Imugene — Update 18 February 2016

Imugene is an Australian biotechnology company developing HER-Vaxx, a gastric cancer vaccine. The company is currently a pure-play, one-product, one-trial-focused cancer opportunity in the highly valuable area of cancer immunotherapy. If the proposed Phase Ib/II study shows a strong efficacy signal, data possibly in H219, it might enable a major deal with a big pharma company. The global market for gastric cancer is over 900,000 patients annually.

If its Phase II succeeds, HER-Vaxx could gain a big pharma partner. Assuming an A$25m upfront, a regulatory milestone of A$50m with potential royalties of 12% starting in 2025 and ending in 2036 (due to 12 years of data exclusivity for biologicals in the US and the likelihood of additional patents based on the new HER-Vaxx composition), Imugene has an indicative value on discounted cash flow of A$56m. This assumes a Phase Ib/II probability of reaching the market of 20% and a 30% probability of a 2020 licensing deal. Our standard 12.5% discount rate is used. Imugene is assumed to pay 18% royalties to Biolife, based on Imugene revenues, until 2030. Our valuation is equivalent to 2.9c per share, including dilution for 480m options on issue. Note that most of the options are currently out of the money.

Imugene reported an operating loss of A$2.4m in FY15. We forecast operating losses of A$2.6m in FY16 and FY17. In September 2015 the company announced an A$3.0m placement (400m shares issued at 0.75c per share with 200m attached options at 1.5c per share, expiring 31 March 2017). The cash balance at 30 September 2015 (the end of Q116) was A$1.3m. End-September pro forma cash was ~A$4.9m including net capital raise proceeds and a A$0.8m R&D incentive payment received in October 2015. Operating and investing cash outflow for the first quarter of FY16 was A$0.7m. Current funding is sufficient to initiate the Phase Ib/II trial, but further funding will be needed to complete it. Additional illustrative long-term debt of A$3m in each of 2017e and 2018e is included to represent this. If instead of debt the A$6m was raised as equity at a 10% discount to the current share price, our diluted valuation would decline to 2.5c per share.

The major potential value inflection point for investors would come if the Phase II trial produces strong data to enable a big pharma licensing deal (with an upfront fee) that covers Phase III costs. Before such time, it may be of interest to potential partners if the Phase Ib shows evidence of potential efficacy (cellular plus humoral immune response, generation of anti-HER2 antibodies). In October 2014 BMS paid US$50m for an option to acquire Austrian biotech F-star Alpha, and its Phase I-ready bi-specific antibody drug targeting HER2-positive cancers; total deal value could reach US$475m if the drug is approved in the US and Europe. However, there is no guarantee that Imugene will succeed in partnering, and the company would require additional funds to complete the Phase II trial, as outlined above.

Uncertainties arise as any survival gain in gastric cancer is not known, but may be smaller than that achieved in breast cancer as the Herceptin gain was smaller. It is unclear how effectively HER-Vaxx can be combined with chemotherapy in Phase II as vaccine responses take time to develop. Royalties are hard to forecast accurately since most gastric cancer patients are in Asia and therapeutic options may broaden over the next eight years as other trials report data.

Imugene is an Australian biotechnology company developing HER-Vaxx, a gastric cancer vaccine that aims to stimulate production of high levels of polyclonal antibodies against HER2. HER2 is a well understood cancer target that is expressed at high levels in about 15-25% of breast and gastric1 cancers; it is targeted by the approved monoclonal therapeutics Herceptin (trastuzumab, Roche) and Perjeta (pertuzumab, Roche). Herceptin is used in breast and gastric cancers. Perjeta in combination with Herceptin and chemotherapy adds 15.7 months to median breast cancer survival. HER-Vaxx aims to replicate and improve on the Perjeta-Herceptin combination for patients with HER2-positive cancers. Management sees gastric cancer as a faster indication to develop, relative to breast, with a large potential gastric cancer market and high unmet medical need. Global gastric cancer incidence is 952,000 cases with few therapeutic options and low survival.

Imugene acquired the HER-Vaxx technology in December 2013 through the purchase of 100% of Biolife Science Qld for 300m issued shares valued at A$4.5m (A$0.015/share). The technology originated from the Medical University of Vienna, one of Europe’s leading cancer institutes. Imugene has raised ~A$9m since late 2013 at prices ranging from 0.75-1.0c per share to fund the HER-Vaxx strategy.

