Expert Financial Analysis and Reporting

Investment Overview

ImmunoCellular and its dendritic cell cancer vaccine ICT-107 were written off as failures in December of 2013 after it was announced that the phase 2 trial in newly diagnosed glioblastoma multiforme (GBM) failed to reach statistical significance on the primary endpoint of median overall survival. However, I believe IMUC is putting forward a compelling case that data created in that trial provides a sound basis for the design of a phase 3 registrational trial that could begin in 1H, 2015 if financing can be put in place.

Actually, this in line with my thinking going into the phase 2 data release. In a November 11, 2013 report I wrote as follows: “I have learned from long experience that predicting trial outcomes is hazardous. My best judgment is that the primary endpoint won't be reached but that the data will still warrant conducting a phase 3 trial. This is not a judgment based on objective data. I do buy into the thesis that the patients in phase 1for ICT-107 were healthier than those who were enrolled in this phase 2 trial so that results will be less robust. I also think that the primary endpoint calling for an 8.0 months improvement in median overall survival (something like 26 months) over standard of care is a very high hurdle to jump over. I think that the initial reaction to an announcement that the trial failed to meet its primary endpoint would cause a swift decline in the stock.”

The results of the phase 2 trial were announced on December 12, 2013. This resulted in the price crashing from $2.72 at the close on December 11 to $1.10 on December 12. The stock currently trades at about $0.98. Emerging biotechnology stocks trade on expectations set by analysts and management in lieu of earnings. My call on IMUC was not based on a belief that the drug would be shown to be ineffective and would therefore cause the trial to fail, but rather that expectations were so high for phase 2 results that there was little chance of them being met. Before the arrival of the current CEO, Andrew Gengoes, management had allowed expectations to reach unrealistically high levels.

This was a small 124 patient exploratory trial. However, optimism expressed by previous management had encouraged widespread belief that this was a potential registrational trial and that it might even be stopped early at an interim analysis because of efficacy. The trial more properly should have been presented as an exploratory trial that was intended to establish safety, confirm signals of clinical effectiveness seen in phase 1 and to gather information needed to plan for a phase 3 trial. Had it been represented in this context, investors might well have deemed phase 2 results as encouraging and very successful. There is no way of knowing, but I suspect that had expectations been set for this result, the stock would have gone up instead of down.

Like the Company, I view the phase 2 results as encouraging even though they failed to meet the primary endpoint of median overall survival. Interestingly, they did meet a secondary endpoint of progression free survival. From a safety standpoint, results were very encouraging. It appears that ICT-107 when added to standard of care is very well tolerated and does not meaningfully increase the side effect profile. Viewed against the toxicity that older chemotherapy and new targeted therapies are associated with, this is a major differentiating point for ICT-107. The use of a drug once it has demonstrated efficacy is importantly determined by its safety profile. Safety is a big plus for ICT-107.

One thing that is always looked for in clinical trials is sub-groups that do unusually well in the study. The objective is to identify such sub-groups and if biological markers can be determined that allow the pre-selection of these patients, new trials can then be designed to enroll just these patients. The phase 2 trial has led IMUC to believe that results in a sub-group of patients who are HLA-A2 positive form such a group and will be the basis of a new phase 3 trial. This greatly increases the economic benefits of the drug for society by targeting only those patients who are most likely to respond.

It also appears that patients with unmethylated MGMT benefit (relatively) more than patients with methylated MGMT. The phase 3 trial will include patients regardless of MGMT status but will probably be stratified to clearly show the results in each group. (Later in this report, I give a brief explanation of HLA-A2 and MGMT).

The results in HLA-A2, unmethylated MGMT patients are especially encouraging. There were 24 such patients who were on ICT-107 plus SOC and 14 on SOC. Because of the small number of patients involved the confidence intervals are so wide that it should not be expected that the results would reach statistical significance and indeed they did not. However the numerical trends were quite impressive suggesting that the ICT-107 patients experienced a 4.0 month increase in overall survival and 4.5 months in progression free survival. In my opinion, if this data were replicated in a phase 3 trial it would be the basis for approval. In an aggressive cancer like GBM, a 4.0 month increase in median overall survival is considered a major advance.

