Immunicum — Kicking the hornet’s nest of immunoncology

Immunicum is an IO company listed on NASDAQ Stockholm and based in Gothenburg, Sweden, that develops allogeneic DC technologies. The company was formed in 2002 based on research originally carried out at Sahlgrenska University Hospital in Gothenburg, Sweden. Immunicum is developing an ‘off-the-shelf’ immune primer (ilixadencel, formally Intuvax) based on activated allogeneic DCs and another ‘off-the-shelf’ vaccine technology platform (IMM-2) that generates projects based on adenovirus-transfected allogeneic DCs. Ilixadencel is in Phase I and II clinical studies in several solid tumour indications. It is based on Immunicum’s patented pro-inflammatory allogeneic DC technology. The company will develop and license ilixadencel as an immune primer in combination with tyrosine kinase inhibitors (TKIs) (sunitinib), the PD-1/L1 CPIs and the standard oncology chemotherapy drugs (including gemcitabine), in five solid tumour indications. The IMM-2 platform products are currently in preclinical testing. There are many different approaches aimed at enhancing the activity of CPIs in solid tumours that range from orally bioavailable small molecules, oncolytic viruses all the way to manipulated cellular therapy. Immunicum’s products are at the most innovative end of this spectrum and, as whole allogeneic cells, might be expected to produce the most vigorous immune response when injected into tumours.

Our risk-adjusted Immunicum valuation comprises Immunicum’s cash plus the risk-adjusted royalty, milestones and a single up-front payment for ilixadencel in five indications: RCC (ilixadencel IM-201), hepatocellular carcinoma (HCC) (ilixadencel IM-102), non-small cell lung cancer (NSCLC) (ilixadencel IM-202), head and neck squamous cell carcinoma (HNSCC) (ilixadencel IM-202) and gastric adenocarcinoma (ilixadencel IM-202). We assume that the first ilixadencel indication to launch will be in the treatment of RCC patients followed by the largest indication, NSCLC. We have modelled sales by Immunicum’s partner in all indications with RCC and NSCLC representing 25% and 35% of our rNPV valuation based on peak sales (on which royalties and milestones are based) of $1.4bn and $2.3bn, respectively.

We have assumed one partner licenses all the indications with a single up-front payment at the end of 2019 on the release of the data from Immunicum’s clinical studies in that year. Multiple transactions with different partners would represent upside to our valuation. We recognise the up-front, milestones and royalties for valuation purposes but do not recognise them as revenue until the transaction is signed. This excludes the considerable cash flows of the anticipated licensing transaction from our model of Immunicum’s income statement and balance sheet. To compensate for not recognising these cash flows in Immunicum’s financials, we have included a SEK50m non-interest-bearing debt financing at the end of 2020.

Immunicum recently reported its interim Q118 financials. The reported operating loss increased to SEK28.8m from SEK20.5m in Q117, and was SEK80.7m for FY17. This reflected Immunicum’s increased clinical trial spend as it moved through Phase II studies. Immunicum finished Q118 with SEK168.1m in cash (SEK84m at the end of Q117) and we anticipate the company to be funded through the two 2019 clinical trial read-outs, which we expect will result in a partnering transaction.

With 94 patients treated to date in a range of clinical studies, the usual risks associated with clinical development still apply. The data reported to date have suggested that ilixadencel is well tolerated with the safety profile in oncology patients appearing to be acceptable. The efficacy measures, although immature, have been promising with three metastatic RCC patients surviving for at least 50 months after treatment, whereas high-risk and intermediate-risk patients have historical median survival times of 9.0 months and 16.2 months, respectively.

