Oncternal Therapeutics: Opportunistic Investment In A ROR-1 Biotech

Summary

• Oncternal Therapeutics is one of the few companies with clinical assets targeting ROR-1.
• Recent M&As for two ROR-1 companies by Merck and Boehringer Ingelheim have set a market value around $1B-$2B.
• With upcoming clinical catalysts for their lead drug candidate, Oncternal is an opportunistic investment in a potential M&A over the next year or so.

Source: Company

Summary

Oncternal Therapeutics (NASDAQ:ONCT) is an early-stage biotechnology company developing a pipeline of medicines targeting ROR-1. Receptor tyrosine kinase-like orphan receptor 1 (“ROR1”) is a tyrosine-protein kinase transmembrane receptor that is overexpressed in several cancers. The clinical data is still early; however, M&A has validated biopharma’s interest in the target and its potential to support a large business. Last year there were 2 billion dollar acquisitions for assets targeting ROR-1:

• Merck (MRK) buying VelosBio for $2.75B - Merck inks $2.8B VelosBio buyout to snag anti-ROR1 ADC

• Boehringer Ingelheim buying NBE Therapeutics for $1.5B - Boehringer inks $1.5B NBE buyout, joining Merck in new cancer race

One caveat here is that these companies are developing antibody-drug conjugates for ROR-1 where Oncternal is developing a monoclonal antibody. However, early clinical data from Oncternal and the ROR-1 field in general have been exciting in terms of response rates and the potential patient impact is large in terms of lives and number of indications. Oncternal Therapeutics is developing a diverse pipeline with an anti-ROR1 antibody, cirmtuzumab, a small molecule targeting ETS oncoproteins, and a chimeric antigen receptor (“CAR”) T-cell also targeting ROR1.

The investment opportunity here is to purchase stock in a company with an interesting asset for a highly valued target, ROR-1. Oncternal is one of the handful of companies with clinical data in ROR-1, and one of the few not to be acquired. Current Phase 1/2 data for the company’s lead drug program as a combination therapeutic has been promising in mantle cell lymphoma (“MCL”) and acute lymphocytic leukemia (“ALL”), and Oncternal has several catalysts over the next few months that can validate these programs and the overall approach of developing mAbs against ROR-1.

Based on the market opportunity and comparables, we believe the company’s stock is undervalued. There are modality risks along with the risk that Oncternal will not be acquired and will need to issue dilutive equity to progress their pipeline. As a result, we see Oncternal as an opportunistic investment in a clinical-stage company with a unique asset that has the potential to become highly valued from acquisition in the next 1-2 years.

Figure 1: ONCT daily chart (Source: Capital IQ)

Opportunity

Oncternal Therapeutics has reported promising data for their lead asset, cirmtuzumab, which is a first-in-class monoclonal antibody targeting ROR1. The drug candidate came from research out of UC San Diego and the California Institute for Regenerative Medicine (“CIRM”) and is in a Phase 1/2 clinical trial in combination with ibrutinib (“targeting BTK”) to treat MCL and CLL. At American Society of Hematology (“ASH”) 2020, Oncternal reported new data from this trial: Cirmtuzumab, an Anti-ROR1 Antibody, in Combination with Ibrutinib: Clinical Activity in Mantle Cell Lymphoma (MCL) or Chronic Lymphocytic Leukemia (CLL) from a Phase 1/2 Study

In relapsed/refractory (“r/r”) MCL, the combination of cirmtuzumab and ibrutinib showed an objective response rate (“ORR”) of 87% in 15 patients with a little under half having a complete response. Excitedly at the time of the study reporting data, the median progression free survival (“PFS”) had not been reached after a median follow up time of 12.1 months. In this study, patients have received a median of 2 prior treatments with the maximum being 5 therapies. The 4 patients that were previously treated with ibrutinib had a response with 2 showing a complete response and the other 2 a partial one.

