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SBOT: Q4 Update: Neovacs IFN-K Development Accelerating Following Positive Ph2 Results

12/07/2018
By Brian Marckx, CFA

NASDAQ:SBOT

READ THE FULL SBOT RESEARCH REPORT

Q4 / FY 2018 Financial Results/Update: Revenue Underwhelming But Investment Fundamentals Intact…

Stellar (NASDAQ:SBOT) reported financial results for their fiscal fourth quarter ending September 30th. While revenue remains immaterial, coming in at $54k in Q4 and $212k for the full year, long-term investment fundamentals remain largely intact in our opinion. Importantly, indications are that clinical trial and overall product development progress continues of those therapeutic candidates that SBOT supplies with their KLH. This includes Neovacs’ IFNa-Kinoid (IFN-K) development program.

Earlier this year Neovacs announced positive results from a (multi-country, including U.S.) phase IIb study for the treatment of systemic lupus erythematosus (see our discussion below) and subsequently announced an anticipated orphan drug designation regulatory filing related to the same candidate in S. Korea. Moreover, a separate development program could initiate in China following news in September that Neovacs’ partner, Biosense Global, exercised their rights to develop IFN-K for lupus in that country.

And, in addition to supporting commercial clinical trials, Stellar recently secured an agreement with the U.S. National Institutes of Health (NIH) to supply their proprietary KLH for government-sponsored studies. As we explained in our September 20th Note (NCI Supply Contract: Highlights Growing Interest of KLH for Cancer Immunotherapies), while it is not yet clear what this contract means in terms of potential financial contribution to SBOT, we think it does add additional validation to SBOT’s manufacturing capabilities, the importance of traceability of the source of KLH and the potential utility of KLH in cancer immunotherapies.

Revenue has been negligible and, while we had not expected significant sales at this point, we had anticipated a more obvious steepening of the topline based on assumed more-rapid progression of certain of the company’s KLH-supplied clinical trials. Unfortunately, with SBOT’s revenue largely tied to progress and stage of their customers’ clinical trials, there is not much the company can do other than wait for revenue catalysts to materialize.

Revenue over the last several quarters has largely reflected the lull between the conclusion of earlier-stage trials and commencement of later-stage trials. As later-stage studies typically enroll a greater number of patients, SBOT’s revenue opportunity increases as well. Successful conclusion of later-stage studies also improves the chances that a drug candidate eventually reaches commercialization and SBOT’s opportunity to support the approved product. We have since modified our model to reflect a slower than previously estimated pace of certain of the supported clinical trials and related development programs.

Current customers, including Neovacs and Araclon represent potential opportunities to increase KLH sales with progression of their clinical trials to later stages and, in the case of Neovacs, possibly from initial commercial sales in S. Korea. While Neovacs has not tipped their hand as it relates to next-steps for their multi-country IFN-K lupus program, their press release in July announcing the phase IIb results strongly suggested (i.e. “…very pleased with these results that will enable us to move into phase III within a partnering
to be finalized…”) that they expect to forge directly ahead with a phase III study. And, as noted above, with Biosense Global presumably developing their own development program, we think that may offer another KLH-supply opportunity for Stellar.

Meanwhile, Amaran/OBI could be moving their metastatic breast cancer candidate into phase III studies. We also think the recent clinical success of certain immunotherapies (including Gilead’s Yescarta and Novartis’ Kymriah) is likely to further fuel investment dollars into the space and potentially facilitate additional opportunities for SBOT.

And while revenue has been meager as of late, management has done a good job of controlling expenses and cash burn as they wait for the next phase of customers’ clinical programs to accelerate. Fiscal 2018 operating expenses were $4.9M, unchanged from that of the prior year. Meanwhile, cash used in operating and PP&E-related investing activities was $4.6M and $383k in 2018, respectively, compared to $4.9M and $302k in 2017. SBOT exited the year with $10.3M in cash and short-term investments on the balance sheet.

Net loss and EPS were $1.1M / $0.21 in Q4 and $5.0M / $1.76 for the full-year 2018, compared to $1.2M / $0.81 and $5.0M / $3.44 in the comparable prior year periods.

