Who Heard About This Biotech?

| About: Innate Pharma (IPHYF)


The company has a unique technology that could be the future of combination treatments in oncology.

This technology has been supported by licensing agreements with two large pharmaceutical companies, namely AstraZeneca and Bristol-Myers.

Clinical data point to the likely success of some key trials.

Risk reward is skewed to the upside since valuation fails to account for potential programs' success.

Brief company description

Innate Pharma (OTCPK:IPHYF) is a clinical-stage biotechnology company, headquartered in Marseille (France). The company is listed on Euronext Paris and has a market capitalization of roughly €594m ($663m). This is how they describe themselves in their website:

"Innate Pharma specializes in immuno-oncology, a new therapeutic field that is changing cancer treatment by mobilizing the power of the body's immune system to recognize and kill cancer cells. The Company's aim is to become a commercial stage biopharmaceutical company in the area of immunotherapy and focused on serious unmet medical needs in cancer. Innate Pharma has pioneered the discovery and development of checkpoint inhibitors to activate the innate immune system. Innate Pharma's innovative approach has resulted in three first-in-class, clinical-stage antibodies targeting natural killer cell receptors that may address a broad range of solid and hematological cancer indications"

What makes Innate Pharma different?

To understand why Innate Pharma is different from other oncology companies, we need to understand how the immune system works. The immune system is a complex system designed to protect the body from external threats like bacteria, viruses and cancers. The immune system can be divided between innate immunity and adaptive immunity as showed on the following slide:

(Source: Unless stated otherwise, all slides and pictures come from the company presentations that are available on the website.)

Innate immunity is the first defense of the immune system. These defenses include different cells (NK cells, macrophage…) that react immediately to a pathogen attack. Since its creation, Innate Pharma has always focused on the innate immunity, more precisely on NK (Natural Killer) cells which are defensive cells produced by the immune system.

Adaptive immunity is a slower response of the immune system to an attack. After being in contact with a pathogen, the adaptive immunity develops an immunological memory that leads to an improving response of the immune system when it encounters again this pathogen. This immunity can be activated by vaccination or by immunomodulating antibodies such as anti-CTLA4 or anti-PD1/PDL1.

A brief explanation about how a cancer works and we will understand what makes Innate Pharma different.

In general, tumor cells contain different proteins and some of them are able to interact with lymphocytes' specific receptors. This interaction prevents lymphocytes (T cells) to do their work which is killing the tumor cells.

For example, certain tumor cells express a protein, called PD-L1, which interacts with the PD-1 receptor of T cells. As a result, T cells become "blind" and do not recognize the tumor cells; thus, they do not even try to attack them. Drugs blocking the receptor PD-1 on T cells allow canceling the effects of the PD-L1 proteins produced by the tumor cells. Therefore, T cells become active again, recognize the tumor cells and kill them. However, these treatments may have negative side effects that may lead to death or serious complications when T cells attack normal tissues and organs.

To conclude, Innate Pharma focuses on the innate immunity system (NK cells). Combining immunity system drugs (NK cells) with adaptive immunity drugs (T cells) should improve the efficacy because they have different mechanisms working on different receptors. Given that tumor cells are interacting with different lymphocytes' receptors, a combination with existing drugs should lead to improved efficacy. Moreover, the drug is well tolerated by patients whereas existing treatments (PD-1, CTLA4…) are quite toxic; thus, they can't be used at a high dose, making combination the future of cancers treatments.

Clinical programs

Innate Pharma is currently developing three clinical programs: Lirilumab, Monalizumab and IPH4102. Let's analyze them one by one.

1) Lirilumab

The most advanced candidate is Lirilumab, which is a KIR checkpoint inhibitor. The following slide explains what the Lirilumab's mechanism of action is.

Tumor cells have molecules, called HLA-C, which inhibit the KIR receptors of NK cells. As a result, NK cells are not able to make the difference anymore between the affected and unaffected cells in the organism. Being unable to recognize tumor cells, NK cells do not attack them as they should do it. Adding Lirilumab in the organism prevents the interaction between KIR receptors and HLA-C molecules. Indeed, Lirilumab blocks the NK cell inhibitory receptor (KIR) that restores NK cells' ability to detect cancer cells in order to attack them.

Lirilumab is currently studied in Phase II (EffiKIR study). This study is evaluating Lirilumab as a monotherapy for elderly patients with AML (Acute Myeloid Leukemia) in maintenance setting (complete remission after induction chemotherapy and consolidation treatment). The following chart will help to understand the population targeted and the treatment paradigm.

