Opexa Therapeutics — Update 29 November 2015

Established in 2004, Opexa is focused on applying the proprietary ImmPath immunotherapy platform in-licensed from Baylor College of Medicine, to poorly served autoimmune diseases. ImmPath is a personalized immunotherapy using a patient’s own blood samples to help down-regulate the dominant T-cells specific to that individual, which are responsible for or highly contributory to disease processes. Lead product Tcelna is in Phase IIb studies for secondary progressive multiple sclerosis (SPMS), with data anticipated in H216. OPX-212 is a separate product candidate and in preclinical development for neuromyelitis optica (NMO). Merck KGaA has an option to in-license Tcelna by the end of the Phase IIb program.

Our rNPV-derived equity valuation of $51m (inclusive of $15.6m net cash at Q315), or $7.39 fully diluted, applies a 12.5% cost of capital and assumes a 15% probability of success for Tcelna in SPMS and a 5% probability for OPX-212 in NMO. We assume global Tcelna peak sales by partner Merck KGaA of $2.6bn in 2026, with Opexa entitled to 8-15% in tiered royalties.

On 30 September 2015, Opexa had $15.6m in cash and equivalents and its trailing 18-month cash burn rate was $17.3m. In September 2015, the firm raised $0.5m from a $5m equity facility dedicated to OPX-212 (we expect the remaining $4.5m to be raised by year end 2017). We project quarterly burn rates of $3.2-3.7m in the coming quarters as the firm completes the Tcelna Phase IIb study and advances OPX-212. If Tcelna Phase IIb data, expected in H216, are positive, Merck KGaA can exercise its option to in-license Tcelna, which would trigger a $25m upfront payment to Opexa. Merck KGaA would then fund the remainder of Tcelna studies in MS. We forecast that Opexa will raise $60m between 2018 and 2020 to advance OPX-212 and potentially other ImmPath programs. This assumes Merck KGaA exercises its licence option; otherwise, we expect Opexa will need to raise an additional $5m in Q416 and $10m in 2017. For illustrative purposes, we assign these fund-raisings to long-term debt.

While early pooled open-label Phase I SPMS data show a slower than average rate of disease progression, the condition is notoriously difficult to treat, with numerous clinical trial failures (including the recently reported natalizumab Phase III SPMS study) and only one treatment being approved by the FDA. Altogether, there remains significant development and regulatory risk for emerging treatments in neurodegenerative conditions such as MS or NMO. An additional challenge will be sustaining access to capital at favourable terms to fund OPX-212 and future ImmPath programs through multiple clinical trials, and/or to further advance Tcelna if Merck KGaA does not exercise its option. Competing products are also being developed for SPMS and could potentially reach the market earlier than Tcelna, and Tcelna’s commercial success will depend on its performance vs potential competing new products.

Opexa is advancing a novel and personalized T-cell immunotherapy platform to suppress inflammatory processes implicated in several diseases, with the lead program Tcelna (imilecleucel-T) in Phase IIb trials for secondary progressive multiple sclerosis (MS). Merck KGaA has an option to in-license Tcelna following this study (results expected in H216). Opexa is also investigating its platform for other indications of unmet needs, as it is developing OPX-212 for neuromyelitis optica (NMO), for which it plans to file an IND by year end 2015.

Opexa’s core technology platform, ImmPath, was in-licensed from Baylor College of Medicine in 2001 (Baylor will be entitled to low single-digit royalties on revenues received by Opexa on using the technology) and encompasses a proprietary method for the production of a patient-specific (autologous) T-cell immunotherapy following the collection of a patient’s own blood. Peripheral blood mononuclear cells (PBMCs) are isolated and screened against prespecified peptide (protein derivative) potential targets. The dominant reactive T-cell lines that are present against such selected antigen1 (peptide) targets are isolated and then expanded.

The product is formulated into a desired number of treatment doses for a year and then cryopreserved. Before administration, each product dose is attenuated by irradiation to prevent its replication. These attenuated T-cells are then injected subcutaneously into the patient, to enable the patient’s immune system to recognize the specific T-cell receptor molecules of the administered T-cells as immunogenic. This is expected to initiate an immune response reaction against them, resulting in the depletion and/or immunosuppression of the existing circulating reactive T-cells in the patient’s blood that carry those peptide-specific T-cell receptor molecules. This should reduce autoimmune reactions against these selected antigens. Management anticipates that its scalable production process could have lower overhead costs than PROVENGE, an autologous immunotherapy for prostate cancer hampered by high COGS. The firm’s lead program, Tcelna, applies this process as a potential treatment for multiple sclerosis (MS).

