Expert Financial Analysis and Reporting

Introduction to This Thought Piece

Emerging biotechnology stocks obviously are very hard to value on an absolute basis because they usually have no or minimal sales and huge operating losses. Many Wall Street analysts arrive at price targets by making long term sales and earnings projections; risk adjusting the estimates through predicting probability of successful development; and then estimating a discount rate to get to net present value. Unfortunately, this involves so many unconstrained variables and arbitrary assumptions that the final price target estimates have little value.

I wish that I could tell you that I have a better method for coming up with a price target, but I don’t. I usually look at the potential addressable market and make estimates on potential sales of a new product(s) under development at some point like five years in the future. Depending on features such as the uniqueness of the product, stage of clinical development, intellectual property position, etc. I try to find current companies that are at the commercial stage now that this company will be in five years or so. I then look at the market capitalization to sales ratio of commercial companies; this is usually five to ten times sales. There obviously is a great lack of precision in this approach also.

The point I am struggling to make is that valuations of biotechnology stocks are very imprecise and subject to over or under enthusiasm and valuation. This leads me to the purpose of this report. There is a major discontinuity of valuations between emerging biotechnology companies in which companies that have recently come public have been given valuations that can be several times the level of companies that have been public for some time, even if they have similar prospects; familiarity breeds contempt.

In this report, I highlight the example of the valuations of the CAR-T companies Juno Therapeutics (JUNO) and Kite Pharma (KITE) in comparison to the dendritic cell cancer vaccine company Northwest Biotherapeutics. None of these three companies has created the clinical data that defines their ultimate role in treating cancer so that we are dealing with hypotheses. That said, I view Northwest’s technology to be as promising as that of Kite and Juno or perhaps more so because its DCVax vaccines have the prospect for being broad spectrum anti-cancer agents while the current CAR-T products are narrow spectrum agents. The market is ignoring this important distinction.

While as I just discussed, it is very hard to determine what the absolute valuations of these three companies should be, the current difference in valuations seem wildly out of line. If so, at some point in time this valuation gap is going to be narrowed. My guess is that this is primarily achieved through a drop, potentially sharp, in the valuations of Juno and Kite.

Key Points

• CAR-T products are an important new technology  and have produced exciting early results in relapsed/ refractory hematological cancers by targeting the CD-19 antigen that appears on the surface of most B-cell lineages.
• However, solid tumors seem to be a much more difficult challenge as their antigen targets are much more heterogeneous from patient to patient and even within a single patient. For solid tumors, treatments that can hit multiple targets (i.e., broad spectrum treatments) are needed.  Importantly, the CAR-Ts are rifle shots that hit just a single target on a tumor.
• To date, the market valuations for CAR-T companies like Kite and Juno have been unusually high given that their technologies are just in Phase 1/2 trials and have only treated small numbers of patients. These market valuations appear to be based on unrealistic assessments of the potential for their technologies:  namely that early success in hematological cancers will also extend to solid tumors (which are a much larger market).
• A small set of data recently presented at AACR  indicated a lack of efficacy for a CAR-T product in certain solid tumors.  This is the first “small” reality check about what CAR-Ts will be able to do in solid tumors.  This caused a sharp reaction in stock price
• With respect to these companies, the market has been in a love relationship that has turned a blind eye to development hurdles they face. This reaction to the AACR data may be the start to a more critical assessment of CAR-T companies.
• I view CAR-T products as a major new technology with great commercial potential, but they are rifle shot technologies. Based on my view of the science, I think that cancer vaccines may offer a more effective, broad spectrum approach to cancer treatment for solid tumors. Hence, my focus on Northwest Biotherapeutics, ImmunoCellular, Advaxis, Aduro and other companies in this space.
• As I look at the market valuation of Northwest which I follow closely, I can see the dramatic valuation gap between Northwest and Kite/ Juno narrowing as the market begins to register the points above, although this could come primarily on the basis of a decline for Kite and Juno.

 Data Presented at AACR Causes Weakness in CAR-T Companies

The University of Pennsylvania and Novartis (NVS) collaboration presented data at the American Association for Cancer Research (AACR) annual meeting on Sunday, April 19 that caused concern about the potential for CAR-T therapy in solid tumors. This resulted in a decline in stock price for Juno and Kite which are seen as the leading small companies in the CAR-T space.

