Expert Financial Analysis and Reporting

Key Points;

• The most important data point between now and yearend 2016 is release of data from ZUMA-1 that shows whether the CR rate for KTE-C19 in r/r DLBCL remains unchanged at 33% over time. This is the expectation of key analysts and management. If it comes in meaningfully below that rate, the stock could come under downward pressure. Such data could be presented at ASH in December 2016.
• Kite and top analysts believe that Kite will achieve first mover advantage in the CAR-T space. However, a sound argument can be made that Novartis may be the first mover. We may not have meaningful facts to assess this until sometime in 2017. The outcome of this issue also could have a very meaningful impact on the stock

Introduction

I have written several reports on Kite in recent weeks in which I expressed views that run counter to some of the top analysts who cover the stock. Let me quickly add that I know and respect the views of these analysts, but disagree with their conclusions. Yesterday, I attended an Analyst Day sponsored by KITE. There was not any immediately actionable information presented at the meeting, but the Company did comment on some expectations that are baked into the current stock price and could have a meaningful impact on the stock price by the end of the year.

In this report, I highlight those expectations as well as otherimportant issues discussed. The style I use is to discuss key aspects of an issue and then follow with my interpretation. I would not own the stock at this price as I feel the stock is priced on a near best case scenario so that the risks meaningfully outweigh the rewards.

Will Kite File a BLA by Yearend 2016?

I believe that a meaningful majority of members of the investment community believes that KITE will file a BLA by yearend based on interim data from the ZUMA-1 trial and will receive approval by mid-2017. An analyst directly asked if KITE would file a BLA by yearend.

Management responded that before it could affirmatively answer that question, it must hold a pre-BLA meeting with FDA to discuss the data. They said that they believe that the interim data does support a BLA filing, but obviously FDA has to concur. One member of management noted that because KTE-C19 had been designated as a breakthrough therapy that the BLA could be rolling, i.e., data could be submitted as it becomes available and the filing of all data does not occur when the last piece is available.

SmithOnStocks Point of View:

Management has been very assertive since the 2014 IPO that a BLA would be filed at yearend 2016 based on an interim look at the ZUMA-1 trial. I am skeptical. I think that a rolling BLA is more likely and that could delay potential approval from mid-2017 to late 2017 or early 2018. While this would not meet expectations, I don’t think there would be much of an impact on the stock for this modest delay.

How Good Does the Interim Data Have to Be?

Certain of my sources saw the investigator protocol for the ZUMA-1 trial which laid out Kite’s expectations for the trial. The investigator protocol called for the interim analysis to be based on the first 51 patients treated in the r/r DLBCL cohort of the ZUMA-1 trial and the statistical plan was based on this. The r/r DLBCL cohort is planned to enroll 72 patients. A second cohort is planned to enroll 40 r/r PMBCL and TFL patients.

I asked a member of management if it was still the case that the company would seek approval on the basis of these 51 patients. He acknowledged that my information from the investigator protocol was correct. However, he said that the Company plans to submit data from r/r PMBCL and TFL patients in cohort 2 combined with the r/r DLBCL patients in cohort 1. Remarks made in the meeting also referred to using interim results from both cohorts in the BLA filing.

The investigators protocol also stated that the expectation for results in the trial was that 40% of the r/r DLBCL patients would achieve a CR and that historical data suggested that the control group would achieve a 20% CR. If achieved, this would be statistically significant.

SmithOnStocks Point of View:

I am confused by the statements by management on this issue. Similar treatment regimens are used to treat r/r DLBCL, r/r PMBCL and TFL. However, based on the very limited data I have seen, patients with r/r PMBCL and TFL respond better to CAR-T treatment than r/r DLBCL patients. Indeed in the interim look at ZUMA-1, the CR rate for r/r DLBCL patients was 33% and the CR rate for the 11 patients with r/r PMBCL and TFL was 64% (an outstanding result). The combined rate was 39%. So why is this significant? The addressable population of r/r DLBCL patients is about 7,500 while that for the r/r PMBCL and TFL is a few hundred. The overwhelming number of patients to be treated are r/r DLBCL so that I think FDA will base their decision on results in that group alone. Why else would there be two cohorts in the trial?

Just to repeat myself, the interim results showed that the CR rate for the r/r DLBCL cohort was 33% which is below the 40% target set in the investigators protocol. The CR rate for 11 PMBCL/TFL patients was a much higher 64 % and combining the groups results in a CR rate of 39%. The limited amount of data I have seen suggests that the CR rate for PMBCL/ TFL patients is meaningfully better than for r/r DMBCL. If so, I question whether the FDA would allow the results from cohort 1 and 2 to be combined, especially if this was not specified in the protocol.

