Genticel — Update 3 January 2016

Genticel has two products: GTL001 and GTL002. GTL001 is in Phase II to treat HPV 16 or 18 infected women with either no or only low-grade cervical abnormalities. Infected women are at risk of progressing to high-risk, pre-cancerous cervical lesions requiring surgery. After GTL001 Phase II data (due in Q116), Genticel aims to find a partner to run the Phase III studies and market globally, potentially from 2021. GTL002, in preclinical, will expand the market by treating up to six HPV types including HPV 16 and 18. GTL001 was developed using CyA vaccine technology licensed from Institut Pasteur in 2002; GTL002 uses enhanced CyA technology (Vaxiclase). Genticel was founded by the CEO, Benedikt Timmerman in 2001. It is based in Toulouse in southern France, with offices in Paris. It completed its Euronext IPO in April 2014 at €7.90/share, raising €34.5m gross.

On a Phase II probability of 45%, we estimate a risk-adjusted indicative value of about €139m, or €8.93 per share before dilution (€8.19 fully diluted). If GTL001 progresses to a 65% Phase III probability in Q116, the value would rise to €198m, or about €12.80/share before dilution or €11.70 if fully diluted by 1.4m options. Note that Phase III needs either a deal or funding to raise the required cash. Genticel has enough cash until 2017 before any partnering upfront fees. There is a royalty and deal fee share to the Pasteur, which is undisclosed and which we assume to be 5%. This valuation is based on the current two projects and a 2017 partnering deal (currently set by Edison at 60% probability). It is assumed that GTL002 is included in the deal with development funding.

On 30 September, cash was €21.5m. In H215, Genticel will receive a tax credit cash payment of €2.6m in respect of 2014; in France, companies get good tax refunds on R&D investments. Our forecast cash outflow in 2015 is about €12.2m. The expected 2015 tax credit of €3.5m cuts the forecast 2015 loss to about €11.4m, this credit will be received in 2016. Losses should reduce in 2016 as the GTL001 Phase II enters its follow-up phase. A partner is expected to fund the GTL001 Phase III studies from 2017. Genticel has previously benefited from subsidies and financial advances from government. Two advances totalling €1.73m are now being repaid up to 2017.

2014 prophylactic HPV vaccine sales were $2bn, showing the demand for treatments to manage HPV infections. GTL001 could develop a strong new market as an ‘active’ therapeutic vaccine that proves to be more socially acceptable than the prophylactic HPV vaccination of teenage girls. This could enable a premium price, depending on good clinical performance. GTL002 will expand the market further. The immediate sensitivity is the GTL001 Phase II outcome. A statistically significant result in Q116 would facilitate a good-quality, valuable deal. The risk comes from the uncertainties around the positive but limited Phase I viral clearance data and the placebo rate, thought to be up to 50%. The GTL001 Phase II uses a diagnostic-based viral clearance endpoint. The Phase III will use a clinical endpoint, probably based on reducing the incidence of higher-grade lesions. Phase II is therefore indicative of the Phase III outcome, but not necessarily predictive. This strategy is similar to the development route used to gain approval of prophylactic vaccines. The changing and dynamic market provides the other key uncertainty. The 25-29 age cohort is 12% of the 25-64 age range eligible for molecular testing, but accounts for 44% of HPV prevalence in this age range. The HPV prevalence in this cohort will gradually be reduced by prophylactic vaccination. Treatment guidelines after GTL001 approval will need revising and then adoption, which can take time.

Genticel develops therapeutic vaccines against high-risk HPV infections (types 16 and 18), Exhibit 1.1 These two viruses cause 70% of cervical cancer. Terminology is defined in Exhibit 2. The products are based on CyA technology exclusively licensed to Genticel from Institut Pasteur, a world-leading vaccine research centre. The lead product, GTL001, is in a large Phase II, due to report in Q116. The follow-on product, GTL002, uses an enhanced CyA technology (Vaxiclase) to extend the coverage to six HPV types to expand the potential market; these six viruses cause about 85% of cervical cancer cases. The products are targeted at patients who have either no observed cellular abnormalities on the cervix or only low-grade abnormalities.