Patients start their treatments with induction chemotherapy. Younger patients are "stronger" and can receive transplantation and maintenance chemotherapy after the initial chemotherapy. As a result, time before a relapse is longer than for elderly patients (> 60 years old). Indeed, older patients cannot benefit from transplantation and maintenance chemotherapy; thus, the period before relapse is shorter with only 12 months in average.

The enrollment has been completed in July 2014: the study is ongoing for 26 months, which is clearly longer than the average relapse period of 12 months. This longer duration could be explained by the high efficacy of Lirilumab and it is one of the reasons why I think Innate Pharma is a strong investment proposition.

Innate Pharma has already initiated several clinical programs with its partner Bristol-Myers (NYSE:BMY) investigating the use of Lirilumab in different combinations. The following table shows the different clinical programs that involve Lirilumab, and among them, some trials in combination with Opdivo (Nivolumab) and Empliciti (Elotuzumab), both drugs developed by Bristol-Myers.

The Phase I study evaluating a combination Lirilumab/Opdivo has shown positive safety data on Monday 11th October at the ESMO medical congress. Indeed, the combination of Opdivo with Lirilumab has demonstrated no added toxicity over Opdivo in monotherapy. Efficacy data will be released before year-end, thus Bristol-Meyers will have all the required data in its hand to take a decision about pursuing the program or not in the coming months.

Innate Pharma has received an upfront payment of $35m in 2011. The group is eligible to receive milestone payments up to $430m and double-digit royalties on sales. Currently, there is no standard of care for elderly patients in post-induction setting. Thus, if the product is successful, we can easily imagine that it will become the standard of care. In a blue sky scenario, the drug could be approved after its Phase II if results are very good.

2) Monalizumab

AstraZeneca (NYSE:AZN) has paid an upfront payment of $250m in 2015 for licensing Monalizumab. Innate Pharma is also eligible for milestone payments up to $925m. Innate has co-promotion rights in Europe (50% of profits) and will receive double-digit royalties on ex-Europe sales.

The mechanism of action is more or less the same as Lirilumab. Instead of activating KIR receptors, Monalizumab activates NKG2A receptors which have been inhibited by the molecule HLA-E (instead of HLA-C). As a result, NK cells start fighting tumor cells but also stimulate CD8 T cells which are also part of the immune system. Monalizumab is currently investigated in Phase II. These studies are evaluating Monalizumab as a monotherapy in two indications: the head & neck cancer and gynecological cancers. Preliminary data will be presented before year-end.

The mechanism of action is similar to Lirilumab, thus positive results of Lirilumab Phase II study will support a positive outlook for Monalizumab. It is also important to consider that unlike Lirilumab, Monalizumab boosts also CD8 T cells, which could further increase efficacy. So far, preclinical data have been supportive:

The potential for Monalizumab is huge due to the wide variety of tumor types expressing the HLA-E molecule. According to the company presentation, 80% of head & neck cancers, 90% of ovarian cancers, 75% of colorectal cancers, 70% of lung cancers and 90% of chronic lymphocytic leukemia cancers express the HLA-E molecule. That is why AstraZeneca has initiated different clinical programs in different cancers.

3) IPH4102

IPH4102 is studied in the cutaneous T cell lymphoma which is a rare form of cancer. It results from a mutation of T cells. From the company website:

"IPH4102 is a first-in-class anti-KIR3DL2 humanized cytotoxic antibody (IgG1), designed to selectively destroy CTCL cancer cells. KIR3DL2 is an inhibitory receptor of the KIR family, normally expressed on a fraction of normal NK cells but specifically expressed in all subtypes of the orphan indication of cutaneous T-cell lymphomas (CTCL). CTCL is a group of rare cutaneous lymphomas of T lymphocytes with poor prognosis and few therapeutic options at advanced stages. IPH4102 selectively binds KIR3DL2 and has demonstrated a high level of efficacy in various pre-clinical models. It has been granted orphan drug designation in the European Union for the treatment of CTCL. IPH4102 is currently in Phase I trial for the treatment of CTCL. Biomarker tools are developed in parallel to allow the monitoring of KIR3DL2 expression in patients."

Unlike the two previous drugs, IPH4102 is not a checkpoint inhibitor. The drug does not stimulate the immune system but target directly the cancer cells through a cytotoxic mechanism.

Innate Pharma is fully in charge of the development and the commercialization of the drugs. From a strategic point of view, it makes sense because the company will be able to retain all the potential profits. Moreover, due to its orphan drug designation, the company will not need to invest a lot in R&D and the limited number of patients (roughly a total of 6000 in the US and Europe) will make the commercialization possible.

