MEI Pharma: Flawed Deal w/ INFI, Activist Target

MEI Pharma (MEIP) ($50MM market cap) is a fledgling clinical stage biotech that has a pending merger with Infinity Pharmaceuticals (INFI) ($18MM market cap), the merger is facing activist pushback from a shareholder group (14.8% stake) led by Cable Car Capital and Anson Advisors.  

Last November, MEI Pharma's development partner (Kyowa Kirin) on their primary drug candidate (Zandelisib) walked away after the FDA provided feedback on the need for a new clinical trial design that would be costly, the partnership ended and MEI Pharma laid off a good portion of their employees.  The company does have two additional programs, both in Phase 1b trials with expected readouts around year-end.  In February, in an attempt to restock their development pipeline, MEIP entered into a stock-for-stock merger agreement with INFI where INFI shareholders would end up with 42% of the new company (to be renamed Kimbrix Therapeutics - KMBX) despite only bringing $4MM in net cash to closing compared to $80MM from MEIP (using the minimum net cash amounts in the merger agreement).  INFI has one product in their pipeline, Eganelisib (to be used in combination with Keytruda) for patients with a type of skin cancer, that desperately needs capital to fund a phase 2 trial.  As usual, I have no view on the merits of the science, but it is clear why INFI wants to do this deal, without it, INFI will run out of cash quickly and be forced into a quick asset sale or liquidation.  From INFI's Q1 10-Q:

If the Merger is not completed, we will need to raise additional capital in order to successfully execute on our current operating plans to further the development of eganelisib. If the Merger is not completed, we will explore other plans to mitigate the conditions which raise substantial doubt about our ability to continue as a going concern. We consider one of the following courses of action to be the most likely alternatives if the Merger is not completed:

•Pursue another strategic transaction. We may resume the process of evaluating a potential strategic transaction, including the sale of the company or its assets. Based on our prior assessment, we do not expect that we would have the necessary time or financial resources to pursue another strategic transaction like the proposed Merger.

•Wind down the company. If the Merger does not close and we are unable to enter into another strategic transaction, our board of directors may conclude that it is in the best interest of stockholders to cease normal operations and wind down the company through bankruptcy or dissolution proceedings. In such case, there would be no assurances as to the amount or timing of available cash remaining, if any, to distribute to stockholders after paying our obligations and setting aside funds for reserves.

MEIP's intentions are less clear as the company trades well below cash.  The agreed stock-for-stock exchange ratio is 0.052245 MEIP shares for each share of INFI, at current prices, the spread is approximately 100%; the market has serious doubts this merger will be approved and/or significant concerns about INFI's value on a deal break.  Last week, the company postponed their shareholder meeting to July 23rd, presumably because they don't have enough votes, and this week, the activist group filed a preliminary consent solitication seeking to replace the entire board.  Despite having the support of the proxy advisory firms, this merger seems doomed to fail.  However, MEIP does have two readily apparent alternative options:

1) The activist group did previously submit a proposal to buy the shares they don't already own for "cash consideration of not less than $8.00 per share" plus a CVR for the disposition of MEIPs remaining clinical assets.  Management has rejected this proposal.

2)  As part of MEIP's strategic alternatives process, they did evaluate a liquidation, from the S-4 (6/2/23):

 Liquidation Value

The pro forma DCF analyses imply a significant premium to both MEI’s standalone DCF valuation range and current trading price. Torreya also compared the implied value of MEI as presented in the pro forma DCF analyses to the estimated liquidation value of MEI. To calculate the liquidation value, management provided its best estimate for the cash available to shareholders upon a hypothetical liquidation. Based on discussions with management, a hypothetical liquidation could occur in the second quarter of 2023, and after paying all wind-down obligations, a fully wound-down MEI entity would be left with $82.8 million of available cash. This would imply a liquidation value of $0.62 per share. Given that the pro forma DCF represents a significant premium of up to 134% to the liquidation value, and up to 52% in the scenarios with required equity fundraising, Torreya believes the DCF supports their opinion that the exchange ratio is fair to MEI shareholders.

That analysis was pre-reverse split, post-split the liquidation value per share would be $12.40.  Similar to MGTA, the liquidation analysis assumes an unrealistic scenario where the company could be wrapped up within a few months with minimal expenses.  A more realistic scenario is as follows:

To be a bit conservative, I'm using the minimum net cash amount required if the deal closed in July of $78MM.  This is likely too low, management's projected (versus the minimum to close the deal) net cash level as of 6/30 was $92.8MM, but MEIP is spending money on this merger and fighting off the activists, makes sense to be a little conservative.  And then MEIP would escrow $10MM for any contingencies and still be able to make an initial distribution of $10+, well above where the shares trade today.  I bought shares recently.

The biggest risk I see, even if the deal breaks and the activist group fails to remove the board, MEI Pharma could continue on with their two phase 1 product candidates while burning cash.

Other thoughts:

• Infinity Pharmaceuticals (INFI) on a break might be interesting in a very speculative way.  The company doesn't have any real debt the liabilities, the related to sale of future royalties line item on the balance sheet is only payable on the receipt of any royalties to assets they've previously sold (and aren't Eganelisib).  Even in a potentially conflicted sale, MEIP did assign significantly more value to INFI's IP than the market.
• Daniel Gold stepped down as CEO on 6/2 and was replaced by former General Counsel and COO David Urso, probably a non-event as INFI management would take over the reigns, but shows a little lack of confidence in seeing the deal through to completion.
• Another probably nothing-burger, but MEIP and INFI do share a board member, Sujay Kango who orchestrated the original meeting between the two companies, he then excused himself according the background section in the S-4.

Disclosure: I own shares of MEIP