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).
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.
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.
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)
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.
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.
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