Cellular Biomedicine Group — Results from AlloJoin Phase I

On 16 March 2018, the company reported the final results from the AlloJoin Phase I clinical trial. AlloJoin is an allogeneic cell therapy composed of mesenchymal progenitor cells isolated from adipose tissue. The study enrolled 22 Chinese patients with knee osteoarthritis (KOA) and monitored them over 48 weeks. The primary endpoints of the study were safety and improvement in symptoms, as measured by the Western Ontario and McMaster Universities Arthritis Index (WOMAC). The patients were randomized onto one of three different dosing arms: 10m, 20m and 50m cells (n=7, 8, 7 respectively).

The most important data from the study at this point was safety. The adverse event (AE) profile provided by the company was largely consistent with earlier results and AE were primarily composed of pain and swelling of the knee, and no serious adverse events (SAEs) were observed. Two patients on the trial did not receive the second dose of cells because of pain following the first administration. The company provided a detailed breakdown of the grade 3 AEs (no grade 4 were observed), and they were of a similar profile (Exhibit 1). The most common grade 3 event was knee pain (seen in half of all patients). These rates are much higher than seen with other intra-articular injections. None of the AEs was reported as serious and the company stated that the pain remitted in five to 14 days following treatment. At this time, we do not consider these rates of pain necessarily limiting, considering the promises of long-term resolution in KOA symptoms which the treatment could potentially provide, although the product will have to justify this with efficacy. However, importantly, these safety results have removed several safety overhangs that could have halted development, such an inflammatory reactions or neoplasia.

The efficacy data provided by the company are limited by the fact that they are not placebo controlled and the company did not provide detailed numbers on treatment effects (instead opting to provide charts alone, Exhibits 2 to 5). The trial reported an improvement in patients’ WOMAC scores of an estimated 10-20 points, and the improvement was statistically significant with the combined arms compared to baseline (p=0.0181, Exhibit 2). The WOMAC scale is a 24-item questionnaire measuring the impact of arthritis on daily function, such as pain while walking or the ability to rise from bed or go shopping. It is subdivided into three subparts: WOMAC A for pain, WOMAC B for stiffness, and WOMAC C for function. Historically, intra-articular saline injections show reduction in WOMAC scores of approximately 25-30% at week 12.

We find it encouraging that the trial was able to demonstrate an improvement in WOMAC in such a small number of patients and to maintain its effect for such a prolonged period. The widely used intra-articular hyaluronic acid (HA) injection product, Synvisc-One (Hylan G-F 20, Sanofi), showed a 37% improvement over baseline in the WOMAC A pain subscale at 26 weeks (31% for placebo),1 although the total WOMAC was similar to saline.2 The recently approved Zilretta (Flexion), an extended-release formulation of the steroid triamcinolone, improved WOMAC scores by approximately 50% in each category, although these effects peak at weeks 4-8 and are similar to placebo (~25%) by week 28.3

The company additionally provided data on knee pain (as measured on the visual analogue scale, VAS, Exhibits 3 and 4), and these values appear similar to Synvisc and placebo (improvement of 2.0 and 2.1 units respectively).4

The company also provided new data on the regrowth of cartilage using the product. Previously, the company reported that ReJoin increased cartilage volume by 104 mm3 in the Phase I/IIa trial and 302mm3 in the Phase IIb trial, as assessed by MRI. This is an important and unique property of this technology because other treatments for KOA may provide symptomatic relief but do not alter the course of the disease. In this instance the company provided data showing that AlloJoin altered the rate of change in cartilage volume, instead of absolute amounts. The 19 patients on the trial evaluable for cartilage volume had a small positive rate of cartilage gain, similar to ReJoin (albeit smaller). This is in comparison to the steady loss seen in healthy subjects and KOA patients in the historical controls.

In general, we view the efficacy results as encouraging. It is difficult to draw conclusions without more specific data to compare to historical controls, but this is tempered by the prolonged period the effect was seen and the apparent effects on maintaining cartilage.

There have been a number of significant changes to Chinese regulations, which are expected to affect the company. In December 2017, the CFDA released guidance on the development and regulatory pathway for cell-based therapeutics. This document provides significant clarity on the regulatory framework under which CBMG’s products (and others) will be evaluated. Notably, cell-based therapeutics will be regulated as drugs. This has several immediate impacts. CBMG’s products should qualify for priority review as innovative drugs, which should expedite filing timelines significantly. The company will need to file a clinical trial application (CTA) for each product, like other drug companies, but this should also be expedited. We also expect this regulation to put increasing scrutiny on the CAR-T and stem cell industries in China, by requiring manufacturing inspections, although we do not see this as a limitation for CBMG, because the company has consistently focused its efforts on maintaining its manufacturing quality to international standards. Finally, cell therapy products have a more direct pathway to reimbursement as drugs. There are a series of national drug reimbursement lists in China that are periodically updated, and cell therapies are entitled to inclusion on these lists, which insures some level of reimbursement (varying by province and resources).

Additionally, in an interesting departure from the standard protocol for drugs, which requires a Phase I, II and III, the CFDA announced that cell therapy products will only need to go through two clinical Phases: an early phase (focused on safety, dosing, and pharmacokinetics and pharmacodynamics) and a confirmatory phase. We believe that this is in part an effort to accelerate the development of this segment of healthcare, and that it will be reflected in the timeline for CBMG.

In other regulatory news, the CFDA, as well as other healthcare agencies, was reorganized into a larger market regulatory body. We expect this reorganization to increase governmental pressure on the agency, but that most of its regulatory functions will remain intact.

The company announced with its year-end 2017 results that, after a strategic review, it has decided to focus its development efforts exclusively on China. Previously, the only program with a US presence was AlloJoin, although the company had not started US clinical trials. US development efforts to date have been limited to the establishment of a cell line for future trial use. We hypothesize that the recent results and the new regulatory pathway in China have increased confidence in the company’s ability to gain traction there, and that the decision was made to simplify operations and maintain focus.

We have increased our valuation of CBMG to $353.1m or $20.76 per basic share from $191.6m or $13.58 per basic share. This is largely driven by an increase in the probability of success for AlloJoin (to 40% from 15%) based on the safety data from the recently reported clinical trial results. Additionally, we have advanced our clinical trial timelines based on the new regulatory framework. We expect each product to require only two trials and to receive priority review status. This has advanced our timeline for ReJoin by approximately one year, and 18 months for the remaining products. Finally, we have increased net cash to reflect the recent financing. These factors are offset by removing the US commercialization of AlloJoin from our model and an increase in the negative NPV from AlloJoin/ReJoin cannibalism (due to the increased probability of success). The company has stated that it intends to release top-line results from the ongoing CAR-T studies around the end of H118, and we expect to update our valuation at that time.

The company reported a loss of $24.8m for 2017, which was lower that 2016 ($29.2m) despite R&D expenses increasing from $11.5m to $14.6m. This increase in R&D spending was driven largely by the advancement of the CAR-T and KOA clinical programs, and we expect it to continue to increase in later years ($15.9m in 2018). The company ended the period with $21.6m in cash following a $14.5m private placement at the very end of the year. This was subsequently followed by a $30.6m private placement at the beginning of February. We expect this cash to provide a runway into 2019, although we expect the company to need $90m in additional capital before profitability in 2022 ($20m in 2019 and $70m in 2021).