Adaptimmune (NASDAQ: ADAP) was established by licensing the T-cell receptor technology licensed from the Oxford University and in collaboration with University of Pennsylvania. The company is developing its TCR therapy for treatment of various solid tumors.
We provided a background of the TCR therapy (a form of cancer immunotherapy) in our recent research report on Juno Therapeutics (NASDAQ:JUNO) (link to article). In brief, CAR-T cells recognize proteins expressed on the cell surface, while the TCR therapy recognizes peptide fragments from proteins, either on the cell surface or inside the cell. TCR therapy has the ability to target a wide range of proteins and can be used to target solid tumors. TCR therapy is also less likely to elicit an immune response against the infused cells (thus, reducing relapse and improving clinical efficacy). The engagement of TCR therapy is dependent on the MHC (major histocompatibility complex) type (unlike CARs), so different TCRs may be required for different MHC types.
We have a Buy rating on Adaptimmune common stock with a price target (fair value based on sum-of-parts, enterprise DCF method= $10.59).
Figure 1: Adaptimmune common stock price chart (from Nasdaq.com)
- Stock rating= Buy
- Stock price target (fair value)= $10.59
- Current stock price= $7.13
- 52-week price range= $6.19 to $14.78
- Average daily share volume= 121,090
- Market Cap= $504.7 million
- Cash reserves= $205.93 million
- Debt= nil
Apart from phase 1/ 2 clinical trials of its TCR therapy in synovial sarcoma and multiple myeloma, Adaptimmune is targeting more than 30 different tumors in early stage programs.
Figure 2: Adaptimmune, product pipeline
Problem: Synovial sarcoma is a soft tissue tumor arising from mesenchymal cells. The annual incidence in the developed world (including the U.S. and Europe) is about 2-3 per million (source-10Q). About 600 new cases are diagnosed in the U.S. each year. The tumor can metastasize (spread to distant sites) in about 15-20% cases. Median survival is about 22 months in metastatic synovial sarcoma (source). The usual treatment is surgical resection and chemotherapy. Survival rate for relapsed inoperable synovial sarcoma or metastatic tumor is poor. Historically, only 4% of these patients had a partial response with Pazopanib, the only therapy currently approved for this indication (source).
Adaptimmune's TCR technology targets the NY-ESO-1 antigen which is expressed in about 70% cases of synovial sarcoma. In the clinical data presented last year (November 2015) in 12 patients with metastatic or relapsed, inoperable synovial sarcoma (with failed prior chemotherapy), the overall response rate was 60% in patients who received the target dose of 1-6 billion T cells (after fludarabine and cyclophophamide preconditioning). 90% patients who received the target dose were alive on long-term follow-up. T cells persisted for up to 21 months at the target dose. From safety point of view, severe cytokine response syndrome (SCRS) was less severe and less common that seen with CD19 targeted CAR-T therapy. Grade 3 CRS was seen in 17% patients while there was no grade 4 CRS (link to press release). This phase 1/ 2 open label clinical trial is currently enrolling more patients.
FDA has granted breakthrough therapy status to Adaptimmune's NY-ESO-1 targeted TCR therapy for treatment of inoperable/metastatic synovial sarcoma expressing this antigen. The product also has orphan drug designation in the U.S. and E.U. for treatment of soft tissue sarcoma.
Issue with FDA hold: In early August 2016, FDA placed a partial hold on a planned, pivotal study of NY-ESO1 TCR therapy in myxoid, round-cell liposarcoma (link to press release). This partial hold was not related to safety issues with the therapy. FDA asked Adaptimmune for more information on changes in the clinical study design and manufacturing in this pivotal program.
