Expert Financial Analysis and Reporting

The Terms of the Juno Celgene Deal

Celgene and Juno announced a ten year collaboration for drug development using CAR-T therapy for both cancer and autoimmune diseases. Celgene has the option to commercialize Juno programs outside North America and co-promote certain programs globally. Juno has the option to co-develop and co-promote select Celgene programs. Celgene will make an initial payment of about $1 billion which is a made up of an upfront payment of approximately $150 million, and in addition Celgene will purchase 9,137,672 shares of Juno's common stock at $93.00 per share.

The stunning deal between Juno and Celgene in which Celgene is committing $1 billion of cash to aid Juno’s product development effort has obvious implications for Juno, but I think that it goes far beyond that in its potential implications for how investors look at emerging companies involved in biotechnology in general and immune-oncology in particular.

Investment Significance for Northwest Biotherapeutics and Other Emerging Biotechnology Companies

This deal has potentially enormous implications for emerging biotechnology companies. It a powerful validation by one of the two leading oncology companies in the world-the other being Roche Genentech- for the promise of immune-oncology in general and CAR-T therapy in particular. In this report, I tend to focus on the positive implications for Northwest Biotherapeutics. This is not because I think that the implications are only positive for this company, rather, NWBO is the company I am most closely associated and familiar with. Northwest has been the subject of a particularly vicious attack by short sellers and I think that this Juno-Celgene deal offers strong counter arguments to those made by the short sellers; key to their attack on the stock were these representations:

• The immune-oncology approach of Northwest can’t work. One blogger wrote that dendritic cell cancer vaccines are no more effective than grapefruit juice. However, the intense interest by big biopharma companies in “all things” immune-oncology would seem in my opinion to inevitably come to focus on the dendritic cell technology of NWBO. The dendritic cell is the central player in the adaptive immune system and would seem to be a potent way of activating the immune system against cancer. It potentially mobilizes all of the cellular components of the adaptive immune system. In contrast, the CAR-T cells of Juno utilize T-cells and monoclonal antibodies, (the current leading immune-oncology therapeutic class) mimic the antibody creation of B-cells to fight cancer. The dendritic cell cancer vaccines have the promise of activating both T-cells and B-cells.
• Northwest has no meaningful clinical data as all of its data is based on open label trials involving small numbers of patients. With DCVax-L, NWBO has encouraging phase 1/2 data on 20 patients and in the information arm of the phase 3 trial of DCVax-L it has encouraging data on another 51 patients. There also may have been well over 20 patients treated with compassionate use. DCVax Direct has completed a phase 1 trial of 42 patients and the data from this trial is maturing, but there have been some early signals of clinical activity. Compare this with Juno which has data on only 28 patients for its lead product JCAR015.
• Northwest is too early in clinical development. Juno is just starting its first phase 2 trial of JCAR015 in adult acute lymphoblastic leukemia. Northwest will complete a phase 3 registrational trial of DCVax-L in glioblastoma in 1H, 2016. It is poised to begin at least two phase 2 trials of DCVax Direct in different types of solid tumors.
• The autologous cell manufacturing process used by Northwest to produce DCVax-L and DCVax Direct is too cumbersome and costly to ever be used in a commercially viable product. Juno uses an autologous cell manufacturing process.
• On a fully diluted basis, the market value of NWBO is excessive at $950 million based on the potential fully diluted share count of about 100 million shares. Juno had a market capitalization of $4.1 billion before the Celgene deal was announced and Celgene bought stock at $93.00 per share or a market capitalization of $8.3 billion.

Again, I want to emphasize that the willingness of Celgene to step up in the CAR-T field has positive implications for a large number of early stage biotechnology companies, many of which have been the targets of the same short sellers who have attacked NWBO. This will be a focus of later reports, but there is a good deal of important investment insight that can be gained by comparing and contrasting Juno and Northwest. I think that this raises the potential for  Northwest and other emerging biotechnology companies involved with immuno-oncology technologies to strike major deals with large biopharma companies.

What Does this Say About Biotechnology Valuations?

