CBMG Strong Speculative Buy with $33.50 Target Price
Current Weakness Provides Significant Buying Opportunity
Immuno-Oncology and Stem Cell Programs Advancing
CBMG Continues Building a Leading Biotech in China
Download Full 35-Page Report with Important Disclosures: CBMG Initiation 05-06-15
Note: LifeTech Capital became affiliated with Newbridge Securities Corporation on April 1, 2015 requiring all prior research coverage to be terminated. Previous research coverage for CBMG began on February 2, 2015 as Strong Speculative Buy with $23.75 target, raised to $32.50 on February 17, 2015 and terminated on April 1, 2015.
Strong Speculative Buy with $33.50 Target As Weakness Provides Significant Buying Opportunity: CBMG shares have declined significantly due to both a sell-off in the biotechnology sector triggered by a failure of Celladon’s (Nasdaq:CLDN Not Rated) gene therapy drug for heart failure on April 27th (CBMG programs are not related to gene therapy or heart disease) and a negative blog entry by an anonymous author on April 7th appearing on SeekingAlpha, which we characterize as a “Short and Distort” article (see page 29 “Anonymous SeekingAlpha Article”). Despite this, CBMG’s fundamentals remain intact and have, in fact, gotten stronger over the past 5 weeks with additional data for both immuno-oncology and stem cell programs, a NASDAQ uplisting, a U.S. scientific advisory board, additional scientific facilities, $19.6M gross in additional funding and positive events in China and the Sector.
Our sum-of-the-parts valuation consists of our financial model valuation for technical services revenues, future revenues for ReJoin™ and R&D costs for the CAR T-cell and anti-PD-1 programs as well as the Asthma and COPD programs of $21.00 per share based on a 45x multiple on projected fiscal year 2020 EPS and discounted 35% for cumulative risk. Added to this, we conservatively value the immuno-oncology pipeline at $12.50 per share ($150M or 25% of Bellicum Pharmaceuticals market value (Nasdaq: BLCM Not Rated)) for a total valuation of $33.50 per share. It is important to note that comparable valuations in the CAR T-cell space are significantly higher than our $150M valuation of CBMG’s CAR T-cell program and could represent significant upside to our target price as more details and timelines emerge. (see Market Size and Financial Assumptions)
ReJoin™ Phase IIb Clinical Trial Interim Data for Knee Osteoarthritis (KOA): On March 25, 2015, CBMG presented 24-week interim data from their Phase IIb clinical trial for Rejoin™ human adipose-derived mesenchymal progenitor cell (haMPC) regenerative therapy for Knee Osteoarthritis (KOA) at the 2015 Annual Regen Med Investor Day. The 24-week interim data showed that patients treated with ReJoin™ had a statistically significant (p=0.017) improvement of 47.12% in the primary endpoint of WOMAC score versus an improvement of only 16.32% in patients that were treated with ARTZ (sodium hyaluronate). Secondary endpoints showed improvement in the visual analog score (VAS) of 45.14%/49.52% (left/right knee) for ReJoin™ patients versus 19.22%/26.92% improvement for ARTZ patients and median changes in the volume of knee cartilage showed ReJoin™ patients with 403.1/329.8mm3 (left/right knee) versus (307.5)/445.6 mm3 for ARTZ patients at 24 weeks. The secondary endpoints had not reached statistical significance at 24 weeks. There were no serious adverse events reported. The final 48-Week data is expected later this year. (see Interim 24-week data – Phase IIb Clinical Trial – Knee Osteoarthritis (KOA))
Early-Stage CAR T-Cell Data Looks Promising: On March 25, 2015, CBMG announced CD19 and CD20 Phase I/IIa clinical data from their recently acquired CAR T-cell immuno-oncology clinical development programs at the 2015 Annual Regen Med Investor Day. Specifically, these early-stage trials involved genetically engineered lymphocyte therapy in treating patients with B-cell leukemia or lymphoma that is relapsed (after stem cell transplantation or intensive chemotherapy) or refractory to available therapeutics. The trials recruited male and female subjects with CD19+ and CD20+ B cell malignancies with no available curative treatment options (such as autologous or allogeneic stem cell transplantation) that had limited prognosis (several months to <2 year survival) with currently available therapies. We also expect CBMG’s Phase I/IIa data for their other CAR T-Cell candidates, CD30-positive Hodgkin’s lymphoma and EGFR/HER1-positive advanced lung cancer in Q3.
