- Advaxis appears undervalued, and bears a striking resemblance to Imclone Systems prior to acquisition by Eli Lilly for $6.5 billion.
- The company has a robust platform technology with the ability to express any antigens of interest, potentially making Advaxis' pipeline quite extensive.
- Multiple candidates designated as orphan drugs by the FDA should push Advaxis' valuation in line with peers: Puma Biotech (Mkt Cap, $2.2 billion) and Inovio Pharmaceuticals (Mkt Cap, $500 million).
- Advaxis' management team is seasoned in the development and commercialization of immunotherapies.
The trajectory of biotechs can often be tough to predict for various reasons; but when accurately predicted, the returns on shareholder dollars are immense.
One example of this is the story of Imclone Systems, a biotech involved in the development of growth factor blockers and anti-cancer vaccine, popularized by its EGFR inhibitor, Cetuximab. Its story gets interesting in early 2004, when a piece on Bloomberg BusinessWeek identifies the company as a likely acquisition target. The author bases his speculation on:
1. The possibility of its lead drug being a highly successful therapy;
2. Good collaborative arrangements with Big Pharma;
3. The possibility of developing other drugs with the right financing.
An important fact about this piece is that it was published on Jan 20, 2004, when shares traded for $43; roughly 3 weeks before Cetuximab received its first FDA approval on February 12, 2004. Fast-forward to November 24, 2008, Imclone is formally acquired by pharma giant Eli Lilly and Company, LLY, for $70 a share, fulfilling the BusinessWeek prediction. In an interview with Eli Lilly's (NYSE:LLY) CEO at the time, special emphasis was placed on the third point, the possibility of developing other drugs with the right financing.
The acquisition can only be considered a win in the eyes of investors who purchased stock at the time of publication. More importantly, the stock was a home run for those invested in the company in its infancy, before its Phase III trials took shape. With that in mind, the remainder of this article examines a lower profile biotech company that, in my view, parallels Imclone's story. This is not to say that the company (Advaxis) will be bought out, but rather that it is an attractive prospect to Big Pharma and likewise to investors at its current valuation.
At $2.64/share, a relative low point since its uplisting to the Nasdaq, Advaxis (NASDAQ:ADXS) is a cheap biotech company involved in the development of immunotherapies. A discounted cash flow analysis reveals that the price per share should be $6.14, approximately 2.5x the current market price.
Advaxis' Drug Candidate Overcomes Efficacy-Limiting Factors Seen With Other Immunotherapies
Advaxis utilizes a bioengineering version of the live bacteria, Listeria monocytogenes, or Lm, to create its immune therapy. With prominence of the Lm pathogen, the human body has developed an immune response to its presence. This evolutionary fact is what allows the body to induce a targeted attack on the tumor cells triggered by the extrinsic Lm bacteria. Such response allows for the body's immune system to accept the tumor-associated antigen encoding information present within the LM pathogen and then produce killer T-cells to attack tumor cells expressing the given antigen. The antigens are the identification element in the therapy; allowing killer-T cells to distinguish the cancerous cells from the healthy ones. The highly potent response induced by the technology allows the overriding of immune system checkpoints, essentially preventing the tumor's cells from disguising their presence to the immune system. It also allows for bypassing the regulatory T-cells (Tregs) and myeloid-derived suppressor cells (MDSCs) which are believed to limit the effectiveness of immunotherapy-based treatments (Klebanoff et al. 2012, Journal of Hematology). The figure below provides a visual for the mechanism of action. The technology does have to deal with the baggage of transfection via bacteria; fever, nausea and diarrhea can be some of the possible side effects.
Figure 1. This summarizes the mechanism of action. Source: Company Presentation
A recent licensing deal between Arudo Biotech and Johnson and Johnson's Janssen Biotech is further affirmation of Advaxis' technology. In exchange for up to $365M, Aduro exclusively licensed its LADD (Live, attenuated, double-deleted Listeria monocytogenes) platform. Advaxis' technology operates in a similar mechanism of action and carries much of the benefits of the LADD platform. That being said, the two companies are not competitors, as their drug candidates are targeting different cancer indications.
The three drugs resulting from this platform are ADXS-HPV, ADXS-PSA and ADXS-cHER2. The table below summarizes the clinical development of the three drugs. Given the robustness of the technology, Advaxis draws a major parallel to Imclone in this capacity. Per a conversation with management, the Lm bacteria can be genetically altered to express any antigen of interest, with over 20 product candidates having already been derived. Armed with financing, Advaxis' dynamic pipeline - much like Imclone's - could come into focus. The table below provides a more extensive description of the company's clinical development.
