Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Mast Therapeutics Inc; A Potential Ten Bagger

|Includes: Savara Inc. (SVRA)

Over the past few months it is estimated that over 54,000,000 shares of the 102,710,000 shares outstanding of Mast Therapeutics Inc. (NYSE MKT: MSTX) have been bought up by the "Who's Who" of Institutional Investment firms, yet the PPS has remained at, or very near the 52 week low of $0.41 which is less than the $0.50 the institutions just recently paid in the June 2013 offering which implies the current market cap is roughly $14 million under cash value. As with most stock offerings their are institutional warrants with options to buy additional shares. They would not be in the money until the PPS reaches $0.65 which from this writers point of view would make a great first target price netting a very generous profit for a shorter term swing trade given the current PPS.

The opportunity to buy stock in this company while it is trading below book value will not likely last much longer. MSTX has over $50 million in cash with no debt. There is no further risk of an ATM dilution with the June 2013 financing out of the way. Given the current burn rate of $5-6 million a quarter and available cash of $69.6 million (once all warrants are exercised) MSTX has adequate financial resources for at least 3 years, which would allow them ample time to bring at least one application of their lead product MST-188 to market.

The Pipeline

MSTX is initially developing MST-188 as their lead product candidate to be used as a treatment for complications arising from sickle cell disease.

Exelbine™, or ANX-530 (vinorelbine injectable emulsion), is a novel emulsion formulation of the chemotherapy drug vinorelbine (Navelbine®). MSTX is seeking a partner or outside investor to continue development of the Exelbine program.

ANX-514 (docetaxel for injectable emulsion) is a novel, detergent-free emulsion formulation of the chemotherapy drug docetaxel. MSTX is seeking a partner or outside investor to continue development of the ANX-514 program.

A Fresh Start

MSTX changed their corporate name in March of 2013. Prior to the name change it was called ADVENTRX and traded under the ticker (NYSE MKT: ANX). Over the years the stock has traded to as high as $12.00 per share to as low as it is right now. The company's recent name change is the beginning of a new story. There's nothing like a clean break with the past if you want to focus on the future.

MSTX certainly meets the criteria to classify it as a bottom play. It is not too far of a stretch to postulate that MSTX is a candidate for a buyout offer that could see the PPS double, or triple overnight. That is in fact a rumor that has been being floated for quite some time, but certainly not one that I would suggest is worth banking on; although it may very well be one worth cashing in on at some point.

It is my belief that the positive results of studies and trials that have met their end points; along with the recent financing to fully fund the phase III trials of MST-188 in conjunction with the massive influx of institutional investors and positive analyst coverage have created a perfect storm.

The conditions for a series of positive catalysts that could propel the PPS of MSTX to increasing multiples of its current value are in place. For those more risk averse MSTX appears to be poised for a short term profitable swing trade at the very least as we approach the MST-118 FDA Orphan status designation as the next near term catalyst.

2013 Catalyst Event Timing

Initiate tQT/QTc Study Completed

Secure Orphan Designation for MST-188 for SCD in EU Completed

Activate First Site in Phase 3 Study Completed

File New Patent Applications Completed

Dose First Subject in Phase 3 Study Completed

Report data from tQT/QTc Study Q3 Completed

(See Sample of Positive Data we can expect during Phase III Trials.)

Submit Applications for U.S. Government Funding for Phase 2 Study in Resuscitation of Shock following Major Trauma Q3

Request Orphan Designation for MST-188 for ALI in U.S. Q3

Initiate Nonclinical Proof-of-Concept Study in Heart Failure Q3

Open First Ex-U.S. Clinical Site in Phase 3 Study Q4

Initiate Phase 2 Study in ALI Q4 '13/Q1 '14

A Sample of the Positive Data to Come from the Departments of Pathology and Laboratory Medicine, UC Davis School of Medicine, Davis, CA, USA.

