Immunicum — Very busy second half

Immunicum’s recent news is that the supply of CPI in the Phase I/II ILIAD multi-indication study is being negotiated with a leading global pharmaceutical company to be provided to Immunicum at no cost. When signed, this will be the most significant announcement since the summer for the following reasons:

We now assume that the Phase Ib portion of the multi-indication ILIAD study (see below) will be conducted in the US where CPIs are the approved standard of care and is reimbursed. This means Immunicum does not need to buy CPI clinical trial supply for either the Phase Ib or potentially the II parts of the ILIAD study when the supply agreement has been signed and hence we have reduced the clinical trial costs in our model.

The availability of the CPIs across Europe can be described as patchy at best in 2018, so depending on whether the CPI being negotiated is approved in Europe the CPI backbone the ILIAD study could potentially enrol patients at European study sites. This brings the possibility of a faster recruitment in the Phase II portion of the study since European study sites, and therefore more patients, could be available.

Merck &Co’s CPI Keytruda overtook Bristol-Myers Squibb’s Opdivo (nivolumab) in Q218 sales for the first time since their launches at the end of 2014. Keytruda has become the standard of care in first and later lines of non-small cell lung cancer (NSCLC), hence our assumption of its status as at least a component of the backbone therapy in the US part of the ILIAD study. CPIs from other companies have launched and are playing selective catch-up with Keytruda and Opdivo in an attempt to demonstrate activity in combination studies that would be superior to either Keytruda or Opdivo alone. Nevertheless, Keytruda and Opdivo are being studied in 268 and 242 combination studies respectively, with 52 and 148 being immunoncology combination studies. Other CPIs from Roche, AstraZeneca and others appear to be more selective probably because many immunoncology studies have already failed (in combination with Opdivo, for example).

In mid-October, Immunicum announced an underwritten fund-raising split between a directed share issue (about SEK178m) and a rights issue (about SEK173m), which management states will extend its cash runway to the end of 2021. The rights issue is contingent on shareholder approval at the 8 November EGM and the rights will trade separately between 26 November and 10 December. The issues propose two new shares for every current five – the outcome will be announced around 13 December.

Meanwhile, we have updated our model to reflect the following changes:

Before considering the effect of the proposed rights issues, we updated our model to take account of the end-Q2 net cash position (SEK149.1m), adjusted for current exchange rates and reduced clinical trial spend in 2018 and 2019. The latter reflects our assumption of the removal of the cost of the CPIs from the ILIAD study. In our initiation note, we had modelled a licensing transaction for ilixadencel in Q419, which subsequently reduced R&D and SG&A spend and had the effect of concentrating the cash outflows in our model after 2019. The removal of the costs (SEK10m in 2018 and 2019) of the CPIs from the clinical trial spend has a positive effect on the valuation, but this is more than outweighed by the increased investment provided by the recent fund-raising.

The funding announcement noted that the equity issues will provide a cash runway through to the end of 2021. In terms of our model, this materially alters the pattern of our forecast cash outflows, concentrating much of this investment between the end of 2018 and the (initiation of) out-licensing of ilixadencel at the end of 2019 and resulting in the exhaustion of the pro forma Q418 cash balance by the end of 2021. Incorporating the anticipated maximum fund-raising proceeds of SEK351m gross, we estimate a year-end FY18 net cash balance of SEK423.1m. In our previous model, we had assumed illustrative funding of SEK50m in Q220, which is now obviated by the funding from the forthcoming rights issues.

The recent funding is expected to result in earlier initiations of the clinical trials, for example the Phase II portion of the ILIAD study, and to bring the GMP manufacture of ilixadencel to commercial-grade quality faster than we previously assumed. The fund-raising also puts Immunicum in a stronger position to negotiate the licensing transaction for ilixadencel after the next tranche of clinical trial results are issued in 2019.