The Company stated in its last conference call that it will have an end of phase 2 meeting with the FDA late this summer to discuss phase 2 results and get FDA agreement on a phase 3 trial design. It will also discuss a registration strategy with European regulators in the same time frame. Management won’t commit to a time frame for letting investors know the outcomes of these meetings, but I am guessing that they will inform investors on the phase 3 trial design by November of this year. Management has indicated that the phase 3 trial will involve about 600 patients. If funding is available, the trial could start in mid-2015. I would estimate that topline results would be available in 2018 or 2019; management has not given any guidance.

I think that there has been a strong consensus view of investors that ICT-107 has failed and any plan of management to do a phase 3 trial would be a hopeless, quixotic adventure that would only waste shareholders money. There will be a great deal of discussion about this data and whether it is indeed the basis for going forward with a phase 3 trial. Some investors will accuse IMUC of data dredging to come up with positive results in sub-groups even though the HLA-A2 and MGMT groups were pre-defined in the statistical plan.

I am assuming that ICT-107, if successfully developed would be priced at $150,000 per treatment. I estimate that the patient population in the US of newly diagnosed GBM patients with positive HLA-A2 immune status is 1,200 to 1,800 patients. This suggests an addressable market of $180 to $270 million in the US and an equivalent amount in Europe. Sales in the rest of the world are generally half that of the US and Europe or $90 to $135 million. Hence, I estimate that the worldwide addressable market for ICT-107 in newly diagnosed GBM patients with HLA-A2 immune status is $450 to $575 million.

The addressable market should not be confused with potential sales. It is an estimate of sales based on 100% penetration of the target population. It is extremely, extremely unlikely that ICT-107 would capture all of the market. There would likely be patients who would not be put on the drug for a broad variety of reasons including competitive drug regimens and health status. Making an estimate of the penetration of the addressable market is sheer guesswork at this point. However, if ICT-107 is approved, I think there is reason to hope that it would get its fair share. Also, I would remind readers that dendritic cell cancer therapy is applicable to a broad number of cancers beyond GBM.

Investment Opinion

I agree with management that the data generated in phase 2 provides a sound basis for planning a phase 3 registrational trial. However, I think that I am in the minority on this view and a look at the depressed stock price of $0.98 and market capitalization of about $70 million seems to confirm that the consensus is much more skeptical than me. If this skepticism cannot be changed, the Company faces a difficult challenge in being able to raise funds needed to run a phase 3 trial and support other essential operations of the Company.

IMUC is in a very difficult financial condition. It ended the second quarter of 2014 with $25 million of cash and is burning about $2.5 million per quarter. At this rate, it will end 2014 with $15 million of cash and would have about $10 million of cash in mid-2015 when I am estimating that phase 3 trials for ICT-107 could begin. Phase 3 trials involving 600 patients could cost up to $10,000 per patient based on my industry sources so that this would entail a cost of $60 million spread over the three year period from mid-2015 to mid-2018. In addition, other parts of the Company might require $10 million per year of funding to continue to function. If these assumptions are roughly correct, IMUC will need to raise about $90 to $100 million in capital by the end of 2018. This is a formidable challenge for a Company with a market capitalization of only $70 million.

I am continuing with a neutral recommendation on the stock because of the uncertainty over IMUC’s ability to attract enough capital to fund the phase 3 trial. It is ironic that IMUC with the quality of data that it has is so cash strapped and faces formidable hurdles to raising cash. I suspect if IMUC had this data and was a private company, it could come public and raise the $100 million, but unfortunately this is not the case.

If IMUC had $100 million or so on its balance sheet, I would probably recommend the stock, but I am on the sidelines for now. However, this does not mean that I may not change my view. Biotechnology companies can be enormously creative in raising capital and history suggests that IMUC may find a way to fund its trial. Let me anticipate your next question. If the data is so good, can’t they find a big pharma partner? This is a possibility, but I will wait for a partnership to be announced before I take any action.

The cancer vaccine space has seen innumerable failures using a variety of technologies. There has been only one cancer vaccine approved and this was Dendreon’s Provenge. While it used dendritic cell technology, this does not seem to have alleviated big pharma’s cautionary approach to new, potentially paradigm changing technologies like dendritic cell cancer vaccines.

