Expert Financial Analysis and Reporting

Investment Conclusions:

• Cryoport: My recommended best way to invest in CAR-T launches (CYRX, Buy, $3.60)
• Kite Pharma: Seems priced for perfection (KITE, Underperform, $76.00)
• Novartis: Too big of a company to make an impact (NVS, No Opinion, $80.00)
• Be aware that June 14 could be a very important date. Novartis will present meaningful data on CTL-019 in r/r DLBCL for the first time at a major medical conference allowing investors to compare CTL-019 data in r/r DLBCL to Axi-Cel’s already released data.

Investment Overview

Much Anticipated Launches of CAR-T Products Probable by 4Q, 2017

There is great excitement about the pending launches later this year of the CAR-T products: Novartis’s CTL-019 (tisagenlecleucel-T) and Kite’s Axi-Cel (axicabtagene ciloleucel). From an investment standpoint, attention has centered on Kite as evidenced by its $4.3 billion market capitalization. Novartis has not much benefitted as the consensus view is that it is such a large company that even in the event that  CTL-019 achieves several hundreds of millions of dollars in sales, it would only modestly increase sales and profit growth,

While I think that Axi-Cel will be a successful product, for reasons that I articulated in my report of April 27, 2017, I am cautious on Kite as it seems to be priced for perfection. One of my concerns about Kite is that its advocates seem to be ignoring the fact that Novartis and Kite will be launching a comparable product at about the same time so that they are going split the market. At this time, there is insufficient information to make a reasonable estimate on the split, but my guess is that it will be 60/40 or 50/50. In listening to analysts who cover Kite, they just don’t seem to take this into account. Indeed. Kite management also seems to be downplaying this by repeatedly stating that they will have significant first mover advantage in the market that will lead to a commanding the major market share. I think that this aggressive expectation is priced into the stock and is a basis for my concern about Kite’s valuation.

Cryoport is a Very Interesting Way to Invest in the CAR-T Launches

Cryoport is a really interesting way to invest in this introduction of the CAR-T products as it provides critical logistics support to both Novartis and Kite. Cryoport’s investment outlook is indifferent to the market share split of CTL-019 and Axi-Cel. Importantly, the impact of these launches on the sales base of Cryoport can be tremendous. This was a major factor in my initiation report of April 12, 2017 Cryoport: Initiating Coverage of this Highly Unique Health Care Company with a Buy (CYRX, Buy, $2.25). Investors have the potential to get much more bang for their buck with an investment in Cryoport than Kite in my opinion.

Upcoming Key Data for Kite and Novartis on June 14

I want to call your attention to a very important data point that is upcoming. At this time Novartis is poised to launch CTL-019 for both r/r ALL and r/r DLBCL while Kite is preparing to launch Axi-Cel only for r/r DLBCL. Kite has published a good deal of clinical data from its ZUMA-1 trial in r/r DLBCL, but investors haven’t yet seen comparable data for CTL-019 from the JULIET trial in r/r DLBCL. Investors are anxious to see how the data will compare

Novartis has now confirmed that it will present interim data from JULIET at the International Conference on Malignant Lymphoma (ICML) in Lugano, Switzerland on June 14, 2017. Novartis has earlier indicated that this would be data on 80 patients. So how good is the data? Novartis’ Chief Medical Officer Vas Narasimhan, M.D., said the breakthrough designation CTL-019 got from the FDA gives some indication of how the data panned out. It doesn’t give any insight on how it might compare to ZUMA-1. My guess is that the data from the two trials is comparable. Data from the ZUMA-1 trial indicates that the complete response rate for Axi-Cel in r/r DLBCL is about 30%. However, if the data from JULIET suggests a higher CR rate for CTL-019 than Axi-Cel, it could have a profound negative impact on Kite.

Novartis has said that it also will present more comprehensive data on CTL-019 in pediatric r/r ALL data at this June meeting. Prior data suggests that the complete response rate in this indication is 80% to 90%.

FDA Has Given Breakthrough Designations to both CTL-019 and Axi-Cel

The FDA granted breakthrough designations as follows:

• Kite’s Axi-Cel was granted this status for Axi-Cel in r/r DLBCL on December 7, 2015.
• Novartis’ CTL-019 for r/r ALL on July 7, 2014 and
• CTL-019 for r/r DLBCL on April 18, 2017

BLA Submissions and Timing of Approvals

Kite completed a rolling BLA and submitted it to the FDA on March 31, 2017. On May 26, 2017, Kite announced that Axi-Cel was granted a priority review with a PDUFA date of November 29, 2017. A priority review shortens the estimated review time from ten months to six. The establishment of the PDUFA date does not mean that the drug will be approved on that date. It could be sooner. Indeed, after speaking with Kite management one brokerage analyst speculated that approval might be in just a few weeks.

