CYCLACEL PHARMACEUTICALS, INC. CYC065 Shows Promise in Mcl-1 Regulation; Initiate Coverage with Buy & $6.25 PT
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Biotechnology and Diagnostics Initiating Coverage September 7, 2018 BUY Kevin DeGeeter; [email protected] 212.409.2027 CYCLACEL PHARMACEUTICALS, INC. CYC065 Shows Promise in Mcl-1 Regulation; Initiate Coverage with Buy & $6.25 PT CYCC (NASDAQ) We are initiating coverage of Cyclacel Pharmaceuticals, Inc. (Nasdaq: CYCC) with Company & Market Data a BUY rating and $6.25 price target. We believe CYC065, the company’s CDK Closing Price (as of 09/06/2018): $1.43 2/9 inhibitor, has demonstrated clear signs of activity against the Mcl-1 pathway, Rating: BUY which has long been viewed as an attractive target for treatment of hematologic Price Target: $6.25 52 Week Range: $1.28 - $2.27 malignancies. Our investment thesis is based on the following assumptions: 1) CDK9 Shares Outstanding (MM): 12.0 is a validated approach to regulating the anti-apoptotic Mcl-1 protein in CLL, AML and Market Capitalization (MM): $17 other hematologic malignancies, 2) Phase I data has demonstrated CYC065 provides Cash (MM): $19.8 prolonged suppression of Mcl-1 expression following a single dose, and 3) additional Fiscal Year End: Dec regulation of CDK2 may offer synergy based on exploratory preclinical findings. If Estimates CYC065 maintains an acceptable safety profile – a key challenge for first-generation EPS 2017A 2018E 2019E CDK2/9 inhibitors – in our view, CYC065 will be an important option for combination 1Q $(0.44) $(0.13)A — therapy in 2nd line hematologic malignancy populations with peak sales potential of 2Q $(0.55) $(0.20)A — $650M+. In terms of catalysts, we view mid 2019 presentation of top-line Phase II data for 3Q $(0.21) $(0.18) — CYC065 in combination with venetoclax in patients with relapsed/refractory CLL as the 4Q $(0.17) $(0.21) — most significant milestone. While Mcl-1 has been linked to disease activity in a range of Full Year $(1.10) $(0.71) $(0.91) malignancies, we view second line CLL as an attractive path to market based on 1) more Revenue (MM) 2017A 2018E 2019E homogenous disease biology than AML, 2) preclinical data suggesting potential synergy 1Q $0.0 $0.0A — with venetoclax, and 3) unmet need with median survival around 2 years. Our $6.25 price 2Q $0.0 $0.0A — 3Q $0.0 $0.0 — target is based on a DCF analysis assuming a 32% discount rate, 20.3 million shares on a 4Q $0.0 $0.0 — fully diluted basis, terminal year (2025) FCF of $177.1M and 13% long-term growth rate. Full Year $0.0 $0.0 $0.0 CYC065 CLL Combo with Venetoclax –$650M Peak Sales: CYCC has submitted • a protocol for IRB approval to evaluate CYC065 in combination with venetoclax for Cyclacel is a clinical stage biotechnology company treatment of 2nd line CLL patients with data available as early as mid 2019. We expect developing oncology drugs based on cell cycle patients to be titrated up to the prescribed dose of venetoclax from a starting dose of regulation, transcriptional regulation and DNA 20mg. Once the patient reaches steady state, we expect CYC065 to be added at a damage response. The company’s research schedule of a 4-hour infusion once every 3 weeks. We encourage investors to focus activity is focused on CYC065, a CDK2/9 inhibitor primarily on tolerability including neutropenia and tumor lysis syndrome. In terms of in Phase I development for relapsed/refractory efficacy, we believe the unmet need in 2nd line CLL is for deeper responses (i.e., more CLL. The company's early-stage pipeline includes CRs) rather than higher ORR or PFS. Durability data will likely mature in 2H19 and CYC140, a PLK1 inhibitor. The Berkeley Heights, 2020 providing additional clinical news flow from the study. NJ-based company retains global rights to each of its drug candidates. • Targeted Agents for CLL Supports Combination Strategy: With growing acceptance of BTK inhibitors such as ibrutinib in the frontline setting and potential of the BCL-2 inhibitor venetoclax to be established as the standard of care in second line setting, we believe 1) chemotherapy will be increasingly less relevant to treatment of CLL, at least in the U.S., and 2) combination regimens of two or more targeted agents may offer higher complete response rates effectively “curing” more frontline patients and providing more durable response in the second line setting. • Tolero Offers Attractive Benchmark for Strategic Value of CDK9: Sumitomo acquired Tolero Pharmaceuticals for $200M at closing and $580M in milestone payments based on the CDK9 inhibitor alvocidib. Alvocidib was entering Phase II development when Sumitomo acquired the asset. We view CYC065, which could enter Phase II development in CLL in 2H18, as potentially differentiated from alvocidib based on both IV and oral dosing compared to IV dosing with alvocidib, potential for better tolerability and different paths to regulatory approval in AML (alvocidib) and CLL (CYC065). DisclosuresandAnalystCertificationscanbefoundinAppendixA. 