Since the protocol was submitted, KITE did a large meta-analysis called SCHOLAR-1. This was a large study that looked at the CR rate that was achieved with chemotherapy standard of care in past trials. This study found that the CR rate was 8%, much lower than the 20% predicted in the statistical design of ZUMA-1. So originally, Kite was expecting a 40+% CR rate with KTE-C19 to be judged against an estimated rate of 20% for standard of care. Remember this is an open label trial so that there is no actual control group in ZUMA-1. Based on the current data the CR rate for KTE-C19 is 33% and the expected CR rate for standard of care is 8% according to SCHOLAR-1.

In either the case of 40% versus 20% or 33% versus 8%, the results are pretty striking. I can raise the question as to whether the FDA might require the statistical analysis based on 33% versus 20%. I don’t think so, but it is a question to be asked.

What about Durability of Response?

There are two key objectives of this trial and that is to determine the CR rate and the durability of the response over time. I am only going to focus on r/r DLBCL in discussing these two outcomes. The data at the interim look shows that 47% of the r/r DLBCL patients achieved a CR but a lesser 33% maintained the CR at three months. Management states that it believes that this CR rate will be maintained at six months, nine months a year and more based on experience with CAR-T drugs tested in this indication at NCI. This duration of response is an absolutely critical data point.

SmithOnStocks Point of View:

For KTE-C19, the durability of response must be much greater than three months. Given the cost and the meaningful side effect risk, the FDA will only approve and physicians will only use KTE-C19 if it affords a very long duration of response. How long is long? It is not for me to say, but I think it may have to be a year or more.

Both management and top analysts (whom I very much respect) believe that the CR rate of 33% will remain stable for years. I am far less sanguine. I would point out that 47% of r/r DLBCL patients achieved a CR, but only 33% retained the CR at three months. Why won’t we continue to see a drop? The response from proponents is that the CR rate has been maintained in prior trials. However, I have seen no data that demonstrates that this is the case. I am also skeptical because I have never seen a cancer drug in which the CR rate does not drop over time.

The key question for now is what the CR rate will be at six months. If it is 33%, it will be quite positive. If it drops to 25% to 30% as I am guessing, it will cause some concern and might cause the FDA to wait for the data to become more mature. They might not act until they have a good feel as to whether the CR rate will remain stable or continue to drop. If so, they might want to see data on all subjects at six, nine, twelve months or more.

Key opinion leaders seem to feel that a 25% CR rate at one year would be medically meaningful. Despite the optimism of management and top analysts, I think there is a real possibility for further meaningful drops in CR. If the rate drops to 20% or below this could be an issue for FDA, but I think they would still approve KTE-C19. This is a significant medical advance and getting the drug on the market would allow the investigator community to find ways to improve efficacy and reduce side effect risks. However, this would have serious consequences for reimbursement and use of the drug by the medical community.

The single most importantnear term  issue for the stock is the CR rate for KTE-C19 at six months and we could see this data at ASH in December 2016. If it is 33%, it would be quite bullish and I think the stock price would increase. If it drops to 25% to 30% as I am guessing, it would be a moderate negative. If it drops below 20%, it could cause very strong selling pressure.

Will Kite Gain First Mover Advantage?

If you listen to Kite management, they constantly stress that Kite will have first mover advantage in CAR-T drug treatment. Key analysts echo this assertion. Both groups rightly dismiss Juno because the clinical hold in the ROCKET trial has delayed entry until mid-2018 and even then the entry would be for adult r/r ALL. Novartis seems to never be mentioned by either Kite or Juno or analysts. I asked a member of KITE management about Novartis and was told that Novartis was being very secretive and they had no good sense as to when they might come to market.

The first mover advantage is always important. Historically the first company to market gets about a 60% share, the second 25%, the third 10% and all others 5% if the products are not meaningfully differentiated. So far there is no compelling reason to think that there is meaningful differentiation amoung the first generation CAR-T products.

In the case of CAR-T products the first mover advantage may be even more important. CAR-T products will be sold more like a medical device than a drug according to Novartis. If so, companies will play an integral role in the overall planning of a treatment regimen and become working partners with physicians and their institutions. Once such bonds are formed, it is very difficult for a newcomer to compete unless they have a dramatically better product.

SmithOnStocks Point of View:

Novartis has said that it will file a BLA for pediatric r/r ALL (sometime) in 2017 and if so will receive approval in late 2017 or early 2018 assuming success in the clinical trial. For this indication, Novartis will clearly be the first to market with perhaps a one to two year lead over Kite and Juno in this indication.

Kite has maintained that it will gain the first mover advantage in r/r DLBCL but will they? As previously discussed, Kite hopes to file a BLA based on interim data from the ZUMA-1 trial by year end and gain approval in mid-2017. However, FDA may want to see the full data set from the ZUMA-1 trial which ends in March 2017 according to ClinTrials.gov. This would point to approval in late 2017 or early 2018.

