Molecular Templates: Updates To Thesis

Jun. 06, 2019 4:45 PM ETMolecular Templates, Inc. (MTEM)3 Comments

Summary

  • Shares have risen as a result of optimism regarding Takeda partnership and advancing ETB pipeline.
  • I provide an overview of the company's assets and a recap of recent events.
  • Large opportunity is being targeted with TAK-169 in multiple myeloma patients who've progressed after or are unlikely to respond to CD38-targeted antibody therapy.
  • Multiple data updates for MT-3724 in relapsed/refractory DLBCL and for combination studies in earlier lines of treatment are expected in the second half of the year.
  • The stock is a Buy and I suggest patiently accumulating dips over the next couple of quarters. Risks include dilution and 'sell the news' reaction to data updates later this year given the competitive state of CD20 space.
  • Looking for a community to discuss ideas with? ROTY features a chat room of like-minded investors sharing investing ideas and strategies. Get started today »

Shares of Molecular Templates (NASDAQ:MTEM) have risen by over 30% since my September 2018 article pointed out that the "new" Takeda (OTCPK:TKPHF) agreement provided more validation for its Engineered Toxin Bodies (ETB) platform.

May's earnings update served as a reminder that I need to revisit this one, given that a couple of important programs are about to enter the clinic and data is expected from phase 2 studies evaluating MT-3724 (CD-20 targeting immunotoxin).

Chart

Figure 1: MTEM daily advanced chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the above chart (daily advanced), we can see a steady uptrend forming starting in February and continuing to the present. This could have had something to do with strengthening of executive leadership and presentation of preclinical data for TAK-169 at AACR.

Overview

Molecular Templates made its way onto the Nasdaq via merger with struggling biotech firm Threshold Pharmaceuticals in March of 2017. I considered it a green flag that around the same time it accessed a $40 million equity financing led by Longitude Capital with participation from BVF, Perceptive Advisors, and others. As if that were not enough, after the merger, Takeda Pharmaceutical made a $20 million equity investment in its tiny partner as part of a collaboration and license agreement.

The basis of the thesis here is that the company was ushering forward a new class of targeted biologic therapies with unique biological properties, known as Engineered Toxin Bodies (ETBs). One special characteristic of ETBs is that they can induce internalization into cells even against non- or poorly internalizing targets (expands number of extracellular receptors that can be targeted by direct cell-kill). Additionally, a unique intracellular mechanism of action has been observed via enzymatic and permanent ribosome inactivation (observed activity is not inhibited by generalized mechanisms of chemo-resistance). ETBs can also be used for seeding of foreign antigens in a tumor cell for surface expression.

Figure 2: Pipeline (Source: corporate presentation)

Looking at the company's pipeline, I appreciated the updated agreement with Takeda to jointly develop CD38-targeted ETBs for the treatment of a range of diseases, starting with multiple myeloma. The rationale for the pact is based on the fact that multiple myeloma cells have wide expression of CD38 protein and the hypothesis that ETBs could bring about more extensive, deeper responses as they don't rely on the body's immune system to be effective. The CD38 collaboration involves $632.5 million in potential milestones, double digit up to low-twenties royalties, and 50/50 cost share. Apart from that, the multi-target deal involves $547 in milestone payments and royalties in the mid single to low double digit range (not to mention $25 million when Takeda exercises its option to license ETBs).

Data presented at ASCO last year for wholly owned asset MT-3724 also looked intriguing (in phase 1 and 1b study in patients with non-Hodgkin's lymphoma who had previously relapsed after anti-CD20 Mab and chemotherapy). Best activity took place in heavily pretreated patients (median five prior therapies) with relapsed or refractory diffuse large B-cell lymphoma (DLBCL). Management made the call in the future to enroll patients with low levels of rituximab (RTX), as those with high circulating levels exhibited a poor response to MT-3724. In DLBCL patients with these low RTX levels (n=10), objective response rate was 30% with disease control rate of 70%. Interestingly enough, two patients with stable disease experienced tumor reductions of just under 50%. The tolerability profile left more to be desired and management chose to implement a maximum tolerated dose (MTD) of 50 mcg/kg (with 6 mg per dose at most). It should be pointed out that dose interruptions or reductions were required in the first 2 of 3 patients treated and toxicities occurring at 100 mcg/kg were consistent with Capillary Leak Syndrome (CLS). However, as pointed out above, the new MTD should allow for efficacy (observed at 5 mcg/kg as there was little evidence for CLS at less than 7 mg per dose).

Time to dig a bit deeper to determine if there's a near to medium term opportunity for us to take advantage of here.

Select Recent Developments

On February 19th, the company announced the hiring of Roger Waltzman as Chief Medical Officer (prior served for 9 years in senior drug development roles at Novartis leading development of Glivec and Jakafi).

On February 27th, the company announced new data on multiple programs to be presented in posters at the American Association of Cancer Research meeting. Of these, CD38-targeted ETB TAK-169 appeared to draw the most attention given that it's active in the presence of daratumumab and active against daratumumab resistant cells (keep in mind Darzalex did over $2 billion in sales in 2018). If data in the clinic lines up with preclinical results, the drug candidate could find its niche in patients who've progressed after or are unlikely to respond to CD38-targeted antibody therapy. In xenograft models, complete regressions were observed using both once and twice-weekly dosing schedule.

Figure 3: Promising preclinical data for TAK-169 points to improved safety and potency (Source: corporate presentation)

The company's PD-L1 targeting ETB appeared interesting as well (not just another checkpoint inhibitor), given that it directly targets tumor cells and overcomes resistance mechanisms against PD-1 and PD-L1 antibodies. Cytotoxicity delivered is designed to be independent of a requirement for tumor infiltrating lymphocytes, high tumor mutational burden, or modulatory effects of the tumor environment. PD-L1 ETB MT-6035 can also deliver a viral peptide for cell surface presentation and targeting by a specific antiviral CTL population for a complementary mechanism for tumor cell destruction (antigen seeding)

Lastly, the company expressed plans to develop bispecific ETBs (although this is early in the works with much headway still to be made).

