2023-12-29 14:20:49 ET
Summary
- ADCs are a promising development in cancer treatment, targeting specific tumors with minimal side effects.
- ADCT's first drug, Zynlonta, was approved for third line treatment of lymphoma, but a halted trial for second line treatment was a setback.
- New data shows that the combination of Zynlonta and Rituximab can cure certain types of lymphoma, and ADCT has a robust pipeline of potential therapies.
Overview
ADCs - antigen-drug conjugants - are among the hottest developments in cancer treatments. In combination with other drugs, they hold the promise of replacing chemotherapy on a whole host of cancers, because, unlike chemo, which is systemic and comes with severe side effects, ADCs target specific tumors with minimal impacts on healthy tissue. Sometimes called "Smart chemo," and "Cancer guided missiles," ADC's work by delivering a combination of an antibody and a cancer-cell killer to a specific site on a tumor, whereupon the poison is released. The drugs have proven themselves effective and are now a leading treatment of several type of cancer, notably breast cancer.
ADC Therapeutics ( ADCT ) is a leading developer of ADC's and in April, 2021, the FDA approved ADCT's first drug, Zynlonta, for third line treatment of several types of lymphoma (third line treatments come into play when front line (treatment at first diagnosis) and second line therapies don't provide any or sufficiently durable response). Even before this, the company seemed to have unlimited promise and late in 2020 had a market cap of $3.8 billion $48/share). Sales lagged as competition in academic centers increased, and community doctors were slow to abandon old remedies, and the market price retreated. Then, this past summer things got even worse. The company halted a trial of Zynlonta in combination with a monoclonal antibody called Rituximab after seven patients died. This looked like the end of the road for ADCT, as the combination of Zynlonta and Rituximab had promised to move Zynlonta from a third line to second line therapy, more than tripling its addressable market. The stock dropped from around $5 a share at the beginning of the year to 36 cents at its nadir in November.
Then things began to change. For one thing, a closer look at the halted drug trial, revealed that six of the seven deaths had nothing to do with Zynlonta. The trial was for frail and unfit patients, average age of 82, and all participants had one or more severe co-morbidities. One death might have been linked to the drug, but the connection was by no means definitive. Secondly, even though the trial was halted, the interim results showed a very high complete response rate of 58.8% .
In early December, the whole class of ADC companies got a kick when AbbVie ( ABBV ) bought ADC-maker ImmunoGen ( IMGN ) for $10 billion, in what many investors saw as a volley in the competition between the major Pharma and biotech companies to acquire ADC intellectual property and expertise for the next generation of cancer drugs. The very next week, ADCT announced the results of an extremely successful trial of the combination of Zynlonta and Rituximab to address relapsed follicular lymphoma. The drug combination was the same as the combo in the halted trial of last summer (though the earlier trial was for a different lymphoma). The complete response rate, meaning the complete disappearance of cancer, was 85.2%, and all of the complete responses were still cancer free after 12 months. Now ADCT is close to completing enrollment for a phase III trial to validate the combination of Zynlonta and Rituximab in second line Diffuse Large Blood Cell Lymphoma (DLBCL), the same cancer that was the target of the trial halted this summer. Should this trial replicate or improve on the complete response rates of the halted trial, the combination of Zynlonta and Rituximab could compete with CAR T treatment , the current standard, as a second line for certain types of lymphoma. CAR T regimens involve genetically modifying a patient's T cells to attack the cancer, but are very expensive and require hospitalization. Second line treatments involve a much larger patient population than third line interventions. The advantages of the ADCT combination would be much lower cost (about $150,000 for full course of treatment vs. $500,000 for Car T), easier treatment regimen (injection rather than hospitalization), and less toxicity.
At the same time Roche is conducting two trials of ADCT's Zynlonta with what are called bispecifics . Monoclonal antibodies seek out one target antigen; bispecifics can bind to two different antigens. There should be Phase I/II trial data available by the middle of 2024. Should this combination prove efficacious, it holds the promise of replacing the current standard front line treatment which involves Rituximab in combination with a cocktail for four chemo drugs. Given the harsh side effects of chemo, an efficacious treatment with minimal side effects could quickly gain traction as first line treatment for the 150,000 patients newly diagnosed with DLBCL each year.
