Bavarian Nordic — Update 2 June 2016

Bavarian Nordic is a biotech company headquartered in Kvistgaard, Denmark. Its shares are listed on Nasdaq OXM Copenhagen and it as an ADR programme traded on the OTC US market. Bavarian Nordic’s products focus on two main areas: cancer immunotherapy and infectious diseases. The company’s lead products are Imvamune, a smallpox vaccine that has generated $1.2bn primarily from US government orders; and Prostvac, a Phase III vaccine for prostate cancer partnered with Bristol Myers-Squibb (BMS). Additionally, the company is developing CV-301, an immunotherapy for solid tumours; and MVA-BN RSV, a vaccine for respiratory syncytial virus (RSV) that recently reported positive data from a Phase I study and will commence Phase II testing in H216. Other assets include Ebola and HPV vaccines partnered with Janssen.

The company’s strategy is to combine its immunotherapies with immune checkpoint inhibitors. Prostvac will start Phase II trials in combination with ipilimumab and nivolumab, as part of the collaboration agreement with BMS; CV-301 will be combined with nivolumab in a Phase II trial in lung cancer.

Our upgraded Bavarian Nordic valuation is DKK13.4bn or DKK423/share (from DKK12.97bn and DKK421/share). This increase is driven by inclusion of the RSV programme, which recently presented positive Phase I data and is advancing into Phase II trials. We assume a global partnering deal will be struck after Phase II and include upfront and milestone payments and royalties on sales. We have also refined some of our Imvamune/Imvanex assumptions; in particular, we have downgraded our European sales estimate to bring it in line with Canada sales (adjusted for population), and have also incorporated the $100m US order in 2017 revenues. We have also updated the cash position and the FX rate to DKK6.66/$ (from DKK6.56/$).

Bavarian Nordic recently raised $100m (DKK666m) in a private placement that substituted a planned US IPO (see note). As at end-Q116, the company had a cash position of DKK972m plus an additional DKK393m of undrawn credit lines. Funds raised in the private placement will be used to fund Phase II trials of the RSV vaccine, CV-301 Phase II studies in combination with nivolumab in three cancer indications as well as to expand capacity at its Denmark plant.

The main sensitivities for Bavarian Nordic are related to its clinical pipeline and commercial operations:

Prostvac is among Bavarian Nordic’s main value drivers. Prostvac is a cancer vaccine that encodes transgenes for PSA (prostate specific antigen) as the targeted tumour associated antigen, and three co-stimulatory proteins known as TRICOM (B7-1, ICAM-1 and LFA-3) that further activate cytotoxic T lymphocytes that may recognise and kill PSA-expressing cancer cells.

The vaccine is undergoing a Phase III clinical trial (PROSPECT) in 1,297 patients as a standalone therapy for asymptomatic or minimally symptomatic metastatic castrate-resistant prostate cancer (mCRPC). PROSPECT is a randomised, double-blind, placebo-controlled three-arm trial (Prostvac + GM-CSF; Prostvac alone; placebo control) with an overall survival (OS) primary endpoint. The trial was granted a Special Protocol Assessment (SPA), and aims to achieve a hazard ratio of 0.82 or less (18% reduction in risk of death).

The trial is event-driven and recently completed an interim analysis after 214 events in which the Data Monitoring Committee recommended that the trial proceeds without changes. There are two further interim analyses prior to data; the second analysis will take place after 321 events (60%) and the third on 427 events (80%). While there is potential for the trial to be stopped early (criteria undisclosed), we, and management, expect the study to continue until final analysis when 534 events have occurred.

In a previous Phase II trial,1 Prostvac outperformed the control arm by 8.5 months (overall survival of 25.2 months for Prostvac vs 16.6 months for control, hazard ratio of 0.56). A four-month survival benefit would be deemed approvable in the PROSPECT study.

