Adicet Bio: Searching For Upside In Cell Therapeutics (NASDAQ:ACET)

Investment Overview – The Appeal Of Investing In CAR-T Cell Therapy Drug Developers

When the FDA approved Swiss pharma giant Novartis’ (NVS) Kymriah for the treatment of patients with B-cell precursor acute lymphoblastic leukemia who haven’t responded to standard therapy or who have relapsed at least twice, in October 2017, it represented the first ever approval of a type of class of drug known as Chimeric Antigen Receptor (“CAR”) T-cell therapy.

The FDA called the approval a “historic action” and has subsequently approved five more such therapies – Gilead Sciences (GILD) Yescarta and Tecartus, Bristol Myers Squibb’s (BMY) Abecma and Breyanzi, and Legend Biotech (LEGN) / Johnson & Johnson’s (JNJ) Carvykti – all for different types of hematological (blood based) cancers.

CAR-T cell therapy is a highly complex drug class which essentially involves harvesting a patient’s T-cells (a type of white blood cell that’s part of the immune system and helps protect the body from infection and disease), then genetically engineering those cells ex-vivo to give them enhanced cancer cell seeking and killing properties, before reintroducing them back into the patients’ body, to given them a better chance of fighting their cancer.

CAR-T cell therapy is capable of achieving exceptional results in patients who have failed other forms of therapy such as surgery, chemotherapy, or treatment with Immune Checkpoint Inhibitors (“ICIs) such as Merck’s globally best-selling (>$20bn per annum in 2022) Keytruda.

For example, when Kymriah was approved in the new indication of relapsed or refractory (“r/r”) follicular lymphoma in May last year, the therapy achieved an Overall Response Rate (“ORR”) of 86% and a Complete Response (“CR”) rate (cancer patients experiencing complete remission) of 68%. Carvykti was approved in March last year in r/r multiple myeloma after demonstrating an ORR of 98%, and a 78% CR, with a median duration of response of 22 months.

When approved in r/r large B-cell lymphoma (DLBCL), Breyanzi more than quadrupled event-free survival versus a standard of care (“SoC”) therapy to >10 months, and Tecartus achieved an ORR of 87% in its pivotal study in Mantle Cell Lymphoma, with a CR rate of 62% – enough to secure FDA approval.

All of these drugs have the potential to generate blockbuster (>$1bn per annum) sales, and Yescarta did so in 2022, earning $1.16bn, with Tecartus earning $299m in its first full year on the market. Abecma and Breyanzi earned $388m and $182m in their first full year on the market, and Carvykti earned $55m in Q322, only a few months post-approval. Johnson & Johnson has predicted the therapy will one day generate peak sales of >$5bn per annum.

As such, it’s hardly surprising that there are a host of biotech companies developing CAR-T cell Therapies, attempting to create superior therapies targeting lucrative markets, and perhaps eyeing a buyout by a big pharma if successful. Unfortunately, however, investing in the vast majority of these companies in the last couple of years would have been a disastrous decision.

The Pitfalls Of Investing In CAR-T Cell Therapy Drug Developers

The reality is that creating these types of therapy is fraught with difficulty. Before their cells are harvested, patients must undergo a form of chemotherapy known as lymphodepletion, which can severely weaken them, and when the engineered cells are reintroduced into the patient the risk that the patient’s immune system rejects them – causing potentially fatal diseases such as cytokine release syndrome (“CRS”), graft vs. host disease (“GvHD”), and immune effector cell-associated neurotoxicity syndrome (“ICANS”) is substantial.

The genetic engineering itself is a highly complex process, and it’s also time consuming and expensive, meaning that CAR-T therapies are not cost effective in the market unless they’re priced ~$350 – $500k, and that doesn’t include costs of lymphodepletion or treating cases of CRS, for example.

Some biotechs have attempted to find better approaches to CAR-T, such as using Natural Killer cells as opposed to T-cells, but this has not proven to be a fruitful approach. Still more companies are looking at “allogeneic” therapies as opposed to “autologous” approaches.

Allogeneic therapies take cells from a donor and engineers them, as opposed to using a patient’s own cells, creating a more readily available “off-the-shelf” therapy, although the risks of rejection by the immune system are higher, as is the risk of patients building resistance to the drug – one of the most worrying aspects of CAR T cell therapy is whether the cure is durable, – rates of relapse are typically high.

As shown in the table above, I have picked out a selection of 37 biotechs that have cell therapy programs. Some of these companies – e.g. CRISPR Therapeutics (CRSP), bluebird Bio (BLUE) and Intellia Therapeutics (NTLA) – are primarily focused on gene therapies, although their ex-vivo therapies work in a very similar fashion to CAR-T and they have both autologous and allogeneic cell therapy programs.

Other companies are working with NK cells as opposed to CAR-T cells, some are more focused on solid tumor cancers as opposed to blood cancers (solid tumors represent a tougher challenge) and some favor allogeneic over autologous.

What most have in common is that their share prices have nose-dived since they listed publicly on the Nasdaq. Out of the 37 companies, only seven have made a share price gain over the past 12 months, and even Cabaletta Bio (CABA) – up >300% across the past 12 months – is only +37% since its October 2019 IPO.

