OSE Immunotherapeutics — Milestones anticipated throughout FY23

OSE Immunotherapeutics is a French biotechnology company focused on the development of novel therapeutic agents for the treatment of cancer and autoimmune disorders. The company’s leading clinical asset is Tedopi, a cancer vaccine being investigated for the treatment of NSCLC. Tedopi reported positive top-line data from the Phase III ATALANTE-1 trial, demonstrating efficacy and safety in NSCLC patients, and following discussions with US and EU regulators, the company is preparing a confirmatory and potentially pivotal follow-on Phase III study. Tedopi is also part of three ongoing investigator-sponsored Phase II studies in combination with ICIs or chemotherapy for the treatment of NSCLC, ovarian and pancreatic cancer. OSE has a further four clinical assets in its pipeline: OSE-127 for the treatment of UC, OSE-172/BI 765063 in colorectal cancer (out-licensed to Boehringer Ingelheim), FR-104/VEL-101 as a maintenance therapy following kidney transplantation (out-licensed to Veloxis Pharmaceuticals) and OSE-279 in solid tumours (fully owned by OSE).

We value OSE at €280.8m or €15.2 per share on a risk-adjusted NPV analysis using a 12.5% discount rate, including net debt of €14.7m at end-December 2022. We have included five assets in our valuation of OSE: Tedopi in NSCLC, OSE-127 in UC, OSE-172/BI 765063, FR-104/VEL-101 and OSE-279. As the Tedopi pancreatic and ovarian cancer studies are investigator sponsored, we have excluded these indications from our valuation until their clinical development strategies become more apparent. We assume a full licensing deal for Tedopi is achieved in 2027 following the completion of the Phase III NSCLC study. Additionally, OSE-279 is currently in a first-in-human open-label Phase I dose-escalation and expansion study, and the solid tumour indication for which the treatment may be most effective is not yet known. However, OSE has stated that it intends to address orphan indications with significant unmet needs and, as such, for the purposes of our model we have assumed OSE-279 will be advanced in small cell lung cancer (SCLC).

In FY22, OSE reported revenues of €18.3m through payments received from licensing partners. Operating losses were €18.4m and the company ended the period with a gross cash position of €25.6m and net debt of €14.7m. OSE has a debt facility in place with the EIB worth up to €25.0m, of which OSE has, to date, drawn down a total of €20.0m bearing interest of 5%. The company has also secured an equity financing agreement with Vester Finance, which has committed to subscribing up to a maximum of 2.8m shares of OSE common stock (14.8% of existing share capital). Should the EIB debt financing facility be fully exercised, at our projected cash burn rates, and in line with management guidance, we forecast OSE to be operationally funded into Q224.

OSE is subject to the regular commercial, development and regulatory risks associated with drug development. While the company has a later-stage clinical asset in Tedopi, the planned follow-on Phase III study will require OSE to raise further capital to fully fund the trial to completion. If this financing is realised through equity issuance, this may result in dilution to OSE’s existing shareholders. The licensing deals with Boehringer Ingelheim and Veloxis diversify the impact of developmental risk and clinical trial expenditure for OSE. However, as with all licensing partnerships, these assets could potentially be returned to OSE in the event of clinical failures or strategic changes from partners, as was the case with Servier and OSE-127. Additionally, the successful commercialisation and launch of Tedopi, provided results from the follow-on Phase III study are positive, are highly dependent on OSE securing a licensing deal with larger pharmaceutical partners. Failure to secure such a deal may delay or limit market uptake of Tedopi.

OSE has multiple ongoing clinical programmes covering both immuno-oncology and immuno-inflammation disease areas (Exhibit 1). Spearheading OSE’s development pipeline is Tedopi, a cancer vaccine comprised of a unique combination of neoepitopes, small peptides derived from tumour-specific antigens expressed by various cancer cells. Tedopi is being developed for the treatment of patients with NSCLC with secondary resistance to ICIs. The treatment works by directly activating tumour-specific T-cells, which, in turn, bind tumour-associated antigens presented on the surface of cancer cells by the HLA-A2 receptor (c 45% of NSCLC patients are HLA-A2 positive). Tedopi has shown encouraging data in clinical trials so far, and OSE is preparing a confirmatory and potentially pivotal Phase III trial to support the regulatory approval of the therapy. While positive clinical results were reported from the previous Phase III ATALANTE-1 study, we note that patient recruitment in the study was affected by the COVID-19 pandemic, with only 219 of the planned 363 patients enrolled in the study. This may account for why the ATALANTE-1 study alone was not sufficient to fulfil the requirements for regulatory approval. Following discussions with the regulators, OSE has now planned a follow-on pivotal study that will focus on second-line NSCLC patients who have acquired resistance to ICIs.

