PSTX - Poseida Therapeutics: Why I Am Still Holding On To The Stock Into 2024 (Rating Downgrade)

2023-10-04 02:20:41 ET

Summary

• Poseida Therapeutics reported strong Q2 2023 revenue growth of 641.22% YoY, beating estimates by $14.93 million.
• Astellas Pharma's $50 million investment in Poseida's cancer cell therapy is a positive step after the termination of its collaboration with Takeda Pharmaceuticals.
• Poseida is advancing its CAR-T Phase 1 trial and has received FDA clearance for its investigational new drug application for the treatment of B-cell malignancies.

It has been a tumultuous year for Poseida Therapeutics ( PSTX ) dropping 31.23% (YoY) and up to 60% (YTD(. Still, Q2 2023 revenue rode high at $20.01 million recording a 641.22% (YoY) growth beating estimates by $14.93 million. Poseida’s EPS of -$0.32 beat forecasts by $0.22 indicating progress into 2024. I attribute the poor performance of the stock in 2023 partly to its breakup with Takeda Pharmaceutical over the development of the “6 liver-directed and hematopoietic stem cell-directed in vivo gene therapies.” This collaboration and license agreement worth close to $3.6 billion in future milestone payments that had been running since October 2021 was terminated in July 2023.

Thesis

Poseida is advancing its CAR-T Phase 1 trial for both P-BCMA-ALLO1 and P-MUC1C-ALLO1 with important updates about the allogeneic programs expected in early 2024. Additionally, Astellas Investment’s $50 million capital injection into Poseida's cancer cell therapy is a step in the right direction, especially after the withdrawal of Takeda Pharmaceuticals in July 2023. Poseida also announced the FDA clearance of its investigational new drug application P-CD19CD20-ALL01, an advancement towards the treatment of B-cell malignancies.

Takeda’s cancellation of its deal with Poseida comes just 3 years after Poseida withdrew its IPO filing in January 2020 and opted for a $142 million Series C funding that closed in July 2020. At the time, Novartis Pharma led with a $75 million investment supported by other institutional backers. It is important to note that Novartis remains a significant shareholder at Poseida to date. Additionally, the inclusion of Japan-based drug manufacturer, Astellas Pharma is a strategic agreement to ensure further development of gene therapy treatment. Not only that, it serves as an invitation for other investors to jump on board. For Poseida, it needed a new collaboration in some areas previously covered by the Takeda deal and an improvement of other internal programs.

While considering this possibility, it is vital to consider, that Astellas’ $50 million will be in exchange for an 8.8% stake in Poseida. In the deal, $25 million will be offered in exchange for about 8,333,333 shares of PSTX common stock sold at $3 per share. The remaining $25 million will be a one-time payment for "the exclusive first negotiation right/ refusal for any potential partnership for P-MUC1C-ALLO1.” As intimated earlier, Poseida is opening the floor to additional collaboration. The agreement with Astellas gives it “the right to designate an observer on the Poseida Board of Directors and Poseida's scientific advisory board” meaning it can drive any change decision in the company.

Product Development

In my earlier article on PSTX, I indicated that P-MUC1C-ALLO1 was in its Phase 1 development stage a sign of its partial success in CAR-T therapy treatment advancement in comparison to blood cancer treatments. Poseida has been a leader in stem cell memory T cell (TSCM) therapy generation. For starters, P-MUC1C-ALLO1 is produced through the “piggyback delivery DNA Delivery System for CAR insertion and the (proprietary) Cas-CLOVER Gene Editing System that knock out both the TCR and MHC class I proteins.” In the study, it was noticed that a “high percentage of desirable TSCM cells” were attained after significant doses of P-MUC1C-ALLO1 were produced from multiple healthy donors. There was minimal destruction of normal MUC1-C-positive human cells and high cytotoxicity of tumor cells. However, past studies have indicated that CAR-T therapy has had potent success against hematologic tumors and lower success when it comes to solid tumors.

Despite this hurdle, it is vital to consider that the approach propagated by Poseida differs from the existing 6 FDA-approved CAR-T therapies. For example, we have Kymriah by Novartis, Yescarta by Gilead and Tecartus by Kite Pharma whose treatment involves the use of a patient's blood cells. With Poseida, P-MUC1C-ALLO1 is being developed from healthy donors and matched with patients to avoid adverse immune reactions.

As previously described, P-MUC1C-ALLO1, the allogenic CAR-T cell (unlike others that target cancer cells) spares normal cells while focusing on the “aberrantly glycosylated MUC1-C antigens. P-MUC1C-ALLO1 CAR-T cells (in a pre-clinical study) showed the potential to treat multiple MUC1-positive solid tumors and in vivo efficacy against breast and ovarian cancer xenograft models.”