Immunicum’s strategy is to develop ilixadencel to the point in RCC (end of Phase II) and at least one of the solid tumour indications in the multi-indication trial (interim analysis of the Phase I/II study) that will enable a partner to license, develop and commercialise ilixadencel. The company’s long-term strategy is to have partners commercialise ilixadencel in several solid tumour indications in combination with different standard treatments. For the purposes of our model, we have assumed Immunicum will be responsible for all the costs of the current and planned studies until the end of 2019, when we anticipate a licensing transaction that will transform Immunicum’s investment proposition. Our model forecasts the future sales in the five indications in order for us to calculate a 5% royalty on total sales. We have assumed one licensing transaction with one up-front payment from one partner, and then milestones and royalties on the five separate indications with sales milestones being triggered as the hurdles are met.

The establishment of the CPIs as blockbuster commercial products by big pharmaceutical companies BMS, Merck, Pfizer, AstraZeneca and Roche has brought its own problems that could be solved by combination use with other agents acting at a different part of the cancer immunity cycle. Immunicum’s ilixadencel is one of these options.

The recent failure of Merck and Incyte’s Phase III study of Keytruda and Incyte’s IDO1 (indoleamine 2,3-dioxygenase) inhibitor highlights the continuing need not just for cancer immunity cycle-active agents that would be complementary to the CPIs, but for different mechanisms of action that a small molecule with modest single-agent activity seems to be unable to provide. The licensing of ilixadencel, whether it comes before 2019’s impending clinical trials, could result in a significant rebasing of Immunicum's valuation.

Ilixadencel is being tested in Phase I and II clinical trials, in several solid tumour indications and combinations (see Exhibit 1). The most advanced programme is in RCC, where ilixadencel is being tested in Phase II (MERECA study) in combination with Pfizer’s approved TKI sunitinib. Recruitment in this trial was completed in early January 2018. The other key study is the Phase I/II in multiple solid tumour indications (patients having NSCLC, HNSCC or gastrointestinal adenocarcinoma) in combination with a CPI. We believe it will be either Bristol-Myers Squibb’s (BMS’s) Opdivo (nivolumab) or Merck & Co’s Keytruda (pembrolizumab). Immunicum is also conducting a Phase I study in gastrointestinal stromal tumours (GIST) with the relevant TKIs in second or later lines of therapy. GIST is a small indication and is not central to Immunicum’s strategy.

The company expects RCC Phase II data as well as multi-indication interim Phase I/II data in 2019. At that point Immunicum will seek to partner ilixadencel and there is expected to be enough information to choose the lead indication(s) and combination(s) to take forward into pivotal Phase III clinical studies (see Exhibit 2 for study designs). The RCC Phase II sample size is not powered to show statistically significant overall survival benefit, but could show a compelling clinically relevant advantage over sunitinib. The primary endpoints for the study are median overall survival and median survival at 18 months. Overall, 88 newly diagnosed mRCC patients have been enrolled in the study.

In 2019 Immunicum would use positive data from both trials to enable the design of a pivotal study testing:

We have assumed that the RCC Phase III will be Immunicum’s first Phase III study (conducted by its partner and starting in 2020) and will be closely followed by the start of the NSCLC Phase III (the largest indication) also by Immunicum’s partner in 2020. We expect Phase III studies in other indications that are commercially significant but not as large as NSCLC to start in 2021 (HNSCC and gastric adenocarcinoma) and 2022 (HCC).

Ilixadencel is an immune primer made up of pro-inflammatory activated allogeneic DCs. When injected into a different patient, these DCs do not fulfil their traditional role, which is to directly prime T-cells in the lymph nodes. Several other unrelated immune priming strategies make use of DCs and are known as DC vaccines. The key difference between ilixadencel and DC vaccines is that ilixadencel DCs are allogeneic (isolated from healthy donors) and are pro-inflammatory (produce an artificially large amount of chemokines and cytokines) in a different patient in their own right. So although not containing any tumour-specific antigens, their mere presence (and death) in a tumour results in an immunological anti-tumour ‘bystander’ effect against the tumour. Immunicum has demonstrated that its DCs have an immune priming effect when delivered intra-tumourally. Mechanistically this is achieved when ilixadencel promotes the recruitment and activation of the patients’ own (endogenous) natural killer (NK) cells and DCs that capture tumour antigens released at the same site within the tumour into which, ilixadencel was injected. Ilixadencel subsequently leads to a systemic therapeutic effect as the immune system becomes primed to those tumour antigens. This effect would be enhanced when ilixadencel is combined with certain TKIs or CPIs. In addition, Immunicum has data in one patient demonstrating that this systemic activity generated against a primary tumour was confirmed with anti-tumour effects against a metastatic tumour.

