Cantargia — Sentiment affected, but fundamentals robust

The CANOPY-2 study was investigating canakinumab in second- or third-line patients with non-small cell lung cancer (NSCLC), patients who are heavily pre-treated having progressed while on or after previous platinum-based chemotherapy and PD-(L)1 inhibitor immunotherapy. In this setting it did not show a significant improvement in overall survival (OS). However, this outcome could be a result of the trial design, that is too advanced second- or third-line treatment; or the docetaxel chemotherapy was not the optimal combination. Or it could indicate the drug’s mechanism of action (ie targeting IL-1beta) was not sufficient. More detailed analysis by Novartis is expected to be presented at an upcoming conference, which we believe could potentially be either at ASCO 2021 (3–7 June), WCLC 2021 (8–14 September) or ESMO 2021 (17–21 September).

Cantargia’s CAN04 and the lead Phase II CANFOUR trial are both significantly differentiated. Recall, Novartis’ canakinumab targets IL-1beta, while CAN04 targets the downstream IL-1RAP, which means CAN04 blocks signalling from both IL-1beta and IL-1alpha, potentially allowing for more comprehensive IL-1 pathway signalling control. CAN04 also has the ADCC effect, which further differentiates its mechanism of action from canakinumab.

The CANFOUR trial is evaluating CAN04 in an earlier-stage setting of NSCLC than CANOPY-2, recruiting first-line NSCLC patients receiving cisplatin plus gemcitabine or second-line after relapse post checkpoint inhibitor therapy. The final analysis from this trial is expected during 2021, which could demonstrate the potential benefits of CAN04’s differentiated mechanism.

Because of these differences, CAN04’s late-stage development will be based on the data from the CANFOUR trial. Novartis’s CANOPY studies will provide valuable information of how to position CAN04, but do not invalidate the IL-1 axis theory in cancer, in our view. Upcoming data from Novartis’s Phase III CANOPY-1 trial is the next key focus (expected H221). CANOPY-1 is investigating canakinumab as part of a first-line combination with anti-PD-1 pembrolizumab and chemotherapy in treatment-naïve NSCLC patients. If the data are again negative, this could further affect the sentiment (but would not invalidate the IL-1 axis theory). If the data are positive, we believe the rebound would be sharp.

Currently, Cantargia is running a Phase IIa CANFOUR trial, with three arms: CAN04 in first-line NSCLC or metastatic pancreatic cancer (PDAC) and in combination with chemotherapy or monotherapy (Exhibit 2). Available interim data were presented in our last update report. The final analysis from the PDAC arm is expected during H121 and will provide efficacy data including progression-free survival (PFS), duration of response (DoR) and some biomarker data. Cantargia also recently started enrolling PDAC patients into the extension phase of the CANFOUR study. Similarly, the NSCLC arm of the CANFOUR trial should also move into the next phase, as communicated before, but details are yet to be announced.

In March 2021, Cantargia announced it will initiate another Phase I/II trial (n=30) with CAN04 in combination with the FOLFIRINOX chemotherapy regimen as a first-line treatment for PDAC (highlighted in Exhibit 2). This is in addition to the PDAC arm in the same indication in the CANFOUR trial, but with a different combination (gemcitabine plus nab-paclitaxel chemotherapy). The two chemotherapies (FOLFIRINOX and gemcitabine/nab-paclitaxel) are standard of care and would cover most of the patients in this setting, so this new trial significantly expands the target patient population.

It is worth noting that recently Novartis also initiated a Phase Ib study in PDAC before receiving an orphan drug designation in pancreatic cancer from the FDA on 24 March 2021. These developments demonstrate a strong interest in this indication, in our view. The new trial will evaluate canakinumab in combination with nab-paclitaxel/gemcitabine (the same chemotherapy as in CAFOUR trial), but also spartalizumab, an anti-PD-1 antibody owned by Novartis. Cantargia has been exploring the idea of combining the IL-1 axis inhibition with checkpoint inhibitors for a while now and already has a US-based Phase Ib trial up and running. It investigates CAN04 in combination with pembrolizumab, with initial data expected in H221. These should provide an initial indication of CAN04 benefit across a range of solid tumours.

We also note that with proceeds from its December 2020 share issue, Cantargia has guided that it intends to start a basket trial investigating CAN04 with various chemotherapy regimens in a range of cancers, including triple-negative breast cancer (TNBC). So again, we expect Cantargia will deliver much more data for CAN04 beyond NSCLC.

Cantargia’s second drug candidate CAN10 is an antibody designed to block the signalling of the inflammatory cytokines (IL-1, IL-33 and IL-36) and is in preclinical development for inflammatory diseases, systemic sclerosis and myocarditis. In March, Cantargia reported that it successfully completed preclinical proof of concept studies in myocarditis for CAN10 and the IND-enabling safety studies are on track to finish during H221, which could enable progression into the clinic in early-2022. CAN10 will diversify the R&D pipeline with a second asset and in non-oncology indications.

During FY20, Cantargia reported an increased operating loss of SEK173.9m (FY19: SEK111.6m), driven primarily by the growing R&D costs of SEK158.4m (SEK97.5m in FY19) stemming from advancement of the Phase IIa CANFOUR study, initiation of the Phase Ib pembrolizumab combination study, higher spending on CAN04 production to support these trials and the maturing preclinical pipeline (CAN10 and CANxx). We anticipate a continued growth in R&D spend during 2021 and 2022 and have revised our forecasts. Our operating loss estimates for 2021 and 2022 increased to SEK276m and SEK297m from SEK138m and SEK139m, respectively.

The extensive revision of our estimates is underpinned by the fact that over 2020 Cantargia raised in total SEK974m. This will allow Cantargia to expand its clinical footprint for CAN04, including the additional Phase Ib trial for CAN04 in PDAC (FOLFINRINOX combo) and the expected CAN04 basket trial across new cancer indications. Likewise, progression of CAN10 into clinical development is expected early-2022, which will incrementally add cost. The balance sheet is robust and the reported cash position at end-2020 was SEK693m with short-term investments of SEK210m. This, according to the management, is sufficient for rapid advancement of the broader R&D programme over the next two years.

Our updated valuation of Cantargia is marginally higher at SEK6.86bn or SEK68.5 per share, vs SEK5.93bn or SEK65.1/share previously. We have rolled our model forward, incorporated the December 2020 capital raise and increased the near-term R&D spend as described above. These changes had a slight net positive effect on the valuation. The capital raise was done at a share price close to the market price and to our per share valuation, therefore the dilutive effect to our current valuation per share was minimal.

Potential use of CAN04 in NSCLC contributes c 35% of our valuation and, while we acknowledge sentiment has been knocked and the share price declined significantly after the Novartis Phase III CANOPY-2 trial data, because of the differences described above we do not feel this currently necessitates a fundamental change to our assumptions.

Near-term catalysts include the readout from Novartis’s Phase III CANOPY-1 trial (H221, first-line NSCLC) and results from Cantargia’s Phase IIa CANFOUR trial (2021), either of which could re-instal confidence.