Slaying Oncology and Infectious Disease with Immunotherapy’s Double-Edged Sword: Maxim Group’s Jason McCarthy
Maxim Group Equity Analyst Jason McCarthy has developed a biotechnology theme that leverages immunotherapy platforms serving both cancer and infectious disease indications. It’s an elegant dual premise that enables one side to fund development of the other, and it seems to be working beautifully for companies and their shareholders. In this interview with The Life Sciences Report, McCarthy explains the principle and describes five companies proving up the model’s profitability.
The Life Sciences Report: Your universe of coverage is split about equally between mid- and small-cap biotech, and you are following two large-cap biopharmas. Generally speaking, when money managers call you these days, what are they interested in?
Jason McCarthy: They want to talk about what’s hot now. I find that money managers want to become experts in a particular area, almost like specializing, or having limited bandwidth. So if they’re picking chimeric antigen receptor (CAR) T-cells as their interest, they want to become very smart in that particular hot area and invest in the space across multiple companies, not just one. They want to invest in Kite Pharma (KITE:NASDAQ). They also want to invest in Juno Therapeutics (JUNO:NASDAQ). They also want to invest in Celyad (CYAD:NASDAQ; CYAD:BR). They focus on areas where they can group companies together at the small-cap and mid-cap levels.
“Inovio Pharmaceuticals Inc. has a very broad pipeline that seems to be moving steadily.”
The same is true for money managers interested in checkpoint inhibitors, which have also become popular lately. They want to invest in bigger companies, like Merck & Co. Inc. (MRK:NYSE), which gives them exposure to the PD-1-blocking antibody Keytruda (pembrolizumab), but they also want to invest in Agenus Inc. (AGEN:NASDAQ), which has a stable of checkpoint inhibitors and checkpoint agonists—mainly through the company’s acquisition of 4-Antibody AG last year—as well as undisclosed checkpoints being developed with Merck. And they also want to invest in Inovio Pharmaceuticals Inc. (INO:NASDAQ), which is combining its DNA-based vaccines for HPV-driven cancers with checkpoint inhibitors through a partnership with MedImmune (a unit of AstraZeneca Plc [AZN:NYSE]). These investors want to have a good base of companies in a hot area.
TLSR: There’s a lot of emphasis on checkpoint inhibitors combined with other agents, isn’t there?
JM: Absolutely. I don’t think you’re going to find any cancer therapy that does not have some sort of combination trial in the clinic. There has been no evidence, at least to this point, that a single therapeutic—a checkpoint inhibitor, a CAR T, a vaccine, a small molecule chemotherapy or radiation—is going to knock out a cancer. For example, dozens of checkpoints are known, and more are being discovered, including some that were otherwise not known to be checkpoints before. What’s important to understand is that each checkpoint represents a different signaling pathway in the immune cell, and thus all checkpoints are not the same. The more we learn about how pathways work and interact—crosstalk—with each other, the more insight we will have into rational combination-therapy clinical trial design. That’s the direction cancer therapy is going.
TLSR: I note that on Sept. 9 you raised your target price on Inovio from $20/share to $23/share. What was the catalyst for that?
JM: We remodeled VGX-3100, Inovio’s DNA immunotherapy for HPV-driven cancers and pre-cancers (cervical dysplasia), which includes INO-3112. INO-3112, a combination of VGX-3100 and DNA-based IL-12 is now partnered to MedImmune. Our model reflects all the milestones, the payments associated with those milestones, and the royalty structure that could be achieved in the market for human papillomavirus (HPV)-driven head-and-neck cancers. We have seen such compelling data from VGX-3100 in cervical dysplasia caused by HPV that we felt comfortable reducing the discount rate used to model free cash flow. We have seen robust immune responses that include histological regression of cervical intraepithelial neoplasia (CIN)-2/3 back to CIN-1 or better—essentially healthy cells with no dysplasia. That also made us comfortable walking down the discount rate. These factors could potentially drive the stock price higher.
TLSR: Your target price of $23/share represents more than a 200% increase. Is this a 12-month target?
JM: Yes. We believe that Inovio is going to start its Phase 3 trial with VGX-3100 in cervical dysplasia. INO-3112 will also get going. In addition, we expect data from the company’s Ebola consortium and the Phase 1 trial in healthy volunteers, as well as data on other pipeline projects.
“Money managers focus on areas where they can group companies together at the small-cap and mid-cap levels.”
Inovio has a very broad pipeline that seems to be moving steadily. Each time the company puts out data over the next 12 months, we think the valuation could incrementally increase, and could hit our price target. We think it’s a fair target. This is biotech, so a company with the potential for 200% upside is not terribly uncommon. Just a little bit of data in an indication with an unmet medical need can cause significant increases in valuations.
