3 Reasons Why Wall Street Hates Merrimack Pharmaceuticals

A rising short interest is often times a bad omen for a stock. Specifically, the high degree of risk involved in shorting tends to ensure that short-sellers have a clear cut investing thesis for why a particular stock is overvalued. 

Merrimack Pharmaceuticals  (NASDAQ: MACK  )  has been attracting shorts like moths to a flame following the company's top line data readout of its proposed second-line pancreatic cancer treatment MM-398. Namely, Merrimack's short interest has risen to a noteworthy 25% following this data readout.

What's particularly interesting is that MM-398 reportedly increased survival by 1.9 months on average when combined with 5-fluorouracil and leucovorin, which was statistically significant compared to the control arm of 5-FU and leucovorin alone. In other words, I think that MM-398 has a decent chance of being approved as a second line treatment based on these results. So, let's take a look at three reasons why Wall Street is betting heavily against the company despite these positive clinical trial results. 

Reason No. 1
Although pancreatic cancer reportedly kills more than 38,000 Americans each year, the market is only estimated at around $700 million at the present time. That's tiny in comparison to the multibillion dollar markets for breast or lung cancer. Moreover, the pancreatic cancer market is projected to grow by a mere 3% a year for the next six years. Put simply, this small market size and anemic growth rate aren't exactly striking fear into the hearts of short-sellers.

Reason No. 2
Perhaps one of the biggest reasons Wall Street isn't enamored with Merrimack is because MM-398's commercial prospects remain an open question. The problem is that the pancreatic cancer market lacks any drugs that could provide even a rough guideline for how MM-398 would perform commercially.

Presently, Celgene's (NASDAQ: CELG  ) Abraxanethe generic version of Eli Lilly's Gemzar, and the toxic cocktail known as "FOLFIRNOX" are the most commonly prescribed front-line treatments. However, there aren't any standard second-line treatments in place for this devastating disease, making it difficult to quantify MM-398's potential market share. In short, we don't have much insight into how MM-398 will impact Merrimack's bottom line if it is approved. 

Reason No. 3
Merrimack currently lacks the funds necessary for a commercial launch of MM-398. As of March 31, the company reported having cash and cash equivalents and available-for-sale securities of $124.2 million. Given that Merrimack will need to raise a sales force from scratch, it's not unreasonable to assume that the company will need a good bit more than this amount to fund its current operations and launch MM-398.

As the company progresses toward a regulatory filing for MM-398, I would thus expect management to take advantage of the recent run-up in share price to raise additional funds. From a short seller's perspective, this could mean that a fairly substantial amount of dilution is coming down the pike. 

Foolish wrap-up
Understanding why short interest is rising in a given equity is perhaps equally as important as having a grip on a company's bull prospects moving forward. Regarding the large short interest in Merrimack, we can probably attribute most of this pessimism to the high degree of uncertainty surrounding MM-398.

With that said, I think Merrimack could be a long-term winner if MM-398 gains FDA approval. My view centers around the drug's value proposition relative to the company's market cap of only $771 million. If Merrimack clears the forthcoming regulatory and commercialization hurdles, MM-398 could be a decent revenue driver for the company even as a minor player in this market due to the complete lack of alternative second-line treatments. In the near term, however, you might want to sit on the sidelines until these issues have been resolved.  

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  • Report this Comment On June 05, 2014, at 3:54 PM, Italian302000 wrote:

    This is a completely myopic summary of Merrimack's clinical pipeline, their potential for business development opportunities, and the landscape changing impact that their system biology platform brings to cancer therapeutics. This author made no mention of the "game changing" impact of the recent MM 121 biomarker results released at ASCO and discussed at great length at the recent Jeffries global health care conference. This compound will change the treatment landscape of solid tumor cancers and will revolutionize how future cancer therapeutics are designed for specific patient application.

    Merrimack CEO has also made it clear that current cash and projected cash from business development opportunities meets needs through 2016 for commercialization and expansion of pipeline applications.

    This article fails to summarize the market potential that Merrimack's developmental pipeline brings to the table: MM-398, MM-302, MM-121, MM-111, MM-141 & MM-151. With a completed phase 3 (MM-398) , a pending initiation of phase 3 (MM-121) partnered with Sanofi, 3 pending phase 2 trials (MM-302, MM-141 & MM-151) & a current phase 2 (MM-111). Each of these compounds are based upon separate scientifically designed methods of treatment and therefore establishes a risk diversified portfolio seldom seen in developmental bio pharma companies.

    This author is either biased in his motives for the one sided nature of this article or he was thoroughly remiss in his journalistic research! Either way, I am disappointed that MF deemed this sub-standard article worthy of publication!

  • Report this Comment On June 05, 2014, at 5:01 PM, Minnie999 wrote:

    Wow, talk about hardly scratching the surface - what a load of rubbish. Start with a thesis (bear) and then go and assemble a bunch of supporting data to back-fit a pre-existing bias (thesis?). First off, author fails to mention a goodly portion of the short % relates to convertible arbitrage on a deal sold almost a year ago. Do you understand what convert buyers do?

    Second, fails to mention that 398 had a statistically stronger P-value and better side effect profile than Abraxane in 1L (much lower neuropathy) as well as fact that there is more confirmatory data on 398 yet to be released at ESMO in 2.5 weeks. The co's own feedback from oncologists who have seen more of the data-set has been enthusiastic - ultimately its oncologists who matter - and only oncologists - give them some time - the data just came out.

    Third, the vast majority of 398 would be sold through 25 cancer centers - this isn't Zoloft for pete's sake! - we're talking about a small specialty sales force, not a mass-market product. Last, and most important, the author ignores the fact that the co has an enormous antibody pipeline - of which the furthest along - MM-121 just established efficacy/proof of concept in BM populations in ovarian and breast cancer w/ Hz ratios of 0.35-0.37- and will likely be moved into P-3 by the co's partner Sanofi in short order. The co sports a $770m mkt cap and many analysts are ascribing peak sales potential to MM-398 in one (yes one) indication - 2L PC of $300-500m - that should tell you the naysaying camp is already very very crowded. Let's revisit in 3 mos and see if they were correct.

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George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

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