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Initiating Coverage of Midatech Pharma (MTP); Novel Nanotechnology Platforms Focused on Oncology and Other Therapeutic Areas

11/27/2017
By David Bautz, PhD

NASDAQ:MTP

We are initiating coverage of Midatech Pharma Plc (NASDAQ:PLC) with a $6.00 valuation. MIdatech is a U.K. based international specialty pharmaceutical company focused on oncology and other therapeutic areas. The company has three proprietary drug delivery technologies: Q-Sphera for sustained release of already marketed products, Midacore gold nanoparticles (GNP) for targeted delivery, and Nano Inclusion (NI) for local delivery. The Q-Sphera technology involves the consistent and precise encapsulation of active drug compounds within polymer microspheres. The microspheres are engineered to release the drug compound into the body in a controlled and consistent manner over an extended period of time. The GNP technology was developed for repurposing and improving key parameters of new and existing drugs, including how the drug is distributed in the body and targeting to specific tissues. The NI technology is utilized to enhance solubility to allow for localized delivery. Each platform has the capability to be used in a variety of disease areas including oncology, immunology, and neurology. Midatech currently has three lead compounds in development:

➢ MTD201 (Q-Octreotide): Octreotide is an existing product administered by injection for controlling the production of growth hormone in people suffering from acromegaly. It is also a treatment for carcinoid syndrome from the occurrence of neuroendocrine tumors (NET; tumors that secrete hormones). Midatech is developing a sustained release version of octreotide (“Q-Octreotide”) that will compete with the market leader Sandostatin® LAR® (sold by Novartis). Midatech is planning an initial human bioequivalence study of MTD201 in 24 subjects, which will be followed by a confirmatory study in 76 patients. We anticipate the initial study beginning in the fourth quarter of 2017 or first quarter of 2018 with topline data available in the first half of 2018. 

➢ MTX110: This is a formulation of panobinostat (already approved for treatment of multiple myeloma) that utilizes Midatech’s NI technology to enhance solubility and allow localized delivery. The company is developing MTX110 for the treatment of diffuse intrinsic pontine glioma (DIPG), an ultra-rare pediatric cancer of the brain stem. Thus far, five patients have been treated through a compassionate use protocol, and Midatech is planning to initiate a formal clinical trial in early 2018. 

➢ MTD119: This is a GNP construct that utilizes cytotoxic DM1 (which is used in an approved antibody-drug conjugate). Midatech is developing MTD119 for the treatment of hepatocellular carcinoma, an orphan indication with a total market size forecast to reach $1 billion in 2024. Preclinical studies show that GNP conjugation allows otherwise lethal doses of DM1 to be administered, which results in peak tumor growth reduction more than six times the current standard of care (sorafenib). IND enabling studies are initiating with a first-in-human study planned for late 2018 or early 2019. 

Midatech has a number of value drivers over the next 18 months as the company moves its lead products into the clinic. Both MTD201, which is being developed along the 505(b)(2) submission pathway, and MTX110, which is targeting an ultra-rare indication, could potentially move from the clinical to commercialization in a short time frame. In addition, MTD201 is relatively de-risked from a regulatory viewpoint as octreotide is already approved and data up to this point shows strong equivalence between MTD201 and the Sandostatin® LAR® reference. The company is further differentiated by its existing U.S. sales force, which could help the company to quickly capitalize on an approved product by seamlessly integrating it into the sales infrastructure without the need to sign a partnership with a larger biopharmaceutical company. Lastly, without the need for a commercialization partner, Midatech stands to potentially realize the full value of each of the development products. 

Valuation

We value Midatech using a probability adjusted discounted cash flow analysis that takes into account future revenues for MTD201, MTX110, MTD119, and the Midatech US products. For each of the products, we believe the company will promote them in the U.S. through the use of the existing sales team and will partner for areas outside of the U.S and receive a royalty of 12%. We model for MTD201 and MTX110 to enter the U.S. market in 2020 and the E.U. market in 2021, with MTX119 entering both markets in 2024. 

For MTD201, acromegaly is the value driver as only a very small fraction of the $1.6 billion in revenue for Sandostatin® LAR® was derived from malignant carcinoid syndrome. We estimate approximately 20,000 individuals in the U.S. and 47,000 individuals in the E.U. suffer from acromegaly. We model for MTD201 to be priced at a slight discount ($14,000/yr) to Sandostatin® LAR® ($16,000/yr) and to have peak revenues of approximately $50 million in the U.S. and €42 million in the E.U. We assign a 50% probability of approval, a 15% discount rate, and the current exchange rate to arrive at an NPV for MTD201 of £37 million.

For MTX110, we model for a 50% peak market penetration, as there are no other treatment options currently available for DIPG patients. Due to DIPG being an orphan disease, we believe that the drug will be priced at a premium at $150,000/yr (although this could end up being conservative), which leads to peak revenues in the U.S. of $25 million and in the E.U. of €10 million. Using a 50% probability of approval, a 15% discount rate, and the current exchange rate leads to a NPV for MTX110 of £23 million.

The largest potential opportunity for Midatech is MTD119 in liver cancer. While the markets in the U.S. and the E.U. are small (although we estimate they still represent $180 million and £150 million opportunities, respectively), China is by far the largest opportunity with 350,000 new cases of liver cancer every year (Chen et al., 2011). We believe an effective HCC drug could lead to peak revenues in China of $300 million. We assign a 25% probability of approval, given the fact that only 2 drugs have been approved for treating first-line primary liver cancer. Using a 15% discount rate and the current exchange rate leads to a NPV for MTD119 of £54 million.

We believe that revenues from Midatech US will grow at a good rate for the next few years mostly from a ramp up in sales of Zuplenz®, with revenues growing 30% and 20% in 2018 and 2019, respectively. We forecast for sales to then slowly rise to approximately £11 million annually. Using a 15% discount rate and the current exchange rate leads to a NPV for Midatech US of £60 million.

Combining the NPV for each of the company’s programs, the current cash position, and an additional £15 million operating burn leads to a NPV of £170 million. Dividing this by the fully diluted share count of 67.3 million leads to a valuation of £2.39 per share. 1 ADR represents 2 shares of common stock, and using the current exchange rate (1 US dollar = 0.75 GBP) leads to a current valuation for the ADRs of approximately $6.50. Midatech is currently trading well below our valuation, which we believe may change quickly as investors become more familiar with the story and how rapidly the company’s lead programs could enter the market.  

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