Another of OSE’s proprietary assets is OSE-279, a high-affinity anti-PD-1 monoclonal antibody ICI therapy that blocks both PD-L1 and PD-L2. These are the ligands of PD1 overexpressed by tumour cells, and inhibition of which is a validated mechanism for tumour immune escape. OSE-279 is currently in a Phase I/II dose-escalation trial as a monotherapy for the treatment of solid tumours or lymphomas.

In addition to these immuno-oncology assets, OSE is working on the development of immuno-inflammation therapies. OSE-127 is the most advanced clinical candidate in this space, and is being evaluated for the treatment of UC. This candidate is a monoclonal antibody that acts as an antagonist of the interleukin-7 receptor (IL-7R), a cytokine on the surface of certain immune system T-cells, for the downregulation of inflammatory immune responses. OSE-127 has previously shown encouraging safety data across two Phase IIa studies, for SS (NCT04605978), and UC (NCT04882007). However, in Q223, negative readouts were reported from the Servier-sponsored trial in primary SS. Management attributed the lack of efficacy to uncertainty in the role of IL-7 biology in the disease. OSE and Servier have mutually decided to terminate the option license agreement, and the clinical development in primary SS will not be pursued. OSE will continue with the clinical development of OSE-127 in UC with full rights to the asset, and top-line results for this study are anticipated in Q423.

Patients with progressive disease showing secondary resistance to ICI treatment represent a significant unmet medical need, and with no approved therapies to address this, we believe this offers sizeable market opportunity. OSE has already conducted a randomised Phase III trial (ATALANTE-1) to evaluate Tedopi as second- or third-line treatment following ICI failure in HLA-A2 positive patients with locally advanced (stage IIIB) or metastatic (stage IV) NSCLC. The standard of care (SoC) for NSCLC patients is typically dependent on the following:

According to the World Health Organization, in 2020 there were 2.2m cases of lung cancer worldwide, and it is estimated that there will be 238.3k new cases of lung cancer in the United States alone in 2023. NSCLC is the most common type of lung cancer, accounting for c 85% of cases. For patients diagnosed with stage IIIB/IV NSCLC (without ALK and EGFR mutations), the typical first-line treatment regimen involves chemotherapy in combination with an ICI. However, in many cases patients may not respond to treatment (primary resistance) or they may develop resistance after an initial period of response (secondary resistance). We note that the NSCLC market is a highly competitive space and is dominated by ICIs such as Merck’s blockbuster Keytruda (pembrolizumab). However, the existing strategy of positioning Tedopi in the post-ICI setting (Exhibit 2) may avoid direct competition with ICIs and provide an opportunity for OSE to garner a share of the growing NSCLC market, which is projected to reach $55bn by 2028 (source: EvaluatePharma, Exhibit 3).

In the ATALANTE-1 study, 219 patients were enrolled, of whom 118 met the definition of ‘population of interest’ with regard to exhibiting secondary resistance. Tedopi was compared to existing SoC chemotherapy treatments (docetaxel or pemetrexed) and results showed that the therapy significantly improved overall survival (OS) rates and maintained positive patient-reported outcomes (PROs), quality of life and safety. More specifically, highlights from this trial included:

