The market punished NewLink Genetics (NASDAQ:NLNK) after presenting data on their indoleamine 2,3-dioxygenase (IDO) combination with Keytruda in advanced melanoma. The stock initially lost over 20% of its market value only to recover half of its losses and end the day down 10% after a number of analysts came to the company's defense. This article will explore whether the market overreacted to the data or if the data truly as bad as the market made it out to be.

IDO Inhibitor

IDO is a intracellular enzyme that regulates the immune response by degrading tryptophan to kynurenine. IDO pathway activity allows tumors to hijack the pathway to avoid the immune response.

The IDO pathway has gained a tremendous amount of hype in response to initial data released from Incyte (NASDAQ:INCY) at EMSO in 2016 as well as recently expanded trials in combination with PD-1 inhibitors with both Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) across a variety of tumor types. Immuno-oncology companies are looking to find the right combinations to provide synergistic benefits in areas where currently approved therapies are inadequate. While there is still limited available data, IDO inhibitors appear to be the front-runner to be one the first approved I-O combination with PD-1 across multiple tumor types.

NewLink Genetics

NewLink has wholly owned IDO inhibitor, Indoximod, as well as a partnered IDO inhibitor, GDC-0919, with Genentech/Roche. The company has two distinct strategies to target the IDO pathway. Indoximod acts directly on immune cells to reverse IDO pathway-mediated response. GDC-0919, like Incyte's epacadostat, is an enzymatic inhibitor, which blocks tryptophan metabolism.

NewLink's AACR presentation released data on Indoximod in combination with Keytruda to treat advanced melanoma. The interim data shows 60 patients treated, with 52 (87%) having stage IV melanoma. Importantly, NewLink included patients with difficult to treat Ocular Melanoma. In Merck's Keytruda phase 3 trial for melanoma, patients with ocular melanoma were excluded.

Source: AACR 2017

Across all 60 patients, there was a 52% objective response rate (12% complete response; 42% partial response), 22% stable disease, which resulted in a 73% disease control rate. Removing patients with ocular melanoma the ORR and DCR increase to 59% and 80%, respectively.

Source: AACR 2017

Source: AACR 2017

Good Results, Negative Reaction

Considering Keytruda's Phase 3 trial in advanced melanoma had a 33% ORR, it's clear adding an IDO inhibitor provides tremendous benefit. To understand why the market punished NewLink, we need to examine Incyte's IDO data with Keytruda in melanoma released at EMSO in 2016.

Source: EMSO 2016

Incyte presented a smaller data set comprising only 19 patients with advanced melanoma, none of which had ocular melanoma. Across all 19 patients, there was a 58% ORR (26% CR; 32% PR) and 74% DCR. Removing ocular melanoma patients from NewLink's data and you get strikingly similar data with one exception. Incyte's limited trial saw 26% of patients experience a complete response compared to just 12% in NewLink's trial.

Incyte's safety data presented at ESMO isn't apples to apples because the company included multiple tumor types, but Incyte's combination did include a higher number of grade 3/4 treatment related adverse events with 19% compared to NewLink's 6%. Importantly, no grade 4 or 5 events were reported in NewLink's data. This is an important distinction for the IDO combination, because the Opdivo/Yervoy combo saw a marked increase in adverse treatment related events. In Opdivo/Yervoy phase 3 trial in advanced melanoma the ORR was 59%, but grade 3/4 treatment related adverse events was 58%. This puts the IDO/PD-L1 at an advantage over Opdivo/Yervoy combo due to its comparably clean safety profile.

Balance Sheet

NewLink ended 2016 with $131.5 million in cash. The company expects a quarterly cash burn around $14 million, which would put the 2017 ending cash balance around $75 million. This excludes any possible milestone payments from Genentech, if they are able to advance their IDO partnership, GDC-0919, into Phase 2 during 2017. The bottom line remains NewLink has an acceptable cash balance to fund current studies well into 2018. Having said that, small cap biotechs are notorious for surprising investors by issuing new shares to raise capital. Investors should expect NewLink to raise funds sometime in the next 12-18 months.

Speculative Biotech Risks

As with all small cap biotech companies in the development stage, NewLink remains a high risk/high reward investment and should only be viewed as a speculative investment. While the company is targeting one of the hottest immuno-oncology pathways, there's no guarantee either of NewLink's IDO therapies will prove superior to Incyte's IDO program. A classic example of the risks in biotech is exemplified by NewLink's AACR presentation. The company reported encouraging data that was comparable to data released by Incyte, but the market did not give the company the benefit of the doubt and pushed shares down 20%. Investors who can't stomach volatility should probably look elsewhere.

Conclusion

IDO inhibitors are a huge step forward in combination with PD-L1 and paves the way for additional advancements in checkpoint inhibitors. It's too early to write off NewLink's proprietary IDO inhibitor, Indoximod. The data presented showed encouraging results in a broader patient population than has thus far been available. I believe the market has overreacted to what should be viewed as at the very least comparable data. Incyte may have shown a higher complete response rate, but in a far smaller data set. If it turns out Incyte's IDO enzymatic approach to block tryptophan metabolism is indeed superior to Indoximod mechanism of action, remember NewLink has a partnership with Genentech/Roche (OTCQX:RHHBY) utilizing the exact same approach. IDO inhibitors will remain a focal point for any company pursuing immuno-oncology and NewLink has distinguished itself as a major player with proven results in this area.

I'd recommend NewLink as a speculative buy on any continued weakness below $20/share. Data on IDO/PD-1 combinations should continue to be released throughout 2017 with ASCO in June as a likely event for Merck, Bristol-Myers or Roche to present data in areas outside of melanoma.

Disclosure: I am/we are long NLNK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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NewLink Genetics Unfairly Punished - Seeking Alpha - Seeking Alpha