintained no assets or liabilities related to the Sanofi Agreement. As of December 31, 2014, the Companymaintained the following assets and liabilities related to the Sanofi agreement: (in thousands) December 31,2014 Accounts receivable, billed $369 Accounts receivable, unbilled 1,282 Deferred revenues — PharmaEngine, Inc.On May 5, 2011, the Company and PharmaEngine, Inc. (“PharmaEngine”) entered into an assignment, sublicense and collaboration agreement (the“PharmaEngine Agreement”) under which the Company reacquired rights in Europe and certain countries in Asia to MM-398. In exchange, the Company agreed topay PharmaEngine a nonrefundable, noncreditable upfront payment of $10.0 million and up to an additional $80.0 million in aggregate development and regulatorymilestones and $130.0 million in aggregate sales milestones. PharmaEngine is also entitled to tiered royalties on net sales of MM-398 in Europe and certaincountries in Asia. PharmaEngine is not responsible for any future development costs of MM-398 except those required specifically for regulatory approval inTaiwan.On September 22, 2014, the Company amended the PharmaEngine Agreement to redefine sublicense revenue and reduce the portion of sublicense revenuethat the Company is required to pay to PharmaEngine. As a result of this amendment, the Company made a $7.0 million milestone payment to PharmaEngine inSeptember 2014. Additionally, as a result of this amendment, the Company agreed to pay a previously contingent $5.0 million milestone to PharmaEngine in thesecond quarter of 2015. Prior to the amendment of the PharmaEngine Agreement, this milestone payment was contingent upon the award of certain specifiedregulatory designations. These milestone payments were recognized as research and development expense during the year ended December 31, 2014. TheCompany also made an $11.0 million milestone payment to PharmaEngine in July 2015 in connection with the EMA’s acceptance for review of an MAA for MM-398, which occurred, and was recognized as research and development expense, in the second quarter of 2015.During the years ended December 31, 2015, 2014 and 2013, the Company recognized research and development expenses of $11.4 million, $12.6 millionand $1.5 million, respectively, related to the PharmaEngine Agreement.ActavisIn November 2013, the Company and Actavis entered into a development, license and supply agreement (the “Actavis Agreement”) pursuant to which theCompany will develop, manufacture and exclusively supply the bulk form of doxorubicin HCl liposome injection (the “Initial Product”) to Actavis. The ActavisAgreement was subsequently amended in January 2015 to transfer certain responsibilities from the Company to Actavis in exchange for reducing the aggregatemilestone payments that the Company is eligible to receive by $0.4 million. Under the Actavis Agreement, Actavis is responsible for all costs related to finishedproduct processing and global commercialization. Pursuant to the agreement, additional products may be developed for Actavis in the future. The Company iseligible to receive up to $15.1 million, of which $3.9 million has been received through December 31, 2015, and the remainder in development funding anddevelopment, regulatory and commercial milestone payments related to the Initial Product. The Company will also receive a double-digit share of net profits onglobal sales of the Initial Product and any additional products. The Company will manufacture and supply the Initial Product to Actavis in bulk form at an agreedupon unit price. F-19Table of ContentsThe Actavis Agreement will expire with respect to the Initial Product and any additional products developed in the future ten years after Actavis’ first sale ofthe applicable product, unless terminated earlier, and will automatically renew for additional two year periods thereafter unless either party provides notice of non-renewal. Either party may terminate the Actavis Agreement in the event of an uncured material breach or bankruptcy filing by the other party. Actavis may alsoterminate the Actavis Agreement for convenience in specified circumstances upon 90 days’ prior written notice.The Company applied revenue recognition guidance to determine whether the performance obligations under this collaboration, including the license,participation on steering committees, development services, and manufacturing and supply services could be accounted for separately or as a single unit ofaccounting. The Company determined that these obligations represent a single unit of accounting and will recognize revenue as product is supplied to Actavis.Therefore, the Company has recorded $4.0 million and $3.8 million of billed and billable milestones and development expenses related to the Actavis Agreementas deferred revenue as of December 31, 2015 and 2014, respectively. This revenue is expected to be recognized by the Company over the ten year period thatbegins after Actavis’ first sale of the applicable product under the Actavis Agreement.6. Fair Value of Financial InstrumentsThe carrying values of cash, restricted cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, and other short-term assets andliabilities approximate their respective fair values due to the short-term maturities of these assets and liabilities.Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transactionbetween market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data fromindependent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tiervalue hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quotedprices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and(Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires theCompany to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.Recurring Fair Value MeasurementsThe following tables show assets measured at fair value on a recurring basis as of December 31, 2015 and 2014 and the input categories associated withthose assets: As of December 31, 2015(in thousands) Level 1 Level 2 Level 3 Assets: Cash equivalents – money market funds $704 $— $— Marketable securities – commercial paper — — — Marketable securities – corporate debt securities — — — As of December 31, 2014(in thousands) Level 1 Level 2 Level 3 Assets: Cash equivalents – money market funds $33,199 $— $— Marketable securities – commercial paper — 6,491 — Marketable securities – corporate debt securities — 81,849 — There have been no impairments of the above assets measured and carried at fair value during the years ended December 31, 2015 or 2014. In addition, therewere no changes in valuation techniques or transfers between the fair value measurement levels during the years ended December 31, 2015 or 2014.There were no liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014. F-20Table of ContentsNon-Recurring Fair Value MeasurementsCertain assets, including IPR&D, may be measured at fair value on a non-recurring basis in periods subsequent to initial recognition. No non-recurring fairvalue measurements were required during the years ended December 31, 2015 or 2014.Other Fair Value MeasurementsThe estimated fair value of the $125.0 million aggregate principal amount of the Convertible Notes was $184.6 million as of December 31, 2015. TheCompany estimated the fair value of the Convertible Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input. The carryingvalue of the Convertible Notes is $88.5 million as of December 31, 2015 due to the bifurcation of the conversion feature of the Convertible Notes as describedmore fully in Note 11, “Borrowings.”As discussed in Note 11, “Borrowings,” in December 2015, the Company closed a private placement of $175.0 million aggregate principal amount of11.50% senior secured notes due 2022 (the “2022 Notes”). The carrying value of the 2022 Notes was $169.2 million as of December 31, 2015. The fair value of the2022 Notes approximated their face value of $175.0 million as of December 31, 2015.7. Consolidated SubsidiariesSilver Creek Pharmaceuticals, Inc.On August 20, 2010, the Company acquired a controlling interest in Silver Creek. The Company has concluded that Silver Creek is a variable interest entityand the Company is the