11th March 2017
Disclaimer & disclosure: I have a position in this share. The views expressed here are opinion only and nothing in this article is intended as a recommendation to invest. Information may be incorrect or out of date at the time of reading and it is your responsibility to research and understand the risks of investing before doing so.
Motif Bio (LON:MTFB, NASDQ:MTFB) suffered a major fall-back towards the end of last year as it completed a widely-anticipated US IPO and European placing in order to complete its ongoing Phase 3 clinical trial (REVIVE-1) in its novel antibiotic iclaprim.
With the share price still languishing at 24.875p (10-March close), down over 64% from a 52-week high of 68.25p (including dilution mcap is down 36% from £74.3m high, to £47.5m today) there’s a potential to see significant upside when the company releases the first data readout from its phase-3 trials.
The asset: iclaprim
Iclaprim is a novel antibiotic used to treat acute bacterial skin and skin structure infections (ABSSI), the most well-known of which is probably MRSA. It is also known to be active against respiratory pathogens (pneumonia) and couldn’t come at a more critical time in the search for new antibiotics; antibiotic resistance hits the news most weeks.
Being novel (structurally unrelated to other antibiotics), Iclaprim doesn’t start its life hampered with what is known as “cross-resistance”, where bacteria adapt more quickly to a new antibiotic due to it being structurally related to an existing drug.
Additionally, Iclaprim is bactericidal (http://aac.asm.org/content/53/10/4542.full"), meaning it kills the bacterial cause of an infection, rather than simply inhibiting its reproduction. It is thought the bactericidal mechanism of iclaprim will mean it is less prone to resistance in future. (Nearly all other antibiotics are bacteriostatic - they cure disease by stopping bacteria reproducing.)
ABSSIs are a serious life-threatening condition and as resistance increases the search for new antibiotics is becoming increasingly urgent. The current standard treatment, vancomycin, can cause complications in patients with kidney problems. Additionally, MRSA has developed vancomycin resistance (VISA/VRSA) and iclaprim should prove effective against these resistant strains.
Phase 3 – what it could mean for the valuation
Achaogen (NASDAQ:AKAO), a peer currently seeking FDA approval for its antibiotic plazomicin, saw its shares rise 240% in one day when it announced phase 3 trial data in December 2015. AKAO’s share price has since held further gains, 5-bagging since the trial, and its mcap today stands at $938m.
There are a few notable differences between Achaogen and Motif – plazomicin and iclaprim target different bacteria, and Achaogen released data for both its phase 3 trials on the same day whereas Motif will only announce data for its first trial (REVIVE-1), so we can’t predict a 5-bagger on Motif solely by the performance of this peer.
However, AKAO didn’t suffer a painful major fundraise just months before its data readout: it rose steadily over the year in the run up to the major event; whereas Motif Bio is currently sat close to 52-week low on a valuation well under half the lowest risk- and dilution-adjusted DCF valuation made by the 3 brokers covering Motif (Rodman & Renshaw: 64p, Northland: 90p, Zeus Capital: 107p).
Additionally, whilst Motif is only due to release data from its first trial, the second trial merely replicates the first, so the results will very likely be similar. So on balance I think it’s reasonable to be targeting 300% - 500% gains from the current share price in reasonably short order, should that all important trial data be good.
Another interesting question is whether we might see any rise in anticipation of the data readout; after all, a 50% rise would only put the mcap back to where it was at the 52-week high prior to the turbulence of the US IPO. Watching the stock closely over the last 5 months I’m seeing hints of numerous positions in play in the run-up to this significant event, so whilst there’s a chance of a correction, I think the jury’s out on how it will behave in the coming weeks leading up to the data announcement.
Timescales and risk overview
The significant milestone of LPO (Last Patient Out) was reached on the 31st January, and typically data analysis takes 2-3 months on trials of this size.
Therefore readout is widely expected in the first half of Q2, putting the timescales at weeks - rather than months or years - and I don’t think I’ve ever seen a biotech company approach upcoming results with such an attractive entry price; at a push the data readout might be just 2-3 weeks away.