Operational Highlights:

Recent highlights on the operational front include

• Sept 2018: Stellar awarded contract to supply KLH for NCI/NIH-sponsored studies
• Neovacs announced positive results from IFN-K phase IIb Lupus study in July
      ∙ July 3rd press release indicates Neovacs plans to move directly to phase III study
      ∙ Sept 2018: Biosense Global exercises option to continue development of IFN-K in Lupus for Chinese market
      ∙ Oct 2018: Neovacs announces that they and S. Korean partner Chong Kun Dang will prepare Orphan Drug Designation (ODD) regulatory filing in that country. ODD, if granted, could allow Neovacs to launch IFN-K for lupus (w/o the need for any additional clinical studies)
• Neovacs IND approved, allowing for phase IIa dermatomyositis study to expand to U.S.
• Neovacs announced positive results from Type I diabetes POC study, preclinical development continues
• OBI Pharma indicates progress has been made towards pursuit of Ph III studies with OBI-822. OBI’s Sept 2018 investor presentation includes slide describing OBI-822 “Global P3 Trial Design”
• AXON's phase II Alzheimer's study completed enrollment in July 2017
• Araclon commenced phase II Alzheimer’s study

Neovacs Announces Ph2 Lupus Results, “Will Enable Us To Move Into Ph3…”
In early July Neovacs announced results of its phase IIb trial investigating safety and efficacy of their IFNa-Kinoid (IFN-K) candidate in the treatment of systemic lupus erythematosus (SLE). The vaccine uses Stellar’s KLH as a carrier vehicle. While one of the two co-primary endpoints did not reach statistical significance, the other did (and, in fact, was highly statistically significant). In addition, one of the two secondary efficacy endpoints was statistically significant, while the other showed a positive trend towards significance (although did not reach it). Safety, per Neovacs’ press release, was “favorable.” Despite the less-than-perfect results, Neovacs appears undeterred and indicated that they expect to move into phase III testing.

As a refresher of Neovacs’ Lupus program and SBOT’s relationship with the company…
In 2011 IFNa-Kinoid completed a phase I/IIa study (n=28) for Lupus. Results showed IFNa-Kinoid was well tolerated and patients experienced a strong immune response with a significantly higher production of binding antibodies compared to TNF Kinoid in humans. The phase IIb study, which had originated in 2015 in Europe, Latin America and Asia, was expanded to the U.S. In April 2016 Neovacs received IND approval from FDA to extend the study to the U.S. which also prompted an increase in total enrollment (in 20 countries) and expanded the number of sites from 5 to 15. In July 2017 the study completed enrollment (n=185).

In November 2016 Neovacs announced that they enrolled the first patient in the U.S. In December of that year FDA granted Fast-Track status to IFNa-Kinoid in lupus. The Independent Data and Safety Monitoring Board (IDSMB) overseeing the study issued favorable safety-related opinions throughout the duration of the trial.

Stellar’s role has been to supply Neovacs with KLH, which is used as a carrier protein for IFNa-Kinoid. In addition to lupus, Neovacs is evaluating IFNa-Kinoid in earlier stage programs in type 1 diabetes as well as for the treatment of dermatomyositis. Stellar and Neovacs recently expanded the supply agreement to ensure sufficient KLH quantities are available to support these studies as well as a potential future commercial launch. In addition, the agreements call for Neovacs to pay Stellar for maintaining a dedicated colony of limpets. Neovacs has accounted for only a small portion of SBOT’s total revenue over the last couple of years but with additional clinical activity as well as potential preparations towards launch, we think this will increase. The duo are also JV partners in Neostell, which was formed for the purpose of producing and commercializing Neovacs’ vaccines (assuming eventually approved).

Phase IIb Study in SLE…
The phase IIb randomized controlled, multi-center study enrolled 185 subjects with moderate-to-severe lupus. Patients were randomized to either IFNa-Kinoid or placebo, administered IM at five prespecified time points; days 1, 7, 28 and month 3 and 6. All subjects also received standard of care including immunosuppressants/steroids.

Per clinicaltrials.gov the following are the primary and secondary endpoints;

Primary endpoints;
- expression of IFN-induced genes (change from baseline) at week-36
- response to IFN-K treatment as measured by BILAG Composite Lupus Assessment (BICLA) at week-36

Secondary endpoints:
- treatment response based on SRI-4 at week-36
- safety (based on number of patients with treatment-related adverse events)

Results (per Neovacs’ PR);
Relative to the primary endpoints, Neovacs reported that the change from baseline on the gene-expression measure was highly statistically significant (p<0.0001) but that BICLA was not. The PR did not disclose specifics in terms of response rates of each arm and, in the case of BICLA, the p-value.

