OSE Immunotherapeutics — Maintaining momentum after an active H123

OSE is a French biotechnology company with an active clinical pipeline comprising programmes focused on both immuno-oncology and immuno-inflammation disease areas (Exhibit 1):

OSE’s lead cancer vaccine recently made headlines as the results from its already completed Phase III trial (ATALANTE-1) were published in Annals of Oncology (September 2023), a high-impact medical journal. This was particularly notable as the announcement saw the company’s share price rise by c 70% from 11–12 September 2023, highlighting a significant level of interest, in our view. ATALANTE-1 was a randomised study to evaluate Tedopi as a second- or third-line treatment following ICI failure in patients with locally advanced (stage IIIb) or metastatic (stage IV) NSCLC who are HLA-A2 positive. We note that the COVID-19 pandemic had an impact on recruitment for this clinical trial, meaning that only 219 out of the planned 363 patients were enrolled. These 219 patients were randomised to receive either Tedopi (n=139) or standard-of-care (SoC) chemotherapy (docetaxel or pemetrexed, n=80). Of these, 118 (54%) met the definition of population of interest (secondary resistance, ie progression after 12 weeks of ICI treatment) and were used for the main analysis. The results (first presented in September 2021) showed that Tedopi met its primary endpoint with significantly improved overall survival (OS) rates, while also maintaining positive patient-reported outcomes, quality of life and safety. Highlights from the trial included:

While the data were encouraging for both the efficacy and safety of Tedopi in this patient population, discussions with regulators concluded that it was not sufficient for regulatory approval. This decision was attributed to the early termination of patient enrolment due to the COVID-19 pandemic, which meant that the pre-planned analysis according to the original trial design was not feasible. However, in February 2023, OSE received positive recommendations to conduct a follow-on confirmatory pivotal Phase III trial. Both the FDA and EMA provided scientific advice for this study, which we believe will build on the results of ATALANTE-1 by acquiring more data in a larger NSCLC patient population, and focus on Tedopi as a potential second-line monotherapy, rather than a second- or third-line treatment. Management has communicated that it will aim to recruit c 400 patients, and that the trial is on-track to commence in 2024, and we expect it will conclude in 2026. The results from this confirmatory pivotal trial could be a significant catalyst for the company, and provided the data continue to be supportive, we anticipate a launch for this product in 2028.

Lusvertikimab is an IL-7R antagonist targeting CD127, a cytokine that modulates the proliferation, apoptosis and activation of CD4 and CD8 T-cells. To our knowledge, this is a novel and differentiated mechanism of action for immuno-inflammation therapies. Initially, Lusvertikimab was developed as a part of an option licence agreement with Servier. Two Phase II studies were launched, one of which was assessing the antibody for the treatment of primary Sjögren’s syndrome (SS), sponsored by Servier, and the other for the treatment of UC, fully funded by OSE. Servier had the option to assume full development in both indications after completion of the Phase II clinical trials. However, following negative results from the SS trial, attributed to uncertainty in the role of IL-7 biology in the disease, OSE and Servier mutually decided to terminate the option licence agreement. Despite this, OSE remain committed to the clinical development of Lusvertikimab in UC with full rights to the asset. This represents a potentially sizeable opportunity for OSE, in our view, as the UC market is projected to reach $11bn by 2028 (EvaluatePharma).

The Phase II multicentre, randomised, double-blind, placebo-controlled trial investigating Lusvertikimab in patients with moderate to severe UC is ongoing (Exhibit 2). In July 2023, OSE announced a positive review from the independent drug safety monitoring board (DSMB). It was recommended by the DSMB that the trial should proceed without any modifications to the design, which we view as a positive indicator that the trial is progressing as planned and without indications that the safety profile of the drug in treated patients to date is provoking cause for concern. The trial is expected to be fully enrolled (n=150) in Q423, slightly later than prior guidance of Q323. The top-line results after induction (primary endpoint at week 10) are expected in late-2023 or early-2024. With Lusvertikimab being OSE’s most advanced asset in the immuno-inflammation space, we believe readouts from this Phase II trial may represent a significant catalyst for investor attention.

In July 2023, OSE also announced that the EMA had provided a positive opinion on Orphan Drug designation for Lusvertikimab in acute lymphoblastic leukaemia (ALL). This was based on preclinical results from a collaborative research programme with the University Medical Center Schleswig-Holstein in Kiel (Germany). The research demonstrated the therapeutic potential of Lusvertikimab in targeting and blocking the high and dysregulated expression of IL-7R, which, according to management, is observed in 84% of B- or T-cell ALL patients. Notably, the antibody was found to have significant activity in models involving leukemic samples from refractory and relapsed ALL patients. While we note that these data were first reported in December 2022, we believe that the positive opinion from the EMA is encouraging for a potential clinical programme for Lusvertikimab in ALL. OSE may explore this indication with a Phase I/II trial in 2024; we await further details from management.