In a malignant process, cancer cells die and proteins/antigens are released including abnormal, ‘non-self’ mutation-derived ‘neoantigens’, which are cancer specific (step 1 in Exhibit 3). These are then taken up by the patient’s own antigen presenting cells, or DCs and in lymph nodes they present these antigens to T-cells (step 2). This leads to an activation and production of populations of T-cells, which can now recognise and destroy cancerous cells that display the same antigens as those previously presented (steps 3 to 7). This process is not perfect, which is why not every malignant process is stopped. Once a tumour develops, it often also has multiple ways to suppress the immune response and enable the tumour to ‘hide’ from the immune cells. The goal of cancer immunotherapies such as Immunicum’s ilixadencel is to expose the tumour microenvironment as non-self to the patient’s immune system so the tumour is recognised and immunologically attacked.

Ilixadencel is manufactured and used in the following steps:

Immunicum has preclinical data supporting ilixadencel’s proposed mechanism of action (mouse in vivo, human in vitro) but the Phase I study in RCC is much more important. The safety end-points showed ilixadencel to be safe and well tolerated. The study was conducted at Uppsala University Hospital, Sweden, in 12 newly diagnosed metastatic RCC patients. Patients were only enrolled if they were candidates for nephrectomy, had a tumour larger than 4cm and at least one metastasis. The study had three groups, each with different dose of ilixadencel (either 5x106, 10x106 or 20x106 cells). This was administered by two injections into the viable part of the tumour, guided by computer tomography (CT). Following the treatment with ilixadencel, patients underwent nephrectomy and were then treated with the standard of care. The primary safety endpoints were adverse events (AEs), as well as changes in vital signs and laboratory parameters from baseline. Immunicum also measured the tumour-specific response as a secondary endpoint by various immunological techniques. The main findings were:

The data are summarised in Exhibit 5 and the patients were treated differently following treatment with ilixadencel, so the efficacy that was observed could have been also due to these treatments, or could have been due to the combination. However, median time to the start of additional systemic treatment was delayed as compared to the standard schedule and taken together with the surprising efficacy in metastatic CNS and sarcomatoid tumours, this data indicated that the pace of tumour progression had slowed.

Immunicum is pursuing a recently emerging strategy to exploit complementary mechanisms of action of drugs targeting different points in the immunity cycle (see Exhibit 3). This is because the success of the first- and second-generation CPIs has brought with it additional challenges. When patients are treated with anti-PD-1 monoclonal antibodies like Keytruda or Opdivo, for example, not all patients respond because of the heterogeneity PD-1 expression on their tumour cells either at the time of therapy, or after a number of cycles. Poor response rates have been demonstrated in patients with NSCLC whose tumours have low PD-1 expression because the majority of the tumour escapes the targeted treatment. This is why more traditional chemotherapeutic drugs are used in combination with CPIs either to hit the tumours at different targets or to maintain anti-tumour activity when the tumour attempts to escape the host immunity by up-regulating PD-1/L1. The most recent data on Merck’s Keytruda in first-line NSCLC used the CPI as monotherapy. In the medium term, CPI monotherapy could create a large market for second-line therapies from a bolus of CPI monotherapy-relapsed patients. Second-line therapy would then contain a CPI and a next-generation immune-priming enhancer of CPI activity, like ilixadencel. Having built on the early success of the PD-1s, big pharmaceutical companies have been very active in licensing products that could be active within the cancer immunity cycle but at different, hopefully synergistic points than PD-1/L1 inhibition. Ilixadencel could be one of these CPI enhancers. Ilixadencel targets the first stage of the cycle which prepares the immune system to attack the tumour. CPIs, and possibly also TKIs, target the last stage of the cycle and inhibit the tumour’s immune suppression mechanisms (‘releasing the brakes’). Combining these two mechanisms should improve clinical responses in patients by improving the immune system’s ability to attack and kill tumour cells.

