Quick Pitch: MEI Pharma (MEIP)
Potential liquidation – 29% Upside
Mei Pharma’s disastrous stock-for-stock merger with Infinity Pharmaceuticals (INFI) is very likely to fail as suggested by the 100% spread. This would leave MEIP at an almost 50% discount to its cash on the balance sheet and close to a 50% discount to the recently indicated liquidation value by MEIP’s financial advisor. While it is far from clear if the company will choose the liquidation path when/if the merger breaks, the disclosure of a 5% stake by Tang Capital adds some confidence to the setup. Keep in mind that the stock is already up 40% since Tang’s filling and currently trades at the same levels as before INFI’s merger announcement.
The merger with INFI was the result of the strategic review and was briefly covered here. MEIP’s leading drug candidate has recently failed, leaving the company with two Phase 1 treatments. Approximately 40% of the employees have already been let go as part of MEIP’s ‘staggered workforce reduction’ efforts. The disclosed information in the proxy also shows that management has, in fact, considered winding up the company during negotiations with INFI. The financial advisor calculated MEIP’s value in a full wind-down scenario and came up with $82.8m or $12.4/share (adjusted for the recent reverse stock split). This compares to the current share price of $7/share and $112m cash as of Mar’23.
Torreya also compared the implied value of MEI as presented in the pro forma DCF analyses to the estimated liquidation value of MEI. To calculate the liquidation value, management provided its best estimate for the cash available to shareholders upon a hypothetical liquidation. Based on discussions with management, a hypothetical liquidation could occur in the second quarter of 2023, and after paying all wind-down obligations, a fully wound-down MEI entity would be left with $82.8 million of available cash. This would imply a liquidation value of $0.62 per share.
A similar figure is indicated in another part of the proxy:
Or the other strategic alternatives available to MEI, including the winding up of MEI’s operations and declaring a dividend of available cash to MEI’s stockholders in an amount equal to approximately $80 million.
I think that with such an estimate already disclosed it might be hard for MEIP to pursue anything else besides liquidation, especially when no other viable merger candidates were identified (as per merger background info in the proxy). The standalone DCF analysis by the same financial advisor hardly offered a better alternative: even with the assumption of successful commercialization (in years 2028 and 2032) of MEIP’s remaining drug candidates and an additional $200m equity raise at $20/share, standalone valuation resulted in $12-$14.8/share (post reverse split). I do not think company will restart the strategic review process when seemingly all alternatives have already been considered.
The calculations of the indicated liquidation estimate were not shared, but the valuation exercise was dated mid-February with the assumption that the liquidation will wrap up by mid’23. The company has obviously chosen a different path and the operating expenses since then have been much larger than it would’ve been in the wind-down mode. The timeline has also stretched, so the actual liquidation value of MEIP is now likely to be lower than the advisor’s estimate. However, given how wide the discount to net cash is, I think a substantial upside still remains. If the merger were to break by mid-year and MEIP would then liquidate by the end of 2023, I would need to deduct two additional quarters, or c. $20m, of incremental cash burn from the $80m estimate given in the proxy. That would result in liquidating distributions of $60m or $9/share, a 29% upside from the current prices.
Sense checking this liquidation estimate, I arrive at a similar figure:
- $112m – cash as of Mar’23;
- Less $21m – accounts payable and accrued liabilities as of Mar’23;
- Less $1m – merger termination if the merger with INFI gets voted down. In case of a competing offer, the termination fee would go up to $4m.
- Less $18m – cash burn until the end of 2023. I’m counting cash burn for the current quarter at $12m (same as for the quarter ended Mar’22) and estimating a further $6m for the rest of 2023.
- Less $2.5m – operating lease termination calculated as 1 year’s worth of rent.
- Less $10m – further liquidation expenses and severance. This figure would cover around $5m for lay-off costs, $2m executive severance, and another $3m buffer for any other liquidation-related costs.
- This sums up to a $60m liquidation value.
