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) Abraxane, the 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.
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.