Becoming an increasingly prominent player

The purchase of privately-held Trianta Immunotherapies in January 2014 (€4m upfront, €3.9m milestones paid and potential future milestone of €2.1m) was a transformational transaction, positioning Medigene as an emerging cancer immunotherapy player. Trianta had three key technology platforms – DC (dendritic cell) vaccines, adoptive T-cell therapy (TCR) and T-cell specific antibodies (TABs) – and Medigene is focused on advancing these starting in haematological malignancies. Originally founded in 1994 as a spin-out of the Munich Gene Center, Medigene raised €125m in its Frankfurt Stock Exchange IPO in 2000, and its legacy assets – Eligard (prostate cancer), EndoTAG-1 (breast cancer) and RhuDex (autoimmune) – have now been sold or out-licensed. It has also sold 100% of its stake in Catherex to Amgen and 50% of its stake in Immunocore. Supply chain revenues, royalties and milestones are received on Veregen, a topical ointment for genital warts, sold in 23 countries through partners. Medigene now employs 88 staff (end 2016) and is headquartered in Munich, Germany.

We have raised our rNPV to €293m (vs €233m), as we have increased the probability of the TCR programme to 13% (vs 5%), rolled the model forward by three months and now use the reported FY16 cash position of €52.6m. We have also included the bluebird bio deal and removed the IIT DC vaccine trial as this is incorporated into the DC vaccine deal metrics. Medigene is well-funded (into FY19 on current forecasts), which should enable it to execute on an expanding clinical trial programme. There are a number of potential inflection points, including the start of its own TCR study (expected 2017), complete enrolment in its own DC trial in AML (expected 2017) and the start of a TCR-IIT trial in multiple myeloma (expected 2017). Alongside this there is the potential of further TCR R&D collaborations similar to its recent bluebird bio deal. Medigene is operating in a hot area which as it progresses could make it increasingly attractive to investors.

Medigene reported a FY16 cash position of €52.6m. We forecast a cash runway into FY19, which should enable completion of its Phase II DC vaccine trial, significant advancement of its company-initiated TCR trial (starting H217) and the start of a second company-initiated TCR trial (H218). At that point, we expect Medigene to either raise further funding and/or partner some of its programmes. We expect an increase in R&D spend due to the initiation of a Phase I study in TCR and the continuation of its DC vaccine study. We now forecast R&D in FY17 of £17.9m (vs £10.8m) and £19.7m in FY18 and SG&A costs of €8.3m (vs €8.1m) in 2017 and €8.5m in 2018.

Medigene is subject to the risks typically associated with biotech company drug development, including the possibility of unfavourable outcomes in clinical trials, success of competitors and commercial decisions by partners or potential partners. Cancer immunotherapy is a highly-promising and rapidly evolving field, yet Medigene’s technology platforms are still in relatively early stages of development. The outcomes of the investigator-initiated trials with the DC vaccines and the TCR CIT and IIT trials are therefore key sensitivities. Equally, while the TCR CIT and IIT trial are expected to start in 2017 there is still work to be done on the GMP manufacturing and the submission of the clinical trial applications. Equally, multiple companies have more advanced DC vaccines and TCRs in development, which could limit the market opportunity for Medigene’s candidates and restrict the cancer targets that may be pursued.

Medigene is an immuno-oncology company focused on T-cell directed therapies. It has a proprietary pipeline and partnered clinical development programmes in oncology. Its technology platforms are synergistic with one another and therefore able to potentially address different types and stages of cancer (see Exhibit 1). The technology platforms are Dendritic cell vaccines (Phase I/II in AML), T-cell receptor-modified T cells (TCRs) (late preclinical stage, moving into clinical in 2017) and T-cell-specific antibodies (TABs) (preclinical development). These are underpinned by its immune monitoring facility, which detects cellular immune responses at preclinical and clinical stages.

An autologous (patient-derived) dendritic cell-based vaccine technology is the most advanced programme, with a company-initiated trial ongoing in AML (currently in Phase II of a Phase I/II study) and two investigator-initiated Phase I/II studies, in acute myeloid leukaemia (AML) and prostate cancer (ongoing). The TCR programme, similar in mechanism to CAR-T therapies and currently attracting industry interest, is at the pre-clinical stage with a GMP-compliant manufacturing process being developed and a Phase I/II study expected to start late 2017. Medigene’s overall product portfolio is summarised in Exhibit 2.

Medigene has progressed over recent years to become an immunotherapy-focused company. Importantly, it has a track record of gaining value from non-core assets which it has executed over the past 24 months. Exhibit 3 provides an overview of these deals. Veregen is the remaining legacy product which we expect Medigene will also look to exit in order to complete the move into its core focus of immunotherapy.

