Source: VIC user lendario
MEI develops cancer drugs. Since 2012, the company has had no revenues, and has thus consistently generated a loss. However, it recently signed a new contract with Helsinn for the development and commercialization of one of its drugs, Pracinostat.
The Helsinn agreement grants Helsinn the right to develop, manufacture, and commercialize Pracinostat. It also means Helsinn is “primarily responsible” for funding its development and commercialization. MEI still has to conduct the Phase II study, which involves sharing costs 50/50 with Helsinn. In exchange, the company has received $20m so far, and will receive “up to $444 million in potential regulatory and sales-based milestones, along with royalty payments on the net sales of Pracinostat.”
On average, in 2014–16, Helsinn spent 19m on R&D and 8m on G&A. Due to the offloading of Pracinostat, the R&D figure should fall, or at least will be refocused to new drugs.
The business breaks down into the Helsinn agreement for Pracinostat and the development of two other drugs. On their balance sheet, they have around $60m of value, offset by some small liabilities to $55m.
Probability of Payout
We can value MEI Pharma in a very simplistic way. Assume there are two scenarios: either they get a $450m payout in 5 years, or they burn through all of their cash on future drug development projects that don’t pan out and are worth nothing.
Since $450m discounted at 20% for 5 years is $180m, you need a 72/180 = 40% chance of this scenario panning out for MEI Pharma to yield 20%. The question is whether this set of assumptions is conservative or aggressive.
- One good base rate would be previous headline values of Helsinn’s contracts vs. the actual payouts over 5y. This would make it easy to figure out the % chance of the $444m in 5y. Here, one instructive case is Zealand, which entered an agreement with Helsinn in 2008, and recently re-acquired the drug after Helsinn decided to stop marketing it.
- Another candidate rate might come from a similar analysis of the industry in general. This would be more data but a little less direct and thus maybe less reliable. MWE provides one source of info, which seems to suggest about a 40% payout rate, though lower (23%) for pre-revenue companies.
- The fact that the $444m figure does not include any royalty payments suggests that higher figures are within the realm of possibility.
- New stock of $150m is very dilutive. Why would they do this, especially if the stock is undervalued? This could be dilutive enough to threaten returns, even if a good payout is reached.
- CEO has very little ownership and is paid largely in cash. His previous two projects also failed: Prospect Therapeutics, where he was CEO, went bankrupt in 2009, and Favrille, where he was Chief Scientific Officer, fell 90% in 2008.
The only real source of value for MEI is its contract with Helsinn; everything else is speculative. I lack any confidence in the team, both when it comes to new drugs and capital allocation, and have no detailed information on the contract. Overall, it does not seem like a 40% chance is conservative enough to warrant investing, and I don’t see a viable way to get enough confidence on this company, so I will stop analyzing it.
- MEI will achieve $450m+ in milestone payments within 5y (25%)