With over 500K Americans dead since the outbreak of the COVID-19 pandemic and only modest easing of restrictions after a year of lockdowns despite a nationwide vaccine rollout, people are looking for the light at the end of the tunnel. Since the first COVID-19 vaccines developed by Pfizer (Nyse: PFE)/BioNTech (Nasdaq: BNTX), Moderna (Nasdaq: MRNA), and Johnson and Johnson (Nyse: JNJ) earned FDA emergency use authorization (EUA) in late 2020/early 2021 more than 136M individuals have received at least one jab (>50% of U.S adults). Yet, the number of new daily COVID-19 cases has risen in recent weeks both domestically and abroad; The Eastern U.S and Asia/India being the most impacted regions. Although alarming, it has been stated by top U.S health officials that the real-world efficacy of marketed COVID-19 vaccines reflects their P3 data and likely provides some efficacy against known variants. One experiment looking at blood samples from individuals after receiving their second MRNA shot saw that antibody levels induced by the recombinant B.1.351 spike mutant were 6X lower than when exposed to the original Wuhan-Hu-1 spike protein. We confirmed this with data made available by MRNA (figure 1). Yet, researchers have qualified these observations by saying that it may still drive an adequate immune response to prevent COVID-19 or at least severe disease.
Nonetheless, the inevitable emergence of new variants/strains of COVID-19 has prompted the development of second-generation mRNA-based vaccines and boosters by the aforementioned companies, and other biotech players. One that is of particular interest to us is Gritstone Oncology who before the pandemic was advancing its neoantigen-specific cancer vaccine into mid-stage clinical trials. Significant and continued investment by the DHH (specifically NIH/NIAID) in these vaccine programs along with recent commentary by Dr. Facui signals that second-generation vaccines are needed to thwart the threat posed by variants that will inevitably arise, especially ones with mutated Spike proteins.
In a heated exchange between the leading infectious disease expert in the United States Dr. Anthony Fauci and a Republican lawmaker regarding a return to normalcy, Fauci asserted that the daily infection rate must fall under at most 10K per day. While the number of new cases is down dramatically from a peak of 313K/day in Jan. 2021 to ~60K today (7-day avg) we clearly have a ways to go. Furthermore, testimony delivered by Dr. Fauci to a U.S House of Representatives subcommittee on 4/15/21 made clear that a major hurdle to extinguishing the pandemic is getting ahead of new variants before they become problematic. In our view, these five quotes from the hearing summarize well Dr. Fauci’s and the government’s mindset toward variants:
- “One of the most concerning developments of the ongoing pandemic is the spread of genetic variants of SARS-CoV-2, some of which appear to be more transmissible than the original virus, more virulent, and/or less responsive to certain therapeutic agents and vaccine formulations. So far, scientific evidence suggests that the COVID-19 vaccines distributed in the United States under FDA Emergency Use Authorizations (EUA) continue to be effective against these variants, but we must remain vigilant.”
2. “NIAID researchers analyzed the immune responses of individuals who recovered from COVID-19 prior to the emergence of variants and demonstrated that T cells – a key component of the immune response to SARS-CoV-2 – were also capable of recognizing the three most widespread SARS-CoV-2 variants, B.1.1.7, B.1.351, and P1”
3. “On March 25, 2021, NIAID launched a Phase 1 clinical trial in healthy adults to assess the safety and immunogenicity of second-generation COVID-19 vaccine candidates developed by Gritstone Oncology, Inc. Gritstone’s COVID-19 vaccine candidates utilize a strategy aimed at inducing both neutralizing antibodies and T cell responses to elicit a broad immune response. This approach could provide protection against emerging SARS-CoV-2 variants by targeting several viral antigens, all of which are highly conserved among viral strains.”
