TxCell — Humanised CAR Tregs are a key step forward

TxCell is one of the few companies focusing on regulatory T-cell therapy (Tregs) for autoimmune and inflammatory indications. The Treg area is underdeveloped and TxCell offers a rare investment opportunity, targeting transplant and major autoimmune indications. Tregs have very powerful control functions in the immune system and can control adverse immune responses (Singer et al (2014). The area is gaining increased interest with Novartis in an academic collaboration on a new clinical trial in Graft vs Host Disease. TxCell has a big advantage in Tregs as it is using CAR-T technology to improve the efficacy of Treg therapy. Additional information on Tregs, market sizes and the immune system is contained the note of February 2017.

TxCell’s current Treg pipeline is

The Phase II product, Ovasave, based on the earlier ASTrIA platform is on hold. Its manufacturing process has been optimised. TxCell will integrate know-how and intellectual property from the ASTrIA platform into its active CAR Treg projects. TxCell continues to explore licensing opportunities for its technologies and products including Ovasave.

TxCell’s CAR Treg platform offers flexible, powerful and precise targeting to any antigen and the transformed cells selected. The basics of CAR design, a fast-evolving field in the cancer space, are reviewed in Sadelain et al (2013) and also in the Edison report on T-cell cancer therapies. Exhibit 1 shows an overview.

CAR Tregs use an antibody fragment as a receptor to target Tregs to specific cell types or locations – like a transplanted organ. In the first generation, these antibody fragments were derived from mouse antibodies which are easier to generate. However, these often are immunogenic so can only be used once as the immune system recognises and destroys them on subsequent use. As the antibody targeting domain of the CAR Treg is humanised, repeat doses of humanised Tregs can be given. The process involves harvesting patient cells, sending to a manufacturing facility, transfecting with virus and after culture and testing, returning to the patient for infusion. This process is accepted by regulatory authorities. TxCell has an agreement with Lentigen Technology for supply of the lentivirus vector used. A manufacturing CMO will be appointed. A clinical proof-of-concept study in transplantation is planned by TxCell to reach the clinic by late 2018 – this will be the first CAR Treg clinical study and could give validation of the CAR Treg concept by H12020.

The concept of CAR Tregs was published in a patent in 2008 by the Weizmann Institute of Sciences, Israel, EP2126054. This patent has been granted by the European Patent Agency and was licensed by TxCell in June 2016. It is in process in the US. This patent gives broad coverage. To provide further layers of extended protection, TxCell is developing other CAR Treg intellectual property, in the molecular technologies used and in manufacturing and processing technologies.

Tregs are used by the immune system to control other immune cells, like CD8+ killer T-cells, to prevent them attacking normal tissues or generating toxic levels of cytokine signalling molecules to attract and activate other immune cells. It is assumed that CAR Tregs will enable immune disorders to be controlled without the use of toxic drugs. TxCell is developing CAR Tregs that recognise a specific antigen trigger. This can be a self- recognition antigen, like HLA (crucial for tissue matching in type, in transplantation), or a natural protein, perhaps as in multiple sclerosis. When the CAR Treg is activated by the signal, it will limit the activity of any active immune cells in the neighbourhood so down-regulating the immune response.

Industrial competitors are limited and many are not in the CAR Treg area but instead use either general Treg populations or sorted polyclonal Tregs against a target like an allograft (usually bone-marrow). Others are using mesenchymal or adipose stem cells. Exhibit 3 summarises projects.

The main new development project is a pilot study at the University of Kentucky with Novartis as a collaborator. This is enrolling 12 patients undergoing a kidney transplant. Tregs will be harvested, cultured and infused. The patients will use Zortress (Everolimus) as immunosuppressive therapy. These are unmodified Tregs and the study is small. However, it could yield interesting data and it is very interesting that Novartis, the leader in CAR-T cell cancer, is collaborating. Novartis also has a licence to use Celyad’s patent on allogeneic T-cell production. It is therefore well placed to develop a Treg programme. TxCell holds key patents in Treg CAR technology.

Caladrius has a polyclonal Treg concept but only in Type 1 Diabetes so far. ILTOO is developing low-dose IL-2. This aims to stimulate Tregs but not other immune cells. This is the area that Celgene (via Delinia) is targeting but that project is still preclinical. ILTOO appears to be behind schedule on recruitment. In other cell types, Mesoblast is perhaps the most advanced with an NCI-run allogeneic 60 patient Phase III for GvHD intravenous. Data is may be released in H2 2017. Mesoblast has also reported promising Phase II safety and efficacy data in biologic refractory RA patients using a single dose of 1m/kg or 2 m/kg cells.

TxCell sees the solid organ transplant indication as a good starting indication for its CAR Treg programme. Unless a transplanted organ or tissue is a close match for the HLA type of the host, there is always a risk of rejection where the host immune system attacks the transplant. Mismatch means the number of HLA types that are the same between the donor and recipient. As the HLA system is very polymorphic with six genes to match, it is hard to get exact matches. Over four mismatches seems to be a risk factor.