TLSR: Because the Inovio platform addresses many different infectious disease and oncology indications, many different medical specialties are going to be involved with the company’s products. Do you imagine Inovio will want to create value through clinical development and then partner out its programs?
JM: Like any biotech company, Inovio could partner if the deal was right for both parties. But right now, our understanding is that Inovio plans on taking VGX-3100 all the way through Phase 3 on its own. It hasn’t discussed any partnerships, at least not publicly.
There are a lot of advantages to partnering, one of which is that you can offset cash burn associated with later-stage clinical trials to enable other early-stage assets to progress—pipeline growth. I think partnering minimizes costs significantly. Clearly, Inovio has attracted partners for its DNA-based vaccines in Roche and MedImmune, and I am very curious to see where it takes its DNA-based monoclonal antibodies. If Inovio could master making DNA-based antibodies that are checkpoint inhibitors, I believe it would attract potential partners.
When a tumor cell is attacked with chemotherapy, it frequently expresses antigens—the checkpoints—that suppress T-cell responses. Imagine if a patient could make his or her own antibodies to turn off the checkpoints and take the brakes off the immune system. Inovio is looking at several checkpoints that might be susceptible to antibodies that could be encoded by its DNA vaccines. Another consideration is that tumors are likely displaying multiple checkpoints, and Inovio’s technology could encode additional antibodies in a single vaccine. Truly exciting.
TLSR: Speaking of the DNA-based antibody platform, I’m thinking that could be a very valuable call option for investors. That’s not in your model currently, is it?
JM: No, we don’t value those products yet. But I’m an antibody person, and just the idea is unfathomable. I read the literature, and it’s pretty amazing. Antibodies are such large molecules, and the fact that they can be generated by expressing them on a plasmid, and they can be effective, is amazing.
“The more we learn about how pathways work with each other, the more insight we will have into rational combination-therapy clinical trial design.”
I can’t wait to see the Ebola data, because if Inovio’s platform works, it could be a game changer in the antibody space. People will start thinking about taking that type of approach for checkpoints on the oncology side. I believe there’s a lot of upside, but again, it is very early, so I would say that with caution.
TLSR: You are very big on the immunization theme right now, and you have several companies working in this field under coverage. Could I hear about another company with that platform?
JM: Sure. We are following CEO Marc Mansour’s group, Immunovaccine Inc. (IMV:TSX.V). The theme with these vaccine platform companies seems to be that they have an oncology side and an infectious disease side, like Inovio. Mansour is targeting a cancer antigen called survivin, which is commonly overexpressed in most cancers, but especially in ovarian cancer. The vaccine is called DPX-Survivac, and it is now in Phase 1b for ovarian cancer and in a 24-patient Phase 2 study for diffuse large B-cell lymphoma.
Mansour’s unique adjuvant platform has allowed Immunovaccine to generate multilayered immune responses, which other companies haven’t been able to generate. The platform has several layers of T-cell memory. It has cytotoxic T cells, and it’s generating antibody responses. The immune response is enhanced further by using an oral, low-dose cyclophosphamide, which is a chemotherapy agent. It’s really an interesting approach that others are not using, and Immunovaccine is using the same type of system on the infectious disease side. The company is working toward an anthrax vaccine with PharmAthene Inc. (PIP:NYSE.MKT) and the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health. Anthrax is a disease you don’t hear about that often, but I think it is more insidious than Ebola, and there are not a lot of groups working on it.
TLSR: The anthrax vaccine is a biodefense project, where the model is to sell the vaccine to the U.S. government, which will stockpile it. Where is this project in the development timeline?
JM: It is preclinical, but a Phase 1 is expected to initiate soon. We have seen this biodefense model with Bavarian Nordic (BAVA:OMX) and its smallpox vaccine, Imvamune. The way we view companies like Immunovaccine is that the funding from the contract is nondilutive and can drive the more lucrative oncology programs. Infectious disease versus oncology: They sound so different, but you are using a common vaccine backbone or platform. If you can get good data in infectious disease, in terms of potent, multilayered immune responses, it could be very suggestive of what you might see in oncology. Gaining nondilutive funding through federal grants, awards and supply contracts is an attractive approach to driving a company.
The company also has the right management—the right CEO—and in my view this is very important. Marc Mansour is a Ph.D., essentially an immunologist by training. He has developed a lot of the technologies we’re seeing and I believe he has made the right partnerships.
TLSR: With regard to Immunovaccine’s DepoVax platform, the antigen and the adjuvant are encapsulated in an oil-based formulation, which is supposed to prolong the time that the antigen is exposed to the immune system. How strong can the intellectual property be on a technology such as that? Isn’t that something other companies can get around?
JM: I think it could be pretty strong. It’s essentially in the same class as the liposome delivery technologies.