In CLL, the combination had treated 49 patients as of October 30, 2020. Forty-five of these patients showed a response with an ORR of 92% with one patient showing a complete response and 4 showing stable disease after treatment. Also, median PFS was 29.5 months for patients with r/r CLL (“n=30”) after a median follow-up time of 17.1 months. Moreover, the combination therapy showed adverse events matching ibrutinib as a monotherapy and good tolerability.

This data is promising; however, ibrutinib as a monotherapy already shows good ORR, around 90% in CLL and 60% in MCL, and complete response rates over 10% in a r/r setting. In both indications, Oncternal is showing similar ORRs. In MCL, the company has CRs in line, if not better, than ibrutinib as a monotherapy, while in CLL, the CR rates of the combination therapy are still behind the monotherapy regimen.

The latter might be due to these patients including treatment-naive patients and the r/r patients were not treated with ibrutinib before taking Oncternal’s combination therapy. The data is still early to tell; however, these trials are meant to validate cirmtuzumab and set the drug candidate to expand to more indications. Cirmtuzumab is also in Phase 1 trials to treat HER2-negative breast cancer in combination with paclitaxel (“a chemotherapy”). Long-term, the drug candidate can expand into solid tumors and expand the number of patients Oncternal can treat.

Figure 2: Oncternal Therapeutics’ pipeline (Source: Oncternal Therapeutics’ corporate presentation)

Figure 3: Overview on ROR1 as a target in solid and liquid tumors (Source: Oncternal Therapeutics’ corporate presentation)

Figure 4: Phase 1/2 data on Oncternal’s lead drug candidate in combination with Ibrutinib in MCL and CLL (Source: Oncternal Therapeutics’ corporate presentation)

Figure 5: Safety and efficacy data on Oncternal’s lead asset in MCL (Source: Oncternal Therapeutics’ corporate presentation)

Most, if not all, of Oncternal’s valuation is driven by cirmtuzumab. Right now, the clinical data has established safety and some promising efficacy signals as a combination therapy. The company needs to show the drug candidate’s ability to act effectively as a monotherapy, but right now, ROR-1 is an attractive target and any positive data ought to increase Oncternal’s valuation.

The valuation model assumes an FCF margin of 35%, discounting the company's ability to generate this cash flow from Cirmtuzumab over the lifetime of the product. The model also assumed a drug price of $90K (“the average biologic is priced around $80K-$100K”). From this work, Oncternal Therapeutics in my opinion is trading at a ~5x discount implied by the model. To triangulate the valuation, the M&A comparables of VelosBio and NEB imply a discount for Oncternal of 2x-5x.

For this value to be realized for shareholders, Oncternal will likely need to be acquired by a larger company over the next few years. If the company decides to remain independent and develop cirmtuzumab themselves, existing investors will experience some level of dilution to finance this work. Given that ROR-1 is still an early target and most of its value is derived from recent M&A, it is not exactly clear to us that stock price increases for Oncternal from positive clinical news are due to expectations of approvals and market success but a potential acquisition.

Figure 6: Valuation of Oncternal Therapeutics (Source: Author's valuation work, using base data from ONCT’s 10-K)

The long-term vision of Oncternal is to develop several modalities targeting ROR-1. The lead asset is a monoclonal antibody, but the company is also developing a CAR-T cell therapy. Juno Therapeutics, now part of Bristol Myers Squibb (BMY), also have a CAR-T program in ROR-1, but haven’t reported new data for the last ~4 years. Moreover, Oncternal has a small molecule program targeting ETS oncoproteins to treat Ewing sarcoma, a rare cancer.

All in all, the company has most of its eggs in the ROR-1 monoclonal antibody basket. The CAR and small molecule programs are interesting and add some value, but they are not sufficient backup plans to offer much downside protection for Oncternal investors. Upcoming clinical data from Oncternal and other ROR-1 companies will drive the company’s stock price. We see a similarity to the CD47 field; however, ROR-1 is not nearly as well developed as a target. But if the field can maintain its current trajectory, we believe that Oncternal is a unique and undervalued company in the ROR-1 class.