CART CD19 Results: While the overall pooled data for CD19, combining both autologous and allogeneic cells in all patients of various status, yielded an overall response rate of 67%, we believe the small number of patients and confounding variables such as the advanced stage of the cancer and the lack of pre-conditioning chemotherapy (patients with high tumor cell burdens) require a more detailed analysis (see CART CD19 for Acute Lymphocytic Leukemia (B-cell ALL) Data Analysis) We believe the results are roughly comparable with other CART CD19 results seen considering the differences in initial patient cancer status and lack of conditioning therapy. For example, only 3 of the 16 patients had extramedullary disease in the Davila et al. Memorial Sloan-Kettering Cancer Center trial http://stm.sciencemag.org/content/6/224/224ra25.abstract and none in the Maude et al. University of Pennsylvania trial http://www.nejm.org/doi/full/10.1056/NEJMoa1407222 while conditioning chemotherapy has been proven to be beneficial in trials. For CBMG two of the nine patients with extramedullary lesions received allogeneic (donor cells) CAR-CD19 T cell therapy and had converted mixed to complete donor chimerism at the onset of graft-versus-host disease (GVHD). One of those patients eventually died of GVHD, but the other gradually reached a complete hematologic remission and a partial regression of their extramedullary leukemic lesions. There were 2 Grade 2-3 toxicities and 2 GVHD Grade 4 toxicities.
CART CD20 Results: Also presented were the summarized results of a Phase I/IIa clinical trial on CAR-CD20 T cell therapy (CBM-C20.1), which enrolled seven patients with chemotherapy refractory advanced diffuse large B cell lymphomas (DLBCL). One of the two patients with no bulky tumor achieved a 14-month durable and ongoing complete remission by cell infusion only, and another achieved a 6-month tumor regression achieving a complete response (CR) rate of 50% (1/2) and an overall response rate (ORR) of 100% (2/2). Of those patients with bulky tumor burden, four of five patients were evaluable for clinical efficacy. Of those four patients, three achieved 3 to 6 month tumor regression for an overall response rate (ORR) of 75% (3/4). For this small exploratory trial, the researchers concluded “Adoptive immunotherapy with anti-CD20 CAR-modified T cells is a feasible and possibly effective treatment modality for patients with relapsed or refractory aggressive DLBCL. Prior treatment with an effective debulking conditioning regimen is a prerequisite for inducing a prolonged tumor regression by CART-20. Patients with residual disease may have a favorable clinical response even with CART-20 treatment alone. Finally, but importantly, it should be re-emphasized that the targeting of lesions localized in special sites, such as sites within intrapulmonary tissue and the submucosa of the alimentary tract, by CAR T cells must be undertaken with extreme caution.” We note one patient died of massive hemorrhage of the alimentary tract possibly related to the CAR-T cell therapy and one patient died from multiple organ failure evoked by pulmonary infection not related to CAR-T cell therapy. The results have been published in Clinical Immunology Vol.155 Iss.2 pgs.160-175 and may be accessed at http://www.sciencedirect.com/science/article/pii/S1521661614002381
Strong Management Team: CEO Dr. Wei (William) Cao has extensive research experience in the immune-pharmacology field at Harvard Medical School, Stanford University Medical Center Fudan University Medical College in Shanghai with 30 patents granted. He has also served at Bayer Diagnostics Asia Pacific and as China General Manager of Affymetrix (Nasdaq:AFFX Not Rated). CFO Bizuo (Tony) Liu was formerly Corporate Vice President at Alibaba Group (NYSE:BABA Not Rated) responsible for Alibaba’s overseas investments and as General Manager of Corporate Strategy for Microsoft (Nasdaq:MSFT Not Rated) managing their China investment strategy and corporate strategic planning process. CBMG has a broad base of experience both within company management and on the Board of Directors (see Management)
RECENT CBMG EVENTS:
CBMG Uplisted to NASDAQ Global Market: On April 10, 2015, CBMG was uplisted on the NASDAQ exchange from their small-cap NASDAQ Capital Market to the mid-cap NASDAQ Global Market. Investors should note that the Global Market listing has stricter financial requirements and corporate governance standards. We believe this uplisting could make CBMG shares more attractive to larger institutional investors.