MS is an inflammatory disease that attacks the central nervous system. It erodes the protective myelin sheath around nerve fibres, impairing neural signal conduction, and may also attack the nerve fibres themselves. Patients with MS experience a range of neurological dysfunction such as paralysis, ataxia, vision and other sensory losses, in addition to dementia and psychological symptoms. According to the Cleveland Clinic, MS affects approximately 400,000 people in the US and 2.5 million worldwide. Onset is usually between 20 and 40 years and the disease tends to affect women twice as frequently as men. MS is most frequently described in one of three forms:

A fourth form, progressive relapsing MS, is considered to be a variant of SPMS, where the initial relapses/remittance were very subtle or asymptomatic.

MS is believed to be an autoimmune disorder, as immune cells targeting myelin components and associated inflammation factors or mediators (cytokines and antibodies) are involved. Most existing approved disease-modifying treatments for MS (including interferon-beta, glatiramer acetate and natalizumab) aim to modulate immune system function to reduce attacks against myelin and nearly all these are specifically approved for RRMS only.

Tcelna intends to impede the inflammatory processes of MS by targeting and suppressing myelin-reactive T-cells (MRTCs) believed to be responsible in modulating inflammatory processes. After blood is extracted from an MS patient, PBMCs are isolated and screened for T-cells (MRTCs) against a proprietary bank of 109 different myelin peptides. These include peptides from myelin basic protein (MBP), myelin oligodendrocyte glycoprotein (MOG) and proteolipid protein (PLP). The process then identifies which specific peptide antigens are being targeted by the patient’s own MRTCs. Management estimates that out of 109 peptides screened by the process, typically MRTCs against three or four peptides are dominant.

An autologous pool of MRTCs is then generated and raised against these selected peptides. The treatment principle is that the dosage of these MRTCs (after being attenuated with gamma radiation) initiate an immune response that depletes and/or suppresses circulating MRTCs that carry similar peptide-specific T-cell receptor molecules. Hence, Tcelna attempts to impede the function of specific subsets of personalized MRTCs believed to attack myelin and related components.

The Tcelna approach screens patients’ blood each year (against the 109 myelin peptides), as the myelin peptide antigens targeted by the patient’s own endogenous MRTCs can change over time. Effectively, the patient’s own epitope2 profile is re-analysed at each year of therapy, thus re-customizing the treatment to account for potential “epitope drift”.

A 16-patient, Phase I/II open-label study in MS patients intolerant or unresponsive to existing treatments showed statistically significant MRTC cell count reductions over baseline at all visits through one year (five doses given per year, at weeks 0, 5, 13, 21 and 28).3 Tcelna doses were comprised of attenuated MRTC cells selected against six myelin peptides (two each from MBP, PLP and MOG). Three dose levels were tested (6-9m cells per dose, 30-45m cells per dose, 60-90m cells per dose), and the effect was strongest in the middle dose range. There were no reports that MRTC changes for RRMS patients (n=9) differed from those of SPMS patients (n=7).

In the high-dose group, the data were skewed by a high MRTC count increase for one subject. This could suggest a dose-limiting effect. Opexa used 30-45m cells per dose for subsequent studies. The data indicate that Tcelna causes immediate depletion of these MRTCs, which subsides in the weeks following dosing. A subset of the above patients was followed in an extension study, and of these, those who had a rebound of MRTC were given a subsequent annual Tcelna course and then showed continued significant reductions over baseline in the MRTC counts.

A 150-patient, 12-month, placebo-controlled Phase IIb study of Tcelna in RRMS (Tovaxin for Early Relapsing Multiple Sclerosis, TERMS) in RRMS or Clinically Isolated Syndrome4 was completed in 2008. Patients received five subcutaneous Tcelna injections (at weeks 0, 4, 8, 12 and 24).This study did not show statistical significance in its primary endpoint, cumulative number of gadolinium-enhanced brain lesions using magnetic resonance imaging (MRI). However, in a modified intent-to-treat patient population consisting of patients who received at least one dose of study product and had at least one MRI scan at week 28 or later (n=142), the annualized relapse rate (ARR), a measure of RRMS progression, for Tcelna-treated patients was 0.214 compared to 0.339 for placebo-treated patients, representing a 37% decrease in ARR for Tcelna vs placebo. This decrease in relapse rates vs placebo is comparable to those of approved RRMS drugs.