There is a lot of discussion among investors that we are in a biotechnology bubble and that valuations on emerging biotechnology stocks in particular are stretched beyond reason. Before this deal, Juno was selling at a market capitalization of $4.1 billion, but Celgene is buying stock in Juno at a price of $93.00 which represents a valuation of $8.3 billion. I can look at this in two different ways. On the positive side, Celgene has sophistication to evaluate technologies that far exceeds the capabilities of almost all investors and their willingness to invest at these levels is a powerful validation that sophisticated investors think the current valuations are justifies. On the other hand, Celgene is itself a major beneficiary if indeed we are in a biotechnology bubble; management of Celgene may be somewhat blinded by thinking in relative terms that the Juno valuation is reasonable in relation to theirs. However, what if Celgene is also far over-valued.

I don’t know the answer to this question and we will probably only be able to determine if we are in a biotechnology bubble when we look back from the perspective of five to ten years in the future. I do think that in the immediate environment in which we are living, this could trigger off an industry reaction of monkey see, monkey do. The big biopharma companies are herd followers and this aggressive action by Celgene could very well encourage many other biopharma companies to seek out other early stage immuno-oncology assets. For reasons that I discuss subsequently, NWBO has compelling attributes.

What Does This Say About The Potential for Immuno-Oncology?

The development of monoclonal antibodies started with the FDA approval of Rituxan in 1997; this was the first major commercial product. It is a monoclonal antibody that targets the receptor CD 20 on B-cells. The big pharma companies at the time ignored monoclonal antibodies and remained focused on small organic molecules for drug development. The monoclonal antibody field was left for many years to the biotechnology companies and Genentech in particular. It took the big pharma companies nearly 20 years to recognize the potential of monoclonal antibodies. However, it is now a major focus of virtually every big biophama company.

Eventually, monoclonal antibodies gained broad acceptance, but the other major component of the adaptive immune system, the T-cell, was ignored as a product development source. This changed in 2011 as Bristol-Myers introduced Yervoy. This product is a monoclonal antibody, but it is targeted at a receptor on T-cells called CTLA-4 that regulates T-cell activity. Cancer cells can activate CTLA-4 and this results in the activity of T-cells being turned off. Yervoy binds to CTLA-4 and blocks the ability of cancer cells to turn off T-cells. As a result, T-cell activity against the cancer is restored. Initially, there was skepticism and indifference toward Yervoy. However, its ability to produce striking improvement in perhaps 20% to 30% of the intractable cancers in which it is targeted quickly changed attitudes. The development of other checkpoint inhibitors and checkpoint agonists has triggered a gold rush to develop new checkpoint modulators and virtually every big biopharma company is rushing to establish expertise in this area.

In the last year or so, the public offerings of two companies, Kite and Juno, has brought enormous investor attention to still another immuno-oncology technology; this is the engineered T cell. Essentially, this technology uses genetic engineering to produce a receptor on the T-cell that binds with a tumor antigen. This combines the targeting power of a monoclonal antibody with the killing power of a T-cell. This appears to have triggered another big biopharma gold rush of big biopharma to get into the game. Amgen announced an extensive collaboration with Kite on January 5, 2015 and now we have the Celgene deal with Juno.

It seems logical that investors should be looking at other immuno-oncology technologies that may capture the interest of big pharma. I submit that this could be cancer vaccines. This is an area that has been scorned by investors and big pharma. The introduction of Provenge in 2010 could have been the start of a cancer vaccine gold rush. However, Provenge was a crudely constructed and difficult to manufacture drug that led to cost and logistics issues. Also, it came to market at the same time as two small molecule drugs that were targeted at the same indication of metastatic prostate cancer, Medivation/ Astellas’ Xtandi and Johnson & Johnson’s Zytiga. Provenge got buried by the commercial marketing power of these big companies. While Provenge reached sales of over $300 million, it never lived up to expectations and investors and big pharma took this as evidence of the lack of potential of cancer vaccines.

I have been interested in cancer vaccines in general and dendritic cell cancer vaccines in particular for some time. I wrote a report called “The Rationale Behind Dendritic Cell-Based Cancer Vaccines and How They are Manufactured” on April 26, 2012. This was my first report on cancer vaccines on this website, but I have been heavily involved in the field for a decade. I have been frustrated by the indifference of investors and big pharma to this field. Perhaps this will change. Amgen’s cancer vaccine T-Vec (talimogene laherparepvec) was endorsed by an FDA advisory panel on April 29, 2015 and is likely to be introduced in 2016. I have focused on the dendritic cell vaccines of Northwest Biotherapeutics and Immunocellular Therapeutics; they have a different mechanism of action than T-Vec. However, the common ground is that they each seek to induce an immune response against cancer.

