Selvita — Update 8 December 2015

Selvita, founded in 2007, is already the largest research-based biotechnology company in Poland. It employs 300 staff (c 30% with PhDs) split approximately 40:60 between its Innovations Platform and Research Services divisions. The company operates out of a ~20,000ft2 modern research facility in Krakow, Poland. The internal pipeline is close to Phase I and focused on novel small molecules for cancer. The research outsourcing business covers contract chemistry, biology and bioinformatics (clients from a range of big biopharma companies). Selvita listed on the Warsaw Stock Exchange NewConnect Market in July 2011 and upgraded its listing to the WSE Main Market in December 2014 with the successful offering and placing of 2.65m shares at PLN10.3 per share and gross proceeds of PLN27.3m. Selvita operates a capital-efficient financial model, although fresh funds may be sought to advance its internal pipeline.

Valuation: Consistently strengthening

Our fair value increases from PLN275m to PLN333m or from PLN21 to PLN25.4 per share. Services, pipeline products from collaborations and subsidies are valued at PLN198m (PLN15 per share), the new Merck collaboration adds just under PLN1 per share and cash the remainder. Since our initiation note in November 2014, our valuation has consistently risen on solid performance, collaboration and portfolio newsflow; an increase of 59% in one year. We now take the view that some of Selvita’s cash will be required to develop SEL24 and SEL120 and we have therefore allocated some cash to R&D expenses for the SEL24 and SEL120 projects ($6m in total) to enable progress through Phase I and pre-Phase I respectively.

Selvita operates a hybrid business model, with a largely de-risked research services business, and higher-risk drug development in its Innovations Platform. Contract research is a highly competitive and increasingly global field, which may put pressure on this side of its business achieving the rapid growth guidance. However, we feel this business is well placed and has sufficient flexibility in its business model to adapt. Since our initiation in November 2014, the innovations pipeline has progressed to Phase I with first clinical studies expected to commence in early 2016. We have included estimates for deal metrics that Selvita could secure for SEL24 and SEL120, but these are indicative only, so the actual terms secured could have a materially positive or negative impact on our valuation.

Selvita reached break-even in Q413 and we estimate that it will record a net profit of c PLN6.7m in 2015. Profitability should be sustained, although significant extra investment in its own pipeline will be required. Selvita has delivered consistently strong performance over the last seven quarters, with 2015 annual revenues forecast to grow 54% in its core Service business, 16% in its subsidies and 24% in Innovation. We anticipate continued strong growth from Innovation due to improving fees from innovations and an increasing number of contracts as the Service business expands its reach into the UK and US. The value of the 2015 order book, including commercial contracts signed, at September 2015 totalled an all-time high of PLN53.3m (Services PLN 24.6m, Innovation PLN14.3m, Grants PLN14.3m). It is too early to assess the value of the Bioinformatics business separately at this stage. Selvita’s cash position is strong, with an estimated PLN36.5m at the end of 2015. There is sufficient cash to progress the internal drug candidates SEL24 and SEL120 to complete Phase I and pre-Phase I respectively. For these programmes to progress further, we would anticipate additional financing and/or a collaborative deal.

Selvita has established a good track record with its Services business, which has enabled it to also develop its own pipeline of novel small molecule programmes. Revenues from the Services division, research collaborations from eg Merck and H3 Biomedicine and grants/subsidies have propelled Selvita to profitability (since Q413). The Services business is expected to continue on a high-growth revenue trajectory (>20%) over the next two years, but the greater potential long-term upside could come from the development and licensing of a number of candidates from the internal pipeline. Key among these could be SEL24 and SEL120 in the near term, but Selvita has another five preclinical programmes, across oncology and autoimmune indications, which may also offer partnering potential. Selvita’s operations are summarised in Exhibit 1.

Towards the end of 2013 Selvita’s research capabilities received significant validation through the signing of two oncology research collaborations with H3 Biomedicine (a US research subsidiary of Eisai) and Merck KGaA.

Most recently a fresh three-year drug discovery deal was agreed with Merck to identify first-in-class small molecules as lead candidate drugs for multiple oncology indications. Under the terms of the new agreement, Merck will have an exclusive licence to the joint intellectual property and Selvita will receive milestone payments and royalties on successful development and commercialisation of products by Merck. The collaboration consists of a joint research phase up to lead identification, after which Merck will further research and develop the projects on its own. The scope of these collaborations is summarised in Exhibit 2.

