Lineage Cell Therapeutics (LCTX) is a small biotech developing 3 different off-the-shelf cell therapy products in dry AMD, spinal cord injuries, and non-small cell lung cancer. These are large unmet medical needs and have attracted interest from third-party groups that have provided some funding to advance Lineages programs. Currently valued at just under $125 million, Lineage could clearly have a huge upside if these programs make it to market. This article provides my assessment of why Lineage is worth the risk at present.

Lineages main pipeline asset is OpRegen which is being developed to treat dry age-related macular degeneration. Dry AMD is a huge market opportunity. One market estimate Ive seen is that the dry AMD market was worth approximately $2.09 billion in 2017 and that the overall growth rate of the AMD market (both dry and wet AMD) as a whole is expected to be around 7.8% in the coming years. It's likely this growth rate understates dry AMD growth potential in particular given the relative lack of treatment options for dry AMD as compared to wet AMD.

According to Lineage, this estimate is likely way under what the true market size could be, too. Lineage says the wet AMD market is greater than $10 billion yet dry AMD represents about 90% of the total cases.

Figure 1: Lineages Dry AMD Competition (source: corporate presentation)

Apellis (APLS) has a Phase 3 candidate for dry AMD that, if successful, will likely hit the market before OpRegen. In addition, there are a couple other potential therapies that are more early-stage products. As you can see from Figure 1 though, OpRegen should stack up pretty well if Lineage can continue to successfully develop the product.

OpRegen utilizes Lineages technology platform of off-the-shelf pluripotent stem cells.

Figure 2: Lineages Technology Platform (source: corporate presentation)

In the case of OpRegen, Lineage is using these pluripotent stem cells to create retinal pigment epithelium cells that are injected into the eye to replace those lost due to disease. This should support photoreceptors that otherwise would have lost function due to disease progression, causing decreased levels of vision and eventually blindness over time in severe cases.

Figure 3: OpRegen Mechanism of Action (source: corporate presentation)

Lineage has an ongoing Phase 1/2a trial that is close to full enrollment, lacking just 3 patients now. Enrollment was temporarily paused due to the COVID-19 pandemic, but the company has re-initiated patient enrollment and hopes to have complete enrollment later this quarter (Q3). Lineage also recently reported that 1 of the 18 patients enrolled to date has already shown signs of retinal tissue regeneration, a first-in-human clinical result.

Although very early, this type of progress is encouraging, and its clear that the market potential is huge if Lineage can make it to the finish line. Investors should be aware though that a major setback in a lead program like OpRegen could be devastating to Lineage and its shareholders.

Lineages Other 2 Pipeline Programs Have Received Third-Party Funding and Similarly Address Large Market Needs

In addition to OpRegen, Lineage has 2 other potentially lucrative products in its pipeline.

Figure 4: Lineages Pipeline (source: Lineages website)

The one that is furthest along after OpRegen is OPC1 for spinal cord injury. Spinal cord trauma was a $2.27 billion market in 2017 and is expected to grow at 3.7% per year. Unfortunately for patients affected, there are no current treatments on the market that affect disease progression or reversal of the traumatic damage, but by contrast, OPC1 is intended to actually improve the function of a patients upper extremities.

Lineage uses its pluripotent stem cell technology to create oligodendrocyte progenitor cells and injects them into the area of the spinal injury. This hopefully allows for re-myelination at the injury site and increased nerve and blood vessel growth in the area. A Phase 1 and a Phase 1/2a trial have already been completed with promising results. Although obviously just one anecdotal case, Lineage has shared the story of 1 clinical trial patient going from complete paralysis to throwing out the first pitch at a baseball game.

Figure 5: Results of 1 OPC1 Trial Participant (source: Lineages website)

Lineage is in the process of evaluating this trial data and plans as a next step to have a meeting with the FDA about proceeding with a Phase 2/3 trial.

Lineages last pipeline asset is VAC2, which is a potential dendritic cell-based cancer vaccine that has received support from Cancer Research UK. The underlying VAC platform could potentially be used for both cancers and infectious diseases based on what type of antigen is loaded into the cells before injection into the body. The first targeted indication is in non-small cell lung cancer, for which there is already an ongoing Phase 1 trial. Interim Phase 1 data should be available in Q4. Upon receiving positive results, Lineage intends to try using VAC2 in conjunction with an immune checkpoint inhibitor in a Phase 2 trial.

A couple years back, the 20th drug on the list of best-selling anti-cancer agents still brought in $960 million and the 1st brought in $6.7 billion. That market is already larger now and will be even more so by the time Lineages therapy might hit the market because the estimated CAGR is around 7.6%. Non-small cell lung cancer in particular is estimated to be a $10.9 billion market next year and is notoriously hard to treat.

