Telix Pharmaceuticals — Novartis/Endocyte deal illustrates upside potential

On 18 October, Novartis announced that it had entered an agreement to acquire Endocyte for ~US$2.1bn. Endocyte is developing 177Lu-PSMA-617, a small molecule MTR therapeutic that, like Telix’s TLX617, targets prostate specific membrane antigen (PSMA) in prostate cancer tumours.

Endocyte started a 750-patient Phase III trial of PSMA-617 in prostate cancer patients earlier this year. It presented encouraging data from a Phase II study of PSMA617 in prostate cancer at ASCO in June. In the 50-patient Phase II trial, 62% of subjects treated with 177Lu-PSMA-617 experienced a prostate-specific antigen (PSA) decline of at least 50%. The treatment was well tolerated, with the most common side-effect being grade 1–2 dry mouth reported by 68% of subjects (66% grade 1, 2% grade 2). The occurrence of grade 3–4 hematologic toxicity was low; there were no cases of grade 4 neutropenia and only 6% of subjects experienced grade 3 neutropenia.

The US$2.1bn price that Novartis has offered for Endocyte suggests that if TLX591 can demonstrate comparable efficacy and tolerability in the upcoming Phase II study, then we would be likely to see a substantial lift in market capitalisation.

The Endocyte transaction is Novartis’s second substantial acquisition of an MTR radiotherapeutic company in 12 months. In October 2017, Novartis announced an offer to acquire Advanced Accelerator Applications (AAA), for US$3.9bn. The bid was made soon after AAA received EU approval for MTR therapeutic product known as 177Lu dotatate, or Lutathera, for the treatment of gastroenteropancreatic neuroendocrine tumours, a rare form of cancer. Lutathera was subsequently approved by the US FDA in January 2018. Lutathera reduced the risk of disease progression or death in NET patients by 79% in pivotal studies.

In another example of big pharma interest in the field, in February 2014 Bayer acquired Algeta for NOK16.2bn (~US$2.6bn). Algeta had developed Xofigo, a therapeutic radiopharmaceutical for patients whose prostate cancer had metastasised to their bones, which had been approved in the US and Europe in 2013.

In September, Telix completed the anticipated acquisition of Atlab Pharma to strengthen its IP position and gain access to clinical data and know-how related to its TLX591 prostate cancer therapeutic. Telix held an option to acquire Atlab for US$10m, as disclosed in the IPO prospectus.

As part of the acquisition, Telix renegotiated Atlab's background intellectual property licences with BZL Biologics, which holds a portfolio of patents originating from Professor Neil Bander’s lab at Weill Cornell Medical Centre.

While the total consideration was approximately US$10m, as expected, the consideration to Atlab shareholders was reduced to US$9m in Telix shares at A$0.89 per share, and part of the consideration (US$0.5m of Telix shares and US$0.5m of warrants) was diverted to BZL biologics as partial consideration for a significant reduction in royalty rates for the background IP.

Atlab had previously conducted a number of clinical trials of a single cycle of treatment with 177Lu-J591, in conjunction with Weill Cornell. Telix’s TLX591 is based on an enhanced version of the huJ591 mAb.

The transaction gives Telix access to IP rights that support potential indication expansion of TLX591, including the combination use of anti-PSMA therapeutics with anti-androgen drugs such as Zytiga and Xtandi. It also gains an extensive clinical data set in ~200 patients that is highly informative for TLX591 development, including unpublished data around dose optimisation schemes for antibody-based PSMA radiopharmaceuticals.

Atlab conducted a number of clinical trials of 177Lu-J591 in prostate cancer patients. While there was evidence of efficacy, with up to 22% of subjects experiencing a 50% reduction in PSA levels, there were also signs of bone marrow toxicity, with 74% of subjects treated having grade 3/4 haematological toxicity.

Haematological toxicity is a common feature of antibody-based therapeutic radiopharmaceuticals, which is attributed to their long plasma half-life.

Telix has engineered TLX591 to reduce the plasma half-life to 12 hours vs 133 hours for huJ591, while achieving similar levels of radiation to the tumour in animal models, as shown in Exhibit 1. Telix expects the shorter plasma half-life to reduce the haematological toxicity while maintaining anti-tumour efficacy. It also expects the antibody-based TLX591 to be less likely to damage the salivary glands and cause dry eye than small-molecule MTR products like PSMA-617.

Manufacture of drug material for TLX591 toxicology and human biodistribution studies is expected to be completed by the end of 2018. The company is on track to initiate an Australia/US multi-centre Phase II study in mid-2019.

