Merrimack Pharmaceuticals (MACK) ($220MM market cap) is essentially a publicly traded CVR in a c-corp form, I owned the stock briefly in 2017 after the company sold Onivyde to Ipsen and committed to passing through any future milestone payments related to Onivyde to shareholders. Unfortunately, it didn't have the same protections of a CVR and management ended up diluting shareholders of those future milestone payments by raising equity to pursue their remaining development stage pipeline. In 2019, the company officially gave up development of new drugs, management was removed and it has been little more than a shell since as the company awaited any milestone payments from Ipsen.
Seven short years later, Ipsen announced that Onivyde was approved by the FDA for metastatic pancreatic ductal adenocarcinoma ("mPDAC"), a particularly awful form of pancreatic cancer. This approval triggers a $225MM milestone payment to Merrimack, the remaining milestones for Onivyde and another asset sale (to Elevation) are not expected to be reached. Merrimack waited little time to announce they were formally liquidating pending a shareholder vote in May, with the liquidation distribution range of $14.65 to $15.35/share.
We'll have to wait for the proxy to see how conservative this estimated range is, but to my eye, it looks pretty conservative, with the actual distribution likely to be at the top of the range or even just above. Below is my math, as usual, it might be wildly off (and any variance to these numbers can swing the expected IRR quite violently), I'm particularly wary of my tax estimate, any tax wizards out there please feel free to chime in below in the comment section.
The board at MACK has been controlled by investors/owners since 2019, they've been prepping and preparing for this day since, I don't anticipate any large surprising expenses or much of an escrow. Congratulations to that team, I've followed at a short distance but never felt fully comfortable betting on an FDA approval.
Disclosure: I own shares of MACK
Also saw this this morning. Seems pretty straightforward.
ReplyDeleteI'm probably being stupid, but what makes me a tiny, tiny bit nervous is that they don't have the cash yet, strictly speaking. I think it's super likely they will but there could be a nasty "Esperion" tail risk. Would love to see some clarity on that from Ipsen before I try to pick up pennies in front of the steamroller in size.
ReplyDeleteAlso, I think it is likely they will keep a bit more cash in the stub. A bigger reserve for (tax?) contingencies and/or some extra money in case one of the CVR's does turn out to be promising a few years down the line and they have to keep operating.
I thought about the Esperion risk a bit, but FDA approval seems a bit more cut and dry than the Esperion situation, and its for the exact indication that was outlined in the milestone. But yes, that is worth thinking about.
DeleteI thought about pulling the trigger on it yesterday but passed because it looks like all their other milestone payments are likely zeros, didn't think about how conservative their range was. It's also disappointing that Onivyde only adds a couple months to the average survival period, such a nasty cancer.
ReplyDeleteYeah, its not a "get rich" idea. Maybe a cash plus type of thing. I like that those in charge have proven they're good stewards of capital, aligned with us, etc., they'll squeeze every penny out of it.
DeleteTheres no risk Ipsen wont pay . Ipsen talked up the drug at their investors day last month and MACK insiders were buying in size late last year when stock was in the 12s
ReplyDeleteexcelente thank you
ReplyDeletePlease send out an email when you purchase your stocks. They always seem to be Up by the time you've fleshed out your pro forma here. I've read and followed along long enough to feel comfortable going along for the ride if I can get on at the starting gate.
ReplyDeleteI do have an email option off to the right, not sure what time it goes out. I think there are other services that scrap the site and send out an email sooner if I post, but not sure the details there. Either way, have to give the classic "do your own work" disclaimer! I'm often wrong or overly optimistic.
DeleteApologies if I have missed it but do you have thoughts on TLIS? Seems to be right in line with your broken biotech theses but because it’s so small (perhaps) there is a wider discount than usual. Thanks and always enjoy reading your posts!
ReplyDeleteI do like this one too, on my short watchlist, but don't own it currently. As others run off, I might add it if they don't reach a deal or liquidate first.