The concept is that if a CAR Treg targets and binds to a non-self HLA in the graft, it will be activated locally and suppress direct cytotoxic T-cell and indirect helper T-cell antibody-led responses against the transplanted organ. Any activated CAR Treg should suppress any local immune response.

The evidence that CAR Tregs can control rejection comes from a paper by Professor Levings of the University of British Columbia with preclinical work on a mouse antibody fragment CAR Treg published (MacDonald 2016). TxCell has a collaboration with this group to target solid organ transplantation. The September 2017 preclinical data on humanised CAR Tregs is not yet published. The project is based on the HLA-A2 CAR Treg discussed above. This will work in about 25% of cases.1 TxCell may need to develop other HLA-type CAR Treg constructs.

The market value for Tregs in transplant management is hard to assess. This is a niche opportunity but potentially of high value as long-term management of grafts is not optimal and as these are very expensive procedures. Graft failure is expensive to manage and often fatal so there are good reasons to use effective Treg therapies even at the Kymriah US$475,000 price point. The lung procedure should easily transfer into kidney transplant if efficacy is seen. Tregs may be useful for other organs like liver as well (c 6,000 USS transplant a year) but these are not assessed.

In the United States in 2016, there were 2,327 lung transplants, data. Over 80% of lung transplants had four or more HLA mismatches so have higher rejection risk. Survival of lung transplant patients is not good at about 50% after five years. A 2014 report indicates 1,809 lung transplants in Europe. Initial lung transplant data is planned to be available in 2020 or 2021. This may be enough for a named patient approval but a larger study will probably be needed especially for an FDA approval so 2024 is used tentatively as the expected date.

In the United States in 2016, there were 13,431 deceased donor kidney transplants. About 75% of decreased kidney donor grafts had 4 four or more mismatches. These are better managed but as a larger market offer more commercial upside and still have high medical need if a graft starts to fail due to rejection. The European markets are more fragmented. A 2014 report showed 9,912 decreased donor transplants.

An initial value assessment is shown in Exhibit 4. This is tentative but reflects known parameters. It is based on lung and kidney grafts. The patient column is the number of transplants (lung) or decrease donor grafts (kidney) each year. Accessible patients are 25% of this due to HLA type. A further adjustment is made based on the level of four or more mismatches discussed above. We estimate a relatively high market share based on medical need although lower in the EU due to funding limits. The price used is US$475,000. NPV are calculated from 2024 for 12 years biological exclusivity in the US and 10 in the EU based on an assumed 25% post-tax net margin. An alternative scenario would be a partnering deal. If so, earlier upfront payments with a lower cash flow based on royalties would be assumed instead. It seems possible that TxCell, with funding, could develop the small and specialist centre based transplant niche. We assume 12.5% probability for lung although this is high for preclinical. However, cell therapies have been approved by the FDA on fast track with limited data compared to mainstream drugs. As Kidney is less well defined, it is given a 7.5% probability.

These calculations indicate a value of about €71m before clinical trial costs. The overall market peak sales could be nearly €1bn. Adding in other HLA types will extend use rates and add value but as these are separate development projects, they are not included in our current forecasts.

The global multiple sclerosis (MS) market has grown to an estimated US$21.1bn. About $11bn of products come off-patent before 2020. Dimethyl fumarate (Tecfidera, Biogen), the leading product comes off patent in 2023. None of these drugs enable gain of function.

For a CAR Treg therapy against MS, a suitable antigen target is needed. A paper from Uppsala University Fransson (2012) showed that in a model of multiple sclerosis, Tregs diminished symptoms and enabled some nerve function to be regained. TxCell and the Center for Research in Transplantation and Immunology, will collaborate to develop CAR CD8+ Treg cells.2 The collaboration specifically focuses on multiple sclerosis and manufacturing development. This collaboration expands TxCell’s internal research in MS which is focused on CD4+ CAR Treg cells.

The prevalence of multiple sclerosis is high at about 90/100,000 people. This indicates about 650,000 cases across North America and the leading European states. The prevalence is very variable across regions and ethnic groups. It is likely that significant large trials will be required to gain approval and prove efficacy and safety so any launch before 2026 seems implausible and partnering looks essential given the clinical complexities and costs.

MS is a major possible indication and could have a high NPV estimate once more information is available. It is currently given a €10m nominal valuation. This is unchanged.

A collaboration with the Lübeck Institute of Experimental Dermatology will develop CAR Treg approaches in bullous pemphigoid (BP). The incidence of BP is poorly known. A 2008 study, Langham et al (2008), indicates perhaps 12-15,000 European cases and perhaps 12,000 US cases. The disease is treated with steroids (UK guidelines). This indication would be a niche orphan product. The market is likely to be very price sensitive and limited to very severe chronic refractory disease. It is given an unchanged nominal value of €5m.