Figure 7: Development programs for Oncternal to target ROR1 with two modalities (Source: Oncternal Therapeutics’ corporate presentation)

Catalysts

Oncternal has several data releases for cirmtuzumab this year along with broader updates on their pipeline. The company has over $100M in cash, which provides around 1-2 years of runway and allows Oncternal to complete these ~12-month milestones. In the second quarter of 2021, Oncternal is expecting to report new data on their lead drug candidate in MCL and CLL. Also, the company is projected to report Phase 1 data for cirmtuzumab in HER2-negative breast cancer along with more preclinical data on their ROR-1 programs. For the overall pipeline, Oncternal is planning to provide an update of their ROR-1 CAR-T program in China during the second half of 2021 and also give an update on TK216, their small molecule program in the second quarter of 2021.

Figure 8: Oncternal Therapeutics’ catalysts (Source: Oncternal Therapeutics’ corporate presentation)

Risks and Challenges

Oncternal has several risks related to their clinical trials, ROR-1 M&A, and their cap table. The company still has to report developing Phase 1/2 data of their lead drug candidate in MCL and CLL, and any negative news would cause large stock price drop of around 50-80%. This clinical risk is found in many biotechnology companies, but Oncternal does not have a platform or business model to buffer negative clinical data. As a result, the investment here is opportunistic due to the concentration risk for Oncternal.

Moreover, recent M&A for two companies developing ADCs for ROR-1 is promising for Oncternal; however, the company is developing monoclonal antibodies and CARs instead. Juno’s CAR-T program for ROR-1 hasn’t had an update and bispecific programs for the target have been discontinued by Macrogenics among others. In short, ADCs might be the valuable modality to target ROR-1 due to its expression profiles in cancers and not its direct effects on cancer. Clinical data over the next few months will validate Oncternal’s use of antibodies to target ROR-1.

Lastly, Shanghai Pharmaceuticals has historically had a large imprint on Oncternal’s cap table. At one time, the company owned up to 40% of Oncternal and now owns around 7%. Sometimes a large ownership presence by a corporation can negatively impact a company’s focus on increasing valuation and serving the interests of other shareholders.

Conclusions

The company is an exciting oncology company with a first-in-class drug for ROR-1. The investment opportunity is centered around recent M&A in the ROR-1 space and promising, but early, clinical data for Oncternal’s lead drug program. VelosBio and NEB create some sort of market value for ROR-1 companies, and Oncternal has data with exciting efficacy signals in MCL and CLL and superior safety in MCL versus VelosBio’s data in r/r MCL.

The story here is mainly driven by M&A with clinical data around ROR-1 validating the long-term thesis. If Oncternal can provide another exciting update on their lead drug candidate, that might set the company up for an acquisition. If an M&A event doesn’t emerge over the next 6-12 months, the investment opportunity changes significantly. Oncternal will need to raise more capital to bring their drug candidate to pivotal trials and expand the number of indications. This shifts the thesis from catalyst-driven M&A to ROR-1 as a long-term drug target in cancer.

We feel that Oncternal is an exciting investment due to the current market value on ROR-1 assets. The target itself is very early and more work needs to be done to understand what indications are compelling and which modality is useful. Our thesis is more opportunistic and is not taking a long-term view on ROR-1. New data can significantly change this approach if Oncternal or others report ROR-1 data for larger patient populations.

The thesis to invest in Oncternal Therapeutics is premised on the following:

1. The company has an exciting lead asset targeting ROR-1 with the potential to treat a wide range of cancer patients.

2. With recent billion dollar M&A for two ROR-1 companies, Oncternal has a unique and valuable asset that in our opinion is significantly undervalued.

3. The company has upcoming clinical catalysts for their lead asset creating an opportunistic investment that must be sized appropriately due to concentration and modality risk.

Analyst’s Disclosure: I am/we are long ONCT. 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.