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. Deeper under the hood, Merrimack's remaining assets are still in early stage trials, which, in fact, have an inherently low success rate. However, the company announced today a license agreement with Baxter (NYSE:BAX) for MM-398, sending shares as much as 27% higher in pre-market trading. As a result, I amend my bear thesis to "hold" since Merrimack is on course to continue developing and eventually commercialize MM-398 under a lucrative partnership arrangement.
Some key highlights of the license agreement with Baxter are as follows:
- Baxter agrees to develop and market MM-398 outside the United States.
- Merrimack will receive $100 million upfront from Baxter in the current quarter and it now has the opportunity to unlock $120 million in milestone payments.
- Merrimack could receive another $280 million in development and milestone payments from Baxter if MM-398 shows potential in a second pancreatic cancer indication.
- The approval process for MM-398 is currently underway. Baxter anticipates regulatory approval submissions outside the United States in 2015.
- Merrimack retains commercial rights to the U.S. and Taiwan.
I have amended my bear thesis on Merrimack to "hold" for reasons two-fold. First, I expect that Merrimack will benefit from enhanced earnings growth going forward into next year. For in addition to the $120 million in milestone payments for the initial indication of MM-398, the company established a lucrative $280 million auxiliary agreement if the compound shows promise in a second pancreatic cancer indication. Merrimack will also receive tiered royalties and $100 million upfront from Baxter, which should benefit earnings for Q3 2014. Second, I maintain that MM-398 could become the standard of care for pancreatic cancer, which resembles a $1.2 billion market opportunity going into 2015. I believe Merrimack's ability to license the drug to a proven winner in Baxter demonstrates the drug's viability. However, I continue to be skeptical about the viability of Merrimack's other cancer treatment in MM-121. As a reminder, Sanofi spent in upwards of $400 million developing MM-121 before walking away from it. Thus, until we learn more about the conditions of the termination, as well as Merrimack's plans to acquire another partner, I will maintain coverage at "hold."
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