In mid-July, Seven Corners published its long thesis on Merrimack Pharmaceuticals (MACK). [Please see our full writeup in our Research section here.] We also published a follow-up blog post entitled "Merrimack Pharmaceuticals - Long Thesis UPDATE" [for which, please see here]. Since then MACK's board of directors and activist investors JFL Management and 22NW Fund have been trading rhetorical blows in a proxy fight [see full SEC filings here]. As a reminder, MACK delayed the annual meeting from its originally scheduled date of September 11th, apparently lacking votes for their candidates' re-election; now it is expected to occur on October 17th [per company proxy statement here].
We recently received in the mail a "Dear Fellow Shareholders" brochure from the company pitching their director slate and, frankly, we were disgusted by what we read [see full text here]. Thus, we decided to point out a few of the more egregious items contained therein, so "fellow shareholders" can see the level of weak spin MACK's board is resorting to in order to win votes in the proxy fight:
MACK's board claims that "...the Company and its financial advisor, a leading healthcare industry bank, MTS Health Partners, L.P., contacted more than 100 potential companies regarding transaction opportunities – ranging from reverse mergers with private companies to an outright sale of Merrimack. Unfortunately, none of these potential transaction partners offered sufficient near-term value for Merrimack shareholders. Furthermore, none of these potential partners were able or willing to assume responsibility for capturing and distributing the potential long-term ONIVYDE milestones to the Company’s pre-transaction shareholders."
SEVEN CORNERS RESPONSE: WAS "MTS HEALTH PARTNERS, L.P." REALLY THE BEST OPTION AVAILABLE TO MARKET MACK'S ASSETS? ACCORDING TO THEIR WEBSITE, THEY ONLY HAVE 22 EMPLOYEES ABOVE THE "ANALYST" LEVEL [SEE HERE]. HOW CAN MACK SHAREHOLDERS BE SURE THAT MTS WASN'T JUST "GOING THROUGH THE MOTIONS" TO PROVIDE COVER FOR MANAGEMENT TO CLAIM "SORRY, SHAREHOLDERS, NO STRATEGIC ALTERNATIVE WORKED"? MORE IMPORTANTLY, WHILE MACK CLAIMS THAT NO POTENTIAL TRANSACTION PARTNERS WERE WILLING TO PURCHASE THE ONIVYDE CVRs, DID MACK (OR MTS, ON BEHALF OF MACK) EVER CONTACT THE PRINCIPAL LOGICAL BUYER OF THESE ASSETS, NAMELY IPSEN S.A.???? WE ASSUME NOT, OTHERWISE THEY WOULD HAVE LIKELY MENTIONED IT IN THIS SHAREHOLDER LETTER. IF IPSEN WAS NOT CONTACTED, THIS WOULD EVIDENCE MACK MANAGEMENT'S LACK OF SERIOUSNESS IN MARKETING THE COMPANY'S KEY ASSETS (AND, CONSEQUENTLY, THEIR ENTRENCHMENT).
MACK's board brags that they "reduced the Company’s workforce by 100 percent since the initiation of the strategic review, including the Company’s entire senior management. The Company currently has no full-time employees and has engaged experienced consultants to manage day-to-day operations."
SEVEN CORNERS RESPONSE: IF MACK'S BOARD IS SO KEEN ON WORKFORCE REDUCTIONS AND LOWERING EXPENSES, THEN WHY DID THEY AGREE TO PAY OUT EXORBITANT SEVERANCE AMOUNTS TO THE FORMER CEO & CFO WHILE SIMULTANEOUSLY HIRING THEM BACK AS PRICEY "MONTHLY CONSULTANTS" DESPITE HAVING MINIMAL ACTIVE COMPANY OPERATIONS??? FOR EXAMPLE, A FORM 8-K FROM LATE JUNE [SEE HERE] REVEALS THAT MACK WILL PAY EX-CEO RICHARD PETERS "a lump sum severance amount of $743,746.21 [plus] a pro-rated bonus of $294,891.15", WHILE AT THE SAME TIME "[MACK] and Dr. Peters entered into a Consulting Agreement (the “Peters Consulting Agreement”), pursuant to which Dr. Peters will assist the Company with its on-going reporting obligations and the administration of the Company’s remaining assets. Dr. Peters will be compensated at a rate of $30,989.43 per month for his services under the Peters Consulting Agreement, which will be paid quarterly. The term of the Peters Consulting Agreement continues until June 29, 2021". SO MUCH FOR COST CUTTING! SIMILARLY, MACK FIRED THE CFO, JEAN FRANCHI, AGREEING TO PAY OUT A MASSIVE SEVERANCE OF NEARLY $500,000, AND THEN INEXPLICABLY HIRED THE EX-CFO BACK AT AN ABSURD RATE OF $17,292/MONTH IN RETURN FOR ADDITIONAL "CONSULTING" SERVICES. THUS, AFTER HEMORRHAGING APPROXIMATELY $1.5 MILLION IN SHAREHOLDER FUNDS FOR SEVERANCE PAYMENTS, MACK'S BOARD HAS OBLIGATED SHAREHOLDERS TO PAY NEARLY $50,000 PER MONTH IN CONTINUING CONSULTING EXPENSES TO THESE TWO "FORMER EMPLOYEES". HOW IS THIS FINANCIALLY LOGICAL AND/OR RESPONSIBLE?
