Jounce Therapeutics (NASDAQ:JNCE) is a small biotechnology company focused on the rapidly expanding industry of immuno-oncology. Armed with a productive drug discovery platform, a unique mid-stage lead candidate in lung cancer, and a penchant for striking lucrative deals with big pharma, the future looks bright for Jounce Therapeutics. What's more, with the stock having retraced significantly after initially rising on a major partnership deal with Gilead Sciences (GILD), the future looks similarly bright for JNCE investors.
Jounce Therapeutics specializes in treating cancer through a relatively new approach called "immuno-oncology". This field involves creating drugs that harness patients' own immune systems to fight off cancer cells. Although this idea has existed for decades, it has only recently translated to successful medicines through the discovery of molecules known as "immune checkpoints". These are molecules that normal healthy cells can express in order to deter immune system cells from attacking them. Picture this: An immune system cell is patrolling the body, looking for foreign invaders or "self" cells that are behaving strangely (such as showing signs of cancerous growth). When the surveilling immune system cell encounters a friendly cell, it may be holding up sign that tells the immune system that everything is fine, disarming the immune cell and preventing it from launching an attack. Immune checkpoints can be viewed as this "sign" that the healthy cell uses to tell the immune system to stand down. While these checkpoint molecules are very important for healthy cells, dubious cancer cells may learn to co-opt these signals, thus becoming able grow uncontrollably while shutting down immune cells who would normally attack them.
The discovery that we could develop drugs that would block these checkpoint signals (thus preventing cancer cells from being able to disarm immune cells) was a massive breakthrough in the treatment of cancer. This revolution has lead to staggering clinical benefits, with thousands of people alive today who wouldn't be without it. The benefit for the pharmaceutical industry has been staggering as well, with the leading checkpoint inhibitor molecule, Keytruda, setting up to possibly become the best selling drug of all time.
Much of this immuno-oncology revolution was spurred by James P. Allison, an immunologist who helped discover the anti-cancer properties of checkpoint inhibitors. Shortly after gaining notoriety for this groundbreaking research that would go on to win him a Nobel prize in medicine, James Allison co-founded a company known as Jounce Therapeutics.
Jounce's most advanced drug (currently in Phase II trials) is a monoclonal antibody named Vopratelimab. This drug is an "ICOS agonist", meaning that it works by stimulating (or "agonizing") a molecule called ICOS. ICOS is short for "Inducible T-Cell Co-Stimulator", and it is a molecule that may be found on certain activated Immune system cells. Specifically, a type of immune system cell called the "Helper T Cell" is well-known for ICOS expression.
Helper T Cells are one of the many different types of cells involved in fighting off foreign invaders or cancerous growth. Unlike the better known "cytotoxic T cells" that actively attack and kill cancer cells, "Helper" T cells take a more passive role in fighting cancer. One could think of these helper T cells as whistleblowers that not only help the fighting T cells to find their targets, but also help provide the ammunition they need to fight by sending out signals that ramp up immune system activation.
Once helper T cells have become aware of an enemy target, they can release molecules like "IL-2" and "interferon gamma" that drive strong anti-cancer effects. One of the molecules that helper T cells use to activate these inflammatory signals is ICOS. In developing Vopratelimab, a drug that binds and activates the ICOS molecules found on helper T cells, Jounce Therapeutics hopes to recruit and activate these helper T cells to join in the battle against cancer, bringing other immune cells to fight along with them.
The history of vopratelimab is somewhat complicated. Early in the molecule's development (July of 2016), vopratelimab was part of a large partnership agreement between Jounce and Celgene (CELG) that included an impressive upfront payment of $261 million. This deal gave Celgene the ability to commercialize vopratelimab if approved (paying royalties to JNCE). Furthermore, the deal included the option to expand the agreement future JNCE molecules and the potential to yield $2.3 billion in milestone payments to JNCE.
However, after initial trial results that were viewed as disappointing (and after Celgene was acquired by Bristol Myers (BMY)), the rights to vopratelimab were returned to JNCE, and a new deal was struck. This deal involved a $50M upfront payment to JNCE for a new, pre-clinical molecule in their pipeline called "JTX-8064" (more on this molecule below).
The reasons for CELG returning vopratelimab to JNCE are surely multifactorial. For starters, CELG's acquisition by BMY was likely a confounding piece of the equation. It is possible that vopratelimab was simply a casualty of the transition of Celgene's pipeline into Bristol Myers', where non-core assets were tossed aside to focus on molecules that BMY saw as most promising. Of course, we must also acknowledge the fact that Vopratelimab's early clinical trial results were overall unimpressive.