Australia’s Pharmaceutical Benefits Advisory committee (PBAC) recommended at its July 2015 meeting that the treatment of HER2-positive gastric cancer should be subsidised under the Pharmaceutical Benefits Scheme (PBS). Widespread access to an approved targeted therapy such as Herceptin would have made it difficult to recruit HER2-positive patients for the HER-Vaxx trial in that country, as previously planned.

Asia represents the largest target market for gastric cancer therapies. Of the 952,0002 new cases of gastric cancer that were estimated to have occurred globally in 2012, 700,000 occurred in Asia, including 108,000 cases in Japan and 405,000 cases in China. Gastric cancer is less common in the other major pharmaceutical markets, with 28,000 cases in Western Europe and 24,500 cases in North America.

In addition to the high incidence of gastric cancer in Asia, many patients in Asian countries do not have ready access to Herceptin. The combination of these factors means that it makes sense to conduct the Phase Ib/II trial in Asia, where there is a large pool of suitable patients from which to recruit subjects for the trial.

The clinical research organisation (CRO) Novotech was appointed in December to manage the trial, which will recruit patients at a number of leading cancer centres in Asia. Novotech is based in Sydney, Australia, and has a particular focus on the Asia-Pacific region.

Imugene is putting in place the finishing touches as it prepares to initiate the Phase Ib trial of HER-Vaxx in patients with gastric cancer in mid-2016. The trial design is largely complete and an Investigational New Drug (IND) application will be submitted to the US FDA in early 2016. Manufacture of the reformulated vaccine is on track to produce clinical doses of HER-Vaxx well ahead of trial commencement.

The Phase Ib lead-in trial will test three different doses of the reformulated HER-Vaxx in 18 patients (three groups of six) in combination with chemotherapy. The key endpoints of the Phase Ib trial are to:

The Phase Ib trial will be followed by a randomised Phase II trial to test the efficacy, safety and immune response of the selected dose in 68 gastric cancer patients. The efficacy endpoints of this randomised, placebo-controlled trial will be progression-free survival and overall survival.

Imugene will closely monitor the immune responses that patients generate following administration of HER-Vaxx in the Phase Ib trial, to determine whether the patient’s immune system is being 'turned on' to produce the desired anti-HER2 polyclonal antibodies. The level of anti-HER2 antibodies that patients produce following vaccination will be an important indicator of the potential for the treatment to be an effective anti-cancer therapy.

Data from previous preclinical studies showed that polyclonal antibodies produced following vaccination with HER-Vaxx were more potent than the marketed monoclonal antibody (mAb) Herceptin at inhibiting the growth of breast cancer cells. Exhibit 1 shows that less than half the dose of HER-Vaxx-stimulated antibodies was required to inhibit cancer cell growth to the same degree as Herceptin; 18.75µg of polyclonal antibodies isolated from the serum of rabbits that had been immunised with HER-Vaxx inhibited the growth of breast cancer cells to the same degree (39%) as 50µg of the monoclonal antibody Herceptin.

While immune responses are not direct evidence of efficacy, they will be important early data to provide to potential pharma partners because we can infer that if HER-Vaxx can stimulate high levels of antibody production, it could potentially match or exceed the efficacy of Herceptin.

HER-Vaxx is designed to produce antibodies against the HER2 receptor, a growth signal receptor protein found on the cell surface that is overexpressed in many cancers. HER-Vaxx contains three peptides that stimulate the patient’s immune system to produce antibodies against the P4, P6 and P7 sites on the HER2 molecule. These peptides cover the Herceptin (P6 and P7) and Perjeta (P4) binding sites, as shown in Exhibit 2. The binding of Herceptin and Perjeta block the 'growth-promoting' activity of the HER2 molecules on the surface of the cancer cells. The polyclonal antibodies stimulated by HER-Vaxx and binding to the P4, P6 and P7 sites on the HER2 molecule would act in the same way. They may also trigger an immune response against the HER2-expressing cells, so called antibody-directed cell cytotoxicity (ADCC).

The HER2 receptors that are expressed at abnormally high levels in many cancers are normal or 'wild-type' proteins that do not typically contain any mutations. These wild-type HER2 proteins would normally be tolerated as 'self' antigens and would not trigger an immune response. A key attribute for a successful HER-Vaxx vaccine will be its capacity to stimulate the production of enough antibodies to block the growth-promoting activity of the HER2 receptors. Imugene has made two important improvements to HER-Vaxx that would be expected to stimulate anti-HER2 antibody levels that were at least four times higher than seen in the Phase Ia breast cancer trial.