According to ClinTrials.gov Novartis started a trial in r/r DLBCL patients in July 2015 that will enroll 118 patients. Recall that Kite’s ZUMA-1 trial started in January 2015 and has enrolled 124 patients. Both trials are open label and use objective response rate as the primary endpoint. The secondary endpoints are similar. Novartis has not said if it will conduct an interim look for efficacy as Kite is doing, but I would think they would.

Here are the questions that come to my mind. Given the probable close timing for completion of the Novartis and Kite trials wouldn’t the FDA want to see the results for both before approving either? What if they approved one drug first and then clinical data suggested superiority for the second drug or raised some type of safety issue. If I were the FDA, I would approve both products at about the same time. In this event, it would be a significant advantage for Novartis. The institutions using CAR-T might also treat not only r/r DLBCL but also pediatric r/r ALL. Wouldn’t it be easier to use just the Novartis product (I assume approval in both indications) than to use Kite for r/r DLBCL and Novartis for pediatric r/r ALL? Key to this assumption is that the products are not meaningfully differentiated.

I can make the argument that if both products are approved at about the same time that Novartis is more likely to gain first mover advantage in the CAR-T market and go on to garner much of the market share. I bases this on the assumption of approval for two indications.

What About Pricing and Reimbursement?

Kite management says that they will announce pricing at the time of launch. However, they did give some metrics that provide an insight into what they are thinking. Kite showed data that indicated that the cost for two years of therapy for three novel chemotherapy drugs-Revlimid, Imbruvica and Blincyto- is $300,000 to $450,000. This implies to me that they believe that they can present this treatment as a drug that can effectively control the disease for two years or more. They also pointed out that an allogeneic stem cell transplant can cost all in about $930.000. The latter includes inpatient charges, physician fees and pre/post-transplant charges.

SmithOnStocks Point of View:

There are three components to the cost of CAR-T therapy. The first is the pre-conditioning chemotherapy that involves the cost of the drugs and their administration. Then the patient is hospitalized (usually for a week) given the CAR-T cell infusion and treated for side effects. I am guessing that KTE-C19 will be priced at $300,000 to $500,000 and I would lean toward the upper end of that range. Kite estimates that the addressable patient population is 7,500 r/r DLBCL patients and a few hundred (let’s guess 1,000) r/r PMBCL and TFL patients. At a price of $400,000 per KTE-C19 treatment, the US addressable market is $3.2 billion and the European market is about the same $3.2 billion. Obviously, CR-T drugs won’t be used in all of these patients. At this time I am not venturing an estimate on market penetration for the drugs either independently or as a whole. Remember that Novartis will enter this market segment at about the same time as Kite and perhaps Juno will enter a year and one half or more later so this market will not likely to be the province of just Kite.

There will be additional costs from the pre-conditioning program and the costs of managing side effects assocoated with both pre-conditioning and cell infusion. Kite has been opaque in discussing side effects, but I think that between the chemo pre-conditioning and the cell infusion that 30% to 50% patients may experience at least one grade 3 or 4 side effect. These can be extremely expensive to treat. If KTE-C19 is priced at say $400,000 the all-in cost of treatment might be $600,000 or more when these other costs are added in.

During the meeting when asked about reimbursement, Kite answered simply that institutions would somehow find a way to gain reimbursement for a breakthrough product like KTE-C19. I am more skeptical. Given the complexity and cost of this therapy, gaining reimbursement is going to be time consuming and difficult in my opinion.

Building Infrastructure

Investors have showered Kite with almost $1 billion of cash since it came public. Kite has used this money to spend aggressively to build its management team and dramatically broaden its technology base. It has attracted an impressive assemblage of experienced individuals who have successfully helped to pioneer multiple innovative cancer drugs and technologies.

Primarily through partnerships it has brought in-house a broad array of technologies that address next generation eACT technologies far beyond the current CAR-T technology. These are all early stage and most are at the pre-clinical stage. At the meeting, they highlighted three technologies: (1) a CAR control switch capable of reversibly titrating the expansion of engineered T cells in the body that is being developed in partnership with Cell Design Labs (2) Transmembrane Immunomodulatory Proteins (TIPs) that increase the potency of TCRs which are being developed with Alpine Immune Sciences; and (3) efforts to develop allogeneic CAR and TCR T cell therapies via genome engineering of iPS cells followed by differentiation into T cells.

SmithOnStocks Point of View:

Kite has positioned itself to be a dominant factor in the development of eACTs over the next decade. This is a huge positive. The one downside I would point out is that these newer technologies are likely to not produce revenues for perhaps a decade and will consume huge amounts of cash. A commercial disappointment with KTE-C19 could cause a cash problem.

Tagged as 2016 Analysts Day, KITE, Kite October 18, Kite Pharma, KTE-C19 + Categorized as Company Reports, LinkedIn