Multiple myeloma (MM) is a common cancer arising from plasma cells in the blood. The tumor presents with bony lesions and kidney failure. There are about 95,000 patients with this cancer in the U.S. and about 30,330 new cases are diagnosed each year. About 12,000 patients die each year due to this cancer in the U.S. alone (source). The usual treatment is chemotherapy agents like melphalan and immunomodulating agents like Thalidomide. Autologous hematopoietic stem cell transplant (HSCT) is the next step in patients who have relapsed/progressed after the available chemotherapeutic, immunomudulatory or other newer drugs. However, median progression-free survival is about 36 months in MM patients who receive autologous HSCT and most patients receiving autologous HSCT relapse. The prognosis is extremely poor in patients who relapse even after autologous HSCT (median survival of 9 months). These patients are currently treated with second autologous HSCT, non-myeloablative allogenic HSCT or salvage chemotherapy (source).
NY-ESO-1 antigen is expressed in about 60% cases of advanced MM (source:10-Q). Adaptimmune is conducting a phase 1 /2 open-label study testing its NY-ESO-1 targeted TCR therapy in patients who relapsed after autologous HSCT. In the clinical data presented at the American Society for Clinical Oncology's (ASCO) annual meeting, 2016 (25 patients), 91% had overall response rate at day 100 of follow-up (source). In more detailed data released in 2015 (post autologous HSCT and high-risk cytogenetic abnormality MM), about 90% patients had complete or near-complete response. T cells persisted for 2 years in about 90% patients after the TCR therapy (source). A combination study of this TCR therapy with a check-point inhibitor (anti-PD1) in refractory MM is expected to start in early 2017.
A phase 1/ 2 open-label trial of NY-ESO-1 TCR therapy is on-going in melanoma (a form of skin cancer). The therapy is also being tested in a phase 1/ 2 open-label trial in refractory/resistant, stage 3-4 ovarian cancer. Another early stage clinical study testing NY-ESO-1 TCR therapy is on-going in refractory/relapsed non-small cell lung cancer (NSCLC). Other on-going studies in various tumors are demonstrated in the pipeline figure (figure 2) above.
We expect 12 years of market exclusivity as a part of future BLA application for NY-ESO-1 TCR therapy (which could extend the intellectual property) till 2031.
Collaborations and partnerships: Adaptimmune will pay Immunocore royalties as single-digit percentage of revenues on its NY-ESO1 TCR program. GlaxoSmithKline (NYSE:GSK) has licensed the NY-ESO1 TCR program (clinical indications= synovial sarcoma, multiple myeloma, ovarian cancer, malignant melanoma, NSCLC and esophageal cancer), and will pay Adaptimmune up to $350 million in milestone and other payments over 5 years from 2014-2019 (source). In addition, Adaptimmune will receive royalties on net worldwide sales of products from this programs (as tiered high single to low-double percentage of revenue). Adaptimmune has also entered into an agreement to supply Dynabead CD23/CD28 technology from Thermo Fisher (NYSE:TMO) which is being used to isolate and expand T cells (source). It has also entered into an agreement with PCT, a division of Caladrius Biosciences (NASDAQ:CLBS) for the manufacturing and supply of SPEAR TCR therapies (source). Adaptimmune has an existing collaboration with MD Anderson Cancer Center to develop TCR therapies targeting MAGE-A10 and MAGE-A4 across a variety of cancers (source).
More clinical data from these on-going clinical trials may be presented at the annual meeting of the European Society for Medical Oncology in early October 2016. Additional data in multiple myeloma may be released at the annual meeting of the American Society for Hematology in December 2016.
Kite Pharma (NASDAQ:KITE) has a planned TCR program targeting NY-ESO-1 antigen but this is at a much earlier stage than Adaptimmune's program.
The CEO, James Noble, has more than 20 years of experience in the drug development industry, including as the past CEO of Immunocore and Avidex (which was Adaptimmune's predecessor). The Chief Medical Officer Rafael Amado was previously the Senior Vice President of Oncology R&D at GSK and Executive Director of Therapeutic Oncology at Amgen (NASDAQ:AMGN).
The Founder Bent Jakobsen is a prominent scientist and has worked at the Universities of Oxford and Cambridge, U.K.
More details about the management and the Board of directors can be accessed here.
