Sunesis Pharmaceuticals — First signs of efficacy coming up

Sunesis is a pharmaceutical company developing drugs for the treatment of cancer. Its lead program is vecabrutinib, an inhibitor of Bruton’s tyrosine kinase (BTK) that is being developed for refractory chronic lymphocytic leukemia. The drug’s mechanism of action (as a non-covalent BTK inhibitor) enables potential activity in patients who have progressed on the standard of care Imbruvica (ibrutinib, AbbVie/Janssen). Approximately 25% or more of those treated with Imbruvica develop resistance and this number is expected to increase with more patients on the drug for an extended amount of time. The company is in the dosing phase of its ongoing Phase Ib/II study, and is expected to provide a clinical update on the program at the EHA Congress in June 2019.

Our valuation remains relatively unchanged at $241m (from $243m) albeit lower on a per share basis ($2.70 per diluted share including new convertible preferred stock, warrants and options, from $2.97). This valuation is based on a risk-adjusted NPV analysis of the company’s development programs. We value the lead vecabrutinib program at $187m, based on peak sales of $666m at a 20% probability of success. We expect the company to be able to launch vecabrutinib in 2023 if it remains on schedule, which in our assumptions includes advancing to the Phase II portion of the trial in 2019. We expect to update the valuation with more information regarding the efficacy of vecabrutinib, which we expect as the drug progresses through the higher dosing cohorts: efficacy is expected in the range of 100mg to 300mg, and the 100mg arm is fully enrolled.

We estimate that Sunesis will require $115m in additional capital before profitability in 2023 ($40m in 2020, $40m in 2021, $35m in 2022). These costs are driven largely by R&D and the vecabrutinib development program. The company spent $14.6m in 2018 on R&D and we expect these values to increase in 2019 with the advancement of the clinical program to the Phase II portion of the study. The company recently completed an offering in January 2019 of $20m for 23m shares of common stock and 17,000 shares (equivalent to 17m common shares), which should provide a cash runway through the end of 2019.

All clinical-stage development companies face a series of similar risks associated with clinical drug development. There is unavoidable uncertainty regarding the outcomes of clinical trials. However, we have a higher degree of confidence in the vecabrutinib program than in other Phase I assets because the drug’s target BTK has already been the basis of two successful drug approvals. Sunesis has also demonstrated attractive biochemistry and pharmacokinetics suggesting that it can engage the target in vivo. This being said, there are no guarantees and multiple factors outside of the company’s control. For instance, there are multiple other BTK inhibitors and other drugs for CLL in development competing for patients in the clinical trials, and eventually on the market. Moreover, the eventual size of the market has a degree of uncertainty, because the true rate of the various BTK resistance mutations is a matter of ongoing study. If the company encountered significant hurdles in the development of vecabrutinib, its options are limited, because it is the primary value driver in the company. Finally, the company faces financing risk as it may face significant dilution raising the additional capital needed to complete development of vecabrutinib.

Sunesis’s primary focus is on the clinical development of vecabrutinib for the treatment of B-cell malignancies. Vecabrutinib is an inhibitor of Bruton’s tyrosine kinase (BTK), a target that has already been validated for the treatment of chronic lymphocytic leukemia (CLL) and other B-cell cancers through the success of the approved BTK inhibitor Imbruvica (ibrutinib, AbbVie/Janssen). Vecabrutinib, however, is a non-covalent inhibitor and therefore has potential activity in patients who are resistant to Imbruvica and other covalent BTK inhibitors. The drug is currently in the dose-escalation portion of a Phase Ib/II clinical study. Sunesis has two additional early stage programs. SNS-510 is a preclinical phosphoinositide dependent protein kinase 1 (PDK1) inhibitor being investigated for solid and hematological tumors. PDK1 is a novel target that could have improved efficacy in tumors with PI3K and PTEN mutations, which are exceptionally common (30–50% of certain cancers). Lastly, Sunesis has out-licensed the pan-Raf inhibitor TAK-580 to Takeda, which is being investigated for the treatment of pediatric glioma. Pan-Raf inhibitors are a new class of drug that avoids the paradoxical enhancement of tumor growth in some patients who take B-Raf inhibitors.

