Merrimack Pharmaceuticals

Merrimack’s recent R&D day highlighted an impressive pipeline of six clinical stage drug candidates assembled largely through its integrated, systems biology-driven drug discovery and development approach. These drugs are being tested in 10 patient populations, including one Phase III and nine Phase II studies, with multiple data read-outs in the next year. In our opinion, the relatively modest $470m EV and considering the pipeline, Merrimack is an attractive investment proposition.

Rational Drug Design
Merrimack is focussed on exploiting systems biology to identify critical pathways in cancer and design drugs (mostly antibodies) that modulate multiple components at the same time. It then studies these drugs in selected patient populations that are most likely to respond based on its biomarker work. The lead candidate is MM-121, an anti-Erb3 antibody partnered with Sanofi that is in six Phase II studies for NSCLC, breast and ovarian cancers. The first cohort reported recently from its Phase II study of MM-121 in NSCLC and failed to show reversal of resistance to erlotinib. However, two more cohorts from the study have yet to report data.

MM-398 For Pancreatic Cancer Could Surprise
The most advanced drug candidate, MM-398, a nanoliposomal formulation of irinotecan, came to Merrimack through its acquisition of Hermes Biosciences. It is being studied as monotherapy and in combination with 5FU-LV in a Phase III trial in second-line pancreatic cancer, with the read-out due by the end of the year.

Unsurprisingly, given the high historic failure rate in pancreatic cancer, the market is very cautious on this study, hence a positive outcome would be a significant event. MM-298 has generated good Phase II data (albeit from a single-arm trial) and is compared to a modest drug regimen (5FU-LV).

Multiple Data Read-Outs Should Drive Value
Merrimack expects to report data from four randomised Phase II studies in H213 and two in 2014. Positive results should lead to Phase III registration trials.

Valuation: Modest Given Breadth Of Pipeline
Merrimack’s EV of $470m (market cap less $110m of cash at 12/2012) appears modest to peers with a targeted cancer drug pipeline. Multiple data read-outs, if positive, could therefore add significant value over the next year.

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