All invasive cervical cancer (ICC) is caused by HPV, a sexually transmitted infection. The two HPV types causing 77% of cervical cancer in the US and 74% in the EU are HPV 16 (most dangerous, 55% US, 58% EU) and HPV 18 (22% US, 16% EU) see Bosch 2008 and CDC 2014. For the US, the SEER estimate is for 12,900 women diagnosed with cervical cancer and 4,092 deaths. The five-year survival rate is 67.8%. In the EU, the incidence is 33,335 with 12,996 deaths. Rates vary widely between EU members, see EUCAN. For example, in France, (66 million population) with its sophisticated healthcare, there were 2,862 cases and 1,167 deaths.

Studies (Rositch 2013) show that persistent high-risk HPV infections lead to a higher risk of developing precancerous cervical abnormalities (lesions) with a risk of ICC. In women aged 27 or under, the weighted median HPV 16 infection period was just under 12 months. Insinga (2011) found over 36 months that 9.3% of HPV 16 +ve cases developed high-risk CIN2/3 but 67% of women naturally cleared the virus, Exhibit 3. HPV 16 CIN1 cases had more persistent infections with a 27% 12-month clearance rate and 7% progression.

There are no external symptoms of either HPV infection or of precancerous lesions. Consequently, screening was introduced (over 50 years ago) and there is now extensive medical literature. As a benchmark, England spends about £150m/€200m per year on cervical screening and follow-up treatments. This funds just over 3m tests per year. The current method uses cytology, microscopic examination of cells harvested from the cervix mostly now using LBC, Exhibit 2. HPV molecular testing has been routinely available for about 15 years and can be used to triage cytological abnormalities (co-testing) by identifying high-risk types, specifically HPV 16, 18 or others.

Primary HPV DNA screening without cytology is FDA approved using the Roche Cobas 4800, with HPV 16 and 18 specifically detected. Primary HPV testing has a high sensitivity (it finds 54% more CIN3+ cytological cases) but a low specificity (there are many more false positives). Exhibit 4 shows the association between cytology status and HPV 16 and 18. DNA screening requires twice the colposcopy capacity and a major restructuring of screening systems. The extent of the transition is unknowable and likely, in our view, to be faster in the US than the EU.

The market is likely to shift slowly towards direct HPV DNA screening to find more, rare CIN3 cases and away from cytology screening. This move is crucially important for GTL001 as its market is much smaller if cytology screening remains.

Most published studies were done as molecular testing was being introduced and evaluated, so detailed longitudinal studies use cytology as a primary screen with follow-up HPV testing. The change to primary HPV direct testing will take time to be implemented in standard medical practice. ARTISTIC: a long-running English longitudinal study started in 2001, in which a cohort of women aged 20-64 was tracked over three screening rounds. Nearly 90% of UK cytology tests are negative and only 1.6% of these have HPV 16 or 18 infections, although 8.8% overall have an HPV infection. This is similar to other reported figures. Most of these infections clear naturally. A 2005 review found about 4-5% of women screened by cytology had ASCUS, 2.5-3% had LSIL and 0.3-0.6% had HSIL.

The primary HPV screening suggested by the Roche ATHENA study, accepted by the FDA in mid-2014, refers HPV 16 and 18 infections directly to colposcopy (Exhibit 2) to stage any CIN abnormalities. However, to do this routinely, the colposcopy capacity of the healthcare system needs to at least double, as many more women will be examined. A systematic 2015 review of screening strategies to give guidance (Huh et al) identifies the risk of progression. Basically, the possibility of a high-risk lesion or ICC if a women has no HPV infection and normal cytology is tiny. 3 Rescreening after a negative test is now recommended no sooner than three years later and five years for women over 50, although the three-year interval is well embedded in medical practice.

Historically, women in the US have been screened every one to two years (Sirovich 2004). The US guidelines have been in a state of flux and the latest recommendations (from 2012 and partly updated in 2015) are that cytology screening is done every three years or every five years for women over 30 at low risk.4 Women with early-stage disease and HPV infection should be tracked more frequently. Any identified high-risk lesions are resected (removed) by one of several simple surgical treatments; all of these are curative.5

In Europe, the guidelines vary from possible screening from 20 years old in Germany to 30 in Finland. Some European countries, like England, have systematic national screening.

