Transgene — Update 13 April 2016

Transgene is a drug discovery and development company based near Strasbourg, France. It is developing immunotherapies for the treatment of cancers and infections. The company was founded in 1979 and was listed on the Nouveau Marche (now NYSE Euronext) in 1998. Transgene is 52% owned by Institut Mérieux, which is 68% owned by the Mérieux family. Alain Mérieux is the chairman of Institut Mérieux and sits on the board of Transgene and bioMérieux (an in vitro diagnostics company); Philippe Archinard (CEO of Transgene) is also on the board of bioMérieux.

Transgene has two lead clinical-stage programmes. Pexa-Vec (JX594/TG6006) is partnered with SillaJen and recently entered a Phase III study in hepatocellular carcinoma (HCC). TG4010 has completed a Phase IIb study for non-small cell lung cancer (NSCLC). Transgene is planning combination trials, with immune checkpoint inhibitors (ICI) such as nivolumab and ipilimumab for both Pexa-Vec and TG4010.

We re-initiate coverage of Transgene with an rNPV-based valuation of €160m, or €4.15 per share. This includes the prospects for TG4010 in NSCLC in the US and Europe (combined peak potential sales of €2.4bn), Pexa-Vec for HCC in Europe (€425m peak sales) and TG1050 for hepatitis B in the US and Europe. For TG4010 we assume a classical clinical development timeline, starting with the Phase I/II studies planned in combination ICIs, so there could be considerable upside should a conditional marketing authorisation (CMA) submission be possible in Europe based on the Phase IIb TIME trial. For Pexa-Vec the Phase III PHOCUS study being conducted by SillaJen will potentially be sufficient to file for approval in Europe, assuming a positive study result. As such, we suggest our valuation largely reflects a base-case scenario and therefore represents fair value for the stock today, ahead of a number of potential catalysts.

Transgene is subject to the usual risks associated with drug development, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. The key sensitivities relate to the clinical performance of Pexa-Vec in the Phase III trial (initial data expected in 2018) and the results of the ICI combination studies of Pexa-Vec and TG4010. The outcome of the TG4010 combination studies in particular will have an impact on its partnership and/or fresh financing prospects for the programme. Precise details of these trials have yet to be announced; we assume that they will commence in mid-2016, with results possible by late-2017.

Transgene held €31.7m in cash as of end-2015, and secured access to a further €30m in funds in January 2016: €20m via an EIB loan and a €10m commitment from its largest shareholder, Institut Mérieux. As a result, the company expects to have sufficient funds to conduct its pipeline development activities through 2016 and 2017, with a cash burn of €35m anticipated by the company for 2016. For modelling purposes, we have assumed that the €20m EIB loan is drawn in two tranches of €10m in H116 and H216. Limited details have been provided on the terms of the EIB loan, except that the loan will be released in two tranches (at Transgene’s request), and it is a five-year loan, with the principal and accumulated interest reimbursable only from the fourth year. We then assume the additional €10m shareholder commitment is received in 2017, which we nominally attribute to long-term debt, given that the timing and nature of this ‘commitment’ is unknown at this stage.

Transgene has a pipeline of immunotherapies for the treatment of cancer and viral indications. The two lead programmes include the oncolytic virus Pexa-Vec, which recently entered a Phase III trial in HCC, and TG4010, a therapeutic cancer vaccine in development for NSCLC. Exhibit 1 details Transgene’s clinical development pipeline. The programmes utilise viral vector technology with the aim of killing infected or cancerous cells (directly or indirectly).

Transgene recently announced a shift in strategy to move away from monotherapies towards combination therapies with immune checkpoint inhibitors. There is recognition within the immunotherapy sector that a combination approach can provide substantial efficacy improvements over monotherapies. A Phase II combination trial of Nivolumab and Ipilimumab demonstrated that patients had an objective response of 61% compared with 11% in the Ipilimumab only cohort; however, safety is a concern. 54% of combination patients suffered a grade 3 or 4 adverse event, compared to 24% on the monotherapy treatment. Most significantly colitis was reported in 17% of combination patients. The hope is that a lower dose of two agents may avoid some of the toxicity associated with either agent alone at its full monotherapy dose.