ADCT has several other drugs in the pipeline. In the first half of 2024, the company also expects early results from trials for treatments for a number of solid tumors. One line of attack involves suppressing the expression of AXL, a kinase that plays a critical role in cancer progression. ADCT's trial involves non-small cell lung cancer, pancreatic cancer and sarcoma. Another line of attack on solid tumors involves the so-called kaag1 (kidney associated antigen 1) target, which proliferates on tumor surfaces associated with triple negative breast cancer and relapsed ovarian cancer, as well as other cancers that resist many therapies. (All of these trials were discussed by CEO, Ameet Mallik, at the Jefferies London Healthcare Conference in November, as well as in the Q3 earnings call .) Both the AXL and Kaag1 trials combine phase one and phase two in they address both safety and efficacy.
Yet another trial involves an ADC targeting late stage leukemia, specifically a complex protein called CD22 , which is commonly found on malignant B-cells in leukemia. This ADC has reached the trial phase, and the company expects to report out Phase I-II data by the middle of next year.
Put these all together and we see a biotech that has taken its lumps, but seems to have found its footing, with a proven cancer therapy in the market, promising combination therapies that would enable the company to enter much larger markets. and a robust pipeline with a relatively near-term time horizon in which to see whether they will work.
With around $300 million in cash, the company says it has liquidity to get it to mid-'25. That computes to a burn of around $17 million a month. Should the Zynlonta and Rituximab combination be approved for second line interventions in lymphoma in 2025, revenues could be expected to rise from the $100 million level of sales from its existing approved use, to north of $300 million. Should its therapies for triple negative breast cancer and refractory ovarian cancer prove out, and depending on market penetration, each drug could have the potential of peak revenues north of $1 billion annually, and would thus become a highly desirable asset for any large pharma company [e.g., conservatively estimating treating one quarter of 30,000 triple negative breast cancer patients each year, with a full treatment costing $150,000, yields estimated revenues of $1.125 billion]. In mid-January of 2023, ADCT has a market cap north of $400 million. Now it's just north of $100 million, with about half of the year's punishment coming after the company halted the trial in July.
Headwinds remain, one of which is money. While the company is expanding sales of Zynlonta to Europe, Asia and South America, it will have to raise additional funds before it gets FDA approval for any new therapies. If, however, the cure rate continues to be anywhere near the 85.2% mark it hit on its initial data for the combination of Zynlonta and Rituximab, and it has successful trials on difficult to treat cancers such as triple negative breast cancer and refractory ovarian cancer, it should have an easy time raising additional funds. Bottom line: my take is that ADCT could well reclaim some of the ground it lost this year, and if it delivers on its pipeline in the coming year or so, it could re-approach its lofty market cap of 2020.
Value Proposition
Currently, the list price for an infusion of Zynlonta is about $27,000 (though many factors can adjust this cost), and a full course of treatment involves an injection every three weeks for between five and six months. Physicians typically have a sense of whether treatment is working after the first several cycles. Given the variables, a conservative average cost for full treatment comes to about $125,000 -$150,000 per patient.
During the Jefferies conference , CEO Ameet Mallik said that the reasonable market for the combination of Zynlonta and Rituximab treatment second line treatment for Diffuse large B cell lymphoma (DLBCL) is about 18,000 patients (out of 80,000 new cases a year). If the combination was used in just 10% (a very defensible position which acknowledges a crowded market of competitive therapies) of this population, it would mean significant additional revenue. Add this to sales for third line treatment, and with approval for second line application, total sales for Zynlonta could well exceed $300 million.
These numbers don't include revenues from other combinations now in trial. Waiting in the wings, for instance, is a combination of Zynlonta and bispecifics, which might also be used in second line treatment of DLBCL, and even be adopted for front line treatment as it has drastically fewer side effects than the standard treatment based on chemo.