The original formulation of HER-Vaxx that was tested in a Phase I breast cancer trial contained the three separate P4, P6 and P7 peptides incorporated into a virosome, an artificial virus. Imugene has shown that synthesising all three peptides together as one long, straight peptide strand doubles the production of antibodies that bind to the target HER2 native protein, as shown in Exhibit 3. The company refers to the fusion peptide as P467.

Imugene has made a second enhancement by replacing the virosomes used in previous formulations of HER-Vaxx with an existing, clinically and commercially validated vaccine carrier protein called CRM197 together with an adjuvant.

Exhibit 4 shows that immunisation with the P467 fusion peptide conjugated with CRM197 leads to earlier HER2 antibody production (significant after two immunisations), with a peak response after three immunisations, compared with an earlier P467 virosome-based formulation of HER-Vaxx. After four vaccinations, the antibody levels stimulated by the CRM197 and virosome formulations were similar.

Advantages of the new CRM197 formulation include a notably faster and stronger immune response, a new patent filed that will extend IP coverage to 2036 vs 2030 at present, if granted, and a cheaper, simpler and more reliable manufacturing process.

HER-Vaxx is designed to produce antibodies against the HER2 receptor, which is a member of the epidermal growth factor receptor (EGFR) family of growth signal receptors found on the cell surface. Only patients with high levels of HER2 achieve good results with Herceptin therapy. HER2 is quantified in cancer in in two ways.

The previous Phase I trial of HERR-Vaxx was conducted in 10 patients with metastatic breast cancer. Results have been published and a detailed summary is in Exhibit 5. The main conclusion identified by the lead investigator was that HER-Vaxx 'broke tolerance' – that is, it stimulated clear antibody responses against all three peptide sites with some evidence of a wider immune effect.

With the Phase Ib open-label gastric cancer study to start in mid-2016, results should be available in 2017. The Phase II trial is likely to take two to three years depending on recruitment and mortality. Assuming a H217 start, data could be available in H120. This could lead to partnering in 2020 and Phase III development from 2021. We have assumed it will take three years to complete Phase III studies and a year to gain regulatory approval with a possible 2025 launch.

The clinical performance of current anti-HER2 monoclonal antibodies is given in Exhibit 6 and gives a benchmark for potential HER-Vaxx responses. Herceptin is a well-established therapeutic monoclonal antibody approved for use in IHC3+ patients. In clinical trials, the HER2 status of patients is very important.

Gastric cancer patients eligible for Herceptin therapy in the US and Western Europe should receive the therapy as standard of care.

The majority of metastatic breast cancer patients who respond to Herceptin develop resistance within one year of treatment. In the adjuvant setting, 15% of patients relapse despite Herceptin. In patients resistant to Herceptin, Kadcyla (trastuzumab linked to the cytotoxic agent emtansine, Roche) is approved for use in metastatic breast cancer; a gastric trial is underway.

Gastric cancer is a major unmet medical need with ineffective chemotherapy and modest additional gain from Herceptin use. Exhibit 7 shows that a number of trials in HER2 are underway. Various tyrosine kinase inhibitors have been tried (dacomitinib, afatinib, lapatinib) but with limited results (not shown). NeuVax is a T-cell vaccine aimed at low HER2 patients, but with no gastric studies currently underway.3 The major threat to HER-Vaxx is the Perjeta-Herceptin trial due in 2021.

The immune checkpoint inhibitor Opdivo (nivolumab, BMS) could be launched in the Japanese market by 2019, with possible later extension into the US and EU. Separately, Merck partnered with MacroGenics in November 2015 to conduct a Phase Ib/II trial of MacroGenics’ margetuximab and Merck’s Keytruda (pembrolizumab) for gastric cancer. Margetuximab is a mAb against HER2 (ie comparable to Herceptin and Perjeta) that has been optimised to increase killing of cancer cells by ADCC.

Herceptin costs US$4,500 a month, or US$54,000 a year. Perjeta costs US$5,900 a month, or about US$71,000 a year, and combination therapy with the two drugs costs US$125,000 per year. In the first nine months of 2015, Roche reported Herceptin sales of CHF4.9bn, up 10%. At current exchange rates, this is US$4.8bn for the period, annualised about US$6.4bn. Perjeta sales were up 66% at CHF1.0bn after the 2012 launch. This demonstrates that there is a large potential market for HER-Vaxx if it can match the efficacy of Herceptin and Perjeta.

