Is Now The Time To Buy Merrimack Pharmaceuticals?


Merrimack has multiple shots on goal, but the odds of success are still against it.

Recent events surrounding MM-121 cannot be taken lightly, and investors must consider the fact that the drug could lack potential.

I think the bottom line is whether Merrimack's prospects can be rooted in the success of one drug, which has its own relevant implications.

For these reasons, I think time is the prospective investor's best friend here, since it shouldn't hurt to simply wait on the sidelines until more unravels.

Merrimack Pharmaceuticals (NASDAQ:MACK) is attracting attention lately, but unfortunately for all the wrong reasons. The stock has slumped over the past few weeks, as notable concerns have emerged regarding the validity of Merrimack's pipeline. So, does it make sense as an investment? Here's what you need to know about this stock.

MM-398 a potential game changing therapy

Merrimack's MM-398 could become the standard of care for pancreatic cancer. In a Phase 3 clinical trial concluded earlier this year, MM-398, a derivative of the topoisomerase I inhibitor irinotecan, achieved its primary endpoint in overall survival (OS) in a second-line metastatic cancer.

MM-398, combined with 5-FU and leucovorin, extended OS from 4.2 months to 6.1 months in a study of 417 patients, achieving statistical significance over 5-FU and leucovorin alone. As far as safety is concerned, the late-stage study was completed without a notable increase in toxicity.

Selecting OS over progression-free survival (PFS) as the trial's primary endpoint was a bold move that certainly paid off. Specifically, the latest study of MM-398 showed a statistically significant OS benefit, which improves the prospects of approval, since the FDA is much likelier to reject a drug that is not shown to extend patient life. Nevertheless, the majority of marketed cancer therapies don't enhance OS, especially those indicated for late-stage forms of the disease. Understandably, many readers who are unfamiliar with the differences between PFS and OS typically assume that all cancer therapies help patients live longer, but this is unsupported by medical research. Gemcitabine, for instance -- which was used as a first-line treatment in the Phase 3 study of MM-398 -- is approved in the US, Canada, and EU for advanced ovarian cancer solely for its PFS benefit, not OS.

What's encouraging for Merrimack and pancreatic cancer patients, however, is that late-stage studies of MM-398 support statistically significant OS and PFS benefits as compared to currently marketed therapies. Therefore, in theory, unless the FDA doesn't consider the increase in OS and PFS sufficient for approval, I think it's likely that Merrimack will advance MM-398 to the market. Accordingly, I think investors should watch the drug's development closely as it approaches NDA, since I suspect that the only obstacle to the market is whether or not MM-398's OS and PFS benefits are significant enough to warrant regulatory approval. In the meantime, note that each additional step in the drug development process improves Merrimack's prospects of entering the global pancreatic cancer market, estimated to reach $1.2 billion by 2015.

A clinical grey area could impede success

The level of significance required under FDA guidelines is obscure. For instance, Amgen's Xgeva, the first drug to significantly increase bone metastasis-free survival in castration-resistant prostate cancer, faced a vote 12:1 against, because the PFS was four months less than what the FDA wanted, which was six months. Further, when Dacogen was reviewed for approval in AML by the FDA, the vote was 10:3 against, in spite of the fact that the median survival was two months longer than standard care. Granted, these were rejections based on PFS, not OS, which should be considered when assessing the viability of MM-398 in relation to the above examples.

Nevertheless, judging from these cases, it's difficult to approximate the PFS and/or OS benefit that is sufficient for FDA approval of Merrimack's novel drug candidates. Thus, with respect to MM-398, the main question is whether a 1.9-month increase in OS is adequate for the FDA to approve MM-398. If so, I think Merrimack would benefit from MM-398, since it could acquire significant market share due to its superior OS benefit. As it stands, however, I'm not overly optimistic about MM-398's prospects, especially considering that the market opportunity is relatively small, and Merrimack will likely exhaust significant capital advancing its other clinical products, thus hindering earnings growth.

MM-121 could be a no-go

Although I think MM-398 could enhance Merrimack's prospects as an emerging biotech, we cannot ignore the company's reacquisition of the rights to MM-121 from Sanofi (NYSE:SNY). Coinciding with a sharp decline in stock price, it appears that the news came as a surprise to investors, since the immediate implication of the event is that the drug lacks potential. In other words, it fosters the suspicion that after spending in upwards of $400 million to develop MM-121, Sanofi may realize that it's no longer cost-effective to further advance through clinical trials.

Case in point, three previous Phase 2 clinical studies of MM-121 failed to meet the primary endpoints, so I think Merrimack's reacquisition of the rights to the drug from Sanofi shouldn't be surprising. Specifically, it's possible that, in addition to some extenuating circumstances, MM-121's poor clinical success rate could have prompted Sanofi to conclude the license agreement because it anticipates further clinical failure.

Furthermore, a series of failed oncology investments could have influenced Sanofi's decision-making process with respect to MM-121. Last year, for instance, it forfeited its $285 million investment in iniparib after the drug failed a Phase 3 study for squamous non-small cell lung cancer, followed by a costly Phase 3 clinical halt of fedratinib due to safety concerns only four months later.

Regardless, it's highly speculative to pinpoint Sanofi's motives for parting ways with Merrimack, but what we do know is that Merrimack could now be stuck between a rock and a hard place with respect to the future development of MM-121. With no partnership in sight, it must determine whether to advance the therapy alone, or attempt to partner with another firm, which I suspect would only be achieved under less favorable terms, given the fact that previous studies of MM-121 failed to meet the primary endpoints.

Therefore, significant risk overshadows any potential partnership for MM-121, in light of serious clinical failures that have plagued the drug's development ever since Sanofi entered the license agreement with Merrimack.

A look under the hood
Although some are optimistic about Merrimack's late-stage clinical candidates as developments materialize, they should consider the fact that the success rate for oncology therapies is the lowest among all indications. For Merrimack, which has three clinical products in Phase 1 and one clinical product in Phase 2, the odds of success must be put into perspective accordingly.

Strictly from a statistical standpoint, there is only a 6.7% probability that Phase 1 therapies advance to FDA approval, which increases to 10.3% for Phase 2 therapies. Needless to say, statistical analysis supports clinical failure for all of Merrimack's early-stage products. Thus, with respect to long-term growth potential, I think investors may have to look elsewhere.

Financial overview

Unlike the uncertainty of its pipeline with respect to MM-121, Merrimack's financial position remains strong, with a $155.2 million cash position. As a result, the company should have enough runway to fund R&D through 2015.

But with the latest success of the NAPOLI-1 study, I suspect that it should cause Merrimack to incur additional expenses, as commercialization of MM-398 could take place following potential regulatory approval. Of course, these expenses could possibly be offset by a collaboration, if one ever materializes.

Final thoughts

I think the key question for Merrimack is whether future success can be weighted in the prospects of one drug. At this point, only MM-398 has shown any promise, but it's indicated for a relatively small market. Meanwhile, the optimism behind MM-121 appears to be diminishing, coinciding with a sharp drop in stock price following Merrimack's reacquisition of the rights to the drug from Sanofi. Further, the remainder of the pipeline is in an early stage, and success rates for such products are dismal.

Following the company's top line data readout of MM-398, short interest rose to an astounding 25%. This negative sentiment must be considered before entering a long-term position in Merrimack. As a result, I think it's best to sit on the sidelines until further information about MM-121 materializes and Merrimack's early-stage pipeline matures.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.