Quick Update: Genprex (NASDAQ: GNPX)
Stock Rating: CONVICTION BUY from prior BUY
Price Target: $13.07 from prior 8.27(+283%
upside 12-months)
Market Price: $3.41
Research Publication Date: 12/08/20
Genprex (GNPX) came out with positive news on November 30th,
2020 where they anticipate a 1H’21 start date for its Acclaim-1 clinical trials.
With this announcement, the REQORSA + Osimertinib clinical trial should create
more optimism around the clinical program. What makes this unique is the FDA
Fast Track Designation, which is why Genprex is able to commence both a phase 1
& 2 clinical trial. We think reliable data can be achieved within 12-18
months where surrogate endpoints would be necessary to maintain a 4-to-5-year
timeframe for new drug acceptance by the FDA.
What makes the clinical program more unique is the announced
number of patients, where the first phase-1 component is limited to 9-18 patients.
Typically the number of patients is limited for the first phase, as its
intended to measure dosage and safety outside of lab conditions with animals
(pre-clinical vs. some clinical data). We think, the drug program has matured
to a point where establishing safety and dosage will not be as difficult as
establishing the comparative benefits of REQORSA in combination with
Osimertinib vs. placebo/conventional treatments.
We are upgrading Genprex from BUY to CONVICTION BUY upon updates to its manufacturing process, and further visibility on its clinical pipeline. We are also revising up our prior $8.27 PT to $13 PT, based on the diminished risk of the clinical pipeline due to commercial scale production, which increases the implicit likelihood of a combination treatment reaching the drug market by 2025-2026. Therefore, we have reduced our discount rate by 10 percentage points from 60% to 50%, while maintaining the same shareholder dilution rate from follow-on cap raises in our updated model.
When should investors anticipate an update on clinical
trial data?
As such, the real clinical datapoint that will keep investors onboard ties to the midpoint/interim analysis of the phase-2 clinical trial. According to Genprex, the company will release the interim analysis after studying/enrolling a patient population of 82 people in a randomized manner. The company will then announce the interim analysis after 53 events have been measured (disease free progression, disease progression, death, etc).
Typically, with new cancer treatments, results are compared to more conventional treatments like Platinum based doublet-chemotherapy or versus a placebo. In this case, we will have more details in the future when pertaining to the study itself. However, investors would want the clinical data from REQORSA + Tagrisso to show meaningful improvement. Tagrisso/Osimertinib as a standalone treatment has a median progression free survival rate of 10.1 months. Hence, the data would have to demonstrate that there was an improvement in excess of 10.1 months when combining REQORSA with Tagrisso.
We think this seems fairly probable based on the effectiveness of REQORSA with other cancer therapeutics from other clinical trials. However, we do not anticipate this data readout until we reach the end of phase 2 clinical trials, with mid-point data likely released before 10 months of progression free survival on a median data set basis.
Also, when pertaining to the interim analysis, we think those data points will demonstrate a clinical benefit ratio in excess of the standalone Tagrisso treatment. In this case, we anticipate that Phase 1 clinical trials will take less than a year, whereas mid-point Phase 2 clinical trial data should be available by 2H’22. We also anticipate that in the next 12-months there will be an update on the REQORSA + Tarceva combination treatment, along with added news tied to the Acclaim-2 clinical trial (REQORSA + Keytruda).
Genprex has established an efficient manufacturing
process for REQORSA
Genprex announced on December 8th, 2020 the
successful technology transfer to a Contract Development and Manufacturing
Organization (CDMO). This is important, as it signals the beginning of
commercial scale production, which ties into the ability of Genprex to administer
the drug to a larger sample of patients. Prior to this announcement, Genprex
relied on MD Anderson Austin, TX to produce small batches for the purpose of
clinical studies.
Given the patient sample size of 100 for Acclaim 1, the need
for more treatments for the REQORSA + TARCEVA phase 3 clinical trials
(typically 100+ patients are enrolled for phase 3 studies), and the Acclaim 2
trial… the announcement of commercial scale production could not have happened
at a better time. We anticipate that the reduction in cost, and the commercial
production quality will result in more accurate clinical trial data and will
keep Genprex on track to meet key milestones through its clinical pipeline.