Seven companies have seen their share prices decline by >80% across the past 12m, 16 by >50%, and 27 by more than 20%. Of those that have been listed >3 years, the average decline across the past 36 months is 38%, and excluding Intellia and Beam, whose core focus if not specifically CAR-T, the average loss on investment is 58%, with 5 of 24 companies losing >90% of their value.

To summarize, investing in the highly promising yet equally highly complex field of CAR-T cell therapy drug development is an extremely risky business, although after the torrid bear market of 2022, and with valuations having declined by such a substantial amount, is there now a case for making one or two carefully chosen investments.

It was notable that Swiss Pharma giant Roche (OTCQX:RHHBY) recently paid Poseida Therapeutics (PSTX) $110m plus up to $6bn in development and commercial milestone payments to develop new allogeneic cell therapies using Poseidon’s unique “piggyBac” platform and its memory stem cell targeting approach. I covered Poseida in a note for Seeking Alpha published this week, and after some research I have picked out 2 other companies that I believe present a potentially strong “Buy and Hold” opportunity.

The first is Atara Biotherapeutics (ATRA) about which I hope to publish a post shortly. The second, and the subject of this post, is Adicet Bio (NASDAQ:ACET).

Adicet Unique Targeting Of Gamma Delta Cells Shows Promise – Durability Is The Stumbling Block

Adicet Bio currently has a market cap valuation of $375m, and a share price of $8.6.

As we can see above the company’s sole focus is cell therapy and it has a wide range of programs covering both hematological and solid tumor cancers, as well as a partnered program with New York based pharma giant Regeneron. All of Adicet’s programs are allogeneic, and the company’s Unique Selling Point is its use of gamma delta T-cells as opposed to the more generally used alpha beta t-cells. A statement on Adicet’s website summarises the benefits of this approach:

Unlike alpha beta T cells, gamma delta T cells perform their tumor killing function in a major histocompatibility complex (“MHC”) independent manner and thus can be used in an allogeneic setting without the risk of causing Graft vs Host Disease (GvHD). Additionally, gamma delta T cells perform their immune surveillance by naturally homing to various tissues giving them a superior potential to alpha beta T cells to eradicate solid tumors in tissues.

Adicet joined the Nasdaq via a reverse merger with distressed respiratory disease biotech ResTORbio in April 2020, meaning it did not raise money via an IPO, although it had some notable venture capital backers – including OrbiMed Advisors, Novartis Venture Fund, while Regeneron and Johnson & Johnson also helped the company raise $80m prior to the merger. In Q322, Adicet reported a cash position of $283m, and a net loss for the year to date of $39m, so funding ought not to be an issue for the company for at least a couple of years.

By September 2020 Adicet’s share price had risen to >$20 driven largely by the promise of ADI-001, targeting the protein CD20, which tends to be over-expressed in hematological cancers such as B-cell lymphomas and leukemias. ADI-001 is still the only one of Adicet’s candidates to have made it into in-human studies.

As recently as November 2022 Adicet shares traded >$20, but the stock price suffered a severe correction after the company reported data from its Phase 1 study of ADI-001. The headline figures actually look pretty positive.

ADI-001 demonstrated 75% ORR and 69% CR across all dose levels, with favorable safety and tolerability profile in patients with relapsed/refractory high-grade aggressive NHL.

100% ORR and CR rate in 5/5 anti-CD19 autologous chimeric antigen receptor T cells (CAR-T) relapsed large B-cell lymphoma (LBCL) patients.

86% CR rate in LBCL patients across dose level three (DL3) and above (75% CR rate in LBCL patients across all dose levels).

The issue that caused investors to panic and sell out of Adicet stock was durability – as mentioned, the achilles’ heel of CAR-T therapy. The six-month CR rate at both dose level 2 and 3 was just 33%.

As we can see above, of nine patients evaluable at six months, only two continued to have a CR, each of the others having relapsed. The seven newer patients are showing CR’s after a short period, but it’s clear that should these patients relapse similarly to the previous population, Adicet has a major problem on its hands.

Nevertheless, there are certainly some positives that can be taken from the study to date, as outlined by Adicet in an investor presentation slide shown above. 5/5 LBCL patients who relapsed after autologous anti-CD19 therapy achieved a CR with ADI-001.

A 33% CR rate at 6m is still a relatively strong performance in patients running out of treatment options, and there is a potentially pivotal study scheduled to begin in Q223, which ought to prove to be a near-term share price upside catalyst, if achieved. There will also be 6m data from the newer patient set available soon, which may tip the durability scales in Adicet’s favor.

The goal is to position ADI-001 as a post autologous CD19 CAR-T therapy, which narrows the market opportunity – to a pool of ~25k second line, and ~11k third line patients, from an initial treatment pool of ~60k patients worldwide – but is more than sufficient for a first approval shot, with the validation of Adicet’s approach likely to drive to just as much upside as an approval itself would.

