MEI Pharma (MEIP): Breakthrough Cancer Drug For Free

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1 MEI Pharma (MEIP): Breakthrough Cancer Drug For Free One Page Summary Thursday, May 19, 2016 In A Nutshell: MEI Pharma is the most compelling orphaned biotechnology stock we ve ever come across. With an excellent Chief Medical Officer (helped discover Avastin, Herceptin and Tarceva at Genentech) and a pipeline of drugs the market currently believes is worthless, yet data has been building in recent months that suggest all of them could be very compelling. After inconclusive results in MDS (pre-leukemia) generated by Pracinostat, the market has been ignoring the much more promising results the drug has been producing in a Phase 2 trial in elderly AML patients. The company can t officially report top-line results because its patients are living much longer than anticipated. We estimate the drug has at least doubled the life expectancy of elderly patients with AML, and almost all who have responded to the drug, continue to live cancer free - a very welcome development. Even still, the stock currently trades for the cash on its balance sheet, with a reduced recent cash-burn rate allowing the company to get all three programs to value-inflecting proof-of-concept without any incremental capital. However, given Pracinostat s early data, we believe multiple large pharmaceutical companies will be standing by to pay MEI for the development rights in the medium-term. We disagree with some public comments that the company will be raising capital. The company s CEO has long acknowledged the innumerable examples of small cap biotech commercialization failures, and is currently negotiating a partnership for Pracinostat s development. This will bring cash & a higher NPV as it will accelerate the approval timeline. Valuation Considerations Price $1.35 Period Cash / Share x Shares /31/15 $1.57 = Market Cap /30/16 $ Net Cash /31/16 $0.92 = Enterprise Value (EV) 2.9 In millions, unless per share Pracinostat vs. Other Leading Elderly AML Treatments & Trials Robert Mass, MD, Chief Medical Officer Dr. Mass has held a number of leadership positions at Genentech from 1998 to 2009, most recently as Head of Medical Affairs, BioOncology, a position created to strategically integrate and optimize all of the nonsponsored clinical programs within the company s oncology portfolio. He also served on the Executive Development Review Committee at Genentech, which was responsible for the review and approval of all sponsored clinical programs across the company s therapeutic portfolio. Previously he served as clinical science leader for Herceptin from 1999 to 2002, Tarceva from 2002 to 2003, and Avastin, currently the leading oncology therapeutic worldwide, from 2003 to Pracinostat VYXEOS*** Vidaza Conventional SGI-110 Median Overall Survival >20* ** Overall Response Rate 54.0% 47.7% 27.8% 25.1% 52.4** 12-Month Survival 60.0% 41.5% 46.5% 34.2% 44%** 60-Day Mortality 10.0% 13.7% 16.2% 18.2% 16.5%** *,** See exhibit 2; ***Patients were only deemed to be high-risk, whereas under half of patients in MEIP s trial are high-risk Major Assets Asset Stage Note / Timing Pracinostat Phase 3 Awaiting median overall survival data. Initiating a Phase 3 trial in 2H we are expecting a a partnership announcement some time before then. ME-344 Phase 1B Results from Ovarian cancer patients coming in December - not expecting anything significant here, but drug is very promising. Phase 2 likely in 1H PWT-143 Phase 1 Will be running a Phase 1B trial in the first half of 2016, very early stage. GreenWood Cash Investors 3/31/16 LLC Equal to the current market capitalization. MEI Pharma (May 2016)!1