Immune primers such as ilixadencel target step 2 of the immunity cycle, with the aim of helping the body’s immune system recognise and target patient-specific tumour neoantigens. Most of these products are known as cancer vaccines and can be grouped by their key competitive advantages (see Exhibit 6 for full landscape):

Exhibit 6 shows ilixadencel’s competitive landscape. Ilixadencel’s competitive advantage is that it targets the solid tumour neoantigens that are specific to the patient and it is being tested in combination with a TKIs or CPIs.

Immunicum’s positioning of ilixadencel is as a first-line treatment for advanced solid tumours in combination with standard treatments (for example in RCC, where sunitinib is the standard of care). Ilixadencel appears to be a typical neoadjuvant opportunity that could be applied to many solid tumours as it can be injected into any primary or secondary solid tumour above 2cm in diameter prior to surgical excision. Activity against metastatic tumours relies on the assumption that a reasonable proportion of patients will have a liver metastasis (which is not unreasonable) and that enough of the tumour neoantigens are conserved between the primary and secondary tumours. This enables the CD8+ cells to attack the primary tumour if they are ‘primed’ to the metastasis and vice versa. The market potential of ilixadencel will ultimately depend on its efficacy demonstrated in clinical trials, although with a number of IO adjunctive agents like Bavarian Nordic’s Prostvac and Incyte’s epacadostat both failing in Phase III, combination studies with Keytruda and Opdivo respectively, the barrier for a combination to show increased clinical activity is not high. An advantage of ilixadencel over Prostvac and epacadostat is that ilixadencel has demonstrated single-agent activity, albeit at an early stage. The need for new adjunctive IO agents and the low clinical bar was demonstrated by the FDA’s approval of Amgen’s Imlygic in unresectable melanoma on the basis of a single open-label Phase III study that did not demonstrate an overall survival benefit or have an effect on metastases.

Although ilixadencel could be applied to a range of solid tumours, Immunicum is starting in solid tumours chosen partly on the basis of unmet medical need and partly on the accessibility of tumour for injection.

If shown to be effective, ilixadencel may be able to offer the following advantages over alternative combinations with TKIs or CPIs:

The company’s other technology platforms include IMM-2, an off-the-shelf vaccine in which allogeneic dendritic cells are pre-loaded with selected neoantigens through a proprietary adenovirus vector, and IMM-3, a proprietary method for expanding T-cells, which could be applied to CAR-T products. Both platforms are currently being tested in preclinical studies in academic collaborations.

Immunicum is an oncology company devoted to drug discovery and development, so it will be loss making for the immediate future. Immunicum announced its Q1 interim results with an operating and net loss of SEK28.77m compared to SEK20.53m in Q117 (EPS loss of SEK0.6 vs a loss of SEK3.1 in Q117). As would be expected for a R&D company, clinical trial costs and the cost of the infrastructure allowing clinical trials to be conducted comprised most of Immunicum’s expense. R&D costs were SEK22.2m (SEK14.0 in Q117) while administrative costs were SEK6.0m vs SEK6.6m in Q117. R&D expenditure is expected to increase in 2018 due to the initiation of the multi-indication Phase I/II trial.

