2023-06-15 01:02:35 ET
Summary
- Arcus was founded in 2015 - the company is co-developing 4 different drugs in partnership with Gilead.
- Thanks to Gilead, Arcus has a cash position of >$1bn. Its most significant asset is the anti-TIGIT antibody Domvanalimab.
- Arguably, Arcus is leading the race for a first TIGIT targeting drug approval - with Roche, BMY, GSK, Novartis and Merck all in this race.
- The reality is that none of these companies have delivered TIGIT data strong enough to suggest superiority over standards of care - but that could happen.
- In this post, I provide an overview of Arcus and its programs, its partnership with Gilead, its key data readouts to date (including ASCO TIGIT updates), and what the investment opportunity may be.
Investment Overview
I last covered Arcus Biosciences ( RCUS ) for Seeking Alpha back in March 2020, giving the company' stock a "BUY" rating - more than 3 years later, Arcus stock has reached a value of $20 at the time of writing - up 63% since my note.
Arcus was founded in 2015 by Terry Rosen and Juan Jaen - as I wrote in my last note:
Terry Rosen and Juan Jaen, Arcus CEO and President, respectively, previously worked together when they founded Flexus Biosciences - a small molecule cancer immunotherapy specialist - in 2013. The pair sold the company to Bristol-Myers Squibb for $1.25bn less than 2 years later. Rosen and Jaen say they look for "Goldilocks targets" - validated biological targets that have been overlooked by other companies.
At the time of my last note the company was focused on developing several drugs directed against solid tumor cancers - an anti-PD1 candidate, zimberelimab, dual antagonist of adenosine receptors A 2a R and A 2b R AB928 - now known as Etrumadenant - and of course its most hyped drug - the anti-TIGIT antibody Domvanalimab ("DOM").
Fast forward 3 years and the focus remains on these 3 assets, plus the CD73-inhibitor small molecule Quemliclustat. None of these assets have been approved to date, but Arcus has 13 different clinical studies ongoing, 4 of which are at the potentially pivotal Phase 3 stage i.e. data from these studies could support an FDA or European approval, if positive.
Arcus is partnered with the California based Pharma giant Gilead Sciences ( GILD ) on development of all 4 of its assets. The 2 companies share development costs, and will co-commercialise and equally share any profits from net sales of any of these assets, if approved, with Gilead holding exclusive rights ex-US, although Arcus would be eligible for tiered royalties in the mid-teens to low-twenties.
At least, that is the information provided in a presentation made by Arcus at The American Society of Clinical Oncology ("ASCO") conference 2023, which took place last week, in which Arcus presented its latest TIGIT data. According to its Q321 10Q submission , however:
In 2021, we entered into the Amended Gilead Collaboration Agreement pursuant to which Gilead exercised its option to three programs-providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets-for a total payment of $725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement.
Gilead made a $175m payment to Arcus in 2020 and also owned 18.9% of Arcus' outstanding common stock as of Q123, having purchased 6m shares for $200m in 2020, and 5.7m shares for $220m in 2021. The 10Q also states that:
For the three months ended March 31, 2023 and 2022, we recognized revenue under this agreement of $25 million and $16 million, respectively; and net reimbursements from Gilead recognized as reductions in R&D expense of $33 million and $30 million, respectively.
As a result, Arcus is cash rich company, boasting $1.015bn of current assets as of Q123, whilst operating loss for the quarter was $86m. Across FY22, net loss was $267m. But can the company take the next step, and secure its first approval - and a further $500m milestone from Gilead if that approved asset is domvanalimab.
Arcus Presents New Dom Anti-TIGIT Data at ASCO
TIGIT Overview & Arcus/Gilead Progress To Date (Versus the Competition)
TIGIT has been a much-hyped target for companies developing anti-cancer drugs for some time, but the space has been dogged by some high profile failures. According to Arcus' 10K submission ( annual report) :
TIGIT is believed to play an important role in suppressing the immune response to cancer. The primary ligand for TIGIT (T-cell immunoreceptor with Ig and ITIM domains) is CD155, a protein that plays both inhibitory and stimulatory roles in regulating the activity of effector immune cells such as T and NK cells. TIGIT is an inhibitory receptor highly expressed on T cells displaying an exhausted phenotype, tumor-infiltrating Treg, and NK cells.
