Celyad — Update 9 January 2017

Celyad

Colorectal patient in THINK study

Solid tumour trial start

Pharma & biotech

9 January 2017

Price	€18.84
Market cap	€175m
$1.11/€
Cash (€m) at 30 September 2016		87

Shares in issue	9.31m
Free float	54.7%
Code	CYAD

Primary exchange	Euronext Brussels
Secondary exchange	NASDAQ

Share price performance

%	1m	3m	12m
Abs	(2.4)	(2.4)	(59.3)
Rel (local)	(6.1)	(5.2)	(59.9)

52-week high/low

€52.9

€14.8

Business description

Celyad is developing an innovative CAR T-cell (NKR-2) immuno-oncology technology. The THINK Phase Ib study is underway in haematological and five sold tumour types. Celyad is seeking a strategic partner for C-Cure, an autologous stem cell therapy for chronic heart disease.

Next events

Final FY16 results	Q217
US trial starts	Q117
THINK dose data	Q317
Six-month THINK efficacy	H218

Analysts

John Savin PhD	+44 (0)20 3077 5735
Lala Gregorek	+44 (0)20 3681 2527

healthcare@edisongroup.com

Edison profile page

Celyad is a research client of Edison Investment Research Limited

Celyad has enrolled the first patient the Phase Ib THINK study. The THINK Phase Ib trial is a major expansion of CAR therapy with five solid tumours plus AML and MM being explored. The first patient has colorectal cancer, a key move into solid tumours, and will be dosed at 3 x 108 autologous cells. In the previous Phase I study, one patient at the highest 3 x 107 dose showed unexpected signs of efficacy. The US allogenic CAR patent has been confirmed. Our interim indicative value remains at €45 per share.

Year end	Revenue (€m)	PBT* (€m)	EPS* (€)	DPS (€)	P/E (x)	Yield (%)
12/14	0.15	(18.46)	(2.7)	0.0	N/A	N/A
12/15	0.00	(28.35)	(3.3)	0.0	N/A	N/A
12/16e	11.25	(25.17)	(2.7)	0.0	N/A	N/A
12/17e	0.00	(31.28)	(3.4)	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

NKR-2 has a lead positon in solid tumours

Celyad has started the Belgian arm of the immuno-oncology autologous NKR-2 trials (THINK). US approval of the trial is expected soon. THINK recruits patients with two haematological and five solid tumours. Celyad has enrolled the first patient at a single dose of 3 x 108. Once this dose cohort completes, the dose rises to 1 x 109 then 3 x 109 cells. Celyad then aims to treat about 14 patients per tumour type at the highest dose. The expansion phase may start in H217, with six-month results possible in H218. The exploration of NKR-2 in solid tumours puts Celyad in a leading position in this area. Other CAR companies will initially have to compete for a limited number of patients in the congested CD19 area. There are a few, limited clinical trials using CAR constructs in solid tumours, but otherwise this large potential market is not being addressed by active clinical development.

Possible effect at 30m cell dose

In the completed dose-ranging and safety Phase I, Celyad noted “reports of unexpected clinical benefit”; unexpected because the single, low doses were not expected to show efficacy. A patient with acute myeloid leukaemia treated with 3 x 107 NKR-2 CAR T-cells showed no disease progression after 12 weeks, had no further treatments and showed improved haematological parameters. Other patients with aggressive disease also showed prolonged survival (but received other therapies) and showed improvements in haematological parameters.

Valuation: Unchanged at €45 per share

Our valuation focuses on NKR-2 indications and includes five solid tumours plus the AML and multiple myeloma (MM). C-Cure is given an indicative deal value while a strategic partnering deal is negotiated. Celyad has cut its cash burn to no more than €31m per year to conserve cash to mid-2019. The interim indicative value is unchanged at €45 per share. The possible threat to value from a challenge to the US patent on allogeneic CAR therapy has been removed (see 28 November 2016 note “Unexpected CAR clinical benefit” (EU US)); the challenger cannot appeal.

Phase Ib: Higher, multiple doses in seven tumour types

The new Phase Ib study, THINK (THerapeutic Immunotherapy with NKR-2), has been designed by Celyad as an open-label, multiple-dose US and European study. It will assess higher dose levels, safety and clinical activity of autologous NKR-2 cells in seven refractory cancers: the two haematological cancers with Phase I data (acute myeloid leukaemia [AML] and multiple myeloma [MM]) and five solid tumours (colorectal, ovarian, bladder, triple-negative breast, and pancreatic).

In the THINK Phase Ib, Celyad is starting at 3 x 108 cells, a dose an order of magnitude higher than the final Phase I dose. It will then rise in subsequent dose cohorts to 1 x 109 then 3 x 109. If patients have a weight of less than 60kg, these doses will be adjusted but will otherwise be standardised. At each dose, the patients will receive three successive administrations, two weeks apart, of NKR-2 T-cells. There will be 24 patients, eight per dose group. They can be from any of the above cancer types. Results from this stage of the trial are expected by Celyad in Q317.