If you talk to immunologists, everybody has their own flavor of adjuvant, and thus their unique intellectual property (IP). Agenus has QS-21 Stimulon, and Immunovaccine has DepoVax. I think the company has done a good job of insulating itself against competition, or people moving in on DepoVax.
TLSR: Immunovaccine has a respiratory syncytial virus (RSV) program that is essentially in Phase 1. I know you’re aware that back on Aug. 10, Novavax Inc. (NVAX:NASDAQ) released data on a Phase 2 trial in 1,600 healthy, elderly subjects, and achieved every primary and secondary endpoint. The RSV attack rate was just 4.9%. With its low market cap of about $82 million ($82M), should Immunovaccine continue its RSV program? It appears that Novavax has a huge jump.
JM: In medicine and in science, there is always room for improvement, and I think Immunovaccine’s DepoVax platform could potentially do better.
There is not going to be a single winner, and Novavax is not there yet. It is certainly ahead, but Immunovaccine’s approach with DepoVax generates a unique multilayered immune response that I think could become more attractive as we see more advanced data. I don’t think that, just because one group finished a Phase 2 study with more than 1,000 subjects, other groups should be deterred from pursuing their own vaccine strategies.
TLSR: Could you move on to another name?
JM: Let’s talk about ADMA Biologics Inc. (ADMA:OTCBB). I like this company a lot. Adam Grossman is the CEO, and his family has been in the blood products business for many years, so the company certainly has the right management in place.
“Just a little bit of data in an indication with an unmet medical need can cause significant increases in valuations.”
Most people I speak to almost dismiss intravenous immunoglobulin (IVIG) because you can get it anywhere and it’s relatively cheap, at just $75–80/gram. IVIG is used in primary immune deficiency diseases (PIDDs), as well as in other conditions where patients have compromised immunity—i.e., chemotherapy, bone marrow transplant, solid organ transplant, etc. ADMA has developed RI-002 (human plasma-derived, polyclonal immunoglobulin), which is specifically manufactured to have high titers of anti-RSV antibodies. The company has submitted its biologics license application (BLA) for approval, and my understanding is that the high anti-RSV titer, or indication, would be in the label. RI-002 also has high titers of other major disease-fighting antibodies. We think that will drive premium pricing closer to what we saw for RespiGam at $300+ per gram.
ADMA did its Phase 3 clinical trial in PIDDs—essentially, in children with no immunity. When a patient’s immune system is compromised, whether it’s from cancer, chemotherapy or something else, a physician will pick a flavor of IVIG. That’s often a mistake. I have seen a friend’s child have several bone marrow transplants, and his physician continuously tried new IVIGs because there wasn’t any one tailored to specifically ward off known infectious pathogens like RSV in this population. I think, in that respect, RI-002 is a great product, and should drive premium pricing. We’re anticipating that uptake by the medical community could be rapid.
TLSR: When do you expect approval for RI-002?
JM: By mid-2016. The company submitted the BLA about a month ago. It expects final acceptance of the application sometime in October, and we anticipate 10 months to approval. The compound has met every endpoint and all the standards other IVIGs needed to gain approval. We don’t anticipate any trouble, and we have factored approval and launch into our model.
In addition, I believe if ADMA does achieve reimbursement, which it should, you could see off-label use of this product, as many physicians are able to choose an IVIG at their discretion. So the challenge becomes marketing the product to the physicians to build awareness that there is a better alternative to standard IVIG that can specially target RSV and other pathogens. I think the product could go beyond PIDDs.
TLSR: How much could RI-002 be worth?
JM: We believe that it could generate $96M in 2017. The company is 90% owned by institutions and early investors, and 90% of the 10% that’s left is owned by insiders. You have a low share count and a relatively high-margin product (~45%) dropping to the bottom line and generating value for investors.
TLSR: With a current $101M market cap and the company generating $96M in revenue, I’m thinking you’re looking conservatively at a $500M market cap, or five times what it is today. Is that how you see it?
JM: We would agree with that. We have modeled peak sales in 2023 of $280M, with $110M dropping to the bottom line. That’s sufficient to drive more than $6 in earnings per share, in our view. This company is generating value, and it could be generating a market cap four to five times where it is today.
TLSR: Another name?
JM: Celyad is an interesting company. This company is working on cardiopoietic stem cells for congestive heart failure (CHF), but it’s also involved in CAR T-cell therapy. The company is developing C-Cure (autologous bone marrow-derived mesenchymal cardiopoietic cells) for CHF, and is expecting topline data from its 240-patient Phase 3 trial called CHART-1 sometime in mid-2016. This will be a pivotal milestone for the company and the regenerative medicine space. It’s a European study, but Celyad is expecting to do a U.S. study, CHART-2, and the company is in discussions with the FDA right now to determine the final protocol. We expect CHART-2 to start sometime before the end of this year, which would be another milestone for the company.
