Short These Merrimack MM-398 Phase III Data


MM-398 won't be approved. It's an "improved irinotecan" no better than irinotecan.

MM-398 has extremely limited peak sales potential.

The company is bleeding cash and will likely do a secondary offering soon.

Merrimack Pharmaceuticals (NASDAQ:MACK) released positive Phase III results yesterday for MM-398 for post-gemcitabine metastatic pancreatic cancer. Judging by the stock movement, the first reaction of many investors was "hey, nothing works for metastatic pancreatic cancer so if they have something that does it's a layup, BUY BUY BUY."

Unfortunately, just like with everything, the devil is in the details. As I will show below, the data are actually not that impressive, does not meet an unmet medical need and I doubt the FDA will approve MM-398 without further clinical trials. Also, even if it is approved, it's unlikely to be widely used. And finally, with about 4 quarters worth of cash left, the company is going to be conducting a secondary soon, diluting investors and flooding the market with more shares. It makes more sense to short MACK shares here rather than buy them.

So why won't it be approved? Didn't they meet the gold standard of clinical trials, overall survival? Well, yes and no. If you run an overall survival trial comparing a drug to the ebola virus in cancer patients, you will show an overall survival benefit but that doesn't mean that your drug will be approved. In order for the FDA to give you credit, you have to show an overall survival benefit against the standard of care therapy for an indication. Unfortunately, MACK ran their trial comparing a combination of MM-398 with 5-FU and leucovorin versus 5-FU and leucovorin alone. The combination of 5-FU and leucovorin is decidedly not the standard of care. According to an article titled "Second-line therapy for gemcitabine-pretreated advanced or metastatic pancreatic cancer" published in the World Journal of Gastroenterology in 2012, just about 0% of the patients in the study were treated with 5-FU and leucovorin. Sure these drugs were used but usually in combination with another drug, like Cisplatin or irinotecan, but almost never by themselves.

What the company should have done is conduct a trial comparing MM-398 to the standard of care. However, looking at the literature, it's pretty clear why they didn't. If you compare the data from this trial with the data from other trials with the different standards of care, there really is no benefit of MM-398. According to a review article published just in March of 2014, there is nothing remarkable about the 6.1 month overall survival we saw in the trial. In the last decade or so there have been 9 trials of chemotherapeutic regimens in this very indication that demonstrated 6.1 months in overall survival. So this drug is hardly a great leap forward or revolution in patient care.

In fact, when you understand what MM-398 actually is, you understand that this drug does nothing to advance anything. MM-398 is not some new stem cell therapy or a kinase or even a monoclonal antibody. It is just good old fashioned chemotherapy. It is a "nanoliposomal encapsulation" of irinotecan which is supposedly going to be more efficacious than regular irinotecan. And based on these data, it is no better than regular (and importantly, generic) irinotecan. Based on the review article mentioned above, when you add irinotecan to 5-FU and leucovorin (known as the FOLFIRI regimen) you can see overall survival of up to 6.6 months. So a "better irinotecan" gets you 6.1 months in survival while normal irinotecan can get you 6.6 months. How does this meet an unmet medical need? Why would the FDA ever approve this? There is going to be no pressure from patients or physicians to get this through the approval process. And given these data, I think it is very likely that the FDA will want to see a trial of MM-398 in combination with 5-FU and leucovorin vs. FOLFIRI (or another trial that gives a definitive answer as to the benefit of MM-398 to metastatic pancreatic patients) before they approve it. And this trial which will likely take years to conduct and based on the data from this trial, will likely be a failure.

Could I be wrong? Sure. But I think the consequences for being wrong here are minimal. Let's say MM-398 will be approved, who is going to use it? Based on this article, MM-398 was compared to a regimen which has about 0% market share in 2nd line pancreatic cancer. Even FOLFIRI is only used in about 15% of patients and there doesn't seem to be any incentive for patients to take MM-398 over regular irinotecan. They have the same survival and irinotecan will be an order of magnitude cheaper because it is generic. Remember, this isn't cholesterol where even a single digit market share is a great heap of money. According to Roche, there are 15,000 treated 2nd line metastatic pancreatic patients, which means there are probably only about 2,250 metastatic pancreatic patients on FOLFIRI. How many patients would forgo an equivalently efficacious generic for the honor of paying a biotech or pharma company $50k-$80k? 10%? That leaves you with 225 patients and at $80k that means sales will reach only $18m. Just try to pay for manufacturing, sales and marketing with that. MM-398 is a drug with a negative NPV even if approved!

If after all of this you still think you want to buy some MACK shares, just remember, they will be issuing a lot of new shares soon. Their cash balance fell by $31 million in the latest quarter to $124 million leaving them with 4 quarters worth of cash. Given the stock pop today they will probably want to do a secondary sooner rather than later and will probably try to raise around a year's worth of cash. Whatever number of shares you buy today will be diluted by 10% in the next several weeks.

So even if you like this MM-398 data, it probably makes sense to short the stock here and then buy it back at lower levels. Mark my words, you will get the chance.

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

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