MACK's board crows that they "Announced an anticipated reduction in the size of the Board from seven to four".
SEVEN CORNERS RESPONSE: WE BELIEVE THE REDUCTION IN THE SIZE OF THE BOARD WAS DONE PRIMARILY FOR ENTRENCHMENT PURPOSES RATHER THAN COST-CUTTING, SINCE IT MAKES IT EASIER FOR THE INCUMBENTS TO ARGUE THAT JFL/22NW ARE TRYING TO "GAIN FULL CONTROL" OF THE BOARD (SINCE THEY HAVE NOMINATED FOUR DIRECTOR CANDIDATES). IF THE BOARD SIZE HAD BEEN LEFT AT SIX OR SEVEN, JFL/22NW COULD AT MOST ONLY OBTAIN 4 OUT OF 6 OR 7 BOARD SEATS (NOTE THAT MACK COULD EVEN HAVE EXPANDED THE BOARD TO 9 SEATS, SO IT WOULD BE IMPOSSIBLE FOR JFL/22NW TO GAIN A MAJORITY OF THE BOARD). NOW, CONVENIENTLY, MACK'S INCUMBENT DIRECTORS CAN HIDE BEHIND SPECIOUS "CHANGE OF CONTROL" ARGUMENTS TO BLOCK JFL/22NW'S NOMINEES (INDEED, MACK NOW CLAIMS THAT JFL "[is] uninterested in any outcome besides being handed control of the Company" and that "[JFL/22NW are] uninterested in any settlement that did not give them clear control of Merrimack’s Board").
MACK's board states that "Since the announcement of the Company’s restructuring and strategic process on November 7, 2018 Merrimack’s stock price has increased by approximately 55 percent – reflecting the overall positive reception by shareholders of the significant steps Merrimack has taken".
SEVEN CORNERS RESPONSE: MACK's BOARD CONVENIENTLY OVERLOOKS THE FACT THAT BOTH THE STRATEGIC ALTERNATIVES ANNOUNCEMENT, AS WELL AS THE SUBSEQUENT STOCK PRICE RISE, COINCIDED WITH JFL BEGINNING IN LATE OCTOBER 2018 TO ACCUMULATE ITS LARGE POSITION IN THE STOCK [SEE SCHEDULE 1 TO JFL'S PROXY STATEMENT HERE] AND THEREBY PUT PRESSURE ON THE BOARD TO (AT LONG LAST) ACT IN THE INTERESTS OF SHAREHOLDERS RATHER THAN THEMSELVES. IN FACT, IT IS JFL (RATHER THAN THE INCUMBENT BOARD) WHO IS RESPONSIBLE FOR THE STOCK RISE OVER THE PAST YEAR.
The above points are, in our opinion, just a few of the many where MACK's board is engaging in intellectually dishonest and disingenuous arguments out of desperation to win a proxy fight they clearly deserve to lose. Let's face it, Board Chairman Gary L. Crocker is simply a failure and must be removed. Per the company's proxy, he has served as a member of MACK's board of directors since 2004, as Chairman of the Board since 2005 and as President and Treasurer since June 2019--and he has failed to create shareholder value during that entire period. In just the past 4.5 years alone, MACK's stock price has cratered ~95% under Crocker's supposed "leadership"(!!!) THUS, DESPITE A DECADE AND A HALF OF FUTILITY UNDER CROCKER, HE AND MACK'S BOARD ARE ASKING MACK SHAREHOLDERS TO KEEP THEM IN OFFICE. Why should we oblige?
Enough is enough, fellow MACK shareholders. Let's end the incumbent board's reign of financial terror and take back our company. The REAL reason the stock is up and the board is scrambling to appease us is because JFL & 22NW have been putting pressure on them. If we side with the incumbents now, all that leverage will be gone for another year (if not for many more years) and the value of our investment in MACK will likely plummet.
VOTE THE BLUE PROXY CARD IN ORDER TO SUPPORT THE JFL/22NW NOMINEES!
DISCLOSURE: Long MACK.