Melinta Therapeutics Inc. (fka MLNTQ)

[stockguard]

Melinta Therapeutics: Could The H.R. 6294 Bill Improve The Prospects Of Antibiotic Innovators?
Jul. 5, 2018 11:45 AM ET|5 comments | About: Melinta Therapeutics (MLNT), Includes: CDTX, MDCO, PRTK, TTOO
BioSci Capital Partners
BioSci Capital Partners
Integrated biosci research, consultant
MARKETPLACEIntegrated BioSci Investing
Summary
Despite that most companies in our various Specialty Reports have outperformed, the performance of the infectious disease innovators like Melinta are subpar to date.

There are hurdles that deter newly approved antibiotics to generate blockbuster sales.

Novel antibiotics are maintained as the last-line reserves to prevent antibiotic resistance.

Stellar new policies pioneered by the FDA Commissioner (Dr. Scott Gottlieb) can significantly improve the fundamentals for these companies.

We present a fundamental analysis and pertinent updates on Melinta. And we wish to share this article with all readers in celebration of July 4th.

This idea was discussed in more depth with members of my private investing community, Integrated BioSci Investing.

Life will have terrible blows in it, horrible blows, unfair blows. It doesn't matter. And some people recover and others don't. And there I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well. Every missed chance in life was an opportunity to learn something and that your duty was not to be submerged in self-pity. But instead to utilize the terrible blow in constructive fashion. That is a very good idea. - Charlie Munger

We recently increased our focus on the Specialty Reports, as part of our increasing emphasis to cover various niches in bioscience for subscribers of Integrated BioSci Investing. Most equities in our five Specialty Reports have outperformed the market. Nevertheless, the infectious disease innovators - Melinta Therapeutics (MLNT), Paratek Pharmaceuticals (PRTK), Cidara Therapeutics (CDTX), Achaogen (AKAO), and T2 Biosystems (TTOO) - are lagging behind. Regardless of a heighten demand for novel anti-infectious agents, there is a key reimbursement issue that makes investing in this niche unprofitable. Interestingly, highly promising policy changes - initiated by the stellar FDA Commissioner (Dr. Scott Gottlieb) - can substantially improve the investing prospects of these firms while delivering hopes to patients. In this research, we'll feature an update of our investing thesis on Melinta.



Figure 1: Melinta stock chart. (Source: StockCharts).

About The Company
First thing first, we'd like to briefly go over the background on Melinta for new investors. If you are already familiar with the firm, we recommend that you skip to the next section on the H.R. 6294 Bill. Melinta Therapeutics operates out of Chapel Hill, NC. The company is the product of the merger with Cempra that completed on Nov. 06, 2017. The reorganization gave Melinta and Cempra stockholders 51.6% and 48.4% ownership of the new company, respectively. We explicated in the prior research:

With the FDA approved delafloxacin (Baxdela) from Cempra, Melinta now has more option to execute the mission, in developing and commercializing antibiotics for the treatment of serious infectious diseases. Moreover, the mutually beneficial union enabled Cempra with Melinta's abundant cash and resources. Accordingly, the firm now has a highly enriched pipeline of antibiotics to service the infectious diseases market (one that is strongly in demand of better molecules to treat bugs increasingly-resistant to available medicines).



Figure 2: Therapeutic Pipeline. (Source: Melinta Therapeutics). Note: ABSSSI: Acute bacterial skin and skin structure infections || CABP: Community-acquired bacterial pneumonia || cUTI: Complicated urinary tract infections || ESKAPE: The ESKAPE pathogen program includes a focus on multidrug- and extremely-drug-resistant versions of the following pathogens: Enterococcus faecium, Staphylococcus aureus, Klebsiella pneumoniae, Acinetobacter baumannii, Pseudomonas aeruginosa, Enterobacter species and Escherichia coli || QIDP: Qualified Infectious Disease Product.

Increasing Antibiotic Resistance
With rising elderly population, more people are becoming sick and thereby increases antibiotic use. The more prescription, the higher the chances that bacteria will develop resistance. The statistics from the Center for Disease Control and Prevention ("CDC") showed that annually, there are at least 2M people who get serious bacterial infection requiring one or more antibiotics. Due to their increasing utility, the "work-horse" antibiotics that we currently have will become obsolete in the future.

From the economic view, antibiotic-resistant raises the financial burdensome on the U.S.'s healthcare spending. Accordingly, to the CDC's Antibiotic Resistance Threat Report, the total annual cost of antibiotic resistance amounts to the staggering $20B. Moreover, the additional society costs from productivity loss can be as high as $35B.

Reimbursement Keeping The Lid On Melinta Shares
Notably, the reimbursement for a novel antibiotic is strikingly different from that of other therapeutics. Physicians are strongly encouraged to prescribe a newly approved drug. Therefore, this translates into increased earnings for the company to offset (the approximate $1B used to innovate a molecule from bench research to commercialization).

In contrast, a newly approved antibiotic is being kept as the last-line reserve in the effort to deter resistance. Hence, this lowers the sales volume. Without much sales, the companies cannot get back their capital invested. Ultimately, the current situation will deter further innovation that, in and of itself, is much needed in this space. And, the health consequences will boil down to an increased mortality and morbidity for us all.

H.R. 6294 To Potentially Ameliorate The Situation
In the prior Rounds Report, we note that the FDA is working with Congress in the development and launch of various campaigns to help the antibiotic innovators. One policy is the "qualified infectious disease product ("QIDP") designation. Interestingly, new applications considered as QIDP can receive the fast track designation, priority review, and possibly a 5-year extension of any exclusivity. Second is the new ("LPAD") pathway that streamlines the approval process. LPAD requires a much smaller and shorter clinical trial yet still ensuring the adequate safety for approval.

