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Merrimack (MACK) Goes Uphill: Is a Turnaround Likely?

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Shares of Merrimack Pharmaceuticals Inc (MACK - Free Report) have increased 47.9% in the last twelve months. The plunge in the share price was much steeper than the 11.3% decline witnessed by the Zacks classified Medical Biomed/Genetics market.

It has been a roller coaster for the shareholders of Merrimack in the recent quarters. Merrimack gained FDA approval for its first product, Onivyde, in Oct 2015. Onivyde is approved in the U.S., for use in combination with fluorouracil (5-FU) and leucovorin (LV), for the treatment of patients diagonised with metastatic adenocarcinoma of the pancreas following Gemzar (gemcitabine)-based therapy. The drug was also approved in the EU in Oct 2016.

Merrimack was also expanding Onivyde’s label into front-line pancreatic cancer. The drug was also added to the NCCN 2016 Clinical Practice Guidelines in Oncology as a category I treatment option, for patients with metastatic pancreatic adenocarcinoma who have previously been treated with Gemzar-based therapy.

However, trouble started brewing for the company in Oct 2016 when the CEO of the company, Robert Mulroy resigned. Concurrently, Merrimack undertook a restructuring initiative to focus R&D on a set of oncology products as well as to strengthen its cash runway for the next two years. As part of this move, the company has reduced its headcount by 22%.

Earlier in the month, the strategic review undertaken by the company was completed and Merrimack announced to sell Onivyde, to Ipsen. The sale will include commercialization rights in the U.S. and Merrimack’s licensing agreement with Shire . Ipsen will also purchase Merrimack’s generic version of Doxil (doxorubicin hydrochloride (HCI) liposome injection.

The transaction is expected to close in the first quarter of 2017. Merrimack will receive $575 million from Ipsen on closing, along with $450 million in milestone payments.

Merrimack will also retain the rights to receive net milestone payments of up to $33 million, pursuant to its exclusive licensing agreement with Shire, for the development and commercialization of Onivyde in the U.S.

These restructuring activities will reduce the company’s workforce by 80% and Merrimack will be left with only 80 employees, down from 400 employees prior to the implementation of the restructuring in Oct 2016.

Merrimack currently carries a Zacks Rank #3 (Hold). As of Sep 30, 2016, the company had only $48.5 million of cash and marketable securities and the company had expected that revenues from Onivyde and royalty payments should be sufficient to fund operations in 2018. Hence, the influx of cash is a definite positive. The company is likely to raise more funds through issuance of equity.

On the flip side, the cash received from Ipsen will be used to pay down the huge levels of debt ($216.9 million of long term debt as of Sep 30, 2016) and return value to shareholders in the form of dividends. Thus Merrimack is back to being a development-stage biopharmaceutical company. Although Onivyde’s launch was disappointing, it was the only marketed drug in Merrimack’s portfolio.

Consequently, Merrimack will now focus its resources on the development of its three pipeline candidates – MM-121, MM-141 and MM-310. Of the $575 million that the company will receive upon closing, it will invest $125 million to develop its pipeline candidates.Merrimack will also discontinue the phase I study on MM-151 and defer persistent investment in MM-131, MM-302 and several preclinical programs until the company gets partners or funding sources.

In Dec 2016, Merrimack announced to discontinue its phase II trial on breast cancer candidate, MM-302. The decision was taken following the recommendation and a subsequent futility analysis by an independent Data and Safety Monitoring Board (DSMB).

Thus, successful development of other candidates in its pipeline is critical for Merrimack’s growth prospects henceforth. Given the transition mode Merrimack is in, we expect investors to remain focused on the further updates provided by the company on its pipeline candidates.

Key Picks

A couple of better-ranked stocks in the health care sector include Biogen Inc. (BIIB - Free Report) and Intercept Pharmaceuticals . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Biogen’s earnings estimates for 2016 have been stable while estimates for 2017 have gone up by 11 cents in the last thirty days. The company posted a positive surprise in all the four trailing quarters with an average beat of 8.15%.

Intercept Pharma’s loss estimates narrowed by two cents for 2016 in the last 30 days. For 2017, loss estimates have narrowed from $14.03 to $13.86 in the last thirty days. The company posted a positive earnings surprise in three of the four trailing quarters with an average beat of 3.19%.

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