Vecabrutinib is currently being investigated for a series of B-cell malignancies that are being enrolled for the Phase Ib/II study. These include CLL, mantle cell lymphoma (MCL) and Waldenström’s macroglobulinemia (WM), diffuse large B-cell lymphoma (DLBCL), follicular lymphoma (FL), and others. However, given the potential of the drug in Imbruvica-resistant CLL patients, this remains the primary target market. CLL is a hematologic malignancy indicated by the proliferation of mature B-cell lymphocytes and the clinical course of CLL can vary from indolence with a relatively normal life expectancy to a rapidly progressive disease leading to an early death. There were an estimated 20,940 new patients in the US in 2018 (4.7 per 100,000 on an age-adjusted basis).1 The treatment of B-cell malignancies has been an area of substantial investment and it has been transformed over the past decade by the development of new, targeted drugs for these diseases. One of the greatest successes in this field was the development of Imbruvica by Pharmacyclics (acquired by AbbVie in May 2015, partnered with Janssen). The drug was approved in 2013 with accelerated approval following a three-year Phase III trial and it retails for approximately $150,000. Imbruvica substantially improved the standard of care for relapsed and refractory CLL by more than doubling the survival rate for these patients (HR=0.43 vs ofatumumab at 18 months). Imbruvica is also approved in MCL and WM. In 2018, worldwide sales were approximately $4.4bn.

Vecabrutinib is a non-covalent inhibitor of BTK, which means that it does not form a permanent chemical bond with the target protein. This is in contrast to the majority of other BTK inhibitors in development as well as the two currently approved inhibitors Imbruvica and Calquence (acalabrutinib, AstraZeneca) (Exhibit 2).

These covalent inhibitors derive their activity by forming a covalent bond to cysteine 481 (C481) in the BTK protein. However, if patients develop a mutation of this amino acid, they will become resistant to treatment.2 Vecabrutinib, in contrast, retains its activity in C481 mutants, and therefore has the potential to work in resistant patients (Exhibit 3). Moreover, it prevents the generation of activated BTK (auto-phosphorylated BTK, pBTK) in the presence of the mutant, whereas this effect is lost by Imbruvica.

Given the only recent approval of Imbruvica, there is limited experience with resistant patients, and the mechanisms of resistance are an area of ongoing research. However, by all accounts C481 mutations (in particular the serine mutation C481S) appear to be the predominant mechanism of resistance. Estimates of the rate of C481 mutations in resistant individuals are typically derived from small anecdotal studies at this point, but are found in the range of 60% to 80%.3,4

Outside of BTK inhibitors, we expect vecabrutinib to face some competition from Venclexta (venetoclax, AbbVie/Roche), a B-cell lymphoma 2 (Bcl-2) inhibitor that was approved in 2016 for the treatment of refractory CLL (and in 2018 for AML). The drug had sales of $344m in 2018. Venclexta does not necessarily preclude treatment with vecabrutinib, but is an additional factor in the treatment algorithm. However, AbbVie has also recently reported Phase II results showing the effective use of Venclexta in combination with Imbruvica in the first-line setting. We view this as a positive for vecabrutinib, because it suggests both the potential to combine Venclexta with other BTK inhibitors (such as vecabrutinib) in the second line, and the potential to move Venclexta to the front line, where it would compete less with vecabrutinib. Examining activity in patients exposed to Venclexta is a key objective on the ongoing Phase Ib/II clinical study.

Sunesis presented the results of a Phase Ia healthy volunteer study of vecabrutinib via a poster at the Second International Conference on New Concepts in B-Cell Malignancies in September 2016. The clinical trial examined the pharmacokinetic and pharmacodynamic profile and adverse events in volunteers following a single dose of the drug at four different dosing levels (from 50mg to 300mg) or with placebo. Six volunteers received drug for each active arm (n=24 total for vecabrutinib) and eight received placebo. Although these results are from a small set of healthy volunteers, we consider them very important for evaluating the viability of this drug, because while the targeted mechanism of action has already been validated through prior approvals of other drugs, this study provides vital hints of other key vecabrutinib attributes (the pharmacokinetic, pharmacodynamic and safety profile of the molecule).

The primary endpoint of the trial was safety, and in general the adverse event (AE) profile was similar between patients who received drug and those who received placebo (Exhibit 4). 33% of patients who received active drug (at all tested doses) had an AE, compared to 38% in the placebo arm. The adverse events observed in the trial were all mild (grade 1) except for a single patient on the 300mg arm who reported grade 2 fatigue and headache. Also, an important AE to note is that a single patient reported supraventricular tachycardia (racing heart) on the 300mg arm. Although the event was asymptomatic and resolved in 20 seconds, adverse events related to heart rhythm have been associated with BTK inhibitors in the past and 6–9% of patients receiving Imbruvica experience atrial fibrillation, typically after prolonged exposure. Importantly, the trial also monitored patients via laboratory blood testing and via electrocardiogram, and no other abnormalities were found.