2 Research Note We like looking at biotech blow-ups because when a company announces inconclusive or negative trial results, typically the entire shareholder base turns over, and traditional plain vanilla institutions that have held the shares will exit their positions as the, thesis has changed. Price-agnostic selling is one of the more reliable areas to hunt for bargains, yet most of the companies are left with little cash resources, little other developmental assets, or regrettably often: both. MEI Pharma (MEIP) has both sizable cash resources to fund development and an active pipeline of three drug candidates, one of which is demonstrating very substantial efficacy data. We believe MEIP will be generating proof-of-concept data on all three candidates within 2016, and will end the year with $0.92 per share in cash. Accordingly, we think it has fairly limited downside with very substantial upside if any of its products prove to be successful. Data that is already being generated by its lead compound, Pracinostat suggests that it s going to be a breakthrough drug for Leukemia patients with AML. We started buying shares of MEI Pharma in March of 2015 (too early) in the fallout from inconclusive news that its lead late-stage program, Pracinostat, had no detectable benefit in patients with MDS (pre- 1 leukemia). Patients with MDS are often healthy and the disease is treated in ambulatory clinics. Your author s father actually unknowingly had MDS for roughly a year, yet was running and leading a very active lifestyle during the pre-leukemia period. If not successfully treated, MDS will lead to Acute Myeloid Leukemia (AML), a much more serious condition that typically comes with a poor prognosis (if left untreated, patients have a 3-6 month life expectancy). If the patient is healthy enough to handle standard chemotherapy treatment, they are immediately put on an intensive chemotherapy regimen of idarubicin and cytarabine. Unfortunately, many elderly patients that present with AML are not able to with-stand this 7+3 chemo regimen, which transfuses two chemotherapies at the same time, continuously for a week. It packs a hefty punch, and typically almost half of patients will respond to the 7+3 and will go back into remission. From there, depending on the severity of the genetic profile (some mutations are far more severe than others), the patient will either start a bone-marrow-transplant process, or will continue for months of chemotherapy. Celator s (CPXX) recent successful trial tested its own slight variation of this 7+3 regime and was able to achieve a 9.56 month median overall survival (OS) vs months in the standard 7+3 regiment in patients with high-risk AML. 2 Prior to announcing results of the trial, the company traded under a $50 million market capitalization, exactly where MEIP trades today. Today, the market cap is over $700 million (with a slight increase in the share count). While the market and CPXX management expect the drug to get approved for a high-risk AML indication, over half of patients never respond to the standard 7+3 regimen. Additionally, patients over 70 are almost always deemed to be unfit for the rigorous chemo treatments, and thus are typically put on hypomethylating agents Vidaza or Dacogen, which are actually approved for MDS yet frequently used for elderly AML patients. There are approximately 20k AML patients a year, and 10k deaths in the U.S. related 1 See MEI Pharma Announces Top-Line Data From Randomized Phase II Clinical Study Of Pracinostat In Front-Line Myelodysplastic Syndrome. MEI Pharma, 3/25/15. 2 See Celator Announces Phase 3 Trial for VYXEOS (CPX-351) in Patients with High-Risk Acute Myeloid Leukemia Demonstrates Statistically Significant Improvement in Overall Survival. Celator Pharmaceuticals 3/14/16 GreenWood Investors LLC MEI Pharma (May 2016)!2

3 to AML. MDS has far larger numbers of patients, and is treated in a very different manner in the clinic, and as we said, is typically traded in an ambulatory clinic. This starkly contrasts with the 7+3 chemo regimen, where the patient is almost always admitted to the hospital. Given AML is a very severe disease with a high unmet need for more than half of patients, many companies work on therapies in this space. Also, given the hematological nature of the cancer, it is easier to prove a cancer-cure concept in AML as companies can be assured that the cancer cells are getting exposure to the drug (as opposed to tumors, where drugs often fail to fully penetrate into the tissue). There have been so many unsuccessful attempts in the space that investors view AML as a graveyard of broken dreams (though not as bad as pancreatic, glioblastoma, or MDD). We ve invested successfully in a company in this space before, Astex Pharmaceuticals (ASTX), which had an approved drug in MDS, called Dacogen, and was working on a MDS-AML drug called SGI-110, among a fairly robust pipeline of very early-stage candidates. SGI-110 was having early clinical success, far greater than what Dacogen was able to achieve, which also happened to be running off of patent protection in the near future. SGI-110 also had some early stumbles in MDS, but the AML data was compelling enough to receive a buyout offer from Eisai Pharmaceuticals for $886 million. 3 At that time, management s internal projections required an additional $180 million in incremental capital over the next few years, as revenue from Dacogen was rolling off, and trials for SGI-110 were kicking into high gear. Thus, this was pretty much a $1 billion buyout for one drug, plus a few other candidates in the pipeline. While Astex s pipeline clearly had some value, typically early-stage Pre-Clinical and Phase 1 assets receive little to no risk-weighted value in buyout considerations. Thus, we believe most of the $886 million bid was targeting the promising clinical success of SGI-110, which is currently enrolling an 800-patient late-stage registration trial in treatment-naive elderly AML patients that are considered unfit to receive intensive chemotherapy (the 7+3 regiment we discussed earlier). $886 million ($14.41 per MEIP share) would clearly be a terrific outcome for investors, but the early data that MEIP has been generating in treatment-naive elderly AML patients in its Phase 2 study are more compelling than the SGI-110 data generated to date. Leading the open-label Phase 2 trial for Pracinostat in elderly AML patients is Guillermo Garcia-Manero, MD of the M.D. Anderson Cancer Center, where you author s father was also treated and later cured despite a 2% chance of 5-year survival at onset. Sixteen other major institutions also participated in the trial, including Emory, the Mayo Clinic, Stanford and USC Norris Cancer Center. Mathematically, given specific dates set out by the company regarding the trial, we believe the Pracinostat AML enrolled half its patients by early September Given trials typically accelerate enrollment in the later months, we took a conservative mathematical view on the enrollment process, our assumptions of which are shown in exhibit 1. The company issued a press release on June 10, declaring the trial had met the criteria to upsize the patient population to 40 patients (later revised to 50), and at the time, said it had already enrolled 12 patients. Using a conservative late-acceleration enrollment assumption, we 3 See Kelly, Tim. Japan s Otsuka to buy U.S. cancer firm Astex for $886 million. 4 See MEI Pharma Reports High Response Rates In Phase II Study Of Pracinostat In Front Line Acute Myeloid Leukemia. MEI Pharma, 6/10/14. GreenWood Investors LLC MEI Pharma (May 2016)!3

