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Ten Percent Of A Winner Is A Great Deal For Monster Digital Inc (NASDAQ:MSDI)

Ten Percent Of A Winner Is A Great Deal For Monster Digital Inc (NASDAQ:MSDI)
Written by
Chris Sandburg
Published on
August 16, 2017
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At the start of July, Monster Digital Inc (NASDAQ:MSDI) appeared on our radar. The company had just announced the terms of a deal with an entity called Innovate Biopharmaceuticals and, while a Letter of Intent for the deal was announced a couple of months earlier, markets seemed to wait until they could get a look at terms before committing to a bias, one way or the other.Anyway, once the terms hit press markets piled into the stock and ran the company up from $0.50 a share to $2.30 practically overnight. It seems investors liked what they saw from Innovate and decided that the proportion of the latter that a holding in Monster would afford them was worth the punt on an exposure.Since then, however, sentiment has soured somewhat.From the above mentioned highs at $2.30, Monster now trades for in and around $0.62. For anyone thinking about getting in on this one before the merger closes (and we think price will run at close, so it might be worth doing so) now could be a nice opportunity to take action. The thing is, at core, this is a reverse merger designed to give Innovate access to public capital markets through a quick and easy NASDAQ listing, nothing more. We see this sort of thing all the time at this end of the market and while sometimes it can materialize unfavorably for holders of the original stock (the one that's having its ticker taken), sometimes it can play out well for both parties.We think this is one example of the latter.The terms see old Monster shareholders (pre-merger) pick up 10% of the new company. At a glance, that doesn’t seem like a lot. Take into consideration what they held 100% of before, however, and what the new 10% represents, and thinks look a little rosier.Innovate is about to start a phase III study of an asset called Larazotide, or INN-202. It's a celiac disease target and it's got a neat mechanism of action in this indication. In celiac disease patients, ingestion of gluten causes disruption or opening of the tight junctions (tight junctions here refers to the structure that's in place to seal epithelial cells in a narrow band just beneath their apical surface. In early and mid stage trials, Innovate has been able to show that INN-202 can act as a tight junction regulator, which helps restore leaky or open junctions to a normal state.No other drug has done this before and it's a large potential market. There are more than 3 million Celiac patients in the US and a similar number in Europe with another 15 million in the rest of the world. A phase IIb in involving 342 patients demonstrated efficacy and the company is ready to take the asset into phase III. If it works, and there's no reason to think it won't, given the data to date, it could be approved by 2020 and be the only asset on the market in the US in this indication.That's a big opportunity for Innovate and it's an opportunity that Monster shareholders are being handed an exposure to through this merger.There's also a secondary asset targeting ulcerative colitis (UC) for which phase II trials should initiate in 2018. This one's a bit further behind the 202 asset but its still going to bring with it plenty of catalysts and, with each, the potential for some upside momentum in Monster (which, by then, will be called Innovate).The bottom line here is that this was basically a dead ticker. Sure, a few agreement PRs hit press early in the year but none of them were going to get Monster moving above the $1 threshold it needs to maintain listing status and none of which were going to help the company recoup the more than 80% in capitalization that's been shaved off over the last twelve months. Innovate is a way out for shareholders but, more than that, it's a fresh start and a first step towards a major market and/or a spate of revaluation catalysts.Dilution risk is there, don't be fooled. There's a reason Innovate wants a public market listing and its rooted in access to capital. If the capital can fund succesfull pipeline advance, however, the dilution won't matter.Check out our previous coverage of this one here. We will be updating our subscribers as soon as we know more. For the latest updates on MSDI, sign up below!Image courtesy of Tatiana T via FlickrDisclosure: We have no position in MSDI and have not been compensated for this article.

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