MethylGene Poised to Move With New Management, Board, and Capital

Despite closing a $26.1M private financing last Wednesday, shares of MethylGene (TSE:MYG) have yet to respond, but precedents suggest that MYG may be in for a major move higher as the thinly traded company gains visibility. Just this month, Nasdaq-listed MEI Pharma (NASDAQ:MEIP) announced a $27.5M private offering featuring a cast of high caliber investors; the stock climbed from $0.39 to $1.50 within two weeks. MethylGene conducted a raise in 2011, also with high quality institutions, and the stock jumped more than 300%. That move was facilitated in large part by a flurry of trading activity, and last Wednesday’s announcement has similar characteristics with the added benefit of new management and Board members taking charge of the development pipeline and suggesting that the company will gain visibility with Wall St. soon. In fact, Methylgene’s new management team is scheduled to present Wednesday at the Piper Jaffray Healthcare Conference in New York City. As a result, we would not be surprised to see this stock start to respond with big percentage gains. While small and from Canada, MYG is actually covered by Wall Street analysts, with price targets ranging up to $1.00 per share.

While MYG’s visibility is currently below the radar screen, last week’s capital raise featured the backing of some noteworthy funds in the biotech industry. Tavistock Life Sciences, Baker Brothers Life Sciences, and Tang Capital all took part in the deal, as well as RA Capital Management, BVF Partners, and other smaller institutions. Following the raise, Baker Brothers owns 24% of the outstanding diluted shares. And with cash, equivalents and marketable securities of $17M at the end of the third quarter, the additional $26M recently raised, and a burn rate of less than $4M quarterly during 2012, the company’s approximate $43M should be sufficient to advance the company’s two lead compounds to the point where major value-creating events are possible.

Currently, MethylGene is an unknown; it trades less than 50,000 shares daily on the TSX, despite repeated interest from the VC community. MethylGene’s development program consists of two mid-stage products: the kinase inhibitor MGCD265, and MGCD290, an inhibitor of the fungal HOS2 enzyme being developed as a treatment for vulvovaginal candidiasis (yeast infection). Shareholders that we spoke with note that all of the investor interest is in MGCD265, a C-Met inhibitor, which is known to be a highly promising class of drugs to treat cancer. The issue is that advanced C-Met compounds developed by other companies, like Exelixis (NASDAQ:EXEL), have shown significant toxicity, and therefore combination cancer therapy or raising dosages are all but impossible. MGCD265, however, has so far demonstrated a very favorable toxicity profile. In fact, the company has dosed the candidate higher in clinical studies, but has yet to find its maximum tolerated dose (MTD), suggesting that this C-Met inhibitor could be the best-in-class compound. Also, MGCD265 has shown VEGF inhibitor activity, broadening the drug’s potential use in many cancers. MGCD265 is completing Phase I/II studies, so while investors wait for the advancement of this exciting drug, Phase II results for MGCD290 provide a catalyst, and in our opinion, a free call option for value creation. Top line Phase II results for MGCD290 as a treatment for yeast infection are due out in 1Q 2013. MethylGene also has three preclinical drug candidates, indicating multiple shots on goal for investors to make money.

In addition to the high quality investor backing and drug pipeline, new executive talent is also a sign that real sustainable value could be created over the next several quarters. Most recently, the company hired Dr. Charles M. Baum as CEO. Dr. Baum worked for Pfizer (NYSE:PFE) as a Senior VP, VP and Head of Oncology, and as a Chief Medical Officer, playing a key oversight role in developing the company’s oncology portfolio, which included Sutent, Inlyta, and Xalkori. In January, MethylGene hired Dr. Rachel Humphrey as Chief Medical Officer; Humphrey was key in developing Yervoy at Bristol-Myers Squibb (NYSE:BMY) and Nexavar at Bayer. MethylGene also thinned the board of directors this month, after making a number of additions earlier in the year. The restructuring is a clear sign to investors that MethylGene is organizing itself ahead of a crucial development period, and that new management is ready to execute on development activities and increase visibility on Wall Street. While these operational executives are relatively unknown to Wall Street investors currently, presenting at conferences like Piper Jaffray will undoubtedly showcase the new talent running the company.

MethylGene’s oncology candidate, MGCD265, is also the reason that these seasoned oncology drug developers joined the company. This compound has demonstrated significant potential to treat solid tumors, and as Phase I/II data begins to read out, volume in the stock should pick up further. Oncology-focused biotechs generate considerable interest from the investing community, and if MGCD265 continues to demonstrate activity in solid tumors, MYG could move towards a $200M+ market capitalization, the typical valuation for a promising Phase II oncology drug. Phase II data for the anti-fungal agent, MGCD290, provides an opportunity for the valuation to rise faster, and a NASDAQ listing, which will probably occur over the next several quarters is also likely to fuel higher interest in the story. Because of the limits of MYG.TO, namely its low liquidity, share price, and Canadian listing, individual investors have a chance to get in on what is shaping up to be a very interesting biotech asset, before the big institutions come charging in. Meanwhile, the recent high quality capital raise is at the least a strong short-term trading opportunity.