The reason why the manufacturing component adds material
upside to the investment thesis: 1) despite complexity of the
plasmid cassette delivery mechanism of the TUSC-2 suppressor gene, it can still
be manufactured and stored at scale 2) upon large scale production,
reaching key clinical milestones won’t be as difficult or cost prohibitive diminishing
some of the cash burn tied to more expensive manufacturing processes 3) perfecting
manufacturing prior to new drug acceptance creates a stronger gross margin
profile despite the associated licensing costs and manufacturing costs of REQORSA.
Valuation/Financial Model Update
We anticipate more meaningful market saturation assuming the approval of REQORSA + Osimertinib, which is why we forecast that revenue growth will accelerate meaningfully from FY’25 onwards. We anticipate that market share gains will improve as modest inclusion of REQORSA in combination with Osimertinib would translate to $405M FY’25 and $615M FY’26 revenue. We anticipate that Osimertinib drug sales will grow from $3.2B FY’19 to $5.8B by FY’25. This implies that only a very modest percentage of patients on Osimertinib would need to transition to the combination therapy of REQORSA. As such, we anticipate meaningful revenue contribution, but we keep our expectations conservative so we do not model too much implied upside.
Therefore, we forecast revenue of $405M in FY’25 and FY’26 $615M revenue. The remaining revenue contribution ties to our prior estimates pertaining to Erlotinib + REQORSA. We maintain the conservative timing of REQORSA + Erlotinib in a FY’23 timeframe and anticipate that the release of REQORSA + Osimertinib would address some added patient cases and would increase our market penetration scenario upwards from 2.75% to 7.5%.
This drives our revenue/EPS estimates higher, as we anticipate that the expansion of the clinical program will address more patients with differing EGFR-types. Furthermore, we limit our expectations on drug pricing to $80K per patient to keep our financial upside scenario as conservative as possible.
Figure 1. Valuation Model
Source: Cho Research
We value the stock based on an end of period discount on forward earnings. Based on the improved outlook due to commercial scale production, we believe the risks tied to the clinical pipeline have diminished. We base our new valuation based on an end of period valuation of 34x FY’26 earnings based on a 50% discount vs. the prior 60% discount rate. Given the number of combination treatments in clinical trials we anticipate that the risks of not completing clinical trial phases has diminished due to the number of treatments in combination with REQORSA, and the ability to procure enough treatments for multiple clinical trials concurrently.
Figure 2. Risk Probability
Source: J.A. Dimasi Journal of Medicine (New Estimates of
R&D Cost)
When basing it on median probabilities, REQORSA has multiple combination treatments, and so when basing it on probability of entering phase, we believe that with three drug combinations likely to reach phase 3 clinical trials, the riskiness implicit in the Dimasi model does not capture risk accurately in this situation. This is because management has demonstrated that they can recapitalize via secondaries when necessary, improved production to commercial scale, and has multiple combination candidates. Assuming Tarceva + REQORSA combination reaches phase 3 clinical trials our risk model would diminish from 50% to perhaps 30% to reflect the risks of a phase 3 + phase 2 clinical trial for REQORSA. This is because the model hinges on both the REQORSA + TARCEVA and REQORSA + TAGRISSO reaching consumer markets by 2025-2026.
Final thoughts
We are upping our expectations tied to Genprex, as risk/reward has improved considerably from our prior publication. Our upside target suggests +283% upside vs our +190% upside scenario from our prior PT estimate.
Therefore, we have revised our BUY rating to CONVICTION BUY, which is our highest buy rating, and characterizes the diminished risk profile due to the positive news on the clinical pipeline. Typically, we demand a skewed risk/reward profile prior to offering our highest buy rating on stocks we cover.
Disclosure: Cho Research was compensated to publish “Genprex (GNPX) Raising PT to $13 on Commercial Manufacturing” The to-date compensation terms were $15,000 cash and 15,000 shares via options over a 7-year contract duration as of January 2019. Though Cho Research does use the research dollars it
generates from other clients of our research service to fund market research
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