In a prospective group of patients (n=50) with more active disease at baseline (ARR>1), the Tcelna-treated group demonstrated a 55% reduction in ARR vs placebo, and a significant improvement in disability (using Expanded Disability Status Scale, EDSS5) vs placebo (p<0.045). A pooled analysis from 36 SPMS patients from earlier Phase I open-label studies (two Opexa-sponsored studies completed in 2006 and 2007 and one by Baylor in 19986) showed that c 80% of those completing two years of Tcelna showed no disease progression as measured through EDSS. Historical control data (ESIMS study,7 published by Hommes et al. in Lancet in 2004) suggest that 40% of SPMS patients would normally progress. This, combined with the stronger efficacy signal in patients with more active RRMS in TERMS, helped lead the company to pursue SPMS for future Tcelna studies.

Although SPMS develops from RRMS, it exhibits many PPMS characteristics. Where RRMS is characterised by active inflammation, an increase in lesions and evidence of remyelination, SPMS is characterised by more diffuse and less intense inflammation, little to no expansion in the number or size of lesions, and sparse evidence of remyelination. SPMS patents tend to have significantly more gray matter atrophy compared with RRMS patients.

The reduced level of acute inflammation could help explain how available immunomodulating and immunosuppressive therapies approved and validated for RRMS have not been effective in SPMS.

SPMS pathology may involve both the adaptive and innate immune system (whereas RRMS pathology is driven by adaptive immune cells). Unlike RRMS, cells of the innate immune system, including persistently activated microglia and dendritic cells, are dominant in progressive MS,8 and lymphoid follicles in the meninges (close to gray matter) are also present. Opexa believes that the transition to SPMS may involve a transition to a T-cell-dependent inflammatory mechanism, which may more heavily involve the MRTCs as targeted by Tcelna. This could potentially provide a rationale for Tcelna to provide more efficacy in SPMS than RRMS.

Opexa believes that Tcelna’s down-regulatory responses against the overrepresented MRTCs can in turn down-regulate similar (but not identical) alternate endogenous disease-causing MRTCs. It believes that Tcelna up-regulates Foxp3 (Forkhead Box P3) and Interleukin-10 secreting regulatory T-cells, both of which have been shown in animal studies to improve self-tolerance (and reduce autoimmunity). The company cites that among TERMS patients who had baseline ARR>1, Tcelna-treated patients had statistically significant changes from baseline (p=0.02) in Foxp3 cells.

One complicating factor for SPMS, which may also explain why existing RRMS-approved drugs are unsuccessful, is that the blood-brain barrier (BBB) is less disrupted (and more impermeable) in SPMS compared to RRMS, which may impede the ability of therapeutics to reach target sites; indeed, the (chronic) inflammation and inflammatory cells surrounding SPMS may effectively be “trapped behind the BBB” and less reachable by proposed experimental treatments.

In fall 2012, Opexa initiated a 190-patient, placebo-controlled (1:1 randomization) Phase IIb study (termed Abili-T) of Tcelna in patients with SPMS and recruitment was completed in June 2014. The trial is being conducted at 35 US and Canadian sites and recruited patients must have EDSS scores between 3.0 and 6.0, evidence of ongoing SPMS progression and measurable MRTCs in their bloodstream. Patients receive two annual courses of Tcelna treatment consisting of five subcutaneous injections per year at weeks 0, 4, 8, 12 and 24. The primary endpoint is the percentage of brain volume change (whole brain atrophy) at 24 months, and EDSS change and ARR are included as secondary endpoints. The firm will also monitor pro-inflammatory and anti-inflammatory immune biomarkers for patients in the study. The firm expects top-line data in H216. We have limited information as to whether Tcelna has shown effects on atrophy in SPMS patients treated in prior studies. If Abili-T data are positive and Tcelna proceeds to pivotal Phase III SPMS trials, we anticipate that the primary endpoint would be EDSS change.

In February 2013, Merck KGaA paid $5m upfront to Opexa to acquire an option to obtain an exclusive worldwide licence (excluding Japan) to the Tcelna program for the treatment of MS. Merck KGaA has existing familiarity with the MS drug development and commercialisation, as it markets Rebif (interferon beta-1a) for RRMS.

Merck KGaA can exercise this option before or after the completion of the ongoing SPMS Abili-T study. If the option is exercised, Merck would pay a $25m upfront licence fee, unless additional Phase II studies are required (as determined by Merck KGaA) to bring Tcelna to Phase III studies, which would reduce the upfront fee to $15m. Following the exercise, Opexa would be entitled to tiered royalties on Tcelna commercialisation, at rates in a range of 8-15% of net sales, with step-ups occurring in this range when annual net sales exceed $0.5bn, $1.0bn and $2bn.