“Gaining nondilutive funding through federal grants, awards and supply contracts is an attractive approach to driving a company.”
This CHF study has some parallels with and some implications for Mesoblast Ltd. (MSB:ASE; MBLTY:OTCPK), an Australian company partnered with Israel-based Teva Pharmaceutical Industries Ltd. (TEVA:NYSE). Mesoblast is conducting a 1,700-patient study in CHF with Revascor (mesenchymal precursor cells) that is not ready to read out yet—it’s still a few years away. If Celyad can show some progress, or even just a signal that autologous cardiac cells can work for CHF, that could do a lot for other companies in this space, like Mesoblast and Teva.
TLSR: Revascor is an allogeneic, or “off-the-shelf,” therapy, whereas C-Cure is an autologous therapy, in which cells must be harvested from and processed for each patient individually. Does Celyad’s autologous therapy, with its much higher cost of goods sold (COGS), give you pause?
JM: I think anything autologous is going to be a cause for concern in terms of valuation, and that extends all the way to CAR T-cell therapies. We think of autologous cell therapy as first-generation technology, and allogeneic cell therapy, which is a few years away still, as second generation. Allogeneic is where the space wants to go, but I think the first successes will be in autologous cell technology. If you can harness the body’s endogenous repair mechanisms with an autologous regenerative cell, that opens the door to allogeneic therapies.
Mesoblast has shown, so far, that its allogeneic cells are safe. I think these two companies can complement each other. If Celyad shows that, yes, autologous cells do work in CHF, and then Mesoblast comes along and says, “Well, now we can do it allogeneic,” the progression of regenerative medicine can move forward from there.
TLSR: Celyad was originally scheduled to collect its final data on this 240-patient Phase 3 trial in December 2014. Does it have the data yet?
JM: No. It just dosed the last patient sometime over the summer. It’s going to take 18 months or so. We need time to see how the patients do. No data have been released yet.
TLSR: Did you want to talk about one more name?
JM: Yes, we can add Bavarian Nordic to the list. Bavarian Nordic is a Copenhagen exchange-listed stock that has been the topic of discussion lately. The company is developing Prostvac, which is a cancer vaccine for metastatic castration-resistant prostate cancer targeting prostate-specific antigen. It’s in a pivotal Phase 3 trial now, and it is fully enrolled, with more than 1,400 patients, all of whom have been treated. We expect data at the end of next year.
Prostvac is partnered to Bristol-Myers Squibb Co. (BMY:NYSE), which paid Bavarian Nordic an upfront $60M in March. The entire deal could be worth a billion dollars. It’s essentially similar to the type of partnerships we’re seeing in the CAR T-cell space with big pharma. We’ve seen promising data from the Phase 2 study, which suggests this could be the first vaccine in prostate cancer that has efficacy since Provenge (sipuleucel T; Dendreon Corp. [DNDN:NASDAQ]). The National Cancer Institute is involved, and is conducting combination studies with Xtandi (enzalutamide; Medivation Inc. [MDVN:NASDAQ]). There is a lot of potential for Prostvac if the data are positive.
TLSR: Earlier you mentioned that Bavarian Nordic was a supplier of smallpox vaccine to the U.S. government. The company is a solid mid cap with a US$1.2 billion (US$1.2B) market cap. Has the smallpox program been lucrative?
JM: Yes. Bavarian Nordic has generated more than US$1B in smallpox revenue. It targets subjects in the U.S. who cannot tolerate the current vaccine because they’re immunocompromised or there’s some other issue. The company also has a partnership with Johnson & Johnson (JNJ:NYSE) to develop an Ebola vaccine, which is now in a Phase 2 trial. That was about a $200M partnership. We expect that relationship to continue, and we expect Bavarian Nordic to develop multiple infectious disease vaccines with J&J.
This is a company that people don’t talk about much. It hasn’t listed in the U.S., and we are not sure if it’s going to do that. But when we talk about companies like Immunovaccine and Inovio, which are using infectious diseases to drive an oncology program, Bavarian Nordic is the model for us. It is generating US$1B on the infectious disease side to drive oncology, and it is the most advanced of the group with pivotal Phase 3 assets.
TLSR: Thank you, Jason.
Jason McCarthy, Ph.D., is an equity research analyst covering the biotechnology industry at Maxim Group. McCarthy joined Maxim Group in July 2014. Prior to joining Maxim he received his doctoral degree in biomedical sciences from the Albert Einstein College of Medicine. McCarthy also holds master’s degrees in both biomedical research (Albert Einstein College of Medicine) and molecular biology (Adelphi University), as well as a bachelor’s degree in biochemistry from Stony Brook University.