The H3 collaboration is focused on validating and developing compounds against new kinase targets, while the Merck deal will seek to inhibit targets associated with cancer metabolism. These collaborations had an initial contract period of 2013-15 and, given the positive progress of the collaborative projects, both companies extended those programmes to the next phases of development. In addition, Merck has recently entered into a completely new collaboration which, if successful, is directly linked to developmental and sales milestones and royalties on sales for Selvita.

Selvita’s current pipeline of novel drug programmes, often referred to as new molecular entities (NMEs), is displayed in Exhibit 3. The primary focus is on the anti-cancer programmes, particularly SEL24 and SEL120, which are the most advanced in terms of development and selection of a preclinical candidate.

SEL24 is Selvita’s most advanced oncology programme, focused on developing a compound with a potential dual mechanism of action to target two kinases, namely PIM (1, 2 and 3 isoforms) and FLT3 mutants, which have been shown to be important in the development of acute myeloid leukaemia (AML) and other haematological malignancies.1

AML normally originates in the bone marrow (where new blood cells are made), but often quickly moves into the blood, resulting in uncontrolled growth and accumulation of malignant white blood cells, which fail to function normally and interfere with the production of normal blood cells. AML is the most common type of acute leukaemia in adults and affects nearly 40,000 patients in the EU and US (new cases per year). AML is generally a disease of older people and the average age at initial diagnosis is 66 years. The five-year survival rate for all AML patients, irrespective of age or genetic status, is 23%. The standard-of-care treatment for AML has not changed significantly for many decades, primarily based on chemotherapy (cytarabine) and followed by a stem cell transplant where appropriate. The goal of treatment is to reduce the blasts in the bone marrow to below 5% and return the blood cell counts to normal levels. A bone marrow transplant is generally recognised as the only curative treatment option, but is not always appropriate. To date there are no targeted agents approved for the treatment of AML, although many are in development.

The PIM family of serine-threonine kinases play an important role in intracellular signalling. PIM kinases are induced by several pro-oncogenic proteins such as FLT3, PI3K kinases, JAK and NF-κB, and when overexpressed can mediate drug resistance. As such, targeting both PIM kinases and FLT3 mutants may improve response rates and reduce relapses.

Overexpression of PIM has been reported in a variety of haematological malignancies2 (eg. AML, CLL, B-cell lymphoma), as well as some solid tumours (pancreatic, liver). In Exhibit 4 shows the most advanced candidates against PIM kinases and those against FLT3. AstraZeneca’s AZD12083 completed a Phase I study, but terminated clinical development in Q314 due to efficacy and safety reasons (no detail provided). Novartis has launched a number of Phase I and Phase I/II studies with LGH447, so data over the next 12-18 months will provide greater insight into the viability of specifically targeting PIM kinase.

FLT3 (FMS-like tyrosine kinase-3) is a kinase receptor expressed on hematopoietic progenitor cells (immature blood cells) and plays a critical role in regulating their activation, growth, proliferation, survival and differentiation into mature blood cells. The specific FLT3-ITD mutation results in aggressive proliferation of immature, irregular blasts that lack the ability to differentiate into normal blood cells. Physicians, as a standard part of diagnosis, routinely test patients for the FLT3-ITD mutation, which is estimated to affect 25-35% of elderly AML patients. Patients who are FLT3-ITD positive have a significantly worse prognosis compared to FLT3-ITD negative patients.

As such, FLT3 presents an obvious molecular target for new therapies. While a number of multi-kinase inhibitors already on the market, including Bayer’s Nexavar and Pfizer’s Sutent, already act on FLT3 (as well as other receptors such as cRAF, VEGFR, c-KIT), compounds that specifically target FLT3 are still in clinical development (Exhibit 4).

Ambit Biosciences’ quizartinib (AC220) and Novartis’s midostaurin (PKC412) are the most advanced FLT3 inhibitors in AML. A recent abstract disclosure for the 2015 ASH meeting in December revealed event-free survival and overall survival in a 717-patient midostaurin study in AML patients with FLT3 mutations (Exhibit 5). This is the first large Phase III trial to confirm a therapeutic benefit of FLT3 inhibition in AML patients.

