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Menlo IPO: Happy Days For Biotech?

Biotech is looking up again. Five biotech companies went public this week, with all of them achieving positive results at the start. The most successful was Menlo Therapeutics (Pending:MNLO). Despite boosting its initial share price to $17 right before it went public on Thursday, Menlo saw its stock rise to $28.51 at the close of trading on Friday. It raised $119 million in this IPO and is having a great start.

Menlo is a skin treatment company with several treatments in the process of testing and is in a field where it faces heavy competition and will not see results for some time. Fortunately, there is a clear and growing market for its product, and this is a good time for biotech. Biotech always carries more risk than most companies, but Menlo is one company where investors should take a stab and hope for long-term results.

Growing and Developing

Menlo describes itself in its SEC report as “a late‑stage biopharmaceutical company focused on the development and commercialization of serlopitant.” Serlopitant is a drug designed to battle pruritus caused by skin diseases such as atopic dermatitis, psoriasis, and prurigo nodularis. Pruritus, in layman’s terms, is itchiness.

Developing medicine to fight itchiness caused by skin diseases may not be as glamorous as developing credit cards or cancer drugs, but the demand is unquestionably there. Atopic dermatitis, often known as eczema, is best known for inflicting small children. But the American Academy of Allergy, Asthma, and Immunology reported that 10.2% of American adults suffered from eczema with older, female, Hispanics, and the highly educated being the demographics most at risk. Prurigo nodularis is rarer, but the National Institutes of Health states that its itch “is very challenging to treat” and that “no treatment works for everyone who has PN, and current treatments may not offer complete relief from symptoms for some.”

Because of how prevalent these conditions are and how badly they can affect patients’ quality of life, a December 2016 report found that the global pruritus therapeutic market is projected to reach $13.83 billion by 2022 with a CAGR of 4.8 percent between 2016 and 2022. And while drugs do exist to fight pruritus in general from established companies like Allergan (NYSE:AGN) and Pfizer (NYSE:PFE), Menlo points out that there are no U.S.-approved therapies to deal with pruritus from the aforementioned skin diseases.

Pruritus is testing serlopitant’s use in fighting pruritus and expects to begin two Phase 3 clinical trials for its use against prurigo nodularis early this year and which will conclude in early 2020. Phase 2 tests for the drug’s use against the other skin diseases will conclude in either 2018 or 2019.

Menlo has already conducted two Phase 2 tests studying serlopitant’s effectiveness against chronic pruritus and prurigo nodularis, and some details (though not the test results) can be found on Clinicaltrials.gov. The test against chronic pruritus was completed in April 2015 and involved 257 participants.

Menlo proudly states in its SEC report that the serlopitant group experienced a statistically greater improvement in itchiness relief compared to a placebo. While that is good, a closer look at the results indicates that there was no substantial improvement between the 1 mg serlopitant group and the 5 mg. Meanwhile, a 0.25 mg group found some pain relief, but at a much smaller scale than the other groups.

The test against prurigo nodularis was completed in June 2016 and involved 127 patients who took either a placebo or 5 mg of serlopitant over an 8-week time frame. Once again, serlopitant was found to be effective at relieving itchiness.

And in further good news, the side effects of the drug appear to be mild. A Medscape report on the study last September noted that a third of the patients reported adverse effects such as dizziness, diarrhea, and headache, but the vast majority were mild to moderate. These trials as well as the FDA’s approval to go ahead indicates that serlopitant may be very well effective at treating debilitating conditions which affect a substantial portion of the American populace.

It should be noted that Menlo has no other drugs in development besides serlopitant and, like most biotech IPOs, has no revenue to speak of. It had a net loss of almost $20 million in the nine months ending September 30, 2017, but admits that losses will continue to pile up as it continues development.

With the money raised in this IPO, Menlo will be able to operate until the end of 2019. After that, it will have to continue to raise more through issuing further debt and equity. This should not be a concern, given that Menlo has already raised over $100 million through dealing with private investors, including a $50.5 Series C financing last July. It is somewhat disappointing that it will have to go through financing before the prurigo nodularis test data is unveiled, but that is not a substantial concern.

An Improving Biotech Market

There is substantial risk in a company which does not have enough funds to keep operating until its most advanced trials are up, but the biotech market as a whole is in a good spot now. The NASDAQ Biotechnology Index is up by 15 percent since hitting a low in November 2017, and other biotech companies have surged as well in 2018 such as Armo Biosciences (Pending:ARMO) and Iovance Biotherapeutics (NASDAQ:IOVA). Nevertheless, few have done as well as Menlo.

And while biotech is doing well, it is not overheated like it was in 2015. Menlo only raised $119 million, compared to biotech companies back then, which raised hundreds of millions if not billions. And the societal concerns about medical companies jacking up the price of drugs are no longer present and forcing companies to take things cautiously.

Biotech is in a firm position, and enterprising companies with leadership experience, good trial results, and a proven ability to raise funds can take advantage of this to grow success over the long term. Menlo has no backup plan if serlopitant fails, and investors have no way of knowing if it will succeed in treating skin diseases for years.

For that reason, there is no harm in waiting on Menlo until more progress is made on its trials, and we see if the biotech renaissance will continue. But if you are interested in getting into the biotech IPO market again as soon as possible, Menlo is a very good prospect.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

SeekingAlpha

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