The risk of a women with no detectable HPV and no or minor cellular abnormalities progressing to late-stage precancerous disease (CIN3+) is less than 1% after five years (see ACS-ASCCP-ASCP Screening Guidelines). The US NCI notes that 86.7 % of women with a positive HPV test did not develop cervical cancer or related premalignant disease after more than a decade of follow-up. However, HPV 16 and 18 infections carry a high risk of progression, Exhibit 4. This means that, on ATHENA data, for every 1,000 women with HPV 16, 117 will develop high-risk precancerous lesions at some time, but only three HPV -ve women will do so. This is a nearly fortyfold increase in risk.

As outlined in the document de référence 2014 (annual report), Genticel’s management calculates a prevalence of 12 million HPV 16 or 18 cases in mature markets (defined as North America, EU, Korea, Australia and NZ and Japan. These countries have about 330 million women in the 20-64 age cohorts. Genticel has used a flat rate, age-independent prevalence of 3.5%, which is within published ranges for 15-64 year olds.6 Prophylactic vaccination is expected by management, based in market research, to cut the prevalence by 33% to eight million.

We have used age-specific cohort prevalence rates and limited the ages used to 25-64, as these will be identified by HPV screening even if no cytology is present. The HPV rate on average is therefore lower, about 2.8%, than in the overall population: typically about 3.5%. In addition, only leading European countries have been included, which reduces the market by about 50% relative to the overall EU. This is because these core markets have good epidemiological data, effective screening and have implemented prophylactic therapy, so are also likely to use GTL001 immunotherapy. We then make a 20% addition for sales in other European countries, Australia, New Zealand and Asia.

HPV infection peaks in women in their early 20s, then declines. Prevalence is a balance between the infection and natural clearance rates. In young women, infection is higher than clearance, but this switches by age 24 so prevalence drops. Few counties, the US being an exception, screen before 25 (HPV over 25). Infections in the over 25s are weighted to the 25-34 group; within that group they are heavily weighted 63:37 to the age 25-29 vs 30-34 age cohorts, Exhibits 6 and 7. (Note that the histograms use a different y-axis range and the x-axis data categories differ.)

The HPV 16 infection rate falls to 0.7% in the 45-64 age group. Information on infection and clearance is limited, but one very small UK study reported that 15-20% of older women became infected (any HPV type) over a three-year period, with about 80% clearing an infection.

Applied to current US and EU country demographics, we calculate that there may be 2.2m HPV infections in the US and 2.8m in accessible European countries, Exhibit 8. National prophylactic vaccination rates are a significant factor in modelling GTL001 sales.7 In many countries, it is hard to get all three prophylactic doses administered. There are often higher rates for one and two doses and this gives protection in more than 80% of cases (Kreimer et al 2015).

The current European national positions vary. After a slow start, a European Centre for Disease Prevention and Control survey found 2012 vaccination rates of 50-84%, but only the UK and Portugal achieved ±80% with three doses, the recommended full schedule (the UK vaccinates girls at school); Germany was 49% at three doses plus 11% with one or two despite free, on-demand vaccination; France achieves 39% for the full course with 58% getting at least one dose (45% of the cost is paid by the individual); and Italy is at about 50%. Our population-weighted average calculation indicates that more than 60% of girls now receive at least one dose at the present time.

The US started vaccinating in 2006 and by 2010 coverage of the full three-dose vaccine course was reported as 32%. In 2014, Centre for Disease Control data showed that 60% of girls received at least one dose, with about 40% getting all three. The US also vaccinates 21% of boys.

Vaccination is also being implemented in women who missed initial prophylactic vaccination as they enter screening. Rates for this are not clear as only 10 EU states have such programmes in place, but Denmark, as a leader, is reported to have achieved an 81% coverage.

The commercially crucial 25-34 age cohort is 12% of the EU and US target age range and accounts for 42% of HPV infections. From 2020, this age cohort will be increasingly protected by vaccination. For example, in the UK about 80% of girls are vaccinated at 12-13 years old; a 2013 report showed a fall in HPV prevalence from 19.1% to 6.5% once 65% of young women had been vaccinated.