Crucially here with Motif there’s an unavoidable possibility that the trial data won’t be good; and, having few other assets, if the data is truly bad then investors face a possibility of being wiped out. That could happen, and it’s worth stating in black and white just so we’re all clear.
However that risk, to some level, is there on pretty much every share investment; particularly on AIM: the chance of a commercially viable mineral discovery or oil strike can be remote, yet many shares don’t struggle to attract investors in the run-up to a drill/spud; and even with a proven deposit, junior miners can and do continue to fail at the finance or mine development hurdles.
Dr Gary Waanders of Zeus Capital (https://vimeo.com/163530128 at 03:38 in) described in 2016 a “high chance of being approved, probably around the 75% level, and this is based on the earlier good phase 3 results and the special regulatory status that the product has with the FDA”
Since that interview the odds can only have improved with REVIVE-1 closing ahead of schedule with no “severe adverse reactions” (SAEs) reported relating to iclaprim. (For trial safety reasons SAEs are reported on an ongoing basis.)
And Iclaprim has some pretty heavyweight backers (Invesco: 25.2%, Sabby healthcare fund: 8.7%); institutional investors who have already crunched the risk.
Phase 3 trials: a history lesson
Usually a drug entering phase 3 trials would be facing no better than a 50/50 chance of success.
But that’s not true of Iclaprim because a lot is already known about the drug from a set of phase 3 trials in 2007 under its previous owner, Arpida (http://www.fiercebiotech.com/biotech/press-release-arpida-reports-positive-results-of-second-pivotal-phase-iii-trial-intravenous )
We already know from the Arpida trials that the drug ‘works’: it was shown to be effective compared to vancomycin in a smaller-scale phase 2 study (https://www.ncbi.nlm.nih.gov/pubmed/19414572 ) and against linezolid in the Arpida phase 3 study. And we know that it is clinically safe to use on patients with ABSSSIs.
So why wasn’t it approved in 2009?
Whilst the Arpida trials themselves were “successful”, the drug failed to get approval for one very simple reason: the trials did not set out to prove what the Federal Drug Administration (FDA) wanted to see.
To explain in more detail in simple terms is no easy task, but I’ll give it a go: the FDA wanted to see that iclaprim was no worse than the standard treatment for ABSSSIs vancomycin, a drug in widespread use today.
This is usually demonstrated in a non-inferiority (NI) trial, essentially a larger-scale version of the phase 2 trial already completed. In such a trial there is an allowable margin (10% in this case) within which the trials must prove non-inferiority to the control drug, vancomycin.
Non-inferiority must be demonstrated across a wide range of patients to a high confidence - a confidence interval (CI) of 95% needs to be achieved. The CI together with the NI margin (10%) dictates how many patients need to be studied for the trial, but this is all rather mathematically complex and best left for deeper research.
In very basic terms let’s say for an NI margin of 10% the trial needs to show iclaprim works at least 90% as well as the comparator, vancomycin (10 + 90 = 100%). To show this at a CI of 95% they need around 1,200 patients.
Instead of showing this, Arpida set out to prove that Iclaprim was at least 87.5% as good as another drug, linezolid; the rationale being that linezolid is more effective than vancomycin, therefore they could relax the NI margin from 10% (against vancomycin) to 12.5% (against linezolid). With an increased NI margin, Arpida could then use fewer trial subjects (and presumably reduce costs) – but this is where the degree-level statistics comes in.
Now this is all very well and good for designing a cost-effective trial, but for some reason they overlooked how the FDA might react to proving something other than what they asked for.
Inevitably the FDA didn’t approve iclaprim in 2009: they asked for more data – further trials.
Arpida tried to find a partner for these additional trials but ultimately couldn’t raise the money and was subsequently liquidated.
Phase 3 trials: a reason for optimism
Motif Bio took over iclaprim in a significantly better position than Arpida when designing the first phase 3 trials more than a decade ago: Motif had the data from the first trials, so knew the safety and basic efficacy profiles. In addition they knew, in very clear feedback from the FDA, exactly what they needed to demonstrate in order to gain approval.