Sunesis also reported initial pharmacokinetic and pharmacodynamic data from the active arms of the trial, which included both blood concentrations (Exhibit 5) and the degree of BTK inhibition (Exhibit 6) following dosing. Patients were followed for up to 72 hours and the results showed that the molecule had a long half-life in humans (eight to 17 hours depending on dose), and that at the plasma levels observed in this study, BTK inhibition of 85% or more was seen for approximately 12 hours for all the doses studied. 85% inhibition of BTK has previously been identified as sufficient for clinical activity during studies of AstraZeneca’s Calquence.5 This profile presents the possibility of a twice-a-day dosing regimen, which the company has proposed using when moving forward with clinical trials.

Sunesis is currently in the dose-escalation portion of an ongoing Phase Ib/II study of vecabrutinib. The Phase Ib dosing portion of the study follows a standard 3+3 protocol with three patients per ascending dose (potentially expanding to six patients following observations of dose-limiting events). There are seven planned dosing cohorts (25mg, 50mg, 100mg, 200mg, 300mg, 400mg and 500mg twice daily), although the company has stated that it expects to see the first signs of efficacy in the 100mg to 300mg cohorts. Each cohort receives one four-week treatment cycle. Once the effective dose is reached, the study is planned to expand into a Phase II study at that dose with an estimated trial size of 124 patients. The program is taking place at some of the leading cancer institutes in the US, including the Dana-Farber Cancer Institute, MD Anderson Cancer Center and Memorial Sloan Kettering Cancer Center, among others (eight in total).

The company provided an update of the study at the 2018 American Society of Hematology annual meeting in December 2018. At the time of the presentation, the company was on the second (50mg bid) dosing cohort. The company provided a detailed breakdown of the AE profile from the 10 patients with data available (Exhibit 7). Hematologic AEs were common but are not unusual for this class of drug or this patient population. Four grade three events that were potentially related to drug were observed, three hematologic and the third being an ALT elevation. Of note in this profile is that the rate of GI events is low. This is in contrast to Imbruvica, which has high rates of GI effects (51% diarrhea, 31% nausea, 25% constipation, etc). Calquence also has high rates of reported GI effects, albeit at lower levels than Imbruvica. This indicates that the AE profile of vecabrutinib may be significantly different than these drugs, although higher doses will need to be evaluated before drawing any definitive conclusions.

Sunesis also provided additional PK and pharmacodynamic data to support the proposition of vecabrutinib. The PKs in the trial appear similar to previous in vivo measurements. The company also provided a breakdown of the impact of vecabrutinib on the concentrations of pBTK (Exhibit 8). pBTK is the active form of the enzyme and the efficacy of BTK inhibitors is driven by reductions in its concentration. These data also include patients with a C481 mutation. Moreover, the company provided evidence that the drug was having an impact on B-cell function, as indicated by a reduction in cytokines measured in a selection of patients (Exhibit 9). One would expect to see reductions in cytokine release in the presence of a BTK inhibitor, because the enzyme is a key effector of cytokine release pathways. These data provide evidence that the drug is working as intended, and is having a physiological impact.

Based on these data we expect the upcoming cohorts to provide data on the efficacy of the drug. The company noted that early indications of drug effect were seen but it did not report any measures of efficacy in this data. Of the 13 patients enrolled at the time of the ASH update, the majority (nine) had CLL. Patients with mantle cell lymphoma and Waldenström’s macroglobulinemia have also been enrolled in the trial, and although earlier in the year the company expanded enrolment to include other B-cell malignancies none were recruited at the time. The company reiterated on the 2018 earnings conference call in March 2019 that the majority of patients in the study have CLL.

The most recent progress report on the study was presented in early January 2019, when Sunesis announced that it had progressed to the 100mg dosing cohort. The slots for this cohort were filled in early January, so it is expected to progress quickly. The company continued to over-enrol the dosing arm to a total of six patients, which should hopefully limit unforeseen delays. The company will be presenting an update on the study at the EHA conference in June 2019.

The company previously guided that based on pharmacokinetic data, it expects to see the first signs of clinical efficacy in the range of 100mg to 300mg. Patients on the trial are evaluated after four weeks for the safety endpoints, but they may remain on treatment until they progress or withdraw from the study. However, given the short period of treatment that patients will have had at the time of the update, we consider it unlikely that these earliest signs of efficacy will be evaluable as remissions (although it is possible), but some hematologic signs of efficacy may be present. BTK inhibitors historically induce strong nodal responses, which correlate with improvement in disease symptoms.6 Paradoxically, the cells mobilized from the lymph nodes can cause a dramatic increase in blood lymphocytes, which is canonically a sign of progressive disease. However, in these patients symptoms improve over this period and eventually lymphocytosis resolves in the majority of cases.