Table 1. Advaxis development summary
ADXS-HPV, the company's leading drug candidate, is an immunotherapy designed to induce an immune response to tumor cells expressing the E7 gene associated with HPV. There are many HPV-associated cancers, including vaginal, vulva, penile, anal and head/neck cancer. Cervical cancer is the most common HPV-associated cancer, with almost all cases caused by HPV. The company has acquired orphan drug designation (ODD) in indications for anal, head and neck cancer and late-stage cervical cancer. The ODDs could prove useful in securing a dominant position in market for ADXS-HPV.
Understanding ADXS-HPV Clinical Data, Its Position in the Market and Potential Application as a Combination Therapy
At the Annual ASCO meeting, the company presented final results from its Phase II clinical trials studying ADXS HPV in women with recurrent cervical cancer. The trial consisted of 2 arms: one arm consisting of patients being treated with ADXS-HPV alone, and the other with ADXS-HPV and the platinum therapy, cisplatin. The two arms produced comparable results, confirming the drug's stand-alone efficacy.
The biggest highlight of the trial was the demonstration of long-term survival (LTS) greater than 18 months and 24 months in 18% (16/91) and 22% (24/109) of patients respectively. The LTS group not only included the patients with tumor shrinkage, but also patients with increased tumor burden as their best response. Interestingly, among LTS patients was a population (25%, 3/11) that is generally omitted [ECOG Status 2] from clinical trials due to poor survival rate and a population (8%, 2/24) who had recurrence of the disease after at least two prior treatments.
The drug also demonstrated a good safety profile. The drug was well-tolerated, with 62% (68/109) of the patients reporting no adverse events and 38% (41/109) of the patients reporting mild transient adverse events (grade 1 or 2). There was, however, one patient that experienced a severe adverse event described as a grade-3 fever.
Advaxis is likely to move ADXS-HPV into Phase III clinical trials in women with cervical cancer in the second half of 2014 (EquitiesIQ research) following the grant of a special assessment protocol (SPA) from the FDA. The primary endpoints are likely to show an improvement in overall survival, although this may not even be necessary in attaining FDA approval.
One competitor is Inovio Pharmaceutical's (NASDAQ:INO) VGX-3100 immunotherapy. But [VGX-3100] is too early in the development cycle to compare to ADXS-HPV. The first set of results on VGX-3100, currently in a Phase II study, are likely to come in the first half of this year. That aside, ADXS-HPV does have one competitive advantage in that it is further along in development and has secured market exclusivity for 7 years via the FDA's orphan drug designation. Furthermore, Inovio is not a direct competitor, even though its drug could overlap. This is possible because VGX- 3100 is being tested in patients with cervical intraepithelial neoplasia, a condition that can progress to cancer if left untreated. Even still this remains unlikely to pose risk to Advaxis, as cervical intraepithelial neoplasia does not cause any health problems, can take 10 years or longer to develop into cervical cancer and, most importantly, regresses in up to 70% of cases through the body's own immune response. This does not imply that the drug has no use in cervical cancer. But Inovio's market cap of $500 million further supports Advaxis' compelling valuation and potential growth from a market cap of just $37 million. With that being said, ADXS should appear attractive to INO investors looking to realize a larger portion of the cervical cancer market from its pre-diagnosis indications to its late-stage therapies.
ADXS-HPV also presents an opportunity for use in combination with anti-PD-1 antibodies or checkpoint inhibitors which may enhance the effectiveness of the attack by targeted T-cells on cancerous cells. Pre-clinical studies have already shown that the two have produced a synergistic effect and improved survival in TC-1 mouse tumor models.
Advaxis' Other Drug Candidates
ADXS-cHER2 is also poised to be a revenue generator for Advaxis. The company has a partnership with Aratana Therapeutics for the further development of immunotherapies in canine cancers. In particular, the drug has shown efficacy in canine osteosarcoma (bone cancer), with potential to be expanded into other canine indications.
The real value in ADXS-cHER2 would lie in its expansion into human immunotherapy. CEO Daniel O'Connor announced that the company would pursue human indications of HER2 overexpressing cancers, and in particular, pediatric osteosarcoma. Earlier this week, the company reported that it has been granted Orphan Drug Designation for ADXS-cHER2 for the treatment of osteosarcoma. Efficacy in this indication could move the drug into a position where it can be evaluated for treatment in more common types of HER2 cancers, such as breast cancer.