4. “NIAID also plans to test new vaccine formulations that aim to protect against certain variants that show early indications of reduced sensitivity to existing countermeasures. On March 31, 2021, NIAID launched a Phase 1 clinical trial of an investigational vaccine, developed by Moderna based on its authorized COVID-19 vaccine, designed specifically to target the B.1.351 SARS-CoV-2 variant first detected in South Africa. NIAID and Moderna are evaluating this vaccine candidate as a precautionary measure. Preliminary data suggest that available COVID-19 vaccines likely provide an adequate degree of protection against currently circulating SARS-CoV2 variants”
5. “NIAID is working with partners to identify, monitor, and calculate the frequency of current variations in the SARS-CoV-2 genome to help predict emerging variants. NIAID also facilitates the use of cutting-edge modeling and structural biology tools to understand how variants might affect interactions between the virus and the immune system or COVID-19 therapeutics. NIAID scientists are helping to inform our understanding of transmissibility of the variants by studying their stability in the environment of infected individuals and their ability to grow in human lung cells. These efforts add to a growing body of knowledge about SARS-CoV-2 variants and our ability to combat them.”
Because the SARS-CoV-2 virus replicates roughly every 7-8 hours there are ample opportunities for mutations (i.e. alteration) to occur in the viral genome. Most mutations are deleterious but sometimes they increase the fitness of the virus allowing it to escape first-generation vaccines. In particular, this happens when there is a mutation in the Spike protein which the virus uses to bind to and infect host cells. Antigens produced by COVID-19 vaccines mimic this protein allowing the immune system to generate antibodies that recognize the Spike protein. Its mutations like these that Dr. Fauci and the NIH are most concerned with and they are expected to continue to arise at an unknown frequency.
Although MRNA technology is not the only one being successfully deployed for COVID-19 it’s generally considered the better approach due to key advantages encompassing production time, biosafety, immune response, and flexibility. For this reason, our research focuses on the top mRNA vaccine players (Pfizer (Nyse: PFE)/BioNTech (Nasdaq: BNTX), Moderna (Nasdaq: MRNA), and Gritstone Oncology (Nasdaq: GRTS)) and describes why with a fraction of the market cap of its peers ($480M compared to $70B for MRNA and $18B for NVAX which isn’t discussed here but had a sub-$1B market cap before the pandemic) while trading near enterprise value as calculated by Goldmans Sachs ($420M), we see GRTS as the most compelling investment opportunity with monstrous growth potential. Of note Goldmans Sachs recently updated its price for the company from $4 to $17.
MRNA was one of the first companies to initiate a COVID-19 vaccine program. On 3/16/20 the company announced dosing its first patient in a P1 clinical study conducted by the National Institutes of Health (NIH). Exactly one month later MRNA was awarded up to $483M from the Biomedical Advanced Research and Development Authority (BARDA) (a division within the U.S. Department of Health and Human Services (HHS)) to accelerate the development of its novel mRNA COVID-19 vaccine mRNA-1273 and scale-up manufacturing/production capacity. Management further hired 150 new employees to support their efforts.
At this point, MRNA had completed enrollment in 3 dose cohorts (25 µg, 100 µg, and 250 µg) consisting of ~15 healthy adults /cohort (total participants enrolled = 45). About another month later on 5/18/21 MRNA announced positive interim data from the study showing a robust induction of neutralizing antibodies for the spike protein across doses of 25 µg and 100 µg. This data compares favorably relative to antibody levels seen in plasma samples from people who recovered from COVID-19. Additionally, vaccination with mRNA-1273 in mice provided completed protection against viral replication in the lungs.
With this strong foundation of scientific evidence MRNA advanced to P2 and ultimately all the way through P3 and approval of an emergency use authorization (EUA) on 12/21/21 (~9-months after the first patient was dosed). Results from the P3 study that supported the EUA showed that two doses (given 3 weeks apart) of 100 µg of mRNA-1273 in 30K adults prevented COVID-19 disease in 94% of participants. By the time MRNA concluded its P3 work the government had invested over $955M in the vaccine makers COVID-19 program and signed a $1.5B supply agreement with the U.S. Department of Defense. In fact, to date MRNA has signed supply deals with 12 countries including the US, UK, EU, Japan, and Canada totaling 1.4B doses over the next two years (figure 2).