4 gather than the 26th patient (median patient) enrolled in early September This has later been confirmed, as the Q Q the company disclosed that on March 11, 2016, the median observation time was approximately 18 months. 5 This dove-tails exactly to the estimated timetable seen in Exhibit 1, and also means that the median observation time today is over 20 months. There will be slight differences in observation times vs. survival times, depending on when specific drug-responders enrolled, but the two should be closely correlated. Exhibit 1: Estimated Bi-Weekly Enrollment and Patient Population Enrolled Cumulative /10/14 7/10/14 8/10/14 9/10/14 10/10/14 11/10/ As of today, the company has still not hit the Median Overall Survival in the study, which means that over 25 patients are still alive (27 to be exact). The market initially hated the fact that the company couldn t report top-line data in the study. To be clear, this is a very good thing that the company is still unable to calculate median overall survivability, as the longer it takes the company to report, the better the drug is working. Given these patients had enrolled prior to early September 2014, the median overall survival has likely already hit 20 months. We would caution that outliers can influence the median, but this is the best estimate we can make at this point. Yet, even if the data is off by a month or so, this is extremely compelling data and warrants the drug to be developed on an accelerated time-table. Using this preliminary Median OS information, as well as official data showing an overall response rate of 54%, a 60-day mortality rate of 10% and one-year estimated overall survival at 60%, 6 the company decided the proof-of-concept had been established to the point that it has already announced it will initiative a registration trial (Phase 3) in the second half of 2016 in order to support a New Drug Application for Pracinostat in elderly AML. These statistics compare very favorably for other options available to elderly AML patients, and even beats some trial data from the standard 7+3 chemotherapy regimen in elderly patients (under 65 patients typically achieve meaningfully better response rates). Nearly all medically-minded statisticians or regulators hate comparing different trials to each other, as small differences in inclusion or exclusion criteria can make a large difference in reported outcomes - of course 5 See page 12 of the 10-Q dated 5/5/16 6 See MEI Pharma Highlights New Data from Phase II Clinical Studies of Pracinostat in Acute Myeloid Leukemia and Myelodysplastic Syndrome. MEI Pharma, 11/5/15. GreenWood Investors LLC MEI Pharma (May 2016)!4