We have developed a simple model of vaccination levels by year and age cohort. This indicates that in 2021, about 7% of women aged 25-29 might have been vaccinated in their early teens. The rate of 25-29 cohort vaccination rises to 60% by 2029. Vaccination has impacts in the next cohort, 30-34 years of age, from 2024 at 1% increasing to 58% by the end of the 2032 when the detailed US forecast period ends. Vaccinated women enter the 35-39 age cohort from 2029. The maximum vaccination rate assumed is 60% of any age cohort. The model additionally takes account of women vaccinated by GTL001 as it is assumed that this gives lasting protection. It also assumed that catch-up vaccination does not become widespread.

Genticel’s core CyA technology arises from research at the French CNRS 8 and the Institut Pasteur into the bacteria (Bordetella pertussis) that causes whooping cough, Exhibit 9. There is an undisclosed royalty rate to Institut Pasteur. We assume this to be 5% [company asked to at least state not unhappy] running until 2030 on the basis of 10 years from market entry.

GLT001 consists of two recombinant adenylate cyclase (CyaA) proteins, CyaA-HPV 16E7 and CyaA-HPV 18E7 in a 50/50 ratio. GTL001 is given with a cream containing 5% imiquimod as an adjuvant rubbed onto the injection site.9 The Phase I, reported in October 2012, Exhibit 10. The GTL001 Phase II study (NCT01957878) completed recruitment four months ahead of schedule in November 2014. The trial recruited 239 patients across through 39 centres in seven countries; this is expected to give 100+ patients per arm. Enrolled subjects are healthy women between 25 and 50 who have HPV 16 and/or HPV 18 infection. They either have normal cytology, ASCUS or LSIL. Patients received two injections of GTL001 or placebo eight weeks apart plus imiquimod cream. Management reports that compliance with this dosing regimen was very high.

The engineered CyA protein has the potential to deliver a very focused and powerful immune stimulus against virally infected normal tissues through an effective T-cell response. This is clearly shown in the preclinical data, which we have reviewed. However, because HPV infections progress over time and because the surface of the cervix is not well vascularised, it is currently thought by Genticel that the CyA approach will be most effective in the early stages of infection.

Genticel exclusively licensed the technology in 2002 and the core patent runs until 2027. Patent lifetimes can be extended to compensate for delays in clinical trials and regulatory review. In the US, up to a further five years can be obtained (to a maximum of 14-year market exclusivity).

More important, as a biological product, GTL001 and Vaxiclase would individually be eligible for biological protection for 12 years in the US from the date of FDA approval and for 10 years in the EU. This protection could easily last longer than any extended patent protection. Consequently, our model extends to 2032 for GTL001.11

GTL001 is only able to carry one 100 amino acid fragment of E7 into cells. For GTL002, further protein engineering has created a form of CyA able to carry three different fragments. This gives the scope to develop therapeutic vaccines with broader specificity. An announcement in June 2015 showed that GTL002 in preclinical testing eradicated the six most oncogenic HPV types; there are two different Vaxiclase-based CyA constructs in each dose. Genticel management estimates that this could extend, worldwide, the number of women that might benefit from therapy from 93 million using only GTL001 to 158 million with GTL002. Based on similarities to GTL001, a high Phase I probability of 20% has been used in our valuation.

Longer term, Genticel management speculates that Vaxiclase technology might generate products that could target other viruses such as hepatitis B and C, cytomegalovirus (CMV). As with HPV, infection is common, but most individuals generate an immune response. Vaxiclase technology might be used to target early-stage solid tumours such as prostate and colorectal.

As an indication of the potential importance of Vaxiclase, the Serum Institute of India (SIIL) licensed the technology (as of February 2015) to evaluate Vaxiclase in vaccines containing, ironically, pertussis whooping cough) antigens. SIIL is one the world’s leading vaccine producers, particularly providing effective, low-cost vaccines to developing countries. This preclinical-stage licence agreement enables Genticel up to $57m in upfront and milestone payments plus single-digit royalties on net sales

The Phase II is scheduled to report in Q116 with 12 months’ virus clearance data (ie 44 weeks after the second dose) using a sensitive and quantitative HPV PCR assay as the primary endpoint.12 The trial will run until late 2016 to assess secondary endpoints and give two-year data.

The Phase II trial will give a statistically significant result if it shows a 40% improvement in HPV clearance rate relative to placebo. It is expected from the natural history of HPV 16 and 18 infections that up to 50% should clear naturally, Exhibit 3. If the placebo clearance rate is 50% and the GTL001 clearance rate is 70% or more, the endpoint is met. If the placebo rate is significantly over 50%, thought by management to be unlikely, the trial might be underpowered.13 The Phase I met this endpoint at 17 months, but only by combining the open-label and double-blinded data sets. An upper Phase II probability of reaching the market of 45% has been used for valuation purposes.