Immunicum completed a two-part rights issue in December 2017 and January 2018, raising SEK200m in total gross proceeds (SEK167.5m net). Following the raise, the end of Q118 cash position was SEK168.1m. Our valuation model anticipates ilixadencel to be partnered. The forecasts in our financial statements simulate a portion of this transaction by an illustrative SEK50m debt fundraising in 2020 after the Phase IIa RCC study and interim results from the multi-indication study. Depending on the terms of the transaction, Immunicum could choose to retain a larger proportion of the future upside of ilixadencel in exchange for some of the late-stage development.

Our risk-adjusted NPV valuation of Immunicum is SEK1.13bn or SEK22.1 per share, which compares to the current market capitalisation of SEK324m or SEK6.59 per share. The components of our rNPV are outlined in Exhibit 8.

Our model is based on the epidemiological and financial characteristics outlined in Exhibit 7.

We assume that ilixadencel is partnered on the basis of the results of the two clinical studies that report in 2019. Because we only recognise up-front, milestone and royalty payments when a contract is signed we have included a SEK50m debt financing in our financial statement forecasts to compensate for a small portion of these cash flows not passing through Immunicum’s financial statements at the end of 2020.

The forecast horizon on which our valuation is based runs to 2033. This is 10 years after the Combig production method patent expires in Europe and two years after the 2031 assumption of the latest ilixadencel patent expiry. This two-year period would cover any stretch of formal or informal market exclusivity which can be up to ten years in Europe. We have not modelled an extra period of paediatric exclusivity. The period of exclusivity of cellular therapies is, however, opaque. On the plus side, it would be more difficult for a company wanting to launch a biosimilar to ilixadencel to access data on the product within the exclusivity period. In addition, because ilixadencel is an ‘off-the-shelf’ therapy but manufactured by Immunicum or its partner, comparative clinical studies could theoretically be performed, but may be difficult without Immunicum’s consent.

Our rNPV valuation model assumes that RCC is the most advanced indication and all subsequent indications progress through the cascade of clinical and regulatory timings outlined in Exhibit 8. We have assumed 2.3% market shares at launch and 15% peak market shares for all indications except for NSCLC which, while being the largest indication, is the most competitive and we assume 10% peak market share in NSCLC. We have used a probability-adjustment of royalties and milestones due to Immunicum of 15% for all indications except HCC, which is currently in Phase I. Our model forecasts sales in all five indications but the cash flows to Immunicum are based on the schedule of a single up-front payment, then royalties and milestones that are dependent on the hurdles listed in Exhibit 10. The median up-front payment in 10 Phase I/II IO transactions in Exhibit 12 was $98m – we have used $100m. The median value of milestones for the 10 transactions was $606m. We have reduced the total value in the schedule in Exhibit 9 to $160m because almost all transactions include a clinical trial funding component from the licensor, and to reflect the transaction probability risk, which will be reduced when Immunicum signs its first deal. We assume a 5% royalty on sales which are also probability-adjusted. We assume that all clinical development and marketing costs beyond 2019 will be paid by Immunicum’s partner, while any general corporate costs outside the clinical costs not included in the rNPV for each product are grouped as unallocated costs. We stagger by a year the launches for all products in the EU behind those in the US (both markets contribute to the total sales on which 5% royalties are calculated).

Oncology patients in later lines of therapy and their physicians are highly motivated to complete even salvage therapy so we have assumed 100% compliance for all patients treated with ilixadencel. For the incidence of NSCLC, unlike all other indications, we forecasted a 2% decrease in the patient population because of the decline in tobacco consumption in developed markets.

To sense-check our DCF, we have compared Immunicum’s EV against other oncology companies that have IO products in Phase II. We have also benchmarked what an IO product licensed after Phase I could imply to Immunicum’s valuation.