277 Park Avenue 26th Floor • New York, New York 10172 • Telephone: 212-409-2000 • 800-LAD-THAL Member: NYSE, NYSE American, NYSE Arca, FINRA, all other principal exchanges and SIPC Kevin DeGeeter 212.409.2027 Cyclacel Pharmaceuticals, Inc. (CYCC) INVESTMENT THESIS Initiating Coverage with a BUY Rating and $6.25 Price Target We are initiating coverage of Cyclacel Pharmaceuticals, Inc. (Nasdaq: CYCC) with a BUY rating and $6.25 price target. We believe CYC065, the company’s CDK 2/9 inhibitor, has demonstrated clear signs of activity against the Mcl-1 pathway, which has long been viewed as an attractive target for treatment of hematologic malignancies. Our investment thesis is based on the following assumptions: 1) CDK9 is a validated approach to regulating the anti-apoptotic Mcl-1 protein in CLL, AML and other hematologic malignancies, 2) Phase I data has demonstrated CYC065 provides prolonged suppression of Mcl-1 expression following a single dose, and 3) additional regulation of CDK2 may offer synergy based on exploratory preclinical findings. If CYC065 maintains an acceptable safety profile – a key challenge for first-generation CDK2/9 inhibitors – in our view, CYC065 will be an important option for combination therapy in 2nd line hematologic malignancy populations with peak sales potential of $650M+. In terms of potential catalysts, we view mid 2019 presentation of top-line Phase II data for CYC065 in combination with venetoclax in patients with relapsed/refractory CLL as the most significant milestone. While Mcl-1 has been linked to disease activity in a range of malignancies, we view second line CLL as an attractive path to market based on 1) more homogenous disease biology than AML, 2) preclinical data suggesting potential synergy with venetoclax, and 3) unmet need with median survival around 2 years. Our $6.25 price target is based on a DCF analysis assuming a 32% discount rate, 20.3 million shares on a fully diluted basis, terminal year (2025) FCF of $177.1M and 13% long-term growth rate. CDK9 Inhibition Offers Validated Path to Evaluate Mcl-1 Inhibition We believe data from prior studies of pan-CDK inhibitors (dinaciclib) and selective CDK9 inhibitors (alvocidib) have validated CDK9 as clinically relevant in patients with elevated Mcl-1 expression. By way of background, CDK9 is a subunit of the positive transcription elongation factor b (P-TEFb), also comprising CycT1 or CycT2, and is required for transcription elongation by RNAPII. Transcriptional regulation is tightly controlled by CDK9 via phosphorylation of residues on the C-terminal domain (CTD) of RNAPII, which downregulates activity of suppressors that inhibit RNAPII activity. Inhibition of CDK9 mediated phosphorylation of the CTD RNAPII results in reduced levels of antiapoptotic proteins such as Mcl-1. Short-term CDK9 inhibition suppresses Mcl-1 transcription and rapidly depletes Mcl-1 protein (due to short half-life of the protein) resulting in caspase activation and cell death in Mcl1-dependent cancer cells. While CDK4/6 inhibitors used to treat breast cancer have not been amenable to biomarker selection, in our view, Mcl-1 expression may serve as an important predictor of response to CDK9 inhibitors such as CYC065. Addition of CDK2 Inhibition Offers Differentiation from Other CDK9 Inhibitors We believe CYC065 is the only compound currently in clinical development combining selective inhibition of CDK2 and CDK9. In an article published in the January 2018 issue of Molecular Oncology entitled “Molecular profiling and combinatorial activity of CCT068127: a potent CDK2 and CDK9 inhibitor,” the authors concluded CDK2 expression may regulate CDK9 through a feedback loop, which suggests targeting both may be necessary for sustainable suppression of Mcl-1. If this hypothesis is borne out in clinical development, CYC065 may offer superior potency over selective regulation of only CDK9. Our base case assumes potency differences for molecules in the class will be driven primarily by level of CDK9 target engagement and compliance/tolerability of the regimen. CLL Combo Study with Venetoclax Offers Biggest Upside Opportunity CYCC has submitted a protocol for IRB approval to evaluate CYC065 in combination with venetoclax for treatment of 2nd line CLL patients with data available as early as mid 2019. We expect patients in the study to be titrated up to the prescribed dose of venetoclax from a starting dose of 20mg. Once the patient reaches steady state, we expect CYC065 to be added at a schedule of a 4-hour infusion once every 3 weeks. We encourage investors to focus primarily on tolerability including neutropenia and tumor lysis syndrome. In terms of efficacy, we believe the unmet need in 2nd line CLL is for deeper responses (i.e., more CRs) rather than higher ORR or PFS. Durability data will likely mature in 2H19 and 2020 providing additional clinical news flow from the study. Page 2 Kevin DeGeeter 212.409.2027 Cyclacel Pharmaceuticals, Inc.