A rule of thumb widely used by investment bankers for evaluating cancer drugs is to multiply sales by 8 (gross margins on cancer drugs typically are in the range of 95%). At $300 million in revenues, this would imply a value of Zynlonta of about $2.4 billion, and this is without giving any value to the combination of Zynlonta and biospecifics. Nor is it giving any value to Zynlonta in the treatment of other forms of lymphoma.
Then there are the other ADC programs at ADCT. With regard to the solid tumor programs, there are 300,000 new cases of invasive breast cancer each year, 10-15% of which will become triple negative. There are about 20,000 new cases of ovarian cancer each year, 70% of which will become refractory. With non-small cell lung cancer, another program, there are 200,000 new cases each year, 85% of which are non-small cell. And it's not just new patients who are looking for cures for their cancers. These numbers are only for incidence; the prevalence numbers for any of these cancers is much larger.
ADCT will have data on solid tumor programs by mid-year. If pricing is similar to pricing for Zynlonta, and if these therapies prove effective and safe, these markets could dwarf the market for Zynlonta alone.
ADCT will need to raise money well before it runs out in mid-2025. The promise of near term results on several different fronts by mid-2024 means that the company will have a variety of non-dilutive options beyond issuing equity well before a crunch arrives. One is to sell another small royalty stream as they did to Healthcare Capital Partners. Another might be to sell Zynlonta, which could fetch a very high price as big pharma companies position themselves for bispecific combinations - keep in mind one thing that attracted AbbVie to Immunogen was their expertise in bispecifics. CEO, Mallik, will be a good asset when they do look to raise money - he's credible, confident, and articulate.
Given the astounding amount of variables that will be resolved in the next six months, it's a fool's errand to give a target price for year-end '24. Moreover, experience has shown that successful therapies are not guaranteed to be a commercial success - e.g. Dendreon's vaccine for prostate cancer, or Afrezza, Mannkind's oral insulin inhaler for diabetes - and serious revenues for ADCT still lie in the future. That said, I will venture some probabilities: given the interim results of the combination of Zynlonta and Rituximab, it's a very low probability that the company goes out of business. It's a high probability that the company is worth far more than its present $100 million market cap. If any of the solid tumor programs produce positive results, it's a very high probability that ADCT recovers the ground lost this year.
Risks
As with any biotech there is always a risk of a surprise negative event during clinical trials (all the more so in trials for second and third line therapies which typically involve patients whose previous treatments have failed). The reaction to ADCT's halted trial last July shows how devastating such news can be even when the drug performed well. Another such event could put ADCT at real risk.
ADCT expects interim results on several therapies by mid-'24. Should these results be delayed or disappoint, there is a risk that ADCT will have to scramble to raise funds before liquidity is exhausted in mid-'25.
ADCT also finds itself in a hotly competitive market with an estimated 160 ADCs in clinical trials for various cancers. It's latest interim data produced outstanding results, and the company is known for its expertise in the space, but there's always the chance that a competitor with similar efficacy can emerge.
The company has focused a lot of attention on community doctors because its drugs are administered by injection and don't require hospitalization. This approach has proved to be a double-edged sword because community doctors are not always early adopters of new therapies. This means that even with outstanding clinical results. there is no guarantee that community doctors will quickly switch from older therapies.
Finally, as with any company based on scientific innovation, there is always a chance that key people might be enticed away. It's a risk all biotechs face.
Conclusion
ADCT is well-positioned in one of the hottest areas of cancer treatment. It took a hit last summer when investors reacted to a halted drug trial where the drug actually performed quite well. New data from another trial has shown that the same combination of drugs can actually cure certain types of lymphoma. The company finds that the combination of its ADCs with other well-established drugs, as well as emerging agents such as bispecifics, has the potential for cancer therapies that dwarf its present use in the treatment of lymphoma. The company will need to raise money sometime before mid-2025, but should have many options to do so by mid-2024. If the promise of its robust pipeline becomes fulfilled, ADCT can become a major player in treating a host of cancers, including some that presently resist other therapies.
For further details see:
ADC Therapeutics: Rising From The Ashes Of A Halted Drug Trial