primary beneficiary. The Company has the ability to direct the activities of Silver Creek through its ownership percentage and through theboard of director seats controlled by the Company and its de facto agents. As such, Silver Creek is consolidated by the Company.In December 2012, as described in Note 11, “Borrowings,” Silver Creek entered into a Note Purchase Agreement pursuant to which it issued convertiblenotes to various lenders in aggregate principal amounts of $1.6 million in December 2012, $0.3 million in February 2013 and $0.6 million in December 2013. As ofDecember 31, 2013, these outstanding borrowings and related accrued interest of $2.6 million converted to shares of Silver Creek Series A preferred stock at theSeries A preferred stock value of $1.00 per share. As a result of changes to the ownership composition of Silver Creek as of December 31, 2013, the non-controlling interest in Silver Creek increased by $0.8 million.During the year ended December 31, 2014, Silver Creek issued convertible notes to various lenders in the aggregate principal amount of $1.0 million. As ofDecember 31, 2014, these outstanding borrowings and an immaterial amount of related accrued interest converted to shares of Silver Creek Series A preferredstock at the Series A preferred stock value of $1.00 per share. As a result of changes to the ownership composition of Silver Creek as of December 31, 2014, thenon-controlling interest in Silver Creek increased by approximately $0.4 million.During the year ended December 31, 2015, Silver Creek issued and sold a total of 1.6 million shares of Silver Creek Series B preferred stock at a price pershare of $1.35 to investors and received net proceeds of $2.1 million, after deducting issuance costs. As a result of changes to the ownership composition of SilverCreek as of December 31, 2015, the non-controlling interest in Silver Creek increased by approximately $0.9 million.As of December 31, 2015 and 2014, the Company owned approximately 56% and 60% of the voting stock of Silver Creek, respectively, and recorded a non-controlling interest of approximately $0.2 million and $0.1 million, respectively, as a component of mezzanine equity on the Company’s consolidated balancesheets based on the terms of the Silver Creek Series A and Series B preferred stock.As of December 31, 2015, the Company consolidated Silver Creek’s total assets and total liabilities of $0.8 million and $0.2 million, respectively. As ofDecember 31, 2014, the Company consolidated Silver Creek’s total assets and total liabilities of $0.3 million and $0.2 million, respectively. As of December 31,2015 and 2014, the Company’s unrestricted cash and cash equivalents balance includes $0.7 million and $0.3 million, respectively, of cash and cash equivalentsheld by Silver Creek. The cash and cash equivalents held by Silver Creek as of December 31, 2015 are designated for the operations of Silver Creek.Merrimack Pharmaceuticals (Bermuda) Ltd.Merrimack Pharmaceuticals (Bermuda) Ltd. was incorporated in Bermuda during 2011 and merged with and into the Company during the third quarter of2014. F-21Table of Contents8. Goodwill and Intangible Assets, NetAs part of the acquisition of Hermes on October 6, 2009 (the “Acquisition Date”), the Company recognized acquired IPR&D of $7.0 million related toseveral development programs: an antibody-targeted nanotherapeutic that contains a chemotherapy drug, a nanotherapeutic that contains a chemotherapy drug andother early-stage preclinical programs in the amounts of $2.8 million, $3.4 million and $0.8 million, respectively. The Company also acquired intangible assets of$3.2 million related to core nano-carrier technology. These values were determined at the time of acquisition by estimating the costs to develop the acquiredIPR&D into commercially viable products, estimating the net cash flows from such projects and discounting the net cash flows back to their present values. Theprobability of success factors and discount rates used for each project considered the uncertainty surrounding the successful development of the acquired IPR&D.During the fourth quarter of 2015, upon the approval of ONIVYDE by the FDA, the Company reclassified the acquired IPR&D asset related to thenanotherapeutic that contains a chemotherapy drug to definite-lived intangible assets and commenced amortization. This definite-lived ONIVYDE intangible assetis amortized on a straight-line basis through 2028. Amortization of the acquired IPR&D asset related to the antibody-targeted nanotherapeutic that contains achemotherapy drug has not commenced as of December 31, 2015. The deprioritization and delay of the other early-stage preclinical programs during the yearended December 31, 2013 resulted in an impairment charge of $0.8 million recognized during the third quarter of 2013. The core nano-carrier technologyintangible asset is being amortized on a straight-line basis over a period of ten years, which is management’s best estimate of the useful life of this technology. Theweighted-average remaining amortization period for the Company’s intangible assets subject to amortization is approximately 10.6 years as of December 31, 2015.Changes in the carrying value of the nano-carrier technology intangible asset, the ONIVYDE intangible asset, IPR&D and goodwill for the years endedDecember 31, 2015 and 2014 were as follows: (in thousands) Nano-carrier technology intangible asset ONIVYDEintangible asset IPR&D Goodwill Balance, December 31, 2013 $1,845 $— $6,200 $3,605 Amortization (320) — — — Balance, December 31, 2014 1,525 — 6,200 3,605 Reclassification of IPR&D to definite-lived intangible assets — 3,400 (3,400) — Amortization (320) (50) — — Balance, December 31, 2015 $1,205 $3,350 $2,800 $3,605 Amortization expense is expected to be as follows for the next five-year period: Years Ended December 31, (in thousands) 2016 $578 2017 578 2018 578 2019 503 2020 258 F-22Table of Contents9. Property and Equipment, NetProperty and equipment, net as of December 31, 2015 and 2014 consisted of the following: December 31, (in thousands) 2015 2014 Lab equipment $19,305 $16,214 IT equipment 7,742 3,113 Leasehold improvements 21,026 18,219 Furniture and fixtures 910 624 Construction in process 2,243 472 Total property and equipment, gross 51,226 38,642 Less: Accumulated depreciation (29,311) (24,140) Total property and equipment, net $21,915 $14,502 Depreciation expense was $5.5 million, $4.2 million and $2.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. Capitalizedinterest costs were insignificant for the years ended December 31, 2015, 2014 and 2013.During the years ended December 31, 2015, 2014 and 2013, the Company disposed of $0.3 million, $1.6 million and $0.2 million, respectively, of fullydepreciated assets. There were no recognized impairment charges related to fixed assets in the years ended December 31, 2015, 2014 or 2013.10. Accounts Payables, Accrued Expenses and OtherAccounts payable, accrued expenses and other as of December 31, 2015 and 2014 consisted of the following: December 31, (in thousands) 2015 2014 Accounts payable $5,049 $2,510 Accrued goods and services 14,295 17,481 Accrued clinical trial costs 12,764 7,637 Accrued drug purchase costs 7,460 — Accrued payroll and related benefits 9,009 6,166 Accrued interest 3,041 2,956 Accrued dividends payable 19 19 Deferred tax incentives 445 467 Total accounts payable, accrued expenses and other $52,082 $37,236 11. Borrowings2022 NotesOn December 22, 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 11.50% 2022 Notes and entered into anindenture (the “U.S. Bank indenture”) with U.S. Bank National Association as trustee and collateral agent (the “2020 Notes Trustee”). As a result of this placement,the Company received net proceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by the Company. Theprivate placement and offering expenses included $0.9 million of transaction costs that were expensed in accordance with the debt modification guidance perAccounting Standards Codification (“ASC”) 480, as further discussed below. The 2022 Notes bear interest at a rate of 11.50% per year, payable semi-annually onJune 15 and December 15 of each