TxCell has a collaboration with the San Raffaele Scientific Institute in Milan to develop a CAR Treg product for lupus nephritis. Lupus nephritis is a complication of lupus where the kidney is damaged and this can lead to end stage renal failure. Currently, TxCell has not disclosed the antigen.

In the US, the Centers for Disease Control and Prevention (CDC) published two studies in 2014 (Sommers (2014), Lim (2014)). There may be about 160,000 lupus prevalence cases in the US. In Europe, accessible European markets may have a prevalence of about 170,000. This is discussed in the cited February 2017 Edison note. The epidemiology of lupus nephritis as a severe subset of lupus is complicated, but a US estimate is of about 30,000 lupus nephritis cases. The European figure will be lower because of different ethnic profile, perhaps about 17,000 cases. As it is a prevalence market, only a small proportion will be treated each year.

We have retained the €7.5m nominal value.

The February 2017 funding raised €11.01m gross and issued 5,549,300 shares plus tradable warrants at €2 each. The warrants convert at a ratio of four warrants for three shares with each new share priced at €2.60. Of the 2016 Yorkville Advisors Global (YAG) deal using convertible loan tranches, the 27 Sept 2017 situation was as follows.

Exhibit 5 shows the origin of the 21.05m shares in issue as of 27 Sept. 2017. The 5.5m rights warrants if fully exercised by February 2018, yield €10.8m cash for 4,125 new shares. However, they are currently out of the money. Conversion of the remaining Yorkville loans is assumed.

If the February 2017 rights warrants are exercised, or other funding obtained, further Yorkville drawdown can be avoided. There are €15m of possible convertible loans available from 2018.

The CAR Treg opportunity is developing well with four clear indications. As a technology platform CAR Treg (ENTrIA) has a high deal potential. A clinical proof-of-concept study in transplant to start in late 2018 with data by H120 will be the first CAR Treg study and a milestone in the development of the technology TxCell has a granted European blocking patent until 2028; this is still under examination in the US. TxCell may need other CAR technology IP licences. The acquisition of preclinical-stage Delinia by Celgene for $300m upfront indicates that the Treg area is viewed as ripe for development, even with preclinical data. Novartis has shown some interest in Tregs. Finally, the sources of 2018 cash are still not clear with €10m needed. We have assumed that the existing rights warrants are exercised.

TxCell is in a period of strategic transition. A revised valuation has been made Exhibit 6. This increases the value to €84m from €74m and rebalances the pipeline value estimates.

The following changes have been made.

The value per share on the new shares in issue and fully diluted basis is in Exhibit 7. The indicative core value before conversion of all loans and issued warrants is €4.01/share. We assume conversion of all outstanding loan notes at a 15% discount to a share price of €1.75 and exercise of the rights issue warrants. This implies a value of about €3 per share. The previous diluted value was €2.83/share.

At year-end 2016, TxCell had €3.5m cash. The H1 report shows that the Q1 rights issue raised €11.01m gross, €10.06m net. The Yorkville convertible loans in 2016 raised €5m gross, €4.9m net, The unconverted loans were €3.57m in December 2016 and €2.27m on 30 June 2017. The amount unconverted as of 27 September 2017 was €1m. The conversion and sale of €2.7m of shares over the first 9 months of 2017 may account for the weak share price performance. Edison expects the remaining Yorkville convertible loans to be converted and sold before December 2017.

TxCell has some complex accounting on its tax credits. Normally, these are paid in the following financial year. To bring forward the tax credit TxCell has sold the 2016 credits to Predirect Innovation 2020. Of the tax credit in 2016 of €2.8m, noted in other income, €1.6m was gained in 2016 (after presumed fees and costs of €0.3m). The remaining €0.9m was listed as “Other receivables (Note 7, DDR). The amount was realised as €0.8m net cash in H1 2017. The H1 2017 tax credit of €1.03m, is recognised as an asset. Some €0.57m is noted in the cash flow as being a pre-financed tax credit. Edison has assumed that the whole 2017 tax credit is pre-sold with €1m in other receivables at the year-end.

In H1, costs dropped. R&D costs were €3.89m (vs €5.62m) as no clinical trials were run in the period. R&D costs are expected to rise in 2018, Edison estimates by €3m, as the transplant CAR Treg trial starts. Administration and other costs fell in 2016 to €1.84m (vs €2.51m) as the Besançon internal production facility for Ovasave closed. TxCell retains manufacturing pilot facilities.

The 2017 cash outflow, as guided by management, will be about €13m. Year-end 2017 cash could be about €2m depending on cash inflows and working capital. We have assumed that the rights issue warrants convert to yield €10.8m. This is possible as conversion and sale of shares by Yorkville ceases and if further good preclinical data is announced in Q4 2017. The 2018 cash outflow indicated by Edison’s forecast is c €13m; management guidance is that if the rights issue warrants are fully exercised, the cash is sufficient till the start of the transplant CAR Treg clinical study by late 2018. If the warrants remain out of the money, other financing routes will be needed. TxCell does have further €15m of Yorkville funding available. Financial estimates are in Exhibit 8.