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Why Merrimack Pharmaceuticals, Inc. Shares Sank 18% Lower in October

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What happened

Shares of Merrimack Pharmaceuticals, Inc. (NASDAQ: MACK) a cancer-focused biopharmaceutical company, fell 17.8% in October, according to data from S&P Global Market Intelligence. A staff reduction increased concerns that its recently launched cancer therapy might disappoint investors.

So what

With 426 full-time employees at the beginning of the year, Merrimack's staff wasn't enormous to begin with. News it would cut its headcount by 22% almost a year following Onivyde's FDA approval doesn't inspire confidence in its commercial launch, nor Merrimack's ability to advance a bustling clinical-stage pipeline. Including the immediate resignation of CEO Robert Mulroy with the restructuring announcement is downright troubling.

The company's only commercial-stage drug, Onivyde, for treatment of pancreatic cancer, is essentially a longer-lasting version of Pfizer's Camptostar, a drug the FDA approved 20 years ago. Shire (NASDAQ: SHPG) inherited responsibility for commercializing Onivyde outside the U.S. and Taiwan from Baxalta, leaving Merrimack to support its U.S. commercial launch.

So far, the U.S. launch isn't going so well. First-half product revenue of just $22.82 million is far below the company's operating costs of $114.94 million during the period. Tack on another $29.73 million spent servicing long-term debts during the first half, and it's easy to see why a staff cut was necessary.

Now what

Merrimack's working capital fell from $97.65 million at the beginning of the year to just $28.15 million at the end of June. The company expects the staff reduction will eliminate over $200 million in costs over the next two years, but it probably won't be sufficient to avoid raising more capital in the near future.

With a bit of luck, though, Merrimack might not need to raise very much. Onivyde U.S. sales were expected to peak around $400 million per year ahead of the drug's launch. It significantly increased overall survival by two months versus the standard of care in second-line pancreatic cancer. That might not seem like much, but there hasn't been a major improvement for pancreatic cancer treatment in decades.

Shire announced an EU marketing approval for Onivyde to treat pancreatic cancer last month as well. Merrimack is entitled to a tiered double-digit royalty percentage on sales throughout the territory that could reach the low 20s. Investors will want to keep an eye on the European launch, and Merrimack's efforts to expand Onivyde's label to the first-line setting. Success here could bring the company to sustainable cash flows while it develops four additional clinical-stage candidates in its pipeline.

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