After the surprise attack by Japan on Pearl Harbor in World War II Admiral Isoroku Yamamoto said the following to Ogata Taketora; "I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve."
I believe Merrimack Pharmaceuticals (NASDAQ:MACK) is a sleeping giant of oncology, with incredible potential to change the standard of care with personalized medicines and systems biology. This company, which features a very high short interest, has been prodded and poked with skeptical views and misleading articles, particularly recently. Now, Sanofi (NYSE:SNY) has just walked away from their second most advanced program. But I think this prodding and negative press may now inadvertently be bringing more attention to the stock, and with it a realization of their undeniable recent successes and potential. Now, finally, I think the giant is about to awaken.
I have already written about some of the misleading articles published about MACK's most advanced clinical candidate, MM 398. This is a very promising drug, and in my opinion the current market cap (~$800M) undervalues the potential of this drug alone, with analyst estimates of peak sales anywhere from $300 M to $900 M. MM 398 reached its primary endpoint in a second line metastatic pancreatic cancer by extending overall survival from 4.2 months to 6.1 months in a phase III multinational clinical study of 417 patients, with a notable lack of increase in side effects, unusual for any drug that extends overall survival. This is especially remarkable given that there have been no successful Phase III registrational trials in this patient group in 25 years, so this drug could become the standard of care in this very sick patient population. Not to mention the fact that with an imaging diagnostic they may be able to get better efficacy in a select group of responders, further improving the drug's profile and possibly expanding the drug into first line and other indications.
But this is not the reason MACK is a sleeping giant. The reason is their approach to systems biology and personalized medicine. The MM 398 results provide some validation of this, but the real potential of MACK has been hidden by the recent debate around MM 398. The real potential of this company's pipeline can be elucidated by a detailed look at their second most advanced pipeline candidate; MM 121
Ever heard of MM 121? Probably not. It is an ErbB3 / Her3 targeted monoclonal antibody. ErbB3 / Her3 has been hypothesized as an important cancer proliferation pathway and a potential way cancer cells generate resistance to therapies. In a similar fashion to Her2 targeted drugs like Roche's (OTCQX:RHHBY) Herceptin, therefore, the presumption is that if one can inhibit this pathway one can inhibit resistance to cancer therapies where Her 3 / ErbB3 is activated. Sanofi saw the potential in this drug early on and partnered with MACK on it. Now MACK has been studying in a broad array of Phase II studies for breast, lung and ovarian cancers. Together, these studies comprise more than 700 patients.
Or maybe you have heard of MM 121? If so, you most probably think it has failed. A number of articles, including this one and this one, have stated that "MM 121 has failed", so you would have good reason to think this.
Now, MACK just announced they are taking the rights back from Sanofi for MM 121. This was a big surprise to me. Perhaps Sanofi agrees with the press MACK has been getting about the trial failures, or maybe it is reducing oncology investment after a number of other recent failures, or perhaps this competes with another one of their programs. We may never know the reason, but of course the natural inclination is to believe that Sanofi doesn't think MM 121 is any good.
Let's take a closer look at the MM 121 results to see if that last possibility holds merit.
Firstly, MM 121 has not failed. Not by a long shot. In fact, MM 121 could be one of the most attractive oncology candidates under development today. Hard to believe? Please bare with me, I will explain.
The reason the above cited articles are saying that MM 121 has failed is that the Phase II studies it was tested in did not meet their primary endpoint. Obviously that makes for very bad press. So MACK's stock has suffered, especially when they first released top line results for lung cancer in early 2013. I think most people wrote off the drug at that point, and did not pay attention to the mounting evidence of efficacy that followed in ovarian and breast cancer.
You see, it was never MACK's expectation to meet their primary endpoints in these studies. It was MACK's hypothesis that a group of ErbB3-associated biomarker positive patients (biomarkers that they could not determine before starting the studies) would perform well in the study. This group would only be a subset of the overall study population, making it very difficult to show that MM 121 was effective across the whole population, and therefore difficult to meet the primary endpoint.
And so was there a biomarker-positive population that responded?
Well after a number of indication-specific study results, mostly viewed as "failures", they finally summarized the results for breast, lung and ovarian cancers at the recent ASCO 2014 meeting . . . and the results were truly remarkable.