Indeed, orphan drugs benefit from a premium pricing, a shorter development, a faster uptake, a longer exclusivity, less marketing expenses and are subject to tax credits and R&D grants... All these incentives allow orphan drugs to be more profitable and also are less exposed to pricing pressure.

The preliminary clinical date for the dose escalation part will be published by the end of 2016.

Preclinical pipeline

Preclinical assets are very early stage and investors give them no value because the probability that they fail during the development phases is very high. I think we can consider them as a free option. As every option, the final outcome will be known only at a future date. Nevertheless, some programs have already been noticed by large pharmaceutical groups.

Indeed, Sanofi has signed a non-exclusive research collaboration and licensing agreement with Innate Pharma at the beginning of 2016. This agreement covers the development of two innovative bispecific antibodies using the Innate Pharma's new proprietary technology. To make it simple, they want to develop a drug with two actions: one targeting directly the cancer cells and the other focusing on the NK cells. The NK cells will be engaged through the activating receptor NKp46.

A more detailed explanation of the NKp46:

"NKp46 is an activating receptor expressed on all natural killer cells. It is the most specific marker of human NK cells and plays a major role in their tumor cell recognition. NKp46-bispecific NK cell engagers bind with one arm to an antigen at the surface of tumor cells, and with another arm to the NKp46 receptor on NK cells. This leads to activation and specific tumor-killing by NK cells, an immune cell population representing a significant proportion of all cytotoxic lymphocytes in the body."

Sanofi will be responsible for the development, manufacturing and distribution of these drugs. Innate is eligible to receive potential milestones payments up to €400m and royalties on net sales (percentage of royalties has not been disclosed). Moreover, Innate has also received an upfront payment which has not been disclosed. Finally, due to the non-exclusivity clause, Innate Pharma has the possibility to develop similar treatments on its own or with others partners.


It is very difficult to perform a precise valuation of a biotech company, given the many uncertainties surrounding its pipeline. However, we can try to understand if the current market cap is at least representative of the company potential. The balance sheet shows a cash position of $272m (enough to fully cover 2 years of operating expenses).

We will assume that the company stops developing its existing programs regarding drug combinations. As a result, the cash position will not decrease over time. Moreover, we assume that milestone payments are equally distributed among the different programs. For example, Lirilumab incorporates 7 programs, for a total milestone payment of $425m; thus, if one program is successful in Phase III, the company receives a milestone payment of $61m.

Now, we focus only on monotherapy programs because they are the most advanced and have the most chance to be a success. We give $0 value to combination programs and to IPH4102.

Monotherapy programs are in Phase II; thus, it means that the company still needs to invest in Phase III. For this analysis, we consider that future additional royalty payments will offset the operating and research costs. (Even if we think that royalty payment are far higher than R&D costs required for phase 3.)

Considering the previous assumptions and the success of the 3 monotherapy programs, we got a share price of €12.67 ($14.15).

We completely agree that these assumptions are significant but keep in mind that we do not take into account potential royalties, combination program milestone payments, the IPH4102 potential success and early-stage assets (despite licensing agreements).


In general, we don't like investing in biotech stocks because of the often-binary nature of their business. However, we think that this time, the market gives us a chance to invest in a biotech company with promising assets, fair valuation and supportive clinical trials.

Indeed, considering the probable Phase II Lirilumab's success and the strong rationale behind the company technology/platform, I do consider the risk reward skewed to the upside. Preclinical data strongly support the mechanism of action used by the drugs. Moreover, the first candidate, Lirilumab, has already shown strong safety data and the duration of the trial supports positive efficacy data. The second candidate, Monalizumab, has more or less the same mechanism of action that Lirilumab. Finally, the last candidate, IPH4102, could be a large success if it reaches the market.


Innate Pharma is a clinical-stage biotechnology company with no drugs currently commercialized. All its revenue are linked to the success of its clinical programs.

In a worst-case scenario, all its programs will fail, bringing no milestones and royalties payments. Of course, such a scenario will be accompanied by a sharp stock price decline. Moreover, the company would probably need to license new drugs (from the preclinical pipeline) or issue equity to finance its activity.

The market cap is roughly €594m (free float of 68%) which is quite small. Investors should be aware of liquidity risk which is the inability to sell easily & quickly the stock without market impacts.

For non-domestic investors, exchange risk exists because Innate is quote in Euro.

Disclosure: I/we 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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