T-cells are distinguished from other lymphocytes by the presence of T-cell receptors (TCRs) on the cell surface. TCRs allow T-cells to identify cancer targets eg tumour-targeted antigens presented on the surface of the tumour cells. Medigene’s TCR technology aims to arm the patient’s own T-cells with tumour-specific T-cell receptors. The binding of naturally occurring TCRs to cancer cells is typically poor (low affinity) because cancer proteins (TAAs) are often unmutated self-proteins and TCRs that have a high affinity for these self-proteins are rapidly deleted during early lymphocyte development. In general, TCRs therefore need to be modified and engineered in some way to enhance their ability to target and bind to cancer antigens. The process of treating a patient (which Medigene has yet to do) is outlined in Exhibit 4. For more detail please see here.

Cancer immunotherapy, stimulating/modifying a patient’s immune system to target tumour cells, is currently an area of high interest. At the forefront has been the chimeric antigen receptor (CAR) T-cell technology (CAR-T). CAR-T uses an engineered antibody fragment to recognise the target cell and link this to a number of signalling domain proteins within the T-cell, designed to activate the T-cell once the antibody recognition fragment (eg CD19) has bound to a target cell. This has the potential to initiate a powerful immune response to destroy the cancer cells, but it comes with the possible cost of also stimulating cytokine-release syndrome (CRS). There is no evidence that Medigene’s TCR technology causes CRS, which along with the potential ability to target a broader spectrum of intracellular proteins (more addressable targets) and more specificity (recognition is MHC-restricted) indicates that TCRs may become the immunotherapy of choice. Exhibit 5 provides an overview of the key distinctions between Medigene’s TCRs and CAR-Ts.

Medigene has been developing a comprehensive pipeline of recombinant TCRs for which it has established a robotic platform for high throughput generation of TCR lead candidates (see Exhibit 6), while establishing a GMP (good manufacturing practice) compliant process for the final step of combining the TCRs with the patient-derived T-cells. We expect the GMP-process development to complete this year along with the application for its Phase I/II clinical study, planned to initiate in late 2017. An overview of the study design is outlined in Exhibit 7.

While the initiation of its first company-initiated TCR clinical study is important, it is worth noting that Medigene is creating value along the TCR development chain (see Exhibit 8). This has been demonstrated by a R&D collaboration with bluebird bio to generate TCR candidates against four targets (see here for more detail) and TCR development collaborations (see here for more detail).

Medigene’s most advanced cancer immunotherapy technology is its new generation autologous dendritic cell (DC) vaccines. DCs are a type of antigen-presenting cell (APC) capable of processing antigen material and presenting it on the surface to other cells of the immune system. DC-based therapy involves isolating mononuclear cells from a patient, maturing them to DCs and loading them with cancer antigen(s), before injecting them back into the patient. This results in the activation of T-cells to recognise and attack antigen-bearing tumour cells, while also inducing natural killer (NK) cells to help target tumour cells (see Exhibit 9). Medigene has indicated that its ‘new generation’ vaccines overcome the weakness of other DC vaccines as they are high quality and fully characterised with >85% mature polarised DCs. For more details of the technology please see here. Equally, the manufacturing process has a number of important advantages which makes it efficient such as:

Medigene’s DC vaccine programme is the most clinically advanced. There are two investigator-initiated Phase I/II clinical studies underway with DC vaccines, using Medigene’s technology, in patients with prostate cancer (n=30) and acute myeloid leukaemia (AML, n=20), since 2010 and 2013 respectively. Of the 30 patients to be treated in the prostate cancer study, 15 will be treated with the original (investigator-produced) DC vaccine type, and the rest dosed with Medigene’s ‘new generation’ designed vaccine candidates. Importantly, Medigene has also initiated its own Phase I/II trial with its DC vaccine for AML, tailored to present two leukaemia-associated antigens (WT1 and PRAME); the investigator study in AML uses DCs loaded with three antigens (WT1, PRAME and CMVpp65). An overview of both the CIT and IIT studies are given in Exhibit 10 and Exhibit 11. Results are expected in 2019 from the CIT study.

Medigene’s TABS (T-cell-specific antibodies) platform utilises its recombinant TCR technologies in order to produce, isolate and characterise monoclonal antibodies specific for TCR structures. T-cell-specific antibodies (TABS antibodies) recognise T-cells based on their unique T-cell receptors and can therefore distinguish between different T-cells expressing different TCRs. TABS antibodies are highly complementary to Medigene’s TCR technology platform as they can be used to track its TCR-modified T-cells both in vitro and in vivo. In the future, TABs could potentially be applied to precisely control the production of genetically-modified T-cells or to remove them after adoptive transfer in patients if adverse effects appear. This would indicate potential in diseases such as T-cell leukaemia. For more details please click here. It is Medigene’s earliest stage programme and studies are ongoing to establish proof-of-concept.