5 that s why double-blinded trials are so important, because all of the baseline factors are identical between the two arms, and the comparison can be made in good faith. Even still, it s helpful to know what similar patients have been able to achieve in other trials, and we ve displayed these key data in exhibit 2. Exhibit 2: Comparable Elderly AML Drugs & Results Pracinostat + Vidaza VYXEOS*** Vidaza Conventional SGI-110 Median Overall Survival >19* ** Hazard Ratio TBD N/A N/A Overall Response Rate 54.0% 47.7% 27.8% 25.1% 52.4** 12-Month Survival 60.0% 41.5% 46.5% 34.2% 44%** 60-Day Mortality 10.0% 13.7% 16.2% 18.2% 16.5%** Trial 1st Line 1st Line 1st Line 1st Line 1st Line Source: Blood May 2015, Astex Pharmaceuticals; conventional therapy low-dose cytarabine, supportive care of standard chemotherapy induction (option selected depends on patient s health) *Our estimates given the data shown in exhibit 1 **ORR on the treatment-naive patients, similar to Pracinostat and Vidaza data; SGI-110 data uses highest dose available ***Patients were deemed to be high-risk, whereas under half of patients in MEIP s trial are high-risk The market thinks Pracinostat is dead, as when the program was alive and near value-inflection territory (after the company proved its concept for the drug), the stock was over quadruple current levels in the $6- range. Each week that goes by without the AML trial reaching Median Overall Survival, the data becomes more and more compelling and sets up a clinically-relevant drug for MEI or a partner to develop. Given the favorable data generated so far in AML, and similar setbacks SGI-110 had in MDS before generating less favorable data than Pracinostat, we think there s near-term potential for MEI to create value for shareholders through a partnership with a major oncology biotech firm. The most logical candidate is Celgene (CELG), given it already has a salesforce calling on MDS and AML oncologists, it is looking for ways to extend the life of its Vidaza franchise, and Pracinostat just so happens to be dosed in combination with Vidaza. Furthermore, its salesforce is perhaps the only in the industry which would be able to warm call MDS doctors to explain the positive data generated by Pracinostat in MDS patients who remained in the study (too many of them were yanked off drug immediately when side-effects arose). The market opportunity would be well over $1B for Pracinostat if MDS doctors would start using the drug. In last months presentation at the Needham conference, CEO Dan Gold showed surveys the company has conducted with doctors to gauge what kind of survival improvement Pracinostat would need to show in order to gain broad and quick acceptance. In our own conversations with Leukemia and oncology doctors indicated that even a few extra months for this particular indication would be clinically relevant. MEI s survey confirmed this, as 92% of doctors claimed that a benefit of 30% would warrant widespread adoption (that would mean about 3 months for elderly AML). Given Pracinostat + Vidaza appear to be close to achieving a 10-month (100%) improvement in survival, the commercialization potential becomes a much higher certainty event, if the company can just duplicate these results in a large-scale trial. GreenWood Investors LLC MEI Pharma (May 2016)!5

6 Exhibit 3: MEI s Doctor Survey on Clinical Meaningful Improvements in OS Source: Company Presentation CEO Dan Gold has repeatedly acknowledged the high number of failed drug launches by small biotech companies. He believes the biotech industry, particularly smaller companies, are good at one thing only: drug discovery. Commercialization is a very high risk even with very compelling drugs, as small companies are often unable to hire key sales talent to push the drug into patients lives quickly. He is seeking to avoid these risks with a commercialization and perhaps development partner. This is key, as it disproves the only bear argument we ve heard on MEI Pharma: that the company needs to raise capital. Barring a $50 million Phase 3 trial, the company has very substantial cash to support early stage development of its own pipeline. So what will a potential commercialization / development partnership look like? We believe the company will ask for a smaller up-front payment ($30 million or less) to fund its two other drug candidates, in order to secure higher royalties on the eventual sales of Pracinonstat. Astex Pharmaceuticals (formerly Supergen) was able to secure up to 30% royalty rates on its MDS drug Dacogen. Exhibit 4 shows the risked and un-risked (Phase 3 oncology programs have a 34% chance of success) economics to a successfully commercialized Pracinostat, assuming it will carry slightly over 100% of the current Vidaza market - we think this is conservative, because doctors currently dosing patients with Dacogen would very likely convert to Pracinostat given the very superior survival metrics. We ve also assumed a starting price point of $55k per patient treatment cycle, similar to Dacogen and Vidaza before they rolled off exclusivity / patent. We ve assumed lower royalty economics than what Dacogen achieved, with royalties starting in the teens but quickly getting into the 20%-range as we believe doubling the life expectancy of patients will lead to swift market adoption. Additionally, we ve assumed that the revenue drops off after the composition of matter patent expires in May of 2028, despite other patents on the compound lasting a few years thereafter. GreenWood Investors LLC MEI Pharma (May 2016)!6

7 Exhibit 4: Base Case Economics of Pracinostat Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Dec-27 Dec-28 Estimated Penetration of Pairing with Vidaza 33% 80% 90% 100% 110% 120% 125% 125% 125% 50% ASP $55,000 $56,375 $57,784 $59,229 $60,710 $62,227 $63,783 $65,378 $67,012 $68,687 Net Revenue $236 $586 $676 $770 $868 $971 $1,036 $1,062 $1,089 $446 Royalties / Upfront $30 $35 $117 $142 $169 $200 $233 $259 $266 $272 $112 Royalty Rate 15% 20% 21% 22% 23% 24% 25% 25% 25% 25% NPV $28 $0 $0 $25 $76 $83 $90 $97 $102 $104 $97 $90 $34 Sum $825 per share $24.15 Risk-Weighted $299 per share $8.76 GreenWood Estimates We re not showing these estimates to derive a price-target or any certainty of the value of Pracinostat as a fully-developed asset, we re simply using reasonable estimates to derive what the potential is for this drug. Ironically, the NPV of the partnered drug is very close to Celator s current market capitalization, which has yet to file its New Drug Application (NDA) with the FDA. The company s own market research also supports an adoption schedule similar to that shown in exhibit 4. Exhibit 5: MEI s Market Research: Potential Prescribing Behavior Source: Company Presentation Given MEIP trades slightly below current cash, and marginally above year-end cash levels, we believe investors are either paying a pittance or nothing for Pracinostat, and also getting two other earlier-stage compounds entirely for free. That s no surprise, as early stage assets in companies can sometimes be valued as a liability given the low probabilities for eventual success and the heavy investment that accompanies drug development. But we believe both of these compounds are also getting closer to proving the concept and efficacy of the drugs. GreenWood Investors LLC MEI Pharma (May 2016)!7