Genticel’s investment case is that all HPV 16 and 18 infected women either with no cytology or ASCUS/LSIL are eligible for treatment. A positive HPV DNA test leads to automatic GTL001 vaccination plus a referral to colposcopy to check for HSIL. The number of infections detected each year is governed by the rate of vaccination (active and prophylactic) and the screening frequency.

We make an assumption that a lower use rate occurs in younger age cohorts. This is because there is a high natural clearance rate and because a 40% relative increase in clearance carries a high quality of life year cost in low risk, younger age cohorts. However, use in women over 35 is assumed to be higher since persistent infection carries a higher HSIL+ risk.

Exhibits 11 and 12 show the model output calculations for leading European countries14 and the US for the third year after launch, probably 2024-25 as an example. Linked yearly models have been built for each year until 2032. Exhibit 13 describes the model structure.

Longer-term projections for Europe and then US are shown in Exhibits 14 and 15. Because of a high rate of treatment, assumed direct HPV detection and a shorter screening interval, the US market peaks and then falls. In Europe, the lower frequency of testing masks the same effect.

As a benchmark, we have taken a price estimate from Bridgehead Technologies, a report commissioned by Genticel and partly disclosed. This estimates a potential price of US$3,000 (document de référence 2014, page 61 Section 6.6.5.9); our model uses €2,250 in the US. In Europe, an average price of €1,500 is assumed as Europe tends to be more price-sensitive.15

As GTL002 covers more oncolytic HPV types, it will naturally supersede GTL001 in the market. These extra HPV types cause 25-30% of cervical cancers in total, but they are individually small. The greater coverage expands the potential infection market by about 50% as these types are more prevalent in younger women, although more easily cleared and more often cytology negative. GTL002 also has a longer product life cycle: assuming a 2026 launch it could have US protection as a biological until 2037-38. Exhibit 16 shows forecast sales (not risk-adjusted) for both products assuming a substitution effect. Finally, a 20% addition is made to account for additional markets such as Asia and Brazil. This could be conservative, but use of GTL001 depends on a developed screening infrastructure with molecular testing and the ability to fund treatment.

The only possible direct competitor identified is a photodynamic therapy and device, Cevira, with Phase III designation being developed by Photocure. Cevira might clear any HPV infection, but would not directly confer any immunity to a repeat infection. It is an alternative to surgery for LSIL.

2014 prophylactic HPV vaccine sales were $2bn, showing the demand for treatments to manage HPV infections. GTL001 could develop a strong new market as an ‘active’ therapeutic vaccine that proves to be more socially acceptable than the prophylactic HPV vaccination of teenage girls. This could enable a premium price, depending on good clinical performance. GTL002 will expand the market further. The immediate sensitivity is the GTL001 Phase II outcome. A statistically significant result in Q116 would facilitate a good-quality, valuable deal. The risk comes from the uncertainties around the positive but limited Phase I viral clearance data and the placebo rate, thought to be up to 50%. The GTL001 Phase II uses a diagnostic-based viral clearance endpoint. The Phase III will use a clinical endpoint, probably based on reducing the incidence of higher-grade lesions. Phase II is therefore indicative of the Phase III outcome, but not necessarily predictive. This strategy is similar to the development route used to gain approval of prophylactic vaccines. The changing and dynamic market provides the other key uncertainty. The 25-29 age cohort is 12% of the 25-64 age range eligible for molecular testing, but accounts for 44% of HPV prevalence in this age range. The HPV prevalence in this cohort will gradually be reduced by prophylactic vaccination. Treatment guidelines after GTL001 approval will need revising and then adoption, which can take time.

Our valuation is based on the current two projects and a 2017 deal. Genticel aims to develop other projects targeting other viruses and cancer (a patent was granted in H115), but these are not included in the NPV as they are early preclinical. Hence, only a basic cost level is assumed after the potential deal in 2017. In reality, Genticel will have admin and R&D costs on other projects, but these expenses are not included as no revenues are attributed. The forecasts and valuation run to 2037 when GTL002 exclusivity expires. Our key assumptions are summarised in Exhibit 17.

