In August, Gilead (GILD) announced the acquisition of Kite Pharma for $11.9 Billion. The deal generated significant excitement for long suffering Gilead shareholders and initially well received by Wall Street. Unlike most, I had a slightly more skeptical view of this deal. In the articles Kite-Gilead Winners and Losers Part 1 and Part 2, I argued the case that Gilead’s acquisition of Kite was a big win for Kite shareholders and one that potentially posed a fair amount of both upside and downside risk for Gilead. (For additional background on the CAR-T space I suggest that readers refer to Kite-Gilead Winners and Losers Part 2.)
Since then abstracts from the upcoming American Society of Hematology ASH conference have been released and suggest that the competitive landscape in CD19 CAR-T space could already be changing. In particular, Juno (JUNO) announced promising data on its JCAR017 program in Diffuse Large B-Cell Lymphoma (DLBCL) an indication which Gilead recently received FDA approval for. This article will look at the Kite/Gilead strategy in CD19 CAR-T and how Juno has deployed a different potentially disruptive strategy that could change the competitive landscape.
What is Kite/Gilead’s CD-19 CAR-T strategy?
Kite/Gilead chose a single product focused fast to market strategy in CD19 CAR-T that I will call a “First in Class” strategy.
In essence, Kite/Gilead took the CD-19 CAR-T product and protocol that was already largely developed by NCI and focused on doing the work needed to get it quickly approved for use in DLBCL (and a host of other B-Cell malignancies). To do this they developed the commercial manufacturing and moved directly to registrational studies (ZUMA-1) to get Axicabtagene-ciloleucel (KTE-019) approved as quickly as possible.
Like Kite/Gilead, Novartis (NVS) also followed a similar strategy. What became their CLT019 product and protocol was largely developed by University of Pennsylvania. This allowed them to also focus on commercial manufacturing and moving quickly to registrational studies for rapid approval of CTL019 first in pediatric ALL with DLBCL approval potentially close behind.
There are benefits to this type of strategy. The first is less developmental risk since proof of concept for the products and protocols had already largely been established by the NCI and UPENN. The other is getting to market faster also means generating sales and profits quicker as well as additional time to get physicians comfortable with these new products.
The key drawback is that by focusing on getting to market quickly meant that they didn’t invest much resources on figuring out if they could potentially make the products better. This potentially leaves them vulnerable to longer term competitive threats.
How is Juno’s CD-19 CAR-T strategy different?
In contrast to Kite/Gilead and Novartis, Juno chose a multi-product strategy that focused on trying to better understand how to optimize the CD19 CAR-T platform that I will call a “Best in Class” strategy.
Like Kite/Gilead and Novartis, much of Juno’s CD19 CAR-T technology was developed an outside party, in this case Fred Hutchinson Cancer Center. However, unlike Kite/Gilead and Novartis, Juno took existing technology from Fred Hutchinson and spent a lot of time and resources experimenting with different products (JCAR014, JCAR015 and JCAR017), treatment protocols and manufacturing processes trying to figure out how to make the best possible product.
This strategy carried with it a number of drawbacks. First, it meant being later to market and a longer time to reach sales and profits. It also had a higher risk of failure. If they couldn’t create a better CD19 CAR-T then they would lose sales and profits by being late to market against established competitors with another “me-too” product. There is also the headline risk from bad news if things didn’t go well. That was clearly seen when Juno experienced multiple patient deaths and had their JCAR015 program put on clinical hold last year ultimately tanking the stock price as the competition zipped ahead.
The potential benefit to this strategy is the potential to win big if they can develop a product that ends up being meaningfully better than the competition.
So where are we today?
I’ve compiled the following table showing the currently available data in for the three leading CD19 CAR-T products from Gilead, Novartis and Juno in Relapsed/Refractory Diffuse Large B-Cell Lymphoma, the indication for which Gilead recently received FDA approval and Novartis has approval pending.
Comparison of CD-19 CAR-T Rel/Ref Diffuse Large B-Cell Lymphoma Programs
Sources: Juno Press Release Nov 2017, Novartis Press Release June 2017 and Kite Press Release Feb 2017
First, (to avoid the inevitable criticism) I will point out the obvious fact that the currently available data is not a true “apples-to-apples” comparison. For example, Gilead has full 6 month data on 101 patients while Juno and approval while Juno has only 3 month data for 15 Phase 1-2 patients (efficacy at 1 MM cell dose they plan to use for registrational trials) with Novartis’ data somewhere in between. However, as is often the case investors are forced to interpret and make decisions based on uncertain or incomplete data.
