Filing identity and reporting period
Important mismatch: The supplied filing is MEI Pharma, Inc.’s Form 10-Q for the quarter ended December 31, 2018, not a Lite Strategy, Inc. filing for 2017 Q2. The summary below reflects the supplied filing only. Dollar figures are in U.S. dollars; financial-statement amounts are in millions unless noted.
MEI Pharma is a clinical-stage oncology company. Its four candidates are ME-401, voruciclib, ME-344 and pracinostat. The filing compares the three and six months ended December 31, 2018 with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $2.048m | $0.358m | $2.536m | $0.641m |
| Operating loss | $(11.848)m | $(6.172)m | $(21.881)m | $(15.059)m |
| Net income (loss), basic | $12.025m | $(6.079)m | $(2.517)m | $(14.867)m |
| Net income (loss) per basic share | $0.17 | $(0.16) | $(0.04) | $(0.40) |
| Net cash used in operations | Not presented by quarter | Not presented by quarter | $(10.017)m | $(11.313)m |
Quarterly net income included a $23.437m noncash gain from revaluing warrant liabilities; diluted results were a loss of $11.412m for the quarter and $25.954m for the six-month period. The six-month noncash warrant gain was $18.475m. These gains should not be read as operating profitability.
Cost of revenue was $1.009m for the quarter and $1.998m for the six months. Revenue less cost of revenue was approximately 51% of revenue for the quarter and 21% for the six-month period; this reflects license-related revenue and is not evidence of established product economics. Research and development expense was $9.066m for the quarter and $15.197m for six months; general and administrative expense was $3.821m and $7.222m, respectively.
At December 31, 2018, cash, cash equivalents and short-term U.S. government investments totaled $93.415m, down from $102.743m at June 30, 2018. Cash and cash equivalents alone were $8.748m. Current assets were $95.833m and current liabilities $10.904m. Total liabilities included a $26.770m warrant liability; the filing does not report conventional borrowings or debt. Operating cash use was partly offset by the $10m upfront KHK license payment. Cash and cash equivalents declined by $4.561m over the six-month period.
Management said available cash and investments were expected to fund operations through at least fiscal 2020, while also expecting operating losses and negative operating cash flows for the foreseeable future. This is management’s estimate, not a guarantee. Deferred revenue was $9.141m, of which approximately $4.0m was expected to be recognized within 12 months and $5.1m thereafter.
Material changes versus the prior comparable periods
- Revenue rose to $2.048m from $0.358m in the quarter and to $2.536m from $0.641m for six months, mainly reflecting the October 2018 ME-401 license with Kyowa Hakko Kirin (KHK), in addition to Helsinn-related revenue.
- Operating losses widened as R&D and G&A spending increased. For the quarter, R&D rose to $9.066m from $3.444m; management attributed the increase mainly to ME-401 Phase 2 start-up and manufacturing costs, voruciclib trial activity, and increased staffing and share-based compensation.
- The quarterly basic net result shifted to income because of the noncash warrant revaluation gain. For six months, the net loss narrowed from the prior year, but operating loss increased.
- Cash used in operations improved to $10.017m from $11.313m for six months, with the KHK upfront payment contributing to operating cash flows. Cash and short-term investments nevertheless fell by $9.328m from June 30, 2018.
Outlook, programs, risks and unusual items
- ME-401: Patient recruitment began in a global randomized Phase 2 study in relapsed or refractory follicular lymphoma, intended to support an accelerated-approval application. The FDA had communicated support for the proposed trial, but approval remains subject to FDA review. An October 2018 KHK agreement granted Japan rights for a $10m upfront payment, up to $87.5m in additional milestones and royalties. MEI also entered a cost-sharing clinical collaboration with BeiGene to study ME-401 with zanubrutinib; MEI retained ME-401 commercial rights.
- Other candidates: Voruciclib was in a Phase 1b dose-ranging study; ME-344 was in an investigator-initiated breast cancer combination study; pracinostat was in a Helsinn-run Phase 3 AML trial and a Phase 2 MDS study. The MDS study had completed enrollment, with patients to be followed for one year.
- Revenue and contingent payments: KHK revenue recognized in the quarter was $2.048m, including $1.361m under that agreement. KHK future milestones are contingent. The filing also describes potential payments of up to $179m under the Presage voruciclib license and up to $74.5m under the S*Bio pracinostat agreement, as well as other milestone and royalty obligations; these potential future payments were not accrued at December 31, 2018.
- Warrants and dilution: May 2018 financing warrants are liability-classified because specified acquisition circumstances could require cash settlement. Their fair value was $26.770m at December 31, 2018, down from $46.313m at June 30, 2018. The revaluation materially affected reported earnings. Approximately 16.062m warrant shares remained outstanding at period-end.
- Funding and execution risks: The company expects future financing or additional licensing/partnership transactions may be needed. Risks include clinical-trial failure or delay, regulatory uncertainty, reliance on collaborators and third parties, and the possibility that financing may not be available on acceptable terms. Management reported no material changes to the risk factors in its 2018 annual report.
- The company reported no legal proceedings and no material changes in internal control over financial reporting. It leased additional office space in September 2018; both office leases expire in May 2020.
No formal financial guidance for a specific revenue or earnings level is provided in the supplied filing. Management’s stated cash runway is through at least fiscal 2020.
Important facts for investors to verify
- Confirm the filing belongs to the intended company and period: the source is MEI Pharma’s December 2018 quarter, not Lite Strategy’s 2017 Q2.
- Assess the assumptions behind management’s cash runway estimate, planned clinical spending and potential need for future financing.
- Track ME-401 Phase 2 enrollment, results and FDA requirements; accelerated approval is not assured.
- Separate operating performance from noncash warrant revaluation gains and monitor the warrant liability and potential share dilution.
- Review KHK and Helsinn deferred-revenue recognition, collaborator performance, and contingent milestones, royalties and other contractual obligations.