Investment Thesis

Mustang Bio share price performance since joining Nasdaq. Source: TradingView

Mustang Bio (MBIO) is looking like an increasingly attractive investment opportunity within the gene and CAR-T therapy space.

Mustang is a wholly owned subsidiary of Fortress Bio, and operates the same strategy as its parent company, identifying promising therapeutic candidates at research centers and medical establishments and in-licensing them or acquiring an ownership interest, in exchange for funding research and development, and milestone and royalty payments in the event the candidates are eventually out-licensed or brought to market.

Mustang has an experienced management team and is focused on developing next-generation therapies for patients with cancer and rare genetic diseases, working alongside the St. Jude Children's Research Hospital ("St. Jude") on a lentiviral vector treatment of X-linked severe combined immunodeficiency ("XSCID"), and with City of Hope National Medical Center ("COH"), Fred Hutchinson Cancer Research Center ("Fred Hutch") and Nationwide Children's Hospital ("Nationwide") on a number of CAR-T therapies targeting hematologic malignancies and solid tumors.

Mustang leases a 27,000 square foot cell processing and translational research facility situated on the University of Massachusetts ("U-MASS") Medical School campus and is progressing 8 candidates in total, all of which have completed or entered phase 1 clinical trials. As such, the company has numerous milestones upcoming in the remainder of this year and throughout the next 24-month period.

Mustang Bio near-term goals. Source: corporate presentation.

The company's MB107 and MB207 XSCID treatments are both due to enter pivotal trials in 2020, with a real chance of becoming the new standard of care for this ultra-rare disease in which affected patients rarely live beyond infancy without treatment, whilst its CAR-T programs - which target far larger markets, will present data readouts related to ongoing trials of patients with Non-Hodgkin's Lymphoma ("NHL"), Prostate Cancer, and Acute Myeloid Lymphoma ("AML") in early 2021.

Meanwhile, in Q320 Mustang plans to submit an IND filing for CD20-targeting candidate MB106, for NHL and Chronic Lymphocytic Leukemia ("CLL"), and present first data from its NHL trial in Q420, and treat the first patient in a multi-center trial of CD-123-targeting MB-102 in blastic plasmacytoid dendritic cell neoplasm ("BPDCN"), acute myeloid lymphoma ("AML"), and high-risk myelodysplastic syndrome (hrMDS) in Q320.

In Q420, Mustang will also leverage City of Hope's IND for MB108, a C134 oncolytic virus, for a combination trial with its IL13R2-specific candidate MB101, targeting glioblastoma multiform ("GBM").

CAR-T therapy is a highly competitive space, with a host of big pharma firms and early stage biotechs chasing approvals for a range of different modalities, hence there is no guarantee that Mustang can win a race to market, or even if it does, that it can convert an approval into meaningful sales volumes. The only 2 CAR-T treatments to have been approved to date, Gilead's Yescarta and Novartis' Kymriah, made <$750m of sales between them in FY19.

In truth, however, Mustang/Fortress would be most likely look to out-license an approved treatment, and from an investor's perspective, progression to late-stage CAR-T trials would provide price catalysts that could double or triple the current share price, as well as bringing the prospect of a money-spinning acquisition into play, such as Gilead's (GILD) $11.9bn deal to acquire Kite Therapeutics in August 2017, or Celgene's (CELG) $9bn purchase of Juno Therapeutics in 2018.

In the near term, Mustang's XSCID opportunity is its best prospect for approval, and although this market may be small, with just 20 newly-diagnosed patients per annum, it will constitute a significant win for the company and its partners, and vindicate Mustang's approach.

Mustang's shares gained 124% back in April 2019 when the company released positive trial data relating to 8 patients who successfully cleared previous infections and had begun to grow normally, after receiving Mustang/St Jude's therapy.

Share price performance of Fortress Bio, Mustang Bio, other Fortress affiliates (OTC:CKPT), (ATXI) and TG Therapeutics (TGTX). Source: TradingView.