Balance sheet: The company has a healthy balance sheet with about $206 million in cash and other cash-equivalent investments to fund its on-going R&D programs. It has no long-term debt.
Several prominent institutions hold a stake in this company. Insiders (including Samuel Isaly from OrbiMed bought more than $11 million worth of common stock in May 2016).
Figure 3: Adaptimmune, institutional holders (source: Nasdaq.com).
Valuation of the common stock:
We modeled peak 90% market penetration in metastatic/refractory synovial sarcoma indication in the U.S./E.U./Japan in 2031 (annual target market=364 patients, per patient cost= $500K, probability of reaching the market=67%) and peak about $12.63 million risk-adjusted royalty revenue (range 5-12% of revenue for GSK). Free operating cash flow was input as 15.5% of revenue (median for top 40 biotech/pharma firms). Risk-adjusted NPV (at 12% cost of capital for first 5 years, then 10%) from this indication was $60.35 million and per ADS contribution from future revenue from this indication=$0.76 using diluted share count. Adaptimmune has outstanding 476.98 million common shares (including outstanding stock options) as per the quarterly report. Only 70.78 million common shares are traded publicly on Nasdaq in form of American Depository Shares (ADS). Each ADS represents 6 common shares.
We modeled peak 65% market penetration in refractory multiple myeloma indication in the U.S./E.U./Japan in 2031 (annual target market= 26,242 patients, per patient cost= $500K, probability of reaching the market=67%) and peak about $688 million risk-adjusted royalty revenue (range 5-12% of revenue for GSK). Free operating cash flow was input as 15.5% of revenue (median for top 40 biotech/pharma firms). Risk-adjusted NPV (at 12% cost of capital for first 5 years, then 10%) from this indication was $589.74 million and per ADS contribution from future revenue from this indication=$7.42 using diluted share count.
We calculated the contribution of non-operating assets (including cash, deferred tax assets) minus liabilities= $2.41/ADS using diluted share count.
Using sum-of-parts DCF method, we calculated total contribution per share of Adaptimmune from above indications= $10.59 (fair value per ADS). This is our first price target for each ADS for Adaptimmune.
We have not modeled future potential revenue from other indications like ovarian cancer, melanoma and NSCLC which could add further upside to the ADS price.
Subscribers to Vasuda Healthcare Analytics, our premium investment research service on Seeking Alpha's marketplace, can download the valuation models/ spreadsheets used in this article.
Risks in the investment:
Like every emerging pharmaceutical company, this investment has risks. There is no guarantee that Adaptimmune's on-going R&D programs will be successful. It is possible that regulatory agencies might not approve the products, unexpected side effects might be seen in future, clinicians might not widely prescribe the products or insurers might not reimburse them. Competing products from other companies might gain significant market share in the planned clinical indications. The company may also need to raise more cash to fund its operations in future through equity and/or debt financing, which might put downward pressure on the stock price.
In conclusion, we consider Adaptimmune undervalued at its current ADS market price. We have a Buy rating on its ADS and first price target (fair value based on DCF)= $10.59 (adjusted for probability). The company could have the first commercial TCR product in the market and is a leader in TCR therapy in oncology.
Note: To get more investment ideas like this as soon as they are published, click on my profile and hit the big orange "Follow" button and choose the real-time alerts option.
Premium Research Service:
Get more investment ideas like this by subscribing to Vasuda Healthcare Analytics, our premium equity research service (listed in SA Marketplace, in partnership with Seeking Alpha). Subscribers have earlier access to the research reports, can download the valuation models/ spreadsheets in the research reports and have access to the portfolio (40 open positions so far with price targets and suggested allocation, conviction buy list). Few investment ideas are exclusively limited to subscribers (recent subscriber only research reports include Intellia Therapeutics, Medgenics, Inotek Pharmaceuticals, Bristol-Myers Squibb and Chimerix). Free 30-day trial is available to test drive the service (100 more spots left).
Additional disclosure: This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial advisor before making any investment.
Disclosure: I am/we are long ADAP, JUNO, KITE.
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.