They identified a population of responders in each cancer type using the same biomarkers for each cancer type, thus validating their hypothesis for these studies. And how good was this response? Well you can see for yourself below.
ASCO 2014 biomarker positive results for MM 121
|Cancer Type||Prevalence of Biomarker + patients||Biomarker + Improvement in PFS||
Biomarker + PFS Hazard Ratio
PFS = Progression Free Survival. Toxicities for MM 121 were consistent with standard chemotherapy regimens.
This means in 30-50% of the study population, across three cancer types, there was a statistically significant 60% reduction in risk of disease progression. These results are remarkable. If you don't believe me, let's compare this to some other major drug development top line results and how they were viewed by the market. It's difficult to find apples to apples comparisons, but here are the two best examples I could find:
Phase II oncology candidate data release comparables
|Company||Drug and Indication||Number of Patients||Results|
Ruxolitini in Metastatic Pancreatic Cancer
|136 (50% in subgroup)||PFS hazard ratio of 0.79 with a pre-specified subgroup hazard ratio of 0.47.|
|Puma Biotech (NYSE:PBYI)||Neratinib in Breast Cancer||300 patients||Improvement in pCR versus other regimens tested with bayesian p value of 0.047|
On the day of top line data release for the above study, INCY's stock price went from $27 to $36 per share, an increase in market capitalization of >$1.25 billion. PBYI's stock went from $44 to $76 per share, a market capitalization increase of > $750 million.
So did MACK's stock price at least double with these transformational results at ASCO? Clearly this could be a blockbuster drug with profound potential in 30-50% of patients across 3 cancer types, and with a significant amount of safety data to boot. With a market cap of only $800 Million, surely the stock would go through the roof.
The response to this data at ASCO was . . . crickets. In fact, the stock went down along with most of the other cancer care companies at ASCO, despite the aggregate data that included new lung cancer biomarker positive efficacy that was a surprise.
Perhaps MACK got lost in the ASCO data deluge, or perhaps no one was paying attention because they thought MM 121 "failed". Or maybe MACK just isn't cool. Perhaps it isn't "in" with the latest biotech investor fads. Companies boast about immunotherapy, analysts get enthralled with RNAi, checkpoint inhibitors are all the rage, and some people say the next big thing is cancer stem cell inhibition . . . but ErbB3 targeting with heregulin-based biomarkers? That doesn't sound very sexy. And it's pretty complex to explain so better stay away from that one. How many "b"s are there in "ErbB3" again?
. . . and it only works well in 30-50% of breast, lung and ovarian cancers. 60% improvement in PFS - yawn.
Yes, this last bit is sarcasm.
Let's take a look at just how big MM 121 could be.
The primary biomarker for identifying MM 121 responders was heregulin. Below are some heregulin expression data from the Cancer Genome Atlas. These percentage thresholds were based on observed benefit for MM 121 in ovarian cancer, taken from the MACK June 2 Jefferies presentation.
Head and neck cancer = 99%
Cervical cancer =71%
Bladder cancer = 46%
Liver cancer = 55%
Prostate cancer = 48%
So not only could MM 121 be effective in 30-50% of breast, lung and ovarian cancer patients, but possibly more than 40% of prostate, liver, bladder, cervical and head and neck cancers. What is equally important here is that ErbB3 inhibition is a unique mechanism that is orthogonal to other cancer treatments. So MM 121 could be synergistic with all other treatments in biomarker positive populations across these cancers (i.e. in theory it should not compete with Her2 inhibition, immunotherapy, or other monoclonal antibody therapies, but instead it should have an additive benefit).
So what is the opportunity? As far as I can tell it could be literally more than 30% of all solid tumor cancer patients. If you look at Herceptin, which targets Her2 predominantly in breast cancer (Her2 is amplified in 15-30% of breast cancers), it is a drug that generates more than $5 billion in revenue per year. So if MM 121 works in 30-50% of just breast, lung and ovarian cancers, not even considering the other cancers where heregulin is over-expressed, it could generate well north of $10 billion in peak sales . . . . yes that is a 10 . . . and yes . . . that could be conservative. MM 121 has the potential to exceed the potential of top selling drugs like Herceptin, Ibrutinib (NASDAQ:PCYC) or Revlimid (NASDAQ:CELG).