The valuation, based on the numbers and sales projected above at a 12.5% discount rate, is shown in Exhibit 18. The value is heavily affected by French corporate tax (33.3%), but this might be reclaimed by investment in new projects. There are repayments of financial advances from French government agencies totalling €1.7m, paid in instalments up to 2017; these are cash items and discounted at 2.5%. Our financial forecast is summarised in Exhibit 20.

On a Phase II probability of 45%, we estimate a risk-adjusted indicative value of about €139m or €8.93 per share before dilution (€8.19 fully diluted). As of 30 September, there was also €1.38 per share of cash to fund operations. If GTL001 progresses to a 65% Phase III probability in Q116, the value would rise to €198m or about €12.80/share before dilution or €11.70 if fully diluted by 1.4m options. Genticel has enough cash until 2017. There is a royalty and deal fee share to the Institut Pasteur, which is undisclosed and which we assume is 5%. This valuation indication is based on the current two projects and a 2017 partnering deal (currently set by Edison at 60% probability).

In the interim accounts to 30 June 2015, there was a licensing payment of €88k (US$100k) from the SIIL licensing deal in February 2015. Genticel has a low-cost operation with H1 administration of €1.5m (including a €0.5m non-cash, share-based payment charge) and R&D costs of €6.1m. There are only minor depreciation and amortisation charges. The interest line includes recognition of accumulating interest from bonds and term deposits of €5m each, €10m excluding interest in total. Interest was €132k in H1, so about 2.5% annually, assumed to be received in 2017 on redemption. We forecast the annualised loss at about €11.5m after tax credits; in France, smaller companies get good tax refunds on R&D investments. The expected 2015 tax credit of €3.5m cuts the forecast 2015 loss to about €11.5m, this credit will be received in 2016. Losses should reduce in 2016 as the GTL001 Phase II enters its follow-up phase. A partner is expected to fund GTL001 Phase III trials.

The loss should reduce in 2016 and 2017 as the main Phase II study enters its two-year, follow-up phase and a partner might take over development funding. However, preclinical work on GTL002 might intensify and other development projects, for example in cancer, are ongoing.

The anticipated 2015 tax credit of €3.5m is received in 2016. In the 9M to Q3, this delay largely accounted for an operating cash outflow of €11m. However, in Q415, Genticel will receive a tax credit cash payment of €2.6m in respect of 2014. We forecast cash outflow in 2015 (including repayable advances to French government) to be about €12.2m dropping to €8.4m in 2016. The repayments in H215 will be €307k. These rise to €634k in 2016. There is an ongoing project (Magenta see below), which might bring in further funding but this is not forecast. Between 8 October and 25 November, Mr Timmerman (CEO) exercised 23,200 options (awarded in 2005) at €2.90 adding €67,280 to cash. These were sold at an average of €6.53/share.

The balance sheet shows limited intangible and property assets. There is a large item of €10.3m relating largely to financial investments, of which €5m was committed to 2017 in a cash deposit account and another €5m was invested on 18 August 2014 in a Natixis bond. The bond pays 2.25% until at least 31 December 2015 and can be redeemed from August 2017 without penalty.16 Overall, non-current assets as of 30 June were €10.3m.

Current assets include tax credits of €4.5m, of which €2.6 is due for payment in H215. Genticel keeps most cash in term deposits (€12.6m) with €2.4m in cash. With tax credits, this should be sufficient to manage 2016 without drawing down the non-current deposits. Total cash and deposits on 30 September 2015 were €21.5m. If a partnering deal with an upfront of at least €25m is concluded by mid-2017, there may be no need for any funding before Phase III GTL001 data.

Genticel has benefited from subsidies and loans from the regional government and has three current advances from bpifrance, a French innovation public bank initiative (formerly run by OSEO), Exhibit 19.17 .Some advances have royalties attached to IP items developed using the funding.

In April 2014, Genticel signed a liquidity contract with Bank Oddo & Cie to trade Genticel shares to stimulate the liquidity and regular listing of its shares and avoid share price discrepancies not justified by market trends. The cash deposit made in 2014 was €200k. As of 30 June 2015, the arrangement had acquired 13,601 Genticel treasury shares, with €117k remaining on deposit.