OSE Immunotherapeutics — Pipeline momentum builds into FY24

OSE Immunotherapeutics has an active clinical development pipeline focused on immuno-oncology and immuno-inflammation (Exhibit 1). Anticipation is building for its lead asset, Tedopi, with the upcoming confirmatory pivotal trial due to commence in Q224, where the cancer vaccine will be evaluated as a monotherapy in second-line NSCLC for patients with secondary resistance to immune checkpoint inhibitors (ICIs). Tedopi is also being explored in three partnered Phase II combination trials: pancreatic cancer (with chemotherapy; patient enrolment recently completed; results expected in 2024), ovarian cancer (with pembrolizumab; results anticipated in 2025) and lung cancer (with nivolumab; results expected in 2025). If the clinical data are supportive, the company could potentially address earlier lines of treatment, representing a greater commercial opportunity. Momentum is expected to build through 2024 with the Phase II Lusvertikimab readouts expected in mid-2024, which could potentially represent the next major catalyst for the company’s immuno-inflammation portfolio. OSE-279, an anti-PD1 ICI, made good progress throughout 2023 and early-2024, having demonstrated indicators of both efficacy and safety in a Phase I/II trial in patients with advanced solid tumours. Provided the data continue to be supportive for OSE-279, management may look to maximise its clinical potential with various combination approaches, including with Tedopi.

Tedopi is an off-the-shelf cancer vaccine comprising a unique combination of neoepitopes (small peptides derived from tumour-specific antigens expressed by various cancer cells) and is likely the most advanced neoepitopes vaccine in the clinic. It is being developed for NSCLC patients with secondary resistance to ICIs (patients experiencing disease progression after 12 weeks of ICI treatment) and the treatment is designed to directly activate tumour-specific T-cells that then bind tumour-associated antigens presented on the surface of cancer cells by the HLA-A2 receptor (c 45% of NSCLC patients are HLA-A2 positive).

OSE has already demonstrated the potential efficacy of Tedopi in the ATALANTE-1 trial, which was a randomised Phase III study to evaluate the cancer vaccine in the second- or third-line treatment setting after ICI failure in patients with locally advanced (stage IIIb) or metastatic (stage IV) NSCLC and who are HLA-A2 positive. As with all trials during the pandemic, recruitment was adversely affected, and 219 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 patients, 118 (54%) met the definition of the population of interest (secondary resistance) and were used for the main analysis. The primary endpoint for ATALANTE-1 was met, with significantly improved overall survival (OS) rates, and the results showed positive patient-reported outcomes, quality of life and safety (Exhibit 2). Key highlights included:

Following the results of ATALANTE-1, OSE received positive recommendations to conduct a follow-on confirmatory pivotal Phase III trial based on scientific advice from both the FDA and European Medicines Agency (EMA). This will evaluate Tedopi as a monotherapy specifically in the second-line setting (versus second- or third-line in ATALANTE-1), and will involve a larger NSCLC patient population (expected n=350 vs 139 evaluable patients in ATALANTE-1). As part of this confirmatory pivotal trial, OSE will utilise a companion diagnostic screening test to efficiently identify HLA-A2 positive NSCLC patients, which should facilitate the enrolment process by efficiently identifying patients who are more likely to respond to Tedopi epitopes. OSE expects to launch clinical trials in the US in Q224 followed by Europe in H224. The NSCLC treatment market, currently dominated by ICIs, was valued at c $16bn in 2021 by Spherical Insights and is projected to reach a sizeable c $39bn by 2030 (CAGR of 10.4%). Assuming positive clinical data, OSE has the potential to garner notable market share by targeting the second-line post-ICI failure (market value >$5bn per year, according to management). We anticipate the confirmatory pivotal Phase III trial is likely to conclude in 2027 and would be a significant catalyst for the company.

OSE’s lead immune-inflammation asset is Lusvertikimab (formerly OSE-127), 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 within this treatment space (Exhibits 4 and 5).

The Phase II CoTikiS trial is a multi-centre, randomised, double-blind, placebo-controlled study to assess Lusvertikimab in patients with moderate to severe ulcerative colitis (UC) (Exhibit 6). In July 2023, OSE announced an encouraging interim review from the independent drug safety monitoring board, which recommended that the trial should proceed without any modifications to the design. In March 2024, patient enrolment was announced to be complete (n=150), after a minor delay relating to a recommendation to include patients naïve of biological treatments (in addition to those post failure of, or intolerant to, previous biological treatments) and include trial sites in Eastern Europe, where there is a greater population of such patients. The top-line results after induction (primary endpoint at week 10) are expected in mid-2024, which we believe may represent the next most significant catalyst for investor attention.

