2023-09-19 04:56:57 ET
Summary
- Cabaletta Bio stock has experienced a significant bull run, rising over 2,100% in the past year.
- The company's focus on autoimmune conditions with a validated cell therapy approach, rather than oncology, has been a key factor in its success.
- Cabaletta's cell therapy CABA-201 targeting Lupus Nephritis has had its MoA validated by an academic study, leading to increased investor interest and a rise in share price.
- The market opportunity is substantial, and analysts have suggested that if successful, CABA-201 has blockbuster revenue potential.
- There are many hurdles to overcome, but having punished the stock price heavily after an initial study disappointment, the market may still be playing catch up.
Cabaletta Bio ( CABA ) stock has been on a sensational bull run, rising from ~$0.65 per share 1 year ago, to >$18.5 at the time of writing. After Cabaletta's share price rose another 18% in trading today, primarily based on the promise of its potentially curative cell therapy targeting the autoimmune disease Lupus Nephritis, and other autoimmune indications, I take a deeper dive look at the company and speculate about how much higher the share price may rise, as well as considering the downside risk.
Investment Overview - Cell Therapy Specialist Cabaletta's Unique Focus On Autoimmune Sinks Shares At First - Before A Sensational Bull Run
The share prices of cell therapy companies developing ex-vivo drugs to treat cancers have performed dismally across the past 12-18 months - I shared some detail on these companies' overall performance in a recent note on Iovance Biotherapeutics ( IOVA ).
One cell therapy company that has been strongly outperforming the market, however, is Cabaletta Bio, which is a cell therapy company with a single major difference - its focus is on treating autoimmune conditions as opposed to oncological ones.
Cabaletta, based in Philadelphia, IPO'd in October 2019, raising ~$75m via an offering of 6.8m shares priced at $11 per share. The company's share price performed adequately at first - trading at ~$14 two years after its IPO, as it worked on guiding its lead therapy, DSG3-CAART, through a Phase 1 study in patients with mucosal Pemphigus Vulgaris ("mPV"), which causes blistering of the skin.
But by December 2021 the share price had tanked on disappointing initial results from the lowest dose cohorts in the study. Cohort A1 included patients receiving 20m genetically engineered DSG3-CAART cells, and Cohort A2 patients receiving 100m cells. Chief Medical Officer ("CMO") David Chang observed via a press release that "clear signs of DSG3-CAART biologic activity were not observed to date"
By September 2022, Cabaletta stock had slipped to ~$0.7 per share, and it seemed as though the company - despite uniquely shifting its focus from cancer, to autoimmune, was in danger of being delisted from the Nasdaq (listing rules require company's shares to consistently trade >$1), and perhaps wrapping up its operations altogether.
Although Cabaletta upped the dose to 2.5 billion cells, when the company shared an abstract with analysts at Morgan Stanley ( MS ), the bank downgraded the stock, suggesting data remained "limited and unclear". Fortunately, however, by now Cabaletta was working on a second asset - a CAR-T cell therapy targeting the B-lymphocyte antigen CD19, CABA-201, causing Morgan Stanley to quickly change its mind on the stock, upgrading it on hearing that Cabaletta would file a clinical trial application ("CTA") to begin a study of its new asset.
By the time Cabaletta received clearance from the FDA to start a new phase 1/2 trial of CABA-201 to treat systemic lupus erythematosus ("SLE") in patients with active lupus nephritis ("LN") or active SLE without renal involvement, Cabaletta shares were trading at >$8 per share - up >1,100% in a little over 6 months!
Cabaletta Continues Comeback As "CARTA" strategy overtakes CAART Strategy
Cabaletta's technology was initially developed by scientists at the University of Pennsylvania - building on research developed at the same institution that had led to the first commercially-available CAR T cell products for the treatment of B cell cancers - in 2022, Gilead's Yescarta, a pioneering CAR-T cell therapy indicated for large B-Cell lymphoma, earned >$1bn of revenues.