year, beginning on June 15, 2016. The Company will pay semi-annual installments of principal on the 2022 Notes of$21,875,000 each, subject to adjustment as provided in the 2022 Notes, on June 15 and December 15 of each year, beginning on June 15, 2019. The 2022 Noteswill mature on December 15, 2022, unless earlier redeemed or repurchased in accordance with their terms prior to such date.The Company may redeem the 2022 Notes at its option, in whole or in part from time to time at a price equal to the principal amount plus accrued interestand a specified make-whole premium. If the Company experiences certain change of control events as defined in the U.S. Bank Indenture, the holders of the 2022Notes will have the right to require the Company to purchase all or a portion of the 2022 Notes at a purchase price in cash equal to 101% of the principal amountthereof, plus accrued and unpaid interest to the date of purchase. In addition, upon certain asset sale events as defined in the U.S. Bank Indenture, the Companymay be required to offer to use the net proceeds thereof to purchase all or a portion of the 2022 Notes at 100% of the principal amount thereof, plus accrued andunpaid interest to the date of purchase. F-23Table of ContentsThe 2022 Notes are senior secured obligations of the Company and will be equal in right of payment to all existing and future pari passu indebtedness of theCompany (including the Company’s outstanding Convertible Notes), will be senior in right of payment to all existing and future subordinated indebtedness of theCompany, will have the benefit of a security interest in the 2022 Notes collateral and will be junior in lien priority in respect of any asset-based lending collateralthat secures any first priority lien obligations from time to time. The 2022 Notes contain customary covenants, including covenants that limit or restrict theCompany’s ability to incur liens, incur indebtedness, and make certain restricted payments, but do not contain covenants related to future financial performance.The 2022 Notes are secured by a first priority lien on substantially all of the Company’s assets.The 2022 Notes contain customary events of default. Upon certain events of default occurring, the 2022 Notes Trustee may declare 100% of the principal ofand accrued and unpaid interest, if any, on all the 2022 Notes to be due and payable. In the case of certain events of bankruptcy, insolvency or reorganizationinvolving the Company or a restricted subsidiary, 100% of the principal of, and accrued and unpaid interest on, the 2022 Notes will automatically become due andpayable. There have been no events of default as of or during the year ended December 31, 2015.The Company assessed the 2022 Notes pursuant to ASC 815 to determine if any features necessitated bifurcation from the host instrument. The Companyconcluded that none of the embedded redemption features within the 2022 Notes require bifurcation as these features are clearly and closely related to the hostinstrument.A portion of the proceeds from the issuance of the 2022 Notes were used to repay the Company’s outstanding $40.0 million of loans payable under the LoanAgreement with Hercules, as further discussed below. The remaining proceeds will be used to fund future operations of the Company.Debt issuance costs incurred by the Company, excluding costs allocated to the debt modification as discussed below, are accounted for as a direct deductionto the carrying value of the 2022 Notes and are amortized to interest expense using the effective interest method over the life of the 2022 Notes. The effectiveinterest rate associated with the 2022 Notes is 12.32%. For the year ended December 31, 2015, interest expense related to the 2022 Notes was approximately $0.5million.Convertible NotesIn July 2013, the Company issued $125.0 million aggregate principal amount of Convertible Notes in an underwritten public offering. The Company issuedthe Convertible Notes under an indenture, dated as of July 17, 2013 (the “Base Indenture”) between the Company and Wells Fargo Bank, National Association, astrustee (the “Convertible Notes Trustee”), as supplemented by the supplemental indenture, dated as of July 17, 2013, between the Company and the ConvertibleNotes Trustee (together with the Base Indenture, the “Wells Fargo Indenture”). As a result of the Convertible Notes offering, the Company received net proceeds ofapproximately $120.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.The Convertible Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning onJanuary 15, 2014. The Convertible Notes are general unsecured senior obligations of the Company and rank (i) pari passu in seniority with respect to the 2022Notes, (ii) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes, (iii) equalin right of payment to any of the Company’s unsecured indebtedness that is not so subordinated, (iv) effectively junior in right of payment to any of the Company’ssecured indebtedness to the extent of the value of the assets securing such indebtedness and (v) structurally junior to all indebtedness and other liabilities (includingtrade payables) of the Company’s subsidiaries.The Convertible Notes will mature on July 15, 2020 (the “Maturity Date”), unless earlier repurchased by the Company or converted at the option of holders.Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2020only under the following circumstances: • during any calendar quarter commencing after September 30, 2013 (and only during such calendar quarter), if the last reported sale price of theCompany’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the lasttrading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; F-24Table of Contents • during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined inthe Convertible Notes) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of theproduct of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or • upon the occurrence of specified corporate events set forth in the Wells Fargo Indenture.During the fourth quarter of 2015, the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the periodof 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2015 was greater than 130% of the conversion price forthe Convertible Notes on each applicable trading day. As a result, holders may convert their Convertible Notes at their option at any time from January 1, 2016through March 31, 2016.On or after April 15, 2020 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their ConvertibleNotes at any time, regardless of the foregoing circumstances.Following the repayment and satisfaction in full of the Company’s obligations to Hercules under the Loan Agreement, which occurred in December 2015,upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock ora combination of cash and shares of the Company’s common stock.The initial conversion rate of the Convertible Notes is 160 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, whichis equivalent to an initial conversion price of $6.25 per share of common stock. The conversion rate will be subject to adjustment in some events, but will not beadjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the Maturity Date, the Company will increase theconversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances.Upon the occurrence of a fundamental change (as defined in the Wells Fargo Indenture) involving the Company, holders of the Convertible Notes mayrequire the Company to repurchase all or a portion of their Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes tobe purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.The Wells Fargo Indenture contains customary terms and covenants and events of default with respect to the Convertible Notes. If an event of default (asdefined in the Wells Fargo Indenture) occurs and is continuing, the Convertible Notes Trustee by written notice to the Company, or the holders of at least 25% inaggregate principal amount of the Convertible Notes then outstanding by written notice to the Company and the Convertible Notes Trustee, may, and theConvertible Notes Trustee at the request of such holders will, declare 100% of the principal of and accrued and unpaid