Cash Strengthens Balance Sheet: During March 2015, CBMG completed a cumulative sale of 515,786 shares of common stock at $38.00 per share for total gross proceeds of approximately $19.6M.
CBMG Adds GMP Facility in Beijing: On April 22, 2015, CBMG announced a new planned 15,000 square foot GMP facility in Beijing for the development of CBMG’s CAR T-cell immuno-oncology drug candidates. The site is expected to be fully operational in Q3 and increases CBMG’s total GMP facilities to 47,000 square feet in 4 cities (Shanghai, Wuxi, Beijing and JiNing). These facilities allow CBMG to deliver GMP quality cell production products across multiple population centers in China. Also, on April 6, 2015, CBMG announced their GMP laboratory and production facility in Shanghai successfully passed a fourth consecutive China Food and Drug Administration (CFDA) inspection. Investors should note that CBMG’s Helen (Li) Zhang, Vice President of Technology and Manufacturing, was formerly the associate director of cGMP and laboratory operations at the Gene Therapy Initiative of Harvard Medical School in Boston and large-scale manufacturing of clinical grade cell therapy products meeting FDA standards. (see Facilities and Technical Services Business)
CBMG Creates U.S. Scientific Advisory Board: On April 30, 2015, CBMG announced the first two members of their Scientific Advisory Board. Scott J. Antonia, M.D, Ph.D. at the Moffitt Cancer Center will advise CBMG on immuno-oncology and Guoping Fan, Ph.D. at UCLA will advise CBMG on stem cell technology and its applications. Their biographies are as follows:
Scott J. Antonia, MD, PhD: Dr. Antonia serves as department chair and program leader, Thoracic Oncology and program leader of the Immunology Program at Moffitt Cancer Center. He is a professor of oncology at the University of South Florida College of Medicine. Dr. Antonia’s research and clinical interests focus on immunotherapy and immunobiology. He has designed and conducted numerous cutting-edge studies with novel immunotherapeutics and has two patents for technology he has developed. Dr. Antonia received both his medical degree and a doctorate in immunology from the University of Connecticut Health Center. He completed an internal medicine residency at Yale University School of Medicine and pursued additional training at Yale through a medical oncology fellowship and post-doctoral fellowship in immunobiology. Dr. Antonia has published over 90 peer-reviewed publications. See http://moffitt.org/research–clinical-trials/individual-researchers/scott-j–antonia-md-phd
Guoping Fan, PhD: Dr. Fan is a Professor in the Department of Human Genetics, David Geffen School of Medicine at University of Los Angeles (UCLA) and a member in the Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research. He has been a faculty member at UCLA since 2001. Prior to that, he was a postdoctoral fellow at the Whitehead Institute for Biomedical Institute, where he studies the role of DNA methylation and neurotrophins in neural development. Professor Fan earned his B.S. in Biochemistry at Nanjing University, China and Ph.D. in Neuroscience at Case Western Reserve University. His current research focuses on the actions of DNA methylation and chromatin-remodeling in regulating neural gene expression, neuronal function, and stem cell differentiation and reprogramming. Professor Fan has published more than 80 peer-reviewed publications in journals including Nature, Science, Nature Neuroscience, and Cell Stem Cell. Under Dr. Fan’s leadership his team has demonstrated that DNA cytosine methylation plays a major role in regulating neural stem cell differentiation and adult brain function. Dr. Fan also derives specific nerve and retinal cells from embryotic stem cells for cell therapy of stroke and age-related macular degeneration. See https://people.healthsciences.ucla.edu/institution/personnel?personnel_id=45766