However, if the company chooses to continue the development of its two drugs on a standalone basis, MEIP would burn through the cash rather quickly. The proxy notes that “cash equivalents and short-term investments will be sufficient to fund operations for approximately two years” and that “MEI is projected to generate ~$500 million of negative free cash flow before turning cash flow positive in 2029”. So this is a risky bet.
What offsets this concern to some extent is the presence of Kevin Tang, who filed 13G with a 5.4% stake earlier this month leading to a 40% share price spike for MEIP. Tang’s involvement here is definitely positive, although this $2.5m position is only a tiny part of his overall portfolio. Tang has been involved in a couple of similar biopharma setups recently where eventually he took a more active role:
- A failed biopharma / cash-shell JNCE was due to acquire an almost broke clinical-stage peer RedX. The merger was terrible for the buyer as JNCE was giving away $130m in cash in exchange for a 37% interest in a $145m market cap London-AIM listed Redx. Tang built a 10% position and offered to buy JNCE himself. Management quickly ditched the value-destroying merger and entered into an agreement with the biopharma investor, resulting in a much more favorable outcome for JNCE’s shareholders.
- Tang has also blocked the low-balled sale of MTCR to Equillium (covered on SSI here) and the company is now liquidating instead.
Other major shareholders include Anson Funds (8%), biotech investor MPM Oncology Impact Management Fund (7.6%) and small-cap investor Wasatch Advisors (7%).
A bit more background on the merger with INFI
In essence, the currently contemplated merger transaction is a large equity raise for INFI at the expense of MEIP shareholders. Shareholder approval from both parties will be required and it’s highly unlikely that the MEIP’s shareholders will approve this acquisition. The same is indicated by the 100%+ spread. Both companies have small early-stage cancer-focused pipelines – INFI is working on a single Phase 2 asset, while MEIP is developing two Phase 1 treatments. However, MEIP is sitting on a considerable cash pile, whereas INFI has almost run out of cash. In case the merger fails, INFI will be forced to raise fresh financing or wind down. As part of the merger, MEIP is required to keep $80m in net cash compared to only $4m for INFI. Despite almost no cash contribution, INFI shareholders would be getting a 42% stake in the combined company. MEIP’s share price dropped by 30 upon the announcement of this value-destructive transaction.
Great write up – thank you.
How do you feel about the $64.5m of deferred revenue liability on the balance sheet as of March 31? Do you know what that relates to and wouldn’t it need to be settled in a liquidation?
Looks like Torreya exclude it in their estimate of liquidation value…
These deferred revenues relate to licensing agreement of zandelisib, the previous leading candidate of MEIP. Zandelisib was co-licensed in the US and fully licensed for development in Japan. FDA blocked the candidate at phase 2 in Dec’22. Later the parties have mutually terminated development in the US after that. Recently, the remaining development operations in Japan have also been mutually discontinued. Hence, I believe that the remaining deferred revenue figure is just an accounting entry and is not associated with any pending costs to earn these deferred revenues.
Interesting write-up.
I quickly looked at the latest 10q. It reads like they’ve ended an agreement with Kyowa Kirin, and are ending development of their main drug Zandlisib in Japan. The 10q says they spent $7.7m in R&D for Zandelisib this last quarter. They spent $900k in R&D in the quarter for the other two drugs they’re going to continue with. That kinda suggests cash burn may come down materially, no?
That might be the case and maybe my estimate was overly conservative. In any case, before the details of the liquidations get full attention, the company needs to break the current merger and initiate the wind down.
MEIP received an unsolicited offer for “not less than $8/share + cvr
https://finance.yahoo.com/news/mei-pharma-confirms-receipt-unsolicited-214000649.html
on 6/1 MEIP rejected the $8 offer. 6/2 MEIP up 14% pre-market as the buyer is coming back with a statement that the offer should be considered.
https://finance.yahoo.com/news/anson-funds-cable-car-capital-202200068.html
It’s a bouncy illiquid stock, but the clear price trend is DOWN following the 6/1/23 pre-market announcement of the rejection.
Board seems to really like this wacky INFI deal.