Cabaletta initially developed what it refers to as its proprietary CAART technology, which stands for "chimeric autoantibody receptor T cells". According to the company's latest quarterly report (Q223 10Q submission):
the CAART strategy is designed to selectively engage and eliminate only the pathogenic B cells responsible for driving disease by using T cells engineered to express disease specific targeting domains which are designed to mimic the antigen that is the subject of attack in an autoimmune disease.
CAART is the strategy underpinning DSG3-CAART, still in studies for mPV, and a second program, MuSK-CAART, which is in a Phase 1/2 study in patients with myasthenia gravis.
While the jury is still very much out on the CAART thesis, however, which has not generated much in the way of positive clinical data, analysts are much more excited about the prospects for Cabaletta's second approach - known as Chimeric Antigen Receptor T cells for Autoimmunity, or "CARTA".
The explanation for this is the success of a recent academic study of a candidate similar to CABA-201, which is described as a "4-1BB co-stimulatory domain-containing fully human CD19-CAR T construct" in Cabaletta's latest quarterly report. In the academic study, according to Cabaletta, following doses of lymphodepletion with fludarabine and cyclophosphamide:
To date, in patients with systemic lupus erythematosus, anti-synthetase syndrome, and systemic sclerosis, the 4-1BB containing CD19-CAR T cell therapy has led to robust improvement in clinical disease activity within 3 months of treatment through rapid and deep depletion of CD19-expressing B cells followed by return of healthy B cells within 7 months of treatment. Follow-up is ongoing, with the clinical responses in SLE maintained up to 24 months with no relapses reported
It may have taken Cabaletta some time to hit upon precisely the right approach, but today, it seems the company has a genuinely valuable asset on its hands, with development progressing well on all fronts, as illustrated below (source: investor presentation).
Cabaletta's share price has kept rising, as first the FDA approved the company's Investigational New Drug ("IND") application to begin in-human studies of CABA-201 in systemic lupus erythematosus ("SLE"), in patients with active lupus nephritis ("LN") or active SLE without renal involvement, then handed CABA-201 a Fast Track designation, and then agreed to a further study in patients with dermatomyositis, anti-synthetase syndrome, and immune-mediated necrotizing myopathy - three subtypes of myositis.
In mid-May, Cabaletta completed a fundraising of ~$87m at $12 per share, and in July, investment bank Guggenheim initiated coverage of Cabaletta stock, setting a price target of $34, and suggesting that CABA-201 could achieve peak sales of $1.9bn if approved for SLE, and a further $1.4bn if approved in myositis, with further approvals in other indications also a possibility.
Although VC and investment bank targets are notoriously optimistic and rarely achieved, and peak sales targets likewise, there seems to be little doubt that Cabaletta management are developing an asset of truly exciting potential. In August, Cabaletta stock reached $14 per share, but the momentum remains strong - in the past month, the stock price has gained another 60%, and now stands at $19 (at time of writing) - up a staggering 2,100% across the past 12 months.
Where To Next? Reasons To Be Cheerful & Fearful - About Progress Of CABA-201
Cabaletta has now obtained a market cap valuation of $750, which is arguably still a modest valuation for a company seamlessly progressing towards a peak revenue opportunity in the billions of dollars. Is it time for a reality check, or is further upside virtually guaranteed?
SLE and LN are undoubtedly massive market opportunities - Cabaletta cites research estimating up to 320k patients in the US alone with SLE, 40% of whom have LN, implying a risk of kidney failure and mortality. Kidney diseases are difficult to treat and biotechs targeting e.g. Chronic Kidney disease - Akebia Therapeutics ( AKBA ), FibroGen ( FGEN ), Ardelyx ( ARDX ) have destroyed shareholder value with late stage study failures.
There are several drugs approved for LN, including Aurinia Pharmaceuticals ( AUPH ) Lupkynis - expected to make sales of $150 - $160m in 2023, and GSK's Benlysta - which earned revenues of >$1.1bn in 2022. Many other types of drug, including steroids and immunosuppressive agents, are also prescribed to treat the disease.
Cabaletta is still in the early stages of developing CABA-201 - the myositis and SLE studies will enroll a total of just 12 patients - and ex vivo cell therapies require lengthy preconditioning treatment which can be an unpleasant experience for patients. Cell therapies are also expensive - Yescarta, for example, is reputed to cost close to $400k for a single course of therapy.