Herceptin is threatened by the launch of biosimilars, with Biocon/Mylan and Celltrion/Hospira having already launched biosimilars in India and Korea, respectively. The European patent expired in July 2014 and the US patent expires in 2019. While this suggests that there may be a decline in Herceptin pricing and market value by the time HER-Vaxx enters the market (if successful) price falls are less aggressive for biologicals such as Herceptin than small molecule generics.

Two potential competitors failed in clinical development in gastric cancer in 2015. Merrimack terminated developing its MM-111 bispecific antibody targeting HER2 and HER3 after a failed Phase II trial. Roche revealed in October that the Phase III trial of Kadcyla in gastric cancer failed to meet its primary endpoint to improve overall survival.

The additional cash from the recent capital raise sees our valuation increase slightly to A$56m (3.2c per share) from A$53m, with the impact on valuation of a 12-month later expected launch date offset by the likely extension of market exclusivity to 2036 (Exhibit 8). The additional shares and options in issue following the capital raise and issue of loyalty options see our diluted per share valuation fall to 2.9c per share (vs 4.1c). Note that most of the options are currently out of the money. The main changes to assumptions since our previous report are:

Our valuation assumes a 20% likelihood of success and includes a A$25m deal upfront after Phase II (at a 30% probability) and a A$50m Phase III success milestone at a 20% probability.

We assume that peak sales of HER-Vaxx will reach US$740m in 2029, following market launch in FY25, and that the company receives a 12% royalty on net sales (Exhibits 8 and 9). We assume that sales peak in 2029, plateau for three years and decline by 5% pa after 2032, and that 18% of HER-Vaxx revenue received by Imugene up until 2030 (including upfront, milestone and royalty payments) is paid to BSFE,7 the original owners of the HER-Vaxx IP. We have applied the key assumptions in Exhibit 9 to the market data in Exhibit 10 to give potential peak sales of ~US$740m.

Imugene reported an operating loss of A$2.4m in FY15. We forecast operating losses of A$2.6m in FY16 and A$2.7m FY17. In September and October 2015 the company raised A$3.0m (gross) in a placement (400m shares issued at A$0.0075/share plus 200m options expiring on 31 March 2017 with an exercise price of A$0.015 per share). In addition, 177m bonus loyalty options with the same terms were issued to existing Australia and New Zealand-based shareholders. The cash balance at 30 September 2015 (the end of Q116) was A$1.3m. Pro forma cash was ~A$4.9m including net capital raise proceeds and a A$0.8m R&D incentive payment received in October 2015. Operating and investing cash outflow for the first quarter of FY16 was A$0.7m. Current funding is sufficient to initiate the Phase Ib/II trial, but further funding will be needed to complete it. Illustrative additional long-term debt of A$3m in both 2017e and 2018e is included to represent this. If the A$6m was raised as equity at a 10% discount to the current share price, our diluted valuation would fall to 2.5c/share.

The major potential value inflection point for investors would come if the Phase II trial produces strong data to enable a big pharma licensing deal (with an upfront fee) that covers Phase III costs. Before such time, possible partners may also take notice if Phase Ib shows evidence of potential efficacy (cellular plus humoral immune response, generation of anti-HER2 antibodies). In October 2014 BMS paid US$50m for an option to acquire Austrian biotech F-star Alpha, and its Phase I-ready bi-specific antibody drug targeting HER2-positive cancers; the total deal value could reach US$475m if the drug is approved in the US and Europe. This example highlights that potential partners may seek to acquire the company rather than enter a licensing deal. The double antibody action that HER-Vaxx aims to replicate, and perhaps improve on, is proven in breast cancer. In Phase I, in a non-target population, HER-Vaxx generated antibody responses against all three peptides. While these are strong positive indicators, there is no guarantee that Imugene will succeed in attracting a partner or additional funding at acceptable terms.

Uncertainties arise as it is unclear how effectively HER-Vaxx can be combined with chemotherapy in Phase II as chemotherapy could potentially inhibit the immune response to the vaccine. On the other hand, some chemotherapy agents, including cisplatin, have been shown to stimulate the immune system.8 We note that patients in the upcoming Phase Ib/II trial of HER-Vaxx will be treated with cisplatin in combination with either capecitabine or 5-fluorouracil chemotherapy. The Phase I trial showed that patients treated with HER-Vaxx produced antibodies against HER2, but we do not yet know how the concentration of antibodies produced compares with the levels seen in patients treated with Herceptin or Perjeta. As the vaccine aims to stimulate an immune response against the normal HER2 protein that the immune system usually tolerates as 'self', the amount, potency and duration of anti-HER2 antibody production will be an important indicator of likely efficacy.