The midostaurin story had been quiet for a number of years and there may have been some uncertainty about any clinical benefit. However, the first survival results from a large Phase III study should help to reinvigorate interest in the FLT3 target in AML. Overall survival was increased from approximately two years to just over six years. This result could now greatly improve the chances of Selvita finding a suitable partner and move SEL24 through clinical development. FLT3 plays an important role in leukemogenesis and its presence is associated with poor prognosis in acute myeloid leukemia (AML). PIM-1 was found to be one of the most significantly downregulated genes on FLT3 inhibition. Midostaurin inhibits FLT3 but not PIM. SEL24 inhibits both, so could offer improved efficacy. It is too early to say based on clinical evidence to date, but the midostaurin data should help refocus the industry on SEL24.

Ambit should report Phase III data within the next six to eight months. Both these selective compounds, and others, have showed strong in vitro cytotoxicity to leukaemia cells, and activity in relapsed AML patients with FLT3 mutations in clinical trials, with improvements in response rates and overall survival, although this needs to be confirmed for AC220 in pivotal Phase III studies. In addition, the reductions of blasts in blood have often been transient.

We note that Ambit secured a co-development deal with Astellas Pharma in 2009 for quizartinib, when the drug was undergoing Phase II studies, with Astellas paying a $40m upfront fee as part of a $390m total deal value. Astellas subsequently returned rights to the compound in 2013, but Daiichi Sankyo recently agreed to purchase Ambit for $315m, with a further $95m payable depending on commercial milestones being achieved.

Selvita has developed SEL24 as a potentially first-in class dual PIM/FLT3 kinase inhibitor, with potential to treat AML and a range of other haematological malignancies (eg diffuse large B-cell lymphoma, multiple myeloma, follicular lymphoma). SEL24-B489 has been tested extensively in in vitro and in vivo models, which confirm the drug’s dual mechanism of action and demonstrate a strong cytotoxic effect in multiple haematological models, as well as potential synergy with current standard low-cost chemotherapy (cytarabine). Current drugs in development target either PIM or FLT3 kinase enzymes, but SEL24 has the ability to inhibit both families of kinases at therapeutic doses.

SEL24 has shown superior activity in AML cell lines irrespective of the mutation background, in comparison to both AC220 and AZD1208. Exhibit 6 shows how B489 is effective against both FLT3-ITD positive AML cells (MV-4-11) and FLT3-ITD negative AML cells (MOLM-16), which both express high levels of PIM kinases. AZD1208 appears less effective against FLT3 positive cells, while ACC220 is less efficacious against FLT3 negative cells.

In terms of potential combinations with existing therapies, an important consideration for drug development, the use of B489 with cytarabine (current standard of care) produced tumour growth inhibition (TGI) rates that indicate a dose-dependent synergistic anti-tumour effect (Exhibit 6). Increased toxicity can be an issue when combining agents, yet no toxic effects of SEL24 were observed at the highest combination dosing schedule.

Selvita continues to work on preparing SEL24 for an IND filing, with the aim of starting a Phase I study in H216. Non-GLP toxicology studies have been conducted in dogs and rats, which revealed no issues at proposed therapeutic doses of SEL24-B489. IND-enabling studies are being carried out by Aptuit and the Phase I trial will be conducted by Theradex.

Selvita’s goal is to secure a partner for the SEL24 programme, and the company has stated that it is in advanced partnering negotiations with multiple potential pharma and biotech partners.

SEL120 is a potential first-in-class selective CDK8 inhibitor. Cyclin-dependent kinases (CDKs) play an essential role in the control of cell cycle, proliferation and mRNA transcription. These kinases, as well as their regulators, are frequently deregulated in multiple tumour types, so compounds that interfere with these kinases hold therapeutic potential.4 A number of CDK inhibitor candidates are in advanced stages of clinical trials, summarised in Exhibit 7.

A number of pan-CDK inhibitors have been developed, the majority of which target a range of CDK subtypes, such as CDK4/6 (eg palbociclib, abemaciclib, LEE011) and CDK1/2/5/9 (dinaciclib). Palbociclib (Pfizer) was granted accelerated approval by the FDA in February 2015 as a first-line treatment (with letrozole) for ER+, HER2- advanced breast cancer, with consensus global annual sales of $3bn by 2020 (EvaluatePharma World Preview 2014).

However, Selvita’s SEL120 programme appears to be the only selective CDK8 inhibitor in active development. Specific targeting of CDK8 may avoid some of the toxicity issues that pan-CDK inhibitors can cause, while CDK8 is known to be particularly overexpressed in colorectal cancer and in certain haematological malignancies, such as mantle cell lymphomas. Tumour cells that express elevated CDK8 levels are highly dependent on its expression for proliferation.5 CDK8 is also thought to be involved in regulating the activity of natural killer cells (NK cells), which are important components of the innate immune response against cancer cells. Inhibition of CDK8 may therefore also promote natural immunosuppression mechanisms.

