Merrimack Pharmaceuticals (MACK) is an interesting pharmaceutical play for the enterprising small cap stock investor. Following a long history of drug trial failures and the 2017 sale of its main commercial drug assets to drugmaker Ipsen S.A., the stock now effectively trades as a low-priced contingent value right (or CVR) regarding the future approval by the FDA of the cancer drug Onivyde for several indications. Ipsen is running two Onivyde drug trials currently, one for first-line treatment of pancreatic cancer (or FLPC) and the other for small cell lung cancer (or SSLC). MACK would receive from Ipsen $225 million for approval for the former and $150 million for approval for the latter, or $375 million if treatment for both indications is approved. In addition, MACK would receive $75 million for FDA approval of Onivyde for any other indication (although no trials are currently active).
Conservatively assuming (1) FDA decisions on the two active Ipsen drug trials are received within four years and (2) just a 20% chance of FDA approval of Onivyde for either FLPC or SSLC, we reach an expected value for MACK’s Ipsen CVR revenue stream by 2023 of $75 million, or $5.62/share. MACK has other assets (mainly cash and investments) which we currently value at $4.19/share, bringing our total valuation for MACK’s equity to $9.81/share, or 75% above the current market price1. Importantly, the de-risked nature of these other assets puts a solid floor under the stock and means that investors are receiving, for less than $1.50 ($5.61 minus $4.19), two CVRs that could be worth up to $28/share. To top things off, MACK has also announced that it will pay a special dividend to shareholders of between $1.27 and 1.42 per share, which should further de-risk the investment proposition.
While most pharma stocks fall firmly into the speculative category (at best), we believe that MACK right now represents an old-fashioned value play with major (75%) potential upside. Smart investors would be wise to “take their medicine” and put some MACK in their portfolios.
Please see attached a PDF of our full writeup regarding MACK.
Disclosure: I am/we are long MACK.