An option deal was signed with Bristol-Myers Squibb in March 2015 granting it future exclusive rights to in-license and commercialise Prostvac. Bavarian Nordic received a $60m upfront fee. BMS can exercise this option within a pre-specified timeframe once data becomes available from the ongoing PROSPECT Phase III trial; this could be on final data, which are expected during 2017, but could potentially also be post availability of interim data.

If BMS exercises its option an $80m milestone payment would be due to Bavarian Nordic, in addition to a data-dependent milestone payment; if Prostvac demonstrates an overall survival (OS) benefit of 8.5 months compared to placebo, in line with the Phase II data, the milestone would be $230m. A survival benefit of around four months would be deemed approvable..

A further $110m of regulatory milestones could be awarded in addition to $495m of sales-related milestones. Bavarian Nordic is also entitled to tiered double-digit royalties on global sales. In order to leverage the expertise of the company, Bavarian Nordic will be responsible for the manufacturing of Prostvac.

Additionally, Bavarian Nordic is running seven Phase II studies as monotherapy in collaboration with the US National Cancer Institute (NCI) in various stages of disease and in combination with hormonal therapy and chemotherapy. The combination trial with enzalutamide (Xtandi) in early disease is expected to read out in late 2016. Prostvac monotherapy in the adjuvant setting in patients after prostatectomy will also read out later this year. The other trials are further from read out as they are still enrolling or just commenced, and it will take longer to have survival data.

As part of the collaboration agreement with BMS, two Phase II trials in combination with BMS’s immune checkpoint inhibitors are expected to begin in 2016. The planned trials are a 75-patient study in combination with ipilimumab as neoadjuvant therapy that will start mid-year sponsored by the University of California in San Francisco (UCSF), and an NCI-sponsored, 28-patient trial in combination with ipilimumab and nivolumab.

A combination approach is increasingly common in oncology, and could maximise Prostvac’s clinical and commercial potential. The results of these studies will help inform Prostvac’s potential benefit and could position it in earlier disease settings, which could help to expand its addressable market.

The recent $100m private placement has secured the funds needed to advance key pipeline assets through mid-stage development. Among them, Bavarian Nordic is advancing the immunotherapy CV-301 into Phase II trials in combination with PD-1 (programmed cell death-1) checkpoint inhibitors, prioritising non-small cell lung cancer (NSCLC). This combination approach may potentially be more effective in cancers in which checkpoint inhibitors have induced durable responses such as lung cancer. The selected checkpoint inhibitor will be nivolumab and the company is exploring different options for the sourcing of the drug in order to start a Phase II trial in H216.

Other studies in bladder and colorectal cancer in combination with PD-1/PD-L1 inhibitors are planned to start in H117, although trial design is still undetermined.

CV-301 is a cancer vaccine that expresses the CEA and MUC-1 tumour associated antigens, both membrane-associated glycoproteins overexpressed in various solid tumour types including colorectal, breast and lung cancers. Hence, unlike Prostvac (which targets a prostate-specific antigen), CV-301 could have potential in a broad range of tumours and has already generated initial survival data in other solid tumours in small trials.

In particular, in a 74-patient Phase II CRC trial at Duke University, it showed improved overall survival vs concurrent matched controls from the same centre (median not reached at 75 months for CV-301 vs 44 months for the controls; p<0.0001), but no difference in progression free survival. In metastatic breast cancer, a Phase II study in 48 patients showed progression-free survival of 6.6 months in the CV-301 group vs 3.8 months among those receiving docetaxel alone. These data did not reach statistical significance due to the small sample size of the trial. An earlier NCI trial in advanced pancreatic cancer showed no survival benefit.

Bavarian Nordic has elected to prioritise development of CV-301 in lung cancer based on a number of factors. These include the potential for CV-301 in combination with a checkpoint inhibitor, the large number of patients in lung cancer who could benefit from such an approach, and the potential for trials based on shorter endpoints, such as overall response rate and progression-free survival, to rapidly establish proof-of-concept.