If ADXS-HER2 is positioned in the burgeoning HER-2 breast cancer market, Advaxis could be catapulted into a billion-dollar valuation, supported by peers like Puma Biotechnology (NYSE:PBYI), which sports a market cap of $2.2 billion, driven by the development of its own HER2 inhibitor, Neratinib. The drug's dynamic nature has been the driving force behind Puma's valuation. It is also an EFGR, HER1 and HER4 inhibitor. This gives Puma potential to expand into other indications and attract Big Pharma's attention. However this diverse application may actually limit the effectiveness, as is the case in patients that experienced severe diarrhea stemming from the drug's HER1 inhibition. This is an example of undesirable robustness. While the drug has shown some safety concerns, its data has suggested that it is more effective that Roche's Herceptin. Puma Biotech's market cap is fuelled by the number of trials evaluating neratinib's across different cancers, with one Phase III study nearing its end. Advaxis could benefit from this type of growth as the company develops its portfolio of drug candidates across different indications.
All the while, ADXS-PSA has been neglected from inclusion in Advaxis' valuation due to its early stage. This could further boon the price of shares, particularly as advancements are made in the clinic.
Understanding The Risks In Advaxis And Generally Small Biotech Companies
Imclone Disclaimer: It should be noted that at the time of the Bloomberg publication referred to above, Imclone had three other large (1000+ patients) Phase III trials. This could be a contributing factor to Imclone's strong valuation and label as a prospective buyout. However, the critical study that led to the approval on February 12, 2004 was a smaller Phase III trial (329 patients) evaluating the drugs response in patients with refractory colon cancer. With Advaxis likely to engage in a similar-size Phase III trial, comparison between the companies is justifiable. Nevertheless, Advaxis' valuation further below will bear a large margin of safety of 60% as a reflection of the difference between Imclone in the capacity just mentioned.
Advaxis is inherently dependent on the success of its drug candidates. Failures in clinical testing and further scrutiny by the FDA will create volatility. That said, a diverse pipeline with multiple candidates targeting equally large, unmet medical needs in oncology gives Advaxis' investors diversification in the company itself. For instance, if Advaxis is unsuccessful in cervical cancer, the company will be adversely affected as this is discovered. However, any progress or success in any one of over a half dozen potential indications (cervical, head and neck, anal and prostate, among other cancers) will quickly buoy the price and continue to support the valuation model we've suggested (see our discussion of valuation, below). Furthermore, Advaxis' ability to secure Orphan Drug Designations for its candidates, while not explicitly guaranteeing success, positions the drug candidates favorably with respect to meeting the threshold requirements for regulatory approval and reducing the timeline to market. A simpler way of putting this is to think about what the FDA's stance on highly aggressive cancers with a large mortality incidence would be, particularly if there are no therapies to address these conditions (as discussed, cervical cancer patients who relapse from platinum therapy have no other treatment options available, and death is the ultimate and near outcome). The other significant risk worth mentioning is dilution. Fortunately, Advaxis recently completed a $12.6 million round, which brought its cash balance to an estimated $29 million, and should stave off further dilution for the foreseeable future (we estimate 12 months). The last round of financing was also completed at a premium ($3.00/share) to the recent market price for Advaxis' common shares, which implies the company is de-risked from this point of view. For a more elaborate explanation of the risks involved, refer to the company's 10-k. The table below will outline, in my opinion, some of the more important risks listed in the annual report.
Table 2. Risks outlined in the company's 10-K
There is no assurance that the clinical product candidate will obtain regulatory approval, or that the results of the clinical studies will be favourable.
The company may not be able to obtain or maintain the benefits associated with orphan drug designation, including market exclusivity.
The company has no manufacturing, sales, marketing or distribution capability, and must rely upon third-parties for such.
If the company is unable to establish or manage strategic collaborations in the future, its revenue and drug development may be limited.
The valuation below utilizes a relatively large margin of safety as a means of sufficiently incorporating the risks mentioned above. By and large, I view the upside to Advaxis as being asymmetrical to the risks, which is based on the market opportunity, recent cash infusion and technology underlying the company's product candidates.
