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• On March 23rd, MEI Pharma reported that its Phase II trial investigational drug candidate Pracinostat in combination with azacitidine failed to meet its primary endpoint, improved complete response/remission rates.
• The study was a double-blinded and placebo-controlled, enrolling 102 patients with previously untreated intermediate-2 or high-risk myelodysplastic syndrome (MDS). The trial was geared towards Pracinostat as a first line treatment.
• The company remarked that it saw a high dropout rate in the drug arm, and is looking to see if this resulted in the trial failure.
• However, Pracinostat has shown a strong signal in treating previously untreated (first line) patients with acute myeloid leukemia (AML).
• Additionally, the company has 2 other drugs in its early pipeline, but currently trades below its current cash level. This may have to do with end of Q "window dressing.".

Sometimes in biotech, things do not go as expected. In the case of MEI Pharma (NASDAQ: MEIP), this was definitely one of those times when the company's cancer drug failed to meet the main goal in a mid-stage study. In December of last year, the company engaged in an offering along with reporting some very promising early data for its lead investigational drug, Pracinostat. Based on the early data, institutions piled in, bringing the company's institutional ownership up over 70%, quite a feat for a stock that was selling under $5/share at the time.

These institutions, along with us did not expect the company announcing on March 25, 2015, that the combination of Pracinostat and azacitidine showed no difference compared to patients being treated with azacitidine alone.

After all, the company's pilot data for patients with MDS was very positive, with 10 patients who were treated with a combination of Pracinostat and azacitidine showing an overall response rate (ORR) of 89% including one additional responder, bringing the response rate to 90%. The ORR was defined by either a CR or a complete remission with incomplete blood count recovery (CRI).

So what happened in the latest trial of Procinostat in the same combination with azacitidine that lead to the trial failing to produce positive CR/CRI over placebo?

One part of the answer is likely the fact that in the pilot study, seven patients had received prior treatment for their MDS with three patients failing to show any benefit whatsoever from prior therapy. So, these patients were refractory (hard to treat, resistant to first line/prior therapy).

From the pilot study PDF;

Seven (78%) patients had therapy related MDS with history of prior chemotherapy/radiotherapy exposure (3 breast cancer, 2 non-Hodgkin's lymphoma, 1 breast and ovarian cancer, and 1 melanoma). Three patients had failed prior therapy.

Another part of the answer may lie in the actions of the investigators in the trial itself. In the trial, the patients were randomized to receive azacitidine alone and Pracinostat in combination with azacitidine (the combination being studied for a positive result).

In the trial, there was a high dropout rate as trial investigators discontinued administering Pracinostat and azacitidine to many patients. Pracinostat is an HDAC inhibitor which are known to cause worsening conditions at first, including blocked maturation of red blood cells, platelets, and neutrophils (myelosuppression). However, once these adverse conditions subside, the patients should then see a benefit (similar to chemotherapy).

Also, HDAC's are known to work best in actively replicating cancer cells. MDS is a pre-malignant condition and the cells are generally not actively replicating unless they are in the blast phase. (This is not the case in AML, which will be covered later in this article).

We wonder if the investigators here were too quick to discontinue patients on the Pracinostat/azacitidine combination. It's probably easier to convince patients to 'stick it out' in a smaller trial like the ones MEI have ran before, but in a larger trial it's much more impersonal, so it's easier to simply discontinue patients who report adverse effects in mass.

We also wonder if the investigators understood clearly the set timeframe of recovery from myelosuppression as in the pilot study, or did they just "panic" and were not aware of HDAC's causing myelosuppression in MDS patients, thinking it was an unknown hematological event, and remove patients from the combination drug arm on the first sign of this?

Considering these, we might get a better understanding as Daniel P. Gold, Ph.D., President and Chief Executive Officer (CEO) of MEI commented:

While we are disappointed with these top-line response data, we are diligently analyzing the entire data set as well as subsets from this study. 

Specifically, we are trying to fully assess the impacts of discontinuations on clinically important efficacy outcomes, including duration of response, event and progression free survival and overall survival.

These findings will be important to inform the future development path for Pracinostat.

Investigators have made errors before. Whether trial design or simply being unaware of various preconditions that certain drug agents cause.

A good example of this was with Amicus (NASDAQ: FOLD). Many biotech analysts (including us) were expecting the company to present positive Phase III data in late 2012 (as in the current case of MEI). However, the company surprisingly disappointed investors and announced the study did not meet primary endpoints. Later, partner GlaxoSmithKline (NYSE:GSK) gave up co-commercialization and co-development rights on the drug.

We wrote in July 2014 concerning Amicus;

In the [company's] original study, about half of the patients enrolled had a mild case of Fabry's Disease, while the other half had a severe case. The study was constructed for patients that had a severe case of the disease. Thus, when Amicus announced Phase III trial results, the patients with a mild case of the disease "diluted" the trial results.

The study was not setup [powered] to have both types of patients and, in a sense, missed primary endpoints by a formality. Patients with a mild case of the disease were treated with the drug or placebo. Of the patients treated with the drug, 32% were responders. Conversely, of the patients treated with placebo, 44% were responders. The mild case of Fabry's Disease is difficult to measure and this is what most likely caused the trial to miss primary endpoints.