PD-1 inhibition appears to be most effective when tumour cells express high levels of PD-L1 (PD-L1 on tumour cells binds to PD-1 on T cells blocking the immune system from killing the tumour). Hence, as CV-301 upregulates PD-L1, a combination with PD-1 in patients with low PD-L1 expression has the potential to improve efficacy.

Bavarian Nordic also plans to take CV-301 forward in combination with PD-1/PD-L1 inhibitors in bladder and breast cancer. The company will explore options for sourcing the PD-1 inhibitor as part of research collaborations with the NCI or pharmaceutical companies.

The company is leveraging its Modified Vaccinia Ankara (MVA) technology with an additional product that expresses the Brachyury antigen. Brachyury is a transcription factor and is one of the molecular drivers of the epithelial-mesenchymal transition (EMT), a process in which cells lose adhesion and gain migratory and invasive properties. Thus, overexpression of Brachyury is involved in a number of solid tumours and is associated with tumour progression and metastasis.

Bavarian Nordic’s MVA-BN construct is modified to express Brachyury and the T-cell costimulatory molecules TRICOM, just as other products in the immunotherapy pipeline. A 38-patient Phase I trial in collaboration with the NCI reported data last year and showed that MVA-BN Brachyury elicited Brachyury-specific T-cell responses in the majority of patients at different dose levels. Furthermore, the safety profile was clean, with no serious adverse events attributable to the product; adverse events were mild and resolved shortly. Looking ahead, plans are to start a Phase II trial in late 2016/early 2017 in collaboration with the NCI.

Bavarian Nordic will provide an update on its clinical cancer programmes at ASCO 2016 on 4 June at an investor and analyst reception.

As part of its infectious disease programme, Bavarian Nordic is developing an MVA-BN-based vaccine for respiratory syncytial virus (RSV). In healthy adults, RSV has the symptoms of a common cold. However, in children, immunocompromised adults and the elderly it is a major cause of bronchiolitis (inflammation of the small airways in the lungs) and pneumonia and can lead to other serious illnesses. RSV is very common, and according to the US Centres for Disease Control and Prevention (CDC), most children will have had an RSV infection by two years of age.

Bavarian Nordic’s vaccine encodes RSV’s two main surface proteins F, G; the G surface protein from both RSV subtype A and B; and internal proteins N and M2 that induce robust B and T cell responses against both types of RSV (A and B).

Positive data from a 63-patient Phase I study in healthy adults were recently announced. In terms of immune response, MVA-BN RSV generated neutralising antibodies, as well as IgG, IgA and T-cell responses in a statistically significant way.

Part of the funds from the $100m private offering will be invested in initiating a Phase II trial in H216 in 480 elderly subjects (aged 55 or more) with data in mid-2017. A paediatric Phase I study will commence in H217, and a proof-of-concept Phase IIb field study will start in H217 with readout expected in 2018, followed shortly after by a Phase III trial that will readout in 2019.

Regarding the commercial opportunity, Synagis (palivizumab, AstraZeneca) had sales of $662m in 2015, down from $1bn in sales two years previously as its use has been restricted to a small population of high-risk children, according to the guidelines of the American Academy of Paediatrics. We consider that targeting elderly patients considerably expands the market opportunity. Specifically, in America there are 177,000 hospitalisations annually in the population over 65 years old. This, combined with the infant market, represents a commercial opportunity of c $2.4bn, according to our own estimations.

There are multiple candidates in clinical development for RSV. In the therapeutic setting, the most advanced is Gilead’s GS-5806 in Phase IIb, while in the prophylactic setting, GSK’s maternal vaccine is in Phase II and AstraZeneca’s MEDI7510 in Phase I are the most advanced products. For a comprehensive review of the competitive RSV pipeline see our update note. Despite competition, MVA-BN RSV has a differentiated profile: it encodes for more RSV viral proteins than any other competitor.

We include MVA-BN RSV in our valuation model now that human clinical data are available. We see it as a differentiated product as it encodes more viral proteins than any other competitor and is intended to target a wider population of both children and elderly adults.

