Investment Thesis

Forty Seven (FTSV) management must be pleased with the progress they made in December '19.

First of all, early results from clinical trials of the company's flagship drug magrolimab were positive. In a trial evaluating magrolimab in combination with azacitidine for the treatment of myelodysplastic syndrome ("MDS") and acute myeloid leukaemia ("AML"), Complete Response ("CR") rates of 50% and Overall Response Rates ("ORR") of 92% were observed in untreated patients with higher risk MDS.

In Patients with Untreated AML who are ineligible for induction chemotherapy CR and ORR rates were 55% and 64% respectively. Furthermore, the combination of magrolimab and azacitidine was well tolerated, meaning the treatment may be safe for fragile, sicker and older patients.

The strong results appeared to take the market by surprise and Forty Seven's share price accelerated immediately. The stock gained 84% on 28x average volume in a single day to reach $39 and continued its ascent to reach an all-time high of over $44 (price at the time of writing is a little lower at just over $38).

Secondly, after releasing the results Forty Seven management wisely decided to issue a public offering of 5.59m shares at $35 per share, successfully raising $195.6m. (Source: Bloomberg). Given that the last fundraising, in July of last year, raised $86m at an offer price of just $8, the latest raise must be a cause of satisfaction. It is also a clear indication that investors are starting to see Forty Seven and magrolimab as the frontrunner amongst a plethora of biotechs focused on CD-47 directed therapies, in my view.

The company reported cash, cash equivalent and short-term investments of $166.7m on its Q319 earnings call which includes proceeds from the July raise and a $15.7m upfront licence payment from a collaboration with Ono Pharmaceuticals (Source: Globenewswire) which will see the Japanese firm develop, market and commercialise magrolimab across Japan and the ASEAN region.

Management stated this funding would be sufficient for Forty Seven to support its operations - which include up to ten clinical trials of magrolimab plus pre-clinical trials of anti-SIRPa antibody FSI 189 and anti-cKIT antibody FSI-174 - through to the first quarter of 2021.

Factor in December's raise and we can see that Forty Seven is now in a strong position to pursue and meet its stated goal of being the first company to release an approved therapy targeting the CD47 checkpoint of the innate immune system.

This being biotech, there are many reasons why Forty Seven's best efforts may fall short of winning approval for commercialisation from the FDA. Magrolimab is still in the early stages of being tested and its good results to date will count for nothing should Phase II or III trials reveal safety concerns or a failure to meet the primary endpoint.

Forty Seven does not have a strong pipeline to fall back on should magrolimab ultimately fail to secure commercialisation, meaning investing at this time comes with a high chance of making a loss.

A rival company could produce a CD47-directed treatment that proves to be more effective in which case Fifty Seven will struggle to sell magrolimab even if it is approved. Clinical tests could go on for longer than expected requiring further funding and there is no guarantee the company will be able to raise enough cash. Or, an alternative therapy, such as gene editing or RNAi could outperform all other treatments, rendering the company's development efforts fruitless.

Despite these concerns, however, if I were to pick a CD47 focused immunology company to back today, it would be Forty Seven. With no current concerns on the funding front and with such impressive early trial results from its lead candidate the near-term future certainly looks bright.

There are further reasons for optimism. The company owns exclusive rights to magrolimab which means should the drug be approved Forty Seven will retain the bulk of the profits from its sale. If results continue to impress Forty Seven represents an attractive acquisition target for a big pharma firm. And perhaps most importantly, besides MDS and AML magrolimab has the potential to be approved for numerous indications. Non Hodgkin's Lymphoma, for example, as well as ovarian cancer, colorectal cancer and bladder cancer.

In other words, magrolimab has blockbuster potential, and therefore, despite the obvious risks - one bad trial result could decimate the current share price - in my view Forty Seven should be carefully considered as an investment due to its upside potential. There has not been a new treatment available for Myelodysplastic syndromes ("MDS") in over a decade. Some investors may feel the rewards on offer for a successful treatment are significant enough to justify the risks.

Forty Seven was founded in 2014 in Menlo Park, California by a group of Stanford scientists, most notably Irv Weissman. Weissman played an instrumental role in identifying and developing CD47 as a potential cancer treatment.

Forty Seven went public in June 2018. The company raised $112m at a price of $16 giving it a valuation just shy of $480m. Today, thanks to the recent share price gain, Forty Seven's market cap stands at over $1.5bn.