At the very least, data from the upcoming dosing cohorts should show high occupancy rates for the BTK enzyme. Rates above 80% are historically associated with clinical responses. Importantly, to support the premise that vecabrutinib can maintain activity in C481 mutant cancers, we hope for any direct evidence of BTK binding in patients harbouring this mutation. We expect biomarkers of BTK inhibition (such as reduction in cytokines and FC receptor activity) to correlate with higher doses. Ideally these data should correlate with some early signs of symptom improvement, and any indication of nodal response or lymphocyte mobilization will be indicative of direct drug activity.

Sunesis has two additional programs: SNS-510, a phosphoinositide dependent protein kinase 1 (PDK1) inhibitor for hematological and solid tumors; and TAK-580, a pan-Raf inhibitor program being investigated for pediatric glioma.

The receptor tyrosine kinase (RTK) signaling pathway has been central to the development of targeted cancer therapies for the past two decades. RTKs are a class of protein that respond to signals from growth factors and other signaling molecules, but mutations in this pathway can lead to a constitutive growth signal that is characteristic of cancer. Drugs have been developed targeting the receptor itself (for instance Herceptin targeting HER2), as well as the downstream effectors of RTKs in the so-called PI3K/AKT pathway, for instance PI3K (Gilead’s Zydelig) and mTOR (Pfizer’s Torisel). The RTK pathway is central to the pathology of a wide array of different cancer types, as evidenced by the indications this class of drug has been approved for in both solid tumor and hematologic malignancies. One of the multiple downstream pathways from RTK is the PI3K/AKT pathway, which has been a topic of considerable development interest due to its role in promoting cancer cell survival and metastasis.

Sunesis has developed SNS-510 as an inhibitor of PDK1, a previously unstudied target in the PI3K/AKT pathway. PDK1 is an effector of PI3K, and therefore it is reasonable to expect a potential efficacy profile comparable to PI3K inhibitors like Zydelig (idelalisib, Gilead). Zydelig was approved for the treatment of B-cell malignancies such as CLL and non-Hodgkin lymphoma. Because the RTK pathway is implicated in such a broad array of cancers, SNS-510 could potentially have many applications. However, the drug would be uniquely effective in malignancies where PI3K or PTEN is frequently mutated such as breast cancer (27% PI3K mutation frequency), or endometrial cancer (38% PTEN mutation frequency). In these cases, a PDK inhibitor could potentially limit the effect of these mutations as it is the immediate downstream effector of these proteins. A potential risk to this program is opportunistic infections among patients, considering that inhibition of this pathway by Zydelig is associated with this risk. In early 2016, a series of deaths in clinical trials involving Zydelig prompted Gilead to terminate further clinical development. Sales of the drug have been declining (from a peak of $168m in 2016), but in spite of this it had sales of $133m in 2018.

There are no other PDK1 inhibitors in development to our knowledge. Sunesis has completed SNS-510 non-GLP toxicology studies, and is currently engaged in IND enabling studies. The drug was initially developed in a collaboration with Biogen Idec, whose rights were acquired by Takeda. Sunesis will owe royalties and $9.2m in development milestones to Takeda for these rights. It is protected by composition of matter patent 8,778,977. Research to support an IND filing is ongoing, but the timeline has been delayed until after 2019 to prioritize vecabrutinib development.

There has been substantial success recently developing and getting approval for inhibitors of the oncogene B-Raf. There are currently three B-Raf targeted medications approved in the US (Nexavar, Bayer; Zelboraf, Roche; Tafinlar, Novartis) and at least four others in development. B-Raf is a very common oncogene that is mutated in 20% of cancers. When mutated it activates a pathway that triggers uncontrolled growth of cells.

However, a major limiting factor in the efficacy of B-Raf inhibitors is that they can have a detrimental effect when the upstream signaling protein Ras is mutated. Cancers with a Ras mutation have a very similar phenotype to B-Raf mutations and activate the same pathway, but the signal is transduced through all three Raf isoforms (A-Raf, B-Raf, and C-Raf aka Raf1). The presence of a B-Raf inhibitor paradoxically enhances tumor aggression by encouraging the association of B-Raf with other isoforms. Because Ras mutations are exceptionally common in certain cancers (eg 34% of colon cancer, 57% of pancreatic cancer), the potential application for B-Raf inhibitors is limited to only certain cancer indications where paradoxical activation is not an issue.

