I covered Cullinan Therapeutics, Inc. (NASDAQ:CGEM) twice in the last year, and both times I wondered why the stock was trading below cash. It had a decent enough market cap for a small biotech; it just had way more cash.
I am just checking it again now, and I am once again surprised to see that this small company has this uncanny ability to generate cash. In September 2023, the company had a cash balance of $512mn, and it was spending some $37mn a quarter. Extrapolating for 4 quarters, that should be around $110mn; so they should have about $400mn right now. However, after those 4 quarters, it now has a cash balance of $664mn, or nearly $250mn more than what it should have. I checked and saw that sometime in April this year, the company was able to raise $280mn from an “oversubscribed” private placement. Meanwhile, the company no longer trades below cash because it now has a market cap of $1.06bn. So how is this small company able to generate so much enthusiasm from the market – or, in this case, private funds?
Lead asset and Taiho partnership
Cullinan’s lead asset is Zipalertinib, also known as CLN-081, or TAS6417, as the molecule is partnered with Taiho Pharmaceuticals. This partnership is complicated, and on researching, I see that this is where Cullinan first came into unplanned money. What happened was this: in 2019, Cullinan purchased development rights to CLN-081 from Taiho, an Otsuka subsidiary. The exact upfront fee for this deal was never disclosed. The rights were ex-Japan. Cullinan didn’t have a lot of money at the time; the company IPO-ed in 2020, and in 2017 it had raised $150mn.
In 2022, Taiho came back to Cullinan with an offer to buy back rights to the molecule everywhere except the US and China for $275mn in upfront fees and $130mn in potential milestone fees. This was a sweet deal for Cullinan. This deal occurred in the May quarter. At that time, Cullinan had $410mn in cash and equity in the bank, after beginning with some $473mn in 2021. This deal raised their funds to $685mn. Usually, dealmaking companies do not top load their deals; rather, they have a smaller upfront fee and a larger milestone fee, called “biobucks,” to account for all the risks associated with biotech dealmaking. Here, the upfront fee was twice the milestone. And it was such a sweet deal because, despite that large upfront fee, Taiho still didn’t get the US or China – two of the world’s largest NSCLC markets; China, especially, has a considerable NSCLC market with EGFR mutation.
This deal and its reversal 3 years later is a surprise to me, frankly. One reason could be that Taiho had recently launched its VC arm, called Taiho Ventures, with a $300mn fund, and it was looking to expand in the US. However, this does not make sense because Otsuka, Taiho’s parent company, was a global giant and did not need unknown Cullinan Oncology to enter the US or to move its novel NSCLC drug to the market.
Zipalertinib data
Furthermore, frankly, I do not see what is the big deal about Zipalertinib, not yet. Zipalertinib is an orally bioavailable, irreversible EGFR inhibitor that targets the “selective inhibition of EGFRex20ins mutations while relatively sparing cells expressing wild-type EGFR.” The two other drugs approved for EGFRex20ins mutation NSCLC apparently don’t; however, the data we had so far from Cullinan – and data we had in 2022 when Taiho sought the fresh deal – wasn’t so outstanding. As I noted last time, the two other drugs approved for the same indication, Takeda Pharmaceutical Company Limited’s (TAK) small molecule Exkivity, and Johnson & Johnson’s (JNJ) mAb Rybrevant, had ORR of 28% and 40% respectively, while Zipalertinib had 41%.
Not bad, but not outstanding either, especially at this early stage. Zipalertinib’s wild-type EGFR sparing abilities may also have given it a safety edge, with no rash and diarrhea seen in patients unlike with the other two molecules. But these are not major safety issues, especially in a severely ill patient population – and can be easily managed. So I still don’t see the big deal.
The 2022 Taiho deal
Thus, this was a smart deal pulled off by Owen Hughes, who was the CEO of Cullinan in 2019, and Nadim Ahmed, who was the CEO in 2022. This deal was responsible for making Cullinan loaded with cash.
Another interesting aspect I am speculating on here is that this deal and the money came from outside the US. This could be one reason why CGEM’s US market cap did not catch up with its cash balance until recently. What I mean is a sweet deal like this, done in the US, could have raised the value of the stock and made it expensive, expanding the company’s market cap at the same time. However, since it was done outside the US, maybe – and I am just speculating here – the deal didn’t get as much media coverage in the US. Hence, the stock remained cheaper than it should have.
While explaining this deal, CEO Ahmed said at that time that the deal was part of a “competitive process,” and that perhaps the value that Taiho put into the drug – a molecule they already knew – came from its “breakthrough” designation. So, does this mean there was a bidding war for this molecule, and that a simple breakthrough designation derisked it? I don’t know, but this sounds like a lot of speculation. Anyway, there is no good reason to look a gift horse in the mouth, and this partly explains for me how Cullinan came to acquire so much cash.