Novartis announced on March 29, 2017 that the FDA had accepted its BLA filing for CTL-019 in r/r ALL and has granted it a priority review. The PDUFA date is in early October, 2017.

We don’t know if Novartis has submitted a BLA for CTL-019 in r/r DLBCL. Its data is based on the phase 2 JULIET trial which is very similar in design and size as the phase 1/2 ZUMA-1 trial of Axi-Cel. JULIET started on May 5, 2015 which was three months and 13 days after the start of ZUMA-1 trial on January 22, 2015. Novartis has not stated whether it has submitted the BLA for CTL-019 in r/r DLBCL. There is no way of an outsider knowing, but one can speculate that Novartis could be about this length of time behind Kite in filing for approval.

Probable FDA Action on the BLA Filings

FDA Seems Comfortable with Clinical Data

The approval of a BLA is obviously dependent on clinical data and the breakthrough designations granted to Axi-Cel and CTL-019 are more than convincing evidence that FDA believes that the data for both drugs supports approval. However, there is more to an approval than just the clinical data. There is a section in the BLA called the chemistry, manufacturing and control section (CMC) in which a company must submit compelling evidence that it can manufacture a product with the same consistency and quality as in the clinical trials that were the basis of approval.

Could There Be a CMC Issue?

Many a product has been tripped up because of CMC issues with the result being a delay in approval of several months or much longer. The CAR-T products are very complex. They involve apheresis of living cells that are cryopreserved and shipped to a central manufacturing site. There, they are genetically engineered to produce a chimeric receptor, cryopreserved and sent back to the clinical site for administration. The FDA has only minimal experience with products that are manufactured from living cells. Given this and the complex manufacturing and logistics involved in product development, there has to be some concern that Kite or Novartis or both could both stumble over CMC issues.

I am not sounding an alarm that there are CMC issues. I have no way of knowing. I just wanted to point out that there is the potential for an issue. On an encouraging note, in a recent analyst meeting, Novartis said the CMC and regulatory path for CTL-019 has not been as problematic they originally thought.

Will The FDA Want to Convene an Advisory Committee?

Novartis expects to have an advisory committee meeting (AdCom) for CTL-019, with a focus on safety management, and some discussion of manufacturing. The Company thinks that it is possible that in the event there is an AdCom for pediatric r/r ALL, an AdCom would not be necessary for r/r DLBCL. Kite has given no indication that it expects to have an AdCom meeting. It is hard for me to imagine that there would be one for CTL-019 and not for Axi-Cel. Indeed, it seems highly likely that there would be an AdCom meeting to discuss both drugs.

So when will the drugs be approved. It seems highly likely that CTL-019 for pediatric r/r ALL could be approved on or before its early October PDUFA data and that Axi-Cel could be approved for r/r DLBCL on or before its November 29, 2017 PDUFA date. The timing for approval of CTL-019 in r/r DLBCL is more uncertain. One can make the argument that because the ZUMA-1 trial started 3 months and 13 days before JULIET that Axi-Cel will be approved by the same time before CTL-019. Kite and bullish analysts are counting on this. However, I think that because many of the safety and manufacturing issues for CTL-019 in r/r ALL and r/r DLBCL are the same or similar, that the FDA could move much faster.

Timing of Approvals

I think there is a reasonable probability that CTL-019 for r/r ALL and r/r DLBCL will be approved at or close to the same date as Axi-Cel in r/r DLBCL. My guess is that this could be in October or November of 2017.

Issues with the Launch

Marketing Approach will be Different than with Conventional Drugs

Novartis has indicated that it will take a different approach to marketing CTL-019 than its practice with conventional drugs because of the complex logistics and treatment protocol. There has to be a highly reliable process to gather the cells at the clinical site, ship them out for manufacturing, return them to the clinical site and then administer them. Throughout this process, the utmost attention must be paid to retaining the viability of the living cells, which in most cases are irreplaceable. Moreover, managing the grade 3 and 4 side effects of this treatment require strict attention and probable hospitalization. This is all very different from detailing a drug and this is where Cryoport plays a key role.

Novartis is planning a marketing model that is similar to that used by manufacturers of complicated, implanted medical devices. In this model, the Novartis sales representatives will function as a resource and assistant to the physician, often sitting in on the cell infusions. This requires much more interaction with the physician and hospital staff than traditional detailing. This strategy is intended to avoid problems with complicated logistics , treatment protocols and reimbursement issues resulting from the high price tag of the treatment.