To this end, Transgene plans to conduct combination studies of the Pexa-Vec and TG4010 with immune checkpoint inhibitors (ICIs). ICIs target antigens that tumour cells display periodically (eg PD-L1), or T-cell receptors that dampen cytotoxic activity (eg PD-1 or CTLA4) in order to overcome tumour-mediated immunosuppression. Immunotherapies such as vaccines (eg TG4010, TG4001) or oncolytic viruses (eg Pexa-Vec) cause tumour cell death, triggering the release of tumour antigens for presentation to the immune system, and also help drive the tumour into a more immunogenic state, so increasing its susceptibility to immunotherapy with ICIs. Success in the TG4010 studies would improve the attractiveness of the programme to potential partners and should improve Transgene’s negotiating position in the future.

The last six months have seen two key milestones for Transgene’s programmes: the start of the Phase III study of Pexa-Vec (HCC) and the first-in-human Phase I study of TG1050 (chronic HBV). Transgene has also commenced further exploratory trials for Pexa-Vec: one evaluating Pexa-Vec in combination with metronomic cyclophosphamide (repetitive, low doses; shown to potentiate the activity of other immunotherapies) in breast cancer and soft tissue sarcoma (sponsored by the Bergonié Institute) and a second evaluating Pexa-Vec in the pre-surgery setting for cancer patients to further document Pexa-Vec’s mechanism of action (sponsored by the University of Leeds).

Pexa-Vec is an oncolytic virus armed with a GM-CSF gene that selectively targets and destroys tumour cells. It is designed to replicate in tumour cells, causing those cells to rupture or be targeted by the body’s immune system, without affecting healthy cells. It also reduces the tumour’s blood supply by disrupting the formation of blood vessels.

The Phase III PHOCUS trial commenced in January 2016. It is a randomised (1:1), open-label study comparing Pexa-Vec followed by sorafenib (tyrosine kinase inhibitor) versus sorafenib alone in patients with advanced HCC who have not received prior systemic therapy (n=600). Pexa-Vec will be administered as three bi-weekly intratumoural injections at day one and weeks two and four, followed by sorafenib at week six; the comparator arm will receive sorafenib 400mg twice daily starting on day one. The primary endpoint is overall survival (OS); secondary endpoints include time to progression, progression-free survival and overall response rate. Initial OS data are expected in 2018.

In November, Transgene announced a revised agreement for Pexa-Vec. SillaJen will now assume responsibility for conducting PHOCUS (previously Transgene was responsible for development costs in its licensed territories plus a fraction of central costs, estimated to cost $18m). In return, Transgene will pay a total of $6m to SillaJen over four years beginning this year; Transgene will now focus only on Europe, having returned the rights for all Middle Eastern countries, Russia, Ukraine, Belarus and Turkey. Transgene will also initiate and fund an independent exploratory trial evaluating Pexa-Vec in combination with ICIs. We view this outcome as positive; importantly it has enabled progression of Pexa-Vec’s development, and while Transgene has had to return rights to certain areas, we believe that this is more than compensated for by the reduced financial burden, allowing it to focus on the remaining pipeline and commence combination trials.

Pexa-Vec has been evaluated in more than 10 trials in a number of tumour types; it has been well-tolerated in all trials. In the Phase II dose-finding study in HCC patients (n=30; 80% first-line), those receiving high-dose Pexa-Vec (intratumoural delivery) had a median OS of 14.1 months compared to 6.7 months for those on a low dose (HR: 0.39; p=0.02; Exhibit 2). However, the subsequent Phase IIb TRAVERSE study in second-line HCC was terminated early in 2013 as data from the first 80 events showed no evidence of OS benefit associated with Pexa-Vec.

