Merrimack Pharmaceuticals, Inc. (MACK)

[roger wilco]

Seeking Alpha on $MACK

Merrimack: Does Special Dividend In May Present A Buying Opportunity?

https://seekingalpha.com/article/4062026-merrimack-special-dividend-may-present-buying-opportunity

Summary

Merrimack stockholders approve sale of ONIVYDE® and generic version of DOXIL® to Ipsen for up to $1.025 billion.

Merrimack declares $140M special dividend in connection with recently completed asset sale.

With plans to develop a robust oncology pipeline, Merrimack is well-funded for future research and development.


Merrimack Pharmaceuticals, Inc. (NASDAQ:MACK) has recently announced it entered into an asset purchase agreement with Ipsen (OTCPK:IPSEY) for approximately a $1 billion. Under the agreement MACK will sell to Ipsen its first commercial product ONIVYDE, including U.S. commercialization and licensing rights with Shire (NASDAQ:SHPG), and generic DOXIL, licensing and supply agreement with Activis LLC.

MACK restructuring with an extended cash runway and cost cutting seems to be designed to improve its financial outlook, savings are estimated to be about $200 million over the next two years. Although the pipeline will suffer the loss of ONIVYDE's approximate 15 million per quarter in sales at a growth rate estimated to be between 15 and 20%, there is a $33 million royalty income to be gained from future sales that includes an expansion into Europe. In October 2016, MACK announced it had received FDA ANDA approval for DOXIL, with a growing trend in sales due to drug shortages.

The company unveiled its new clinical pipeline focus in January 2016. It evaluated its candidates with regard to chances of greatest success and determined that MM-121, MM-141, and MM-310 are the programs with highest potential return on investment. This reflects a greater trend in cutting edge cancer treatment to refocus efforts away from toxic chemotherapies (developed in the 1950s) for less toxic alternatives including biosimilars and biobetters.

The writing may be on the wall for doxorubicin hydrocholoride liposome injection (generic DOXIL), with multiple safety concerns notably including cardiotoxicity, and new antibody therapies and drugs showing great promise in late stage clinical trials. Because future pipeline candidates MM-121, MM-141, MM-151, MM-161, and MM-310 are antibody and biobetter therapy approaches, it does make sense to cut loose the older technologies as they start to obsolesce.

As mentioned in the bullet points, a special dividend was declared for shareholders on record as of the close of business on May 17, 2017. The dividend of $1.06 per share is payable on May 26, 2017, and proceeds from the sale will be used for this. The ex-dividend date is May 30, 2017. Shareholders who sell shares prior to May 30 will not receive the special dividend payment. MACK has a current market cap of about 400 million. The sale agreement of 575 million at close and additional 450 million with milestones achieved plus royalties would imply that there is a deep value opportunity here.

Milestones are composed of 225 million for FDA approval in first-line pancreatic cancer, 150 million for small cell lung cancer, and 75 million for any other indication. 100% of these potential milestone payments will also be returned to shareholders, according to the company.

This new pipeline shown on the company website is just entering the clinic or is soon to enter. MM-310, is an antibody-directed nanotherapeutic (ADN) that entered Phase 1 clinical development in March of 2017 for solid tumors. MM-310 delivers a taxane and targets EphA2, a tumor marker of solid tumors with prostate, ovarian, gastric, pancreatic, and lung origin.

It is designed to provide sustained release of the therapeutic docetaxel prodrug at the site of the tumor, which was achieved in preclincal models. This approach uses both immunotherapy targeting and pro-drug biobetter approach in conjunction with the plan of minimizing toxicities common with classic chemotherapy.

MM-141 (isitartumab) is a monoclonal bispecific antibody that acts as a tetravalent inhibitor of IGF1-$ and HER3. Preclinical studies focus on Ewing's sarcoma models. MM-161 is a novel pan-FGFR antibody. MM-151 is an oligoclonal therapeutic with a mixture of 3 fully human monoclonal antibodies designed to inhibit epidermal growth factor receptor signaling. Because these therapies all focus on specific biomarkers, screening for the presence of biomarker-enriched homogeonous populations could lead to improved clinical trial success rates.

It's not often that one can invest in an early pipeline with a bit of compensation for and lower risk of future dilution at such a low market cap. StrongBio examined MACK as a contrarian candidate stock, having been beaten down from the $5 to $6 range over the course of the year. There is certainly some benefit to buying a stock with a $1 per share dividend within 6 weeks of purchase, and more potential future dividends given milestone successes.

However the milestones dividends are for full approvals, two in really tough cancer types, and remain years away. Currently trading at about $3 per share, dividend inclusion puts the purchase price only $2 per share, and the cash value of the company is probably going to hold $2 for some time, given 375 million of the sale combined with cash on hand.

Royalty payments from the deal are somewhat low, and will probably only help sustain cash to a small extent considering cost of lengthy cancer trials. The novel targeting and release approach combination, however, does land a possible chance of FDA breakthrough therapy designation in one or more of these tough cancers or other fast-track opportunities.

One might anticipate a slight to moderate sell-off following a one-time special dividend. Survival as a biotechnology investor makes timing and selection of picks critical. StrongBio couldn't help but think it might be noteworthy to make an exception for early clinical trial MACK due to the dividend enticement. Especially, in the event it would undergo a pullback prior to mid-May 2017. However, the extensive time, effort, and cost associated with new trials, and a likely sell-off post-dividend relegate MACK from the StrongBio portfolio to the interesting watchlist for now.

It looks more like a damage control measure for existing longs than a buying opportunity simply because it is possible the price will sink below $2 per share over the next 4 to 5 years. The way biotechnology companies are punished by the markets up to the end of clinical trials, it's hard to see this dividend as enough compensation to make a new long position, for now. It does show that management is sympathetic to shareholders and that is a great quality. Overall, it is probably a much better than average candidate for a long-term portfolio.