Beyond UC, OSE has also announced plans to expand Lusvertikimab to acute lymphoblastic leukaemia (ALL), backed by a positive opinion from the EMA for Orphan Drug designation in this indication. Preliminary research has 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 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. We expect OSE to provide an update on this front within 2024 and note this will most likely include plans for a Phase I/II trial. With the ALL treatment market projected to be worth c $4.5bn in 2031, we believe this could represent a potentially sizeable opportunity for OSE.

Targeting the lucrative ICI market, OSE-279 (an anti-PD1 monoclonal antibody) is currently in a Phase I/II clinical trial for the treatment of advanced solid tumours. This is a first-in-human, multi-centre, dose-escalation/expansion study aiming to determine the maximum tolerated dose and/or recommended Phase II dose (RP2D) of the ICI as a monotherapy. Secondary objectives include the assessment of anti-tumour activity, safety, investigating the pharmacokinetic/pharmacodynamic profile of the treatment and measuring receptor occupancy.

In February 2024, OSE shared an encouraging clinical update corresponding to the first 20 patients, representing 13 different tumour types. There were four confirmed partial responses (PR) from patients receiving 600mg every six weeks (q6w), with a 36% response rate in patients with: anal squamous cell carcinoma, undifferentiated pleomorphic sarcoma, oncocytic thyroid cancer and alveolar soft part sarcoma, potentially showing a competitive edge over current approved anti-PD1 ICIs (though we caution that there may be limitations in comparing clinical trial data to historical data due to differences in trial designs and control) (see Exhibit 7). One ongoing PR (81% reduction of target lesions) was reported for a hepatocellular carcinoma patient after a single dose (300mg). Stable disease was reported in five patients (multiple dose levels) and treatment is ongoing in seven patients. The pharmacokinetic analysis showed dose-proportionality and favourable exposure. It was also noted that receptor occupancy was maintained. Importantly, at 600mg q6w, there were no dose-limiting toxicities (n=10) and, therefore, in addition to the RP2D of 300mg every three weeks, 600mg q6w has been selected as the second RP2D. Management is also exploring the possibility of combination approaches, such as with its lead cancer vaccine Tedopi, which we believe could maximise the potential of its proprietary therapies.

ICIs currently dominate the immunotherapy treatment landscape and as a result it is a highly competitive area. The FDA has approved four different categories of ICIs, including inhibitors of: PD1; the ligand PD-L1; the cytotoxic T-lymphocyte associated protein 4 (CTLA-4); and lymphocyte activation gene 3 (LAG3 –Opdualag, a combination of nivolumab and relatlimab targets PD1 and LAG3, respectively, and is approved for the treatment of melanoma) (Exhibit 8). OSE will likely aim to differentiate by targeting orphan indications with high unmet medical needs, as well as by assessing OSE-279 in combination with its proprietary assets. Management anticipates that such combinations could overcome some of the challenges associated with cancer resistance mechanisms.

In addition to the above, we note that BeiGene received FDA approval for tislelizumab (Tevimbra), a PD-1 inhibitor, in March 2024 for the treatment of advanced or metastatic esophageal squamous cell carcinoma, and it is expected to be available in the US from H224.

Exacerbated by the biotech funding challenges, large pharma partnerships and acquisitions continue to garner the most mindshare in the sector. Fortunately, OSE remains engaged in multiple partnered programmes, reflected in the company’s proprietary programmes presented below:

OSE is a clinical-stage company and therefore all reported revenues comprise either licensing, upfront, milestone or servicing-related revenues from partners. In FY23, OSE reported revenues of €2.2m (we had estimated €2.7m), which we believe can be attributed to direct-cost invoicing to partner Boehringer Ingelheim (BI). The corresponding figure for FY22 was €18.3m, which included a €9.8m milestone payment from BI and €5m in upfront payment from Veloxis. The FY23 operating expenses were down 31.3% to €25.2m (€36.7m in FY22; lower than our estimate of €29.3) benefiting from a combination of lower R&D expenses (completion of the Phase III ATALANTE-1 study) and tighter control over overheads by management. R&D expenses, which made up 68% of the operating expenses in FY23, declined 36% y-o-y to €17.2m, from €26.9m in FY22. Overhead expenses improved too (€6.0m vs €6.7m in FY22), resulting in a reported operating loss of €23.0m (loss of €18.5m in FY22), lower than our estimate of €26.5m. Cah outflow from operating activities was €19.8m, slightly higher than the €18.3m recorded in FY22.