During phase 1 trials in advanced solid tumor patients, vopratelimab showed the ability to generate stable disease in a portion of patients and modest response rates when given in combination with checkpoint inhibitor "Opdivo". Although these results likely contributed to CELG/BMY's decision to part ways with vopratelimab, JNCE management believes they may have identified new strategies to get better results out of the drug moving forward. Based on what they learned from these early trials, JNCE is going solo with vopratelimab, employing two new techniques discussed below.
Based on learnings from their previous trials, JNCE scientists have realized that patients have markedly better outcomes when their helper T cells express more "ICOS" on their surface.
The chart above is a "waterfall plot". Each bar represents 1 patient and their corresponding change in tumor size after treatment. As you can see, most patients on the vopratelimab treatment experienced tumor growth even after therapy (which is largely expected for any treatment in refractory solid tumor trials). However, the patients on the far right (those who experienced the greatest decreases in tumor size) all have something in common: They were classified as "ICOS-high" patients - patients who had higher levels of ICOS on their helper T cells. Of course, it is no surprise that patients with more ICOS on their helper T cells did better with vopratelimab treatment since ICOS is the molecule that vopratelimab targets. However, the degree of difference between the ICOS-high and ICOS-low patients is marked enough to merit extra attention.
Armed with this information, JNCE has launched the EMERGE trial. In this study, vopratelimab is being combined with a checkpoint inhibitor called Ipilimumab, which blocks a checkpoint called CTLA-4. In addition to the theoretical synergies of vopratelimab and ipilimumab both stimulating different parts of the immune system, Jounce management is excited by the fact that CTLA-4 inhibitors like ipilimumab have been shown to increase ICOS expression on helper T cells. So, in this trial Jounce management believes they may have found a way to increase vopratelimab's efficacy by combining it with a drug that can increase ICOS expression, thus generating more patients in the "ICOS-high" cohort that has already been shown to benefit most from vopratelimab treatment. As the trial's name suggests, JNCE is hoping that ICOS-high patients "emerge" at a higher rate when vopratelimab is combined with Ipilimumab.
The EMERGE trial is treating patients with NSCLC (non-small cell lung cancer), a very large indication where immuno-oncology drugs have had great success. In their most recent earnings call, the management team confirmed that the trial was fully enrolled and that an update containing data on all 40 patients would be available in early 2021.
Unlike the EMERGE study where JNCE is hoping to combine vopratelimab with a drug to induce ICOS-high patients, the SELECT study is seeking to identify patients who are already predisposed to being ICOS-high. Again, as the trial's name suggests, only patient's who are predicted to have the best responses to vopratelimab treatment will be "selected".
Based on analysis of tumor samples from the original phase 1 vopratelimab study, JNCE has identified a set of genetic markers that predict a patient's ICOS status. This technique, dubbed "TIS-Vopra" is allowing JNCE to "enrich" for ICOS-high patients in the SELECT study. This means that, in order to be eligible to receive the treatment, patients must be screened and found to meet a pre-determined threshold on the TIS-Vopra test. In doing this, JNCE will filter out the patients who are less likely to respond well to their treatment, thus likely increasing the response rates and median survival of patients in the study.
This "bio-marker driven" approach to oncology is increasingly prevalent. For years we have known that some patients respond to some treatments and some don't, without ever being able to tell why. In the new wave of precision oncology, doctors are searching for "biomarkers" that can tell them what drugs a patient is more likely to respond to, so that treatment plans can avoid therapies with low probabilities of success. For vopratelimab, the difference in outcomes between ICOS-High and ICOS-Low patients is so distinct that a biomarker driven approach makes perfect sense, and likely offers the best opportunity for JNCE to overcome initially disappointing results.
The chart above shows "overall survival" curves from the original phase 1 vopratelimab studies. These types of charts show the percentage of patients that remain alive as time goes on in a study. In this particular chart, JNCE has divided the patients from the past study into two groups: One group that is above the TIS-Vopra threshold, and one group that is below. What we can see is that the patients above the TIS-Vopra threshold have a higher probability of surviving longer, with a median overall survival over 10 months longer than the patients below the TIS-Vopra threshold. This is a very important slide for the company, as "overall survival" has largely replaced "response rates" as the benchmark by which immuno-therapies are judged. Accordingly, it will be a major milestone if JNCE is able to employ its TIS-Vopra screen to select for patients who will live longer on their treatment in the SELECT study.