Does it sound unbelievable? Again, a natural inclination would be to say "yes", especially given the decision by Sanofi. But MACK has a strong scientific premise, they have proven it clinically by having the same biomarker across three very different cancer types, and shown significant efficacy in those biomarker positive populations. Moreover, the risk of some unknown toxicity or severe side effects is very low because these trials have enrolled well over 700 patients. MM 121 has been substantially de-risked and phase III results in biomarker positive populations have a high likelihood of success. If the hazard ratios hold up for overall survival, Phase III trials in biomarker positive populations may even be stopped early for overt efficacy.
Given the potential for MM 121, I am having trouble believing that there is something wrong with MM 121. If there was, MACK and Sanofi would have an obligation to disclose it to the public. Now, I think it much more likely that Sanofi walked away for strategic or budgetary reasons. This could include the fact that Sanofi has already made many investments in the space. Their pipeline shows significant investment in other drugs in breast and ovarian cancer, including a Dual PI3K/mTOR inhibitor, and a PI3K inhibitor. In fact, this decision could have been made long before MACK aggregated all the data, including positive lung cancer biomarker data. Whatever the reason, I have a feeling Sanofi could greatly regret letting MM 121 go. The market potential for MM 121 is mind-boggling relative to the company's current market capitalization.
I can't help but think that, in the long run, this new development may actually be very positive for MACK. If Sanofi did make this decision due to strategic or budgetary reasons, it could result in MACK regaining most of the value on a potential megablockbuster that has shown great proof of concept data.
And keep in mind MACK has a pipeline of other candidates that utilize ErbB3 inhibition, and other nanoliposomal drugs with mechanisms similar to the now-proven methods used for MM 398. All of which have great potential for further improving efficacy in more targeted populations.
There are always risks. The phase III clinical trials could fail, or competition could catch up to them. Daiichi Sankyo (OTCPK:DSNKY) is close in ErbB3, but they only have lung cancer data. Or there could be a biotech sell off after the recent run-up in biotech stocks. Although MACK didn't participate in the 2013 bull market for biotech stocks, so it may not participate in any sell off. Also, MACK has a diversified pipeline with one product near commercialization, so these risks should have limited downside, especially considering MM 121 is barely a consideration in MACK's current market capitalization.
Valuation comparables are difficult and speculative but I think this could play out in a similar fashion to Pharmacyclics. In late 2011 PCYC had a valuation of about $1 billion as it had shown some startling efficacy with Ibrutinib, but very few people understood their technology platform. Over time as people realized this new concept of checkpoint inhibition with Ibrutinib is highly effective and they had a mega blockbuster on their hands the valuation grew to $7 billion now as the drug is being launched. MACK arguably has a broader pipeline than PCYC with MM 398 near commercialization and a number of other ErbB3 inhibitors, but MM 121 is clearly earlier stage than Ibrutinib.
The naysayers will continue to take shots at the company, especially with this new development. In the release about regaining the rights to MM 121, MACK also announced final top-line results for neo-adjuvant therapy in triple negative breast cancer. The top-line results were a wash, with an early indication of improvement in the TNBC that are biomarker positive (full data set not in yet). These results don't mean anything, because all that matters is the impact on biomarker positive patients. Of course, as shown here, the negative press about trial "failures" continues, showing that people still do not understand MM 121. One has to wonder if Sanofi really did as well.
I will let you do your own math on what is an appropriate market capitalization for MACK. All I know is that it has a very long way to go to get to fair value, with or without MM 121. Remember, the market cap doesn't even fairly value MM 398 today, never mind MM 121. But it will get there, whether by the prodding of skeptics, MM 398 advancing through FDA approval, MACK or a new partner advancing MM 121 into Phase III trials soon, MACK being taken out in an Idenix (NASDAQ:IDIX)-like deal, or other lucrative pipeline deals, the giant has to awaken soon, and I wouldn't want to be on the giant's short . . . I mean bad . . . side when he does.
Disclosure: The author is long MACK. 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.