The Overlooked Meaning of the Successful QT/QTc Trial. When the poloxamer 188 drug was first acquired by MSTX, it was stated that the solution to the negative effects of the previous clinical trials was thought to be "a failure on the manufacturer's part to provide a proper level of purification". The success of the 64 patient QT/QTc trial has verified that evaluation. What we have now is a safe drug that was found to be "generally well-tolerated at both therapeutic and supratherapeutic doses", that has already been granted Orphan Drug Designation for pediatric SCD (Sickle Cell Disease) in Europe. Now what remains is verification of the data which has been derived from over 100 pharmacology studies, more than 15 clinical studies in multiple indications in which over 2,500 subjects have been exposed to both purified and non-purified poloxamer 188, and over two decades of experience manufacturing and purifying poloxamers.

Video of Management of Mast Therapeutics speaking about MST-188 for Sickle Cell Disease.

Valuation by Dawson James Securities

Based upon the recent merger and acquisition activity, it is estimated that the SCD application of MST-188 is valued at $340-$665 million. Assessing MST-188's market potential and valuation in respect to cardiovascular related diseases is much easier. According to leading analysts, the Peripheral Arterial Disease therapeutics market is expected to reach $1 billion by 2017, the estimated global market for Acute Heart Failure therapeutics is projected to reach $4.8 billion by the year 2017, and global Acute Ischemic Stroke therapeutics market is expected to reach approximately $880m by 2018. MSTX is grossly undervalued with a market cap of only $44 million, while its leading product has multi-billion dollar potential. Appreciation of 5x to 10x ($2.25- $4.50) in the two years leading up to the Phase 3 results is not unreasonable and may occur sooner based on partnerships and Phase 2 ALI results.

JMP Securities initiated coverage on MSTX with a Market Outperform on 4/2/2013 with a PT $2.00.

Piper Jaffray initiated coverage of MSTX on 6/25/2013 to Overweight with a PT of $1.00.

Vista Partners updated coverage of MSTX on 7/18/2013 with a twelve-month price target of $2.25.

Ross Silver, Principal Analyst at Vista Partners, stated, "MSTX completed an underwritten public offering in June with institutional investors that include Franklin Resources (NYSE: BEN), Deerfield Capital Management & others that collectively own approximately 50% of MSTX post the offering. Attracting these prestigious investors to fully fund their Phase 3 sickle cell trial is encouraging." Mr. Silver continued, "Per the first quarter earnings release on May 15, 2013; MSTX has opened more than a dozen clinical sites in EPIC and is on track to meet its goal of opening approximately 40 U.S. sites by year-end. MSTX plans to support U.S. enrollment by opening roughly 30 sites outside the U.S., beginning early next year. MSTX remains the only company with a new drug in phase 3 development in sickle cell disease and investigators have been enthusiastic about the potential for MST-188 to become the first agent approved to treat an on-going vaso-occlusive crisis of sickle cell disease. Mr. Silver concluded, "MSTX also plans to develop MST-188 in complications of arterial disease, initially as an adjunct to thrombolytics in acute limb ischemia (ALI), a complication of peripheral arterial disease. Peripheral arterial disease affects an estimated 8 to 12 million people in the United States."

Not for the Risk Averse

Investing in biotech companies is a notoriously risky business, but on the upside it has a notoriously mad profit potential. Results of pending and future studies can always go wrong. The timeline for clinical and manufacturing activities can be delayed. The regulatory approval process with the FDA is both costly and time consuming and more often than not results in extreme volatility as a company awaits an FDA response to an application. Biotech companies invariably run out of cash with their high burn rates resulting in shareholder dilution to raise funds. The timing of your entry to buy and exit to sell a biotech stock are of the utmost importance to consider and should be based on as much up to date due diligence as is possible. Biotech plays are very much catalyst-driven by events that result in positive and negative news. The old saying that goes "buy the rumor, sell the news" is arguably more true for biotech stocks than most other sectors. MSTX is no exception to the rule and is certainly a high risk play, but at the current discounted PPS the risk-reward profile was tempting enough to entice this writer to gamble on it.

Disclosure: I am long MSTX.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.