Description

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Overview:

Molecular Templates (MTEM) is a newly public company that came about via a reverse merger with Threshold Pharmaceuticals (THLD). It started trading under the ticker MTEM on 8/2. Given the route it took to go public the company will be under the radar with respect to analyst/investor coverage for a while creating an arbitrage between the value where its comparables trade and the current MTEM price. I think there is an interesting opportunity here for investors that are willing to stomach biotech trading volatility. 

In recent years, the focus on the treatment of cancer has been transformed by targeted agents, drugs which selectively target tumor cells and leave normal cells relatively unharmed.  Several companies, including Seattle Genetics (market cap = $7.0 billion), have introduced what are called antibody drug conjugates, which are antibodies with which are linked to cytotoxic chemotherapy.  The antibody binds a receptor on the membrane of the tumor cell, the receptor self-internalizes and the chemo is released inside the cell destroying the cell.  However, many viable tumor cell receptor targets do not internalize or poorly internalize leaving the cytotoxic unable to enter and kill the tumor cell. MTEM is the only oncology focused company that is developing engineered toxin bodies.  Engineered toxin bodies can be designed to bind to these same receptors but uniquely by their very design force internalization and ultimate release of the cytotoxic inside the cell.  This unique mechanism expands the universe of druggable targets and tumor types well beyond what is currently accessible to antibody drug conjugates.

While the immunotoxin strategy to cause internalization of tumor cell surface targets and release of payload inside tumor cells is unique, the targets MTEM has designed its drugs to hit are well validated cancer targets by existing marketed drugs (CD20 = Rituxan; CD38 = Darzalex; HER2 = Herceptin; PD-L1 = Tecentriq).

MTEM has several proprietary assets, the key one being MT-3724, a treatment for non-Hodgkin’s lymphoma. MT-3724 demonstrated promising signs of single agent activity in patients with diffuse large b-cell lymphoma, an aggressive type of non-Hodgkin’s lymphoma, who relapsed or were refractory to multiple prior lines of therapy.  MT-3724 has begun being tested in a phase 2 study which could form the basis of a pivotal trial for approval. There are several other drugs which are expected to enter clinical trials throughout 2018. 

Unlike other early stage biotech companies that rely on a single drug to make or break the company, MTEM has a pipeline of engineered toxin body assets and a technology platform that could support additional non-dilutive collaborations like the one it recently signed with Takeda Pharmaceuticals to help drive revenues and advance its proprietary assets.  

MTEM has $75mm of cash on its balance sheet against a $161mm market cap. The cash was raised from an equity investment from Takeda Pharmaceuticals ($20m) and a capital raise from a series of institutional investors including Longitude, BVF and Perceptive ($40mm).

Valuation:

The company has 26.9 mm of shares outstanding pro-forma for the merger, giving it a $161mm market cap at $6 per share. There are ~2.9m warrants out with an exercise price of $6.8423. In a press release yesterday the company said it has $75mm of cash post its $40mm capital raise, and $20mm investment from Takeda.

Comparable oncology platform technology companies in biotech trade at a multiple of MTEM’s current valuation. None of the companies below have a clear commercial candidate and are valued on the business development collaborations they have generated, as well as their strong balance sheets. Examples include XNCR, IMMU, CTMX and MRUS. All of which have enterprise values between $200-$600mm compared to MTEM’s $86 MM enterprise value at a $6 per share price.  MTEM just began trading through a reverse merger and is largely unknown to public investors at this time.

Thesis:

I think the stock is likely to trade up more in line with peers (2-3x higher) as the story becomes better known. On a longer time horizon, if the key drug candidate is approved by the FDA, the returns could exceed a double or triple. Assuming $250mm in peak sales for MT-3724, and a 4x multiple – the return to investors would exceed 4x just on the value of that drug alone. Logically the platform itself should also be much more valuable if one of the drugs is successful. 

The company’s rich cash position gives the team 2-3 years of runway to generate value. 

Catalyst

Re-rating near term, drug approval success on longer time horizon.