Biondvax Pharmaceuticals — Phase III for universal flu vaccine starts in 2018

The preliminary clinical trial design (Exhibit 1) includes recruitment of around 7,700 participants aged 50+ years who will be stratified into two groups ie those below 65 years and those who are 65+ years of age. M-001 will be administered intramuscularly on day 1 and again on day 21. Participants will be recruited mainly in Eastern European countries, as seasonal vaccine coverage rates in these countries tend to be smaller compared to Western countries, therefore recruitment could be faster and pose less ethical concerns (vaccinating with M-001 instead of conventional seasonal vaccine). At least one season will be allowed for follow-ups, with interim reports likely after each season. Since flu seasons tend to fluctuate in terms of infection prevalence, the trial is designed to have flexible enrolment which will allow recruitment of the additional required participants in season 2 and season 3 if needed.

Regulatory authorities currently evaluate seasonal vaccines based on influenza virus hemagglutinin (HA) antibodies, which correlate with protection, ie seasonal vaccine manufacturers do not need to conduct robust, large-scale clinical trials every year. Since the M-001 vaccine does not induce the production of these antibodies, BiondVax plans to evaluate the clinical efficacy of vaccination with M-001 by measuring the reduction in influenza-like illness (ILI) rate and severity, a robust primary clinical endpoint. The European Medicines Agency (EMA) confirmed that a single pivotal efficacy trial that proves efficacy against laboratory-proven ILI would be sufficient for an approval in the EU.

The trial is planned to start prior to the 2018/19 flu season (late Q318). BiondVax’s financial position improved substantially over 2017, but we maintain our scenario that with current funding the company could initiate the study and make substantial progress, although to finish it additional funds will be needed. According to BiondVax, these funds could come from various sources including non-dilutive funds, equity raises or partnering (we assume partnership deal as described in the Valuation section).

Market expansion strategy

We note that the upcoming Phase III study will involve participants who are over the age of 50, which BiondVax views as the primary target population. Typically, guidelines consider the elderly population to be most at risk and therefore recommend vaccination, so this target population could be the fastest route to the market. If the Phase III trial is successful there is potential for it to be expanded to other age groups, although for the time being it is not clear whether a bridging study will be needed. In terms of geographies, the EMA agreed that the upcoming study, if successful, would be sufficient for registration in Europe. To register M-001 in the US, BiondVax expects the FDA to use the data from the European study.

The use of M-001 as a multi-seasonal flu vaccine is the primary indication, although national stockpiling is a distinctive opportunity as well. If approved, M-001 could become a preferred vaccine for national stockpiles, in our view.

To date, BiondVax has conducted two Phase I/II trials and four Phase II trials involving 698 participants across different age groups. Phase IIb BVX-007 was the latest trial to report the data in July 2017, which further confirmed the findings from previous studies. M-001 has been shown to have a good safety profile, elicit immunogenicity to multiple flu virus strains and activate both humoral and cellular immune responses (cell-mediated immunity), as opposed to the mainly strain-specific humoral arm stimulation elicited with conventional seasonal flu vaccines. Exhibit 2 summarises M-001’s clinical trial results to date.

In November 2017, BiondVax announced that it had signed a clinical trial agreement for a Phase II clinical trial with the National Institute of Allergy and Infectious Diseases (NIAID) of the US National Institutes of Health (NIH). As guided before, the trial will be funded by the NIH and, according to plans this will be the last Phase II study. The US study (n=120) is designed to test M-001’s priming effect before the administration of seasonal vaccine (the other group will receive placebo and seasonal vaccine). The study is expected to start after the end of the 2017/18 flu season.

In addition to successful share issues in January and September 2017, the €20m loan from the European Investment Bank (EIB) was a game changing event for BiondVax, in our view, as it allowed it to proceed to Phase III trial with M-001. The agreement was signed on 19 June 2017 and over the next three years the company will be able to draw down all the money presuming the development milestones related to the lead universal flu vaccine candidate M-001 are met. The new funds are available via Horizon 2020, the EU Research and Innovation Framework Programme for 2014-20, managed by the European Commission and the European Investment Bank Group. We believe that before the loan was agreed, BiondVax underwent a substantial due diligence process to demonstrate the potential of its universal flu vaccine’s potential. We therefore take it as an external validation of BiondVax technology, which could also raise the company’s profile when approaching potential partners.