The Celgene Juno Deal Is a Validation of Autologous Cell Therapy

The investor community and biopharma companies have also been skeptical on autologous cell manufacturing processes. Some emerging biotechnology companies are developing technologies that involve removing particular cells from the body and then engineering and differentiating them into cells which are then re-introduced into the body. Examples of this are certain stem cell therapies and dendritic cell cancer vaccines like this of Northwest Biotherapeutics and Immunocellular Therapeutics. The investment community has believed that this manufacturing process is so complex and expensive that even if the products are effective, they cannot be priced at levels that cover costs and allow for meaningful profits. I think that the endorsement of Juno’s autologous cell manufacturing process by Celgene is as important for emerging biotechnology companies involved in these processes as the technology itself.

Juno is Very Early in Product Development

Juno’s lead product is JCAR015 which will be entering a phase 2 trial in adult refractory acute lymphocytic leukemia in coming weeks. This is the first trial conducted by Juno in humans.  Juno has never conducted a clinical trial on its own. All of the clinical data on its CAR-T products came from phase 1 open label trials at academic centers. All of the clinical data on JCAR-015 was generated at an academic center in open label trials that involved a total of 28 patients.

Juno Faces Some Heavy Competition from Novartis and Kite

The huge multination pharmaceutical company Novartis is the first mover in CAR-T cell therapy. It started a pivotal Phase III trial in pediatric, relapsed/ refractory acute lymphocytic leukemia ALL started in March 2015 and initiation of the pivotal trial in diffuse large B-cell non-Hodgkin’s lymphoma will start in 2H, 2015. It has a lead on Juno in both indications. It is expected that Novartis will file for approval in late 2016 in r/r/ ALL and in 2017 in DLBCL. It will have first mover advantage and much greater marketing resources and skill. Kite Pharmaceuticals is targeting the same cancers as Novartis and Kite with its lead drug.

CAR-T therapy is very well suited for hematological cancers in that CD19 is an excellent target. However, at its recent analyst day Novartis sounded a note of caution. It said that despite the enthusiasm around CAR-T in hematological cancers, Novartis is finding a safe target in solid tumors is challenging. Most targets overexpressed in solid tumors have some levels of expression in normal tissue and their targeting can lead to severe side effects. For example, HER-2 is expressed at low levels in the lining of the lungs and a CAR-T approach against HER-2 in breast cancer led to severe respiratory toxicity. There is at this point little or no data that suggests that CAR-T therapy can be safe and effective in solid tumors. In the case of NWBO’s dendritic cell cancer vaccines, the safety of the products is well established and they are potentially applicable against every solid tumor and DCVax Direct may be effective against some hematological cancers. Solid tumors are a much larger commercial target.

Why Has Northwest Not Gotten Any Respect

I think that if we look at Northwest, the Company has been around for over a decade and floundered to the point that it was near bankruptcy in the 2008 timeframe. Its phase 3 trial of DCVax-L started over eight years ago and was nearly cancelled due to lack of funds. This tortured history naturally results in caution on the part of investors and biopharma companies.

Why hasn’t Northwest gotten the same interest as Juno? As a starting point, I would say that the CAR-T therapy has a development history longer than dendritic cell vaccine development and for many years appeared to be going nowhere. However, venture capitalists recognized the potential and essentially gathered together scattered datasets from academic centers to create Kite, Juno and other companies. These were the brought public by leading investment banks with much hoopla. I think that if Northwest were a private company without the baggage of being a public company for so long and having suffered the vicious misrepresentations and outright lies of the short sellers accompanied by aggressive shorting, it could come public today at a valuation comparable to Juno.

Northwest also has an unusual visionary leading the Company in Linda Powers. She invested great sums of her own money in the Company and without her, the Company would have gone bankrupt. I think that she has done an amazing job in resurrecting the Company and advancing the clinical trials of DCVax-L and DCVax Direct. However, with her background in in law and finance and she does not bring the immediate credibility of someone with a long background in biotechnology. (As an aside, I would mention that the CEO of Juno was in top level management at Dendreon suggesting that there can be redemption.). I think that this has made investors and companies cautious.