Like the EMERGE study, the SELECT study is being conducted in NSCLC patients. Importantly, management is stating that they expect 20% of patients to meet the threshold TIS-Vopra cutoff in their screening test. This means that, if successful, vopratelimab could stake a significant claim in a cancer indication that occurs in nearly 230,000 people annually in the US alone.
In the SELECT trial, patients get a combination of vopratelimab and JNCE's PD-1 inhibitor JTX-4014. PD1 inhibition with drugs like Keytruda and Opdivo has become the standard of care for NSCLC patients in the United States. The SELECT study is being conducted outside of the US in 2nd line NSCLC patients who have never received any sort of immuno-therapy in the past. This type of patient (one who fails chemotherapy before trying immuno-therapy first) is a becoming rarity in the US, so the trial is being conducted in ex-US sites. Not only will enrolling immuno-therapy naive patients help the company simulate what first-line usage of vopratelimab might look like, but it may also allow them to enroll patients into the trial rapidly as demand for immunotherapies is high ex-us and patients often seek out clinical trials to obtain them. Although enrollment speed will ultimately determine the timeline for an update on the SELECT trial, the company is currently guiding for an update on roughly 75 patients at some point in 2021.
JNCE's next drug candidate is JTX-8064. This drug targets a molecule called "LILRB2", which is thought to be an immune checkpoint on a type of immune cell called a "macrophage". Although most of the currently approved checkpoint inhibitors primarily go after the T cells that directly kill the cancer cells, there has been increasing interest in targeting macrophages for their anti-cancer effects. Although macrophages do actively kill enemy cells, this is not their primary role. After killing an enemy cell (by engulfing it whole) a macrophage digests the enemy into pieces. Then, in a process known as antigen presentation, it holds little chunks of the enemy on its outer surface, displaying them to other immune cells. When other members of the immune system interact with the macrophages, they are taught to be activated and attack anything that looks similar. In this way, macrophages are able to coordinate attacks against enemy cells. By blocking the LILRB2 molecule that can cause a macrophage to shut down, JTX-8064 may be able to keep these cells active in fighting cancer cells that would otherwise evade attack.
The most noteworthy target in macrophage immunology has recently become CD47, with Forty-Seven Therapeutics (FTSV) being purchase by GILD for their CD47 macrophage checkpoint inhibitor in a $4.9B deal. Although JNCE's JTX-8064 is in a much earlier stage of development, it has gathered some big pharma attention of its own. When CELG/BMY decided to part ways with JNCE's vopratelimab in 2019, they inked a new deal that gave JNCE $50M in upfront cash for a JTX-8064 partnership. However like the vopratelimab deal, this JTX-8064 partnership was also scrapped only a few months later.
The company has not said why the partnership was erased. No new public data on JTX-8064 was made available in the interim between the deal's inception and cancellation, and no efficacy data on the drug exists as it is still in the pre-clinical development stage. Though a thorough explanation is unlikely to arise, the transition of CELG's portfolio to BMY after the merger seems as likely a culprit as any. In any case, JNCE management has voiced excitement at having the opportunity to continue development of the molecule on their own, and have recently announced that they plan to start enrolling in the first human trials before the end of 2020. With macrophage-based immuno-oncology becoming an increasingly watched arena, future updates on JTX-8064 may become legitimate value drivers for JNCE stock.
JTX-1811 is JNCE's newest addition to its pipeline. Still in the preclinical phase, JTX-1811 targets a newer character in the immuno-oncology field: "CCR8". CCR8 is a molecule found on a type of immune system cell called the "regulatory T cell" or "T-Reg". T-Regs are the peacemakers of the immune system. When activated, they tell their more aggressive counterparts to calm down, reduce inflammation, and stop attacking. While they are important for a balanced immune system, T-Regs are not the cells that you want to have calling the shots when you have a malignant tumor. When there is cancer to be fought, T-Regs can become part of the problem, telling the immune system to stand down while cancer cells grow out of control. Accordingly, drugs that turn down the activity of T-Regs themselves have become a hot topic for investigation.