2024 fundraising
Cullinan’s uncanny ability to raise cash despite not having a lot to show for it emerged again in April this year. That is when it raised almost the same amount of cash – $280mn – from a flurry of big and mid-level names in the biotech smart funds world. The investors included:
Adage Capital Partners LP, Avidity Partners, Blue Owl Healthcare Opportunities, Boxer Capital, Braidwell LP, BVF Partners L.P., Foresite Capital Management, an affiliate of Deerfield Management, Invus, OrbiMed, Paradigm BioCapital, Rock Springs Capital, RTW Investments, Surveyor Capital (a Citadel company) and Venrock Healthcare Capital Partners.
What sort of due diligence backed up this investment? Let us explore.
Before we move on to their science, one major value add could be the CEO, who has an impressive background, having led the Hematology departments of both Bristol Myers Squibb and Celgene, although he did leave BMS under some shadow. However, Mr. Ahmed, along with that impressive BoD, is well-connected to the biotech world.
As for the molecule itself, its target indication, as I noted before, is a potentially $450mn market. Not huge by any means. There are two approved drugs – Takeda’s Exkivity and JNJ’s mAb Rybrevant – and their data was broadly similar to Zipalertinib’s. There has been no new data from this molecule since last year.
Autoimmune disease
Another event that spiked up CGEM stock – in April this year – was data from Amgen Inc.’s (AMGN) blincyto in systemic sclerosis, an autoimmune disease. This data, published in Nature, showed that blincyto was able to rapidly decline disease in six patients with rheumatoid arthritis in a late-line setting. Blincyto is a CD19 engager, just like CGEM’s early clinical stage CD19xCD3 T cell engager CLN-978. Again, I don’t get this. On this Amgen news, CGEM stock went up from $15 to nearly $30 in less than a week. CLN-978 targets Systemic lupus erythematosus and Rheumatoid arthritis. Now, CLN-978 does have an edge in theory over blincyto and other CD19 engagers. What the company says is that diseases that these CD19 molecules successfully target, like acute lymphocytic leukemia (“ALL”) and non-Hodgkin lymphoma (“NHL”), have very high levels of CD19 expression. There are other diseases which exhibit much lower levels of CD19 expression (i.e., <3000 copies of CD19 per cell). As Cullinan says,
“CLN-978 was designed for high-affinity binding to CD19 to enable the killing of low-CD19 expressing target cells, and for long serum half-life.”
If that can be proven in later trials, that does give CGEM a high value.
Indeed, Cullinan is so bullish on this molecule that it gave a new direction to itself in April this year. This was when it halted an NHL trial where 978 showed much early success, and rebranded itself as an immunology company apart from its oncology arm, refocusing 978 towards autoimmune diseases, as CD19 targeting has considerable viability in this segment. Now, going back to the question we asked about the $280mn private placement, both this funding and the Amgen data happened in April, so the funding may be related to this data. This data released was surrounded by numerous papers suggesting how CD19 targeting may be a suitable approach to treat several autoimmune diseases. For example, an article published in NEJM described:
…a series of 15 patients with systemic autoimmunity treated with a single infusion of CD19-targeted chimeric antigen receptor (CAR) T cells.1 At a median follow-up of 15 months (range, 4 to 29), all were in remission or had had major reductions in symptoms, along with the disappearance of autoantibodies, and had discontinued all immunosuppressive [treatments].
Not too many companies have taken their CD19 molecules to autoimmune diseases. One company is Nkarta, Inc. (NKTX), which recently began a phase 1 trial for its NKX019 in lupus nephritis. Although NKX019 is very different from 978, it does also target CD19. Merck & Co., Inc. (MRK) is another one, which recently paid a Chinese biotech $700mn for CN201, another cd19 targeting molecule that is working in autoimmune diseases.
Financials
CGEM has a market cap of $1.08bn and a cash balance of $664mn. Research and development (R&D) expenses were $36.3 million for the second quarter of 2024, while G&A expenses were $13.8 million. At that cash burn rate, the company has a cash runway of over 10-12 quarters.
Risks
There are two risks here. One is that Zipalertinib still needs to differentiate itself from peer molecules in the EGFRex20ins NSCLC space. The other is that 978, although promising, is too early stage to reassure me as to its potential.
Bottom line
I began this coverage with a puzzle – how did this small company manage to attract so much cash. I hope I have been able to answer that question – one, their lucky deal with Taiho, which garnered them sudden funds on a sweet deal, and two, their CD19 engaging approach to autoimmune diseases, which has attracted investor attention. The company now has a good amount of cash, so there is no real dilution worry. They are also running one pivotal phase 2b trial with their lead drug, and two other interesting molecules in early stages. I am interested, but I would like to observe this stock for 2 to 3 more months before taking a call.
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