As we can see above, Fortress Bio, its listed affiliates Avenue Therapeutics (ATXI), Checkpoint Therapeutics (OTC:CKPT) and another company, TG Therapeutics (TGTX), led by Michael D. Weiss - Fortress' Executive Vice Chairman and Board member - have enjoyed mixed fortunes over the past 5 years.

Whilst Avenue shares are up 94% on the promise of its schedule IV (low potential for abuse) Tramadol pain treatment, and TG Therapeutics up 85% as its flagship MS and cancer drugs ublituximab and umbrasilib inch towards approval, Fortress itself, Mustang and solid tumor treatment developer Checkpoint Therapeutics are down 24%, 73% and 71% respectively.

Whilst it would be misleading to compare companies targeting very different indications, it may be instructive to note that Fortress' overall approach involves regularly tapping investors for funding via share offerings - Mustang has an at-the-market offering agreement in place to sell up to $75m of its securities - and its development cycles - as you might expect for early stage drug-developers - can be very slow - a frustrating combination for investors.

On balance, however, I rate Mustang's CAR-T pipeline as promising based on its diversity and impressive early data and in comparison with the progress being made by rival companies, and the front-running MB-107 and MB-207 opportunity provides an obvious route to market within the next 12-18 months, providing a strong near-term catalyst to support the progress of the more lucrative opportunities.

Ultimately, I believe that Fortress, its portfolio of companies and management team are beginning to demonstrate that they are capable of rewarding patient investors, and given all of the above, I feel bullish about Mustang's upside potential.

In the rest of this article I will take a deeper dive look at the company and its candidates, and attempt to provide justification for my thesis that, as Fortress' portfolio company's development cycles progress, they tend to reward their long-term stock holders, thanks to a disciplined and painstaking approach that is well suited to the biotech industry.

Mustang Bio was incorporated in Delaware in March 2015, and is headquartered in Worcester, Massachusetts. The company began trading on the Nasdaq in August, 2017, debuting at a price of $11. At the time of writing, Mustang's shares trade at $3.58, representing a 207% decline.

Mustang is led by Manuel Litchman, MD, who joined the company in 2017 from biotech Arvinas (ARVN), where he helped advance the company's pipeline of protein-degradation therapeutics, working in collaboration with Merck (MRK) and Genentech. Prior to that, Litchman spent 18 years at Novartis (NOVN) focused on its oncology pipeline.

Nearly all of Mustang's senior management team have joined since 2019, and combine a wealth of biotech and big-pharma experience. Chief Technology Officer Knut Niss joined Mustang from Biogen (BIIB), where he worked on hematopoietic stem cell and lentiviral gene therapy programs, and Head of Regulatory Affairs Lynn Bayless also joined from Biogen, developing phase 3 drug candidate programs, and has also overseen development programs at Voyager Therapeutics (VYGR) and Shire.

Mustang's various licensing agreements with St. Jude, COH, Fred Hutch and Nationwide are complex but are generally based upon an up-front payment, ongoing milestone payments, and in most cases, royalty sharing agreements should commercialization be achieved.

Fortress Biotech owns 29.9% of Mustang (according to Fintel), and City of Hope has a 5.1% holding, however Fortress controls a voting majority of Mustang's stock, meaning it is able to control or significantly influence all matters requiring approval by stockholders, and also receives an annual grant of 2.5% of any equity or debt financing carried out by Mustang, adding to overall shareholder dilution.

Mustang is certainly well-funded however, so investors need not be too concerned. The company reported cash of $85.4m in Q220 (according to its 10Q submission), total assets of $96.8m, and total liabilities of just $25.8m. In the first 6 months of 2020, Mustang's net losses were $26.4m, which suggests that the company may not require further funding until 2022, although costs are likely to ramp up as the company embarks on more of its own clinical trials, as opposed to leveraging the work of its early-stage development partners.

Mustang candidates, partners and development schedule. Source: company presentation.