Bavarian Nordic and Janssen (J&J) have two agreements in place involving Bavarian’s MVA technology platform:

This programme is undergoing 10 clinical trials and has undergone rapid development, progressing from preclinical testing to Phase III in less than a year, reflecting the ability of the companies to address the emergency of Ebola. Ongoing clinical trials of this prime boost regimen include a UK/France Phase II study in 612 healthy adult patients; a 1,188-patient Phase II multi-site African trial; and the 728-patient EBOVAC-Salone Phase III trial in Sierra Leone, which is expected to read out in 2016.

Phase I data were published in the Journal of the American Medical Association (JAMA). In the trial, 21 days after the boost with MVA-BN, 100% of participants generated Ebola-specific antibodies after eight-month follow-up, with no serious adverse events.

We are only including the upfront payment in our valuation, recognising it in 2016 revenues. A Phase I trial will start in H117.

Imvamune is Bavarian Nordic’s revenue-generating product. It is a non-replicating smallpox vaccine suitable for people who cannot tolerate replicating vaccines, such as severely immune-compromised individuals. The product is approved in Canada and the EU and made available to the US government for emergency use. Imvamune is transitioning to a freeze-dried formulation, a more convenient format that extends the shelf life to 10 years or more, as opposed to the liquid frozen formulation that has a shelf life of three years.

To date, 28m doses of liquid frozen Imvamune have been stockpiled by the US government. However, due to the aforementioned shelf life of the current formulation, according to the company, some 20m doses will expire by the middle of next year and will need to be replaced with the freeze-dried formulation over the next three to four years. The company has recently received a $100m order from the US government of bulk substance that can be made into the freeze-dried finished product at a later date. This order brings the total value of US government contracts to more than $1.2bn to date. The US government’s long-term strategy is to secure enough vaccines to protect 66 million people in the US, which represents 132m doses. This started with the $95m R&D contract for the period 2009-11. A request for proposal (RFP) is expected in H216 with the technical review and negotiation taking less than a year. The likely number of doses and pricing in the RFP are difficult to predict, but we expect them to be in line with previous orders.

Imvamune’s liquid-frozen version met the lot consistency endpoint of the first of two Phase III trials needed to complete registration and be commercially available to the wider population in the US. The second trial, in military personnel, will complete enrolment in 2017. According to guidance received from the FDA, the company can file a Biologic License Application (BLA) for both formulations – a positive Phase II study showed bioequivalence between formulations – and expect to get approval in the next three to four years.

In Canada the vaccine is subject to an option contract with the Public Health Agency of Canada (PHAC) for up to 358,700 doses, of which 188,700 have been exercised already, netting $6.8m for the company. Also, the Canadian Department of National Defence has a 160,000 dose contract of which 20,000 doses have been delivered so far. In total, $6.3m in revenues have been recognised.

Bavarian Nordic is subject to the usual biotech risks, including potential clinical development delays or failures, regulatory risks, competition, partnering setbacks, financing, manufacturing and commercial risks (launch, uptake and competition dynamics). The main sensitivities remain related to both Prostvac and Imvamune, the key near-term value drivers.

With Prostvac partnered with BMS, success or failure of the ongoing Phase III PROPSECT trial will be the key sensitivity for this asset. Prostvac has already demonstrated efficacy and safety in a 125-patient Phase II trial; however, the magnitude of benefit will need to be confirmed in the Phase III trial. The Phase II trial demonstrated an 8.5-month overall survival benefit. A smaller improvement of four months could be enough for future regulatory approvals.

The PROSPECT trial could be stopped early if interim efficacy is sufficiently robust, which could bring approval and launch sooner than our currently expected 2018. Conversely, the trial could be stopped early if continuation would prove futile. A trial being stopped early as part of an interim analysis is typically infrequent as the stopping criteria are usually demanding. The PROSPECT trial has passed the first interim trial without changes and is proceeding to the second and third interim analyses during H216 and end of 2016/early 2017.