That aside, the most notable development is the new incentive program being pushed by the FDA Commissioner (Dr. Scott Gottlieb): hospitals can buy the newly-approved antibiotics for a flat licensing fee rather than conventional sales based reimbursement. Under the new structure, a company can procure significant revenues on a novel antibiotic (regardless of how much of the drug is being prescribed). Just weeks into Dr. Gottlieb's announcement, notable politicians drafted a new bill that pushes for greater exclusivity extension for new antibiotics while favoring the flat licensing fee structure. According to a research by BioCentury:

Two members of the House Energy and Commerce Committee introduced legislation that would create a new "pull" incentive pathway for priority antibiotics, providing manufacturers a transferable award that could be worth $1B or more. The bill, the Re-Valuing Anti-Microbial Products (REVAMP) Act of 2018, aims to de-link the returns an antibiotics company receives from the volume of drugs sold by providing a high-value award upon approval of antibiotics to treat multidrug-resistant pathogens. The bill, H.R. 6294, is sponsored by Rep. John Shimkus (R-Ill.) and co-sponsored by Rep. Tony Cárdenas (D-Calif.).

Of note, it is not far from the truth that the whole process of drafting a bill to its passage into its approval can take 2-3 weeks. And yet, only 10% to 12% of the bills are eventually voted into laws. Therefore, the statistics are seemingly not favorable. Despite their small chances of success, Dr. Gottlieb is known for getting things done. His skills and determination to approve more drugs, ensuring public safety and access to medicine are stellar. If H.R. 6294 eventually becomes law, this can be a major catalyst for the infectious disease innovators like Melinta.

Financial Assessment
On May 08, 2018, Melinta reported the Q1 2018 earnings (that ended on March 31). As follows, the company posted $11.8M in product sales. This included the addition of Vabomere, Minocin, and Orbactiv as of Jan. 5, 2018, from The Medicines Company (MDCO) acquisition. Per figure 3, the total revenues came in at $14.8M compared to $22.5M for the same period a year prior. The higher figure for last fiscal was due to the upfront payment from Menarini (re the ex-US Baxdela licensing agreement).



Figure 3: Key financial metrics for Q1 2018. (Source: Melinta)

The research and development (R&D) logged in at $16.1M compared to $12.9M for the similar comparison. The higher spending was due to the more employee count (as a result of the Cempra merger and the new business from The Medicine Company). Moreover, the ongoing community-acquired bacterial pneumonia ("CABP") registration trial for Baxdela added more cost. For the respective periods, there were $29.4M ($0.95 per share) and $5.8M in net losses.

Pertaining to the balance sheet, there were $91.5M in cash and equivalent for Q1. The firm also raised $123M in the offering of 22.0M common shares on May 29. Therefore, the cash position is substantially improved to $214.5M. Based on the $34.6M quarterly burn rate, there should be adequate funding for operations into early 2020 (prior to any additional offering).

Potential Risks
As with any investment, there are pertinent risks. At this point in its growth cycle, the main concern for Melinta is whether various approved molecules will generate increasingly significant sales. As elucidated, the hurdles to blockbuster sales for newly approved antibiotics are nearly insurmountable. The chances of H.R. 6294 to pass is quite low. Nevertheless, if it can be passed, the fundamentals of the company will increase by leaps and bounds. The other risk is the increasing cash burn that will subject the stock to further dilution.

Conclusions
In all, we maintain our buy recommendation on Melinta but lowered its stars rating to a three out of five stars rating. And, we decreased the price target to $10 (to be reached within two to three years). As a merger with Cempra, Melinta has an ample cash to fund further innovation. The cash position was strengthened with the public offering that raised $123M. The three molecules acquired from The Medicine Company (Orbactiv, Minocin, and Vabomere) enabled Melinta to leverage on The Medicine Company's sales team to launch its newly approved molecule (Baxdela) for ABSSSI. The various programs being pushed by the FDA serve as the catalysts to improve the company's fundamentals. The most important is H.R. 6294 that was recently introduced. Despite its small chances of being passed, if it gets voted into law the investing story on Melinta can change drastically. Of note, our reservation on raising the star rating is due to the small chances of passage for the aforesaid bill (and the reimbursement issue centering the infectious disease innovators).

Last but not least, we wish to send our July 4th greeting to our subscribers and all readers. May we remember those who sacrificed their lives for our freedom. God bless America and those who sacrificed for us.

Author's Notes: We're honored that you took the time to read our market intelligence. Founded by Dr. Hung Tran, MD, MS, CNPR, (in collaborations with Analyst Vu, and other PhDs), Integrated BioSci Investing ("IBI") is delivering stellar returns. To name a few, Nektar, Spectrum, Atara, Madrigal, and Kite procured over 155%, 177%, 279%, 258%, and 83% profits, respectively. Our secret sauce is extreme due diligence with expert data analysis. The service features a once-weekly exclusive Alpha-Intelligence article, daily analysis/consulting, and model portfolios. And, we invite you to subscribe to our marketplace now to lock in the current price and save money for the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research articles are best used as starting points in your own due diligence. We are not registered investment advisors and our articles are not construed as professional investment advice.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

https://seekingalpha.com/article/4185550-melinta-therapeutics-h-r-6294-bill-improve-prospects-antibiotic-innovators