Additionally, P-MUC1C-ALLO1 has been identified as a “promising nasopharyngeal cancer pipeline therapy” currently in phase 1 clinical trial. Overall, the product candidate targets solid tumors emanating from epithelial cells that also “include breast and ovarian cancers.” I expect Poseida to provide further updates regarding the product by the end of Q2 2024.

Poseida has for years been associated with stem cell memory T cell (TSCM) but the development of allogenic therapy in recent times has increased this attention. Bio-therapeutical organizations are now appreciating the benefits of TSCM. A recent report from the University of Chicago revealed that CAR-T therapy would benefit both young and old patients depending on the severity of the patient’s cancer and general health condition.

It is noteworthy that Poseida’s P-PSMA-ALLO1 is at an advanced phase at the preclinical stage with clinical data from the P-PSMA-101 (already in Phase 1) expected to inform this allogeneic program.

Strategic Partnership

As stated earlier, the exit of Takeda, necessitated a strategic partner with Astellas joining the likes of Roche Diagnostics into Poseida’s board. Roche and Poseida established an R&D collaboration agreement in August 2022 focusing on allogenic CAR-T for hematologic cancers. According to the agreement, Roche was given exclusive rights to P-BCMA-ALLO1 & P-CD19CD20-ALLO1 (marked as Tier 1 program) & P-BCMACD19-ALLO1 & P-CD70-ALLO1 (marked as Tier 2 program). The options for the Tier 2 program will allow Poseida to get an option exercise fee (for technology transfer).

The Swiss Pharma paid $110 million to Poseida as an upfront fee (recorded in the quarter ending on September 30, 2022) for the exclusive rights to the cell therapy programs including the treatment of multiple myeloma or MM (currently in phase 1). Another $110 million awaits Poseida in indefinite near-term payments and up to $6 billion in total if some agreement milestones are met.

Key Updates

Roche stated that the “open-label dose escalation” Phase 1 study of P-BCMA-ALLO1 in multiple myeloma was in process by the beginning of Q3 2023. Patients in the study have exhibited early efficacy signs and showed “favorable tolerance” to the treatments. I believe there will be further updates on this treatment before the end of H2 2023.

Also, Q2 2023, saw the FDA approve Poseida’s investigational new drug application for P-CD19CD20-ALL01- which is currently in its pre-clinical development stage. A point to note here is that P-CD19CD20-ALL01 is Poseida’s first dual CAR-T cell therapy product candidate that targets “both CD19 and CD20 antigens for the treatment of relapsed or refractory B-cell malignancies. I expect the product’s Phase 1 study (for B-cell malignancies) to start before the end of Q1 2024. It is at this time that Poseida also expects to dose its first patient (within the Phase 1 clinical trial) with P-CD19CD20-ALLO1.

In partnership with Poseida, Roche is also developing additional allogeneic CAR-Ts for multiple myeloma and acute myeloid leukemia (AML) with clinical updates expected in early 2024.

Cash Runway

Poseida's cash balance (including short-term investments) as of June 30, 2023, stood at $214.6 million boosted by the $50 million Astellas Investment funding. In the 12 months trailing to June 30, 2023, Poseida used up $7 million in operations and $83.1 million in investing (CapEx). These two activities used up a total of $90.1 million and with the cash reserve at $214.6 million, it means that Poseida’s cash runaway (at the moment) has been extended to June 30, 2025.

Risk and Valuation

Poseida’s clinical development partners remain the company's critical resource. I believe that a disruption in engagement such as with Takeda will hurt the stock's performance. The company is also yet to establish which previous Takeda programs & internal gene therapy programs will be returned and prioritized into 2024. I expect the company to give an update on the programs before the end of H2 2023.

Poseida has increased its cash balance by up to 50% (YoY) from $142.6 million as of June 2022 to $214.6 million as of June 2023. However, the total cash has reduced by 13.2% (QoQ) from Q1 2023 indicating an increase in CapEx into H2 2023. Further, Poseida's operating expenses (including SG&A, and R&D) have increased 277.12% (QoQ) to $44.5 million from $11.8 million in Q1 2023. An increase in expenses into H2 2023 will affect the cash runway into 2024.

In regards to valuation, the PSTX price/ sales ((TTM)) ratio stands at 1.27 against the industry average of 3.50 indicating a difference of -63.56%. The price/book ((TTM)) ratio of PSTX stands at 1.53 against the industry average of 1.88 (a difference of -18.89%). According to me, these metrics show that PSTX is slightly undervalued with a potential upside into 2024.

Bottom Line

The performance of PSTX is dependent upon the company's implementation of the dosing regimens in 2024 including updates from its allogeneic CAR-T programs, clinical trials, and gene therapy programs. Additionally, strategic investment from Astellas coupled with prudent capital expenditure will extend Poseida's cash runway into 2025. Still, the company needs to maintain its development progress with Roche Diagnostics to ensure it delivers allogeneic CAR-T programs by H1 2024. In view of the management's resilience post Takeda, I recommend a hold rating for the stock.

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