Transgene — 2018: A year of clinical data

Transgene now has 11 ongoing clinical trials, with nine of them expected to read out in 2018. Readouts from these trials are set to inform the company’s future strategy. In our view, combination trials with approved ICIs hold significant commercial and clinical potential. To date, ICIs have generated blockbuster sales; however, the effectiveness of them is currently limited to a small minority of patients. Companies are now looking to test ICIs in combination with other treatments in order to broaden the therapeutic window of these drugs. Transgene’s current strategy aims to leverage on this clinical need and it anticipates that data readouts later this year will further inform whether its product candidates are able to improve on the effectiveness of ICIs. Transgene’s rationale is that the tumour microenvironment may be dampening the response of its therapeutic vaccines and oncolytic viruses. By utilising ICIs to inhibit this tumour generated immune dampening (‘releasing the brakes’ of the immune system), Transgene hopes that its product candidates could generate an improved response to a patient’s cancer. We note that Transgene currently has no clinical data to indicate that its products will be successful in combination with ICIs. Current cash runway into 2019 will enable these data readouts, while future financing and strategy will be influenced heavily by these aforementioned data packages.

For a more detailed look at the pipeline and the expected upcoming data packages, please see our previously published report: Multiple assets in the clinic as data readouts near.

In January, Transgene dosed the first patient in a Phase II combination trial of TG4010, Opdivo (nivolumab – Bristol Myers Squib) and chemotherapy. Transgene’s combination trial is a single arm EU/US study and is anticipated to enrol 39 patients (without EGFR mutations or ALK rearrangements) who express low or undetectable levels of PD-L1. The primary end point is objective response rate; Bristol Myers Squib is supplying Opdivo and initial data are forecast for 2019. Treatment of first-line NSCLC remains a significant market opportunity, particularly in combination with ICIs. While Keytruda (Merck) and Opdivo (Bristol Myers Squib) are currently leaders in PD-1/PD-L1-treated NSCLC, the industry as a whole continues to invest heavily in the space, particularly in combination treatments. The start of 2018 has seen some significant first-line Phase III data readouts from PD-1/PD-L1 inhibitors used in combination. In January, Merck announced Keytruda (KEYNOTE-189) in combination with chemotherapy significantly improved overall survival (OS) and progression-free survival (PFS) in first-line metastatic non-squamous NSCLC patients, when compared with chemotherapy alone. In February, Bristol Myers Squib announced that the combination of Opdivo (Checkmate-227) and Yervoy demonstrated superior PFS to that of chemotherapy alone in first-line NSCLC patients with high tumour burden. Most recently in March, Roche announced Tecentriq plus chemotherapy improved PFS in first line patients with advanced squamous NSCLC (IMpower131), when compared with chemotherapy alone. Recent deal flow has also highlighted that pharmaceutical companies are willing to invest significantly to partner synergistic assets. Of recent note, on the back of positive Phase I/II combination data in PD-L1 negative NSCLC patients, Bristol Myers Squib announced a joint development and commercialisation partnership worth over $3.6bn with Nektar Therapeutics for its immuno-oncology asset, NKTR-214. Patients with low or undetectable levels of PD-1/PD-L1 remain the majority of NSCLC patients and any ability to treat these is significant.

Transgene continues to progress products with partners; recently, at the start of 2018, it announced that the first patient had been dosed in China in a Phase I trial of T101 for the treatment of chronic hepatitis B virus infection. T101 is a viral vector that expresses the same suite of HBV antigens as the already-in-development TG1050. While TG1050 is in clinical development in Europe and North America, T101 is being developed in China through a joint venture (50:50) with Tasly Pharmaceuticals. The trial is a randomised, double blind, placebo controlled study, which is expected to enrol up to 36 patients who are on antiviral therapy. While the primary end point is to validate the tolerability of T101, key secondary end points include studying how the drug acts (in comparison to TG1050) in a Chinese population with different characteristics to that of an EU and US population. Initial data are expected at the start of 2019; at this time, we anticipate safety and efficacy comparable with that of TG1050.

In 2017, Transgene announced the launch of its Invir.IO technology platform. The technology aims to utilise the oncolytic activity of oncolytic viruses in combination with the ability to express anti-cancer compounds. The technology is based around high capacity vaccinia viruses, which are engineered to express a range of anti-cancer drugs like ICIs, enzymes, ligands, chemokines and cytokines. At the end of 2017, Transgene signed two partnership deals with BioInvent and Randox based on the Invir.IO technology. The partnership with Randox (no financial terms disclosed) aims to develop multifunctional viruses for use in solid tumours, where it will look to vectorise Randox’s single domain antibodies. The BioInvent deal will look to vectorise BioInvent’s anti-CTLA-4 antibodies for use in cancers. R&D costs, in addition to revenues and royalties from any candidates produced, will be shared 50:50. Transgene currently has 10 wholly owned preclinical candidates based on its Invir.IO platform and it anticipates the first product candidate will enter the clinic in 2019.

We note recent M&A action in the sector: Merck announced the proposed acquisition of Australian oncolytic immunotherapy company, Viralytics. The deal values Viralytics at approximately A$502m (US$394m) and is predominately focused on CAVATAK, an oncolytic virus (Coxsackievirus Type A21) that is believed to preferentially infect and kill cancer cells. CAVATAK is in multiple Phase I and II trials, including in combination with Merck’s Keytruda.

Transgene reported cash, cash equivalents and financial assets of €41.4m as of 31 December 2017 (compared to €56.2m as of 31 December 2016). This includes the gross €14.4m raised in an accelerated book build in November 2017.

Revenue in 2017 was €8.1m (2016: €10.3m). In core, this was driven by government financing in the form of research grants and tax credits, which were €5.4m (2016: €6.4m) and less then €0.1m (2016: €0.1m), respectively.

R&D expenses in 2017 were €30.4m, an increase on 2016 expenditure of €26.4m, driven by the initiation of multiple trials in 2017. We forecast 2018 R&D will increase slightly to €31.2m as the clinical trials mature. The majority of R&D expenditure continues to be driven by payroll costs as R&D staff costs are accounted for in the R&D expenditure; these were €11.1m versus €10.8m in 2016. Of note, intellectual property costs increased substantially to €4.8m from €1.1m in the previous period, mainly as a result of a €3.8m milestone payment to SillaJen. This was triggered on the first European patient being enrolled in the Phase 3 Pexa-Vec trial (PHOCUS). External expenses for clinical projects remained flat at €7.0m (2016: €7.0m).

G&A costs decreased to €5.7m in 2017 from €6.2m in 2016. This was driven in core by a reduction in payroll costs, which were reported at €3.0m for the period (2016: €3.8m) offset slightly by increases in share based payments, admin fees and other fixed costs. We note interest on the EIB loan (€10m) that was drawn down in June 2016 is not repayable until 2019 with the capital repayable in 2021.

Net loss for 2017 was €32.3m, compared with €24.2m in 2016. We forecast net loss to remain relatively stable over 2018 and 2019 at €31.5m and €34.1m, respectively.

In 2017, Transgene’s cash burn was €28.1m in 2017 versus €30.6m in 2016 excluding capital increases and EIB loan; the company anticipates its cash burn in 2018 to be comparable with that of 2017. Our model predicts a current cash reach until mid-2019, which will incorporate multiple trial readouts later this year.

We value Transgene at €236m vs €207m (€3.7/share) previously. Our valuation is based on a risk-adjusted NPV model of TG4010, TG4001, TG1050, Pexa-Vec and TG6002. We have rolled forward our model, updated for current exchange rates and full-year results. Our operational and product assumptions remain unchanged (Exhibit 2).