Finally, there is a Dose Level 4 which has been introduced to the existing study, which could prove to be more durable than dose levels 1-3. The likes of Allogene (ALLO), Precision BioSciences (DTIL) and Crispr Therapeutics have all had similarly disappointing issues with durability in their own allogeneic CAR-T studies, so it is clear that this is the issue of most significance, given Adicet appears to have overcome significant safety hurdles.

At this point I’m not going to suggest that Adicet has a ready made solution to the durability problems that can transform its share price overnight, but what it does have is a potentially approvable asset driving 33% CR after 6m in patients who have not responded to autologous cell therapy, and that makes ADI-100 both potentially approvable, and potentially best in class.

The fact that ADI-100 is an allogeneic therapy also means that it could be the first allogeneic therapy ever approved by the FDA – although it’s likely that Atara Biotherapeutics’ Ebvallo may beat it to the punch – but as importantly, that it may be cheaper to produce and faster to administer, and more adaptable to other indications, leading to label expansion opportunities.

Preclinical Pipeline – Plenty of Promise Although Challenges Remain Tricky

There are several more highlights to consider within Adicet’s current pipeline. Adicet is currently preparing to file an Investigational New Drug application (“IND”) with the FDA which if approved, will allow it to begin conducting in-human studies of this candidate.

ADI-925 is an interesting prospect for a couple of reasons. Firstly it’s engineered as a Chimeric Adapter (“CAd”) – which can mediate the crosslinking between target and effector cells – that target stress ligands expressed on malignant cells, and apparently allows for greater flexibility and control of T-cell activity. Preclinical studies have shown enhanced potency with better targeting, and expansion within the cancer cell.

Secondly, ADI-925 may be used to target solid tumor cancers as well as blood-based cancers. Despite billions of research dollars spent to date, no company has been able to develop a cell therapy that can successfully target a solid tumor, but slow progress is being made and a breakthrough in this respect could add billions to a biotech’s valuation.

Witness, for example, the rise in the valuation of Moderna (MRNA) when its solid tumor targeting vaccine candidate MRNA-4157 showed efficacy as an adjuvant to treatment with Keytruda in melanoma. PCVs represent a different approach to the same problem – enhancing the immune response to solid tumor cancers – and Moderna’s study results, which cut the risk of death by 44% albeit using study measures that were arguably weighted in its favour, increased the company’s valuation by >$10bn.

Adicet also has a CD70 targeting preclinical candidate targeting the protein PSMA and indicated for prostate cancer, and at least three more programs in development. Although there is absolutely no guarantee any of these programs will be successful, it’s tempting to speculate that the more data gathered by Adicet, the more progress it will make toward valuation-transforming goals such as enhanced durability and targeting of solid tumors.

Finally, it’s worth considering the partnership with Regeneron (REGN). This agreement has been in place since 2016, and Regeneron continues to hold a ~2% stake in Adicet. This is not a partnership on the same level as e.g. Poseida’s deal with Roche and it has yielded only $45m in payments between 2016 – 2022, but there could be another $80m on the table – according to Adicet’s Q322 10Q submission – plus “high single digit royalties” on any commercialised assets.

Conclusion – Why Adicet Stands Out From The CAR-T Crowd

I have selected Adicet as one of a trio of CAR-T cell therapy companies that I believe may be worth watching closely and potentially taking a position in for several reasons.

Firstly, Adicet’s share price has been less volatile than most cell-therapy biotechs over the past few years. Secondly it continues to have a market cap valuation >$300m, which I think is the minimum valuation at which I would want to invest money in a CAR-T specialist, with any company worth <$300m simply too speculative, and historically unlikely to succeed.

Thirdly Adicet stock suffered a major correction in December on data that was – durability aside – quite positive, exhibiting best-in-class potential, at least within the allogeneic field.

Fourthly, Adicet is one of a very few companies that can genuinely contemplate securing an approval for an allogeneic therapy at the present time, and one of the very few to be in discussions over a pivotal trial of an allogeneic therapy. Fifthly, there’s the differentiation of using gamma delta cells, which has so far shown a good safety profile and the 33% CR response after 6m, which is a flawed but nevertheless impressive result considering the current competition.

I could go on, so I will – Adicet is well funded – there are few concerns on that front, other than increasing costs if more assets make it into the clinic – and Adicet could soon secure an IND for its next candidate which will target solid tumors – success in this space would be a massive coup for the company.

Finally, you also could add that the biotech bear market of 2022 has pushed valuations of CAR-T therapy specialists so low that it’s hard to see how they could get much lower.

With all that said, investing in companies developing CAR-T therapies remains an extremely risky endeavor, and especially if those companies are focusing on anything other than “straightforward” autologous therapies targeting hematological cancers – the only field in which CAR-T has succeeded in to date – as Adicet is.

I would consider investing in Adicet on the promise of more ADI-001 data in 2023 – and an IND for another new approach that is innovative yet based on solid scientific evidence e.g. CD70- as a viable target, Chimeric Adaptors. I wouldn’t rule, the possibility of the company becoming an M&A target for a large pharma or a collaboration with a large pharma, and although it’s almost impossible to accurately value a pre-commercial biotech, if a pivotal study of ADI-001 is initiated I struggle to see how Adicet is not worth as leas >$500m, presenting a ~35% upside opportunity.