Is Now Too Soon To Buy Adaptimmune?

Summary

Recent offering at $4.20 will raise 60 million dollars.

Consensus of 6 analysts' one-year target is $14.23.

Key alliances with M.D. Anderson, Merck, Glaxo, and Bellicum puts Adaptimmune's T-Cell anti-tumor technology in the forefront of the industry.

The future in cancer treatment is cell therapy, with the potential for robust therapy and decreased toxicity versus chemotherapy and radiation therapy. However, a substantial of time remains before the vast details of cell therapies are worked out. According to the company website, Adaptimmune (NASDAQ:ADAP) technology platform centers around using enhanced T-cell targeting for therapeutic uses, particularly for use in treating solid tumors. The technology is designed to screen patients prior to treatment to maximize therapeutic effect and minimize cross-reactivity risks to non-target tissues. With ADAP and other cell therapy companies still in early to early-mid stages in treating solid tumors and cancers, it is clear that medicine will still rely on recently improved chemotherapies for some time.

T-cells are white blood cells at the core of adaptive immunity, the system that mammalian bodies use to customize specific immune responses to specific pathogens. T cells have communicative, organizational, logistical, and attack roles in the immune response. This mechanism of defending the body from invaders is distinct from an antibody response, which is mediated by B cells (among others).

Some T cells, like "natural killer cells," function to attack and degrade cancer. But before natural killer cells can be commanded to go to work on cancer, the immune system has to recognize the cancer as harmful to the body. One difficulty of T cells in identifying cancers is that cancer proteins appear very similar to naturally occurring proteins in healthy tissues. Thus cancers often evade the immune system, and can further escape with future changes in surface proteins. ADAP seeks mechanisms to use engineered T-cell receptors to better recognize and bind to cancers, thereby stimulating the immune system to target and destroy them. More specifically, variable regions of T-cell receptors chains containing three complementarity determining regions are modified to enhance affinity to the human leukocyte antigen complex.

There is a novel power at work for ADAP mechanistically. Screen patients for specific cancer antigens (such as peptides shared by the cancer-testis antigens NY-ESO-1 and LAGE-1) that the company has already developed high-affinity, autologous T-Cell populations with high reactivity. Treat patients with specific protein antigens present in their cancerous tissues with populations of T cells developed against the cancer proteins of interest. These cells then expand, track through the body, and exhibit cytotoxic anti-cancer effects. The reality of T-cell receptor reactivity mechanisms is complicated, with different T-cell binding affinity populations mediating different effects, but as practical methods are worked out, therapeutic results are obtained.

One way to determine the pedigree of any speculative biotechnology company's research is to look at its peer-reviewed publications. ADAP has a series of journal articles linked on its site here. Not only does the list of publications contain collaborators from top institutions, the articles are published in the most respected top-tier journals. This does not always translate to clinical or investment success, but it certainly increases the odds. One Nature Medicine paper by Rapoport et al. worth a read for the science nerd types explains the mechanism of NY-ESO-1 in mediating anti-tumor responses in myeloma. This is probably the most advanced technology in the ADAP pipeline, with ovarian, melanoma, myeloma, lung (NSCLC), and esophageal clinical trials underway.

Although companies in early clinical trials are very interesting to study, StrongBio does not generally take positions in companies that are still in phase 2 following a dilutive event as opposed to late phase 3, preferably coming off of a recent dilutive event. StrongBio has learned that companies in phase 3, with higher patient numbers and a higher burn rate, are constantly diluting and raising money, which makes it hard to endure holding the stock. But there are some things working in favor of ADAP that are good enough to shuffle it up to a top position in the watch list. Included in this list of positives is a high level of institutional ownership.

The current market cap of the company is 300 million. According to the company's most recent 8K filing, recent raise of 60 million in cash priced at $4.20 per share will increase cash position to over 200 million, which should fund the company through late 2018 to early 2019. There are not a lot of phase 2 companies that carry well over 200 million in cash and nearly 300 million in liquid assets (so one could argue it is trading at fair value ahead of this next burn phase). ADAP even has a small revenue stream from its partner GlaxoSmithKline (NYSE:GSK) for meeting research and development milestones at or around 15 million per year. GSK and Merck are certainly enviable partners and capable partners as milestones continue to be met. Because part of the ADAP approach is to pre-screen patients for potential therapeutic effect as well as to enhance therapeutic response, StrongBio anticipates the trials will have an advantage over most clinical trials in terms of successes. When a clinical trial, especially in phase 1 and 2, approaches patient selection with proper considerations, adding a medical mechanism at the level of immune molecular affinity gives the patient the best possible prognosis.

Companies seeking to gain approval from FDA to treat cancer undergo a long arduous process with high cost in resources. Research and development expenses for ADAP were up from about 40 million per year in 2015 to about 64 million per year, an increase of over 30%, due to clinical trial costs. These funds were used in ongoing clinical trials of the company's NY-ESO and MAGE-A10 SPEAR T-cell therapies, and preparations for SPEAR T-cell therapy targeting AFP and MAGE-A4, its primary drivers. Initial data on MAGE-A10 and MAGE-A4 T-cell therapies expected later this year. ADAP has Four open INDs, including three SPEAR T cells. Costs should rise as these studies expand and pass into pivotal phase 3, the largest and most costly of trials, and cell therapy trials cost even more than drug trials.

ADAP earnings call transcript refers to some progress being made on the clinical front, including overcoming some problems with delays by opening up access to M.D. Anderson (ranked #1 in cancer by some accounts) and a European clinical site necessary for international multicenter trials. Screening rates that plagued the company with delays over the past year are now improving, leading to faster enrollment in studies including NY-ESO synovial sarcoma. Initial data on this cohort is expected to be presented at ASCO this year.

Synovial sarcoma accounts for approximately 8% of sarcomas, with a majority of patients not surviving initial treatments past 2 or 3 years. ADAP is currently conducting a clinical trial with FDA in this indication, with positive results initially reported. Additionally, follow-up on synovial sarcoma patients in the trial showed an increased median survival of 18 months compared to 13 months previously reported by the company at the last update. Tolerability is proving to be relatively good as development continues as well. Taken together with SPEAR T cells demonstrating persistent tumoricidal activity 28 months post-infusion, the staying power of T-cell therapy is starting to show its colors.

StrongBio regards it as a little too soon to take a big position in ADAP, but will keep a close eye on it and update results as its lead candidates approach phase 3. Risks include dilution, FDA approval obstacles, trial enrollment issues, screening problems, and numerous potential delays in working out the massive details surrounding the trials etc. However, the chance of a phase 2 FDA breakthrough therapy designation is real. This is certainly a future cutting edge technology greatly needed by cancer patients worldwide. It is a must add to any speculative biotechnology watch list with a higher confidence index than almost any phase 2 biotechnology company. But the potential for delays and setbacks and even the substantial time it will take if things go smoothly warrant investor patience as a better price opportunity is sought.

Disclosure: I am/we are long GSK, CYTR.

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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