interest on the Convertible Notes to be dueand payable. In the case of an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significantsubsidiary (as set forth in the Indenture), 100% of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become due andpayable. There have been no events of default as of or during the year ended December 31, 2015.The Company has separately accounted for the liability and equity components of the Convertible Notes by bifurcating gross proceeds between theindebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rateas of the date of issuance for similar notes which do not contain an embedded conversion option. This effective interest rate was estimated to be 15% and was usedto compute the initial fair value of the indebtedness of $71.2 million. The gross proceeds received from the issuance of the Convertible Notes less the initial amountallocated to the indebtedness resulted in a $53.8 million allocation to the embedded conversion option. The embedded conversion option was recorded instockholders’ deficit and as debt discount, to be subsequently amortized as interest expense over the term of the Convertible Notes. Underwriting discounts andcommissions and offering expenses totaled $4.4 million and were allocated to the indebtedness and the embedded conversion option based on their relative values.As a result, $2.5 million attributable to the indebtedness was recorded as debt discount, to be subsequently amortized as interest expense over the term of theConvertible Notes, and $1.9 million attributable to the embedded conversion option was netted with the embedded conversion option in stockholders’ deficit.For the years ended December 31, 2015, 2014 and 2013, interest expense related to the outstanding principal balance of the Convertible Notes was $13.7million, $13.7 million and $6.2 million, respectively. F-25Table of ContentsLoan AgreementIn November 2012, the Company entered into the Loan Agreement with Hercules pursuant to which the Company received loans in the aggregate principalamount of $40.0 million. The Company, as permitted under the Loan Agreement, had previously extended the interest-only payment period with the aggregateprincipal balance of the loans to be repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016. On June 25, 2014, theCompany entered into an amendment to the Loan Agreement, whereby the Company and Hercules agreed to extend until October 1, 2014 the period during whichthe Company makes interest-only payments. On November 6, 2014, the Company entered into a further amendment to the Loan Agreement, whereby the Companyand Hercules agreed to extend by four additional months the period during which the Company makes interest-only payments. On February 25, 2015, the Companyentered into a fourth amendment to the Loan Agreement pursuant to which the Company and Hercules agreed to extend the maturity date and the period duringwhich the Company makes interest-only payments on its current loans in the aggregate principal amount of $40.0 million. As a result of this amendment, theCompany was required to repay the outstanding aggregate principal balance of the loan beginning on June 1, 2016 and continuing through November 1, 2018. As aresult of the FDA’s approval of the Company’s NDA for ONIVYDE, which occurred on October 22, 2015, the Company elected to extend the interest-only periodby an additional six months such that the Company would repay the outstanding aggregate principal balance of the loans beginning on December 1, 2016 andcontinuing through November 1, 2018. This amendment was treated as a debt modification for accounting purposes.Upon the earlier of full repayment of the loans or November 1, 2016, the Company was required to pay Hercules a fee of $1.2 million, which had beenrecorded as a discount to the loans and as a long-term liability on the Company’s consolidated balance sheets. Additionally, the Company reimbursed Hercules forcosts incurred related to the loans, which was reflected as a discount to the carrying value of the loans. The Company amortized these loan discounts totaling $1.6million to interest expense over the term of the loans using the effective interest method.In connection with the Loan Agreement, the Company granted Hercules a security interest in all of the Company’s personal property now owned or hereafteracquired, excluding intellectual property but including the proceeds from the sale, if any, of intellectual property, and a negative pledge on intellectual property.The Loan Agreement also contained certain representations, warranties and non-financial covenants of the Company.During the fourth quarter of 2015, the Company repaid the loans in full in conjunction with the issuance of the 2022 Notes. The total repayment amountincluded the $40.0 million in outstanding principal, the $1.2 million fee discussed above and interest accrued up through the repayment date. The Companyassessed the repayment of the Loan Agreement with Hercules in conjunction with the issuance of the 2022 Notes, of which Hercules holds a portion, in accordancewith the debt extinguishment and modification guidance per ASC 480. Based upon this assessment, the Company concluded that this transaction represented a debtmodification, and accordingly, $0.3 million of unamortized debt issuance costs related to the Loan Agreement will be amortized as an adjustment of interestexpense over the life of the 2022 Notes using the effective interest method. In addition, $0.9 million of debt issuance costs associated with the 2022 Notes wereallocated to the modified Loan Agreement and expensed as a component of “Interest expense” on the consolidated statement of operations and comprehensive lossfor the year ended December 31, 2015.For the years ended December 31, 2015, 2014 and 2013, interest expense related to the Hercules loans was $5.4 million, $4.7 million and $4.9 million,respectively.Convertible Notes—Silver CreekIn December 2012, the Company’s majority owned subsidiary, Silver Creek, entered into a Note Purchase Agreement pursuant to which it issued convertiblenotes to various lenders in aggregate principal amounts of $1.6 million in December 2012, $0.9 million during the year ended December 31, 2013 and $1.0 millionduring the year ended December 31, 2014. The notes issued pursuant to the Note Purchase Agreement bore interest at 6% per annum. Upon issuance, theseconvertible notes contained a feature wherein if at any time prior to maturity Silver Creek enters into a qualifying equity financing, defined as a sale or series ofrelated sales of equity securities prior to the maturity date and resulting in at least $4.0 million of gross proceeds, the notes would automatically convert into thenext qualifying equity financing at a 25% discount. The Company determined that this convertible feature met the definition of a derivative and required separateaccounting treatment. The derivative was estimated to be valued at $0.2 million for the year ended December 31, 2012 using a probability-weighted model and wasrecorded as derivative liability on the consolidated balance sheets. For the years ended December 31, 2014 and 2013, the derivative was remeasured uponconversion of the notes with the gain in remeasurement recognized in other income. The specific notes that were outstanding as of December 31, 2014 and 2013matured and converted, along with an immaterial amount of accrued interest into shares of Silver Creek Series A preferred stock on both December 31, 2014 and2013. Upon conversion, the Company’s ownership percentage of Silver Creek outstanding preferred stock decreased from 74% as of December 31, 2012 to 64% asof December 31, 2013 to 60% as of December 31, 2014, and a $0.4 million and $0.8 million increase to non-controlling interest was recognized as of December 31,2014 and December 31, 2013, respectively. F-26Table of ContentsFuture Minimum Payments under Outstanding BorrowingsFuture minimum payments under outstanding borrowings as of December 31, 2015 are as follows: (in thousands) Convertible Notes 2022 Notes 2016 $5,625 $19,734 2017 5,625 20,125 2018 5,625 20,125 2019 5,625 62,617 2020 and thereafter 130,625 157,664 Total $153,125 $280,265 Less interest (28,125) (105,265) Less unamortized discount (36,505) (5,840) Less current portion — — Long-term debt, net of current portion $88,495 $169,160 12. InventoryInventory consists of the following as of December 31, 2015: (in thousands) December 31, 2015 Raw materials $900 Work in process 2,743 Finished goods 74 Total inventory $3,717 Inventory acquired prior to receipt of marketing approval of ONIVYDE was expensed as research and development expense as incurred. The Companybegan to capitalize the costs associated with the production of ONIVYDE upon receipt of FDA approval on October 22, 2015.13. Stock WarrantsThe following is a description of the common stock warrant activity of the Company: (in thousands, except per share amounts) Warrants for the Purchase of Common Stock WeightedAverage Exercise Price Balance—December 31, 2012 2,842 $3.05 Exercised (65) $2.82 Balance—December 31, 2013 2,777 $3.05 Exercised (396) $3.38 Balance—December 31, 2014 2,381 $3.00 Exercised (2,355) $3.00 Cancelled (26) $3.00 Balance—December 31, 2015 — $— F-27Table of ContentsDuring the year ended December 31, 2013, warrants to purchase approximately 65,000 shares of common stock were cashless exercised and 35,000 shares ofcommon stock were issued. During the year ended December 31, 2014, warrants to purchase approximately 75,000 shares of common stock were cashlessexercised and 38,000 shares of common stock were issued. During the year ended December 31, 2015, warrants to purchase approximately 2,295,000 shares ofcommon stock were cashless exercised and 1,695,000 shares of common stock were issued. As of December 31, 2015, all remaining unexercised warrants for thepurchase of common stock had expired and were cancelled.14. Common StockIn July 2013, the Company sold an aggregate of 5.8 million shares of its common stock at a price to the public of $5.00 per share in an underwritten publicoffering and received net proceeds of approximately $26.7 million, after deducting underwriting discounts and commissions and offering expenses payable by theCompany.In July 2015, the Company entered into a Sales Agreement with Cowen and Company, LLC (“Cowen”) to sell shares of the Company’s common stockhaving an aggregate sales price of up to $40.0 million through an “at the market offering” program under which Cowen acted as the sales agent. The Companyconcluded sales under this program in September 2015, having sold approximately 3.8 million shares of common stock and generating approximately $38.6 millionin net proceeds, after deducting commissions and offering expenses.As of December 31, 2015 and 2014, the Company had 200.0 million shares of $0.01 par value common stock authorized. There were approximately115.9 million and 106.7 million shares of common stock issued and outstanding as of December 31, 2015 and 2014, respectively. The shares reserved for futureissuance as of December 31, 2015 and 2014 consisted of the following: (in thousands) December 31, 2015 December 31, 2014 Common stock warrants — 2,381 Outstanding options to purchase common stock 19,211 19,567 Shares available for future issuance under 2011 Stock IncentivePlan 2,462 1,983 Conversion of the Convertible Notes 25,000 25,000 15. Stock-Based CompensationIn 2008, the Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) for employees, officers, directors, consultants and advisors. The2011 Stock Incentive Plan (the “2011 Plan”) became effective upon closing of the Company’s initial public offering in April 2012. Upon effectiveness of the 2011Plan, no further awards were available to be issued under the 2008 Plan. The 2011 Plan is administered by the Board of Directors of the Company and permits theCompany to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.Additional shares also become available for grant by reason of the forfeiture, cancellation, expiration or termination of existing awards. The Company registered3.4 million, 3.6 million and 3.7 million of additional shares of common stock related to the 2011 Plan in February 2013, March 2014 and February 2015,respectively. As of December 31, 2015, there were 2.5 million shares remaining available for grant under the 2011 Plan.During the years ended December 31, 2015, 2014 and 2013, the Company issued options to purchase 3.7 million, 3.9 million and 3.3 million shares ofcommon stock, respectively. These options generally vest over a three-year period for employees. Options granted to directors during the period from April 2012through December 2013 vest over a one-year period. All other options granted to directors vest immediately. During the year ended December 31, 2013, theCompany also issued options to purchase less than 0.1 million shares of common stock to non-employees. The assumptions used to estimate the fair value ofoptions granted to non-employees at the date of grant were materially consistent with those used for employee and director grants. The Company did not grant anyoptions to purchase common stock to non-employees during the years ended December 31, 2015 or 2014. F-28Table of ContentsThe Company recognized stock-based compensation expense as follows: Years ended December 31, (in thousands) 2015 2014 2013 Employee awards: Research and development $8,271 $6,864 $5,954 General and administrative 7,022 6,065 4,808 Stock-based compensation for employee awards 15,293 12,929 10,762 Stock-based compensation for non-employee awards 58 268 (29) Total stock-based compensation $15,351 $13,197 $10,733 The fair value of stock options granted to employees during the years ended December 31, 2015, 2014 and 2013 was estimated at the date of grant using thefollowing assumptions: Years ended December 31, 2015 2014 2013Risk-free interest rate 1.5 - 1.8% 1.6 - 2.0% 0.1 - 1.9%Expected dividend yield 0% 0% 0%Expected term 5.0 - 5.9 years 5.0 - 5.9 years 5.3 - 5.9 yearsExpected volatility 66 - 67% 64 - 72% 67 - 70%The Company uses the simplified method to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basisupon which to estimate expected term. The computation of expected volatility is based on the historical volatility of comparable companies from a representativepeer group selected based on industry and market capitalization. The risk-free interest rate is based on a treasury instrument whose term is consistent with theexpected life of the stock options. Management estimates expected forfeitures based on historical experience and recognizes compensation costs only for thoseequity awards expected to vest.The following table summarizes stock option activity during the year ended December 31, 2015: (in thousands, except per share amounts) Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding at December 31, 2014 19,556 $4.47 6.17 $133,599 Granted 3,720 $9.63 Exercised (3,606) $2.75 Forfeited (459) $7.36 Outstanding at December 31, 2015 19,211 $5.72 6.24 $47,963 Vested and expected to vest at December 31, 2015 18,923 $5.68 6.20 $47,818 Exercisable at December 31, 2015 14,783 $5.01 5.48 $44,173 The weighted-average grant date fair value of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $5.80, $3.41 and $3.59,respectively.The aggregate intrinsic value was calculated as the difference between the exercise price of the stock options and the fair value of the underlying commonstock. The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $30.9 million, $19.8 million and $2.7million, respectively.As of December 31, 2015, there was $18.3 million of total unrecognized compensation cost related to unvested employee stock awards. As of December 31,2015, the Company expects to recognize those costs over a weighted average period of approximately 1.8 years. F-29Table of Contents16. Income TaxesAs a result of losses incurred, the Company did not provide for any income taxes in the years ended December 31, 2015, 2014 or 2013. A reconciliation ofthe Company’s effective tax rate to the statutory federal income tax rate is as follows: Years Ended December 31, 2015 2014 2013 Federal income tax at statutory federal rate 35.0% 35.0% 35.0% State taxes 1.0 3.1 4.3 Permanent differences (6.4) (9.1) (2.0) Stock-based compensation (1.3) (1.7) (0.6) Tax credits 21.3 30.5 12.4 Foreign rate