I will now give you some background supporting my conclusions on the stock.

The Importance of MGMT Methylation Status in Treating Glioblastoma Multiforme

Temozolomide is the chemotherapeutic agent component of standard of care (SOC) that is used in treating glioblastoma multiforme (GBM) patients. Newly diagnosed GBM patients are surgically resected and then treated with radiation and temozolomide; this constitutes SOC in GBM. In order to gauge what I am about to say, there needs to be some agreement on what length of median overall survivial can be expected from SOC. The original Stupp trial in 2005 determined that SOC for GBM patients was 14.4 months. However, in the last nine years, there have been evolutionary improvements in SOC.

I suggest that we look at two recently completed trials in GBM which compared Avastin plus SOC to a control group of SOC. The data from these trials was released in 2013. In the two SOC control groups the median overall survival was 15.7 months in one study and 16.7 months in the other. I will use the average of 16.2 as the median overall survival that can be expected with SOC. (By the way, Avastin added to SOC did not increase median overall survival in these trials.)

The MGMT gene in the DNA of GBM cells plays an important role in how individual patients will respond to SOC and the expectation for survival. This gene encodes a DNA repair enzyme that can block the effects of alkylating chemotherapy agents such as temozolamide that work through damaging DNA of glioblastoma multiforme cancer cells. Methylation of the MGMT gene's promoter region plays a significant role in patients with GBM in determining whether tumor cells will be more responsive to temozolomide. If the MGMT gene is active, the damage caused by temozolomide is rapidly repaired and the effect of temozolomide is blunted. This is also beleived to be true of radiation therapy which also works through damaging DNA.

In glioblastoma multiforme, the MGMT gene may be inactivated due to methylation of its promoter region which controls gene expression. If the MGMT promoter region is methylated (methylated MGMT), there is a better response to temozolomide because the tumor has no means to repair the DNA damage. Hence MGMT methylation is a favorable prognostic factor for glioblastoma in the setting of radiation and temozolomide. See this link.

To summarize:

•           Methylated MGMT status results in longer survival in glioblastoma patients treated with temozolomide.

•           Unmethylated MGMT confers relatively less survival time.

The importance of methylated MGMT is shown by looking at trials in which temozolomide was used as part of standard of care in the control group. In this control group, patients with methylated MGMT had median OS of about 22 months and the unmethylated MGMT group had median OS of 13 months. Bear in mind that in the Avastin trials in which the SOC group included a mix of methylated and unmethylated GBM patients, SOC produced median overall survival of 16.2 months. Hence methylated MGMT conveys a very significant advantage for survival. About 1/3 to 1/2 of GBM patients are estimated to have methylated MGMT status.

HLA Status Is Very Important

ICT-107 is manufactured by first capturing monocytes through a blood draw from the patient to be treated. Monocytes are precursor cells to dendritic cells, i.e. they differentiate in a series of cell divisions to eventually become dendritic cells. These cells are then pulsed or loaded with six peptides that mimic antigens that are commonly found on cancer cells. Dendritic cells are immune cells whose function is to ingest infectious organisms or cancer cells and digest them. Parts of these ingested organisms or cells are then displayed to circulating T-cells to train them to recognize and attack cancer cells that express such antigens. The ICT-107 manufactured cells are then injected back into the body with the intention of causing a systemic immune response against the cancer cells that express these antigens.

The construction of ICT-107 requires steps that result in these cells being compatible with only certain tissue types found in humans. Human leukocyte antigens are proteins located on the surface of white blood cells and other tissues in the body. Their central role is to allow the immune system to recognize the difference from themselves and antigens displayed to immune system from invaders such as bacteria, viruses and parasites and launch an immune response. Differences can trigger an immune response against antigens. ICT-107 is only compatible with patients with HLA-A1 and HLA-A2 proteins on their white blood cells. Without this match antibodies will be formed to attack and destroy the dendritic cells of ICT-107.