That said, looking at the data we currently have there are two observations. First, is that the clinical data for Gilead and Novartis products look fairly comparable in terms of efficacy and safety (note I haven’t included manufacturing here to which I think Gilead likely has a current advantage). However, in comparison to either product Juno’s program for patients at the higher 1 million cell dose looks better in terms of both efficacy and safety. It is too early to tell if this data will hold up once Juno has run a full study with 6 months of data with ~100 patients needed for approval. However, if Juno can replicate this data and gain approval then it appears likely to become the product of choice in this setting. Further, it may also enable use earlier in earlier lines treatment where much larger patient populations are currently being treated with chemotherapy and/or stem cell transplants. According to the literature, chemotherapy can achieve a durable remission in about 2/3 of first line DLBLC patients. If 75% complete response rates can be demonstrated in relapsed/refractory patients to be durable with an acceptable risk profile that begins to open the door for potential use earlier in therapy.
Juno is working quickly to advance this product and recently reported that they believe that they could file and gain FDA approval for JCAR017 in this setting by the end of 2018. Looking closer at Juno’s recent press release this appears feasible. Juno reports 49 patients in the core analysis with 21 at a 0.5 million cell dose and efficacy on 15 at 1.0 million cell dose. This suggests that an additional 13 patients have already been treated at their registrational 1.0 million cell dose as of the time of abstract submission, probably sometime in mid 2017. Assuming that like Novartis and Kite the FDA is looking for data on ~100 patients for approval this suggests that at 1.0 million cell dose Juno could have at least 25% of needed patients already treated as of mid 2017.
What is the potential valuation for Juno?
CD19 is an antigen present on B-Cells making it a potentially applicable therapy in Acute Lymphoblastic Leukemia ALL, and Chronic Lymphoblastic Leukemia (CLL) as well as Diffuse Large B-Cell Lymphoma. Gilead/Kite, Novartis and Juno have all reported impressive data with their CD19 CAR-T programs in these patients as well and should ultimately see approvals in the relapsed/refractory setting as well.
The CD19 market is estimated at 64,000 patients in the US with 16,000 relapsed/refractory patients per year. Note, that in this analysis I conservatively exclude the ExUS CD19 market since Celgene already owns commercial rights for Juno’s program outside the US.
Gilead recently announced US pricing for its CD19 CAR T at $373,000 in relapsed/refractory DLBCL. I estimate that Juno will likely price at a similar $350,000 in the US with 25% COGS to reflect rebates, patient assistance, manufacturing, and distribution.
I believe that like Novartis and Kite/Gilead’s competing products that Juno’s JCAR017 will be approved in the relapsed-refractory initially in Diffuse Large B-Cell Lymphoma and then expanded across a range of relapsed/refractory CD19 cancers including Acute Lymphoblastic Leukemia ALL, and Chronic Lymphoblastic Leukemia. I assume the same will also be true as well for competing products from Novartis and Gilead/Kite for a pool of ~16,000 patients a year.
I estimated the potential valuation for Juno using the following four scenarios:
Base Case Scenario:
For the base case scenario, I assume that Juno, Novartis and Gilead/Kite all have clinically comparable products based on similar efficacy and safety. Therefore, with a 2019 US launch in relapsed/refractory DLBLC as 3rd to market with a comparable product offering I assume that Juno captures and maintains 30% of the 16,000 rel/ref patients with DLBCL, ALL, and CLL. I assumed pricing at $350,000 a patient with 25% of sales going to COGS, patient assistance, etc. and $200 Million in annual net expenses. Applying a 35% tax rate, 10% discount rate, $1.0 Billion for all other programs and 20% terminal value yields a current valuation of JUNO at $5.1 Billion.
