In early July I wrote a bear article on Merrimack (NASDAQ:MACK), with a thesis stating that the company's prospects could be limited. In highlighting the implications of Sanofi's (NYSE:SNY) recent action to sever ties to MM-121, I argued that MM-121's poor clinical success rate could have prompted Sanofi to conclude the license agreement because it anticipates further clinical failure. As a reminder, Sanofi spent in upwards of $400 million developing MM-121 before walking away from it, which cannot be overlooked. Further, while MM-398 could become the standard of care for pancreatic cancer, it only resembles a $1.2 billion market opportunity going into 2015. Deeper under the hood, Merrimack's remaining assets are still in early stage trials, which, in fact, have an inherently low success rate. And given that none of the above concerns were alleviated through Merrimack's latest earnings beat for Q2, I reiterate my bear thesis as I remain skeptical about the viability of its oncology pipeline.
Some key highlights of Merrimack's Q2 earnings report are as follows:
- Revenues increased to $27.8M, up +50.3% YOY, beating analyst estimates by $16.8 million.
- Operating expenses decreased 12.4% YOY to $41.7M.
- Loss Per Share increased to $0.17, beating analyst estimates by $0.13.
- Cash Burn declined 35.5% to $32.8M.
- The company expects to fund R&D going into 2015 with its current cash position.
Ultimately, I believe Merrimack's earnings beat is superficial. On the one hand, it benefited from a $22.5 million increase in revenue as a result of the termination of the MM-121 license agreement with Sanofi. This allowed Merrimack to adjust estimates for the revenue recognition period, and, thus, beat analyst estimates by a whopping $16.8 million. If one deducts this revenue, however, the company would have fallen short of estimates. In addition, while Merrimack benefited from an overall decline in cash burn, operating expenses and Loss Per Share for Q2, its cash position is declining, and will likely be exacerbated should Merrimack fail to license MM-121. Cash will also be drained should commercial activities commence for MM-398, following possible regulatory approval. Thus, I wouldn't be surprised if Merrimack announces additional financing to offset its declining cash position going into 2015. Ultimately, I remain bearish on Merrimack because, in my opinion, Q2 earnings are overshadowed by looming concerns over the viability of MM-121, the company's core asset and main value driver. Until we know more about Sanofi's motives for abandoning MM-121 (whether that is unveiled directly or indirectly), I will remain a pessimist on Merrimack shares.
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