The bull case for MEIP (from "Seeking Alpha" today) Comments welcome
MEI Pharma: Double Trouble Or Double Double?
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Jul. 10, 2017 9:44 AM ET
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About: MEI Pharma, Inc. (MEIP)
Kenneth Pittman
Long only, value, biotech, healthcare
(113 followers)
Summary
MEI Pharma's stock has doubled YTD despite the relative lack of catalysts.
The financial position of the company and the "second" drug in the pipeline are overlooked aspects of MEI Pharma.
A "Double Double" to reach $5.60 is quite possible, if not likely, in the next 6-12 months.
Quick Background:
I am a Physician (Board Certified in Child Psychiatry, Adult Psychiatry, and General Pediatrics) and I have been an investor in individual biotech companies for about 5 years. I first published on Seeking Alpha in 2014 and have recently resumed writing here. My focus is finding value in Biotech companies while also reviewing technical aspects of their stocks.
General Overview of MEI Pharma (MEIP):
MEI Pharma is a mid-stage biotech company that is devoted to cancer therapy research. They currently have 3 compounds in their pipeline. The first of these is Pracinostat, an oral histone deacetylase (HDAC) inhibitor, which is being investigated as combo therapy for Acute Myeloid Leukemia (AML), Myelodysplastic Syndrome (MDS), and Myelofibrosis. The second is ME-401, a PI3K Delta inhibitor, which is being investigated as single agent therapy for Chronic Lymphocytic Leukemia (CLL) and Follicular Lymphoma (FL). Finally, there is ME-344, a mitochondrial inhibitor, which is being investigated as combination therapy for HER-2 Negative Breast Cancer.
MEI Pharma's stock has been on fire in 2017 and has doubled from $1.40 at the start of the year to a close of $2.83 on July 6th. (The stock actually hit an intra-day high of $3.26.—Blade) This has occurred despite the lack of major catalysts or milestones. In fact, the only two significant data releases of the year were met with short-term sell-offs despite positive information. So is this double a bull trap that will present "double trouble"? Or is it a sign of things to come and there will be a "double double"? I believe that investors have been missing two keys related to the financial position of the company as well and the prospects of their "second" drug, ME-401. For this reason, I believe a "double double" is quite possible and the stock could likely reach $5.60 at some point in the next 6-12 months.
The Financial Position of MEI Pharma Due to Pracinostat and Helsinn
MEI Pharma is one of the better positioned mid-stage biotechs of which I have reviewed the financials. This is largely due to their Summer 2016 deal with Helsinn Pharmaceuticals, a Swiss-based Private Biotech company that is best known for Aloxi. Aloxi is an injectible anti-nausea medication used as adjunct therapy in cancer treatment. Aloxi is notably used frequently in combination with Vidaza, which is the Celgene (CELG) compound that MEI Pharma is testing Pracinostat with for AML and MDS. As part of this deal, Helsinn is responsible for ALL drug development and marketing costs. In other words - MEI Pharma will have ZERO ongoing expenses related to Pracinostat moving forward.
In addition, MEI Pharma will receive milestone payments as Pracinostat advances and is eventually marketed. These milestone payments may total up to $444 million. The majority of these milestones are regulatory and sales related (and this is likely 3+ years away), but smaller payments may exist for benchmarks such as completing enrollment in the upcoming Phase 3 Study. MEI Pharma does owe a small amount in milestone payments to the company it bought Pracinostat from, but these should be more than covered by the Helsinn payments. MEI Pharma would also receive sales royalties on top of the milestone payments. Upon asking MEI Pharma's investor relations, I learned that these royalties "are tiered and begin in the mid-teens" for the US net sales portion.
With Pracinostat fully covered by Helsinn, MEI Pharma can devote its money to the other two drug candidates in its pipeline. To that end, they currently have approximately $57 million in cash and short-term investments (as of the end of Q1 2017). Based off of the net loss of recent years as well as company projections, this should give them a 18-24 month cash runway in the absence of additional milestone payments from Helsinn. If they did not receive additional interim milestone payments and did not have another source of income, they would likely need at least one fundraising stock dilution in the next 3 years. However, the company also has ZERO debt at this time and could also accomplish this fundraising by taking on some debt against future royalties. Of note, the company has not significantly commented on whether they would pursue dilution vs. debt for further financing (if needed).
The current market cap for MEI Pharma is $104 million. Assuming approximately $10 million net loss in the 2Q (which is likely a larger loss than the actual amount), the current market cap is only valuing MEIP's pipeline at approximately $57 million. Prior to the double in value, MEI was trading below the value of its cash and short term investments. It essentially was trading as if the pipeline had no value at the beginning of the year and now (despite little additional data) has a value of $57 million.
I would argue that having a Phase 3 Portfolio Drug with no expenses, $444 million in potential milestones, AND future potential royalties is worth at least $100 million to market cap - if not more. Valuing MEIP's pipeline at $57 million is only giving it less than a 15% chance of eventual regulatory approval AND meeting sales milestones for pracinostat (not counting valuing future royalties OR the other drugs in the pipeline). This is based on an expected value approach. While it is unclear what portion of the $444 million is regulatory vs. sales related (MEI Pharma's investor relations stated that they could not disclose the breakdown), I believe that both Helsinn and MEI Pharma are expecting better than a 15% chance of meeting these milestones and sales goals. The fact that there are significant royalties on top of these goals would lead me to believe that a significant portion of the $444 million is based on regulatory approval.
But Wait, There's More! - How ME-401 is More than "Second Fiddle"
Pracinostat has good potential and a great partnership with Helsinn. However, I believe that ME-401 could be a game-changer and presents value that is not factored in by most investors. The science of this compound and an overlooked data release are the reasons I believe that this early drug candidate already has significant value.