In the expansion phase, to test efficacy Celyad intends to enrol up to 86 more patients to evaluate each tumour type independently. Combined with patients in the dose-escalation phase that have the same tumour type, this should give at least 14 patients per cancer. According to management, this stage should start in H217.

Celyad expects the six-month interim follow-up data from the cohort expansion phase in H218. The formal one-year endpoint data will therefore be available in H119 with two-year data in 2020, depending on patient survival.

Potential NKR-2 tumour markets

With the advantage of the NKG2D mechanism of cell targeting used by NKR-2, Celyad is able to run the THINK trial in multiple cancer types. NKR-2 attacks multiple targets found on severely stressed cells, a profile shown by most cancer types. A risk is that NKR-2 may attack normal but stressed cells, so some side effects are to be expected. The Phase I showed no safety issues.

A major drawback with the current CAR CD19 focus of other companies is that, while it is excellent for B-cell tumours (like leukaemias and lymphomas), CD19 will not target other cancers. Each solid tumour type has a different profile of antigens and often these are also found on normal tissues, albeit at much lower levels.

Of the leading CAR companies Novartis, Juno, Kite and Bellicum, only Bellicum has a single solid tumour trial running: a Phase I in advanced pancreatic cancer with an anti-PSCA CAR construct due to complete in 2020. A National Cancer Institute melanoma study by the Rosenberg group reported in 2016. It used CD4 CAR T-cells targeted to the MAGE antigen. There has been a clinical study using a CEA1 targeted CAR construct in Manchester (UK) against colorectal cancer (among others) NCT01212887. This terminated due to lack of efficacy. A related trial in metastatic liver cancer in Boston was reported by Katz et al (2015) showing “encouraging signals”. There are also some CAR colorectal CAR trials running in China.

Carcinoembryonic antigen, a marker of abdominal tumours, especially colorectal cancer.

The main effort in solid tumours in immune oncology is based around checkpoint inhibitors like the marketed products Yervoy (ipilimumab), which targets cytotoxic T-lymphocyte-associated protein 4 in melanoma, and Opdivo, an anti-PD-1 monoclonal antibody used in melanoma, gastric cancer and renal cell carcinoma. It is possible that checkpoint inhibitors will be combined with CAR therapy at some point in the future, but this is currently some way off clinical development.

It is too early to develop detailed predictive models for solid tumour NKR-2 sales. Exhibit 1 looks at the number of US deaths (SEER database) in each for the two haematological cancers and the five solid cancer types; the death rates are a proxy for the incidence of refractory late-stage cancers. Our value assumes $150,000 per treatment. This may be perceived as very low in the putative acute lymphoblastic leukaemia (ALL) market, where $500,000 is currently seen as affordable. ALL causes about 1,500 deaths per year in the US. All are tragic and mostly children, so this is a worthwhile indication but a small market.

Exhibit 1: NKR-2 potential indications in Phase Ib THINK study

Indication	US incidence	US deaths	Peak share	Potential US sales (US$m)	Probability	Global sales (€m)
AML	20,386	10,460	50%	638	20%	114
MM	26,850	11,240	50%	686	20%	122
Total haematological				1,324		236
Colorectal	136,830	50,310	36%	2,721	10%	200
Ovarian	21,290	14,180	69%	1,464	20%	220
Bladder	76,960	16,390	69%	1,692	10%	127
Breast	232,670	40,000	36%	2,163	10%	159
Pancreatic	46,420	39,590	69%	4,086	5%	153
Total solid tumours				12,125		860

Source: SEER database, Edison Investment Research

The probabilities used reflect a best estimate at this point, but have no substantive evidence base. Ovarian scores highest as there is published preclinical work. Pancreatic cancer is notoriously hard to treat, so a high market share could be expected if NKR-2 had an impact on survival, but a very low probability is assigned. The global market opportunity is based on 75% of the potential US sales as the US is the main market for high-value biological therapies. Earlier-stage cancers might be treated as well, which would magnify the market potential.

Valuation is stable, solid tumours are a big opportunity

The valuation was revised in our note Unexpected CAR clinical benefit published on 28 November 2016. It is summarised in Exhibit 2. Financial estimates are unchanged and shown in Exhibit 3.

Exhibit 2: Celyad valuation

Item	Indication	Probability	Value (€m)
CAR values	AML	20.0%	114.00
	MM	20.0%	122.50
	Solid tumours (weighted average of one success)	Variable	169.37
	Allogeneic		10.00
CAR value			415.86
C-Cure partnered value (milestones plus royalties)		35.0%	162.44
Costs	(Risk adjusted 2017-23)		(148.26)
Total indicative value			430.04
Shares			9.31
Warrants and options			0.30
Value per share (€)			44.73

Source: Edison Investment Research

The indicative value on the revised interim basis is €45 per share. No further dilution is expected until 2019, possibly later depending on any deals in the interim.