UPCOMING MANAGEMENT PRESENTATIONS:
10th Annual World Stem Cells & Regenerative Medicine Congress, London, UK May 20-22, 2015 Dr. William (Wei) Cao, CEO will present a clinical update on CBMG’s Chimeric Antigen Receptor T cell (CART) programs on May 21, 2015 at 2:50pm during the segment titled “Spotlight On T-Cells”. More information can be found at http://www.terrapinn.com/conference/stem-cells/index.stm
Jefferies 2015 Global Healthcare Conference in New York on June 1-4, 2015 More information can be found at http://www.jefferies.com/OurFirm/Conferences/325/210
RECENT CHINA AND SECTOR EVENTS:
China Lifting Price Controls on Drugs Starting June 1st: On May 5, 2015, the Chinese National Development and Reform Commission (NDRC) stated that most price controls on drugs will be lifted on June 1, 2015 (except anesthetics, psychiatric medications and narcotic-based drugs). During price controls cost-cutting created many safety issues including adulterated and contaminated drugs. This move is expected to increase innovation and safety for the China market. We believe this is a positive development for biotech drug developers in China such as CBMG that are focused on the Chinese domestic market. The Chinese press release can be found here (use Google translate to read) http://www.sdpc.gov.cn/xwzx/xwfb/201505/t20150505_690686.html
China Market Now Attracting Large Pharma Partnerships: The China biotech market continues to attract interest from large pharmaceuticals companies for drug development and commercialization partnerships. For example, on March 20, 2015, Eli Lilly (NYSE:LLY Not Rated) announced a strategic alliance with China’s Innovent Biologics (private) for $56M upfront cash with up to $400M in milestones plus additional future sales royalties. The agreement covers Eli Lilly’s cMet monoclonal antibody gene for non-small cell lung cancer (NSCLC) and Innovent’s CD20 monoclonal antibody for hematological cancers. Innovent also has a pre-clinical immuno-oncology candidate and Eli Lilly receives rights to for up to three pre-clinical bispecific immuno-oncology molecules outside of China. Investors should note that this was one of the largest biotech drug development collaborations ever in China between a multi-national and a domestic Chinese company and demonstrates the attractiveness of China’s domestic cancer drug development and market.
CART Immuno-Oncology Sector Continues to Generate Partnerships: On April 23, 2015, AstraZeneca’s MedImmune (NYSE:AZN Not Rated) partnered with Juno Therapeutics (Nasdaq:JUNO Not Rated) to combine MedImmunes’s MEDI4736 anti-PD-L1 checkpoint inhibitor with Juno’s CD19 CAR T-cell candidate for patients with non-Hodgkin lymphoma (NHL). On April 21, 2015, Astellas Pharma (Tokyo:4503 Not Rated) and Potenza Therapeutics (private) announced an exclusive immuno-oncology research and development collaboration for immune checkpoint pathways, co-stimulatory signals and regulatory T cells. On April 21, 2015, MaxCyte (private) and Johns Hopkins University announces a strategic research collaboration with to develop CAR T-cell candidates for solid tumors. On March 30, 2015, Merck Serono (XETRA:MRK Not Rated) partnered with Intrexon (NYSE:XON Not Rated) for CAR T-cell development. Merck Serono paid Intrexon $115M cash upfront with up to $826M in milestones for two drug candidates. We believe the partnership activity demonstrates the continued high level of interest in CAR T-cell therapies.
Download Full 35-Page Report with Important Disclosures: CBMG Initiation 05-06-15