Possible Design of the Phase 3 Trial (s)

In an oral presentation at the May 2014 ASCO meeting, the company presented an update on the phase 2 study. At the time, there had been 79 deaths out of the 124 patients randomized in the trial. During the 2Q, 2014 conference call, IMUC said that it believed the phase 3 program for ICT-107 should go forward and they have gained considerable insight in how to design the next development step. It laid out management’s thinking on how to proceed to a phase 3 trial. It emphasized that the phase 2 trial, did not meet the primary endpoint of median overall survival benefit and cannot be used as the basis for approval.

In the phase 2 trial, IMUC pre-defined both MGMT gene methylation status and HLA tissue type as sub-groups for statistical analysis. The data indicated that HLA-A2 patients appeared to experience more treatment benefit than HLA-A1 patients. A decision has been made to focus only on HLA-A2 patients in phase 3. There was a signal of efficacy in HLA-A1 patients, but it was not as strong.

ICT-107 has a treatment benefit in both MGMT methylated and unmethylated patients even though two patient sub-groups respond quite differently to radiation and chemotherapy. The data shows a numerical treatment advantage as compared to SOC for both overall survival and progression free survival in in HLA –A2 patients with unmethylated MGMT. There was a statistically significant and very large treatment advantage for HLA-A2 methylated MGMT patients in progression-free survival. There have not been enough events in this group yet to observe a survival benefit for ICT-107, but the curve is trending positively.

The phase 3 trial will enroll HLA-A2 positive patients with both unmethylated MGMT and methylated MGMT status. There is an unresolved discussion on whether to conduct one phase 3 trial stratified for MGMT status or to run two phase 3 trials in which one trial enrolls unmethylated MGMT patients and the second enrolls methylated MGMT patients. Whatever the decision, it is anticipated that 600 patients will need to be enrolled.

What is the Size of the HLA-A2 Population in Glioblastoma Multiforme and How Big is the Addressable Market?

I am assuming that ICT-107, if successfully developed would be priced at $150,000 per treatment. Applying this price to a patient population of 1,200 to 1,800 patients in the US suggest an addressable market of $180 to $270 million in the US and an equivalent amount in Europe. Sales in the rest of the world are generally half that of the US and Europe or $90 to $135 million. Hence, I estimate that the worldwide addressable market for ICT-107 in newly diagnosed GBM patients with HLA-A2 immune status is $450 to $575 million. Let me explain how I arrive at these estimates.

One of the enrollment criteria for participating in the phase 2 trials was that patients had to be HLA-A1 or HLA-A2 immune status. The Company screened 278 patients in order to find 124 patients who were randomized for the phase 2. The Company has not quantified how many of the 154 patients screened but not randomized were excluded because they were not HLA-A2 or HLA-A1 positive. It just said that “most” of the exclusions were due to this so I am left to define most.

If all the exclusions were due to this immune status, it would mean that only 44% of the GBM population was HLA-A1 or A-2 positive. However, patients were excluded for other reasons so this seems to low. If we arbitrarily assume that a slight majority, then 51% of the 154 exclusions were due to immune status. With this assumption, then 72% all GBM patients would have positive HLA-A1 or HLA-A2 status. This seems too high. Let me arbitrarily pick a number that averages these two estimates and assume that about 57% of the GBM population has positive HLA-A1 or HLA-A2 status.

In the phase 2 trial, 41% of the 124 randomized patients were A1 positive and A2 negative; 52% were A1 negative and A2 positive; and 7% were A1 positive and A2 positive. This indicates that 59% were A2 positive. If we take 59% of the 57% as previously estimated, this would suggest that 34% of the general GBM population would be A2 positive and eligible for enrollment in an HLA A-2 trial. Management has used suggested a higher number as it believes that 50% of the general population is HLA A-2 positive. I can’t explain the discrepancy.

These tortured and I am sure difficult to follow estimations show that somewhere between 34% and 50% of newly diagnosed GBM patients are HLA-A2 positive patients who will be studied in the phase 3 trial. The National Cancer Institute estimates that there are 23,000 adults diagnosed with brain and other nervous system tumors each year. It further estimates that GBM accounts for about 15% of these cases or roughly 3500 are newly diagnosed GBM patients.