In terms of competition for new therapies, there are several other studies targeting second- or third-line NSCLC treatment options that are either ongoing or have been recently completed (Exhibit 4). In the selection of trials highlighted here, a range of technologies have been used, including tyrosine kinase inhibitors and antibody-based therapies in combination with ICIs and chemotherapy agents. However, several of the trials failed to meet their primary endpoints of OS and progression-free survival (PFS), highlighting the challenge associated with this indication. Of note for positive results is the Southwest Oncology Group (SWOG) Cancer Research Network’s Lung-MAP S1800A trial, which showed a median OS (mOS) of 15.0 months in the experimental arm versus 11.6 months for the control. For OSE’s ATALANTE-1 trial, mOS was reported as 11.1 months with Tedopi versus 7.5 months with the control. We note that Tedopi is the only cancer vaccine from this selection of trials, which may offer market differentiation. In addition, Tedopi has demonstrated a desirable safety profile, offering further differentiation, in our view, in contrast to antibody-drug conjugates and traditional chemotherapy agents, which are typically associated with more adverse side effects.

In February 2023, OSE announced that it had received positive recommendations for a further confirmatory Phase III trial for Tedopi as a second-line monotherapy (against the SoC) in advanced or metastatic NSCLC. Both the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA) provided scientific advice for this confirmatory, and potentially pivotal, Phase III trial. We believe that this trial will build on the ATALANTE-1 trial, by acquiring more data in a larger NSCLC patient population, but also with the focus being on Tedopi as a second-line monotherapy as opposed to a second- or third-line treatment. This new study is designed for HLA-A2+ patients with secondary resistance to immunotherapy (IO)/ICIs after a first-line of chemo-IO, followed by failure to maintain IO for at least 12 weeks (the threshold for secondary/acquired resistance defined by international expert consensus recommendations). Management has communicated that this study aims to recruit c 400 patients and is expected to commence by end-2023 with a conclusion in 2025–26. We believe that readouts from this confirmatory trial may represent a significant catalyst for the company, and we now expect a launch for this asset in 2028 (commercial approval previously expected in 2023), provided the data continue to be positive.

In addition to the Phase III trials evaluating Tedopi as a monotherapy, OSE is also engaged in three Phase II trials, led by external clinical oncology groups, which seek to expand the clinical utility of Tedopi in various oncology indications through combination approaches: with Opdivo (NSCLC), with chemotherapy (pancreatic cancer) and with Keytruda (ovarian cancer). If Tedopi can demonstrate improved survival rates in these combinations, this has the potential to increase the commercial impact of the cancer vaccine, in our view. Updates for each of these trials are expected in 2024. While we recognise that these studies are important in providing further clinical validation for Tedopi, we note that investigator-sponsored trials may not necessarily align with OSE’s future clinical development strategy for the cancer vaccine.

In December 2022, OSE announced the first patient dosing in the Phase I/II trial for OSE-279. This monoclonal antibody ICI therapy is being evaluated in the Phase I/II, first-in-human, multicentre, dose-escalation/expansion study aiming to determine the maximum tolerated dose and/or recommended Phase II dose of OSE-279 as a monotherapy in solid tumours or lymphomas. Secondary objectives for this study include the assessment of anti-tumour activity, safety, investigating the pharmacokinetic/pharmacodynamic profile of the treatment and measuring receptor occupancy. Management anticipates an update on this study in 2024.

We note that this is a highly competitive space, with several ICIs already approved in the market that are designed to target PD-1 or PD-L1 (Exhibit 5). The global ICI market was estimated to be worth $31.4bn in 2021 and is projected to be worth $148.1bn by 2030. However, we believe that OSE will look to differentiate itself in this space by evaluating OSE-279 in combination with other proprietary assets, such as Tedopi, or with external partnerships, to obtain novel treatment options. Management anticipates that such combinations may have potential in overcoming the challenges associated with cancer resistance mechanisms.

While OSE-279 is under clinical development as a therapy for the treatment of solid tumours or lymphomas, it also forms the backbone of the company’s bifunctional checkpoint inhibitor platform (BiCKI). As a reminder, BiCKI is a bispecific ICI fusion protein platform to address primary and secondary cancer resistance mechanisms. ICIs are an effective SoC for many cancer patients, however, in a significant proportion of cases (dependent on the cancer type), patients may show either primary or secondary resistance to the treatment. It has been reported that this resistance could be caused by sustained tumour antigen stimulation, resulting in the exhaustion of T-cells and a dampening of anti-tumour responses. OSE believes that its bispecific approach can stimulate the effective T-cells while disarming the ineffective T-cells, thus circumventing immuno-resistance mechanisms.