Also noteworthy is that Lineage has said it is investigating using its VAC platform for a potential COVID-19 vaccine. Lineage is reportedly seeking grant funding to continue this program. It seems like a long-shot for Lineage to get meaningfully involved in this effort well after many other better-funded companies, but I am glad to see that Lineage intends to use grant funding to pursue this opportunity rather than its own resources if there is funding to be had.

Lineage reported having $9.8 million in cash and $15.9 million in marketable securities as of the end of Q1. These marketable securities include stakes in OncoCyte (OCX), AgeX (AGE), and Hadasit. Lineage also holds a $24 million promissory note from Juvenescence that matures this August, but this note automatically converts to Juvenescence securities in the event of an IPO by Juvenescence before then.

Lineage has no long-term debt and reported an $8.4 million loss in Q1. This level of cash burn implies that Lineage can only make it to around the end of this year on its cash and securities alone. Lineage should get liquidity on its promissory note from Juvenescence later this year whether through repayment or an IPO. This will buy Lineage until late next year at current levels of spending.

I think its also worth noting that there is certainly a risk that the value of Lineages marketable securities will decline resulting in Lineage getting less cash from an eventual sale. For example, just this week OncoCyte reported that its lung nodule liquid biopsy failed and the stock tanked about 40%. Lineages remaining Oncocyte holdings are now worth only about $8.2 million rather than the $11.3 million estimated value reported at the end of Q1. Lineage may find it has far less cash available than expected if similar things keep happening.

Regardless, a company like Lineage will have to sell a large amount of its own stock to raise cash before its therapies will ever even have a chance of hitting the market. Lineages current stock price would make this means of funding inefficient and highly dilutive. Lineage investors need to be aware that major setbacks to its pipeline at this stage could result in the loss of most, if not all, invested capital.

I first analyzed future revenue and earnings estimates to assess Lineages value proposition. There were only 2 analyst estimates posted for most years over the next decade this is less than I would like to see but still a good starting point since these 2 analysts estimates are reasonably similar.

Figure 6: Lineage Sales and Earnings Estimates (source: Seeking Alpha)

As you can see from Figure 6, once Lineage is estimated to be cash-flow positive in 2023, its sales and earnings ratios become extremely low. Im not sure I can recall analyzing a company that was trading at less than .2x estimated future earnings when 15x is about average. I then discounted these estimates to see how the ratios changed.

Figure 7: Lineage Present Value Estimates (source: sales and earnings estimates from Seeking Alpha and my calculations based on them)

Even at an extremely high 30% discount rate to factor in the risky, early-stage nature of Lineage's pipeline, Lineage shares have roughly 2.5x upside to the present value estimate I calculated at an average 5 P/S and about 4.5x upside to my present value estimate calculated at an average 15 P/E. These are strongly suggestive that Lineage is undervalued. Despite this, given how early-stage and unproven as Lineages therapies are, I wanted to conduct a discounted cash flow analysis to see if it would confirm that Lineage shares provide a good risk/reward balance.

I estimated SG&A expenses as 34% of revenue, marketing expense at 5% of revenue, and cost of goods sold at 10%, at the point where the company has substantial cash flow in a few years, and I scale the numbers up fairly evenly from present values for the years in between. I also adjusted for future cash flow needs based on continuing cash burn for the foreseeable future. I used the market size estimates as described above for each of Lineages potential dry AMD and spinal cord trauma therapies, and for the potential cancer therapy, I modeled it as having peak sales equivalent to what would put it just barely in the top 20 of best-selling cancer drugs, albeit scaled up for expected overall market growth.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Figure 8: Lineage Discounted Cash Flow Analysis (source: Lineages 10-Q and my calculations based on it)

As you can see in Figure 8, my model shows a potential fair value of $1.69 per share, which is over 80% above where Lineage is currently trading. In my view, this analysis, in combination with the sales and earnings estimates in Figure 7, shows that Lineage does present a relatively good risk/reward opportunity for long-term investors at current price levels. I recently added a small speculative position in Lineage stock to my portfolio, and I intend to hold on to most of the position long term, absent a substantial change to the companys outlook.

Lineage is targeting disease indications that are big, unmet market needs, but each pipeline therapy is still very early. Any potential investor should note that an investment in Lineage comes with a very real possibility of the loss of the entire investment if Lineages technology proves unsuccessful. That being said, I view the risk/reward as a decent bet at current price levels and have initiated a small position myself.

Disclosure: I am/we are long LCTX. 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.

Additional disclosure: Im not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor the timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself without notification. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. You are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance as financial circumstances are individualized.

Read this article:
Lineage Cell Therapeutics Is A High-Risk But High-Reward Opportunity To Consider - Seeking Alpha

Spinal Cord Stem Cells Comments Off on Lineage Cell Therapeutics Is A High-Risk But High-Reward Opportunity To Consider – Seeking Alpha | July 3rd, 2020