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Is there a way out for Motif Bio following FDA rejection?

Motif Bio has collapsed by more than 80pc to its current 7.1p since revealing that its flagship product has been rejected by the US Food & Drug Administration (FDA) earlier the month. The company plans to address the regulator’s concerns in a meeting in the coming months. However, with cash concerns lingering and a placing on the cards, is there still hope for Motif over the long-term?

Motif is a clinical-stage biopharmaceutical organisation focused on developing antibiotics that can fight infections caused by ‘gram-positive bacteria’ like MRSA. Its lead product candidate is a drug called iclaprim, which it hopes to use for the treatment of acute bacterial skin and skin structure infections (ABSSSI).

According to Motif, more than 3.6 million ABSSI patients are hospitalised annually in the US, with up to 26pc of these having renal impairment. Over the longer-term, the firm also wishes to develop iclaprim for hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia.

FDA rejection

For some time, Motif has been seeking approval from the US Food & Drug Administration for the use of iclaprim in treating ABSSSI.

It will come as little surprise then, that the firm’s shares collapsed by nearly 80pc in a day earlier this month on the news that the FDA had said it could not approve its new drug application in its current form. The regulator has indicated that it needs additional data to evaluate the risk for liver toxicity further before approval.

As if the rejection itself weren’t bad enough, Motif also revealed a pessimistic outlook for its financial situation in the announcement. It said that, while it can finance its operations into the second quarter of 2019, it will need to raise capital over the near term.

As of 31 December 2018, Motif had cash of $12.3m alongside $15m of debt drawn from its Hercules loan facility. Several days after its initial blow, the business announced that it planned to make an early repayment of $7m to Hercules, which will leave it with c.$3m of cash. It will then make a further repayment of $0.5m on the earlier of 90 days or the receipt of funds from an equity raise of $2m or higher.

Sentiment quickly soured – to put it lightly – following this cluster of bad news, with significant city backer Invesco to cut its position from c.25pc to 14.1pc while Prudential reduced its stake to less than 5pc.

The rejection is obviously pretty devastating for Motif, but the upside is that the FDA did not reject its application flatly. With this in mind, the company is currently working towards requesting a meeting with the FDA as soon as possible to discuss potential options to address iclaprim’s current deficiencies.

Earlier this week, the business said it has been consulting with its internal and external experts and is preparing the required information package to request a meeting ‘as soon as possible’. Once requested, the FDA typically grants a meeting within 30-45 days. Although this sounds promising, the business went on to add that there is no certainty that its funds will enable it to reach this date.

‘The Company is currently assessing the options available to it to raise sufficient capital to provide cash runway to enable it to meet the FDA and discuss options to advance iclaprim towards approval,’ it added. Unsurprisingly, the market did not welcome this with open arms either, and shares fell another 73pc.

So, is there any hope?

The bull scenario would be that the company can alleviate the FDA’s concerns successfully and get iclaprim approved. In the case, much of the fundamental investing case backing its 22p-44p share price over the last year (until this month’s announcement) would be little changed.

However, it is not necessarily as simple as having a punt on this outcome. Even if it is approved, the firm’s funding situation has changed drastically – a raise is as good as guaranteed over the near-term given that the company’s recent comments. With this knowledge, there is a substantial risk that any shares one buys at their currently depressed level will be diluted even further. That being said, if you think that the firm can recent to its pre-FDA refusal highs in the previously-mentioned success-case scenario, then the presumed upside will be so massive that this dilution will be of little concern.

Assuming the company does eventually get approval, iclaprim will be eligible for ten years of market exclusivity in the U.S. However, the need for cash will not stop there.

The business is building a patent estate to provide additional protection for iclaprim and has two U.S. method of use patents issued that will expire in 2037. It is carrying out trials for patients with HABP and is looking at treating patients with cystic fibrosis. It is also anticipating ten years of market exclusivity in Europe. This is all very exciting, but commercially a drug cannot be cheap. Will this operational cash keep having to come from the market if Motif cannot find another source of funding now that its cash runway is so short?

The road to making a huge return here is rocky, but not necessarily impossible – regardless, I certainly will not be betting the house on Motif’s recovery.

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The author was remunerated but does not hold shares