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Menlo Therapeutics: Dip In Share Price Post Zilxi Approval Presents A Good Buying Opportunity

Jun. 02, 2020 5:22 PM ETVYNE Therapeutics Inc. (VYNE)25 Comments
Andy Jones profile picture
Andy Jones


  • Menlo now has 2 FDA approved products, and Amzeeq's marketing efforts are already underway.
  • Menlo's current market cap is in the ballpark of peak sales estimates for these 2 products meaning there should be little downside potential in the stock.
  • My discounted cash flow analysis of Menlo's first 2 products suggests that shares are meaningfully undervalued at present.

Menlo Therapeutics (MNLO) is a biopharma focusing on the development and commercialization of dermatologic products. Its first product to market, Amzeeq, is a topical minocycline foam for the treatment of acne, and now Menlo has a second product, Zilxi for rosacea, that has received FDA approval. As Menlo ramps up efforts to initiate and grow sales of these products, the company looks extremely undervalued, trading with a current market cap around the combined low ends of peak sales estimates for just these 2 products and completely ignoring the third product with Phase 2 data expected soon. Boston Biotech Investor recently published an excellent relative valuation of Menlo based on past dermatology acquisitions, and in this article, I present a discounted cash flow model that similarly shows Menlo as undervalued.

Menlo Now Has 2 Approved Products Which Will Soon Generate Substantial Cash Flow

Amzeeq has been on the market since January and is already seeing good growth. Amzeeq represents a step forward in technology for the use of minocycline in acne treatment.

Figure 1: Chart Showing Amzeeq's Benefits Over Oral Minocycline (source: corporate presentation)

As you can see in Figure 1, Amzeeq is far more effective at getting the antibiotic minocycline to the skin and, perhaps more importantly, has a 750x lower plasma concentration versus orally delivered minocycline products. Given the concern these days about antibiotic-resistant bacteria and about chronic antibiotic use being bad for the microbiome, this is a substantial differentiator for Amzeeq over its competitors.

Menlo has said it expects greater than $200 million in peak sales for Amzeeq, but I've seen even higher estimates from other sources. For example, an analyst at Cowen has said up to $250+ million is reasonable for peak Amzeeq sales. At the current market cap of about $330 million, Menlo is only trading for roughly 1.32x to 1.65x

This article was written by

Andy Jones profile picture
I have a value investing background and look for biotech stocks with a wide margin of safety. I tend to focus on companies that are somewhat off the beaten path. Anything I write is simply my personal opinion and should not be taken as trading advice.

Analyst’s Disclosure: I am/we are long MNLO. 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.

I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor the timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself without notification. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. You are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance as financial circumstances are individualized.

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Comments (25)

austexjam profile picture
Why does this stock not move. What is next catalyst?
Boston Biotech Investors profile picture
At $1.70/share MNLO's enterprise valuation is less than $150MM. Our analysis concludes MNLO is trading lower as COVID-19 resurges putting kids going back to school this fall at risk. If schools are delayed MNLO sales will suffer in the short term.

I am otherwise unable to answer your specific question...except to suggest you hold as MNLO cannot trade this low foreever. Peak annual sales for the 2 products are $250 - $300MM/year and both are now approved. At the moment our analysis suggests MNLO is one of the most undervalued commercial biotechs on NASDAQ (excluding any contribution from FCD105).

Good luck whatever you decide @austexjam
They say the best time for a company to raise money is when they don't need it. Looks like that is what MNLO decided to do. Catches investors off guard, but in the long run may be best. The stock was a bargain yesterday. It is a bigger bargain today. After this closes, the company should have about $1.20 per share in CASH. So at $1.90, an investor would be paying about .70 per share for TWO FDA approved products and a third on the way. And the company now has enough money to effectively market the 2 current products and fund the Phase 3 for the 3rd.
I think it is possible that Menlo will get bought out, because the value of their products will increase in the hands of a big international company.

I am betting on Leo Pharma. They are very close to Menlo/Foamix already. They own Finacea foam a product emerged from the Foamix/Bayer cooperation. That's why they have to pay royalties to Foamix. Recently they fought multiple patent infringement cases together and won, at least i guess because they signed license agreements with the defendants, whatever that exactly means, they didn't disclose details.

Only 8% of 2019 revenue from Leo Pharma was from US. I know they had problems with Finacea foam and couldn't sell it for a half year but that's still low. If they want to become a bigger dermatology player Foamix would be the key to it.

More interesting stuff from Leo's annual report: "The significant increase in spending on research and development activities
is expected to lead to an operating loss in 2020
of DKK 1.8 -2.0 billion. Further divestments or
acquisitions may change the outlook."

They are expecting an operating loss for 2020 even tho 2019 was their first year with an operating loss. From 2011 to 2018 they always had a win of around 100-200$ million.

An other interesting part of their report: "To finance the 2025 growth strategy, LEO Pharma secured a EUR 1 billion credit facility from a consortium of Nordic banks in combination with
a shareholder loan of EUR 500 million from LEOHolding."