Merck KGaA would also be responsible for funding all future development, regulatory and commercial activities, as well as product manufacturing costs. Opexa would be entitled to up to $195m of additional milestones, with up to $70m achievable for regulatory approvals or launches in SPMS ($35m for US, up to $30m for Europe and $5m for other regions), up to $40m for approvals or launches in RRMS and up to $85m in commercial milestones (with $55m achievable on annual net sales exceeding $1bn).

Current RRMS drugs are not approved for use in SPMS, and the only FDA US-approved SPMS product is mitoxantrone, an immunosuppressive drug that was originally developed and approved as a treatment for certain cancers. Mitoxantrone’s use in SPMS settings is limited by its propensity to cause irreversible cardiomyopathy. Several other products are in the pipeline for the treatment of progressive MS, including SPMS. The commercial success of such candidates could influence Tcelna’s potential market share and reach if it gains approval.

Roche’s ocrelizumab, which targets CD20-positive B-cells, could be approved for SPMS before Tcelna, given positive Phase III results in PPMS (n=732) reported in September 2015. Ocrelizumab significantly reduced disability progression as measured by EDSS vs placebo. While these data suggest CD20-positive B-cells could play a strong role in the myelin and axonal nerve damage caused by progressive MS, it does not necessarily suggest that MRTCs (as targeted by Tcelna) would be any less involved. Opexa hypothesizes that the involved B-cells could potentially help present antigen to autoreactive T-cells, facilitating MRTC formation propagation. It suggests ocrelizumab’s efficacy in the PPMS study could be driven by the downstream influence of CD20 B-cell depletion on T-cells, and this could bode well for treatments targeting T-cells (such as Tcelna).

Other potentially promising SPMS competitors include Novartis’s siponimod, a more selective sphingosine 1-phosphate (S1P) modulator than fingolimod and in a 1,500-pt Phase III study, and Medday’s MD10003, which reported positive PPMS data (a 67% lower rate of EDSS progression in the treatment arm at 12 months vs placebo; n=144). Biogen’s Anti-LINGO-1 mAb, currently in a Phase II study, is noteworthy for aiming to regrow myelin, rather than just prevent future damage.

NMO is a rare autoimmune disorder whereby immune cells and antibodies attack astrocytic and myelin cells in the optic nerves and the spinal cord, and for which there is no approved treatment. NMO patients suffer from optic neuritis (acute ocular/oculomotor pain and vision loss) and transverse myelitis, which can cause weakness and sensory loss in the limbs. The National Multiple Sclerosis Society estimates NMO affects approximately 4,000 people in the US and 250k globally.

NMO attacks the Aquaporin 4 (AQP4) protein found on the surface of astrocytes (supportive neurological cells) leading to demyelination and axonal damage. Opexa proposes that OPX-212 may reduce the number and/or regulate AQP4 reactive T-cells (ARTCs), thus reducing the progression of disability. The firm intends to file an IND for OPX-212 in H116 and then may potentially start a Phase I/II study in Q216. In September 2015, the company entered a five-tranche stock purchase agreement with a private investor to fund this program, including the planned Phase I/II study, for up to $5m, following achievement of predefined milestones. The initial tranche raised $0.5m (in equity priced at $0.55/share) and the subsequent tranches (of up to $4.5m) will be priced based at 90% of prevailing Opexa share market prices.

Our model assumes that if Abili-T results meet the primary endpoint, Merck KGaA will exercise its option to in-license Tcelna and will then fund all remaining development and commercialization activities in MS. Under a best case scenario, a Phase III pivotal SPMS study could start in 2017, with data in 2020 and potential approval and launch in SPMS in 2021. This schedule assumes Merck’s resources and MS expertise can accelerate study recruitment and execution; as a means of comparison, the pivotal dimethyl fumarate Phase III study (n=1234) took four years to complete.

We assume that Tcelna treatment will have a net US annual price of $60,000, that there are 122,000 people with SPMS in the US (and approximately 190,000 in Europe) and that 50% of these would have measurable MRTC plasma levels justifying treatment. We assume that Tcelna will have a peak US market share of 30% of this market by 2026, leading to end-user sales of $2.6bn. This peak sales estimate is broadly in line with current sales figures for leading MS drugs (eg Biogen’s dimethyl fumarate had 9M15 sales of $2.6bn, and Novartis’s fingolimod had $2.0bn). We model that Opexa will receive tired royalties at 8-15% of such sales and the full amount of milestones slated under the agreement with Tcelna. While Opexa believes that Merck KGaA may resume RRMS development, we believe this is unlikely before the completion of Abili-T, and we are not including RRMS revenue in our model until or unless another human RRMS trial begins.

