Advaxis Recent Collaborations continue to resemble Imclone Systems Prior to Acquisition.
Advaxis and Merck are planning to initiate a phase I/II trial combinational therapy trial in early 2015.
At ~4.00/share the stock could see an upside of 200% with a target price of $12.90/share on a fully diluted basis according to my fair value.
In early June, I put out an article, Advaxis Mirrors Imclone Systems Prior to Acquisition, which presented the Advaxis (NASDAQ:ADXS) as an early stage prospective buyout by Big Pharma. The thesis was based on three mutual traits that Advaxis shared with Imclone that ultimately resulted in Imclone System's $6.5B acquisition in 2008. The points are listed below:
- The possibility of its lead drug being a highly successful therapy;
- The possibility of developing other drugs with the right financing;
- Good collaborative arrangements with Big Pharma.
With the success of their lead drug, ADXS-HPV, in its Phase II clinical trial in women with recurrent cervical cancer, the company met the first criteria.
The robustness of Advaxis' Lm-llo platform enables the company to produce any antigen specific cancer immunotherapy. The dynamic technology coupled with a $365M licensing deal between Aduro and Jannsen Biotech for the former's listeria monocytogenes (similar to Advaxis' technology), qualifies Advaxis for the second point. I cover the first two points more thoroughly in the article mentioned above.
With regards to the third point, as mentioned in my previous article, Advaxis was lacking on this front. At the time of publishing, the company had international licensing deals for its ADXS-HPV drug with Global BioPharma and Biocon. While these partnerships are good, they aren't the high profile collaborations with Big Pharma that investors look for. Since then the company has successfully, as indicated by the stock's activity, taken steps to expand the collaborative arrangements. The remainder of this piece is a discussion of the potential and implications of the company's most recent deal.
The deals with AstraZeneca and most recently Merck are additional de-risking events as the company continues to grow to an adjusted target price of $12.90/share according to my fair value as outlined in my previous article. With a closing price of $4.00/share, stock still presents an attractive ~200% upside.
Putting Merck's Partnership Into Perspective
Due to their synergistic effect in combating the dynamic resistance in cancer cells, combinational therapies are becoming increasingly popular in developing cancer treatments. Headlined by names such as Bristol Myers Squibb's ipilimumab and nivolumab in metastatic melanoma, combinational therapies have shown promise. They have also been the driving force behind Advaxis past two partnerships.
From the most recent press release, Advaxis said it would evaluate its prostate drug candidate ADXS-PSA in combination with Merck's PD-1 inhibitor, pembrolizumab and as a stand-alone treatment in a phase I/II trial. Since the drugs have different mechanisms of action, it is expected that the two drugs will have a synergistic affect.
Given the success of the trials, Advaxis would be in a position to penetrate a global prostate cancer market that is expected to reach $18B in 2017. Approval of ADXS-PSA either in combination or stand-alone would give access to market share that is currently dominated by players such as Johnson & Johnson's (NYSE:JNJ) Zytiga and Medivation's (NASDAQ:MDVN) Xtandi which are expected to account for approximately 80% of the market by 2022.
Historically, cancer vaccines have not performed well in the prostate cancer market as is the case with the short lived success of Dendreon's Provenge due to the competition from the Zytiga and Xtandi. As it relates to Advaxis, the importance of the deal with Merck is that it allows for the company to evaluate the treatment as a combinational therapy effectively escaping the precedence set by Dendreon. Moreover the prostate treatment paradigm could benefit from the addition of immunotherapies that directly combat cancer in contrast to the available hormonal therapies.
According to the press release, the company expects to start the trial in early 2015. Assuming an ideal trajectory for the drug's development, the company could see significant upside as elaborated in the next section.
Updated Valuation Model Reveals Upside of 200%
The following table summarizes the added assumptions used in the updated valuation model. The updated model inherits the same cash flows and assumptions from the previous valuation that can be found here.
Successful completion of the current Phase I/II study in the next two years and a large 3-year long phase III study following that.
Advaxis successfully completes the current phase I/II studies in the next two years and a large phase III study in 3 years, Using Medivation's "AFFIRM" Phase III trial as baseline.
Following FDA approval in 2021, annual cash flows from sales of the drug are $200M, $500M and peak at $1B in 2023.
A discount rate of 30% is used.
A 30% margin of safety is used to account for risk.
The total number of fully diluted shares is 23,298,152
With a current market cap of ~$77M, this represents a growth window of 3.5 x to a computed fair value of $300M. Using the computed fair value, I arrived at a target price of $12.90/share which represents ~200% from the current market price of $4.00/share.
Understanding The Associated Risks
Advaxis' ability to generate antigen specific vaccines does not guarantee that any one will successfully navigate through regulatory development. However, earlier data is a good precursor to evaluating likely outcomes in future studies. To compensate for the unforeseeable risks, a 30% discount rate is used in the financial models (which is in line with analyst discount rates, if not more conservative).
A key underlying assumption is that Advaxis will be able to secure a US and/or global licensing or partnership deal with a large pharmaceutical company. Without a robust partner, Advaxis would incur significant dilution or simply be unable to finance the scope of study needed to prepare a NDA for prostate cancer. Enrolment in a Phase 3 study required for approval in this indication could also be adversely affected (take far longer than if sponsored by a large pharma company) and change my financial assumptions (even under the same future value, discounting back over a greater number of period would result in a significantly diminished present value). I assume Advaxis' product-candidate produces robust clinical activity and a deal is struck in line with the terms of Astellas/Medivation collaboration, which includes a significant upfront ($100M+), milestone payout ($500M+) and a 50/50 costs/profit share. Regardless of the nature of the deal, all income is assumed to be consolidated into the cash flows mentioned above which are in the vicinity Xtandi sales. Nevertheless, a large margin of safety of 30% is used to adjust for risk.
As Advaxis bears the cost of several earlier Phase I/II mono and combination studies, the company will need to raise additional capital from investors perhaps as early as the next 12 months. Certainly, management should see numerous value-creating milestones in foreseeable future as an opportune time to do so. Depending on market conditions, Advaxis would likely look for at least $20 Million, if not more.
Conclusion and Near Term Catalysts
Looking forward there are likely to be many near term catalysts. Most notably, the company is set to meet with the FDA to acquire SPA prior to initiating a phase III trial for their lead drug candidate ADXS-HPV.
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