BiCKI antibodies are based on a humanised anti-PD-1 monoclonal antibody ICI backbone (OSE-279) and are engineered with proteins such as interleukin-7 (IL-7), a cytokine shown in separate preclinical studies to improve immune functions and cancer IO efficacy. This pairing of OSE-279 with IL-7 has formed OSE’s first candidate from the BiCKI platform, called BiCKI-IL-7. The candidate targets PD1 and simultaneously delivers IL-7 pro-survival cytokine to tumour-specific T-cells expressing PD1. At the American Association for Cancer Research (AACR) 2023 annual meeting, the company presented an update, which summarised that BiCKI-IL-7 showed significant anti-tumour efficacy in various in vivo models. OSE hopes to file an investigational new drug (IND) application in 2024 in solid tumours, and if successful, commence clinical trials in 2025. We believe that the clinical trial data from OSE-279 alone will make a significant contribution to the potential success of this IND application.

OSE-127 is the company’s most advanced clinical asset in the immuno-inflammation space. This candidate is an antibody therapy acting as an IL-7R antagonist, more specifically, targeting CD127, a cytokine modulating the proliferation, apoptosis and activation of CD4 and CD8 T-cells. To our knowledge, this is a novel and differentiated mechanism of action (Exhibit 6).

OSE-127 was initially developed in partnership with Servier through an option license agreement, with Servier sponsoring a Phase II study in primary SS, while OSE was fully funding development in a Phase II trial in UC. Servier had the option to assume full development in both indications after completion of the Phase II clinical trials. However, in May 2023, following negative results (as communicated by OSE’s management) from the Phase II primary SS study and a strategic realignment of Servier’s portfolio, OSE and Servier mutually decided not to pursue the option license agreement. The full trial data is still to be disclosed, but the Servier decision means that OSE will miss out on the potential receipt of a €15m opt-in licensing milestone payment and potentially subsequent developmental, regulatory and commercial milestone payments worth up to €272m.

OSE remains committed to the development of OSE-127 in UC, having recaptured the full value of the asset, as the ongoing Phase II study continues to recruit patients. UC is a chronic inflammatory bowel disease affecting approximately 160–290 people per 100,000 each year worldwide, and current treatment options for the disease are associated with having a significant burden on patients’ lives. The trial is expected to be fully enrolled (n=150) by end Q323. The top-line results after induction (primary endpoint at week 10) are anticipated in December 2023, and this update could represent a significant inflexion point, in our view. Additional data will be reported in H124 assessing OSE-127’s use as a maintenance treatment after six months of therapy.

In preclinical research in the immuno-oncology space, OSE is also investigating OSE-127 as a potential treatment for acute lymphoblastic leukaemia (ALL). The CD127 receptor is overexpressed in ALL, hence it is a prime target for the IL7-R antagonist OSE-127. At AACR 2023, the company presented an update concluding that OSE-127 may be a promising option for ALL patients due to its dual mechanism of action. The antibody both blocks the oncogenic IL7-R fuel pathway and triggers macrophage-driven phagocytosis of leukemic cells. This could be encouraging for a clinical programme for OSE-127 in this indication, provided preclinical research continues to be supportive.

OSE also intends to progress with the development of FR-104, which is in clinical development with Veloxis, as a maintenance therapy following kidney transplantations. OSE has already received €13.9m from Veloxis and is set to receive up to €315.0m further in milestone payments. The long-term management of maintenance immunosuppression in kidney transplant patients continues to be an unmet medical need. The current SoC involves the use of calcineurin inhibitors and mycophenolate as immunosuppressive therapies, either with or without corticosteroids. While this approach is often associated with excellent short-term results, long-term exposure to these therapies contributes to allograft rejections. This commonly observed attrition, and the fact that current the SoC has been in place for over 20 years, highlights the opportunity for novel long-term treatment options, in our view.