The data presented was on the Penn/Novartis CAR-T mesothelin program from a phase 1 safety trial that has to date enrolled just 6 patients with mesothelioma, pancreatic, and ovarian carcinoma who had failed all previous treatments. This drug has a chimeric antigen receptor that targets the antigen mesothelin that is expressed on the surface of these types of cancer cells. The concern among some investors is that there were no objective responses in the trial. Four of six patients showed stable disease, which may suggest some anti-tumor efficacy and there was only modest off-tumor toxicity.

The new data were not altogether surprising but disappointed investors who expecting more striking results, comparable to the early results seen in relapsed/ refractory hematological cancers. In some ways, I am surprised at the reaction of these stocks. This is essentially a small dose ranging study aimed at determining a dose that has anti-tumor effect which can be given safely and it is still an early stage of the study. There probably should have been little expectation of efficacy given what may be very small amounts of the drug that might not even be at therapeutic levels. The small numbers of patients (6) and advanced stage of the disease also argues against making firm conclusions. Still, I see in this reaction as the initial dawning of the realization that results in solid tumors may not replicate the spectacular results in relapsed/ refractory hematological tumors.

Implications for Investors: The Bloom May Be Coming off the CAR-T Rose

This strong investor reaction suggests to me that the bloom may be coming off the rose in the CAR-T space that has led to what in my mind appears to be excessive valuations for CAR-T companies. Investors may now start to look under the hood and they may come away with the view that CAR-T is not the powerful engine for all types of cancer that they had imagined. This recent “mini-disappointment” in solid tumors may be followed by other concerns.

Success in Hematological Cancers May Not Signal Success in Solid Tumors

To date, the excitement surrounding CAR-T has come from very high remission rates in patients with relapsed/ refractory hematological cancers such as acute lymphocytic leukemia (ALL), non-Hodgkin’s lymphoma (NHL) and chronic lymphocytic leukemia (CLL). The results in ALL were particularly striking as illustrated by Juno reporting that in an ongoing phase 1 trial of 27 evaluable adult patients with relapsed/refractory B cell acute lymphoblastic leukemia that their lead CAR-T product produced an 89% complete remission rate versus an expected 10% rate based on historical data. Results from other CAR-T studies were impressive although somewhat less so in diffuse large B—cell lymphoma (DLBCL) which is a type of NHL, and CLL.

I think that spectacular results that were achieved with CAR-T therapy in hematological cancers have not been viewed in the correct perspective. Each CAR-T product only addresses a single antigen and, with current CAR-T products, that antigen must be expressed on the cancer cell. The antigen CD-19 is expressed on most lineages of B-cells on their surfaces. It is a near perfect target for a CAR-T product engineered to have a T-cell receptor specific to CD-19.

The effect should not be extrapolated to solid tumors. In the case of solid tumors, there are usually a large number of antigens expressed. This means that CAR-T therapy in targeting just one antigen likely will have a limited effect on many/ most solid tumors. There may be some in which overexpression of a surface antigen may lead to the development of an effective product, but results as have been seen in hematological cancers are extremely unlikely. Moreover, many tumor antigens are expressed internally in the cell and not reachable with CAR-T technology.

The CAR-T Products Have Not Been Carefully Scrutinized

We have been going through a manic phase in the CAR-T space that has been characterized by unreal expectations and lack of critical questioning. As investors begin to be more critical, they will find other things to be concerned with. The following bullet points compare key aspects of the characteristics of the CAR-T products with those of the DCVax cancer vaccines of Northwest.

• The cytokine storm that can result from CAR-T usage can lead to severe side effects that can require hospitalization. Such side effects are acceptable in relapsed/ refractory disease but much less so in less severe disease. The DCVax products of Northwest have a very mild side effect profile.
• Novartis, Kite and Juno will all be going head to head in these modest sized markets for relapsed/refractory hematological cancers with what could be quite similar products. Northwest is far in the lead in development of DCVax-L for glioblastoma multiforme and for DCVax Direct for the treatment of inoperable tumors.
• Neither Juno nor Kite has ever completed a clinical trial. All of their CAR-T data has come from open label phase 1 or phase 1/2 trials at NCI and academic centers. Such early stage, selective trials often produce better results than larger trials now underway. Northwest is in a pivotal phase 3 trial with DCVax-L in glioblastoma multiforme that will report topline results in 1H, 2016. It has completed a 40 patient phase 1 trial in inoperable solid tumors with DCVax Direct and should soon start two phase 2 trial in inoperable solid tumors.
• In the case of autologous cell therapy products, the living cell is the product so that manufacturing is critical. Deviations in the manufacturing process can produce very different products and treatment outcomes. Neither Kite nor Juno or Novartis has ever validated its manufacturing process in a clinical trial. Northwest has a manufacturing process that has been approved for clinical trials by regulators in the US, UK and Germany.

