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Merrimack Poised For Post-Offering Bounce Ahead Of Phase III Results

MACK DD items:

thx mike SA

Merrimack Pharma (MACK) is a cancer biotech with a diverse early-late stage clinical development pipeline that is summarized below.

CLINICAL TRIAL CATALYSTS (status updated in 7/12 SEC 424B5 prospectus filing related to recent offering):

1.) MM-398 (novel encapsulated liposomal formulation of approved anti-cancer drug irinotecan) is currently being evaluated in a Phase III (NAPOLI-1) clinical trial with expected completion of enrollment during Q3 2013 and top-line results expected during Q4 2013 to Q1 2014.

MM-398 is being evaluated for the treatment of metastatic pancreatic cancer that has progressed on gemcitabine treatment (i.e. a second-line treatment indication). ClinicalTrials.gov ID NCT01494506 is the identifier for the study and MM-398 has US and EU Orphan Drug status and the drug is designed to extend the activity and reduce side effects compared to standard formulations of irinotecan.

2.) MM-121 (ErbB3 inhibitor anti-cancer agent) is currently being evaluated in multiple Phase II clinical trials. Based on interim analyses, MACK does not expect MM-121 to meet the primary endpoint for ongoing non-small cell lung (NSCLC) or ovarian cancer Phase II clinical trials and top-line results are expected during H2 2013 from both trials.

MM-121 is also being evaluated in Phase II clinical trials for hormone receptor positive breast cancer (top-line results expected during H2 2013) and HER2-negative breast cancer (top-line results expected in 2014). MM-121 is partnered with Sanofi (SNY) and MACK received $60 million upfront in September 2009 with up to $385M in remaining potential development milestone payments along with SNY funding any future Phase III clinical trials.

3.) MM-111 is a HER2/3 signaling inhibitor anti-cancer agent which is being evaluated in Phase I and II clinical trials. ClinicalTrials.gov ID NCT01774851 is the identifier for a Phase II clinical trial in combination with HERCEPTIN and paclitaxel for HER2-expressing gastric cancer with results expected during H2 2014. NCT01304784 is the identifier for a Phase I combination, dose-escalation clinical trial for HER2 solid tumors with results expected late 2013-early 2014.

4.) MM-302 is a HER2-targeted novel encapsulated liposomal formulation of approved anti-cancer drug doxorubicin which is currently being evaluated in a Phase I clinical trial. ClinicalTrials.gov ID NCT01304797 is the identifier for the Phase I trial for advanced HER2-positive breast cancer trial as both a mono-therapy and in combination with HERCEPTIN +/- cyclophosphamide with results expected around the end of Q1 2014.

5.) MM-151 is an EGFR signaling inhibitor anti-cancer agent with ClinicalTrials.gov ID NCT01520389 as the identifier for a Phase I clinical trial in patients with advanced solid tumors with results expected late 2013-early 2014 to evaluate safety and determine dosing for evaluation in Phase II clinical trials.

6.) MM-141 is a PI3K/AKT/mTOR signaling inhibitor anti-cancer agent with ClinicalTrials.gov ID NCT01733004 as the identifier for an open-label, dose-escalation Phase I clinical trial as mono-therapy for advanced solid tumors with results expected mid-2014.

FINANCIAL STATS:

- On 7/12/13, MACK announced pricing for concurrent offerings (SEC 424B5 prospectus filing) of 5M shares of common stock at $5 and $125M of 4.50% convertible ($6.25/share initial conversion price into common stock) senior notes due 2020 (underwriters have a 30-day option to purchase an additional 0.75M shares of stock and $18.75M in notes with expected closing of the deal on 7/17/13).

- On a post-offering basis (page S-58 of prospectus filing), MACK has $230.7M in cash with 101.4M shares of common stock outstanding and total long-term debt of approximately $159M with additional potential net proceeds from the offering of $18M if the over-allotment option is exercised by deal underwriters.

- During Q1 2013, MACK used ($21.2M) in cash to fund operations and has provided guidance for adequate liquidity to fund operations into 2015 on a post-offering basis.

TRADE SUMMARY:

As illustrated on the stock chart below, MACK recently plunged sharply from around $7 to below the $5 stock offering price following announcement of the stock and convertible debt offering last week.

MACK amended the initial terms of the offering to include a much smaller component of stock sold (5M @$5) with a larger component raised from the convertible debt offering ($125M of 4.5% notes which have an initial conversion price into common stock at $6.25).

Following the expected offering close on 7/17, I expect shares to bounce back toward the 50-day moving average stock price in the mid-$5s in the near-term with more extended run-up potential to the upper $5-lower $6 range heading into key Phase III pancreatic cancer results for MM-398 with expected completion of enrollment this quarter serving as a potential catalyst to jump-start the bounce / run-up in shares from currently depressed levels despite a much stronger balance sheet and multiple upcoming clinical trial catalysts.

The major risk factor for MACK includes expected failure for several Phase II clinical trials for MM-121 as previously reported and updated in the recent prospectus filing. I believe this is mostly a headline risk since most of the bad news should already be reflected in stock unless the drug fails in every ongoing Phase II trial.

MM-398 represents the key catalyst and I estimate a 60-70% chance of success ($9-11 target for positive results vs. sub-$3 for negative results) given that the drug is a novel formulation of an approved cancer drug with evidence of clinical benefit observed in a single-arm Phase II clinical trial, although the treatment of metastatic pancreatic cancer that has failed first-line treatment is a difficult cancer to treat (i.e. no approved therapies for this indication) so success is by no means a sure thing in this study.

http://seekingalpha.com/article/1553772-merrimack-poised-for-post-offering-bounce-ahead-of-phase-iii-results?source=yahoo