As T cells are important in the immune response, domvanalimab was engineered to lack Fc-receptor binding in order to minimize the risk of depleting such cells, which we believe may provide domvanalimab with an advantage over Fc-enabled anti-TIGIT antibodies.
In its ASCO presentation Arcus states that DOM is the "most clinically advanced Fc-silent anti-TIGIT antibody in development", and in its 2022 10K submission the biotech lists its main competitors in this space as "Beigene, Roche (RHHBY)/Genentech, and Merck ( MRK ).
The table above from Evaluate.com published in March 2022 shows how Roche and Merck currently square up, however Roche recently reported the failure of its candidate - named tiragolumab - in its SKYSCRAPER-02 study in first line small-cell lung cancer ("SCLC"), whilst Merck's generally all-conquering PD-1 inhibitor Keytruda has previously failed a late stage study in SCLC, leading analysts to conclude that the addition of its anti-TIGIT drug Vibostolimab is unlikely to beat current standard of care.
As such, the market had become somewhat sceptical of TIGIT, although Roche has subsequently showed that tiragolumab plus its immune checkpoint inhibitor Tecentriq - a keytruda rival - plus chemo drug Avastin achieved a 42.5% objective response rate in hepatocellular carcinoma (liver cancer) - far better than the 11.5% achieved by current standards of care. Meanwhile, GSK ( GSK ) and Novartis have also entered the TIGIT space...the future is this target seemingly remains in the balance.
As we can see above three of Arcus 4 Phase 3 studies are in patients with non-small cell lung cancer ("NSCLC"), one of the largest oncology markets, whilst the fourth is in gastroesophageal cancers. STAR-121 is evaluating DOM, plus its PD-1 inhibitor (the same MoA as Keytruda) Zimberelimab ("ZIM"), plus a platinum doublet, versus Keytruda plus a platinum doublet, versus ZIM plus a platinum doublet.
ARC-10 is a similar study however all patients are expressing high levels of PD-1 (presumably leading to better outcomes), with Keytruda again the comparator - a formidable drug to go up against. The PACIFIC-8 study is in stage III unresectable NSCLC - a smaller patient population but perhaps an easier path to approval - whilst STAR-221 pits DOM+ZIM+Chemo against nivolumab - Bristol Myers Squibb's ( BMY ) Opdivo, and $8bn per annum selling immune checkpoint inhibitor, and Keytruda rival.
The data presented at ASCO was from the Phase 2 stage ARC-7 study which pitted DOM+ZIM against ZIM alone, against DOM+ZIM+ETRUMADENANT ("ETRUMA") in PD-L1+ 1st line NSCLC. In December, Arcus had reported that the ZIM+DOM arm had achieved an objective response rate ("ORR") of 41%, and a median progression free survival ("PFS") of 12m, which was superior to ZIM alone - ORR of 27%, and PFS of 5.4m. The ZIM+DOM+ETRUMA arm was the worst performer, apparently.
The issue is that - despite the positive results - the DOM+ZIM combo struggled to outperform Keytruda as a monotherapy - which achieved a 45% ORR and a 10.3m PFS in its pivotal KEYNOTE-024 study, and failed to best Roche's tiragolumab, which achieved a 69% ORR and 16.6m PFS in combo with its ICI Tecentriq.
The December ARC-07 results triggered a bear run for Arcus, stock, which retreated from a high of >$35, to a low of $18.5 after the data was released. nevertheless, the study did seem to show that DOM could enhance the response of a PD-1 inhibitor.
Arcus Presents New Dom Anti-TIGIT Data at ASCO
The data presented at ASCO was taken from all 150 evaluable patients and showed that ZIM+DOM reduced the risk of disease progression by 33% versus ZIM alone, and that ZIM+DOM+ETRUMA reduced the risk by 28%.
As we can see above there were also 2 complete responses (lack of detectable evidence of tumor) - one in the DOM arm and one in the ZIM arm, with 18 partial responses in the DOM+ZIM arm, and 22 in the DOM+ZIM+ETRUMA arm.
Results in the PDL1 high population were similar, with DOM+ZIM showing a 12m PFS, versus 5.7m in the ZIM arm and 7.6m in the DOM+ZIM+ETRUMA arm. Safety remains a concern however, as 98% of patients in the doublet and triplet arms reported adverse side effects, and 1 in 5 patients in each of these arms dropped out of the study altogether due to adverse side-effects.
Where Does Updated ARC-07 Data Leave Arcus & Gilead?
