It is a pleasure to report that the Merrimack Pharmaceuticals, Inc. (NASDAQ:MACK) is up 58% in the last quarter. But the last three years have seen a terrible decline. Indeed, the share price is down a whopping 92% in the last three years. So it’s about time shareholders saw some gains. The thing to think about is whether the business has really turned around.
While a drop like that is definitely a body blow, money isn’t as important as health and happiness.
With zero revenue generated over twelve months, we don’t think that Merrimack Pharmaceuticals has proved its business plan yet. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Merrimack Pharmaceuticals has the funding to invent a new product before too long.
We think companies that have neither significant revenues nor profits are pretty high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Merrimack Pharmaceuticals investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it reported in December 2018 Merrimack Pharmaceuticals had minimal net cash consider its expenditure: just US$42m to be specific. So if it hasn’t remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 56% per year, over 3 years. You can click on the image below to see (in greater detail) how Merrimack Pharmaceuticals’s cash and debt levels have changed over time.
In reality it’s hard to have much certainty when valuing a business that has neither revenue or profit. Would it bother you if insiders were selling the stock? It would bother me, that’s for sure. It only takes a moment for you to check whether we have identified any insider sales recently.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between Merrimack Pharmaceuticals’s total shareholder return (TSR) and its share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Merrimack Pharmaceuticals hasn’t been paying dividends, but its TSR of -88% exceeds its share price return of -92%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
Investors in Merrimack Pharmaceuticals had a tough year, with a total loss of 13%, against a market gain of about 11%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, longer term shareholders are suffering worse, given the loss of 26% doled out over the last five years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.
But note: Merrimack Pharmaceuticals may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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