Foreign exchange rate movements in Q218 resulted in gains of SEK54m (SEK0m in Q217). Updating for current exchange rates in our model results in a 10% increase in our valuation. At the operating level, administrative Q218 costs were SEK6.4m vs SEK5.3m in Q217. R&D costs were the most significant operational expense at SEK12.8m (SEK13.7m in Q217), in large part due to the preparations for the US Phase Ib/II (ILIAD), as well as the ongoing Phase II renal cell carcinoma (MERECA) studies. Administrative costs were SEK6.4m vs SEK5.3m in Q218, which were slightly lower than we had forecast. The operating loss for Q218 was SEK19.3m (vs SEK13.7m). Net cash at end June 2018 was SEK149.1m (SEK62m in Q217 and SEK128.0m at end 2017). Operating cash outflow for Q218 was SEK18.1m vs SEK23.1m in Q217, and included share issue costs of SEK32.5m from the issue that raised SEK167.5m net and completed in early Q118.

Immunicum’s clinical trial programme seems to follow a trend of threes: three clinical studies – renal cell carcinoma (RCC), HCC and the multi-indication ILIAD study. The Phase Ib/II ILIAD study will include patients with three diagnoses: HNSCC, NSCLC and gastric adenocarcinoma. The staggered portion of the ILIAD will dose three patients at each dose.

The multi-indication ILIAD study is the earliest of the three studies and, in our opinion, is the most interesting. The ILIAD protocol was agreed with the FDA over the summer and enrolment is expected to start in H218. The study will be in two parts:

Two key points can be derived from the announcement of the FDA’s approval of the ILIAD study protocol. First, the CPI that will be dosed in combination with ilixadencel in the Phase I portion (and we assume for the moment at least the NSCLC patients in the Phase II portion) has now been disclosed as Keytruda. Keytruda is Merck & Co’s best-selling anti-PD1 monoclonal antibody, which has well-known efficacy and safety in NSCLC, HNSCC and gastric cancer (among others). However, it is not benign and significant dose-limiting toxicities like pneumonitis, colitis and hepatitis have been reported. In contrast, ilixadencel has a benign safety profile that is largely confined to mild-to-moderate adverse events in small numbers of patients such as fever, chills and rash. Unlike the CPIs, no dose-limiting toxicity has been found with ilixadencel, hence the top dose in the Phase II part of the ILIAD study will escalate up to 40m cells over three administrations. The protocol for the Phase Ib part involves a six-week staggered period between the dosing of the first six patients. The staggered part of the ILIAD study almost certainly represents the FDA’s usual caution resulting from additive or overlapping toxicity in a number of historical CPI combination studies. Based on ilixadencel’s side effect profile to date, we do not expect any significant additive toxicity with CPIs in the Phase Ib/II portions of the ILIAD study. The Phase II NSCLC portion of the ILIAD study is randomised 2:1 ilixadencel plus CPI vs CPI alone.

Although safety and the optimal administration regimen are the main aims of the Phase Ib part of the study, efficacy will also be measured and the expanded 21 patient group to be reported during 2019 will give more weight to any positive indications of efficacy. The expansion of the Phase Ib part of the protocol from nine to 21 patients may have an additional advantage. Very strong efficacy differentiation in one of the three indications (NSCLC, HNSCC and gastric adenocarcinoma) may provide a rationale for prioritising the indications in the subsequent studies.

The agreement of a clinical trial protocol with the FDA is a significant milestone in any company’s history, but more so for companies in the oncology space that are exploring the use of combinations of agents. The ILIAD study is an open-label, multi-centre, Phase Ib/II study in 21 and up to 150 patients to evaluate ilixadencel when injected intratumourally in combination with the world’s best-selling CPI Keytruda (pembrolizumab). The cautious six-week observation between patients (staggered) in the Phase Ib portion of the study could imply recognition of efficacy by the FDA. The performance of ilixadencel in three disease indications should help Immunicum and its partners prioritise indications in subsequent studies.