The only competitor to beat MRNA in the race to emergency approval (albeit, by a matter of weeks) was PFE/BNTX which we will discuss next.
On 3/17/20 PFE/BTNX jointly announced plans to co-develop and distribute (excluding China) an mRNA-based vaccine candidate (BNT162b2) to prevent infection by COVID-19. The partnership leverages the expertise and resources of both companies and built upon a 2018 agreement to co-develop an mRNA-based vaccine for influenza. Greater details emerged on 4/9/20 in a press release outlining that BTNX would supply the mRNA vaccine candidates for testing using PFE’s global vaccine clinical R&D, regulatory, manufacturing, and distribution infrastructure. For its part, BNTX received $185M in cash upfront from PFE, an $113M equity investment, and potential milestone payments up to $563M.
With the first patients dosed on 5/5/20 PFE/BTNX reported positive top-line P1/2 data roughly two months later on 7/7/20. Similar to the MRNA P1 study the PFE/BTNX investigators enrolled 45 healthy individuals. All participants dosed with 10 or 30 µg of BNT162 showed antibody levels specific to the spike protein only 7-days after their second shot at 1.8- and 2.8X the levels are seen in plasma from people after recovering from COVID-19. Soon after the duo was granted Fast Track designation from the FDA for BNT162b2 and secured supply agreements with the U.S and U.K governments for 30M and 600M vaccine doses, respectively.
On 11/18/20 an analysis of the P3 data concluded that BNT162 effectively protected 95% of subjects against COVID-19 twenty-eight days after the first dose. This news was swiftly followed with a EUA in the US on 12/2/20 and European Union (EU) on 12/21/20. As of 1/29/21 PFE/BNTX has supplied over 60M doses globally and projects that they can deliver roughly 2B doses by the end of the year. However, like its peers, PFE/BNTX recognizes the vulnerability of first-generation COVID-19 vaccines to variants and the need for long-term protection (figure 3). Not only because of potential mutations but also over time antibody concentrations (whether induced by natural infection or vaccination) wane.
In response, PFE/BNTX are developing a booster shot that would enable people to maintain an adequate immune response to emerging variants. As we noted earlier, mRNA platforms provide flexibility allowing for BNTX to rapidly customize a vaccine that induces neutralizing antibodies against mutated Spike proteins similar to how we need booster shots for the seasonal flu variants. What is interesting and where we see the greatest opportunity for GRTS is the fact that robust clearance of COVID-19 virus from cells demands a coordinated T-cell response in conjunction with an antibody assault as described in numerous publications. Dr. Sheena Cruickshank, an immunologist at the University of Manchester in England, summed it up well in our view in a recent interview with NBC News:
“A cytotoxic T cell can specifically recognize the virus and latch on and kill it,” said Sheena Cruickshank, an immunologist at the University of Manchester in England. “It’s probably the cytotoxic T cells, in the context of the coronavirus, that might be the most important cells at dealing with the infection”
Furthermore, numerous peer-reviewed studies in respected journals have found that helper and cytotoxic T-cells are needed along with antibodies for the body to effectively fight back (figure 4). Without the T-cell component patients that contract COVID-19 are at much higher risk of progressing to serious COVID-19 disease. This also applies to the people getting inoculated. If the vaccine cannot stimulate a potent enough T-cell response then that person is susceptible to variants with a mutation in whatever antigen the vaccine targets.
Gritstone Oncology (GRTS)
Other than the UK-based big pharma company GlaskoKlineSmith (Nyse: GSK), GRTS is the only mRNA COVID-19 vaccine player using self-amplifying (SAM) mRNA-tech to develop a vaccine that elicits both an antibody and CD4+ helper T-cell response against the Spike protein as well as a C8+ cytotoxic T-cell response against other highly conserved viral proteins. Until January of this year, GRTS had stayed out of the infectious disease space despite such sophisticated technology. Instead, management applied its proprietary predictive EDGE machine-based-learning algorithm to predict which cancer mutations would result in ‘neoantigens’. Subsequently, cancer patients can be vaccinated using GRTS’s GRANITE/SLATE delivery vehicles to train the body’s T-cells to recognize and kill the mutated cancer cells. The vaccines themselves are produced in-house in GRTS’s GMP biomanufacturing facility which has been operational for over 2-years. It wasn’t until the stock declined over 60% in mid-2020 following underwhelming data and a $125M private placement at $3.71/share that management initiated an infectious disease program.