Motif then took three significant steps to improve the trial protocol:
1 They studied the known efficacy and safety data and concluded through mathematical modelling that a change in the way the dose was administered would be both safer and more effective. A fixed 80mg intravenous dose administered over 2 hours as opposed to a variable dose based on patient mass administered more quickly. The dosage variation was externally validated (Synergy).
2 Discussed and sought ‘concurrence’ with the FDA for the main aspects of the trial, including comparator, NI margin, and adjustment to dosing. This time they are answering the questions the FDA want answering; it means a larger trial (1,200 instead of 1,000 patients), and higher cost.
3 They employed Covance, a renowned specialist in clinical trials, again at a higher cost, but with some of the best knowledge in the world when it comes to designing and running the trials.
In addition, the FDA confirmed that iclaprim qualified for 2 special statuses: Qualified Infectious Diseases Protocol (QIDP) and fast-track approval. QIDP means the drug, if approved, will qualify for an extended period of market protection in the US and fast-track status means the FDA recognises an urgent need for the drug and hence is effectively tasked with facilitating a route to market so long as it can be shown the drug’s benefits outweigh its risks.
Several other drugs that failed to gain FDA approval at a similar time (2006-2011) have since gone on to gain approval. Examples include Dalvance/dalbavancin, Sivextro/tedizolid phosphate and Orbactiv/oritavancin.
A binary bet?
One way of looking at a long position in Motif Bio is a binary bet; a coin toss, where heads you double your money and tails you lose.
It’s a bit different to coin toss: the bet will play out over a few weeks, but the odds of winning in all likelihood are significantly higher than 50%; and, as an added incentive, there’s a good chance the returns will far exceed 100% in a short period of time.
But this seems too good to be true, and the fact that the share price remains depressed so close to the data readout could be indicative that the market is pricing the risk higher, or the reward lower.
However, it is also possible the market is yet to catch on to a proposition that is scientifically complex – thorough research means wading through medical papers and assessing complex statistics.
The market takes time to settle on a price, especially for a complex subject matter, and Motif is a relatively young company. Add to this the recent US IPO and European placing - which has significantly increased the share capital very close to a crucial milestone - before the company is even 2 years into its AIM listing.
Yet with Motif and iclaprim the potential rewards are very significant. The average cost to develop and win approval for a new drug is estimated to be around $2.6 billion (2014, http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study) and Motif bio is close to the end of the road with iclaprim: REVIVE-1 is complete and REVIVE-2 is well under way. Big Pharma is becoming increasingly reliant on buying-in new drugs than developing them in house. 2015 and 2016 both saw record acquisitions in the pharma space.
A potential market entry price for a novel antibiotic for a life threatening condition otherwise untreatable (e.g. multi-drug resistant Staphylococcus aureus and patients with renal issues who would benefit from an alternative to vancomycin) is estimated to be around $3,500 for a 10-day course and the company is targeting sales of $1bn from this alone – highlighting the allure for acquisition.
On top of that, Motif is targeting revenue expansion through approval for additional conditions - a further trial for pneumonia is planned and more could follow.
It’s worth noting that the upcoming trial data readout won’t actually be a binary event. FDA approval could still be achieved even if the trial does not fully demonstrate all required indicators – especially given the pressing need for new antibiotics in the face of growing resistance to existing treatments. However the market reaction in the event of a “grey” outcome will dictate the company’s chance of funding the drug throughout the remaining process.
Motif is one of the most under-priced assets on AIM right now. And, whilst it’s impossible to hide from the risk in the forthcoming data readout, a rational analysis of the risk versus reward makes this a very attractive proposition: risk of failure could be 20% or lower with a fantastic team already in place.
The late-stage US IPO and European Placing so close to data readout in a relatively young company has conspired to offer an incredibly low entry point for a potentially significant reward.
There is enough information in the public domain to assess and understand the risks associated with the trial, the demand for novel antibiotics is clear, and the ballpark value of a phase-3 pharmacological asset in a hot space suggests the rewards will be many multiples of the current share price.
More reading? FDA briefing document for the Arpida trials: https://www.fda.gov/ohrms/dockets/ac/08/briefing/2008-4394b3-01-FDA.pdf
MTFB Technical Analysis (TA) chart by bonker99
(Click to enlarge)