Based on all of this, one can assume that ICT-107 will be initially targeted at 34% to 50% of 3500 newly diagnosed GBM patients each year in the US. This represents a population of 1,200 to 1800 patients each year in the US.

But what about price?  Breakthrough cancer therapies such as ICT-107 if successfully developed for small cancer populations suffering from life threatening cancers usually are priced at $100,000 or more per treatment. Indeed, Bristol-Myers Squibb’s new anti-PD-1 drug nivolumab was just approved in Japan (the first approval in the world) at a price of $145,000 per annual treatment.

Update on Phase 2 Results

IMUC has put together an extremely useful slide deck summarizing the key aspects of the phase 2 trial of ICT-107. For those investors who are data driven, it provides a wealth of information on the trial. I am providing a link to this slide deck and urge all of you to review it.

ICT-107 Did Not Meet the Primary Endpoint of Overall Survival in the Phase 2 Trial

In the intent to treat population, there were 81 patients treated with ICT-107 and as of June, 1, 2014 there were 51 deaths. There were 43 patients treated with SOC and 28 deaths. The median overall survival was 18.3 months for ICT-107 plus SOC arm. The confidence interval was 14.9 months to 21.1 months which means that we can say with 95% confidence that median overall survival is in this range. The median overall survival for the SOC arm was 16.7 months with a confidence interval of 12.3 to 23.1 months.

There was the suggestion of numerical improvement as median OS was 18.3 months for ICT-107 and 16.7 months for control. However, because the confidence interval of the two groups overlaps, the data is not statistically significant at p ≤0.05. The actual p value was 0.643. Hence the study did not meet the end point of median overall survival.

Secondary Endpoint of Progression Free Survival was Met

There were 61 progressions in the ICT-107 group out of 81 patients and 39 progressions out of 43 in the control group. On intent to treat basis, the median time to progression was 11.2 months in the ICT-107 group with a confidence interval within a range of 8.2 to 13.1 months and the median progression free survival in the control group was 9.0 months within a range of 5.5 to 10.3 months. The improvement of 2.2 months was statistically significant at a p value of 0.011.

Overall Survival in the HLA-A2 Positive Unmethylated MGMT Group

There were 24 patients treated with ICT-107 who were HLA-A2 positive and had unmethylated MGMT status. The median overall survival was 15.8 months in this group of patients with a confidence interval of 11.4 to 18.9 months. In SOC patients who were HLA-A2 positive and had unmethylated MGMT status the median overall survival was 11.8 months within a confidence interval of 8.5 to 18.4 months. The study showed a 4.0 month numerical improvement had a p value of 0.175 which was not statistically significant. However, given the small number of patients in the sub-group this was a very encouraging signal. Increasing the number of patients in a phase 3 trial should tighten the confidence intervals and hopefully will produce statistically significant results.

Progression Free Survival in the HLA-A2 Positive Unmethylated MGMT Group

In this group, there were 20 progressions in the 24 treated patients on ICT-107 and 14 of 14 on SOC. The median progression free survival was 10.5 months for ICT-107 patients within a confidence interval of 4.5 to 14.1 months. The progression free survival for the control group was 6.0 months within a confidence interval of 3.4 to 10.2 months. The progression free survival advantage of 4.5 months was not statistically significant.

Overall Survival in the HLA-A2 Positive Methylated MGMT Group

There were 17 patients who were HLA-A2 Positive and methylated MGMT status who were treated with ICT-107 and 6 have died. There were 14 similar patients in the control group of whom 6 have died. Median survival has not been reached in either group.

Progression Free Survival in the HLA-A2 Positive Methylated MGMT Group

There 17 patients with HLA-A2 positive and methylated MGMT status that were treated with ICT-107 and 9 have progressed. The median progression free survival was at least 24.1 months and the confidence interval has not been defined. There were 14 patients in the control f group and 13 progresses with a median progression free survival of 8.5 months within a confidence interval of 3.6 to 16.4 months. We can say that there is at least a 15.6 month improvement in progression free survival with a statistically significant p value.

Tagged as ICT-107, ImmunoCellular, ImmunoCellular Therapeutics LTD, IMUC, methylated MGMT, unmehtylated MGMT + Categorized as Company Reports