FR-104 is a monoclonal antibody fragment that inhibits CD28, a T-cell co-receptor, delivering stimulatory signals from antigen-presenting cells to the T-cells. FR-104 has potential clinical applications in multiple autoimmune diseases and particularly with kidney transplants. As a comparison, we note that Bristol Myers Squibb’s belatacept is a T-cell surface glycoprotein CD28 antagonist approved by the FDA in 2011, with the patent expiring in 2023. Belatacept is considered a more modern treatment option following kidney transplants and reached peak sales of $37m in 2021 and 2022 according to EvaluatePharma; we believe this serves as precedent for OSE’s therapeutic approach with FR-104. Competition in this space is somewhat varied, and many approved therapies now have expired patents. However, Hansa Biopharma’s idefirix appears the most modern therapy, with the associated patent expiring in 2029 (Exhibit 8).

Results from the Phase I trial (n=64) involving healthy volunteers showed that FR-104 demonstrated effective engagement with CD28 with a response of up to 57 days, and a desirable safety profile with no signs of cytokine elevation. OSE plans to initiate a Phase II trial in 2023 and share initial readouts in 2024.

OSE-172/BI 765063, a SIRPα-targeting ICI, is in clinical development with Boehringer Ingelheim (BI). OSE has already received €65.3m from BI and is set to receive up to €1.1bn further in milestone payments. The drug operates in a similar way to T-cell ICIs in the tumour microenvironment. However, instead of inhibiting T-cells, it aims to inhibit the checkpoints between tumour cells and myeloid cells. Further details on the mechanism of action of OSE-172, as well as an overview of preclinical data, can be found in our initiation note. The candidate is currently involved in various Phase I trials:

Preliminary results have shown a good safety profile in all cases, one case of partial response (PR) in HCC (associated with a 45% clinical benefit rate as a monotherapy), and three PRs in MSS endometrial cancer and CRC in combination with the ICI. More recently, at AACR 2023, the company presented an update based on a biomarker analysis to characterise the impact of OSE-172 on the tumour microenvironment. This analysis showed that high levels of myeloid cells expressing SIPRα in the tumour microenvironment correlated with longer survival; this was not true with CD47 tumour cell expression. Furthermore, myeloid-derived suppressor cells signature in the tumour microenvironment at baseline also correlated with clinical responses, and collectively these results are supportive of OSE-172’s mechanism of action, in our view. Management expects to provide more detailed updates for these studies across 2023, and will start preparing for Phase II trials in 2024.

OSE is subject to the regular development, regulatory and commercial risks associated with drug development. It is highly likely that the company will be required to source additional financing to fund the follow-on Phase III study for Tedopi, which brings about a potential dilution risk for shareholders should funding be raised through an equity issue. Additionally, funding risk is further heightened considering the current tight capital market situation, particularly for biotechs and drug development companies.

The licensing deals with BI and Veloxis diversify the impact of developmental risk and clinical expenditure for OSE. However, these assets could potentially be returned to OSE in the event of clinical development failures or strategic changes from partners. Additionally, the successful commercialisation and launch of Tedopi, provided results are positive in the follow-on Phase III study, is highly dependent on OSE securing a licensing deal with larger pharmaceutical partners. Any challenges in securing a partner could postpone product development and/or adversely affect the economics of a potential licensing transaction.

Our updated valuation of OSE is €280.8m or €15.2 per share. Given the progress OSE has made over the last year, the updated strategy for Tedopi (preparation of a potentially pivotal Phase III trial) and the initiation of new trials in new indications, we have revised our rNPV model and R&D assumptions. Exhibit 9 provides a detailed description of the assumptions we have used in our rNPV model. Key changes from our previously published model include:

Our underlying assumptions for OSE’s assets are stated in Exhibit 9.

We apply an unchanged discount rate of 12.5% to our rNPV calculations. In addition, our valuation reflects a net debt position of €14.7m at end-December 2022. A breakdown of our valuation is shown in Exhibit 10.