Forty Seven's lead drug candidate magrolimab is an anti-CD47 antibody formerly known as 5f9. 5f9 has the ability to "switch off" the "don't eat me" signalling pathway used by cancerous cells to avoid detection by macrophages.

Macrophages are the innate immune system's first line of defence against abnormal cells. CD47 is expressed by healthy cells as a means of sending a "don't eat me" signal to macrophages, thereby exempting themselves from a process known as phagocytosis whereby a macrophage consumes abnormal cells to protect the body.

Nearly all cancerous cells over-express CD47 as a means of disguising themselves against macrophages to avoid being swallowed up and eliminated. The "don't eat me" message is sent when the cancerous cell binds to a receptor on macrophages known as SIRP-alpha.

Weissman's research at Stanford demonstrated three things. That blocking the "don't eat me" signalling pathway leads to elimination of many types of tumours and increases a patient's chances of survival. That boosting "eat me" signals found on cancer cells using therapeutic antibodies can work in conjunction with blocking CD47. And that, besides phagocytosis, macrophages activate tumor specific antigens that can activate T-cells against the cancerous cells, meaning that blocking CD47 can also work in conjunction with T-cell based therapies. (Source: FTSV Fundraising prospectus Dec '19)

FTSV 3-fold strategy. Source: FTSV Website

This has led directly to Forty Seven's three pronged development strategy. Monotherapy, e.g. facilitating phagocytosis, synergizing with other tumor targeting antibodies and T-cell activation, and using pro-phagocytic signals on tumor cells in conjunction with chemotherapy.

5F9 is a humanized IgG4 subclass monoclonal antibody that Forty Seven say is designed to combine with a proprietary dosing regimen to help overcome the toxicity limitations of rival anti-CD47 therapies developed by other companies.

Besides 5F9 / magrolimab, Forty Seven are also advancing FSI-189, an anti-SIRPa antibody, and FSI-174, an anti-cKIT antibody. FSI-189 is expected to enter solid-tumor trials this year, whilst cKIT - an antibody targeting stem cell growth factor inhibitors and issuing an "eat me signal" - may prove effective in treating leukemia, melanoma and gastrointestinal stroma tumors.

Forty Seven has 6 clinical trials of magrolimab ongoing that have progressed beyond the pre-clinical stage.

The trial that has produced the most positive results to date (referred to in the introduction of this article) is evaluating magrolimab both as a monotherapy and in conjunction with azacitidine as a treatment for MDS and AML in patients with haemotological malignancies.

Trial investigator David Sallman, M.D., H Lee Moffit Cancer Center and Research Institute had this to say on the publication of the encouraging early data:

The data that continue to emerge from this clinical trial are incredibly exciting, suggesting that the combination of magrolimab and azacitidine may offer the first new therapeutic regimen in over a decade, with the potential to induce meaningful and lasting responses in patients with higher-risk disease. Importantly, these results also support magrolimabs tolerability profile, further differentiating it as a safe treatment that may be used even in more fragile, sicker, and older patients.

Forty Seven have subsequently entered discussions with the FDA with regard to initiating a registration-enabling program with the goal of securing accelerated approval, and also hope to submit a biologics license application ("BLA") in Q421.

MDS is regarded by Forty Seven management as one of its most important treatment targets given its high incidence in the US (as illustrated in the chart below) and due to the paucity of treatment options available to patients.

Source: FTSV Investor Presentation Dec '19

Research suggests that 75% of MDS patients receive only supportive care with the only other options: chemotherapy drugs Vidaza (the brand name version of azacitidine), revlimid and Dacogen, or allogeneic stem cell therapy, being ineffective.

As we can also see from the above chart, diffuse large B-cell lymphoma ("DLBCL") represents another target for Forty Seven and it is the subject of a second planned clinical trial of magrolimab, this time in conjunction with rituximab, a monoclonal antibody that targets a protein known as CD20.

The trial will enrol 100 patients who have failed at least two prior lines of therapy, and will begin, management say, in Q120 with the earliest interim efficacy data slated to be made available in Q420. On the Q319 earnings call Forty Seven CEO Mark McCamish stated his desire to advance into earlier lines of treatment as early as possible referring to a "substantial unmet need" in treatment of DLBCL.

McCamish also updated investors and analysts concerning the phase 1b solid tumor trials. Results from both magrolimab combined with avelumab to treat patients with brain cancer, and in combination with cetuximab in patients with colo-rectal cancer will be made available in meetings scheduled for Q120 with abstracts of early data having already been submitted.