ME-401 is a PI3K delta inhibitor. There is currently one of these already on the market (Zydelig by Gilead (GILD)) and several others are in development. Zydelig is indicated for relapsed CLL and FL. ME-401 is looking to enter the same market and is several years behind in development. However, ME-401 has a distinct difference in structure from the other PI3K delta inhibitors and this may give it a significant advantage. Phase 1 studies have shown a more potent PI3K delta inhibition effect than its competitors (including Zydelig). Perhaps more significantly, there is a greater therapeutic window made possible by the fact that ME-401 is more selective in its inhibition of PI3K delta.
On May 31, 2017, MEI Pharma released interim Phase 1b data that showed that ME-401 was well tolerated and had no dose limiting toxicities. Most notably ZERO of the six patients in the study had AST/ALT elevation, colitis, or pneumonitis after 10-28 weeks of treatment. Only 1 of the 6 had severe neutropenia. This was true at a minimally effective biologic dose that at least 3 of the patients were showing clinical response to. This is notable because all of the above are very common side effects with Zydelig and other PI3K delta inhibitors. From examining the prescribing information for Zydelig as well as the studies of the other PI3K delta inhibitors, these side effects are often 20% or more. AST/ALT elevation and colitis typically each occur in 20% of Zydelig patients. Colitis was found in 19% of PX-866 patients. Buparlisib had 40% AST/ALT elevation, 34% colitis, 43% hyperglycemia, and 26% depression in a 2015 study. Alpelisib has a 47% rate of severe colitis in a 2016 study. Severe neutropenia occurs in 40% of Zydelig patients and was found in 44% of PX-866 patients. Of those I investigated, only TG Therapeutics' (TGTX) umbralisib had significantly lower than 40% neutropenia, 20% colitis, and 20% AST/ALT elevation.
While the sample size for ME-401 is too small to fully judge at this time, it is at least incredibly encouraging and consistent with pre-clinical data. If serious side effect rates were anywhere near those described above, then one would expect to see more of them in 6 patients other than the one episode of neutropenia (that was not severe enough to stop the medication). It will begin to peak the interest of potential partners and, if the full study of 84 patients shows anywhere near this improvement in serious adverse side effects, then I would guarantee that large pharma partners will be calling. Attempts at a buyout could be possible. For comparison, Takeda (OTCPK:TKPHF) paid $190 million up front and $120 million more in incentives for Intellikine, a company that had a PI3K inhibitor in a similar stage of development plus another promising cancer drug entering Phase 2. It's not quite apples to apples, but MEI Pharma's lead candidate is entering Phase 3 compared to Intellikine's one entering Phase 2.
MEIP stock on May 30th closed at $2.13/share. While it did reach $2.35 on the 31st (the day of the ME-401 press release), it spent some of that day down and closed at $2.25. Within 10 days the stock hit a low of $1.77 on June 9th despite these interim results. The only news release since June 9th has been related to an announcement of 1st dosing of a planned Phase 2 study of Pracinostat in MDS. However, the price has climbed to $2.83 in the following month. It is possible that investors have finally started to realize the potential value of ME-401. Or maybe larger pharma companies have already started to take an interest in ME-401 and this has led to more buyers.
Risks of "Double Trouble"
The primary risk of "Double Trouble" at this time is technical in nature. The RSI is sitting at 82.5 as of June 9th, which is significantly overbought. A backtest of the 10 or 20 day moving averages (EMA's currently $2.40 and $2.25 respectively, but climbing) will likely occur at some point fairly soon. This could be a good entry point for someone looking to establish a long position.
The longer term risk of "Double Trouble" (within the next 3 years) is failure of either of the first two drugs in the pipeline. For Pracinostat this would mean early termination of the study due to side effects - although this is unlikely due to the study design. For the same reason, it is also unlikely that the study would be ended early due to overwhelming benefit. For ME-401, this would mean significantly greater issues with tolerability in the full 84 patient cohort compared to the 6 patient interim results. While I believe that these outcomes are very unlikely, they both would have a significant negative impact on stock price.
A third risk (as with any biotech) is the risk of dilution. I believe that dilution in mid-late 2018 is more likely than 2017, but management may take advantage of any exponential rise in stock price to go ahead and raise money to cover the time until Pracinostat Phase 3 results in approximately 3 years. While this would depress stock price temporarily, I would likely use dilution as an opportunity to add to my position here.
Why a "Double Double" is Not Only Quite Possible, But Likely
As stated above, the "first double" of MEI Pharma from January 1st until July 6th is basically giving some value to the pipeline on top of the excellent cash/financial position of the company. I believe that the current market cap does not even fully value Pracinostat and gives no value to ME-401 or ME-344 (which is very early in development).
I believe that the "second double" of MEI Pharma to $5.60 will primarily be due to ME-401 and could occur over the next 6-12 months. While I do not expect 0/84 patients to have AST/ALT elevation, colitis, or neutropenia, I do believe that there is STRONG reason to believe that these rates will be significantly lower than peer compounds. If this happens, then ME-401 will add significant value to MEIP stock and likely attract buyout rumors and/or offers. MEIP at that point would clearly be more advanced than Intellikine was at the time of its buyout, so market cap would almost certainly exceed the $190 million paid up front for Intellikine (plus incentives). Alternatively, MEI Pharma may find an early partner for ME-401 even before the end of Phase 1b. That announcement alone could significantly increase share price to a second double given the fact that the pipeline is allocated such little value in terms of market cap at this time.
For these reasons, I believe that the benefit/risk ratio of a "Double Double" compared to "Double Trouble" warrants buying MEIP - especially if there is a pullback to the 10- or 20-day EMA.
Disclosure: I am/we are long MEIP.
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.
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