Should the follow-on Phase III study for Tedopi generate positive data, the asset would be supported by data from two Phase III trials; we believe this could add significant value and potential deal value for future licensing opportunities. In our view, a comparable deal of note is the worldwide licensing agreement signed in 2020 between Roche and Nykode, worth up to $715m (upfront and near-term payments of $200m), for the Scandinavian biotech’s personalised cancer vaccine, VB10.NEO. At the time of the agreement, VB10.NEO was in the Phase I portion of a Phase I/II basket trial that included patients with advanced or metastatic melanoma, NSCLC, clear renal cell carcinoma urothelial cancer or squamous cell carcinoma of the head and neck.

While we have not included indications other than NSCLC in our valuation of Tedopi, we note that it is being investigated in both pancreatic and ovarian cancer in two separate Phase II studies, potentially broadening its application. As such, we believe this could enhance the potential deal value that could be commanded from future licensing opportunities for Tedopi and have modelled a licensing deal equivalent to Nykode’s, with an upfront payment of €182m ($200m) in 2027, following completion of the second Phase III study.

OSE reported operating expenses for FY22 of €36.7m, a 14.5% decrease year-on-year and lower than our estimate of €41.1m. This decrease was primarily driven by a 12% reduction in R&D expenses due to the winding down of the Phase III ATALANTE-1 study. However, these lower operating expenses were offset by a reduction in revenue related to licensing agreements (€18.3m in FY22 vs €26.3m in FY21) resulting in an operating loss for FY22 of €18.4m (FY21: €16.6m). Net cash flow from operating activities stood at €18.3m in FY22, a significant increase from €9.9m in FY21. The figure was negatively affected by changes to working capital (€3.1m) as well as financial charges associated with the repayment of debt obligations (€3.1m).

The costs associated with many of OSE’s ongoing clinical programmes are absorbed either through the company’s licensees (Veloxis, BI) or by academic institutions and investigator-sponsored studies. As such, with the conclusion of the OSE-sponsored Phase II study in UC of OSE-127/S95011 in FY23, we expect operating expenses for the company to decrease slightly yearonyear in FY23. However, we estimate costs will increase in FY24 as the Phase III Tedopi study is initiated. We estimate operating cash outflows of €16.2m in FY23, increasing to €20.2m in FY24.

OSE ended the year with a gross cash position of €25.6m and a net debt position of €14.7m. We note that OSE has entered into financing agreements with the EIB as well as, more recently, with Vester Finance. The debt facility with the EIB includes a €25m loan agreement, of which OSE has received €20m to date. The first €10m tranche was drawn down in July 2021 and the second €10m in December 2022. In combination with each of the €10m loans (which bear a 5% interest rate), 1.4m OSE shares (7.56% of share capital) are available to the EIB through warrants. The warrants attached to the first tranche (850,000 shares) may not be exercised until after 9 July 2026 and those attached to the second tranche (550,000 shares) may not be exercised until after 16 December 2027 (except if there is an early exercise event such as a change in control), at which point the EIB and OSE retain put and call options, respectively, with various conditions attached. In our view, these agreements somewhat limit the dilution risk associated with these warrants. OSE also recently entered into an equity financing agreement with Vester Finance, which has subscribed to a maximum of 2.8m shares (15.1% of the share capital) of the company over a maximum period of 24 months. OSE has committed to a minimum use of the equity financing facility of €0.6m. Shares will be issued based on the average stock market price prior to the issue date and at a maximum discount of 6%. With an FY22 gross cash position of €25.6m and, assuming OSE fully exercises its debt and equity committed financing, management has guided that it expects this to provide a cash runway into Q224. Our model assumes a similar runway, even without the use of the Vester Finance equity financing line.

In our model we assume OSE secures an out-licensing deal for Tedopi by end-2027. We assume the company receives licensing milestones associated with Tedopi, including development milestones associated with existing deals with Veloxis and BI before reaching steady, revenue-generating operating profitability following the commercial launch of Tedopi in FY28. We estimate the company would be required to raise a total of c €65m in funds to reach this point. We account for this raise as illustrative debt in our model. Alternatively, if the funding is realised through an equity issue instead (assuming at the current trading price of €4.05/share), OSE would have to issue 16.0m shares, resulting in our per share valuation coming down to €8.3 from €15.2 currently (shares outstanding would increase from 18.5m to 34.5m).