Price of Cell Infusion Therapy

Based on comments from Kite and key opinion leaders, I think that the price of the cell infusion alone could be $350,000 or more but the additional costs for the chemotherapy treatment used to reduce T-cell populations before cell infusion and costs required to treat side effects (often requiring hospitalization) could add $250,000 and result in all-in costs of $600,000.

Market Size

The addressable market for r/r ALL is about 800 patients in the US. Because of the very high response rates in these patients-the CR rate is 80% to 90%-I think that most of these patients will receive CTL-019. At a price of $350,000 per treatment the addressable market is $280 million. Novartis will be the only player in this market until late 2018 or 2019.

The addressable marker for r/r DLBCL patients is a much larger 7,500 patients. If all of these patients were treated, the US market potential would be $2.6 billion. However, there is more uncertainty on how much of this marketed can be penetrated as compared to r/r ALL. The CR rate for these patients in the ZUMA-1 trial was about 30% with Axi-Cel which suggests that about one of three patients treated may receive a complete response at six months. Also we don’t know the effect of a CR on survival relative to historical data that suggests that the median overall survival for r/r DLBCL patients is about six months. Physicians might be less aggressive in treating r/r DLBCL than r/r pediatric ALL.

Cryoport has given guidance that it can receive revenues of anywhere from $2 to $20 million per CAR-T indication. The amount is importantly dependent on the size of the patient population treated. From this standpoint r/r ALL is a smaller opportunity at the lower end of this range (perhaps $2 million) and r/r DLBCL is in the mid-point (perhaps $10 million). Management does point out that there can be other factors than patient population that determine how much revenues they will receive, but has given no specifics.

Will the Launch of CAR-T Products be Slower than Expected?

It has become axiomatic that virtually all biotech product launches are slower than expected due to hurdles put in place by managed care. In the launch phase, managed care is often not able to incorporate the costs of an important new product in its premium structure and negotiate rebates from the manufacturer. Hence, for a year or more they are purposely slow on reimbursement approvals and hospitals may have concern about getting paid for the possible $600,000 cost of a single CAR-T treatment. Will it be different for CAR-T therapy where patients have exhausted all therapeutic options and have expected survival of six months?

Another key issue is that as of yet, there are no biomarkers to prospectively identify which patients might benefit. Because of the 80% to 90% response rate, in r/r pediatric ALL this is probably not an issue. However, it may be in r/r DLBCL if only 30% of patients may benefit. Managed care could be spending $1.8 million to treat three patients in order to achieve one positive outcome. This suggests to me that negotiating reimbursement and working with clinical sites to establish protocol for treatment will take time. This points to a slow launch.

Most bullish analysts believe the opposite. They think that CTL-019 and Axi-Cel represent such a dramatic breakthrough that they will be quickly and widely accepted for reimbursement. Supporting this argument, I have heard anecdotal comments that suggest the major medical centers are gearing up to treat hundreds of patients. Both Novartis and Kite will initially focus on centers that have experience with CAR-T products; this is a small number of 30 or so.

The data on CTL-019 is based on about 50 r/r pediatric ALL patients and 80 r/r DLBCL patients. The data on Axi-Cel is based on about 80 r/r DLBCL patients. With such a small number of patients, there is much that physicians don’t know about the drugs. At this point, there is no data that suggests any differentiation between the two drugs. If this is the case, it may confer a marketing advantage to Novartis. Most of the clinics being targeted treat both r/r pediatric ALL and r/r DLBCL patients. Given all the complexities of treatment, some centers might find it preferable to deal with just Novartis.

At a recent meeting with analysts, Novartis management indicated that it is currently scaling up manufacturing from being able to treat a few thousand patients to tens of thousands. This may signal confidence that they can overcome the launch issues I have raised.

Other Indications

Novartis and Kite are both moving aggressively to develop Axi-Cel and CTL-019 for other hematological cancers including r/r multiple myeloma (r/r MM) and r/r chronic lymphocytic leukemia (r/r CLL). At the latest analysts meeting Novartis highlighted some recent, very encouraging data in a pilot study that combined CTL-019 with Imbruvica in r/r CLL. Complete responses were obtained in 8 of 9 patients; they showed no disease in their marrow at 3 months.

From the standpoint of Cryoport, the opportunities in r/r MM and r/r CLL are probably comparable to r/r DLBCL. Approvals could come in 2019 adding another big boost to revenues.

Tagged as Axi-Cel (axicabtagene ciloleucel), Cryoport, CTL-019 (tisagenlecleucel-T), KITE, Kite Pharma, Launch of CAR-T products CTL-019 and Axi-Cel + Categorized as LinkedIn, Smith On Stocks Blog