The loan is interest-free; remuneration will vary depending on royalties from net sales of M-001 once approved. BiondVax retains an option to repay the loan and repurchase the royalties at any time. The company can draw down in three tranches within 12, 24 and 36 months, which will also depend on certain agreed milestones eg manufacturing of first clinical batch for the Phase III clinical trials. The tranches are repayable five years after each drawdown. The funds from EIB cannot exceed 50% of the total financing requirement for the M-001 development and related activities.

There are two immune system types: innate and acquired. Innate is the in-born, non-specific ability to defend against infections, while acquired immunity is specific to a pathogen and is responsible for a long-lasting effect eg vaccination. Most vaccines in use today work by inducing antibody based immunity (acquired), but animal models and early-stage clinical trials have suggested that generating cellular immunity via T-cell responses (innate) may induce broad protection that current vaccines lack. Furthermore, humoral immunity (antibodies) is effective against extra-cellular antigens, while a virus’s life cycle is mainly inside the cells and therefore not exposed to antibodies. Cell-mediated immunity is more effective against intra-cellular infections including the influenza virus. The role of cellular immunity (innate) among others includes the direct clearance of virally infected cells, the indirect recruitment of other immune cells and also B cell stimulation (humoral response) leading to specific antigen antibody production.

Most current flu vaccines are subunit vaccines. The virus is grown, then inactivated and its surface antigens (eg HA) are used for immunisation. Other existing types of vaccines are live attenuated typically delivered as nasal sprays or injections.3 These vaccines rely on triggering humoral (acquired) response to the common variable surface regions of the influenza virus, therefore are highly strain specific. BiondVax’s technology, in-licensed from Yeda Research and Development (Weizmann Institute of Science), is based on peptide technology, which uses a combination of conserved and common epitopes from influenza virus proteins.

The conserved epitope-based approach focuses on the minimal component of a viral protein that activates the lymphocyte. Typically this corresponds to short peptides from 8-10 amino acids for the activation of T-cells and longer regions of up to 20 amino acids for activating B-cells. Based on technology developed by Professor Ruth Arnon at the Weizmann Institute (Professor Arnon is also known as the co-developer of Copaxone, the blockbuster multiple sclerosis drug), BiondVax has designed a vaccine specifically to activate both the cellular (T-cells destroy virus infected cells) and the humoral (B-cells produce specific antibodies against the virus) arms of the immune system, both of which are now recognised to play an important role in controlling influenza infection. A number of targets for influenza vaccine have been investigated by BiondVax and other researchers that would activate both T-cell and B-cell responses. These include conserved ‘stalk’ domain of hemagglutinin antigen, nucleoprotein (NP), Matrix 1 (M1) and Matrix protein 2 (M2e) among others.

The engineered ‘multimeric’ vaccine M-001 contains nine conserved and common epitopes (short peptides) from HA, M1 and NP viral antigens (Exhibit 4). The epitopes are combined into a single recombinant protein easily manufactured in E. coli bacteria. These specific epitopes activate both arms of the immune system.

In the US, seasonal flu causes around 23,000 deaths a year, mainly in the elderly, and 200,000 hospitalisations (CDC). Worldwide there are estimated to be 3-5 million severe cases annually resulting in 250,000-500,000 deaths (WHO). Children under two years, those aged 65 and over and the chronically ill are most at risk. For example, around 90% of seasonal flu related deaths occur in elderly people, as influenza worsens outcomes or existing chronic conditions (CDC). Molinari et al estimated that in the US the economic impact of seasonal influenza was $10.4bn in direct medical costs alone, with a significantly larger burden due to lost lives, earnings and productivity of $87.1bn.4 According to EvaluatePharma, the worldwide influenza vaccine market was $4.3bn, with Fluzone (Sanofi, quadrivalent) reaching top $1.5bn in sales in 2015.

Seasonal vaccines often fail to protect from flu infection due to the mismatch of the forecasted and prevailing virus strains, but also because of possible low efficacy even if there is a match. According to the CDC, the average overall adjusted vaccine effectiveness for influenza seasons in the general population has been approximately 40% over 2004-2016, partly due to the antigenic drift of influenza virus strains (‘strain mismatch’), while the variation was significant over the same 2004-2016 from as low as 10% (2004) to as high as 60% (2010). Despite increasing vaccination rates, effectiveness is even lower in the elderly due to immunosenescence. There is a need for a more reliable vaccine that is both more immunoprotective and with coverage against a wider range of flu strains for the entire population and in particular for the elderly.

