Description

IO Biotech, Inc (IOBT)

Biotech markets have been dislocated for over 17 months with a significant number of companies trading below cash. Respected analyst Josh Schimmer recently noted that negative enterprise value companies totaled $14 billion of net cash trading for an aggregate market cap of $8 billion.  There are diamonds in rough, though many will burn cash inefficiently unless the company is winding down.  We see value in companies with strong data, science, target indication, data catalysts management and capital structure.  IO Biotech (IOBT) looks like a potential diamond.  

IOBT’s early data in frontline metastatic melanoma is outstanding.  If the data is replicated in the newly launched Phase 3 trial, it should be a multibillion-dollar company.  IOBT’s IO102/I0103 plus PD-1 checkpoint therapy produced a staggering 73.3% RECIST 1.1 Overall Response Rate (ORR), 46.7% Complete Response Rate (CR) and 25.3 month Progression Free Survival (PFS) in first line metastatic melanoma.  This Nature published data significantly exceeds the current standard of care in terms of both efficacy and durability. Safety also looks clean. A Phase 3 randomized trial designed to be registrational, recently began with the first patient dosed in May.  The current enterprise value of IOBT at $4.20/share is negative $67M with a $121M market cap and $188M of cash at 3/31/22.  The current burn rate is around $20M. IOBT IPO’ed 11/4/21 at $14/share the day the XBI began a greater than 50% decline in the following seven months.  The stock was orphaned with no open market institutional support and ignored from day one of trading, which creates a compelling setup today.

Don’t go chasing waterfalls, unless they look this good 

IOBT’s T-win platform is designed to both directly kill immunosuppressive cells in the tumor microenvironment (TME) that express both PD-L1 and IDO as well as make the TME more pro-inflammatory (aka making the tumor hot). The latter allows for the addition of mAb PD-(L)1 checkpoint therapy to be more effective.  Dual injections of IO102 (a peptide targeting IDO) and IO103 (a peptide targeting PD-L1) combined with BMY’s PD-1 monoclonal antibody nivolumab (nivo) produced the very impressive results and referenced waterfall table above.  This equates to a 73.3% ORR with a median Progression Free Survival (PFS) of 25.3 months.  To put that in perspective, the gold standard approved therapy in frontline melanoma is ipilimumab (ipi, CTLA4) + nivolumab(nivo, PD-1), which produced a 58% ORR and an 11.5 month PFS in its pivotal trial.  While effective, ipi/nivo is a highly toxic regiment (particularly from the ipilimumab contribution) which many patients can’t tolerate leading to a 42% discontinuation rate.  By comparison, the safety profile of IO102-IO103 plus nivo was similar to nivo alone with 13% Grade 3/4 AEs and TRAE leading to discontinuation of treatment 17%.

Given the very positive Phase 1/2 data, IOBT jumped right into a registrational Phase 3 trial which dosed its first patient in May. The trial design is straightforward with 300 patients to be randomized 1:1 in either a Pembrolizumab (pembro, Merck’s PD-1 checkpoint) + IO102-IO103 vs. Pembrolizumab alone. The primary endpoint is PFS with secondary endpoints including ORR, OS and safety.  If the trial reproduces the Phase 1/2 data in its Phase 3 randomized controlled trial (RCT), IOBT is a homerun. 

Expansion opportunities through additional indications

While data from the ongoing Phase 3 melanoma trial will take years to complete, we are not stuck in a data desert. The company is conducting multiple Phase 2 trials across other indications including NSCLC (Lung), SCCHN (Head & Neck), UBC (Bladder). IOBT has a clinical supply agreement with Merck for pembro in these basket trials. The company should provide some NSLC data in the back half of this year with data for SCCHN and UBC into 2023.  Additionally, there are a number of investigator sponsored trials underway including a randomized trial in neo-adjuvant SCCHN and other ISTs in planning mode with data updates expected in 2023. 

Additional pipeline epitope target Arginase 1 (IO112)

IOBT has an Arginase 1 targeting peptide (IO112) nearing the clinic in the US.  Arginase is overexpressed in colorectal, breast, prostate, pancreatic and ovarian cancers. It is currently in a monotherapy trial at Copenhagen University, though we have not yet seen any data.  IOBT expects to file a US IND in H2 2022 for IO112 to be combined with IO102 and IO103 in Arginase positive tumors with initial data in 2023.  Few other oncology programs are targeting arginase and we aren’t aware of any with a vaccine approach.  Incyte has a small molecule arginase inhibitor INCB01158 (CB-1158) licensed from Calithera in 2017 currently in Phase 2 for multiple myeloma. 

Melanoma Competitive landscape 

Unfortunately for patients, metastatic melanoma is a large market with 100K annual cases and over 7K related deaths in the US per year.  The last decade saw a dramatic improvement in the treatment of melanoma with the approval ipilimumab (Yervoy, CTLA-4) in 2011 and the combination of ipilimumab and nivolumab in 2015. Prior to these checkpoint therapy regiments, chemotherapy and high dose IL-2 were the standard of care and produced sub 20% ORR.  Ipi/nivo can produce mid 50% ORRs, leaving room for improvement.  Multiple companies have been working the problem and there has been no shortage of failures. Two recent high-profile, late-stage failures include Nektar/BMY’s pegylated IL-2 (bempegaldesleukin) and Idera’s TLR9 (tilsotolimod).  Each of these front-line therapies plus checkpoint PD-1 would have competed directly for IOBT’s potential patient population.  