In terms of the secondary measures, 54% of IFN-K patients met the SRI-4 endpoint with reduction of steroids to less than or equal to 5mg/day at week 36 compared to 39% in the placebo arm. And while the SRI-4 endpoint did not reach statistical significance (p=0.07), it trended in favor of IFN-K.

Although not disclosed as an endpoint in the clinicaltrials.gov description of the study, Neovacs also reported on Lupus Low Disease Activity State (LLDAS). LLDAS is a relatively ‘new’, although validated, criteria for evaluating the change in activity of SLE. Based on the LLDS measure, IFN-K patients fared better than those in the placebo arm (53% vs. 30%) and the difference was statistically significant (p=0.002).

Next steps…
Based on the PR, Neovacs plans to forge ahead and expects to be able to move directly to phase III – contingent on first bringing on a partner to help with initiating and conducting a late-stage program in lupus. A phase III program would likely mean more patients than phase II – perhaps twice the enrollment – which should mean incrementally more revenue for SBOT in supplying KLH. The ultimate goal, however, remains to be supplying KLH for a commercialized product – and if IFN-K moves into a phase III lupus program, that would be a significant step closer to reaching that goal.

Although we had hoped these phase IIb results would be somewhat more definitive – specifically, that the data would be overwhelmingly positive and leave no doubt about IFN-K’s effectiveness in SLE and its chances for ultimately gaining regulatory approval, that isn’t what happened. And while we do not have enough insight at this point to be able to handicap the chances for success of a phase III program, we think there are reasons to be optimistic that the missed primary (and secondary) endpoint(s) in the phase IIb study may not be overly problematic.

Fortunately for Neovacs (and Stellar), but unfortunately for those that suffer from the disease, SLE is a chronic and oftentimes debilitating condition for which no cure exists. Current treatments only address the symptoms and with variable effectiveness. There is a tremendous unmet need for a true SLE therapy, which is the reason why IFN-K in lupus received FDA Fast-Track designation.

Also fortunate for Neovacs is that regulators, including FDA, have indicated receptiveness in considering a variety of primary endpoints for pivotal SLE studies. For example, while FDA’s industry guidance for developing medical products for the treatment of SLE recommends certain primary and secondary endpoints, there clearly appears to be some flexibility – that is, as long as the endpoints chosen are clinically meaningful and validated – which was the case for Neovacs’ study. For some context/example on this point, primary endpoint of AstraZeneca’s phase III pivotal FDA study of its SLE candidate (for reduction of disease activity), anifrolumab, is SRI-4 (@ week 52) – by contrast, FDA recommends BILAG as the preferred endpoint to measure reduction in disease activity.

Meanwhile, European Medicines Agency guidelines for SLE clinical trials recommends using “validated composite indexes s, (i.e., SLE Responder Index [SRI] or BILAG-based Composite Lupus Assessment [BICLA]) , which both include a measure of global disease activity (by SELENA-SLEDAI), specific organ system involvement (BILAG) and overall subject’s condition (Physician’s Global Assessment).”

As such, we think it is not unreasonable that (for example) SRI-4, separation of which was in favor of IFN-K although not statistically significant in this phase IIb study, could conceivably be used as a primary in phase III – and, with a slightly more robust response, might be successfully met.

Another point relative to reasons to be optimistic is the effectiveness of IFN-K to reduce steroid use as observed in the phase IIb data. Per FDA’s guidance, reduction in steroid use “is an important goal in treatment of patients with SLE if it occurs in the context of a treatment that effectively controls disease activity.” So, while Neovacs might still need to demonstrate that IFN-K can sufficiently reduce disease activity (via an ‘appropriate’ primary endpoint), the ability to reduce steroid use should certainly play in their favor in terms of evidence of clinically meaningful benefit.

And while next-steps relative to the U.S. market have yet to be disclosed, these phase IIb results have culminated in accelerating development activities of IFN-K in other parts of the world. Neovacs announced on September 11th that, in return for an unstipulated fee, their partner Biosense Global has exercised their option to develop and commercialize IFN-K for lupus in China. Meanwhile, Neovacs and their S. Korean partner, Chong Kun Dang (CKD), (per Neovacs’ October 11th press release) anticipate preparing a filing supported by these phase IIb results seeking Orphan Drug Designation from regulators in that country. Given that the clinical study formulation presumably utilized Stellars’ KLH, we would expect any parallel development programs (such as sponsored by Biosense or CKD or others) to also source KLH from SBOT.

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