Is Menlo Therapeutics A Discount Opportunity At Current Pricing?

Menlo Therapeutics Inc.(NASDAQ:MNLO) is an early week mover in the biotechnology space this week with the company picking up some volatility on the back of a data-related release. Specifically, and on Monday, Menlo reported some numbers from a phase 2 trial of one of lead development assets and, on the back of the release, has taken a substantial hit to its market capitalization.

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So what happened?

The asset under investigation is called MTI-103 and with the trial that just read out, a phase 2 trial set in the US, Menlo was trying to prove that MTI-103 could be safe and effective when used for the treatment of pruritus in adults and adolescents with atopic dermatitis (AD).

The drug is what is called an NK1 antagonist and it is the drug on which the vast majority of this company’s long-term valuation rests. That the recent announcement has caused this one to take a substantial hit on the back of its release, therefore, isn’t all that surprising.

To quickly summarize what happened, the trial failed to hit against its primary endpoint and its secondary endpoint in the AD population, which, at best suggests a dramatically reduced efficacy rate for what could potentially be an incredibly large patient population for this company and this asset as compares to rates recorded in earlier studies.

That’s not all, however. There is an alternative group of factors in play here and these should be taken into consideration by anybody looking to pick up an exposure to this company (or, of course, sell out of one).

Specifically, the drug has performed exceptionally well in a range of other itch related indications (and when we say itch here, we mean pruritus) across a wide sample of patients. The failure to perform in the AD population, therefore, could be argued as being nothing more than a small setback against a wider and far more successful effort towards commercialization.

And management looks to agree (although, in all honesty, this is not unexpected).

Menlo CEO, Steve Basta, had this to say on the news:

“While we are disappointed that the results in this Phase 2 trial of pruritus associated with atopic dermatitis did not reach statistical significance and did not show the same magnitude of treatment effect as in our prior pruritus studies, we do see in the results a pattern that shows numerical improvement in each serlopitant treatment group above the placebo group at every time point.”

Essentially, then, the company is kind of disregarding this latest news in favor of a far more positive long-term outlook for the program and looks set to push forward in the other indications towards pivotal studies over the coming couple of years irrespective of the failure to prove efficacy in an AD population.

We already have seen two very strong data sets hit press in chronic pruritus and prurigo nodularis and data from phase 2 trials in refractory cough and pruritus associated with psoriasis are due in the fourth quarter and late-2018/early-2019, respectively.

If these two readouts come in as positive, chances are that the markets will wholly disregard the latest disappointment and sentiment will quickly recover from the recent downturn that came about on the back of the latest news.

And this, for us, serves up something of an opportunity for an investor that is willing to take on a bit of risk against the current situation.

Specifically, and as mentioned above, Menlo has taken a real hit to its market capitalization (closing down 77% at around eight dollars a share subsequent to the news from its preannouncement capitalization and price), meaning it’s currently available incredibly cheap.

Of course, it being cheap is dependent on the company’s ability to stage a recovery but, with the raft of potential catalysts that are set to hit press over the next 18 to 24 months, this ability isn’t in question – assuming that the data we have seen over the last 12 months is replicated in the coming releases.

Bottom line here is this looks like an overreaction to some admittedly disappointing news and that current prices could be an opportunity to pick up an exposure at a discount for anybody willing to take on a bit of risk at this point.

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