If patients have melanoma with a BRAF V600 mutation, there are other possible front-line therapies including BRAF+MEK inhibitors instead of checkpoint inhibitor (ipi/nivo) therapies. For patients who are candidates for both treatments, standard of care guidelines recommend that checkpoint inhibitors should be chosen as first-line therapy.  Approximately 35% to 50% of melanomas have a targetable BRAF mutation. (NCBI BRAF). BRAF/MEK inhibition combo Tafinlar+Mekinist produced $1.7B in 2021 revenue for Novartis across BRAF metastatic melanoma, adjuvant melanoma and NSCLC.  (NVS Long Term BRAF/MEK survival) 

One notable success in front-line metastatic melanoma is the recently approved new BMY checkpoint relatlimab (Opadulag) in combo with nivolumab (Opdivo).  Relatlimab is a LAG-3 checkpoint inhibitor, notable as it is the 3rd FDA approved oncologic checkpoint therapy.  BMY will be in competition with itself as ipi/nivo is one of the best treatments if a patient can tolerate the toxicity.

The table below summarizes the competitive landscape as its stands today

Caveat Emptor- why is the valuation so low?

Like most negative enterprise value biotechs, IOBT has its share of potential red flags including: The prior trial was conducted at a single site in the Netherlands, it was a small trial (N=30), the MOA of IDO produced recent failures for large pharma, the Phase 3 melanoma read is far off, and the therapy is in combination with PD-1 checkpoint therapy which requires an RCT to tease out the true efficacy of the combo agent.  Much of the criticism is fair and larger trials with more data will provide the answers we seek.  

To address the issues directly:

As for risk that the data to data is from single, European trial site, investors can draw comfort that the study was published in the unimpeachable journal Nature (IOBT Nature Publication).  Publication in such a journal means the data, process and trial was peer reviewed and a material level of due diligence was performed. Further, as part of the trial design, the clinical data was validated by a blinded independent external review.  The external review panel determined an ORR of 76.6% and a CR of 53.3%.

Like many hot oncology targets IDO (indoleamine 2,3-dioxygenase) was hyped up prior to a high-profile failure. Incyte’s IDO failed in combo with Keytruda in 2018 https://www.fiercebiotech.com/biotech/body-blow-for-incyte-as-merck-partnered-melanoma-trial-bombs.  In 2017 Genentech handed back its license to NewLink Genetics’ IDO after its failure presented at ASCO (https://www.fiercebiotech.com/biotech/newlink-s-ido-inhibitor-score-sheet-reads-one-fail-one-modest-pass).  The road to success in immuno-oncology is rarely linear.  Despite IDRA’s epic TLR9 failure in Melanoma last year, REGN acquired TLR9 competitor Checkmate (CMPI) 2 months ago.  We are often remined that neither CTLA4 nor PD1 was a smooth path to clinical and commercial success.  

Moreover, there are important distinctions between Incyte’s therapy and IO102-IO103.  INCY’s epacadostat was a small molecule inhibitor designed to block IDO and take the “brakes” off anti-tumor immune response.  This is a similar approach to checkpoint inhibitor therapies that instead target PD-1.  IOBT’s MOA is very different. IO102-IO103 is a peptide designed to directly activate and expand CD3+ and CD8+ T-cells against the targeted antigen (IDO and PD-1). IOBT is using IDO as a targeting moiety and is unrelated to the prior attempts at developing IDO antagonists.

The biggest risk is the lack of a randomized controlled trial teasing out the contribution of IO102-IO103 vs. nivo alone.  bempeg (NKTR) is a good example of how promising early data evaporate in a proper RCT.  It’s worth noting that in the Phase 2 trial Bempeg + Nivo, the ORR of 53% was not dramatically different from that of nivo alone. IOBT’s early data is starting at a much more impressive level but one must run the controlled experiment to know the actual answer.  

Intellectual property

IO Biotech has a long patent life associated with its therapy. Composition of matter expires on IOBT102 (IDO) in 2029. A second family of patents around the use of IOBT102 in combination with IOBT103 and a checkpoint inhibitor expires in 2037. IOBT103 (PD-1) composition of matter patent expires in 2033.  IOBT112 (Arginase 1) composition of matter patents expire in 2037.  IOBT maintains 13 separate patent “families” across its clinical and preclinical programs.

Conclusion

In the vast array of negative enterprise value biotech, we think IOBT stands out as a worthy bet.  Great data is rare and IOBT has cash runway into 2024 to generate transformative data.  Recent competitive failures have cleared a path for new therapies in melanoma and data from NSLC, SCCHN, UBC prior to the melanoma readout could reinforce IO102-IO103’s efficacy.  IO112 Arginase-1 provides an additional shot on goal with early data in 2023. Management is credible and the investor base checks the high-quality box.  Investors are paying a 70% discount to the IPO price from 7 months ago or negative $67M on an enterprise value basis for an option that could be worth a few billion. 

Catalyst

• Phase 3 IO102-IO103 IOB-22/KN-D38 Melanoma trial read out
• Phase 2 IO102-IO103 NSCLC, UBC, SSCHN trial data updates 
• Phase 1 IO112 IND and solid tumor data updates
• Broader biotech recovery