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MethylGene: Initiating With An Outperform

We are initiating coverage of MethylGene (MYG-TO, MYLGF-OTC) with an Outperform rating. Our 12-month price target is $0.75 per share.

MethylGene is a mid-stage development biotech company focused on development and commercialization for the treatment of fungal infections and cancers. The Company has two differentiated lead candidates MGCD290 and MGCD265 for fungal infections and cancers respectively.

MGCD290 in combination with fluconazole has entered into Phase II clinical trial targeting vulvovaginal candidiasis, both acute and recurring. MGCD290 is a first-in-class selective, oral, small molecule inhibitor of the fungal Hos2 enzyme; works in synergy with azole antifungal agents; has broad spectrum antifungal activity; can reduce drug resistance.

We expect MGCD290 will enter into pivotal Phase III trial in 2013. We model the FDA approval of MGCD290 in 2015. Due to the advantages of MGCD290 in combination of fluconazole, the combination will command a significant market share from currently used antifungals. Also, fluconazole is the most widely used antifungal, which will drive the usage of MGCD290;

MGCD265 is a multi-targeted kinase inhibitor in multiple Phase I and Phase I/II clinical trials. This agent is well tolerated and has a favorable safety profile. Early signs of significant clinical activity have been observed in gastric cancer and NSCLC patients when combined with docetaxel or erlotinib. We estimate MGCD265 could enter into Phase III study in 2014 and the FDA approval could happen in 2017.

In addition to MGCD290 and MGCD265, MethylGene has also diversified programs under development with some of them developed by its partners. These programs provide a long term growth potential for the Company.

MethylGene has a strong balance sheet. We forecast that the current cash can last through the 4Q2013. No debt is sitting on its balance sheet as of March 31, 2012.

Current valuation is attractive.

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