As I have discussed in prior notes on Gilead ( GILD ), under CEO Daniel O'Day, formerly head of Roche's Oncology division, the Pharma has been attempting to reinvent itself as an oncology giant, with mixed results:
Gilead had invested $12bn acquiring Kite Pharmaceuticals prior to O'Day's arrival in 2019, which has yielded 2 drug approvals, the cell therapies Yescarta and Tecartus, which drove combined revenues of $1.37bn in 2022, while $5bn was subsequently spent acquiring Forty Seven and its anti-CD47 therapy Magrolimab - not yet approved - and $21bn spent acquiring Immunomedics and its Trop-2-directed antibody drug conjugate Trodelvy - $680m of sales in 2022.
Gilead has invested >$1bn in Arcus, and it is not yet close to securing any approvals, although it is fair to say that every other company that has invested heavily in TIGIT has not fared any better. The latest news from Roche and tiragolumab seems to be that the drug has failed to meet endpoints in its stomach cancer studies.
Both Gilead and Arcus will be praying that its TIGIT programs have ultimately led them down a blind alley, but with lung cancer data to date struggling to make the case that it can outperform standard of care Keytruda, the likelihood of an approval for any TIGIT project may not be better than 50/50, and even if approved, the commercial opportunity is far from proven.
There may be some hope remaining, however. Merck itself is trialling an anti-TIGIT in combo with Keytruda, suggesting that the mega-blockbuster drug's owner is concerned about a TIGIT combo eventually outperforming its star asset. Perhaps Merck would consider trialling DOM+ZIM+PEMBRO (Keytruda) in future trials - if you cannot beat them, join them?
As we can see above, there is plenty more data in the pipeline from Gilead and Arcus' TIGIT programs - which underlines how patient investors may have to be - with key data not arriving until 2025 - but at least offers hope that the right trial design, combination, indication, or patient pool may provide the winning data, and open up the multi-billion dollar opportunity that TIGIT has long promised.
Meanwhile, in May Gilead announced that it had opted to extend its collaboration with Arcus - only not in TIGIT, or even oncology, but inflammatory diseases. According to an Arcus press release:
Under the terms of the expanded collaboration, Arcus will receive an upfront payment of $35 million and will initiate research programs against up to four targets jointly selected by the parties that are applicable to inflammatory diseases. Gilead may exercise an option to license each program at two separate, prespecified time points. If Gilead exercises its option at the earlier time point for the first two target programs, Arcus would be eligible to receive up to $420 million in option and milestone payments and tiered royalties for each optioned program. For any other option exercise by Gilead for the four target programs, the parties would have rights to co-develop and share global development costs and to co-commercialize and share profits in the United States for optioned programs.
Concluding Thoughts - Is Arcus A Strong Investment Opportunity At The Present Time?
Arcus stock hit heights of $48 in December 2021 - more than 2x its current valuation - and with the TIGIT landscape constantly shifting - Roche is apparently back on track with some positive early stage liver cancer data - there is certainly an upside opportunity in play here.
TIGIT reminds me in some ways of KRAS - a signalling protein that was a target for drug developers for years until Amgen ( AMGN ) finally secured an approval for Lumakras in NSCLC, quickly followed by Mirati Therapeutics ( MRTX ) approval for Krazati.
Both companies share prices benefitted from their successful targeting of KRAS, although unfortunately, a lack of commercial success to date has seen Mirati stock fall from >$225, to <$40.
I could see something similar happening with Arcus stock - spiking on news of progress, and approval may take the share price higher than actual commercial performance will, given the many limitations of TIGIT as a target.
Investors could opt to ride those peaks and troughs, keeping an eye on upcoming data presentations - but at this stage in the company's development, I feel that a valuation of $1.5bn may be about right for Arcus.
The fact that management secured a buyout by BMY for their previous company, and were looking for "goldilocks" targets, suggests to me they may be frustrated by the slow progress of the TIGIT programs, but they have 3 other drugs in late stage studies, >$1bn cash - enough to last at least 3 more years, I would expect, and Gilead continues to show faith.
Perhaps TIGIT won't be the winning target for Arcus, but it is likely to sustain the current valuation - and occasionally improve it - while the latest Gilead programs are instigated. If I owned Arcus stock I'd keep holding, but I would probably stop short of buying it today.
For further details see:
Arcus Biosciences: Gilead Partnered TIGIT Pioneer Excites But Frustrates