The decision to continue development of Pexa-Vec was based on the detailed analysis of TRAVERSE and the prior Phase I/II trials with data from over 300 patients in total. The Phase III trial is in patients with first-line HCC, for which Pexa-Vec has previously shown promising data. This is also supported by the concept that immunotherapies are thought to be most effective when the tumour burden is low (ie less advanced) and in patients with functioning immune systems.

Regulators in the US and Europe have approved Amgen’s Imlygic (talimogene laherparepvec), a genetically modified oncolytic herpes virus therapy indicated for the local treatment of unresectable melanoma lesions. The approval was based on the Phase III OPTiM study (n=436) comparing Imlygic to GM-CSF in patients with advanced, unresectable melanoma. The study met the primary endpoint of improving durable response rate: 16.3% of patients treated with Imlygic achieved a durable response versus 2.1% of patients treated with GM-CSF (p <0.0001). No OS benefit was demonstrated; however, there was a trend towards a 4.4-month longer median OS versus control.

It is increasingly accepted that the advent of ICIs has changed the face of cancer treatment; approved antibodies targeting CTLA4 (Yervoy, BMS) and PD-1 (Opdivo, BMS and Keytruda, Merck) promise to be blockbuster therapies, with several other ICIs in late-stage development. ICIs target immune checkpoint pathways that have been co-opted to create immunosuppression within the tumour microenvironment, aiming to stimulate an immune response that results in long-lived tumour destruction. While these drugs can have a remarkable effect in a subset of patients, only one in five patients are likely to respond. The complex interplay between the tumour and the immune system, involving multiple immune-escape strategies, suggests that monotherapies are unlikely to be able to address all the mechanisms that impede anti-tumour immunity.

Attention is now turning to combination approaches in a bid to enhance the anti-tumour efficacy of each individual treatment. Transgene’s active immunotherapy approach utilises viral vector technology to kill the cancerous cells, thereby improving recognition of tumours, increasing tumour immunogenicity and enhancing the subsequent immune response. This active approach is well-placed to act in combination with, and potentially synergistically with, the immunomodulatory approach of ICIs, which block negative stimulation of the immune system to enhance anti-tumour immune responses. Moreover, the fact that immune checkpoint mechanisms are thought to play a role in limiting the clonal expansion of T cells following vaccination, so potentially impeding the vaccination response, provides further rationale for a combined approach. In addition to carrying out combination trials with its lead candidates, Transgene will also conduct Phase II trials of therapeutic vaccine TG4001, for the treatment of HPV-related cancers.

There is a growing consensus that oncolytic viruses will be best used as part of a combination approach with ICIs, serving to kill cancer cells and increasing neoantigen exposure for the ICI-primed immune system to target. In keeping with this, Amgen is testing Imlygic in combination with Yervoy and with Keytruda. In 2016, Transgene plans to conduct exploratory trials of Pexa-Vec in combination with ICIs: the first in combination with Opdivo for the treatment of advanced HCC; the second in combination with Yervoy for the treatment of advanced solid tumours.

Cancer vaccines are designed to elicit robust, durable, tumour-specific T cell immune responses, making them ideal partners for ICIs that aim to overcome T cell anergy. The synergy of these approaches has been demonstrated in pre-clinical models.3 Preclinical data presented at the AACR Annual Meeting in April 2015 demonstrated that a combination of the therapeutic vaccine TG4010 with an anti-CTLA4 resulted in prolonged OS in a lung metastasis model, and, importantly, evidence of synergy on the control of tumour growth when used in combination with an anti-PD-1 in a MUC-1 positive tumour model.

Transgene plans to initiate exploratory Phase II trials in second-line non-small cell lung cancer (NSCLC) in combination with ICIs. These will be done independently of securing a partner for the Phase III trial in first-line NSCLC, but positive results would likely increase the attractiveness of TG4010 and could trigger the much-sought deal.

TG4010 is a therapeutic vaccine that causes patients to develop an immune response against cells that express the MUC1 protein (a large glycosylated protein). This protein is only expressed at low levels in normal tissues, but is expressed at high levels (often with reduced or aberrant glycosylation) in many tumours (70% of lung, 90% of breast, 60% of prostate and 70% of colorectal cancers). It is in development for the treatment of advanced non-small cell lung cancer (NSCLC).

