Is Merrimack Pharmaceuticals Worth More Than $700 Million?

When patients are diagnosed with diseases like pancreatic cancer where survival is measured in months, not years, any advance is an important one.

That's why oncologists and patients are watching Merrimack Pharmaceuticals  (NASDAQ: MACK  ) . Merrimack just released intriguing late-stage data for MM-398 showing that patients previously treated with Eli Lilly's (NYSE: LLY  ) Gemzar, whose cancer had progressed, lived two months longer when given MM-398 alongside chemotherapy, versus chemotherapy alone.

If eventually approved, MM-398 would join Celgene's (NASDAQ: CELG  )  Abraxane, which won Food and Drug Administration approval in pancreatic cancer last fall, as new alternatives for these tough-to-treat patients.

Given that Gemzar's sales totaled roughly $750 million prior to losing patent protection in 2010, and Abraxane is on pace to achieve sales of nearly $1 billion this year, investors are right to wonder if Merrimack's current valuation -- at roughly $700 million -- is on target or not.

MACK Chart

MACK data. Source: YCharts.

Finally netting a win
Shares surged 60% following the release of the pancreatic cancer study data, suggesting investors weren't very optimistic about MM-398. That pessimism was arguably deserved given Merrimack's stumbles last year.

Back in 2011, Sanofi (NYSE: SNY  )  handed over $60 million up front to Merrimack and promised up to $470 million more in milestones to gain rights to MM-121, once a highly regarded cancer drug. However, MM-121 has failed to live up to expectations.

In November, Sanofi and Merrimack reported that MM-121 failed for a third consecutive time during trials. That meant MM-121 hadn't achieved its endpoint in breast cancer, ovarian cancer, or lung cancer. Given that track record, it's understandable that investors were skeptical of MM-398.

But now that MM-398 data is out, investors are trying to figure out just how much the drug could eventually generate in sales for Merrimack. To gain insight into that question, let's take a closer look at the market for pancreatic cancer treatment.

An important market, with few alternatives
First, investors should remember that pancreatic cancer is particularly tough to treat and that more than 45,000 people are diagnosed with the disease every year. Since five-year survival rates are less than 7%, the need for new treatment options is high.

Next, investors should consider that there aren't a lot of therapies currently approved to treat pancreatic cancer. Of those that are approved, the most widely used are generic Gemzar, Roche's Tarceva, and Celgene's Abraxane.

Beyond those three, treatment tends to fall to chemotherapy combinations, including a regimen called folfiri.

The folfiri chemotherapy cocktail is a combination of irinotecan, leucovorin, and 5-FU. That cocktail has had some success in helping patients but isn't widely used.

It's the folfiri combination that MM-398 targets. MM-398 is an improved variation of irinotecan, which means that Merrimack's hope for MM-398 is twofold. First, that MM-398 can displace conventional irinotecan in the folfiri regimen, and second, that trial efficacy will boost doctors' use of the cocktail.

As a result, Gemzar's dominant position as a first-line treatment doesn't appear threatened by MM-398. And given that Abraxane is increasingly prescribed alongside Gemzar in first-line patients, it isn't likely to be threatened by MM-398, either. The total market opportunity for MM-398 is likely to be far less than Abraxane as it has been tested as a treatment for patients who previously received Gemzar.

Foolworthy final thoughts
Since it's unlikely that MM-398 will grab a major foothold in the indication, how much the company will eventually be able to capture in sales from MM-398 is a big question mark.  

Currently, Decision Resources estimates the total market for pancreatic cancer is just $700 million, and is expected to climb to $830 million by 2019.

For now, that market is going to remain dominated by current treatments. Celgene has already captured 36% market share as a first-line treatment, resulting in first-quarter sales of $185 million.

But since Abraxane is also sold as a treatment for non-small cell lung cancer and metastatic breast cancer, it's difficult to determine how much of those sales are tied to pancreatic cancer. That said, Abraxane's sales were $170 million in the third quarter and jumped to $202 million in the fourth quarter following the FDA approval in pancreatic cancer. That may suggest that the pancreatic cancer indication coiuld be worth as much as $100 million to $200 million in Abraxane sales this year.

Given Merrimack isn't likely to be able to price MM-398 as aggressively as Abraxane because there's already a generic irinotecan available, and that MM-398 will likely be serving a smaller market, MM-398's total market opportunity is arguably much less. If so, it may be hard to justify a higher value for Merrimack unless we get better insight into how many doctors will eventually prescribe it.

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Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2014, at 2:39 PM, alphasize wrote:

    Thank you for providing a great buying opportunity in a great company with great technology. By the way, you clearly understand neither MM398 nor the market it addresses.

    First, comparing MM398 to Abraxane is just inane. Second, suggesting that there is little difference between MM398 and irinotican is just as ridiculous.

    The bottom line is that MM398 will be the only approved second line treatment for pancreatic cancer. Majority of pancreatic cancer patients will need second line treatment and majority of those will get the only approved one.

    Let's ignore for a moment the fact that MACK's encapsulation technology has now been validated, which allows targeted delivery of multiple agents with less side effects to treat multiple cancers. The stock is cheap at current levels based on MM398 opportunity alone.

  • Report this Comment On May 05, 2014, at 3:39 PM, pick1998 wrote:

    MM-398 (nal-iri) is not a generic version of irinotecan. Lyposomal Nanoparticle often behaves very differently from its naked chemical, depending how lyposomal encapsulation is done. Your statement is wrong.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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