I guess that means they want to grow aggressively possibly through aquisitions.
Leo already has around 400 employees in US the aquisition of 2 new products and more sales people makes absolutely sense to me. Leo is selling their products in more than 130 countries so they could also get Foamix products appoved in those countries.
I checked Linkedin and found interesting facts. Some people of Foamix worked for Leo Pharma in the past. I made a list of the people and the time when they worked for Leo:

Jeff Zemlak Mid Atlantic Region Manager at Foamix Pharmaceuticals
Dec 2011- Aug 2019

Gilbert Gil Senior Marketing Manager, Pharmaceutical Marketing
Jun 2014- Jun 2019

Stephen Zoffranieri Director, Commercial Operations at Foamix Pharmaceuticals
Jan 2011- may 2016

Vassilis Stakias Vice President of Medical Affairs at Foamix Pharmaceuticals
Jan 2000- oct 2016

Michelle Soranno Project Coordinator, Medical Affairs at Foamix Pharmaceuticals
Aug 2014- dec 2016

Xochitl Jimenez Senior Medical Science Liaison at Foamix Pharmaceuticals
Apr 2012- mar 2019

Iain Stuart Chief Scientific Officer, Head of R&D at Menlo Therapeutics
Nov 2008- oct 2016

Carolyn D'Erasmo Vice President, Sales & Commercial Operations at Foamix
dec 2010- aug 2015

Could be just coincidence but still interesting.

Furthermore in august 2019 Leo exchanged their CEO. They fired the danish Gitte Aabo and the new CEO is Catherine Mazzacco who worked for GE Healthcare in Massachusetts. That is a big increase of international experience for Leo and could mean they want to focus more on the US market.

An other fact is our new CFO Andrew Saik. Linkedin Bio is mentioning: "During his career Andrew successfully completed over 40 M&A transactions and actively lead or participated in all aspects including due diligence, negotiation, preparations of board materials, and integration planning and execution."

He already owns 300000 shares of Menlo and could make a lot of money in a buyout like the rest of the management.(CEO owns 1,247,213 shares if Fintel is correct)

There are a lot of other potential companies who could be interested in Menlos's products and that will increase the pressure to finish a buyout fast before other bigger companies show their interest because that will only increase the price.

I would say a buyout for around a billion $ could arrive any day. Foamix technology, patents and products are easily worth that amount of money.

Jefferies virtual conference could be a good place to show our products. That means more pressure for anybody who is interested in Menlo to make a move and try to buy them before others do it.

Menlo will run out of cash end of year i guess so also for them a buyout before that happens would be a good option.

Even the CEO David Domzalski is a former Leo Pharma employee.

More supporting facts:
Leo and Menlo signed settlement and license agreements with Teva and Perrigo(billion dollar companies) not long ago.
I guess that means they are allowed to produce generic versions of Finacea Foam now. Leo's rosacea product will generate lower sales if generics arrive on the market. That means Leo will possibly look for new products. Since Leo and Foamix/Menlo are working together for some time already it's possible that they will buy them because they can evaluate the value of Menlo's products the best.
m,cml profile picture
Wow thanks for your DD ! Really interesting indeed
Boston Biotech Investors profile picture
Great article @Andy Jones. I admire your format and DCF models. I was thrilled to see MNLO get 2 wins out of 2. I think anything under $2.50 is a good value for new investors.

Thank you for the shout out as well.
Thanks for the great article Andy. MNLO reminds me a lot of Vericel (VCEL) a few years back. That one went from under $3 on FDA approval of their MACI cartilage regeneration procedure to about $4.50. But then dropped back as low as $2.60 while marketing and training of surgeons took place. Always a revenue delay for new medical products and procedures as medical people are reluctant to change. But if the new thing is actually beneficial and better than what is currently available, it ends up a winner. MACI was and the share price eventually went as high as $21. It appears that both AMZEEQ and ZILXI could be one of those new and better products and people being able to buy MNLO shares at current price of around $2.25 have a high probability of reaping big rewards. With their pile of cash I doubt dilution will be a problem for at least 9 month to a year. And when it comes it is quite possible the share price could be 2 to 3 times higher than it is now.
Random Macro Analyst profile picture

Hey, I followed your bio picks a little while back and I have a good tip for you in return.

The only thing stopping MNLO from blockbuster status is the phase 2b / 3 trials going on from legacy BPMX (currently TMBR).

I am thinking about just buying up a ton of both MNLO and TMBR...
I think the stock is definitely undervalued at this price, but also it only has limited life expectancy with current cash. How would you consider the risk of another dilution reflected in the price, considering that’s probably it’s going to be inevitable? Do you see the company able to raise debt instead? Hope you see my point, considering the outlook it seems to be the biggest risk
Andy Jones profile picture
I definitely agree that's the biggest risk, but at present I don't believe the company is likely to need a large amount of funding. This might allow Menlo to raise via debt or at least not have to dilute heavily. Revenues should start meaningfully offsetting cash burn next year, and I am hopeful Menlo will be cash-flow positive in 2022. I modeled for just over a $50 million cash raise in the analysis I show above. If I tweaked my model to incorporate a $100 million raise at $2.50/share (which is significantly higher than what I think Menlo will really need), my model still shows a fair value of $2.87, well above where the company is currently trading. That's why I personally feel good about owning the stock despite a decent chance of further dilution.
Thanks for your answer
Does not look like they will get $2.50/share on a secondary. Perhaps $1.85/share if they are lucky, the way the price is dropping on the news.
Dead stock. Move on
@mike verga

No kidding
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