The Phase II trial is expected to focus on combining TLX591 with androgen deprivation therapy (ADT) in relatively early-stage patients. ADT with the blockbuster drugs Xtandi (enzalutamide) and Zytiga (abiraterone) blocks production of testosterone and inhibits prostate cancer tumour growth, and is standard of care for medium- and high-risk prostate cancers after prostatectomy, and for treating recurrent and metastatic disease.

TLX591 binds to PSMA, which is expressed in very high levels in the prostate but in low levels on most other normal cells. PSMA is significantly over-expressed in prostate cancer cells and some other solid tumours.1

Treatment with ADT drugs increases the expression of PSMA on prostate cancer tumours, making them better targets for TLX591. Telix plans to investigate combining TLX591 with a relatively short course of ADT hormone therapy. If this combination is effective at controlling tumour growth or recurrence, it could potentially allow a ‘treatment holiday’ from ADT therapy and its negative effects on sexual function, mood, energy levels and cognitive function.

Successful development of TLX591 as a combination therapy would allow its use at an earlier stage of the disease and consequently provide a larger market opportunity than our current scenario of use in late-stage disease. We currently model the addressable market being 90% of prostate cancer deaths, which is equivalent to 16% of new prostate cancer patients each year in the US. If use is extended to earlier-stage patients, we estimate that the addressable market could almost double to ~30% of new cases, which would boost estimated peak sales for TLX591 from US$1.1bn to US$2.0bn. We will review our assumptions for the addressable market for TLX591 when we see the results of clinical studies of the combination therapy.

Telix recently launched commercial supply of the illumet investigational prostate cancer imaging agent in the US. Illumet, previously known as TLX591-CDx, is a ‘cold kit’ for the preparation of radiolabelled 68Ga-PSMA-11 for imaging prostate cancer with Positron Emission Tomography (PET). The illumet product was developed by ANMI SA of Belgium, and is being commercialised by Telix in the US under a joint venture agreement.

Telix took an important step forward in early October when it entered into a sales and distribution agreement for the illumet kit with Cardinal Health. Cardinal Health operates the largest radiopharmaceutical network in the US, and prepares more than 20 million unit doses of radiopharmaceuticals annually.

Cardinal Health can use the kit to compound doses of 68Ga-PSMA as well as distributing the kit directly to qualified customers.

While illumet has not yet obtained FDA approval, it can be sold as an investigational product for use in qualified investigator-sponsored clinical trials. Telix has submitted a Drug Master File (DMF) providing confidential detailed information about the manufacture of illumet to the FDA, which has reviewed and accepted the documentation.

Two active INDs are already in place that reference the DMF and enable illumet to be used in clinical studies. The Memorial Sloan Kettering Cancer Center has launched an expanded-access study (NCT03204123), which allows the kit to be used to image 500 prostate cancer patients at its clinics. Endocyte is using illumet kits for screening patients in its 750-subject VISION Phase III prostate cancer trial.

Sales of the illumet kit as an investigational product will generate initial revenues for Telix and will allow clinicians to gain experience with its utility for identifying prostate cancer metastases and sites of local recurrence. First revenues from the illumet kit are expected in the current quarter.

In order to capitalise on the full commercial potential of illumet, Telix is developing a strategy that will enable it to seek full FDA approval, which would bring higher reimbursement and allow active marketing of the kit. It plans to hold a pre-NDA meeting with the FDA in Q418, where it will propose a Phase III programme for illumet that is based on blinded re-reads of existing PET scan data. If this strategy is acceptable to the FDA, then management anticipates an NDA submission in 2019. Given that the FDA has already reviewed the manufacturing and QC data in the DMF, there is the potential that illumet could be approved by the FDA by the end of 2019 (we model a more conservative timeline with a potential approval in 2020). The estimated cost of a Phase III study and NDA filing based on re-reads is US$2m.

In response to considerable clinical interest in illumet, Telix has commenced scale-up manufacturing of illumet in the US; by the end of the year, it will be made at a 20,000-unit scale at an FDA-inspected facility. With the increased supply due to come on line shortly, it has taken the opportunity to expand its partnership with ANMI, so that Telix will sell US-manufactured cold kits to ANMI for distribution outside the US.

Telix is preparing to commence recruitment in the ZIRCON Phase III trial for imaging clear cell renal cell carcinoma (ccRCC) with TLX250-CDx (89ZR-girentuximab), having completed the necessary preparations, including receiving regulatory and ethics approval to commence recruitment at the first of four planned sites in Australia. The first sites in Europe are expected to come on line before the end of the year.