differential — (2.3) (2.8) Change in deferred state tax rate (2.3) — — Other (0.5) 4.5 (1.5) Change in valuation allowance (46.8) (60.0) (44.8) — % — % — % During the year ended December 31, 2014, the Company recorded a deferred tax liability related to the embedded conversion option of the ConvertibleNotes though equity. This deferred tax liability is reflected in the deferred tax table below, but is appropriately excluded from the effective tax rate.Temporary differences that give rise to significant net deferred tax assets as of December 31, 2015 and 2014 are as follows: (in thousands) December 31,2015 December 31,2014 Deferred tax assets Net operating losses $182,992 $160,333 Capitalized research and development expenses 21,444 30,929 Credit carryforwards 93,113 62,362 Depreciation 2,128 2,579 Deferred compensation 11,664 10,682 Accrued expenses 1,807 12 Deferred revenue 10,999 960 Other temporary differences 17,235 9,195 Total gross deferred tax asset 341,382 277,052 Valuation allowance (326,577) (257,489) Net deferred tax asset 14,805 19,563 Deferred tax liabilities Intangible assets (2,667) (3,106) Debt discount (12,138) (16,457) Net deferred taxes $— $— The Company concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements. The Company’sevaluation was performed for the tax years ended December 31, 2012 through 2015, the tax years which remain subject to examination by major tax jurisdictions asof December 31, 2015. However, to the extent the Company utilizes net operating losses from years prior to 2011, the statute remains open to the extent of the netoperating losses utilized. The Company’s policy is to recognize interest and penalties for uncertain tax positions as a component of income tax expense. TheCompany has not recognized any interest and penalties historically through December 31, 2015. F-30Table of ContentsAt December 31, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of $509.8 million and $356.9 million,respectively. Included in the federal and state net operating loss carryforwards is approximately $36.5 million and $24.7 million, respectively, of deduction relatedto the exercise of stock options. This amount represents an excess tax benefit, which will be realized when it results in reduction of cash taxes in accordance withASC 718. This excess tax benefit will be directly credited to additional paid-in capital when it is realized. The Company’s existing federal and state net operatingloss carryforwards will expire in years through 2035. The Company also has available research and development credits for federal and state income tax purposesof approximately $23.7 million and $9.6 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2026,respectively. As of December 31, 2015, the Company also had available investment tax credits for state income tax purposes of $0.8 million, which will expire inyears through 2018 if unused. In addition, the Company has federal orphan drug credits of $62.7 million which begin to expire in 2031. The Company hasevaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating losscarryforwards, deferred revenue and capitalized research and development expenses. Under the applicable accounting standards, the Company has considered itshistory of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly,the Company has established a full valuation allowance against the deferred tax assets.Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 ofthe Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), due to ownership change limitations that have occurred previously or that couldoccur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilizedannually to offset future taxable income and tax. The Company has not currently completed an evaluation of ownership changes through December 31, 2015 toassess whether utilization of the Company’s net operating loss or research and development credit carryforwards would be subject to an annual limitation underSection 382 of the Internal Revenue Code. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject tolimitation.The Company has not yet conducted a study of its domestic research and development credit carryforwards and orphan drug credits. This study may result inan increase or decrease to the Company’s credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presentedas an uncertain tax position. A full valuation allowance has been provided against the Company’s credits, and if an adjustment is required, this adjustment would beoffset by an adjustment to the valuation allowance. As a result, there would be no impact to the consolidated statements of operations and comprehensive loss orconsolidated statements of cash flows if an adjustment were required.The change in the valuation allowance against the deferred tax assets in the years ended December 31, 2015, 2014 and 2013 was as follows: (in thousands) Balance atBeginningof Period Additions Deductions Balance atEnd of Period December 31, 2013 $169,651 $37,653 $— $207,304 December 31, 2014 207,304 50,185 — 257,489 December 31, 2015 257,489 69,088 — 326,577 17. Commitments and ContingenciesOperating LeasesThe Company leases its office, laboratory and manufacturing space under non-cancelable operating leases. Total rent expense under these operating leaseswas $7.4 million, $5.9 million and $5.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. F-31Table of ContentsDuring August 2012, the Company entered into an Indenture of Lease (the “Amended Lease”), which amended and restated its facility lease, and agreed tooccupy approximately a total of 109,000 square feet, all of which is leased until June 30, 2019. In March and September 2013, the Company entered into facilitylease amendments that are co-terminus with the existing lease. As part of the Amended Lease and subsequent amendments, the landlord agreed to reimburse theCompany for a portion of tenant improvements made to the facility, up to approximately $8.2 million. On February 23, 2015 and July 22, 2015, the Companyentered into amendments to its facility lease. These lease amendments provide an additional 45,463 square feet of leased space in total at the Company’s currentfacility with a termination date of June 30, 2019, which is co-terminous with the Company’s existing lease. As a result of these amendments, the Company agreedto additional lease payments totaling approximately $9.3 million through 2019. In addition, under the terms of the amendments, the landlord agreed to provide theCompany with an aggregate leasehold improvement allowance of up to $1.3 million.As of both December 31, 2015 and 2014, the Company has received $8.2 million, of these tenant improvement reimbursements, with the remainingreimbursable tenant improvements recorded within other current assets on the consolidated balance sheets. Tenant improvements recorded in deferred rent areamortized over the term of the lease as reductions to rent expense. The Amended Lease expires on June 30, 2019. The Company retains an option to renew theAmended Lease with respect to all of the leased space for an additional period of either one or five years.Future minimum lease payments under non-cancelable operating leases at December 31, 2015 are as follows: Years ended December 31, (in thousands) 2016 $7,543 2017 7,690 2018 7,846 2019 3,953 18. Related Party TransactionsRelated parties of the Company held approximately 6% of the outstanding shares of Silver Creek Series A preferred stock as of December 31, 2014. Relatedparties of the Company held approximately 7% of the outstanding shares of Silver Creek Series A and Series B preferred stock as of December 31, 2015.19. Retirement PlanOn May 31, 2002, the Company established a 401(k) defined contribution savings plan (the “401(k) Plan”) for its employees who meet certain service periodand age requirements. Contributions are permitted up to the maximum allowed under the Internal Revenue Code of each covered employee’s salary. The 401(k)Plan permits the Company to contribute at its discretion. For the years ended December 31, 2015, 2014 and 2013, the Company made contributions of $1.1 million,$0.8 million and $0.7 million, respectively, to the 401(k) Plan. F-32Table of