TAK-580 was developed as a pan-Raf inhibitor by Sunesis and inhibits all Raf isoforms, therefore preventing the activation of the pathway even in the presence of Ras mutations. The drug was developed in collaboration with Biogen Idec and is out-licensed to Takeda. Following a study in which it was investigated for a range of tumors in multiple combinations, it was decided to focus development on the treatment of low-grade glioma in children, which is currently being investigated in a Phase I/II study. Glioma is a rare cancer, and rarer in children with a rate of 4.84 per 100,000 in the US per year.7 There are few treatment options for the disease, with surgery in the front line, followed by radiation and chemotherapy. Sunesis is entitled to up to $57.5m in development milestones from the collaboration, of which some undisclosed portion would be triggered upon the initiation of a registration trial. Eli Lilly is currently the only other major pharmaceutical company with a pan-Raf in clinical trials (Phase I). TAK-580 is protected by composition of matter patent 8,802,657.

Sunesis faces a series of risks that are typical to similar, clinical-stage drug development companies. Clinical trials carry a range of risks both inherent to the program itself as well as outside of the company’s control. We believe that vecabrutinib is partially de-risked because it is employing a vetted mechanism of action. Moreover, it has shown attractive pharmacokinetics and biochemistry to indicate that it can bind BTK in vivo similarly to the approved BTK inhibitors, albeit the number of patients this has been examined in is small. However, this cannot eliminate all the risk in the clinical studies. For instance, vecabrutinib must compete with a number of other treatments in development for patients to enrol, which may result in delays. Moreover, the treatment of hematologic malignancies is quickly evolving, and the company cannot ensure that it will be able to fill its current niche in the future. Despite increasing evidence that C481 mutations are the primary mechanism of Imbruvica resistance, the size of this market is still largely theoretical. Additionally, the survival for these patients is typically measured in months, presenting issues initiating them on a new therapy. Finally, vecabrutinib is not the only drug developed in this class, and Sunesis may face future direct competition. Vecabrutinib represents the vast majority of the value in the company, and although the TAK-580 and SNS-510 programs are principled in design, they do not provide a significant hedge against potential issues with the lead program. Sunesis also faces financing risk, as we predict that it will need an additional $115m in additional capital to reach profitability in 2023. Raising this capital may result in significant dilution.

Our valuation remains relatively unchanged at $241m (from $243m), albeit slightly lower on a per share basis ($2.92 per diluted share including new convertible preferred stock, warrants and options; from $2.97 previously). We have updated our model by rolling forward our NPVs, which was offset by lower Q418 net cash ($25.1m). We have delayed the development and commercialization timeline of SNS-510 based on company guidance that it does not expect to file an IND in 2019. This has lowered the value of this program to $23m from $25m, previously. We expect to update our valuation with more information regarding the efficacy of vecabrutinib. We currently estimate peak sales of $666m for vecabrutinib, which represents 50% penetration into the US and European market of BTK inhibitor refractory patients with a C481S mutation. We currently assume pricing on par with Imbruvica (adjusted for some future price growth), with a gross/net sales of 80%, and an expected time on drug of 18 months. Our probability of success (20%) reflects partial de-risking of the program given the proven mechanism of action. Our current timeline for the program assumes that Sunesis will be able to find the effective dose of the drug in 2019, which is expected in the range of 100mg to 300mg.

Although a lead indication has not been announced for SNS-510, and the potential indications for this drug are wide (both solid and hematologic tumors), we currently use breast cancer as our target market. We include only metastatic patients with PI3K mutations, which corresponds to approximately 7% of patients. Our launch pricing is based on Zydelig. We model TAK-580 with an orphan oncology pricing of $500,000 per course, and high penetration (50%) given the lack of available options.

Historically the company’s primary expenses have been associated with R&D. Sunesis had losses of $26.6m in 2018, of which $14.6m were associated with the R&D program. We expect these R&D costs to accelerate in 2019 if the company expands the ongoing vecabrutinib study to the Phase II portion of the trial (estimated at $16.4m). We have revised these estimates down from previous reports due to continued cost control at the company (vs $17.5m in 2019 R&D spending previously).

The company recently completed an offering in January 2019 of $20m for 23m shares of common stock and 17,000 shares (equivalent to 17m common shares), at an offering price of $0.50 per common share or equivalent. This should provide a cash runway throughout 2019 and into 2020. The company ended 2018 with $13.7m in cash (and $7.3m in debt). We have adjusted our financing schedule as a result and expect the company to need $115m in additional capital to reach profitability in 2023 ($40m in 2020, $40m in 2021 and $35m in 2022).