The road to success for most companies, biotechs included, is far from straight forward. Investors want to find those diamonds in the rough whose stock will substantially outperform, not just in the coming months but in the years ahead. One approach for achieving this requires discovering companies with a novel, early-stage promising technology and placing a long-term bet.
Adaptimmune Therapeutics (ADAP -12.03%) fills that criteria. Focused on using engineering cells to help the immune system recognize and fight cancer, the company made waves when it showed activity against solid tumors. Blood cancers, like lymphomas and leukemias, garnered initial industry focus, leaving solid tumors as somewhat of a holy grail to crack.
Engineering cells for therapy
Adaptimmune's approach to fighting cancer involves taking T cell receptors from patients, modifying them, and then reinfusing those back into the patient. The engineered T cells increase the immune system's ability to detect cancer cells and destroy them. This method of tweaking patients' own cells and then giving the cells back to them has led to two Food and Drug Administration (FDA) approved cell therapies: Yescarta from Gilead and Kymriah from Novartis.
The field of cell therapy hopes to shift to an allogeneic, or off-the-shelf approach, eliminating the need to harvest cells from a patient, send them off for modification, and then administering those improved cells back to the patient. An off-the-shelf strategy is more like traditional therapy where the cells can be manufactured in bulk and given to a broad number of patients. R&D efforts at Adaptimmune in this area expanded following a January partnership with Universal Cells, a subsidiary of the Japanese pharma giant Astellas Pharma.
Adaptimmune's pipeline boasts four in-house programs pursuing three cancer targets. Another program has successfully transitioned into the hands of Adaptimmune's partner GlaxoSmithKline (GSK -2.17%). More on that one later.
ADP-A2M4, the most advanced program, has entered a phase 2/3 clinical trial for patients with advanced synovial sarcoma and mixoid round cell liposarcoma (MRCLS), two types of rare cancers found more commonly in younger adults and children. Final data are not expected until early 2022, which means biotech investors will have to sit tight, and focus on the rest of the pipeline and smaller, earlier-stage trials for stock catalysts.
Unpacking the numbers
Synovial sarcoma is a horrendous, aggressive form of sarcoma with a U.S. prevalence of just above 2,100 patients, according to a 2018 publication in the Journal of Clinical Oncology. The National Organization for Rare Diseases claims up to 30% of the 2,000 liposarcoma patients in the U.S. have the MRCLS form. That means Adaptimmune's lead program targets 2,700 individuals. Since we're doing back-of-the-envelope math, let's double the number to 5,400 to account for both the U.S. and Europe.
According to Adaptimmune's corporate presentation, 90% of patients progress to second-line therapy. Of those, 45% are HLA positive and 65% of those patients have tumors with positive expression of MAGE A4, a target of the therapy. Both are required for treatment. Thus, the potential treatable population is around 1,425 patients (5,400 x 90% x 45% x 65%). We'll round up to 1,500 eligible patients for convenience.
Now, assume FDA and European approval for both types of sarcoma and Adaptimmune charges $400,000 per patient, per year. This price is based on cancer-cell therapies Yescarta and Kymriah, which initially cost $373,000 and $475,000, respectively. In reality, the companies provide discounts and patient support to afford these drugs, decreasing each drug's profitability. According to some estimates, pharma companies only net 60% of the sales price after these rebates and discounts. That drops the $400,000 per patient down to $260,000. This still makes it a very expensive therapy.
Because of the expense, let's assume peak penetration of the market translates into one-third of patients receiving Adaptimmune's therapy. This pencils out to projected peak revenue of approximately $130 million (1/3 of 1,500 patients x $260,000). Wow! That's an attractive revenue stream for the company but far from the $1 billion blockbuster range many companies strive for.
Fiercely competitive field
Immuno-oncology has been one of the most crowded areas of drug development in recent years. Big pharmaceutical companies to upstart biotechs from across the globe are actively developing potential therapies that harness the immune system from every conceivable angle. Potential investors need only read Adaptimmune's 10-K filing to uncover the laundry list of companies tackling various approaches.
Partners on board
Adaptimmune teamed up with GlaxoSmithKline in 2014 to collaborate on up to five programs. In 2017, GlaxoSmithKline exercised its option for an exclusive global license for the lead candidate, which it formally took over in 2018. The two partners continue to work on additional programs.
In January, Astellas shelled out $50 million to Adaptimmune to kick start a collaboration for off-the-shelf T cell therapies. Each program could earn Adaptimmune up to $148 million in milestone payments. Importantly, the company gets up to $7.5 million in R&D funding annually. This near-term capital will help the company advance these early programs.
What does the future hold?
Five years from now, Adaptimmune will remain independent. This may not be the news some want to read but hear me out. Using the immune system to fight cancer is here to stay. Cell-based therapies, like Adaptimmune's SPEAR T-cells, will be one component of this evolving landscape. Early trials with promising activity in small numbers of patients will need to be reproduced on a larger scale. This will take time. The most advanced study will not have results until 2022.
Until then, Adaptimmune will continue to develop its pipeline and potentially create new strategic partnerships to bring in additional non-dilutive capital. The company will continue to receive payments from GlaxoSmithKline and Astellas as it successfully achieves predetermined milestones. Adaptimmune will likely return to the equity markets at least twice to raise additional capital.
I anticipate the stock could be two to three times higher than it is today even with additional shares issued. The stock more than doubled this year and can potentially keep climbing. In the end, it all depends on the success of the science and whether Adaptimmune's engineered T cells find success in killing cancers.