Based on the FY23 results, subsequent post-period events and updated visibility on the company’s clinical pipeline, we have adjusted our FY24 estimates and have also incorporated FY25 estimates as we roll forward our model. For FY24, we now incorporate the $48m (c €45m) licensing income received from AbbVie in February 2024 as part of the FY24 revenue. We have also assumed a €10m milestone payment from BI based on the assumption that the ongoing Phase I study completes in 2024 and another c €2.5m in servicing-related fees (these are subject to revision). In total, we now estimate c €57m in revenues in FY24, versus €15m previously. For FY25, we estimate revenues of €65.5m, assuming inflows from a partnering deal for Lusvertikimab (management has indicated that it would seek a partner to undertake Phase III studies and subsequent commercialisation of Lusvertikimab). With the anticipated initiation of the confirmatory Phase III trial for Tedopi in Q224 (partially offset by the completion of the Phase II study, CoTikiS, for Lusvertikimab in UC), we expect R&D expenses to rise. In the near term we have adjusted our R&D expectations to €23.2m in FY24 (from our previous estimate of €27.7m) and estimate a similar level to be maintained in FY25 (€23.3m). Overall, we now estimate an operating profit of €27.4m in FY24 (operating loss of €19.8m previously) and €35.7m in FY25.

OSE exited FY23 with a gross cash position of €18.7m and a net debt position of €23.2m. The company had total financial liabilities of €41.9m at the end of FY23, which includes both debt from government agencies as well as repayable advances (€5.3m of this was raised in 2023 with a maturing period of three to five years). Of the total indebtedness, about half (c €20m) of this is made up of loans from the European Investment Bank (EIB), drawn down in two equal tranches in July 2021 and December 2022, respectively. The loan is repayable in 2026, with only minor debt servicing required prior to that. The EIB loan bears an interest rate of 5% and required the company to issue 1.4m warrants (850k for tranche 1 and 550k against tranche 2) to be exercised after July 2026 and December 2027, respectively. If fully converted (assuming no further equity issues from the company), this would dilute existing shareholders by c 6%. In April 2023, OSE entered into an equity financing agreement with Vester Finance, which held the option to subscribe to a maximum of 2.8m shares (15.1% of the share capital) of the company over a maximum period of 24 months. As of September 2023, 2.74m warrants have been exercised (c 12.5% dilution) at a weighted average exercise price of €4.31, netting OSE €11.6m in equity financing. Subsequent to this, the company signed an extension to this facility, against issue of a maximum 900k shares. As per the latest available information, no further warrant exercises have been made under this facility but if exercised, this would lead to a further dilution of c 4%.

Based on the year-end gross cash position of €18.7m along with the $48m upfront payment from AbbVie and expected €5.8m in R&D tax credit (projected to be received in 2024), we estimate the company has operating headroom into 2026 (in line with management guidance), even if there are no further licensing or milestone-related inflows. Our model assumes that the company will continue to receive further inflows across its various assets from existing/new partnership deals and therefore we do not foresee the need for a new fund raise. In case the company does not receive any non-dilutive funding in the form of licensing income, we estimate that the company would be required to raise a total of c €70m across FY26 and FY27 before becoming self-sustaining in FY28, following the launch of Tedopi in the US. If this requirement is met through equity funding, we estimate the need to issue c 14.4 million shares (at the current share price of €4.87), resulting in our per share valuation coming down to €10.7 from €14.6 currently (shares outstanding would increase from 21.7m to 36.0m).

We continue to value OSE using a risk-adjusted net present value (NPV) approach, valuing the different assets (both in-house and partnered) separately, adjusted for the associated risk (based on the phase of clinical development) (Exhibit 10). We use a flat discount rate of 12.5% across all clinical programmes. For the in-house, self-developed programmes Tedopi in NSCLC, OSE-127 in UC and OSE-279 in solid tumours), we keep our underlying assumptions (target market, product pricing, trial timelines, licensing deals and probability of success) unchanged. For the partnered assets (OSE-172/BI 765063, FR-104/VEL-101), based on the current stage of development, we have conservatively extended the launch timeline to 2029, from 2028 previously. The impact of this has been offset by the benefits of rolling forwards our model. Our valuation for OSE adjusts slightly to €317.1m or €14.6 per share (from €311.3m or €14.4/share previously).

Note that our valuation currently does not reflect the potential from OSE-230 (despite the recent deal with AbbVie) as it is currently in the pre-clinical stage of development. Based on recent management communication, we expect the company to file an investigational new drug (IND) application for the asset in 2024, followed by the Phase I study initiation, at which time we will incorporate it in our model and valuation. This should lead to further upside in our valuation.