DeleteCould you provide a bit more color on how you arrived at the $15M tax/interest estimate? Just looking at federal NOLs if it's $225M milestone less $215M NOL (not including ~$2M of NOLs accumulated in 2023) would the tax amount not be on ~$8M of income, plus interest? So looking at <$5M of taxes + interest total?
ReplyDeleteAgain, I'm out of my lane when it comes to taxes, but I believe the 452A taxes owed come first, then the NOL is applied after, not the other way around. But I'd like to be wrong on that. If others know better, please chime in.
DeleteGot it, understood. So how are you approximating the $15M then?
DeleteWhen you say section 452 do you mean 453 - Interest on Deferred Tax Liability?
ReplyDeleteYes
DeleteHere's the line from the press release:
Deleteestimated federal and state taxes payable for 2024, interest payable to the federal government pursuant to Internal Revenue Code Section 453A and state governments pursuant to similar state tax provisions due on the receipt of the Ipsen milestone payment
Thanks. From the 2022 Risk Factors in their 10-K: "If we receive milestone payments in future years pursuant to the Ipsen sale, we will be liable for interest to the federal government pursuant to Internal Revenue Code section 453A and state governments pursuant to similar state tax provisions because it was an installment sale. The interest is compounding and is calculated based on the number of years between 2017 and the year the milestone payment is received by us. Any interest charges cannot be offset by net operating loss carryforwards or tax credits."
DeleteFrom what I've read, the 453 interest is deductible, so mathematically whatever they pay in 453 interest effectively adds to the total NOL amount. It seems like the applicable rate is 8%. More clarity should be given once the K drops in a couple of weeks.
So $225M milestone less 2017 NOL of $138M, times 21% tax rate gets you to ~$18M of unpaid "tax", and 8 years at 8% is ~$15-16M of interest. Is that the thought here?
Delete8% is only the rate this quarter. It's fluctuated between 3-8% since 2017. You can see the table here: https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs/vfcp/table-of-underpayment-rates.
DeleteThe a2 underpayment rates apply. I think the final applicable rate should be lower. I don't think the 2017 NOLs are applicable, but the 453 calculation also includes a reduction by whatever the Gross Profit Percentage on the deal is, which I can't find details for.
The payment from Ipsen is due by 3/29/24 - so assuming a late May or early June distribution, that's another ~$2mm in cash interest likely earned on the payment. The tax amount is still the swing factor here, but adds about another 10c per share.
ReplyDeleteHappy Saturday, Gents and Ladies. Anyone have a good source for RPHM updates? The last we discussed was during the holiday season.
ReplyDeleteRead the SEC filings.
DeleteThey just did another 20% RIF, so things are happening/moving along there.
DeleteCHRS CEO just dumped more shares. Could be heading to brokenville.
ReplyDeleteTaxes and interest estimated at $23.1M in the 10-K. I'm very curious how they get to $15.35/sh on the top end of a distribution...
ReplyDeleteOof. Yeah, I was too optimistic as usual. Only variables would be the remaining IP? But that can't be worth much, and potentially interest income.
DeleteWhat does this adjust your guesstimate to?
DeleteAround $15, assuming no value to the remaining IP (if there is any, probably well less than $1MM) and nothing surprising in their cash management/interest income.
DeleteLooking at the 4Q23 balance sheet, I see the tangible book value for MACK is only $1.31/sh. With this Ispen dividend expected to be ~$15/sh, I see the final value of MACK to be ~$16.31/sh. Does that make sense?
ReplyDeleteInteresting phrasing from Daniel Schneeberger: (https://twitter.com/Biohazard3737/status/1757755694869012696)
ReplyDelete"Now, I also hope we can find a better solution than a winddown…"
Tiny chance some people behind the scenes are trying to do something with the stub? Would make sense as far as I am concerned.
NOLs will be gone. Why do something else besides liquidate? Just trust those in charge? I do respect Newtyn and others in the shareholder registry.
Delete