We can clearly see in Amicus's case, the trial design was faulty in the sense that the designers simply overlooked an important element. We think a similar case is going on here with MEI, but in this case, the investigators did not seem to take into account myelosuppression, and allowed patients to discontinue in the combination drug arm.

Amicus stock plummeted on the 'failed Phase III data,' dropping in time to the low $2 range. Afterwards, Amicus correctly designed the retrial of its Fabry's disease drug, and reported positive results in 2014. Subsequently, the stock has multiplied 5x to its current trading level of $11 a share.

Another case of a trial that first failed, then succeeded happened with Acadia Pharma's (NASDAQ: ACAD) Nuplazid (formerly called pimavanserin)

Nuplazid's first Phase III study was a failure in 2009. Many believed at the time that the trial simply did not administer the higher placebo doses to the placebo group, as they stopped at an earlier dosage when with comparison to the drug arms did not show any benefit. 10mg and 20mg of Nuplazid showed no benefit to 10/20mg of placebo. But, the trial seemed to have stopped the comparison with placebo at 20mg, without comparing both groups at 40mg.

In the retrial, it appears Acadia upped both arm's dosage until Nuplazid was shown to have a clear benefit over placebo. On a side note, it's worth mentioning that for some odd reason, Acadia has still yet to file a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for Nuplazid.

When the company carefully assesses all the data, we are confident it will come to the right understanding of what went wrong here if it has not done so already. We think a new trial for Praconistat should be focused on treating Refractory MDS patients -- a 2nd line treatment setting.

With regards to MEI Pharma, the Pracinostat/azacitidine combination has shown a very good trend in treating elderly patients with AML in a first line setting. AML is often a result of untreated MDS. Elderly patients with AML are very hard to treat in comparison to younger patients (it's rare for younger patients to have AML). In December of last year, MEI reported that;

45% of patients (15 out of 33) evaluable for efficacy achieved the primary endpoint in the study, including nine who achieved a CR, four who achieved a CRi and two who achieved a morphologic leukemia-free state (MLFS). No patient who achieved a response has progressed.

The above seems promising. HDAC inhibitors like Pracinostat are known to work best in actively replicating cancer cells. MDS is a pre-malignant condition and the cells are generally not actively replicating unless they are in the blast phase, so there should be clearer path to designing a first line Phase III trial for the AML indication.

Currently, MEI has a market cap of around $60M and has simply become grossly oversold. One would think that since the company is trading for less than its cash on hand, that the Phase II data failure is a death blow for the company. This simply is not the case. At the very least, Pracinostat can be used to treat refractory MDS (2nd line treatment), and we think the company has gained the correct understanding of this and will redesign future trials accordingly.

However, running a redesigned Phase III trial in an attempt to get Praconistat approved as first line treatment could be successful, but ultimately too risky to attempt in our estimation. The likeliness of success is high if MEI runs a Phase III trial to get Praconistat approved as a 2nd line refractory MDS treatment.

Additionally, MEIP has two other drugs in its clinical pipeline, with one that has completed initial human trials, ME-344. According to the company;

Results from our first-in-human Phase I clinical study of intravenous ME-344 in patients with refractory solid tumors were presented at the AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics in October 2013. Data from the single-agent study indicated that eight of 21 evaluable patients treated with ME-344 achieved stable disease or better, including five who experienced progression-free survival that was at least twice the duration of their last prior treatment before entry into the study.

ME-344 is designed for the treatment of tumor cells and is showing promise, although it's very early. The other drug is in pre-clinical, so we won't go into that one as no value can be assigned to it until it's tested in humans.

So, why did the stock drop so much after the latest setback, are the institutions not understanding the situation? In our opinion, this is hardly the case.

The data failure here happened right near the end of Q1. It's very common for institutions to cut their losing positions to receive a tax loss to counter gains from their successful positions and vice a versa. This is commonly called on the street, "window dressing."

Also, MEI has/had a large institutional ownership of over 70%, with a lower than average short position of around 7%. Institutions seemed so sure of trial success here, that it appears they did not hedge properly. In our estimation, these factors have lead the stock dropping at least two dollars more than it should have, notwithstanding that the company's language in its press release have led many to think that Pracinostat trials could be discontinued.

From our point of view, this will not be the case. Rather, we see management not trying to spin results and acting responsibly, unlike many developmental biotech's who spin results for their own self-interests.

We think many institutions that sold to show a tax loss for the quarter will begin to buy back in now that we have just started the new quarter. Also, with two investor conferences coming up in April, and full data points in June, we feel that MEI will rebound sharply. Therefore, we feel that MEI at the very least should make for an excellent long swing trade opportunity.

However, as much as we do not think Pracinostat will be discontinued and this will be resolved in a positive manner similar to the Acadia and Amicus situations, there is no guarantee that it will be. We are not insiders, so we can only give our best reasoning why we believe this and go from there as developmental biotechs are very speculative.

It's our estimation that MEI should valuate at twice the current market cap. We think over the next three months it has a good chance to make it there.