Earlier this month, Mustang's thinly traded - and therefore volatile - stock leapt 16% on the news that the FDA had awarded Rare Pediatric Disease Designation to its lead gene therapy candidate, MB107, for treatment of XSCID, and granted the company a priority review voucher that can be used to accelerate a future application, or sold to a third party.

XSCID is a genetic disease that causes disturbed development of functional T cells and B cells making patients - usually newborn males - extremely vulnerable to all types of infectious disease, hence it's being termed as "Bubble Boy" disease. Patients with XSCID who remain untreated usually do not survive beyond their first year of life.

The current standard of care treatment for XSCID is allogeneic hematopoietic stem cell transplant ("HSCT"), which works most effectively when there is a matched sibling donor. This only occurs 15% of the time on average, however (according to a Mustang corporate presentation), and when unavailable, mortality rates can fall to ~50% if there are severe infections present at the time HSCT is initiated, whilst even a successful treatment can cause life-long complications.

Mustang licensed its gene therapy treatment MB-107 in August 2018 from St Jude Children's Research Hospital for a $1m up front payment plus an annual maintenance fee of $0.1 million, up to $13.5 million of milestone payments, and royalty payments in the mid-single digits on all net sales of the product if it secures FDA approval.

Lentiviruses - which are responsible for AIDS and other diseases - work by inserting DNA into a host cell's genome, but can be adapted to act as a vector and insert beneficial genes into cells. Using lentiviral transduction of hematopoietic stem cells, MB107 is able to insert a normal copy of the mutated c gene present in XSCID into patients, which leads to the encoding of a normal c receptor chain, allowing patients' immune systems to stage a recovery.

The results of the first early stage trials have been impressive. 24 patients were treated, either at St Jude's, or as part of a single-center trial at the National Institutes of Health ("NIH"). Eight of these patients have been followed for a period of 3-7 years, with 7 experiencing increased host T cells chimerism from 0-2% to 28-93%, and normalized IgM levels, with 4 able to discontinue immunoglobulin replacement therapy. Additionally, patients were able to recover from illnesses including norovirus and malabsorption, and growth retardation.

MB 107 clinical outcomes show promise. Source: company presentation.

Mustang has since developed a refined enhanced transduction ("ET") procedure using 2 transduction enhancers: LentiBoost 1:100 and dimethyl prostaglandin 2 (dmPGE2; 1mM), which has shown a substantial clinical improvement over baseline, and significant biomarker improvement.

The company expects to begin a pivotal trial of newly diagnosed XSCID patients before the end of the year, subject to FDA approval, and will file an Investigational New Drug ("IND") application for a pivotal trial of a second product, designated MB-207 in previously transplanted patients, also before the end of the year. This trial will enroll 20 patients and compare results to matched historical control patients who have undergone a second HSCT.

XSCID is diagnosed in ~20 new patients per annum and Mustang has proposed a reimbursement model where payers could pay for success, following the example of Orchard Therapeutics' Strimvelis treatment, approved for a similar condition, SCID, in 2016. Mustang has hinted at a price-point of $2m for MB-107/MB-207 in the past, which could be paid out over a period of 10 years+ as the patient recovers from the disease.

It is also possible that Mustang could uncover a "reservoir" of ~400 US and ~650 overseas patients whose HSCT treatments have failed, and enhanced screening for the disease may also increase the overall market for XSCID treatments.

Development hasn't all been straightforward for Mustang and there is still a way to go to prove that its enhanced therapy can be safe and effective over a prolonged period, but at this stage, the signs point to an eventual approval in 2022.

MB-107 was acquired in part to provide a faster route to market than Mustang's CAR-T portfolio, and as well as providing a much needed treatment upgrade for a devastating disease, it ought to pique investor's excitement sufficiently to give Mustang further fundraising opportunities, at a higher price, without damaging its reputation.