8 ME-401 is an inhibitor of PI3K delta, a molecular target that has been shown to play a critical role in the proliferation and survival of certain hematologic cancer cells. This target inhibition has already been proven by Gilead s Zydelig, though for toxicity reasons, the drug has only been approved as a second-line treatment, rather than the far-more-valuable first-line indication. ME-401 is >10x more potent in terms of exposing the body to active drug than is Zydelig, which should help the company lower the dosing and improve the toxic side effects of the drug. MEI has recently completed a Phase 1 trial establishing the pharmacokinetic profile of the drug, and is currently starting a Phase 1B (safety combined with proof-of-concept) trial in lymphoma patients in 10 different cancer centers. Proof of concept data will be available in Q The last compound, ME-344, is a mitochondrial inhibitor to cancer cells. Mitochondria is the cellular powerhouse, and ME-344 is designed to shut down the energy-generating ability of cancer cells. The compound is about to enter a Phase 2 program testing the early proof of concept for the drug in combination with a VEGF inhibitor, where it was shown very promising pre-clinical data in preventing tumor growth. Exhibit 6: Pre-Clinical Tumor Growth Prevented with ME-344 Source: MEI Pharma Presentation Last year s trial in ME-344 was run in combination with Topotecan, instead of a VEGF inhibitor, and didn t produce a meaningful benefit to patients. Because data generated subsequent to the start of the trial in 2014 showed a far more meaningful combination with a VEGF inhibitor, the company has been looking through the recent Phase 1B data even prior to it completing, as it was anxious to see the compound developed with a more effective combination. MEI will be launching a Phase 2 trial to use ME-344 with the more compelling VEGF inhibitor, and will be starting in the second quarter of 2016, with trial results likely to GreenWood Investors LLC MEI Pharma (May 2016)!8

9 be reported later in 2016 or early While data won t be coming for multiple quarters, ME-344 represents a drug with a unique mechanism of action with very promising pre-clinical data. Exhibit 7: Breast Tumor Growth Inhibited by ME-344 Source: MEI Pharma Presentation Pracinostat will be the near-term value lever for MEI Pharma, yet the price we re paying for shares of MEIP, which trades for less than its current cash-level suggests that there is no value being given to the drug portfolio nor Pracinostat, which is in the final months of testing out the proof of concept data needed to attract a partner to help develop and commercialize the drug. The precedent has already been set for a transaction in the space through Astex Pharmaceuticals, as well as the market valuation of a potentially successful AML drug with Celator Pharmaceuticals. The NPV of a successful Pracinostat, the market value of Celator, and the take-out value of Astex Pharmaceuticals all point to valuation for the company of over $15 per share. Further clinical success for the drug could mean Pracinostat would be entering an uncrowded >$1B market for non-chemotherapy treatments for patients with AML. Thus, tremendous upside opportunity with very limited downside potential. Risks As previously mentioned, the average odds a Phase 3 trial is successful in the oncology arena is 34%, according to BioMed Tracker, which used data from thousands of trials. Now that the Phase 2 is largely successful and done in Pracinostat, the next risk will be the risk they can t duplicate the results, or come anywhere close to the same results achieved in the Phase 2 trial. Also, if the company is unable to find a partner to help develop Pracinostat, it will need to spend its entire cash balance in support of the drug development, as well as raise equity by this time next year. The GreenWood Investors LLC MEI Pharma (May 2016)!9

10 company has said it s not looking to raise capital anywhere close to today s stock price, but it s clearly always a risk in biotech companies. The earlier-stage compounds carry far lower chances of eventual success, and should never be a part of anyone s base case valuation. This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC. Past performance is no guarantee of future results. GreenWood Investors LLC MEI Pharma (May 2016)!10