My thoughts on the current MEIP setup.
This week, MEIP received a non-binding acquisition proposal from a buyer consortium led by one of MEIP’s largest shareholders – Anson Funds. The consortium owns a 15% combined stake in MEIP and is saying the company sale is a much better alternative for shareholders than the merger with INFI. The bid valued MEIP at “not less than $8.00 per share” plus a CVR to receive 80% of net proceeds from the disposition of the company’s clinical assets. Surprisingly, MEIP’s management not only had the audacity to reject the offer but also explicitly stated that the proposal is inferior to the merger with INFI and deemed it unworthy of initiating any discussions.
This bid from Anson has now removed any remaining doubts that the INFI deal will fail and sooner or later management will be forced to start seriously considering a company sale or liquidation. It appears that some turbulence inside MEIP’s management has already begun as the company’s CEO/president resigned promptly after the offer rejection. As a result of these developments, MEIP currently trades at $7.5/share or a 6% spread to the rejected offer’s cash consideration.
The cash portion of the bid came at only 10% discount to my $9/share estimate MEIP’s liquidation value. My estimate might have been too conservative and the liquidation in the hands of Anson Funds might net them a somewhat better result. Although the buyers said that they are ready to discuss “the potential for additional value to be delivered to all stockholders”, I think any improvement would be very limited. Anson pinned a $76m minimum cash requirement and additional wind-down / merger termination expenses of $11m, leaving $65m cash balance after closing. That’s $9.76/share, which seems to leave some scope for a better offer if management would be willing to engage in negotiations. However, it remains unclear if this is the liquidation value Anson expects to receive after it privatizes the company or whether we need to deduct a few more million for the final wind-down costs (I believe it should be the latter).
The big risk is that this setup will develop into costly proxy fight, which will eat into the cash balance as well as the margin of safety in this setup. MEIP’s management is clearly even more self-interested than I thought initially. Any chances of smooth and efficient liquidation once the merger with INFI breaks are now probably out of the window.
With Anson’s offer now logged and rejected, as well as the earlier disclosed position by Tang Capital, I think there are more developments to come. However, I struggle to answer the question if any upside from the current price of $7.5/share is sufficient to cover the risks that this ends up in a long/costly proxy fight.
The meeting date for the vote on the MEIP’s acquisition of INFI is set for July 14. I expect this merger to be voted down.
The spread to the rejected Anson’s offer for MEIP (cash consideration part only) currently stands at 8%.
A couple of developments with MEIP:
– Anson and Cable Car reitareted their offer to buy out MEIP https://finance.yahoo.com/news/anson-funds-cable-car-capital-132000551.html
– The reiterated offer was once again swiftly rejected by management arguing that the merger with INFI is superior. https://www.bamsec.com/filing/119312523176635/2?cik=1262104
– The released merger presentation indicates that the combined company would have $100m of cash upon closing.
– MEIP/INFI arb spread stands at 87% indicating the market expects this merger to be voted down.
The vote on MEIP/INFI merger was postponed till July 23. I think this is a good sign that management does not have the votes and the merger will break. This would force MEIP’s board to more seriously consider the alternatives.
MEIP shares are up +17% over the last 3 trading days. And the spread to Cable Car / Anson offer (which the board continues to ignore) has narrowed down.
I have explained in the June 3 comment, the $8/share cash offer might still be increased and there is also CVR that might be of some value.
The current offer is phrased as: “Cash consideration of not less than $8.00 per share, plus a contingent value right representing the right to receive 80% of the net proceeds from any license or disposition of MEI Pharma’s clinical assets.”
However, Cable Car / Anson now seem to be starting a proxy war to change the entire board of MEIP. Not yet clear how successful such efforts could be.
“The Board’s unwillingness to return capital to stockholders and refusal to engage with us regarding our all-cash acquisition proposal, in our view, evinces its fundamental misunderstanding of its role as steward of stockholder resources.”