On 1/19/21 GRTS revealed that it was advancing its second-generation “CORAL” COVID-19 vaccine program with support from NIAID. The press release explained that NIAID would lead a P1 study in healthy adults through its Infectious Diseases Clinical Research Consortium (IDCRC), a network of clinical trials encompassing NIAID’s long-established Vaccine and Treatment Evaluation Units (VTEUs). Moreover, GRTS disclosed that it licensed the rights to validated COVID-19 ‘epitopes’ (i.e. viral surface proteins) from the world-renowned La Jolla Institute of Immunology. These epitope targets were identified through studying the plasma and the immunology of 100s of patients who recovered from COVID-19. Through using its EDGE platform GRTS can hone in on unique antigen targets on the Spike protein for antibody + helper T-cells to detect. The key differentiator for GRTS’s vaccine over MRNA and PFE/BTNX is that its two-dose vaccine candidates also induce potent and specific cytotoxic T-cell responses against other viral surface proteins enabling the potential for “pan-SARS/coronavirus” protection (i.e. protect against future coronavirus outbreaks).
Immediately after beginning, the P1 study GRTS announced that it licensed from Genevant Sciences non-exclusive rights to its leading Lipid Nanoparticle (LNP) technology for developing its SAM RNA COVID-19 vaccines. LNPs are delivery vehicles for small-molecule drugs and sensitive biological material like mRNA. In exchange, GRTS will pay up to $192M in upfront and contingent milestone payments in addition to royalties on any future product sales. Less than a month later GRTS expanded its infectious disease program further with a collaboration, option, and license agreement with Gilead Sciences (Nasdaq: GILD) with the aim of curing HIV. Per the terms of the deal, GRTS received a $30M equity investment at a premium to the market price (@~$27/share) and $30M upfront cash for giving GILD the right to use its prime-boost vaccine platform to develop a therapeutic vaccine for HIV. The significance of this agreement, in our view, is it validates GRTS’s vaccine tech as best-in-class at driving a potent and target immune response against viral proteins driving the underlying disease. GILD could have worked with anyone in the industry and they chose GRTS as their collaborator for their bold endeavor of curing HIV.
As high-growth-seeking investors, we feel that GRTS is the best pick among the mRNA-vaccine players discussed. While we appreciate the sound science and strong global commercial positioning of MRNA and PFE/BNTX and believe they will thrive, it is GRTS that we find the most enticing at such a low valuation (MRNA, NVAX MC= 4-18X higher). On top of having scalable in-house manufacturing capabilities, GRTS’s Prime/Boost SAM platform may drive the type of immune response (antibody + T-cell) that real-world data from recovered COVID-19 patients and experiments have shown is needed. GRTS is further differentiated in that its vaccines target viral surface proteins other than the Spike protein, in addition to the Spike, protein making it the only one with stated pan-SARS/coronavirus protection potential. Adding to our confidence in GRTS is financial and clinical support from NIAID and the Bill and Melinda Gates foundation in this early development work which has been a common theme among successful COVID-19 vaccine makers. Importantly, we appreciate that this isn’t a sure thing. Success from this point will require continued support from NIAID to push GRTS’s vaccine through P2/3 which is slated for 2H21 and to commercial availability (1H22) plus the obvious vaccine performance. Collectively, though, we like the odds and have taken a medium-sized stake in GRTS with a 6-month price target range of $15-20.
I am/we are long GRTS. I may buy or sell shares without notice over the next 72-hours. This article shares my opinion only and shouldn’t be considered investment advice.