Kazia Therapeutics — Several upcoming catalysts

Kazia’s primary asset is paxalisib, which is a small molecule PI3K and mTOR inhibitor being assessed in eight clinical trials involving cancers in the brain, most notably GBM, the most aggressive form of brain cancer. The GBM treatment landscape remains challenging with only three drugs approved for treatment: temozolomide (chemotherapy, standard of care), bevacizumab (anti-VEGF monoclonal antibody; not approved in Europe) and Nitrosourea/gliadel wafer (chemotherapy). Within GBM, paxalisib is being evaluated in the pivotal, one-of-a-kind GBM AGILE study (refer to our previous update note for more details) and holds orphan drug and fast track designations from the US FDA. The drug is also being evaluated in other primary brain cancers: DIPG, an aggressive form of pediatric cancer, and primary central nervous system lymphoma as well as secondary cancers that have metastasized to the brain. All trials are investigator sponsored and in the early-to-mid stage of clinical development, with the exception of GBM AGILE, which is a pivotal study.

The second asset, EVT801, is a small-molecule inhibitor of vascular endothelial growth factor receptor 3 (VEGFR3). It was in-licensed from Evotec in April 2021 and began Phase I clinical trials in advanced solid tumors in November 2021.

According to the latest available information, the GBM AGILE study is progressing to plan (unhindered by COVID-19) and has screened over 1,000 patients. In January 2022, the study sponsor, Global Coalition for Adaptive Research (GCAR), announced the inclusion of a further two therapeutic arms to the study: Biohaven Pharmaceuticals’ troriluzole and Vigeo Therapeutics’ VT1021. This makes for a total of five participants to date, including the existing three drug candidates: Kazia’s paxalisib, Bayer’s regorafenib and Kintara Therapeutics’ VAL-083.

A year in from the first patient enrollment (January 2021), the paxalisib arm is recruiting across two dozen sites in the United States and another site in Ontario, Canada (opened in November 2021). While the company had indicated a further three sites expected to come onboard in Canada, it is unclear if that has materialized yet. Geographical expansion of the study is expected to pick up pace in the coming months, with Kazia’s Chinese partner Simcere receiving IND approval for paxalisib in January 2022 and site openings planned for Q2/Q3 of CY22. European expansion of the GBM AGILE study commenced in March 2022 with the GCAR opening its first European site in Zurich, Switzerland, although information on which drug arm will be recruiting is not available yet. Further sites are expected to be opened in Austria, France, Germany and Italy in the coming weeks.

Kazia reported final data from its Phase II study assessing paxalisib as first-line therapy for newly diagnosed GBM (unmethylated MGMT promotor status) in December 2021. Median overall survival (OS) was reported to be 15.7 months (11.1–19.1 months) and median progression-free survival (PFS) was 8.4 months (6.6–10.2 months). These values compare favorably to historical controls using temozolomide alone in a similar patient population (Exhibit 1). Patients with an unmethylated MGMT promoter are more resistant to temozolomide. It is difficult to draw definitive conclusions using historical controls given the variability between patient populations, so these data should be interpreted with some caution, but they are what is expected with an active drug.

We note the OS figure for the final data is lower than the 17.5 months reported in the interim data in November 2020. The company attributes this to the last few patients in the study underperforming the earlier cohort. Nevertheless, given the aggressive nature of the cancer and paucity of therapeutic options, we consider the results to still be clinically meaningful. This observation is also supported by data from primary market research commissioned by Kazia in mid-2021 that indicated an improved survival benefit of 2.6 months versus current standard of care could yield an adoption rate of 84% among clinicians in the United States (Exhibit 2).

While the paxalisib Phase II company-sponsored GBM study was a fairly small (30 participants), single-arm, non-randomized study, if results in the larger, randomized GBM AGILE trials are comparable, paxalisib’s commercial prospects could be significantly boosted in this indication. We note the GBM AGILE study is evaluating paxalisib both in the newly diagnosed unmethylated as well as in recurrent cohorts, but we believe the former (newly diagnosed) is likely to be the target patient population for paxalisib.

Although GBM is the most clinically advanced target indication for paxalisib, the drug is being investigated in a further seven clinical trials, both in other primary brain cancers (DIPG and primary central nervous system lymphoma) and secondary cancers that have metastasized to the brain. Exhibit 3 presents the clinical trials assessing paxalisib in GBM and other oncology indications.