Benchmarking valuation

It could be debated that Immunicum’s immune-priming platform in oncology was recently validated by Merck’s $394m (SEK3.3bn) acquisition of Australia’s Viralytics, which also has a product injected intratumourally, and is in Phase I and II studies. Viralytics’ approach, like Immunicum’s is to engage the innate immune system to target and kill tumours by complementing the IO activity of a CPI. We have included Viralytics with five other US companies in an oncology comparison in Exhibit 11 below. US companies have a greater access to capital and thus their valuations are almost always higher than similar European companies. We have included two US oncology specialists at a similar stage to Immunicum, but both have histories of late-stage clinical and regulatory failures. We have included two other recent transactions in the CAR-T cellular IO space in Exhibit 8 because they are closer to Immunicum’s technology than small molecule oncology companies, but only to conclude that cellular-based, IO therapies such as ilixadencel are in demand in 2018. The demand for IO-enhancing therapies was recently demonstrated by BMS’s licensing of Nektar Therapeutics’ Phase I/II IO product NKTR-214 for $1.85bn (SEK15.3bn) upfront in a total deal worth about $3.6bn (SEK29.7bn). NKTR-214 is a PEGylated recombinant interleukin-2 that showed interesting recent data in combination with BMS’s CPI in a handful of patients in each tumour type in a mixed Phase I/II study. Like Immunicum’s DCs, NKTR-214 is proposed to act synergistically with CPIs at a different part of the cancer immunity cycle.

We have focused more on European companies with oncology products at a similar stage of development to Immunicum. For example, Transgene has three products in eight Phase II studies, one Phase III for one of those products and one non-oncology product in Phase I. Transgene’s market capitalisation of SEK1.9bn is significantly higher than Immunicum’s (and our rNPV valuation of Immunicum), possibly because of its collaborations with BMS and Pfizer. The recent BMS/Nektar deal and Transgene’s much larger market capitalisation than Immunicum illustrate how much a partnership based on positive data could mean to Immunicum.

Germany's Medigene has one Phase II product and has market capitalisation of SEK3.6bn. Geographically closer to Immunicum, Norway's Targovax is an IO company with one product in Phase II and four Phase I studies, three of which are with the same product. Targovax has a market capitalisation of SEK1.0bn. Of the 10 comparator companies in Exhibit 11, only Targovax has a market capitalisation lower than our valuation of Immunicum. Sweden's Oncopeptides illustrates the valuation generation that could be associated with a successful outcome from one of Immunicum's Phase II studies, since Oncoeptides' unpartnered lead and only product – an enhanced chemotherapeutic agent rather than a cellular IO agent – started a Phase III study in June 2017. Oncopeptides’ market capitalisation is SEK5.4bn.

Exhibit 12 lists the most recent IO transactions that occurred after the products were in Phase I. The products included must have some IO component – they are either CPIs, or have been studied in combination with CPIs. This provides supporting evidence that our risk-adjusted NPV valuation of SEK1.13bn ($128m) may be fair because none of the 10 transactions was value of the milestones alone, less than our DCF valuation of Immunicum. It is fair to say the table represents successful transactions and Immunicum has not yet demonstrated that success, so some risk-adjustment on a median value may be appropriate.

In comparison to US and most European IO companies, Immunicum’ market capitalisation is lower than any of the 10 companies in Exhibit 10. In addition, our rNPV is lower than all but one of the market capitalisations of IO companies in Exhibit 11. In the 10 examples of recent transactions for IO products since 2015, none of the transaction values was less than our SEK1.13bn risk-adjusted NPV valuation of Immunicum. In addition, the median value of the upfront payments alone (to remove outliers like Nektar) is $98m or about twice Immunicum’s current market capitalisation. The reason for the difference between Immunicum’s market capitalisation and our valuation could be because of the significant shareholder turnover after the rights issue together with the market volatility since late January. At least that last hurdle has now passed.

Another reason for the difference in valuations between other European IO companies could be that Immunicum listed recently and, being so late in the cycle, it may have a low profile among investors. In addition, there could be investor scepticism associated with other unrelated DC products such as Provenge, despite Immunicum’s product having significantly different characteristics and mechanisms of action.