3 Reasons Why Wall Street Hates Merrimack Pharmaceuticals

A rising short interest in a stock could be a bad omen. Here is a Foolish look at why the Street is betting heavily against the clinical stage biotech Merrimack Pharmaceuticals.

Jun 5, 2014 at 1:43PM

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.  

But can Merrimack keep up with this potential multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

  

George Budwell has no position in any stocks mentioned. The Motley Fool recommends Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers