Biotech investors can make big profits when clinical-stage biotech stocks net wins from the U.S. Food and Drug Administration, but in the case of Merrimack Pharmaceuticals (NASDAQ:MACK), its stock has been a bust since the FDA approved its pancreatic cancer drug, Onivyde, back in 2015.

Following a major restructuring that included the departure of Merrimack's CEO, shares fell 48% last year, and this year, news that management is selling Onivyde to Ipsen (NASDAQOTH:IPSEY) has caused shares to drop an additional 23%. Since selling Onivyde turns Merrimack Pharmaceuticals back into a clinical-stage company, let's dig into the details to see if this is a biotech stock that's worth owning.

A gold pill rests atop a pile of gold coins

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Some background

Onivyde is a pancreatic cancer drug that's increasingly being used in patients who have seen their disease advance or return following prior therapy. Merrimack Pharmaceuticals is solely responsible for the drug in the U.S., but it licenses the drug to Shire (NASDAQ:SHPG) for sale abroad.

The company hasn't reported its full-year 2016 financial results yet, but Onivyde's sales in the third quarter of 2016 totaled $14.5 million, up from $12.9 million in the second quarter of 2016.

A big headwind

Developing an extensive clinical-stage cancer pipeline isn't cheap, and unfortunately, Merrimack Pharmaceuticals efforts to turn itself into a top player in the indication saddled the company with profit-busting ongoing operating expenses, and a high-risk balance sheet.

Recognizing that Onivyde's sales pace wouldn't be enough to get the company on solid financial ground on its own, the company's board of directors announced a significant restructuring last October. The restructuring included the departure of the CEO, and a downsizing of the workforce by more than 20%.

Overall, the cost-saving initiative is expected to reduce ongoing expenses by $200 million over the next two years. However, it appears that even that wasn't enough to convince the board that it's on firm-enough financial footing.

With its cash stockpile expected to run dry in 2018, and following disappointing mid-stage trial results for another one of its drugs in December, the company has inked a deal to sell Onivyde to Ipsen for $575 million up front, plus the potential for another $450 million in milestones.

As part of that deal, the balance sheet will benefit from paying down roughly $175 million in long-term debt, and that has management thinking it will have enough money to get the company into 2019.

A big shift

Onivyde's fast growth, and a trial that could expand its use into first-line pancreatic cancer, had many investors hoping the company could overcome its financial challenges on its own, or that a bigger company would buy it lock, stock, and barrel.

The Ipsen deal, however, caps the potential to profit from Onivyde at milestones, and it erases the likelihood of an outright sale.

As a result, Merrimack Pharmaceuticals is back to square one, as a clinical-stage company with a long-term future that depends on an intriguing yet unproven drug pipeline. Management plans to commit $125 million to a streamlined drug pipeline that includes three drugs: MM-121, MM-141, and MM-310. However, only MM-121 and MM-141 are in mid-stage studies.

Phase 2 trials are under way for MM-121 in non-small cell lung cancer (NSCLC) and MM-141 in front-line pancreatic cancer, and a phase 1 safety study of MM-310 is slated to begin soon.

Potentially rewarding, but uncertainty reigns

Merrimack Pharmaceuticals is proposing some pretty big incentives to convince shareholders to sign off on its Ipsen deal.

If shareholders vote in favor of the move, the company promises to pay shareholders $200 million, or about $1.54 per share, in a special dividend. Management also intends to send 100% of any milestone payments from Ipsen back to shareholders, if the company remains on solid financial ground.

Overall, management estimates that if it receives all the planned milestones from Ipsen, investors could get about $5 per share in special dividends. That's a big incentive given the company's current share price. However, there's no guarantee that all the milestones will be achieved, and if MM-121, MM-141, and MM-310 fail to pan out, the company could run short of cash again as soon as 2019.

Since phase 2 trial results should be available for MM-121 and MM-141 next year, and we should get insight into MM-310's safety next year too, 2018 will be an incredibly important year for this company and its investors.

Overall, while shares could rally ahead of that news, they could also plummet if the trials fall short. Since the risk associated with these trials is high, this stock is best left to only the most aggressive of investors. After all, there are plenty of other stocks to buy that don't come with these risks.

Todd Campbell owns shares of Merrimack Pharmaceuticals. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.