The Phase IIb stage of the Phase IIb/III TIME trial compared chemotherapy plus TG4010 to chemotherapy plus placebo in patients with advanced NSCLC (n=222). In the subset of patients with non-squamous tumours (n=196), TG4010 led to a significant improvement in progression-free survival (PFS; HR: 0.69, p=0.009) and OS advantage (HR: 0.75, p=0.0049). The benefit was greatest in those patients with low levels of the TrPAL biomarker (triple positive activated lymphocytes): at 12 months 30% of these patients remained progression-free (vs 12% on placebo); and at 24 months 40% of this group were still alive (vs 19% on placebo). See Exhibits 3 and 4.

The overall response rate (ORR) and duration of response (DR) data are also supportive of the potential of TG4010: for the total population (squamous and non-squamous NSCLC), those patients receiving TG4010 benefited compared to the placebo arm (ORR: 39.6% vs 28.8%; DR: 30.1 vs 18.7 weeks). Again, the benefit was greatest in those patients with non-squamous NSCLC and low TrPAL (ORR: 39.3% vs 30.3%; DR: 43.1 vs 18.1 weeks). See Exhibit 5.

In post-hoc analysis of all non-squamous NSCLC patients there was a similar level of PFS and OS benefit in the 97 patients with low levels of PD-L1 expression (<5%) to that observed with all non-squamous NSCLC patients. In various studies it has been shown that non-squamous NSCLC patients with low levels of PD-L1 will not benefit as much from ICIs targeting PD-L1 and PD-1 as those with high levels of PD-L1 expression. This suggests that TG4010 could potentially become a valuable treatment in those non-squamous patients less likely to benefit from treatment with PD1 or PD-L1 inhibitors, in addition to the potential synergistic approach discussed previously.

TG4010 was well tolerated; the most frequent TG4010-related adverse events were mild to moderate injection site reactions. To date, over 350 patients have been treated with TG4010.

Transgene continues to plan for the Phase III part of the TIME trial, which will enrol only patients with non-squamous NSCLC. However, Transgene has said in the past that it will not initiate the trial without a global development and commercialisation partner for TG4010. Transgene reports that discussions are ongoing with potential partners; however, in our view it is most likely that any deal will be signed once the planned Phase II studies in combination with ICIs have been completed. The extra data would reduce the risk for a potential partner and should improve Transgene’s negotiating position.

In November, the first patient was dosed in the Phase I study with therapeutic vaccine TG1050 for the treatment of chronic HBV infection. It is an international, randomised, double-blind, placebo-controlled safety and dose-finding study evaluating single and multiple doses of TG1050 in patients who are currently being treated for chronic HBV infection with standard-of-care antiviral therapy (n=48). Secondary objectives include the antiviral activity of, and immune responses to, TG1050. Data is expected in H118.

There are currently limited treatments for this infection. The cure rate from nucleotide analogues such as tenofovir (Viread) and entecavir (Baraclude) or pegylated interferon-α is only 3-5%, so that patients normally need long-term anti-viral therapy to control their infection. Preclinical data with TG1050 suggest that the vaccine could produce a sustained immune response against the virus in chronic HBV patients, thereby preventing relapses without the need for antiviral therapies. Given the size of the potential market (the WHO estimates that 240 million people have chronic HBV infection), Transgene will look to partner TG1050 once it has proof-of-concept data from this study.

Transgene has largely completed its restructuring programme announced in June 2015. In order to focus the business on research and development the company has closed the pharmaceutical development and bio-manufacturing business (which bought in revenues of c €1.7m in 2014). A reduction in future operating costs and new capital will enable Transgene to progress its pipeline through 2017.

Restructuring that started in 2015 aims to generate significant savings from 2016. Operating costs for 2016 are expected to be c €10m below full year 2015. However, one-off restructuring costs of €7.5m will affect the short-term cash balance with a negative cash impact in 2016 of c €6m. Under the new strategy, Transgene’s manufacturing plant and its associated assets were sold for €3.5m.