The Phase III study is planned to recruit approximately 250 cancer patients undergoing surgery to remove suspicious kidney masses in at least 15 sites in Europe, Australia and the US. Management expects the Phase III study to complete by Q319. The study will determine the sensitivity and specificity of TLX250-CDx PET imaging to detect ccRCC in comparison with histology examination of tissue samples collected during surgery.

In recent weeks, Telix has appointed Netherlands-based Radboud Translational Medicine to manufacture TLX250-CDx for clinical trials (and eventual commercial production) in Europe. It has selected Cyclotek to manufacture and supply Australian clinical trial sites, as well as to act as a back-up production site for the global multi-centre Phase III trial.

It has reported the results of an interim analysis of the first five subjects in the 10-patient dosimetry bridging study (ZIR-dose), which confirmed that the TLX250-CDx product that contained 10mg of the girentuximab targeting antibody was superior to the 5mg product, with a 50% lower dose of radiation absorbed by the liver and a 25% lower dose in the lower intestinal dose. Eight of the target of 10 subjects have been recruited and the study is expected to complete before the end of the year.

A comparison with historical dosimetry data showed that the change of isotope from 124I to 89Zr has reduced the dose of radiation absorbed by the patient by approximately 25%. This suggests that in addition to improving image quality, the change in isotope may also have improved patient safety.

The interim analysis has given Telix confidence that it has identified the right dosing and dosimetry for TLX250-CDX, enabling it to proceed with dosing the first patients in the ZIRCON Phase III study.

We expect the primary application of TLX250-CDX to be to help distinguish between ccRCC (the most serious form of kidney cancer) and other renal masses as part of the initial diagnostic work-up. Kidney cancer is the eighth most common cancer, and is expected to account for 65,340 new cases and 14,970 deaths in the US in 2018.2 Globocan predicts that in 2020 there will be 423,000 new cases and 184,000 deaths from kidney cancer worldwide.

We estimate that the addressable market for TLX250-CDX is equivalent to 50% of new kidney cancer cases each year, with half of use being for initial diagnosis and the balance being for applications such as detecting metastatic disease, screening patients for suitability for MTR therapy and monitoring response to therapy with targeted agents.

The IPAX-1 trial of TLX101 in patients with glioblastoma (GBM), commenced recruiting patients in Austria in mid-October, having received ethics approval from two hospitals in Austria and regulatory approval from that country’s Federal Office for Safety in Health Care. Additional clinical sites in Belgium, the Netherlands, Germany, Switzerland and Australia will follow, subject to ethics and regulatory approvals. GBM is the most common and most aggressive form of brain cancer.

The Phase I/II dose-ranging study is evaluating the safety, tolerability, dosing schedule and preliminary efficacy of single or repeated injections of TLX101 in patients whose GBM has recurred following previous treatment. It is intended to recruit at least 35, and potentially up to 55, subjects in the study.

Subjects will be administered TLX101 in conjunction with external beam radiation therapy, thereby simultaneously irradiating both bulky lesions and small metastases. This protocol will capitalise on the fact that, in addition to delivering the 123I radioisotope directly to GBM tumour cells, TLX101 also acts as a radio-sensitiser, increasing the sensitivity of cells to radiation.

The preliminary efficacy assessment will be based on post-treatment imaging and is expected to read out by the end of 2019.

Telix has appointed the Austrian company Siebersdorf Labor to manufacture TLX101 for global distribution for clinical trials and for compassionate use programmes.

We have updated the cash balance to 30 September 2018 and rolled forward the DCF model, which leaves our valuation of Telix is unchanged at A$303m. It is based on a risk-adjusted discounted cash flow model, which includes our estimates of the future milestone payments and royalty streams for TLX250 and TLX591, plus profits from commercialisation of TLX250-CDx, illumet and TLX101, as listed in Exhibit 2. We have extended our cash flow forecasts out to 2037 (supported by 12 years of biologicals market exclusivity in the US and 10 years in Europe) but have not included any terminal valuation.

Our valuation per share has increased to A$1.43 per share (vs A$1.39 per share) as the number of shares issued to acquire Atlab was lower than we had assumed in our initiation report (14.9m vs 20.5m). The lower number of shares was due to the higher share value at the time of the transaction (A$0.89 vs our forecast of A$0.66) and the fact that US$0.5m of the US$10m total consideration was paid as warrants (exercisable at A$1.34) rather than shares. After dilution for options and warrants on issue, our fully diluted valuation is A$1.40per share (vs A$1.36 per share).

Exhibit 8 shows our (unchanged) market assumptions for TLX250, TLX250-CDx, TLX591, illumet and TLX101 imaging and therapeutic products, and the rNPV for each product. We have offset the risk-adjusted trial cost against revenue for each indication.