JTX-1811 is JNCE's first T-Reg targeting candidate, and it will theoretically work by binding to the CCR8 molecule on tumor infiltrating T-Regs, marking them for destruction. Although the molecule is still in very early development (investigational new drug application planned to be filed in 1H2021), JNCE was able to secure an impressively large amount of cash to partner the asset with Gilead Sciences. In all, JNCE received a total of $120,000,000 in upfront cash, up to $685,000,000 in milestone payments, and a cut of future profits if the drug is eventually approved.
It is difficult to project the odds of success for JTX-1811 as no in-human data exists for any drug targeting CCR8. However, this uncertainty makes the scale of the Gilead deal all the more impressive. Rarely does an un-validated oncology target at such an early stage in development fetch such significant pricing. Whether or not the molecule becomes successful, JTX-1811 is another feather in JNCE's cap demonstrating a consistent ability to generate molecules that pique the interest of big pharma and convince them to open their wallets to buy a piece.
Small cap biotech is an extremely volatile sector often seeing large moves in single sessions. Such moves may be caused by unpredictable negative catalysts such as newly developed side effects, or even deaths of patients undergoing experimental trials. JNCE is not immune to such negative catalysts. In the event that serious side effects arise in JNCE trials, significant downside could manifest. Even outside of concerning side effects, a general lack of efficacy in JNCE's drugs poses significant risk, as the majority of experimental medicines are never approved or widely adopted.
JNCE is in mid-early stage development with its lead compound, and the company has several other drug candidates that have never even been dosed in humans. In such early stages, a detailed discussion of risk is difficult to address as there is simply no way of knowing what specific challenges their molecules may face when tried for the first time. However, this element of "the unknown" is exactly what investors should consider when evaluating the risk of investing in such an early stage biotech.
Finally despite my bullish thesis and argument that a low valuation provides significant downside cushion for JNCE, investors must understand that small cap biotechs can trade below cash value for extended periods of time.
As I see it, there are currently distinct short-term and long-term bull cases to be made for JNCE.
"Long-term" bulls would point out the company's enviable cash pile, its efficient and lucrative molecule discovery engine, and vopratelimab's opportunity to bounce back with a newly designed targeted oncology approach.
"Short-term" bulls' thesis is simple: JNCE has been grossly mispriced after its recent cash-rich deal with GILD.
Personally, I can see the merit of both cases and have built a long position accordingly. Much of this article discusses information that would be considered part of the "long term" bull thesis, so a quick recap of that information should sum this up:
The "short term" bull thesis is all about a big pile of cash crammed into a small cap. Adding the up-front cash and small dilution from the recent GILD transaction, the company's financials are (roughly) as follows:
Now trading at only 1.06x cash, JNCE's valuation is a pittance in comparison to other small cap immuno-oncology companies, where valuations well over 2x cash are nothing to write home about. This valuation would perhaps be understandable if JNCE were a one-drug company developing a long-forgotten molecule with no preclinical pipeline to build value off of, but even a cursory look demonstrates that this is clearly not the case. In fact, I am hard pressed to come up with a list of biotechs who have been able to consistently license early-phase assets for such large sums of money. Even without the developmental candidates that JNCE is sure to continue pumping out year after year, the idea that vopratelimab, JTX-8064, and JTX-1811 combine to yield a measly $17,000,000 enterprise value seems a gross miscalculation.
Perhaps even more striking has been the way the company's enterprise value has responded to the GILD partnership. Prior to the deal, JNCE was trading at $4.84/share with $127M in cash and 34.2M shares outstanding, translating to an EV of roughly $38.5M. Fast-forward 5 days, and that EV has been more than halved on the heels of a development that I consider bullish on numerous fronts:
Although I can see the bull case in both the long and short term for JNCE, I view the short term re-valuation play as particularly compelling. I am hard pressed to accept that the company became less valuable as a result of the GILD partnership. To the contrary, my opinion is that the company quite clearly became more valuable through this transaction despite the market's muted reaction. That said, a mere return to the quaint $38.5M enterprise value that JNCE boasted coming into the GILD deal would translate to a price per share of $7.19 (an 8% gain on the 9/5/20 closing price).
Whatever enterprise value one wishes to ascribe to this productive immuno-oncology developer, its stock currently rests only 44 cents from trading at cash. In my book, a reputable company trading that close to cash is a very low risk proposition in the realm of small-cap biotech. Adding in the upside of a drug discovery platform that deserves far more respect, and this is a bet I am willing to take.
Credits and acknowledgements: This article was prepared in consultation with fellow biotech investor, Joe Viater, MBA candidate, Stanford University.
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Disclosure: I am/we are long JNCE. 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.