In January 2016 the European Investment Bank under its InnovFin IDFF (Infectious disease finance facility) agreed with Transgene a five-year €20m loan that will be realised in two tranches at the company’s request. Both the interest and principal are repayable beginning in the fourth year of the loan. InnovFin was launched under the Horizon 2020 initiative in 2014 to help innovative firms access credit easily. Alongside the EIB loan, Institut Mérieux, Transgene’s major shareholder has committed to providing additional funding of approximately €10m. Further details of the funding are expected later this year.

We re-initiate coverage of Transgene with an rNPV-based valuation of €160m, or €4.15 per share. Our key inputs and assumptions are summarised in Exhibit 6 below. We note the following key assumptions on potential development timelines for TG4010 and Pexa-Vec:

As such, we suggest this largely reflects a base-case scenario and therefore represents fair value for the stock today, ahead of a number of potential catalysts. Note that we also do not currently ascribe any value to the pre-clinical assets TG6002 and TG3003 or Phase I asset TG4001.

Transgene is subject to the usual risks associated with drug development, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. The key sensitivities relate to the clinical performance of Pexa-Vec in the Phase III trial (initial data expected in 2018), the results of the ICI combination studies of Pexa-Vec and TG4010 and Transgene’s ability to secure a partner to enable the continued development of TG4010.

The outcome of the TG4010 combination studies in particular will have an impact on its partnership and/or fresh financing prospects for the programme. Precise details of these trials have yet to be announced; we assume that they will commence in mid-2016, with results possible by mid-2017.

The revised agreement with SillaJen for the conduct of the Phase III trial of Pexa-Vec has reduced the financial burden on Transgene, which we see as more than compensating for the returned rights to Pexa-Vec for all Middle Eastern countries, Russia, Ukraine, Belarus and Turkey.

Transgene held €31.7m in cash as of end-2015, and secured access to a further €30m in funds in January 2016: €20m via an EIB loan and €10m commitment from its largest shareholder, Institut Mérieux. As a result, the company expects to have sufficient funds to conduct its pipeline development activities through 2016 and 2017 with a cash burn of €35m anticipated by the company in 2016.

For modelling purposes we have assumed that the €20m EIB loan is drawn in two tranches of €10m in H116 and H216. Limited details have been provided on the terms of the EIB loan, except that the loan will be released in two tranches (at Transgene’s request), and it is a five-year loan, with the principal and accumulated interest reimbursable only from the fourth year. We then assume the additional €10m shareholder commitment is received in 2017, which we nominally attribute to long-term debt, given the timing and nature of this ‘commitment’ is unknown at this stage.

Revenues in FY16 are expected to drop to €6.1m (vs €9.6m in FY15) following Transgene’s restructuring programme, which resulted in its withdrawal from outsourcing of process development and bio-manufacturing activities. A lower R&D spend, discussed below, will also reduce the R&D related tax credits that Transgene also books as revenue.

We forecast a reduction in R&D expenses for FY16 to €27.5m (vs €32.1m in FY15), following the restructuring programme and a relatively lower level of clinical activity in 2016 (combination studies projected to start in H216) compared to concluding the TIME Phase IIb study in 2015. Our R&D estimate includes the one-off $4m (c €3.7m) milestone payment made to SillaJen for the start of the PHOCUS Pexa-Vec study in January 2016, as well as $6m in Pexa-Vec development costs payable to SillaJen over the next four years (FY16-19). Similarly, G&A expenses are also expected to decline in FY16 to €4.3m (vs €5.8m in FY15) as a result of the restructuring programme and reduction in headcount. In total, Transgene is guiding to a €10m overall reduction in operating costs in FY16 compared to FY15.

Other exceptional items in FY16 include a €6m negative cash impact from restructuring costs, which was set aside as a provision on the balance sheet at end-2015, and €3.5m received from the recent sale of Transgene’s manufacturing plant and associated assets.