In February 2022 the company announced the initiation of a Phase II study investigating paxalisib in combination with metformin and a ketogenic diet for newly diagnosed and recurrent GBM. The study, which is sponsored by the Weill Cornell Medical Center, will recruit between 30 and 60 patients and will run for two years (patient enrollment is expected to start in H1 CY22). Earlier, in November 2021, the company announced the inclusion of paxalisib in a multi-drug Phase II study in DIPG and diffuse midline gliomas sponsored by the Pacific Pediatric Neuro-Oncology Consortium. The trial will examine multiple therapies concurrently, both as single agents and in combination, to determine the optimal approach to treatment. DIPG is an ultra-rare pediatric brain cancer (150–300 newly diagnosed cases per year in the US, c 1,000 globally) with extremely poor prognosis (average survival period of 9–10 months following standard treatment). There are no approved therapies for this indication. The market opportunity for any approved treatment is c US$100m.

In the BM space, paxalisib is being investigated in three clinical studies: one Phase I and two Phase II studies, sponsored by Sloan-Kettering, the NIH and Dana-Farber, respectively, all of which are expected to provide headline data in H1 CY22. Of these, the breast cancer BM (BCBM) indication looks to be the most compelling, given it affects 20–24% of all breast cancer cases and is a major cause of mortality for metastatic patients (due to the inability of current treatments to cross the blood-brain barrier). This study is investigating paxalisib in combination with Herceptin (trastuzumab) in HER2+ breast cancer patients. Positive readouts from any of these trials could potentially trigger a re-rating for the stock, in our opinion. However, timelines have previously been pushed out on more than one occasion (a common caveat attached to investigator-sponsored trials) so the read-out is overdue, in our view.

Kazia’s second asset EVT801 is a small molecule VEGFR3 inhibitor, and it commenced Phase I clinical trials in advanced cancers in November 2021. The study, which is expected to recruit a maximum of 60 patients, is designed as a two-stage study. The first stage will be a dose escalation study in subjects with advanced solid tumors designed to determine the maximum tolerated dose and recommended Phase II dose (RP2D) for EVT801. The second stage will recruit 12 patients, six with renal cell carcinoma and six with soft-tissue sarcoma (two cancer types that frequently overexpress VEGFR3), who will be administered the RP2D of EVT801. The Phase I study would primarily assess the safety, tolerability and pharmacokinetics of EVT801 but will also explore preliminary signals of clinical efficacy. The study is ongoing at two sites in France and Kazia has indicated that recruitment remains on track, with initial data anticipated by H2 CY22.

Kazia recently announced two senior level appointments: John Friend as CMO in November 2021 and Karen Krumeich as CFO in December 2021. Both have strong technical and leadership backgrounds, with years of executive experience between them. The new appointments come at an important juncture for Kazia, as it looks to start the groundwork to potentially commercialize paxalisib in GBM (assuming success in GBM-AGILE) and progress the other asset EVT801 through clinical development. Both these positions are US domiciled, which we believe is strategic given the company’s increasing focus on the US market as it progresses its pipeline.

Our valuation for Kazia increases to US$294.2m or US$22.28 per basic ADR, from US$277m or US$20.92 per basic ADR, mainly due to rolling forward our NPV. This was partially offset by lower net cash at the end of H122 and higher R&D expectations. We have maintained the probability of success in BCBMs at 5% but will reassess this after expected data readouts in the coming months.

Kazia’s operating loss for H122 (the six months ending 31 December 2021) was US$9.67m (A$13.4m), ahead of our estimate (c US$7.2m) due to higher than anticipated R&D expenses (US$8.0m/A$11m) during the period, following the commencement of EVT801’s clinical trials. Our revised forecasts for FY22 and FY23 incorporate two major changes. First, we have removed any contribution from R&D rebates in our revenue estimates following the company’s communication on not having sufficient R&D activities in Australia to be eligible for tax rebates for the foreseeable future.1 Second, we have increased our estimates for R&D expenses for the forecast years, based on the recent run rate. Both revisions affect our normalized operating loss estimates, which rise to US$17.2m and US$19.9m in FY22 and FY23, respectively (up from our previously estimated figures of US$12.1m and US$11.3m). Our estimates for net loss during the period increase accordingly.

The company reported net cash of US$11.0m (A$15.2m) at 31 December 2021. Based on our forecasts, the funds should be sufficient to take Kazia into H123 (H2 CY22). Based on our revised projections for R&D and other operating expenses, we estimate that pending any out-licensing deals or partnerships, the company would now be required to raise US$51m in total (including US$22m in FY23 and FY24 each and US$7m and FY25). Our model presents these fund raises as illustrative debt.