Medigene is subject to the risks typically associated with biotech company drug development, including the possibility of unfavourable outcomes in clinical trials, success of competitors and commercial decisions by partners or potential partners. Cancer immunotherapy is a highly-promising and rapidly evolving field, yet Medigene’s technology platforms are still in relatively early stages of development. The outcomes of the investigator-initiated trials with the DC vaccines and the TCR CIT and IIT trials are therefore key sensitivities. Equally, while the TCR CIT and IIT trials are expected to start in 2017 there is still work to be done on the GMP manufacturing and the submission of the clinical trial applications. Also, multiple companies have more advanced DC vaccines and TCRs in development, which could limit the market opportunity for Medigene’s candidates and restrict the cancer targets that may be pursued. Securing the appropriate intellectual property rights is also likely to be an important issue for T-cell-based therapies.

We have reviewed our rNPV model and updated it to reflect the more streamlined focus on immuno-oncology and updated our assumptions. We have raised our rNPV to €293m (vs €233m) as we have increased the probability of success of the TCR programmes to 13% (vs 5%) due to the announcement of it entering the clinical stage in 2017 and included the bluebird bio TCR deal. We have also removed the DC vaccine trial in prostate cancer as this is an IIT trial and its potential is incorporated as part of the DC vaccine deal metrics and in light of a lower sales growth in Veregen (its non-core asset), we have lowered the peak sales to €19m vs c €40m and royalty rate to 10% vs 20%. Finally, we have rolled the model forward by three months and incorporated the reported FY16 cash position of €52.6m into our model. We believe there is further upside here as and when the TCR programme actually enters the clinic. Our valuation model, which applies a standard 12.5% cost of capital, and key assumptions are summarised in Exhibit 12.

Medigene is well-funded (into FY19 on current forecasts), which should enable it to execute on an expanding clinical trial programme. There are a number of potential inflection points over the next 24 months, including:

Cancer immunotherapy, stimulating/modifying a patient’s immune system to target tumour cells, is one of the hottest areas of research and investor interest today. This has been driven by increasingly compelling efficacy data in cancers with historically bleak outcomes, with the potential to achieve a cure or functional cure for some patients. It is clear from recent licensing activity in the cancer immunotherapy field that big pharma’s appetite for these technologies, even at early stages of development, is high and can reasonably be expected to continue for some time. Coupling this with the significant inherent potential of these products to put certain cancers into effective remission has resulted in very high market capitalisations for a number of (mainly US-based) cancer immunotherapy companies. We highlight this peer group in Exhibit 13, which shows an average market cap of approximately $1.4bn (median of $810m). We also include companies working more exclusively on DC vaccine technologies, which shows relatively more modest valuations and highlights the differing levels of current investor interest between the two technologies.

While it is clear that investors are prepared to pay a premium for stocks in the immunotherapy area it is difficult to quantify an appropriate level for Medigene at this stage. However, we note its recent deal with bluebird bio (a large player in this area) as an important indicator of its potential. The deal was Medigene’s first commercial partnering agreement based on its proprietary TCR technology platform. The deal is to produce TCR therapeutic candidates against four targets using Medigene’s TCR technology platform and bluebird bio’s lentiviral vector, gene editing, synthetic biology and manufacturing capabilities. The partnership will be executed with Medigene having responsibility for generating and delivering the relevant TCRs to bluebird bio, as well as joint development of preclinical product candidates. bluebird bio will take responsibility for clinical development and any resulting commercialisation. The deal offers validation of Medigene’s TCR technology and also has wide-ranging potential as the four targets could be utilised across a number of indications.

Medigene will receive an upfront payment of $15m R&D funding (specific to the collaboration) and potential milestones resulting from preclinical and clinical development, along with any resulting commercialisation (company guidance indicates royalty payments could range from single to double digits). While there are few TCR-related deals a useful indicator of the potential of future deals in this area can be seen by looking at recent CAR-T deal activity (see Exhibit 14 below).

Medigene reported a FY16 cash position of €52.6m, which the company has stated is sufficient to fund current operations beyond its forecast horizon of two years. We forecast a cash runway into FY19, which should enable completion of its Phase II DC vaccine trial, significant advancement of its company-initiated TCR trial (starting late 2017) and the start of a second company-initiated TCR trial (H218). At that point, we expect Medigene to either raise further funding and/or partner some of its programmes.

We have reviewed our FY17 forecasts and now include forecasts to FY18. We expect a sharper increase in R&D spend due to the initiation of a Phase I study in TCR and the continuation of its DC vaccine study. We now forecast R&D in FY17 of €17.9m (vs €10.8m) and €19.7m in FY18. We forecast SG&A costs of €8.3m (vs €8.1m) in 2017 and €8.5m in 2018. Finally, we expect capex to increase in FY17 and FY18 as a result of investment into increasing the capacity to generate TCRs along with an expanded team. We forecast €3m of capex in FY17 and FY18.

The main source of revenues for Medigene is its non-core asset Veregen. We currently forecast revenues of €3.1m and €3.4m in FY17 and FY18, respectively. We also include revenue from the bluebird bio agreement which we expect to be recognised over the four years of the deal. We do not include any potential milestones resulting from this deal at this time.