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MEI Pharma (NASDAQ:MEIP) is an oncology company focused on the clinical development of novel therapies for cancer. There are upcoming catalysts for MEI that likely will create some wild swings.

Its lead drug candidate, Pracinostat, is an orally available histone deacetylase (HDAC) inhibitor that is being developed for advanced hematologic diseases such as myelodysplastic syndrome (MDS) and acute myeloid leukemia (AML). HDACs belong to a larger set of proteins collectively known as epigenetic regulators that can alter gene expression by chemically modifying DNA or its associated chromosomal proteins. Abnormal activity of these regulators is believed to play an important role in cancer and other diseases.

MEI will be busy this year. Coming up in March, the company is scheduled to release top-line data from Phase II study in frontline MDS. Full top-line data from Phase II studies in frontline MDS & AML is to be completed in June. Finally, initiation of a Phase III study in frontline elderly AML is also expected to finalize in June. With little advancements in recent years for these forms of cancer, MEI has a nice opportunity if it is able to show strong progress and results this year.

Upcoming data catalyst

The March near-term catalyst is a topline multi-center, placebo controlled, and double blinded Phase II data release for its lead investigational drug candidate Pracinostat in combination with Celgene's (NASDAQ:CELG) azacitidine (Vidaza) in patients with previously untreated intermediate-2 or high-risk myelodysplastic syndrome -- this study is known as the MEI -003 study.

This data is important as the data release will highlight the complete response (CR) of patients in the drug arm of the trial and compare against the placebo arm. Historical CR for Vidaza in MDS has varied from 7-23%.  CR measures how many patients are basically cancer free after the treatment phase is completed.

In the MEI-004 study in which results were made public at ASH 2014, 1st Line elderly patients with Acute Myeloid leukemia showed a CR of 27%, a promising yet early positive signal.

If the topline CR data release in March for MDS shows to be 27% or higher, this would send a very strong signal for the drug to move into a full Phase III trial.  It would likely focus the study on durable CR as the primary endpoint which goes hand and hand with overall survivability. The Phase III study in AML is expected to commence in June. If the MDS CR topline data in March is positive (we think it will be), a Phase III study should commence for MDS in Q4'15.  450 patients is the expected trial enrollment if and when this happens.

More people surviving longer on Pracinostat/Vidaza would equate to a lot more revenue for the drug if eventually approved by The U.S. Food and Drug Adminstration (FDA).

We think Pracinostat is promising and the clinical trial design for the drug is well-thought out by MEI.  However, positive Phase II data here does not guarantee that later stage data points for MDS will be positive as well. Last year, Onconova Therapeutics (NASDAQ:ONTX) had a Phase III data failure for its MDS investigational drug rigosertib. Onconova was one of 2013's most promising developmental biotech initial public offerings, with a stock price that hit as high as the $30 range.  Since it has run into troubled times and is currently trading in the low $2 range.

However, we think MEI is taking a better approach with its multiple indication and combination drug trial designs. Onconova did not fare as well in this regard as it was later discovered that a subset of patients did in fact benefit from rigosertib - too little and too late, the damage was already done.

Financing and recent large institutional buying

On December 10th, 2014, MEI announced that it planned to offer up to $45,000,000 worth of common stock in an underwritten public offering. There has been very strong support of this offering as of late, so it will be interesting to see how the stock price reacts in the near future. After the initial announcement of the offering, the stock lost about 1/3 of its value while sliding under $4 per share. Since, it has rebounded strongly to the mid-$5 range. Part of the reason for that rebound is that several institutions recently jumped on board or increased its position. The size of some of these stakes is evident by some recent 13G forms.

Steven Cohen's Point72 Asset Management, formerly SAC Capital Advisors, is a new owner as of the 4th quarter of 2014. The fund has made a quick and large 1.65 million share investment, representing 6.9% of the company. Some of the other large owners of MEI Pharma with recent 13G filings are shown below:

The newest statistics that we found the most interesting regarding institutional ownership are below:

1. Institutional Ownership = 69.93%
2. Increased Positions in Q4 2014 = 33 totaling $11,951,457
3. Decreased Positions in Q4 2014 = 7 totaling $1,465,806
4. New Positions = 21 totaling $5,105,881
5. Sold Out Positions = 3 totaling $44,463

Clearly, many new funds are getting involved with this small cap company, with a boat load buying in after December 22, 2014, when the company issued a promising press release regarding a milestone in its Phase II MDS trial. Of the first 28 patients who received Pracinostat in combination with azacitidine or decitabine, three have now achieved clinical responses. One patient experienced a partial response while two experienced marrow complete responses, exceeding the pre-specified clinical improvement rate for expansion of study enrollment.

Dr. Daniel Gold, President & CEO of the company commented:

Observing clinical responses in this most difficult to treat patient population only reinforces our confidence in the activity of Pracinostat. Now we will complete enrollment in this study and continue to follow patients for response and survival. Meanwhile we eagerly await the unblinding of our randomized, placebo-controlled Phase II study in front line MDS in March 2015 as we prepare for the initiation of our Phase III study in front line AML in June 2015.

On February 6, 2015 Wells Fargo's Securities released an analyst report giving MEI Pharma an 'outperform' rating and a $10-11 valuation range. The firm noted that recent financing has removed a near-term overhang, the potential for two Phase III trials to be underway by late 2015, and significant high unmet medical need markets of MDS and AML as the reasons for its outperform rating of the stock.

The analyst believes MEI Pharma has a favorable near-term risk/reward profile with an undervalued long term profile in which we agree. This is based on MEI attaining 28% of the U.S. MDS intermediate to high risk patients by the year 2025.

At this point in time, the estimates assume the probability-weighted Pracinostat revenues in the U.S. in AML and MDS of $129 million and $174 million, respectively. The assumptions take into account a 25% flat royalty on sales from AML and MDS in Europe. Of course, all of these projections are discounted back to create a $416-$458M market cap estimate.

Conclusion

With the current market cap sitting around $188M, we believe the upside to be quite favorable from the current stock price level, so we agree with the analyst regarding the current undervaluation of the company. The recent raise gives the company approximately $78.7 million in cash as of December 31, 2014. Having this cash on hand will provide the company with a good deal of flexibility and leverage to control its destiny should it continue the trend of positive data set in 2014 for Pracinostat.

With institutional ownership at around 70% and insiders holding 26%, we see this as a very bullish sign.  We think the stock will move higher heading into the 2nd or 3rd week of March, in anticipation of a strong topline data release.