If data are positive and approvals are granted, pricing and reimbursement will be a key sensitivity. Current prostate cancer therapies are expensive (eg Xtandi costs c $89,000/year in the US), and with the focus on value-based pricing models in Europe, limitations may be imposed that affect peak sales potential. Our valuation is based on our estimates for price and penetration, which we believe are reasonable. However, these could be affected by unknown future pricing dynamics.

Bavarian Nordic’s recurring revenues are currently predominantly derived from US government contracts for Imvamune. Although these have been recurring in the last few years, and Bavarian Nordic does have a longstanding relationship with the US government on Imvamune, this does not guarantee future orders will be secured, as these will be contingent on the availability of future US government funding. At this stage, we believe it is reasonable to assume future contracts from both the US and outside (ie in Canada and Europe), although we have limited visibility on the timing and terms of these. There could be more risk around securing contracts for the next-generation freeze-dried formulation as this is currently under development. However, if there are any delays to this programme, we believe it is likely that the US government could maintain its stockpile with orders for the bulk active product.

Our updated valuation is DKK13.4bn (from DKK12.97bn) or DKK423/share. Our valuation is based on the FX rate of DKK6.66/$ (from DKK6.56/$) and takes into account the recent DKK655m private placement, which provides greater financial resources to advance the development of key assets such as MVA-BN RSV and CV-301.

We have updated our Imvamune/Imvanex valuation to account for the recent $100m Imvamune order secured with the US government. We have also increased our probability of success for the US sales from 70% to 80%. Further, as part of a review of our valuation, we have significantly reduced our European peak sales estimate to bring it in line with our forecasts for Canada, adjusted for population. Following the company’s comments, we have also upgraded our price assumption for future orders in Europe, based on the premium price already achieved in Canada. On top of this, we have increased the probability of success for European sales from 25% to 50%. All changes taken into account, the impact on our valuation of Imvamune/Imvanex is a reduction from DKK3,039m to DKK2,778m.

After positive Phase I data, we have added MVA-BN RSV to our valuation, assigning a 30% probability of success, reflecting the improved chances that infectious diseases products have; a price of $400 per dose; and global peak sales of $310m. We also assume the RSV programme will be partnered after Phase II studies are completed, getting a 25% royalty rate on net sales and milestone payments. As a result, MVA-BN RSV has become the third most valuable product in our model. RSV represents a big market opportunity and we believe that the differentiated profile of Bavarian’s product will translate into improved clinical data, garnering significant market share.

Although CV-301 has been prioritised in lung cancer, at this stage we have made no major changes to our underlying assumptions, which include peak sales of $1.66bn. We will update our valuation of this asset as more data become available and the development plan advances.

We summarise the components of our valuation in Exhibit 4. All product valuations represent the present value of future cash flows forecast for each product, risk-adjusted where appropriate, and then taxed.

We have updated our model with Q116 results and 2016 guidance. The company’s guidance remains unchanged with respect to FY15 results. Bavarian Nordic expects 2016 revenues to be c DKK1bn, most of it in the second half of the year, and break-even EBIT.

Most of 2016 revenues (c DKK 750m) will come from US government orders of Imvamune, whereas a quarter will come from R&D contracts along with the Ebola/Marburg partnership with Janssen. Bavarian Nordic also expects to incur R&D costs of DKK580m, of which DKK475m will be expensed. We have also updated our model to reflect the recent cash raise.

According to Q116 results, Bavarian Nordic had cash and cash equivalents of DKK972m, which increases to DKK1,365m with the addition of readily available credit lines. Revenues generated in Q116 were DKK23m from the sale of Imvamune (DKK8m) and contract work (DKK15m). The bulk of revenues will be recognised in the second half of 2016. The main change to 2017 estimates is the addition of the $100m Imvamune order to 2017 revenues, which now increase to DKK3.1bn from DKK2.6bn. We have also updated the exchange rate to DKK6.66/$ (from DKK6.56/$).