For OPX-212, we assume that Opexa will retain product rights and market the product itself in the US and Europe. We assume fast track and orphan designations, leading to a pivotal study in 2018 and launch in 2021. If Phase I/II study results are exceptional, there is the possibility for a breakthrough therapy and quicker approval timeline. We assume a $100,000 annual US treatment price in a target market of 4,000 NMO patients in the US (and c 7,500 in Europe), peak US market share of 40% and peak OPX-212 sales of $382m in 2026.

Our valuation includes the prospects of Tcelna in SPMS and OPX-212 in NMO. We apply a risk-adjusted net present value (rNPV) model, with a 12.5% cost of capital. For Tcelna we apply a 15% SPMS probability of success, which considers the efficacy signals shown in earlier Phase I and IIa studies offset by the high hurdle rate and challenges for SPMS treatments. For OPX-212, we only assign a 5% probability of success given its early development stage. While the ImmPath platform may be applicable to other autoimmune diseases, we await further advancement and identification of targeted projects and diseases before factoring them into our valuation. After including $15.6m estimated net cash at Q315, our equity valuation of $51m equates to $7.39 per share fully diluted.

Development and regulatory risk: to gain approval, Tcelna and OPX-212 must deliver efficacy in pivotal, randomized studies without significant safety concerns. SPMS and inflammation-based neurological diseases are notoriously difficult to treat.

Competition considerations: the competitive landscape is sparse in SPMS (but intense in RRMS) and Tcelna could become a breakthrough SPMS treatment and hold lead market share. However, competitors are emerging in SPMS, and several may reach Phase III data before Tcelna. If they gain market entry, commercial success will depend on relative performance.

Financing risk: Opexa expects its funds on hand to be sufficient to reach the conclusion of the Abili-T study; if results are positive, Merck KGaA may fund remaining development. If Merck KGaA does not exercise its licence option, Opexa will need a new partner and/or financing to proceed further with Tcelna. In any case, we expect that Opexa will require continued funding to advance OPX-212 into pivotal studies, and potentially other ImmPath-based candidates. We model $60m in financings between 2018 and 2020, which assumes Merck KGaA exercises its option; otherwise, we expect Opexa will need to raise an additional $5m in Q416 and $10m in 2017. While our model accounts for these financings as long-term debt, the firm may need to issue equity instead, at issue pricing that may not be favourable for current shareholders and could lead to significant dilution.

Intellectual property risk: the success of Tcelna and OPX-212 will depend on Opexa’s ability to defend the IP assets surrounding its technologies. The firm indicates that its technology is supported by an IP portfolio consisting of 160 domestic and international patents, including its proprietary manufacturing process. The composition of matter patents surrounding Tcelna, including using the technology for 109 proprietary antigens, will expire in 2028. We model market exclusivity into 2029.

On 30 September 2015, Opexa had $15.6m in cash and equivalents, and its trailing 18-month cash burn rate (operating cash flow minus net capex) was $17.3m. In September 2015, the firm implemented a 1:8 share consolidation and raised $0.5m (at a post-consolidation price of $4.40 per share) from $5m equity facilitated dedicated to fund OPX-212. We expect it will raise the remaining $4.5m in equity by year end 2017, as this program proceeds through a Phase I/II study. We project quarterly burn rates of $3.2-3.7m in the coming quarters as the firm completes the Tcelna Phase IIb study and advances OPX-212. Our forecast includes positive Abili-T results and the triggering of a $25m payment from Merck KGaA in H216, which we have risk-adjusted in our DCF, with the partner funding the remainder of Tcelna MS studies. We expect Opexa to raise $60m between 2018 and 2020 to advance OPX-212 and potentially other ImmPath programs. For modeling purposes, we assign these financings to long-term debt. We add that if Merck KGaA decides not to exercise its option, we estimate that Opexa would need to raise an additional $5m in Q416 and $10m in 2017, as well as seek a new partner or further funding if it wishes to further advance Tcelna. The firm has been amortizing its $5m option fee from Merck KGaA (recording revenue of $1.3m in 2013 and 2014 each) and we expect this to continue in the coming quarters.