U.S. Research Published by Raymond James & Associates Healthcare October 11, 2017 Initiation of Coverage Reni Benjamin, Ph.D., (212) 883-4615, [email protected] Bin Lu, Ph.D., Sr. Res. Assoc., (212) 883-6548, [email protected] Biotechnology: Initiating Coverage ________________________________________________________________________________ An Investor’s Guide to Understanding Gene Therapy: A Paradigm Shift Whose Time Has Come Initiating Coverage of Spark Therapeutics, REGENXBIO, Voyager Therapeutics, and Adverum Biotechnologies at Outperform; Audentes Therapeutics at Market Perform Please read domestic and foreign disclosure/risk information beginning on page 234 and Analyst Certification on page 234. © 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 Raymond James U.S. Research Contents Executive Summary .............................................................................................. 3 Gene Therapy 101 ................................................................................................ 7 Gene Therapy Players ........................................................................................... 8 A Brief History of Gene Therapy: More Than Two Decades of Ups and Downs ................................................ 11 Recent Clinical Successes / Setbacks .................................................................. 13 Let’s Get Technical: A Closer Look at the Backbone of Gene Therapy ............... 17 Acquisitions, Partnerships, IPOs, Secondary Public Offerings, and Performance of Select Gene Therapy Players ........................................ 33 Initiations of Coverage Adverum Biotechnologies, Inc. (ADVM-NASDAQ) .............................................. 38 Audentes Therapeutics, Inc. (BOLD-NASDAQ) ................................................... 68 REGENXBIO Inc. (RGNX-NASDAQ) ...................................................................... 98 Spark Therapeutics, Inc. (ONCE-NASDAQ) ....................................................... 135 Voyager Therapeutics, Inc. (VYGR-NASDAQ).................................................... 182 Appendix: Description of Select Gene Therapy Companies ............................. 216 © 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 Raymond James U.S. Research Executive Summary The Gene Therapy Era Has Arrived What started off as a clinical off-shoot of molecular biology in the 1970s has moved from a therapeutic concept to a viable therapy to address various rare and not so rare genetic diseases. While the gene therapy field has gone through nearly three decades of ups and downs, in our opinion, we are at the cusp of ushering in a new era of therapies that can address the underlying biology of many inherited disorders. Two therapies have already been approved for commercialization in Europe, although calling either a commercial success is a stretch. UniQure’s Glybera, the first approved in Europe in 2012, experienced extremely limited usage in the commercial setting and was withdrawn from the market early this year. GlaxoSmithKline’s Strimvelis, approved in 2016 at a price tag of $594,000 euros (about $665,000 USD), is currently treating patients with ADA deficiency, although given the size of the patient population, we see this platform more as a good will gesture as compared to a robust money generating machine. That said, we view these two products largely as proof of concept therapeutics whereby clinical trials were able to show efficacy and long-term safety, both of which helped clear regulatory hurdles with flying colors. While the pessimist might view the turbulent history of the gene therapy space as more of what’s to come, we view this field as a potential revolution. In short, within the next few years, we expect multiple U.S. approvals of gene therapy products, with Spark’s LUXTURNA leading the pack in January 2018 (PDUFA). In addition, bluebird bio’s LentiGlobin appears to have achieved durable RBC (red blood cell) transfusion independence in patients with β-thalassemia, with Phase III studies underway. Last but not the least, promising clinical results have also been generated in Hemophilia A and B (e.g., Spark and BioMarin), spinal muscular atrophy (AveXis), and Parkinson’s disease (Voyager). What Started Out as a Cottage Industry Has Grown Substantially By our count, there are at least 33 public and 27 private companies developing gene therapy products either by themselves or through partnerships (Exhibits 2 and 3). Collectively, these players are working on one-time solutions for at least 59 diseases, addressing $100+ billion market opportunities, according to our estimates. Given the number of players, the compelling clinical results achieved to date, and the partnerships/deals done in the space, we believe gene therapy is poised to become the next-wave therapeutic category. If we are correct, the current setup of this space is very similar to that seen in the CAR T space, where we just witnessed one of the largest acquisitions of a pre-commercial company (Gilead’s acquisition of Kite for $12 billion) ever. More Partnerships and Acquisitions Are Likely to Occur in the Future Given the market opportunity as well as the clinical successes to date, it is not surprising that a number of partnership or acquisition transactions have already taken place (Exhibits 23 and 24). Interestingly, we view these transactions in two distinct categories: 1) acquisition of a novel platform for a premium, and 2) acquisition of a company with a failed clinical trial but a promising platform and intellectual property, for a premium. For example, there was recently a bidding war between Ultragenyx and REGENXBIO for the acquisition of Dimension Therapeutics (shares of Dimension moved from $33 million in market cap to ~$150 million). In addition, Pfizer acquired Bamboo Therapeutics for an upfront payment of approximately $200 million in addition to milestone payments of up to $495 million. Partnership examples in the space include the Pfizer/Sangamo licensing agreement, which gave Pfizer worldwide rights to Sangamo’s hemophilia A program, and a slew of partnerships signed between REGENXBIO and multiple other gene therapy players (e.g., AveXis and Biogen), which granted these companies access to REGENXBIO’s AAV vectors. While some big pharma companies like Pfizer have an established presence in the gene therapy © 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 3 Raymond James U.S. Research arena, there are still many large-cap pharmaceutical or biotechnology companies who have not subscribed to the gene therapy model – and therein lies the opportunity, in our opinion. Based on the progress made in the gene therapy space, we believe more big pharma or large-cap biotech companies are likely to enter the gene therapy battlefield, resulting in increased potential partnership and M&A activities. IPOs, Secondary Offerings, and Reverse Mergers Have Helped Access Public Funds The IPO activity in the gene therapy space started to pick up in early 2015, with 12 companies having gone public since then. Collectively, these IPOs raised total gross proceeds of more than $1 billion, with Spark leading the largest IPO so far in the space (Exhibit 25). Since their respective IPOs, many of these companies have also been able to continue to access funds through secondary public offerings, delivering total gross proceeds of $3.6 billion since 2013 (Exhibit 26). Notable secondary offerings include this year’s raises for Spark (gross proceeds of ~$403 million), bluebird (~$400 million), and AveXis (~$288 million). Besides IPOs and secondary offerings, revere mergers have also become an option to tap the financial markets. Recently, a private gene therapy company (Rocket Pharmaceuticals) announced its intent to merge with a public company (Inotek Pharmaceuticals). Moving forward, we continue to believe that most gene therapy companies should not have trouble accessing financing as long as they continue to deliver promising results in the clinic. Gene Therapy Valuation Arguably, the entire gene therapy space has taken off like a rocket, with the total market capitalization of the companies in our gene therapy index growing from $9.7 billion as of January 1, 2017, to $20.3 billion as of October 6, 2017. Specifically, the gene therapy group generated an average return of approximately 90% year-to-date, outperforming both the NBI (28%) and the S&P500 (14%) (Exhibit 27). Sangamo Therapeutics achieved the highest return of 423%, while Applied Genetic Technologies Corporation (AGTC) was the worst performer so far. Upcoming Events in the Gene Therapy Space Moving forward, a slew of catalysts could further drive the valuation of the gene therapy space. In the hemophilia A world, we expect additional updates on BioMarin’s BMN270 on October 18 and Spark’s SPK- 8011 at the American Society of Hematology (ASH) meeting. In addition, we expect the first clinical readouts from Sangamo’s hemophilia A program (SB-525)