CAR-T Products are Narrow Spectrum Anti-Cancer Agents; DCVax Products are Broad Spectrum

In my large report on immuno-oncology, I highlighted these shortcomings of the CAR-Ts. One of my major points was that the immune system is comprised of both the innate and adaptive immune branches which have numerous types of cells involved in the response to cancer. These cells communicate with each other using complex signaling systems of protein messengers called cytokines. To give a simplistic analogy, the immune system is like a hive of bees (various cells) communicating through pheromones (cytokines). The end immune response, like the orchestration of a beehive, is based on incredibly complex cell interaction and messaging.

The CAR-T products consist of only one component of this system and that is the T-cell and these T-cells address just one antigen on the surface of cancer cells. As I previously explained they are much less likely to be that effective in solid tumors which can have mutations leading to numerous antigens and in which many of these antigens are expressed internally and may not be accessible to CAR-T cells.

I view the CAR-T cells as an important innovation with major medical and commercial potential. However, they are rifle shot approaches to treating cancer that may not have broad effects or will need to be used in combination with other targeted therapies. In my article on immuno-oncology, I stressed that I am interested in a more systemic approach to activating the immune system. This is the reason I have been so attracted to the dendritic cell cancer vaccines of Northwest Biotherapeutics and ImmunoCellular and other cancer vaccines approaches such as those of Advaxis and Aduro. The dendritic cell is the principal cell that activates an immune response against cancer that brings into play the entire immune system. From my layman’s perspective, this has the potential to provide a broad spectrum treatment for a broad range of solid tumors.

Disparity in Valuation

I have been struck by the disparity in valuation between the CAR-T companies and Northwest. The latter has two broad spectrum products in clinical trials that have given signals of activity as interesting as the CAR-T products. NWBO also has a regulatory validated manufacturing process. When I look at the disparity in valuation with Juno at a market capitalization of $4.7 million and Kite at $3.2 billion versus $775 million for NWBO, I just scratch my head. I can argue that NWBO should sell at a comparable or higher valuation. This is not to say that NWBO should sell at a $3 to $4 billion valuation. It is just to say that the gap between the valuations should narrow substantially. My guess is that this will occur primarily because of the Juno and Kite valuations coming down.

Background on CAR-T Technology

For the last two decades, there has been extensive work going on at the NCI and academic centers on engineering T-cells to combine the killing power of T-cells with the specificity of antibodies. This has the promise to be a transformative therapy. This technology engineers an artificial receptor onto a T-cell that is specific to a cancer antigen.

The large multinational pharmaceutical company Novartis and two small emerging biotechnology firms have emerged as the clear frontrunners in the engineered T-cell space. The initial public offerings of Kite and Juno were spectacularly successful in 2014 and Kite now carries a market capitalization of $3.2 billion and Juno $4.7 billion . These huge valuations were placed on these companies even though the only data they have is based on phase 1 or phase 1/2 trials that were conducted by the National Cancer Institute in the case of Kite and Fred Hutchinson, Memorial Sloane Kettering and Children’s Hospital in the case of Juno. Neither company has yet completed a human clinical trial nor manufactured its product; both of these critical activities are in planning and development stages.

The Technology Platforms

The technologies of Novartis, Kite and Juno are a tour de force of elegant molecular biology techniques that combine recombinant DNA technology, gene transfer using viral vectors and living cell (autologous) manufacturing. This is a patient specific therapy in which T-cells are first removed from the patient through a blood draw. In the initial application of this technology, a viral vector delivers a DNA sequence (made through recombinant DNA technology) into the T-cell genome. This DNA sequence codes for a peptide complex that result in a human designed (chimeric) receptor being expressed on the surface of the T-cell. The cells are then expanded and returned to the body.