On March 28th, the company announced initiation of a single-agent phase 2 study of CD20-targeted ETB MT-3724 in relapsed/refractory DLBCL patients. The trial will enroll up to 100 patients who have already received at least two standard of care treatment regimens (trial has the potential to be pivotal).

In April, more progress in the clinic was made with FDA acceptance of IND application for ETB targeting HER2, MT-5111. The phase 1 study in relapsed/refractory patients with HER2-positive solid tumors should get underway in Q3 (primary objective of safety and tolerability as well as determining recommended dose for phase 2 trial).

Figure 4: MT-5111 designed to overcome resistance mechanisms of HER2-targeting predecessors (Source: corporate presentation)

Other Information

For the first quarter of 2019, the company reported cash and equivalents of $84 million with management guiding for operational runway into the first half of 2021. Net loss fell to $6.2 million, while revenue rose to $7 million (arising from Takeda collaboration and CPRIT grant revenue). The company still holds its existing credit facility with Perceptive Advisors ($5 million loan with $5 million to be drawn at later date).

As for future catalysts of note, TAK-169 is expected to enter the clinic this year and should be a key value driver going forward considering large market opportunity being targeted in multiple myeloma. As for MT-3724, an update is expected on the phase 2 study in relapsed/refractory DLBCL in the second half of the year. Additionally, updates for both combination studies in earlier lines of DLBCL are expected in the second half of the year. As for HER2-targeting MT-5111, dosing in phase 1 study should get underway in Q3 with update to be given in the second half of the year. Lastly, IND filing for MT-6035 (ETB targeting PD-L1 with antigen seeding) should take place in the second half of the year.

In management's presentation at Cowen earlier this year, my impression was that they were most excited about TAK-169 given the high unmet need in the multiple myeloma indication. They also discussed how the company's HER2 asset could benefit non responding or resistant patients or be used in sequential combination (coming after small molecule drugs or ADCs). Lastly, we were reminded that the company's PD-L1 asset is still wholly owned and targeting a huge opportunity with differentiated mechanism of action. A nugget that stood out to me was that management suggested additional deals (along the lines of what we saw with Takeda) could be coming.

As for institutional investors of note, BVF owns a 3.5 million plus share position and Perceptive Advisors owns a decent stake as well. There were a few sizeable insider purchases last year.

Final Thoughts

To conclude, the thesis continues to progress nicely as Molecular Templates advances multiple assets incorporating its novel ETB technology into clinical studies. Near-term data readouts for MT-3724 could provide some upside, but keep in mind the CD20 space is quite crowded. The asset most of interest to me, TAK-169, will move into the clinic in the next quarter or two and valuation should rise as initial data for that one looms closer. The company is going after derisked targets like HER2 and PD-L1, but using a differentiated technology with unique benefits that still need to be proven in human studies. Lastly, per management's commentary, I wouldn't be surprised to see another high profile collaboration in the next twelve months.

For readers who are interested in the story and have done their due diligence, I suggest initiating a pilot position and patiently accumulating dips over the next few quarters. The stock is also appropriate for long-term investors, as multiple assets make their way through clinical studies and further partnerships are struck.

Risks include disappointing data for MT-3724 in the second half of the year, setbacks in the clinic for initiating studies or enrolling patients, disappointing initial data readouts for multiple product candidates in 2020 and intense competition for certain indications. Dilution in the near term is possible given the company's current cash position (raise money while you can, not when you need to).

As for downside cushion and elements of derisking, cash accounts for about 30% of market capitalization and derisking data for the company's CD20-targeting ETB plus partnership with Takeda also provide a measure of cushion.

For our purposes in ROTY, I'd like to consider entry perhaps after another financing or when initial data is closer for TAK-169.

I greatly appreciate you taking the time to read my work and hope you found it useful. Consider clicking "Follow" next to my name to receive future updates and look forward to your thoughts in the Comments section below.

Disclaimer: Commentary presented is NOT individualized investment advice. Opinions offered here are NOT personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making trades. Strategies discussed should not be mistaken for recommendations and past performance may not be indicative of future results. Although I do my best to present factual research, I do not in any way guarantee the accuracy of the information I post. I reserve the right to make investment decisions on behalf of myself and affiliates regarding any security without notification except where it is required by law. Keep in mind that any opinion or position disclosed on this platform is subject to change at any moment as the thesis evolves. Investing in common stock can result in partial or total loss of capital. In other words, readers are expected to form their own trading plan, do their own research, and take responsibility for their own actions. If they are not able or willing to do so, better to buy index funds or find a thoroughly vetted fee-only financial advisor to handle your account.

Join our 500+ member community of experienced biotech investors, profitable traders, industry veterans and novices.

Take your investing/trading to the next level through being part of a group known for its pursuit of profits, continuous improvement and generous sharing of due diligence & knowledge.

My primary focus is on biotech stocks with high % upside potential within the next twelve months (Runners of the Year or ROTY). These picks typically have multiple green flags, elements of derisking or downside cushion, and other criteria I look for.

Membership includes access to our market-beating 10 stock model account, Active Live Chat, Idea Lab and much more!

This article was written by

Jonathan Faison profile picture
16.18K Followers
Community of Biotech Investors Focused on Value & Clinical Momentum

Founder of ROTY (Runners of the Year), a 500+ member community of biotech investors & traders. Big believer in quality over quantity, my goal is to add value for ALL readers.





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.

Recommended For You

Comments (3)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.