MEIP management responded to the activists yesterday, saying that MEIP’s board is classified, the proposal to remove all board members is invalid, and therefore shareholder meeting will not be called.
https://www.bamsec.com/filing/119312523188930?cik=1262104
It is really not clear how the board will behave when/if the merger with INFI is rejected by shareholders. They might also continue to keep postponing the voting date. Proxy fight and any delays will drain cash from the balance sheet.
MEIP post by Clark Street Value – pins a ‘realistic’ liquidation value (or initial distribution) at $10.21. This is calculated by taking a $78m minimum net cash amount from the MEIP/INFI merger contract and deducting an additional $10m for holdback and liquidation expenses. The $78m compares to $92.8m management’s projected net cash as of June end.
I think this is overly optimistic. That $92.8m cash projection by management was published at the end of April and a lot might have changed till then. So it’s hard to tell if there is really a $14.8m buffer.
http://clarkstreetvalue.blogspot.com/2023/07/mei-pharma-flawed-deal-w-infi-activist.html
Another letter from Anson and Cable Car arguing that: “MEI Pharma’s Bylaws and Recent Merger Proxy Disclosures Provide for and Acknowledge the Ability of Stockholders to Remove Directors Without Cause”.
https://www.bamsec.com/filing/92189523001699?cik=1262104
Just realized, that the new meeting date (July 23) is on Sunday in the middle of summer. The previous date was set for the last Friday. To approve the MEIP/INFI merger only the majority of votes cast is required, not the majority approval from all of shareholders. And quorum requirement is only one-third of shares. From the proxy:
It seems MEIP’s management is deliberately trying to hide this meeting from shareholders that could potentially vote negatively.
That’s a potential risk.
Merger voted down. Would be interesting to see where they decide to go from here.
https://www.meipharma.com/press-releases/mei-pharma-announces-results-special-meeting-stockholders
It was a really close call: “The certified results show that 59.70% of outstanding shares were voted, of which 47.86% voted in favor of the proposed transaction, and 51.44% against.”
Really surprised by the 10% sell-off. Liquidation or sale is much more likely than at the start of the strategic review.
“Our Board and management team remain highly-focused on the potential for capturing the stockholder value inherent in the Company’s current development pipeline, which includes Voruciclib and ME-344. With clinical data expected from both of our clinical-stage pipeline programs around year-end and capital to support our near-term development plans, we are focused on the potential opportunities for creating stockholder value.”
Reading that statement made me think liquidation wasn’t being considered; what makes you think it is?
I do not think management had the option to say anything else right after the merger was declined. So I would not read too much into it. I would expect pressure from Anson / Cable Car to continue and I am guessing management will eventually need to change course.
From the proxy, even with the rosy assumptions for the standalone company (successful commercialization of both drugs, revenues in years 2028-2039, and only 12%-15% discount rate), the financial advisor came up with a value that is similar to the liquidation scenario – $0.6-$.74 vs liquidation at $0.62, both figures pre-reverse-stock split. However, to reach the commercialization state, the financial advisor assumed MEIP would burn through $500m of cash and would need to raise $400m in years 2025 and 2027 by issuing shares at $20/share (post-reverse stock split). This is an unrealistic assumption given MEIP shares trade at $7. With issuance done at today’s prices (which is probably also an impossible task), even with the rosy assumptions the stand-alone scenario provides a worse outcome than liquidation. And MEIP’s management knows this and they are cornered now.
Excerpts from the proxy (see pages 149-150):
https://www.bamsec.com/filing/119312523123021?cik=1262104
Interesting update. I represent around 2% of the shares. I didnt vote, which means these 2% would have been a gamechanger about the merger. Reason that we didnt vote was a poor reply from Meip IR. Plus answer came after deadline. Leaves us with a feeling that the board does not work for us shareholders.
I have been following this one and straining to see how and when to take a position. The material drop yesterday (17-Aug-23 to 6.21) piqued my interest again.