Cervical Cancer Approval Alone Would Support A Valuation of $6.14/Share; Suggests Advaxis' Current Price is Extremely Compelling
To value Advaxis, I made the assumptions outlined (below). Chief among these is inclusion only of ADXS-HPV success in one indication, cervical cancer, in order to illustrate the enormous disconnect between current valuation and what I believe is fair value for the company. Inclusion of success in head & neck and anal cancer, breast or prostate would balloon these figures to absurdity. This further supports the parallel with Imclone and the real possibility of interest in Advaxis' pipeline among Big Pharma.
Based on Sales of ADXS-HPV for cervical cancer only, in the United States alone.
The number of eligible patients is approximately 4000, which represents the patient population who die from cervical cancer annually. This figure best incorporates the most easily accessible patient population covered in the orphan drug designation (although, as Advaxis positions ADXS-HPV upstream in the treatment paradigm, this number swells considerably). The cost of the immunotherapy is approximately $110,000, in line with industry standards. This conservatively suggests an approximate market opportunity of S4.4 billion.
The sales experience a 30% growth rate, from the drug's approval in 2018 through, till but not including, 2024. The seven-year period was used, as it guaranteed market exclusivity via the orphan drug status and it's assumed that there is an increase of sales during this period.
The cash flows were discounted backwards at a rate of 15% to 2014 for present value (PV). This model also incorporates the $75.5 million in losses the company has incurred since inception. It also uses a 60% margin of safety.
Table 3. Market Cap as a function of market penetration
Market Penetration (%)
**Market cap in $ millions
Table 4. Advaxis Share Structure
Shares Sold in Most Recent Financing
Fully Diluted Shares
Considering the orphan drug designation and an unmet medical need in cervical cancer, a modest market penetration of 15% was chosen to derive fair value of Advaxis. The company has a market cap of approximately $36M, which suggests it has a growth window of just under 4x to the computed fair value of $143M. This gives Advaxis a target price of $6.14 a share.
CEO Explains How He Sold Imclone for $6.5 Billion And Why Advaxis Could End Down The Same Path
Following its recapitalization in 2013, new management was brought in. Of all members acquired, none are more concerting to investors than Daniel O'Connor as chief executive officer and president. O'Connor's impressive track record is highlighted by the acquisition of his former company, Imclone Systems, by Eli Lilly, which he facilitated in the capacity as senior vice president and legal counsel [Imclone's CEO at the time was incapacitated over charges of insider trading]. Such seasoning is crucial to ensure proper execution, resulting in the growth and sustenance of shareholder value. Shareholders can rest assured that O'Connor is acting in their best interests, as he receives 25% of his compensation via equity [which he opted for in late 2013]. In a recent video interview, O'Connor explains why he expects Advaxis to repeat Imclone's success, and highlights the parallels in the execution of its business strategy. Another individual whose experience at Bristol Myer Squibb makes him invaluable is Dr. Robert Petit, Advaxis' chief scientific officer, who has held one of the most relevant titles in the field of immunotherapy. Petit acted as the lead medical strategy for new oncology products, director of global clinical research and, most importantly, U.S lead medical strategy for the high-profile illipilumab program.
The company has international licensing agreements with Global Biopharma (GBP) and Biocon. GBP would be responsible for the clinical development and commercialization costs in Asia, Africa and the former USSR. Biocon has been licensed for the commercialization of ADXS-HPV in India. Unlike Imclone, Advaxis does not have the large collaboration with Big Pharma at this point, likely due to the insufficient amount of clinical data. This should not be a deterrent to investors who want the company to strictly follow the Imclone model. Reaching a mutually beneficial collaborative agreement, if required, with Big Pharma should not be an issue, considering the companies (Imclone and Advaxis) share management. Further, signing of a collaborative agreement with a large pharmaceutical partner in the U.S. would be a major de-risking event and a huge boon to Advaxis' share value.
Plethora of Catalysts Will Drive Value Near Term and De-Risk Advaxis Long Term
In its present form, Advaxis bears a striking resemblance to Imclone Systems prior to acquisition because of its robust technology and common members of management. Moreover, the company is undervalued given the size of opportunities for its drug candidates. Performance in the near term will be driven by Advaxis' compelling valuation and upcoming catalysts: including presentations, for example the oncology meeting known as ASCO; through additional data expected on numerous ongoing studies encompassing cervical, anal, head and neck, breast, prostate and [likely soon to be announced] bone cancer; and de-risking regulatory milestones, such as attaining special assessment protocol from the FDA and further advancement of its numerous drug candidates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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