Patient enrolment for the Phase II (MERECA) study in 88 newly diagnosed, metastatic RCC patients completed in early January. The patients were treated with ilixadencel in combination with a subsequent nephrectomy (removal of the kidney) and the tyrosine kinase inhibitor (TKI) Sutent (sunitinib) vs nephrectomy and TKI alone. The primary endpoints of the study are the hard clinical endpoints of median overall survival and median survival after 18 months, in addition to other safety and efficacy endpoints. Reporting these hard clinical data in Q319 should enable any prospective partners to make a fully informed business development decision. We assume these data could be combined with those from ILIAD combinations so that ilixadencel’s first Phase III RCC study could include a CPI combination arm.

Ilixadencel has completed a Phase I/II study in 18 HCC patients and was shown to be safe and well tolerated when given as a single treatment, or in combination with Nexavar (sorafenib), and evidence of tumour-specific immune activation was observed in the majority of evaluable patients. The commercial opportunity for ilixadencel in HCC is the lowest (11.4% of the product rNPV) due to the smaller number of patients. This supports Immunicum’s strategy of prioritising the future development of the HCC indication after the multi-indication and RCC studies because the global distribution of HCC is not concentrated in Western markets. About 75% of liver cancer occurs in Asia, with China accounting for over 50% of global incidence.1 Although we have not yet included a licensing transaction for ilixadencel in China in our model, the high healthcare burden in China suggests that we could include royalties on Chinese sales at some point.

As well as the ongoing gastrointestinal stromal tumour (GIST) Phase I/II study in combination with a TKI, Immunicum provided an update on the progress of its preclinical assets IMM-2 (Subcuvax/adenovirus vector) and IMM-3 (CD70, ex vivo CAR-T expansion) at its recent quarterly results announcement. Despite ilixadencel being in Phase I/II in GIST patients, we have not yet included this indication in our valuation, as the number of patients is considerably lower than those with HCC. Neither of Immunicum’s preclinical programmes IMM-2 and IMM-3 is included in our valuation, although Immunicum’s proven ability to turn a product into a multi-indication platform, as it has done with ilixadencel, suggests that at some point we will include them in our model.

We have made adjustments to our model to reflect changes in exchange rates (which are minor) and the Q218 balance sheet, which showed net cash at the end June of SEK149.1m (SEK62m at the end of Q217). As discussed in our financials section, we have reduced clinical trial cost estimates for FY18, reflecting the reimbursement of the CPI in the US. Should the potential CPI supply agreement be signed, it would add more than big pharma endorsement to our investment case for Immunicum as we assume CPI availability as part of a clinical trial protocol would speed the conduct of the study and avoid waiting for the reimbursement of the CPI to be confirmed by the patients’ payers.

In addition, as the Phase I/II study in HCC has now been reported, and we have assumed the company finalises the CPI collaboration and clinical supply agreement, our probability of success2 has increased from 7.5% to 17.4% and applied that probability across all of Immunicum’s Phase II studies. This change alone increased our valuation by just over 11% or SEK2.66 per share before other changes are taken into account.

However, the main change to our valuation lies in incorporating the proposed capital raise, the associated accelerated investment levels and the increased share count.

For the most advanced indication in RCC, the rNPV valuation decreases by c 11% as a larger proportion of the proposed investment arising from the fund-raising affects its value earlier in the NPV calculation, is unaffected by the saving of the CPI costs in the ILIAD study and not offset by the increase in probability of success. For the other later clinical programmes, the savings from not bearing the cost of the CPIs and the increase in probabilities of success have a positive effect, the magnitude of which is related to how much of the programme Immunicum funds before ilixadencel is licensed. We have also absorbed some of the investment into unallocated costs until 2021, which have risen by 54% between our initiation and our latest model. When the cash raised in the fund-raisings, the cost savings in the clinical programmes and the investment apportioned by product are all included (in Exhibit 3, above), our valuation increases to SEK1.52bn or SEK16.4 per share from SEK1.13bn or SEK22.10 per share. The lower per-share value results from the expected 41% dilution from the new share issues.