What I found on MEIP’s site was this: http://www.meipharma.com/press-releases/mei-pharma-announces-first-patient-dosed-clinical-study-evaluating-me-344-plus
“MEI Pharma Announces First Patient Dosed in Clinical Study Evaluating ME-344 Plus Bevacizumab (AVASTIN®) in Patients with Previously Treated Metastatic Colorectal Cancer”
“The Company anticipates announcing safety and efficacy data from the first cohort of 20 ME-344 patients in the first half of 2024.”
I have no idea what the legal and ethical requirements are with regard to continuation of a study once you’ve dosed a patient but it doesn’t look like they are stopping operations etc.
Perhaps this is why the stock tanked i.e. management intend to continue and burn the remaining cash.
It would be good to hear from those more experienced in these situations.
Thanks.
MEIP up 17% today on 9X usual volume. maybe a delayed reaction to this?
https://www.benzinga.com/pressreleases/23/09/b34685735/mei-pharma-confirms-receipt-of-director-nominations-from-anson-and-cable-car
It seems so. Don’t see any other news that could explain it. Does anyone know when the next shareholder meeting is due? How long this whole activism saga could take and how much cash MEIP would burn until then?
No Worries. Before October Anson/Cablecar will have control of the company. We know for sure, that they have around 20% of the stocks. We also know, that 60% of the shareholders are quite passive ( see voting percentages merger/INFI ). We can see Anson active in the open market these days. We also know that insider holders are very weak. What we don´t know is, how many shares will back up Anson/Cablecar. We also don´t know how many shares on “undercover-hands”. Where is Tang in this game ? How much more will/can Anson buy in open market ? Will they put an offer next week of ex. $10 to boost their holdings ? I believe they will have control of more than 40% of the outstanding shares by the end of next – and have support of around total 60%. That´s enough to wipe out the existing board and replace them.
I hope you are right MH, I have a good number of shares I’m voting with them and am kicking myself for not being more aggressive when it fell to $5 last week. I had been buying all the way down until it was my largest position and started to second guess myself a little.
Be smart here ! Don´t give anything away for free. Let them buy your votes. Think… Do you believe, that Tang would keep his 5% if the studies were rubbish !? He is a part of the game. He will check in, when Anson has control of the company. But why give them the company for free ?
Not sure what you mean? Anson is going to liquidate, and that’s going to pay me well. Not voting for them is to let current management incinerate more value.
Did you see the poison pill strategy by MEI?
Yep, it was predictable and probably too late. They already lost one vote when Anson controlled only 15%, now with Anson controlling 20% and more value investors involved it looks like board is unlikely to survive.
What – exactly – about Anson convince you, that they will send out 8, 10 or 20$ to other shareholders ?
I have not seen anything. Just because they “mention” a offer ( 8$ ) of less than cash ?
No, their offer was a minimum of $8 plus an 80% CVR on asset sales. What makes you think their strategy isn’t liquidation? Why should I support management?
As of 6/30/23, their cash is about $100m and total liabilities excluding deferred revenue is $32m, net cash about $10/share. For the last quarter they burnt over $12m, about $1.9/share. Unless you think the IP and operating lease can be monetized for substantial amount, I don’t see how the liquidation can result in more than $10/share.
Subleasing should add close to a dollar per share. I got a burn rate of $10M in June quarter backing out severance, SBC/non cash lease, etc. There is also $1/share of prepaid current expenses that should comprise part of next two quarters burn.
Still end up with a liquidation value at 12/31 of around $9.60, so nothing wrong with that for a 6 month return if Anson can boot the board before then and Kill Bill that burn rate. Then there is the upside of selling IP.
Anson won in the most disappointing manner possible. They got three board seats and a $1.75 dividend (and possibly another based on test results) and run a capital allocation committee on the board. So company will continue to burn cash. Previously I was estimating maybe $1.50/quarter but now on a tighter leash maybe they can cut it down a bit.
I saw MEIP dropped to Sept low levels today on little news that I could find, is there a liquidation play here still?
Given statements from management and the continuation/progress of drug trials, I don’t believe liquidation is the likely path forward here. Moreover, I don’t think there is much upside left to the liquidation value anymore.
Makes sense given the ongoing burn + recent divident. Thanks!