Upside Case Scenario:
For the upside case scenario, I assume that Juno has a clinically superior product in JCAR017 based on preliminary efficacy and safety reported to date. Therefore, with a 2019 US launch in relapsed/refractory DLBLC as 3rd to market but with a superior product offering I assume that Juno captures and maintains 75% of the 16,000 rel/ref patients with DLBCL, ALL, and CLL. I assumed pricing at $350,000 a patient with 25% of sales going to COGS, patient assistance, etc. and $200 Million in annual net expenses. Applying a 35% tax rate, 10% discount rate, $1.0 Billion for all other programs and 20% terminal value yields a current valuation of JUNO at $11.5 Billion.
Best Case Scenario:
For the best case scenario, I assume that Juno has a clinically superior product in JCAR017 based on preliminary efficacy and safety reported to date that allows expanded use beyond relapsed/refractory setting. Therefore, with a 2019 US launch in relapsed/refractory DLBLC as 3rd to market but with a superior product offering I assume that Juno captures and maintains 75% for an expanded 32,000 patients with DLBCL, ALL, and CLL. I assumed pricing at $350,000 a patient with 25% of sales going to COGS, patient assistance, etc. and $200 Million in annual net expenses. Applying a 35% tax rate, 10% discount rate, $1.0 Billion for all other programs and 20% terminal value yields a current valuation of JUNO at $21.9 Billion.
Worst Case Scenario:
In this scenario I assume Juno’s CD19 CAR-T program never makes it market. In this case I assign a current valuation of JUNO at $1.9 Billion which includes $900 Million cash and $1.0 Billion value on the non-CD19 programs.
Based on Juno’s current stock price of ~$55 a share equates to a valuation of ~$6.5 Billion. Given that this is close to my Base Case valuation of $5.1 Billion or ~$45 a share suggests that the market has yet to place much value on any upside potential.
So why didn’t Gilead buy Juno instead of Kite?
I think there are a number of possible reasons.
First, is along the thinking of “the devil you know is better than the one you don’t know”. Kite clearly had an approvable product on their hands with Axicabtagene-ciloleucel. In contrast, Juno had its prior stumbles and the data recently release although very promising is still early and on a relatively small sample size that may or may not hold up. Given the high price tag and risks involved Gilead likely went with the safer choice.
The second reason is that Juno already has a strategic partnership in place with Celgene (CELG). As part of this partnership, Celgene is large Juno shareholder and already owns the rights to any of Juno’s CD19 programs outside of the US and China. Therefore, since Celgene has potentially tied up 30-40% of any commercial value assigned to Juno’s JCAR017 likely made it a much less attractive takeover candidate for Gilead.
Third, Kite/Gilead also has its own programs to improve on Axicabtagene-ciloleucel. This includes a phase 1 combination study with Axicabtagene-ciloleucel and a PD-1 inhibitor in DLBLC (ZUMA-6) that was initiated in Oct 2016. In addition, Kite also signed an agreement with the NCI to develop a next generation CD19 CAR T to treat B-cell malignancies. Similarly, Novartis is working with U Penn on its own next generation CD19 CAR-T program CTL119.
Fourth, if Juno and Celgene management felt they potentially had a superior CD19 product that was not reflected in their market valuation they may have rebuked any acquisition overtures from Gilead.
Gilead/Kite and Novartis have executed a “first to market” strategy to establish themselves as the current leaders in CD19 CAR-T space. In contrast, Juno has taken a “best in class” approach that despite early stumbles, may finally be starting to finally show promise based on recently released data. Based on my estimates from valuing Juno under various scenarios it appears that the market has yet to reflect much of the potential upside. I believe this presents an attractive balance of upside-downside risk relative to current market expectations. If Juno can show additional data similar to that released in the ASH abstract, I believe that the market may begin to revise its expectations upward. Meanwhile if the data ends up looking similar to that of the competition I estimate Juno’s fair value at ~$45 close or 20% below current levels. Recognizing this, I took my Kite winnings and was rolling them into Juno when it was trading in the 40’s.
Even if you are not a Juno investor, given the potential implications Gilead, Celgene and Novartis investors should also be watching closely for additional updates at the upcoming ASH conference in December.
Disclosure: I am/we are long JUNO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Commentary presented is not individualized investment advice. Opinions offered here are not personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making investment decisions. Although I do my best to present factual research, I do not in any way guarantee the completeness or accuracy of the information I post. Investing in common stock can result in partial or total loss of capital.
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