The solid tumour market will be further assessed as more clinical data are obtained. Although other companies are reporting successes with B-cell CAR approaches (Kite has started a rolling BLA application to the FDA and Novartis will file in early 2017), solid tumour types remain a difficult area that has not yet been explored. Celyad may have a significant lead in this much larger market.

Investors should also note that Claim 1 of US patent 9,181,527, which had been challenged (see 28 November 2016 note (EU US) has been upheld by the US Patent office. There is no appeal.

Exhibit 3: Financial summary

€000s	2014	2015	2016e	2017e
Year end 31 December	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue	146	3	11,250	0
Cost of Sales	(115)	(1)	0	0
Gross Profit	31	2	11,250	0
EBITDA	(18,247)	(28,639)	(25,399)	(31,254)
Operating Profit (before amort and except)	(18,440)	(28,912)	(25,672)	(31,527)
Intangible Amortisation	(677)	(760)	(760)	(760)
Other income and charges	3,778	0	0	0
Share-based payments	(1,098)	(795)	179	179
Operating Profit	(16,437)	(30,467)	(26,253)	(32,108)
Net Interest	(16)	558	500	250
Profit Before Tax (norm)	(18,456)	(28,354)	(25,172)	(31,277)
Profit Before Tax (FRS 3)	(16,453)	(29,909)	(25,753)	(31,858)
Tax	0	0	0	0
Profit After Tax (norm)	(18,456)	(28,354)	(25,172)	(31,277)
Profit After Tax (FRS 3)	(16,453)	(29,909)	(25,753)	(31,858)

Average Number of Shares Outstanding (m)	6.8	8.7	9.3	9.3
EPS - normalised (c)	(273.41)	(326.28)	(270.46)	(336.05)
EPS - (IFRS) (€)	(2.44)	(3.44)	(2.77)	(3.42)
Dividend per share (c)	0.0	0.0	0.0	0.0

Gross Margin (%)	N/A	N/A	N/A	N/A
EBITDA Margin (%)	N/A	N/A	N/A	N/A
Operating Margin (before GW and except) (%)	N/A	N/A	N/A	N/A

BALANCE SHEET
Fixed Assets	11,041	50,105	50,293	49,410
Intangible Assets	10,266	48,789	48,031	47,271
Tangible Assets	598	1,136	2,082	1,959
Investments	177	180	180	180
Current Assets	30,265	109,420	80,360	48,508
Stocks	0	0	0	0
Debtors	830	549	1,367	1,367
Cash	27,633	107,513	78,067	46,215
Other	1,802	1,358	926	926
Current Liabilities	(6,053)	(11,490)	(9,209)	(8,529)
Creditors	(5,276)	(10,592)	(7,906)	(7,906)
Deferred revenue	0	0	0	0
Walloon loans for cash payment	(777)	(898)	(1,303)	(623)
Long Term Liabilities	(11,239)	(36,561)	(34,014)	(34,014)
Walloon loans (non-current)	(10,778)	(10,484)	(7,519)	(7,519)
Other long term liabilities	(461)	(26,077)	(26,495)	(26,495)
Net Assets	24,014	111,474	87,430	55,375

CASH FLOW
Operating Cash Flow	(17,398)	(27,862)	(27,144)	(30,989)
Net Interest	(16)	558	645	124
Tax	0	0	0	0
Capex	(640)	(838)	(1,500)	(150)
Acquisitions/disposals	(1,550)	(5,186)	0	0
Financing	26,417	109,155	0	0
Dividends	0	0	0	0
Other	1,638	(3,287)	(1,448)	0
Net Cash Flow	8,451	72,540	(29,446)	(31,016)
Opening net debt/(cash)	(9,557)	(16,078)	(96,131)	(69,245)
HP finance leases initiated	0	0	0	0
Walloon loan recognition (non-cash)	(1,930)	7,513	2,560	(198)
Closing net debt/(cash)	(16,078)	(96,131)	(69,245)	(38,031)

Source: Edison Investment Research estimates, Celyad reports and announcements

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Celyad and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data are permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Thematics

Latest

Inside the mind of investors: International Biotechnology Trust

Borussia Dortmund – executive interviews

UK equities: A generational opportunity?

Audiovisual

Latest

Vantage: Gresham House Energy Storage Fund – Navigating challenges in energy storage

IP Group – executive interview

Georgia Capital in 60 seconds

About Edison

About Edison

Careers

Celyad — Update 9 January 2017

Latest

OPAP — Winning strategy

Patria Private Equity Trust — High liquidity and solid long-term track record

MoneyHero — Emphasis on driving margin

Intralot — Continuing improvement in Q324

Picton Property Income — Delivering on key initiatives

Probiodrug — Update 9 January 2017

Subscribe to Edison