Consensus view on universal flu vaccine

On 10 August 2016, BiondVax participated in the ‘Eighth WHO meeting on development of influenza vaccines that induce broadly protective and long-lasting immune responses’ held in Chicago, US. The WHO’s Global Vaccine Plan calls for at least one licensed universal influenza vaccine by 2020 in response to poor effectiveness rates with conventional seasonal vaccines. The WHO monitors the progress and conducts periodic meetings with experts, who provide thought leadership about the development of innovative influenza vaccines. In our view, the clinical data so far and the positioning of M-001 are broadly in line with the consensus view about the universal vaccine.

Our valuation of BiondVax is increased to $200m (NIS689m) or $32.4/ADS (NIS2.80/share) from $165m (NIS577m) or $26.8/ADS (NIS2.34/share) after substantial revision of our assumptions. We note that there are c 86m out-of-the money options and warrants outstanding (weighted average exercise price of $6.4/ADS). We value BiondVax based on a risk-adjusted NPV analysis using a 12.5% discount rate and including net cash of $22.6m (NIS78.1m), which takes into account cash at end-Q317 and short-term deposits.

Revision of valuation assumptions

In our initiation report, we assumed a scenario in which BiondVax would develop M-001 in a stepwise manner, with a pandemic primer and seasonal primer for at-risk populations being the first indications, and then expanding to a universal, standalone influenza indication, which is the ultimate goal, but also the most R&D-intensive. With the new funds from the EIB and the recent share issue and an input from the regulatory authorities, BiondVax is able to initiate the Phase III trial on its own for the ultimate universal vaccine indication. We have therefore revised our valuation and now include the universal flu vaccine indication and national stockpile potential. As discussed on page 2 (market expansion strategy), the upcoming Phase III trial will involve 50-year-olds+, but, if successful, we believe it is likely that the company would pursue expansion into other age groups. In addition, BiondVax expects to use the Phase III data to file for FDA approval. Subsequently, national stockpiling could be a realistic opportunity, which we also include in our valuation. Below we summarise the main changes to our assumptions compared to our previous reports.

Our other assumptions remain unchanged as discussed in previous reports (initiation and subsequent revision) with key ones being:

BiondVax’s 9M17 operating expenses were $2.5m (NIS8.8m), of which R&D and G&A costs were $1.5m (NIS5.1m) and $1.1m (NIS3.7m) respectively. We revised our total OPEX estimate for 2017 downwards from $4.4m (NIS15.2m) to $3.3m (NIS11.4m) due to better than expected R&D spend. We expect a pick-up in R&D spend (estimate of $5.0m or NIS17.2m for 2018) as the company initiates the Phase III trial.

BiondVax is in a much better financial position than a year ago. The company reported cash and short-term deposits of $22.1m (NIS78.1m) at end-Q317 ($7.1m or NIS 27.4m at end-2016) following successful share issues in January and September 2017. In addition, the company now has access to €20m from the EIB. We estimate cash of $27.7m (NIS95.5m) at end-2017. Notably, as previously our forecast includes the first drawdown of €6m from the European Investment Bank (EIB) loan (more detailed discussion on page 3). However, according to the agreement the first drawdown could be completed within a 12-month period since the agreement was signed in June 2017, so it may slip into 2018. As previously, we assume that BiondVax will draw down €6m in each of 2017 and 2018 (according to the agreement, the first two drawdowns are between €4-6m), while the last drawdown will include the rest. Cash reach depends mainly on the actual costs of the Phase III trial. Our assumption is $50m, however costs related to such a large-scale trial with estimated 7,700 participants enrolled over two to three years are difficult to estimate. As explained above, our base case scenario is that the company will need additional funding to complete the trial. In addition to the completion of the trial, marketing and expansion into other age groups and geographies will require further funds, therefore, we assume a partnership agreement with a large pharma (in year 2020 in our model).

In our financial forecasts we also reflect plans to build a manufacturing facility. As announced previously, around €4m should be invested in the construction of the manufacturing plant and, as previously, we include capex of €0.5m, €2.25m and €2.25m in 2017, 2018 and 2019, respectively.