Contents20. Selected Quarterly Financial Data (Unaudited)The following table contains quarterly financial information for 2015 and 2014. The Company believes that the following information reflects all normalrecurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are not necessarily indicativeof results for any future period. First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) 2015 Product revenues, net $— $— $— $4,328 License and collaboration revenues 14,842 36,558 16,440 17,090 Cost of product revenues — — — 46 Research and development expenses 35,679 42,806 37,763 44,740 Selling, general and administrative expenses 9,189 12,315 16,956 19,335 Net loss (34,432) (22,901) (42,386) (48,068) Net loss attributable to Merrimack Pharmaceuticals, Inc. (34,759) (22,778) (42,594) (47,826) Net loss per share available to common stockholders—basic and diluted $(0.32) $(0.21) $(0.38) $(0.41) First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) 2014 License and collaboration revenues $13,034 $27,815 $28,002 $33,905 Research and development expenses 30,324 33,795 43,632 30,744 Selling, general and administrative expenses 6,224 7,921 8,095 8,277 Net loss (27,754) (18,290) (28,038) (9,477) Net loss attributable to Merrimack Pharmaceuticals, Inc. (27,585) (18,109) (27,901) (9,696) Net loss per share available to common stockholders—basic and diluted $(0.27) $(0.17) $(0.27) $(0.09) F-33Table of ContentsEXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 filed on April 27, 2012) 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1, asamended, filed on January 13, 2012) 4.1 Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on FormS-1, as amended, filed on October 26, 2011) 4.2 Indenture, dated as of July 17, 2013, by and between the Registrant and Wells Fargo Bank, National Association, as trustee (incorporated by referenceto Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 18, 2013) 4.3 First Supplemental Indenture, dated as of July 17, 2013, by and between the Registrant and Wells Fargo Bank, National Association, as trustee(incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on July 18, 2013) 4.4 Indenture (including the Form of Note), dated as of December 22, 2015, by and among the Registrant, any Guarantor that becomes a party thereto andU.S. Bank National Association, a national banking association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to theRegistrant’s Current Report on Form 8-K filed on December 22, 2015)10.1# 1999 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended, filed onJuly 8, 2011)10.2# 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended, filed onJuly 8, 2011)10.3# 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, as amended, filed onJanuary 13, 2012)10.4# Form of Incentive Stock Option Agreement under 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’sRegistration Statement on Form S-1, as amended, filed on January 13, 2012)10.5# Form of Non-Qualified Stock Option Agreement under 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’sRegistration Statement on Form S-1, as amended, filed on January 13, 2012)10.6# Employment Agreement, dated as of August 11, 2015, by and between the Registrant and Yasir B. Al-Wakeel (incorporated by reference to Exhibit10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2015)10.7# Employment Agreement, dated as of February 24, 2015, by and between the Registrant and Peter N. Laivins (incorporated by reference to Exhibit10.6 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2015)10.8# Employment Agreement, dated as of September 30, 2011, by and between the Registrant and William M. McClements (incorporated by reference toExhibit 10.26 to the Registrant’s Registration Statement on Form S-1, as amended, filed on January 13, 2012)10.9# Amended and Restated Employment Agreement, dated as of August 16, 2011, by and between the Registrant and Robert J. Mulroy (incorporated byreference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended, filed on August 19, 2011)10.10# Employment Agreement, dated as of February 24, 2015, by and between the Registrant and Birgit M. Schoeberl (incorporated by reference to Exhibit10.9 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2015)Table of Contents10.11# Amended and Restated Employment Agreement, dated as of August 16, 2011, by and between the Registrant and Edward J. Stewart (incorporated byreference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1, as amended, filed on August 19, 2011)10.12# Amended and Restated Employment Agreement, dated as of August 16, 2011, by and between the Registrant and William A. Sullivan (incorporatedby reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, as amended, filed on August 19, 2011)10.13# Form of Indemnification Agreement between the Registrant and each director and executive officer (incorporated by reference to Exhibit 10.12 to theRegistrant’s Registration Statement on Form S-1, as amended, filed on August 19, 2011)10.14 Indenture of Lease, dated as of August 24, 2012, by and between the Registrant and DWF IV One Kendall, LLC (as successor-in-interest to RBKendall Fee, LLC), as amended by the First Amendment of Lease, dated as of March 18, 2013 (incorporated by reference to Exhibit 10.14 to theRegistrant’s Annual Report on Form 10-K filed on March 20, 2013)10.15 Second Amendment of Lease, dated as of September 12, 2013, by and between the Registrant and DWF IV One Kendall, LLC (as successor-in-interest to RB Kendall Fee, LLC) (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 8,2013)10.16 Third Amendment of Lease, dated as of February 23, 2015, by and between the Registrant and DWF IV One Kendall, LLC (incorporated by referenceto Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2015)10.17 Fourth Amendment of Lease, dated as of July 22, 2015, by and between the Registrant and DWF IV One Kendall, LLC (incorporated by reference toExhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2015)10.18 Sublease, dated as of August 20, 2010, by and between Silver Creek Pharmaceuticals, Inc. and FibroGen, Inc., as amended on January 20,2011, May 4, 2011, May 26, 2011, August 1, 2011 and November 2, 2012 (incorporated by reference to Exhibit 10.15 to the Registrant’s AnnualReport on Form 10-K filed on March 20, 2013)10.19 Amendment No. 6 to Sublease, dated as of December 12, 2013, by and between Silver Creek Pharmaceuticals, Inc. and FibroGen, Inc. (incorporatedby reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed on March 4, 2014)10.20* Amendment No. 7 to Sublease, dated as of June 1, 2014, by and between Silver Creek Pharmaceuticals, Inc. and FibroGen, Inc.10.21† License and Collaboration Agreement, dated as of September 23, 2014, by and among the Registrant, Baxter International Inc., Baxter HealthcareCorporation and Baxter Healthcare SA (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed onNovember 10, 2014)10.22† Assignment, Sublicense and Collaboration Agreement, dated as of May 5, 2011, by and between the Registrant (as successor-in-interest to MerrimackPharmaceuticals (Bermuda) Ltd.) and PharmaEngine, Inc. (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement onForm S-1, as amended, filed on October 26, 2011)10.23† First Amendment to Assignment, Sublicense and Collaboration Agreement, dated as of September 22, 2014, by and between the Registrant andPharmaEngine, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 10, 2014)10.24† Development, License and Supply Agreement, dated as of November 25, 2013, by and between the Registrant and Watson Laboratories, Inc.(incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on March 4, 2014)10.25† First Amendment to Development, License and Supply Agreement, dated as of January 23, 2015, by and between the Registrant and WatsonLaboratories, Inc. (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2015)10.26† Exclusive License Agreement, dated as of November 1, 2000, by and between the Registrant (as successor-in-interest to Hermes BioSciences, Inc.)and The Regents of the University of California, as amended on October 6, 2003, September 13, 2006, June 6, 2007 and September 28, 2007(incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1, as amended, filed on October 26, 2011)Table of Contents10.27† Collaboration Agreement, dated as of November 16, 2009, by and between the Registrant and Adimab LLC, as amended on April 27, 2010, June 2,2010 and October 11, 2011 (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1, as amended, filedon October 26, 2011)10.28† Sublicense Agreement, dated as of June 30, 2008, by and between the Registrant and Dyax Corp. (incorporated by reference to Exhibit 10.23 to theRegistrant’s Registration Statement on Form S-1, as amended, filed on July 8, 2011)10.29† Amended and Restated Collaboration Agreement, dated as of January 24, 2007, by and between the Registrant and Dyax Corp., as amended onJuly 31, 2008 and November 6, 2009 (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1, asamended, filed on October 26, 2011)10.30 Amendment to Amended and Restated Collaboration Agreement, dated as of January 18, 2012, by and between the Registrant and Dyax Corp.(incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K filed on March 20, 2013)10.31 Collateral Agreement, dated as of December 22, 2015, by and among the Registrant, the Subsidiary Parties from time to time party thereto andU.S. Bank National Association, a national banking association, as trustee and collateral agent (incorporated by reference to Exhibit 10.1 to theRegistrant’s Current Report on Form 8-K filed on December 22, 2015)21.1* Subsidiaries of the Registrant23.1* Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm31.1* Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2* Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1+ Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of200232.2+ Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.LAB* XBRL Taxonomy Extension Label Linkbase Database101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith.+Furnished herewith.#Management contract or compensatory plan, contract or agreement.†Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and ExchangeCommission.Exhibit 10.20A MENDMENT N O . 7 TO S UBLEASET HIS A MENDMENT N O . 7 (the “ Seventh Amendment ”) is effective as of June 1, 2014 (the “ Seventh Amendment Effective Date ”) by and between SILVER C REEK P HARMACEUTICALS (“ Subtenant ”) and F IBRO G EN , I NC . (“ FibroGen ”). This Seventh Amendment amends the Sublease entered into byand between Subtenant and FibroGen on August 6, 2010 (the “ Sublease ”), as previously amended (the “ Prior Amendments ”). Subtenant and FibroGen shall bereferred to individually herein as a “Party”, and collectively as, the “Parties”.W HEREAS , Subtenant is presently subletting certain office and laboratory space; andW HEREAS , Subtenant wishes to continue to sublease certain designated office and laboratory space from FibroGen in the 409 Building; andN OW , T HEREFORE , for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: (1)Unless otherwise defined herein, all capitalized terms and phrases used in this Seventh Amendment shall have the meaning ascribed to them in theSublease as amended by the Prior Amendments. (2)Section 3.2 of the Sublease is hereby deleted in its entirety and replaced with the following: “3.2This Sublease will expire on: a)December 31, 2016 (“ Expiration Date ”) b)Subtenant shall have the option to extend term of lease for one additional six (6) month term by giving thirty (30) days written notice no laterthan thirty (30) days from the Expiration Date stated in Section 3.2a” (3)Section 4.1 of the Sublease is hereby amended with the following:“4.1 Subtenant shall pay a monthly rent (“ Rent ”) to FibroGen for the Subleased Premises according to the following Schedule: Months Rent/Sq.Ft./Mo. Total Sq. Ft. Amount/Mo. September 1, 2010-January 31, 2011 (Lab/Office) $6.80 761.00 $5,174.80 February 1, 2011-April 30, 2011 (Lab/Office) $6.80 1271.00 $8,642.80 May 1, 2011-June 14, 2011 (Lab/Office) $6.80 1354.00 $9,207.20 June 15, 2011-July 31, 2011 (Lab/Office/Vivarium) $6.50/Vivarium $6.80/Office/Lab 348.33 1354.00 Total Sq. Ft .1738.33 $$ $2,264.15 9,207.20 Total Amt./Mo .11,471.35 August 1, 2011-August 7, 2011 (Lab/Office/Vivarium) $6.50/Vivarium $6.80/Office/Lab 348.33 1354.00 Total Sq. Ft .1715.33 $$ $511.28 2,079.00 Total Amt . 2,590.28 August 8, 2011-August 31, 2011* (Lab/Office/Vivarium) $6.50/Vivarium $6.60/Office/Lab 348.33 1367.00 Total Sq. Ft .1715.33 $$ $1,752.87 6,984.96 Total Amt . 8,737.83 September 1, 2011-December 14, 2013 (Lab/Office/Vivarium) $6.50/Vivarium $6.60/Office/Lab 348.33 1367.00 Total Sq. Ft .1715.33 $$ $2,264.15 9,022.20 Total Amt./Mo .11,286.35 December 15, 2013-December 31, 2015 (Lab/Office/Vivarium) $6.50/Vivarium $6.60/Office/Lab 511.33 1367.00 Total Sq. Ft .1878.33 $$ $3,323.65 9,022.20 Total Amt./Mo .12,345.85 January 1, 2016-December 31, 2016 (Lab/Office/Vivarium) $7.26 1878.33 $13,636.68 *Note: Pro-Rated Rent Payment” (4)This Seventh Amendment, together with the Sublease, as amended by the Prior Amendments, contains the entire understanding of the Parties withrespect to the subject matter hereof. Except as otherwise provided herein and in the Prior Amendments, the Sublease has not been modified oramended and remains in full force and effect. All express or implied agreements and understandings that conflict with the terms of this SeventhAmendment, either oral or written, heretofore made with respect to subject matter herein are expressly superseded by this Seventh Amendment. (5)This Seventh Amendment may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute oneand the same instrument. Counterparts may be signed and delivered by facsimile and/or via portable document format (pdf) (or similar format), eachof which shall be binding when sent.I N W ITNESS W HEREOF , the Parties have executed this Seventh Amendment to the Sublease as of the Seventh Amendment Effective Date. F IBRO G EN , I NC . S ILVER C REEK P HARMACEUTICALS By: /s/ Pat Cotroneo By: /s/ Matthew OnsumName: Pat Cotroneo Name: Matthew OnsumTitle: CFO Title: President & CEODate: 11/6/2015 Date: 11/6/2015 2Exhibit 21.1SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of IncorporationMerrimack Pharmaceuticals UK Limited* UKSilver Creek Pharmaceuticals, Inc. DelawareCrane Therapeutics, Inc.* Delaware *wholly ownedExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-186369 and 333-194312) and S-8 (Nos. 333-180996,333-186370, 333-194313 and 333-202346) of Merrimack Pharmaceuticals, Inc. of our report dated February 26, 2016 relating to the financial statements and theeffectiveness of internal control over financial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPBoston, MassachusettsFebruary 26, 2016Exhibit 31.1CERTIFICATIONSI, Robert J. Mulroy, certify that:1. I have reviewed this Annual Report on Form 10-K of Merrimack Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: February 26, 2016 /s/ Robert J. Mulroy Robert J. Mulroy President and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2CERTIFICATIONSI, Yasir B. Al-Wakeel, certify that:1. I have reviewed this Annual Report on Form 10-K of Merrimack Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: February 26, 2016 /s/ Yasir B. Al-Wakeel Yasir B. Al-Wakeel Chief Financial Officer and Head of Corporate Development(Principal Financial Officer) Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Merrimack Pharmaceuticals, Inc. (the “Company”) for the period ended December 31, 2015 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Robert J. Mulroy, President and Chief Executive Officer of theCompany, hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 26, 2016 /s/ Robert J. Mulroy Robert J. Mulroy President and Chief Executive Officer(Principal Executive Officer)Exhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Merrimack Pharmaceuticals, Inc. (the “Company”) for the period ended December 31, 2015 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Yasir B. Al-Wakeel, Chief Financial Officer and Head ofCorporate Development of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 26, 2016 /s/ Yasir B. Al-Wakeel Yasir B. Al-Wakeel Chief Financial Officer and Head of Corporate Development(Principal Financial Officer)

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