McCamish also announced a collaboration with gene therapy specialists Bluebird Bio. Forty Seven intend to leverage Bluebird's LentiGlobin platform to evaluate FSI-174 and move forward the cKIT program with a focus on pretransplantation and avoiding the need for chemotherapy or radiation toxicities or secondary malignancies when performing stem cell transplants.

Targeting blood-forming stem cells that express cKIT with FSI-174 releases macrophages to clear the steam cells, and, used in conjunction with magrolimab could, McCamish says:

massively expand the number of patients eligible for transplantation and therefore enable many more people to benefit from the curative potential transplantation.

During Q3 Forty Seven had an R&D spend of $27.1m - up from $18m in Q318, ascribed to the advancement of clinical trials and contract manufacturing costs for the proposed BLA.

In total, the company made a loss of $15.1m, down from $21.7m the previous year. In the first nine months of 2019 losses totalled $61.2m. As mentioned previously, Forty Seven should have more than enough funding to complete its trials and submit the BLA without having to dilute investors further - but it would be wise not to rule anything out. One failed trial could set the whole process back by years. (Source: FTSV 10Q Submission Q319).

There is no doubt that Forty Seven faces stiff competition. Amongst the companies competing in the CD47 antibody space are Surf therapeutics (SURF), Trillium Therapeutics (TRIL), Celgene (CELG), China based biotech Innovent Biologics, and Netherlands Based Aurigene and Synthon. (Source: PM Live)

All are worth studying in more detail and both SURF and TRIL represent a far cheaper investment opportunity, with shares priced at just $1.94 and $1.26 respectively. Neither have experienced a "Forty Seven moment", delivering outstanding results from early stage trials, but the price of Trillium recently spiked as Morgan Stanley reported a 5% holding. (Source: Benzinga)

For my money, however, Forty Seven is the frontrunner, and although it is priced at a premium to some of its rivals, there are good reasons for this, as I have discussed above. Another reason Forty Seven is at a competitive advantage is the 187+ patents it owns protecting magrolimab and FSI-189.

Additionally, although it was painful at the time, in 2018 Forty Seven agreed to make $47m of milestone payments to Synthon to secure non-exclusive rights to several CD-47- and SIRPa- directed antibodies, including rituximab. Other companies will need to make similar agreements if they want to develop their drugs with the same freedom that Forty Seven now has. Further analysis can be found in this informative recent SA article.

The average analyst price target for Forty Seven at time of writing is $39.25 (Source: Nasdaq) with a high of $48 and a low of $35 with the majority of analysts issuing "buy" ratings for the stock.

In my view, provided trial results remain positive, each new development can move the share price higher. Given the size of the addressable market (the global market for MDS treatment alone is set to reach $2.4bn by 2022, at a CAGR of 9.7% according to research from Grand View) and the urgent need for new and better treatments for diseases such as NHL, MDS, AML and DLBCL, the potential upside here is substantial.

If Forty Seven were to perform as well as, for example, gene-silencing treatment developer Arrowhead (ARWR) has done in 2019, buoyed by positive data, the share price could easily double as Arrowhead's has done. That is a big "if", however.

Biotech investing is inherently risky and it is all too easy to get sucked into a "next big thing" such as CD47 antibodies. In Forty Seven's case, however, the exciting premise is backed by years of research and real clinical data. Importantly, the FDA has issued Forty Seven with accelerated approval status both for magrolimab as a treatment for MDS, AML and DLBCL, as well as follicular lymphoma.

The company has treated over 190 relapsed or refractory cancer patients with magrolimab and will shortly enter a pivotal phase III trial, ENHANCE, enrolling 90 new patients to evaluate the combination of azacitidine and magrolimab together, plus it has the BLA scheduled for submission before the end of 2021.

The management team are experienced with big pharma backgrounds including Abbott Laboratories, Amgen, Genentech, Gilead, Janssen Global Services, LLC, PDL Biopharma, Inc. and Sandoz Inc.

Furthermore, Forty Seven has agreed collaborations with big pharma companies Merck and Genentech, a subsidiary of the Roche group to explore opportunities within ovarian and bladder cancer.

On balance, I think there are enough positive signals to make Forty Seven are worthwhile, if speculative investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Forty Seven: Early Indications Suggest Magrolimab Could Be A Winner - Seeking Alpha