Selvita has identified SEL120 as a lead candidate from the programme to take forward into IND-enabling studies. SEL120 has been tested in in vitro and in vivo models, which show significant reductions in the viability of colorectal cancer and mantle cell lymphoma cell lines, with particularly good activity in cell lines overexpressing CDK8. A selection of tumour inhibition data from multiple in vivo models is displayed in Exhibit 8. Importantly, the drug’s safety profile is encouraging, with no signs of neutropenia reported, which is characteristic of cell cycle modulators.

Selvita continues to work on fully characterising SEL120 and developing back-up compounds. Development of SEL120 is part-funded by the KIND-P1 research grant, as discussed above, for SLE24. Selvita is targeting an IND filing and the start of a Phase I study in 2017, but is also aiming to secure a partner for further development of the SEL120 programme. The company has stated that it is in advanced partnering negotiations with multiple pharma and biotech partners.

Applying a standard DCF model for the Research Services business, and an rNPV for the SEL24 and SEL120 programmes, we derive an indicative value for Selvita of PLN333m (€70m), or PLN25.4 per share. The existing operations (services, collaborations, subsidies) are valued at PLN199m (PLN15 per share and the new Merck collaboration also adds just under PLN1 per share. Since initiation in November 2014 our valuation has consistently risen based on solid performance, collaboration and portfolio news flow; an increase of 59% in one year.

It is clear that there has been an improvement across all the valuation elements. The main adjustments to the valuation model reflect increased cash (capital increase of PLN25.4m), improving Research and Services performance, progress of SEL24 and SEL120 towards Phase I and the recent Merck collaboration announcement. Given the increase in cash after the capital increase of PLN25.4m and the further detail provided by the company of Phase I trials for SEL24 and SEL120, we now value cash separately, allocating some of it to specific research programmes. We now take the view that a small fraction of Selvita’s cash will be required to develop SEL24 and SEL120, so we have allocated some cash to R&D expenses for those projects ($6m in total) to enable progress through Phase I and pre-Phase I respectively. The 2018 Services revenue forecast has increased to PLN41m vs PLN28m and Innovation to PLN20m vs PLN15m in our old model. Cash currently represents 11% of the valuation, whereas the Services business represents 60%, and 27% of our fair value corresponds to SEL24 and SEL120 combined. Our key assumptions and valuation metrics are summarised in Exhibit 11.

For the recent Merck collaboration we have assumed that five to six lead candidates are identified and that two of these proceed to Phase I with potential annual peak sales of $750m each. We assume a 5% chance of these reaching the market by 2026 and milestones at various points during the clinical and market stages.

Exhibits 12 and 13 illustrate the significant upgrades to our forecast revenue lines for the Service and Innovation businesses. In 2018 we have revised Services up 48% and Innovation 30%.

Selvita has demonstrated consistently strong performance over the last seven quarters, with 2015 annual revenues forecast to grow 54% in its core Service business, 16% in its subsidies and 24% in Innovation. The growth in the Innovation division was due to the increasing collaboration activities around oncology candidates, which may ultimately lead to several new chemical entities entering Phase I trials. As Exhibit 14 shows, we anticipate continued strong growth from Innovation and Services revenues in Q4 of this year due to improving fees from Innovations and an increasing number of contracts as the Service business expands its reach into the UK and US. The value of the 2015 order book, including commercial contracts signed at September 2015 totalled PLN53.3m (Services PLN24.6m, Innovation PLN14.3m, Grants PLN14.3m).

The bioinformatics business is focused on personalised medicine and has business with players such as Abbott Informatics, Microsoft, Oracle, IBM and Qiagen. Given its strong performance and expertise in the overall business, it was felt that the value from bioinformatics business would be better realised if it was operated as a separate entity. Consequently, the Bioinformatics part of the service group has been spun off into Ardigen, with Selvita retaining a 60% stake, which it expects to be marginally profitable. We have insufficient detail at this early stage to value it separately.

Selvita’s cash position is strong, with an estimated PLN36.5m at the end of 2015. There is sufficient cash to progress the internal drug candidates SEL24 and SEL120 to complete Phase I and pre-Phase I respectively. For these programmes to progress further, we would anticipate additional financing and/or a collaborative deal.