How Risky Is Merrimack Pharmaceuticals Stock?

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Merrimack Pharmaceuticals (MACK 0.27%) won FDA approval of its first commercial drug, Onivyde, last November, and recently, the company announced a cost-cutting plan to reduce its operating expenses by more than $200 million over the coming two years. Will Onivyde's sales growth and management's taking an ax to expenses be enough to propel this company's shares higher? Let's take a closer look.

A new approach to pancreatic cancer

Onivyde is a formulation of the chemotherapy irinotecan that's encapsulated to extend how long irinotecan remains in the body. Onivyde is approved for use alongside chemotherapies 5-FU and leucovorin in pancreatic cancer patients who have previously been treated with gemicitibine, a chemotherapy that was previously sold under the brand name Gemzar.

Prior to losing patent protection in 2010, Gemzar's global sales eclipsed $1 billion.

Irinotecan works by inhibiting topoisomerase I, an enzyme involved in DNA transcription and replication, and in promoting cell death. In trials, Onivyde plus 5-FU and leucovorin therapy improved overall survival to 6.2 months versus 4.2 months for 5-FU and leucovorin alone.

Extending overall survival in this patient population is particularly significant given the poor prognosis and limited treatment options available to previously treated pancreatic cancer patients. Most metastatic pancreatic cancer patients are treated with gemcitabine-based therapy during first- or second-line therapy, but until Onivyde's approval, there was no standard of care available upon disease progression. 

According to the National Cancer Institute, 48,960 new cases of pancreatic cancer are diagnosed in the U.S. every year, and sadly, roughly the same number of people die from the disease annually. Globally, 338,000 people are diagnosed with pancreatic cancer annually.  

Getting on firmer financial ground

So far, Onivyde sales are steadily improving since its launch. In Q1, Onivyde's gross product sales were $11.3 million, and in Q2, Onivyde's sales increased 26% quarter over quarter to $14.8 million.

Momentum appears to have carried over into Q3, too. Script data suggests Onivyde's gross sales were $6.1 million in August and $4.8 million in July.

Onivyde's improving revenue is good news to investors who are eager to see Merrimack offset some of its spending, but revenue still needs to head significantly higher for Merrimack to turn a profit. In Q2, the company's operating expenses totaled $61.7 million, including $41 million that was spent on R&D and $20.7 million that was spent on selling, general, and administrative costs.

Although Merrimack's spending pace means it's unclear when this company could move into the black, management did recently announce a 22% reduction in headcount that it believes will shave expenses by $200 million over the next two years. Those cuts will slow the company's cash burn and allow current cash on the books to finance operations for at least another 12 months.

Expanding its top line

Onivyde is only approved in the U.S. right now, but a key European Medicines Agency's committee issued a positive recommendation for approval in the EU in July, suggesting a green light in that region is on its way.

If Onivyde gets a go-ahead in Europe, then Merrimack's top line should get a nice boost from payments from Shire.

Shire owns ex-U.S. licensing rights to Onivyde, and milestone payments for achieving regulatory and sales hurdles, plus royalties, could be significant. So far, Merrimack has received $62.5 million of up $100.0 million in research and development milestones and $30 million of up to $520.0 million in specified regulatory milestones. Another $250.0 million in sales milestones could be heading its way down the road, too. Additionally, Shire will be paying Merrimack tiered royalties on Onivyde's net sales and those royalties range from percentages between 10 and the low 20s.

Merrimack's top line could also get a nice boost if a trial that's evaluating Onivyde as a first-line therapy in pancreatic cancer pans out. Studies are under way pitting an Onivyde-containing therapy head-to-head against Celgene's Abraxane plus gemcitabine in chemotherapy-naive patients. Results from this mid-stage study are anticipated next year, and if they're good, an eventual label expansion could significantly increase Onivyde's addressable market. To put the market opportunity in perspective, Abraxane is currently selling at an annualized clip of nearly $1 billion.

A second drug in development at Merrimack could also bear fruit in the future. That drug, MM-302, is being evaluated for use in patients with HER2-positive metastatic breast cancer. If results from phase 2 studies are positive, Merrimack believes they could support an FDA accelerated approval for MM-302.

Summing it up

Onivyde's approval and sales growth somewhat de-risks Merrimack's shares, but there's no telling how the first-line pancreatic cancer trial or the HER2-positive breast cancer trial will turn out, and that means this is far from a risk-less investment.

Nevertheless, Merrimack has the potential to reshape pancreatic cancer treatment, and that shouldn't be ignored, especially given the company's relationship with Shire. If trials pan out, this company could eventually enjoy sales approaching blockbuster levels, and that would more than justify the company's current $737 million market cap. Therefore, while this stock would likely be considered too risky for most investors, risk-tolerant investors might want to consider buying some shares.