Cell therapies are unique in that they potentially offer a "one and done" cure for their target disease indications, making them significantly more valuable than disease modifying therapies, but a patient may only ever require one infusion, meaning there is no opportunity for recurring revenues, unlike, say, a daily pill or monthly injection.
Given the prevalence of these diseases, however, Guggenheim's peak revenues estimates may not be too wide of the mark - a bigger problem for Cabaletta is its lack of patent protection.
The Big Pharma industry has been almost exclusively focused on developing cell therapies for cancer, but now that the autoimmune opportunity "cat is out of the bag", so to speak, and the success of the academic study that used a 4-1BB co-stimulatory domain target is widely known, there is little stopping the likes of Gilead - which has secured approvals for 2 b-cell cell therapies, or Bristol Myers Squibb, which has also secured 2 approvals, turning their attention to autoimmune.
These Pharmas can fund substantially larger studies of autoimmune cell therapy candidates and push enrollment along at a much faster pace than Cabaletta thanks to their superior financial resources. In its 2022 annual report Cabaletta warns that:
Within the CAR T field we recognize that a subset of companies with an investment and expertise in CAR T cell development for oncology indications have announced they intend to leverage their technology in autoimmune disease-affected populations.
Whilst discussing patents. Cabaletta goes on to warn:
The patent positions for biotechnology companies like us are generally uncertain and can involve complex legal, scientific and factual issues. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued, and its scope can be reinterpreted and even challenged after issuance.
Still, Cabaletta says its patent protection on CABA-201 may not expire until 2040, which raises an interesting question - would Gilead, BMY, or another large pharma consider acquiring Cabaletta, to gain access to arguably the most advanced autoimmune cell therapy project, with the greatest chance of success? And what kind of premium to current share price would they be prepared to pay?
Concluding Thoughts - Can Cabaletta Keep This Bull Run Going?
Cabaletta stock has been on a roller-coaster ride since the company's IPO in 2019, and the momentum now appears to be very much with the company, with shares rising by another 18% today.
The company's perceptive move - taking an established, validated mechanism of action - the targeting of b-cells with a CAR-T therapy, and moving it into the field of autoimmune - is now beginning to pay off, albeit Cabaletta's initial efforts with its CAART strategy have not had much success to date.
The validation of the CARTA approach through an academic study has completely transformed Cabaletta's fortunes, however, and may have unlocked a path to approval for CABA-201 in markets where the peak sales opportunity could potentially run into the multi-billions.
Even if those peaks are never reached, with its market cap still only ~$750m, the promise of $500m in peak sales and use of a forward price to sales projection of ~3x would imply Cabaletta stock could still be as much as 50% undervalued today.
On the downside, Cabaletta's best efforts could be overtaken rapidly if the Big Pharma industry starts to zero in on cell therapies directed at autoimmune, and the company still needs to navigate through a pivotal / registrational study if it wants to eventually unlock the potential of CABA-201 in a commercial setting, which could take years, with the prospect of a study failure very real.
All things considered, backing Cabaletta can only be considered a very high risk strategy - we have already seen what can happen to the company's share price when the market loses faith in its programs - investors could lose 90% of their investment if the CABA-201 opportunity eventually proves a mirage.
Nevertheless, I am ultimately giving Cabaletta stock a "Buy" rating today. One way to win when investing in biotech is to back companies when the market turns against them, but arguably a more de-risked way to win is to back companies the market has given up on, and then changed its mind about.
If Cabaletta had begun by developing CABA-201, rather than its CAART program, the market may never have lost faith, and today, the company's valuation could have risen >$2bn, based on the promise of a permanent cure for a disease as prevalent as LN, where the unmet need for patients is still strong, and where most biotechs have struggled to succeed.
My feeling is the market is still playing catch up, and I am optimistic Cabaletta's valuation can keep growing.
For further details see:
Cabaletta Bio: How Long Can Unique Cell Therapy Developer's Sensational Bull Run Continue?