The chimeric antigen receptor on the T-cell surface is specific to an antigen that is expressed on the surface of a cancer cell. This allows the T-cell to hone in on that cancer cell with the specificity of an antibody and the killing power of the T-cell. This particular technology is called chimeric antigen receptor which uses the acronym CAR-T. There are also other approaches to T-cell engineering but this is the most clinically advanced. CAR-T cells can only attack cancers that have antigens on their cell surface which is the case for many hematological tumors, but much less so the case with solid tumors. There are two broad platforms that use engineered T-cells of which the most clinically advanced is CAR-T; somewhat further behind is T cell receptor (TCR) therapy. I will address CAR-T primarily in this report.

Almost of the initial data that has excited investors is based on CAR-T products which address a particular antigen (CD19) which is applicable to hematological tumors. Most solid tumors express their key antigens internally and this requires a different T-cell engineering approach that is known by the acronym TCR. Unlike CAR-T, this technology can be directed against intracellular antigens in cancer cells which potentially allow broader use in solid tumors. This technology is much less advanced than CAR-T.

Novartis, Juno and Kite are key players in CAR-T space. The leading products of all three companies are based on a chimeric T-cell receptor that targets CD19 that is expressed on the surface of cancerous B-cells as are found in B-cell acute lymphocytic leukemia, chronic lymphocytic leukemia and non-Hodgkin’s lymphoma. There are others that may emerge as the leaders in TCR. For example, Glaxo is partnered with Adaptimmune and Celgene is partnered with bluebird bio. Pfizer is partnered with Cellectis to develop an allogeneic engineered T-cell.

Clinical Results for CAR-T Products

CAR-T cells have produced some amazing early results in hematological cancers such as non-Hodgkin’s lymphoma (NHL), acute lymphocytic leukemia (ALL) and chronic lymphocytic leukemia (CLL). These were in very small numbers of patients in experiments conducted at the National Cancer Institute and academic centers.

Particularly striking results have been seen in acute lymphocytic leukemia with CAR-T therapies in patients who had failed virtually all available therapies. For example, Juno has reported that in an ongoing phase 1 trial of 27 evaluable adult patients with relapsed/refractory B cell acute lymphoblastic leukemia that their lead CAR-T product produced an 89% complete remission rate versus an expected 10% rate.

Because of the biology of the tumor that makes CD19 easy to reach, ALL is the most responsive of the B-cell tumors. However, 60% complete remission rates have been seen in refractory, relapsed non-Hodgkin’s lymphomas which are bulkier and more difficult to treat. Novartis has reported comparable results to Juno in ALL and Kite has provided striking data in diffuse large B-cell lymphoma, a form of non-Hodgkin’s lymphoma.

CAR-T cells can cause cytokine storms that can result in severe auto-immune like disease. Their mode of action in the case of NHL, ALL and CHL is to attack all B cells that express CD19. Both healthy and normal B-cells that express CD19 are destroyed. The loss of antibody producing B cells means that patients are susceptible to infections which may necessitate prophylactic antibiotic and gamma globulin treatment to guard against infections. While there is excitement about efficacy, this approach has worrisome side effect potential.

Clinical Trial Plans

In the engineered T-cell space, the CAR-T products will be the first to market. Novartis has begun a potential regulatory trial in adult ALL and their product should be the first to the market with approval probable in 2016 or 2017. Juno Therapeutics is a close follower also targeting ALL; they plan to begin phase 2 trials this year that could be the basis for approval. Kite has selected a different hematological cancer and will begin a potential regulatory phase 2 trial this year in diffuse large B-cell lymphoma. As a cautionary note, Juno and Kite do not have proven manufacturing processes in place. Manufacturing is critically important in developing living cell therapies as the manufacturing process is essentially the product. This may be a more difficult hurdle than investors recognize.

On a very preliminary basis, I would pick Novartis as the likely dominant company of the three because of its lead time in clinical development of the first CAR-T product, financial resources, skills in product development and commercial organization. However, Juno and Kite have taken advantage of the market’s enthusiasm to fortify their balance sheets and also could become dominant in the space. They both have great staying power and excellent technology. Also, I am often surprised at the ability of small entrepreneurial companies like Kite and Juno to best the big pharma companies like Novartis.