OSE reported a 23.4% year-on-year decline in its operating expenses for H123 to €14.9m. This was primarily driven by a 32.7% reduction in R&D expenses, which dropped from €14.4m in H122 to €9.7m in H123, led by management’s efforts to reduce operational and social expenses and the receipt of a €2.9m subsidy from PSPC CoVepiT (which was netted into the company’s reporting of R&D expenses; gross R&D costs excluding this and all other subsidies were €15.8m, down 11.4% y-o-y). However, these lower operating expenses were offset by a material reduction in revenue related to licensing agreements (€1.4m in H123 vs €16.0m in H122) resulting in an operating loss for H123 of €13.5m (H122: €3.4m). Net loss was also up from €2.0m in H122 to €11.9m in H123. We note that the revenue in H123 only consisted of re-invoicing of some development costs, as compared to H122 which also included ~€14m in development milestone payments related to its licensing agreements.

Net cash outflow from operating activities was €11.7m in H123, a significant increase from €1.9m in H122. The figure was negatively affected by a reduction in the operating income of the company, as discussed above.

With the company making efforts to reduce its operating costs and the expected conclusion of the OSE-sponsored Phase II study in UC of OSE-127/S95011 in FY23, we continue to expect operating expenses for OSE to decrease ~20% y-o-y in FY23. However, we estimate costs will increase in FY24 as the Phase III Tedopi study is initiated. Further, based on the H1 revenue figure, we have lowered our revenue estimate for FY23. For FY24, we continue to expect €15.0m revenue driven by milestone payments expected to be received with respect to its licensing agreements (including the BI agreement). As a result, we now estimate higher operating cash outflows of €20.4m in FY23 (from €16.1m previously) while keeping our FY24 forecast broadly unchanged at €20.1m.

As of 30 June 2023, OSE had a gross cash position of €15.0m and a net debt position of €24.7m (FY22 net debt: €14.7m). We note that this will be supplemented by (a) the 2022 R&D tax credit of €5.4m received in July 2023, (b) the balance loan of €2.1m from the banking pool received in July 2023 (OSE drew down €3.1m out of the total €5.3m loan before 30 June 2023) and (c) the €11.1m equity financing from Vester through the issuance of 2.61m shares (excludes c €0.5m equity financing from Vester raised in May 2023 through the issuance of 0.13m shares). Therefore, on a pro-forma basis, OSE’s gross cash position and net debt position stand at €33.6m and €8.2m, respectively. We have incorporated these financings in our model, resulting in changes to our debt and cash forecasts for the next two years. At our projected cash burn rate for H223 and FY24, we forecast OSE to be operationally funded into Q424, which is in line with management guidance.

As a reminder, in our model, we assume OSE secures an out-licensing deal for Tedopi by end-2027. We assume the company receives licensing/development milestones associated with Tedopi and other assets, including those from existing deals with Veloxis and BI, before reaching steady, revenue-generating operating profitability following the commercial launch of Tedopi in FY28. Taking into account these expected milestone payments and the recent financing by the company, we estimate OSE would be required to raise a total of c €30m additional funds to reach this point. We account for this raise as illustrative debt in our model. Alternatively, if the funding is realised through an equity issue instead (assuming at the current trading price of €4.71/share), OSE would have to issue ~6.4m shares, resulting in our per-share valuation coming down to €11.1 from €14.4 currently (shares outstanding would increase from 21.6m to 28.0m).

We value OSE at €311.3m or €14.4 per share (€280.8m or €15.2 per share previously) on a risk-adjusted NPV analysis using a 12.5% discount rate, including pro-forma net debt of €8.2m at 30 June 2023 (gross cash of €15.0m, net of €5.4m in short-term debt and €34.3m in long-term debt and pro forma adjusted for €11.1m equity raise in September 2023 and €5.4m tax credits received in July 2023).

We continue to value five assets in our valuation of OSE: Tedopi in NSCLC, OSE-127 in UC, OSE-172/BI 765063, FR-104/VEL-101 and OSE-279. Further, we keep our key rNPV assumptions related to target market, product pricing, trial timelines, licensing deals and probability of success unchanged from previously (as discussed in detail in our initiation note in May).