Following the sale of it first commercialized drug, ONIVYDE to Ipsen Pharma in April, Merrimack (MACK) offers investors substantial upside across a number clinical Phase II drug trial read outs as well as milestone payments from additional ONIVYDE approvals currently trading with a $35M Enterprise Value. The probability of success with respect to any clinical trial is small, however the prior success MACK’s platform has established coupled with the number of current shots on goal, potential ONIVYDE milestones receivable and cash runway make MACK an attractive equity investment today.
History and the Ipsen deal
Merrimack received approval for ONIVYDE for second-line treatment of pancreatic cancer in the US in October of 2015 and subsequently executed a full nationwide launch. Going it alone and building a sales force was the wrong call and MACK’s US ONIVYDE commercial launch was a failure, a common fate for tiny biotech development companies attempting the transition to commercial sales. The Board got religion after a year of lackluster sales, even if the CEO did not, and commenced a strategic alternatives analysis in November of 2016, which concluded with the sale of its US rights to ONIVYDE to Ipsen. Terms of the deal included:
$575M ($4.40/share) up front payment
$450M ($3.45/share) additional approval milestones, all of which are funded by Ipsen. MACK shareholders receive the benefits including:
$225M ($1.72/share) for FDA ONIVYDE approval of first line therapy for metastatic pancreatic cancer
$150M ($1.15/share) upon the regulatory approval by the FDA of ONIVYDE for the treatment of small cell lung cancer after failure of first-line chemotherapy
$75M ($0.57/share) upon the regulatory approval by the FDA of ONIVYDE for an additional indication unrelated to those described above.
Prior to ONIVYDE’s US approval, MACK sold its ex-US rights to Baxalta in September of 2014. MACK still retains $33M of potential milestones (management believes are coming in 2017) from Baxalta (now Shire) comprised of potential payments including $18.0 million from the sale of ONIVYDE in two additional major European countries, $5.0 million related to the sale of ONIVYDE in the first major non-European, non-Asian country and $10.0 million for the first patient dosed in the planned small cell lung cancer trial.
Ipsen is a $10bn euro pharma company and highlighted ONIVYDE as material part of their growth strategy going forward (Ipsen 2017 Investor Day Presentation) Their stated ambition is to “To establish ONIVYDE® as standard of care in metastatic pancreatic cancer,” which along with the large purchase price confirms that Ipsen intends to take the necessary steps to advance ONIVYDE.
MACK’s management has committed to pass through future ONIVYDE milestones to shareholders as dividends. We have spoken with the company about the rationale in not issuing a Contingent Value Right (CVR) related to the ONIVYDE milestones but we did not receive an adequate response. We wonder if a CVR remains a possibility, especially since the new CEO came from Sanofi which issued a CVR associated with the Sanofi Genzyme deal for Lemtrada.
Putting the deal and milestones into context, pro forma MACK has over $200M in cash and $61M in remaining convertible notes due 2020. This includes the redemption of the 2022 notes ($175M+$20M make whole and fees), the payment of a $140M special dividend, and $55M of tax, transaction and restructuring expenses associated with the Ipsen deal. Management attempted to pay a $200M equity dividend but Highbridge and other holders of the 4.5% convertible debentures sued MACK on a “fundamental change” charge. MACK and Highbridge quickly agreed that the dividend would be reduced to $140M and $60M would be put into escrow against the outstanding notes while the lawsuit plays out. In our view, it’s not meaningful if the additional $60M is paid as a dividend or used to repay the outstanding debt in calculating the current EV.
Just ahead of the announcement of strategic alternatives, CEO Rob Mulray was terminated and Gary Crocker (COB since 2004) stepped in as interim CEO. Following the sale of ONIVYDE, the board hired Richard Peters from Sanofi Genzyme as CEO and a full housecleaning of management has since occurred including a new Head of Research (Daryl Drummond, who was promoted internally and was integral to the discovery of ONIVYDE), a new CMO (Sergio Santillana from ARIAD), a new controller, and a search is underway for a new CFO. Despite the wholesale change in the C-suite, the pipeline remains robust with a refocus on a previously successful development platform. Headcount has been reduced to 80 from the former commercial bloat of 300. Going forward, MACK is a “refocused R&D biopharmaceutical company.” MACK has allocated $125M to advance three primary investigational molecules. MACK has forecast a capital runway through the first half of 2019.
We think it is critical to understand that MACK has a track record of success, as MACK has taken one molecule all the way through approval. The current clinical candidates are:
Seribantumab (MM-121) targeting HER3 with Phase 2 trials for both second line non small cell lung cancer (NSCLC) and breast cancer. Top line data from the NSCLC trial is expected in 2018 and the Phase 2 breast cancer trial is expected to start in 2017
Istiratumab (MM-141) targeting HER3 and IGF-1R in a Phase 2 trial for the treatment of front line metastatic pancreatic cancer. The trial was fully enrolled as of 6/19/17 and top line data is expected in the first half of 2018
MM-310 targeting EphA2 for a variety of tumor indications currently in Phase 1 with data expected in 2018. Management describes MM-310 as using similar technology to ONIVYDE, but much more advanced
We won’t attempt to ascribe values to the above candidates, however, note that they are mid to late stage with significant data points coming within a year.
We would also like to highlight the platform potential regarding future drug candidates. MACK is developing targeted patient populations for its drug candidates, and we think this approach may offer less cost and a better success rate. It clearly worked in getting ONIVYDE approved.
The significant 40% decline in the stock price following the payment of the special dividend has created meaningful optionality. We believe some of the selling maybe non-economic which should dissipate. As MACK was previously a commercial enterprise and is now a development phase company, we think it’s probable larger funds don’t want development phase risk and have executed a sloppy liquidation, creating a price dislocation.
With $3.45 per share of potential pass through milestones, three mid/late stage clinical trial candidates, a robust drug discovery platform, a significant cash runway, and impressive new management, Merrimack Pharmaceuticals offers investors significant value at its current $1.35 trading level.
Risks: Failure in the clinic as cash burn takes a toll over time, optionality erodes.
Ipsen milestones/progress and associated dividend pass through
Clinical success in pipeline
Potential dividend if MACK wins Highbridge lawsuit