Mustang has signed an exclusive, worldwide licensing agreement with Fred Hutch to develop MB-106, a CAR-T therapy targeting CD20, a commercially validated target for B-cell lymphomas, including NHL, which has shown an in vivo anti-tumor effect which compares favorably with CD-19-targeting therapies.

Together, Mustang and Fred Hutch have developed an optimized cell-processing technique for MB-106, which had originally shown limited efficacy in the first 3 cohorts of a phase 1/2 trial. Under an amended IND, using the lowest dose possible (due to the expected increase in potency of the CAR-T cells), and a chemotherapy regime of cyclophosphamide + fludarabine, the first patient dosed - suffering from follicular lymphoma - achieved a complete response, with no cytokine release syndrome or neurologic toxicity reported.

Fred Hutch intends to enroll up to 30 patients on this trial, whilst Mustang plans to submit its own IND in the first quarter of 2021, and initiate a clinical trial in patients with NHL, and CLL. These are large markets: ~70,000 people are diagnosed with NHL in the US annually, and the disease causes 19,000 mortalities per annum.

Around 45% of NHL cases are untreatable with current therapies, with the exception, in some cases, of allogeneic hematopoietic stem cell transplant ("allo-SCT"). allo-SCT carries a significant risk of morbidity or mortality however, hence, Mustang will hope to position MB-106 as an alternative treatment option, as well as a second or third-line treatment for relapsed or refractory aggressive B-cell lymphomas.

MB-105 is being developed for the treatment of prostate and pancreatic cancer, targeting the prostate stem cell antigen ("PSCA") that tends to be overexpressed on solid tumors. The first patient enrolled in a phase 1 trial being conducted by COH experienced a significant reduction in PSA at day 28. A third cohort of the trial is currently underway, and further data is expected in Q121. Meanwhile, Mustang is awaiting a funding decision over an initiation of its own trial, in pancreatic cancer, and plans to submit an IND in Q421.

Prostate (164,000 new cases per annum in US), and pancreatic (55,000) cancers are highly prevalent and there are few advanced stage CAR-T therapies in development with Autolus (my July note here) perhaps presenting the biggest challenge to Mustang. Additionally, PSCA is also expressed in bladder, placenta, colon, kidney, and stomach cancers, making it an attractive target.

MB-101 targets the membrane-bound protein IL13Ra2 and was licensed from COH in 2017, alongside MB-102, in a deal that may provide up to $14.5 million to COH based on 8 development milestones, plus royalty payments in the mid-single-digit percentages of net sales should the products become commercialized. Mustang made payments to COH totaling $0.3m in the first 6 months of 2020.

IL13Ra2 is considered an attractive target for brain cancers and is over-expressed on the surface of >50% of glioblastomas - the most common form of brain and central nervous system cancers.

A phase 1 dose-escalation study involving 60 patients has now completed, and COH/Mustang have subsequently identified 3 potential areas of interest. A pilot trial is planned for Q320, using CAR-T therapy alone in leptomeningeal disease, which affects cerebrospinal fluid (CSF), whilst 2 combination trials are also planned. The first is in combination with C-134 oncolytic virus (Mustang candidate MB-108) for treatment of glioblastoma multiform ("GBM"), and the second in combination with checkpoint inhibitors such as PD-L1, with a trial slated to begin in Q220.

GBM is diagnosed in ~11,800 patients in the US annually, and Mustang is the only company currently working on a CAR-T therapy to address this illness.

MB-102 targets CD-123, and addresses BPDCN, AML and high-risk myelodysplastic syndrome ("MDS"). These diseases affect around 500-1,000, 20,000 and 15,000 patients in the US respectively, and median survival rates are generally less than 1 year.

Mustang's IND for MB-102 was approved in Q319, and the company expects to dose its first patient in BPDCN in Q320, using optimized CAR-T cells, and with a reduced dose of 50% of that used by COH in its trials, which have shown promising results, with 2 complete responses in AML, and 1 in BPDCN.

MB-102 has secured an orphan drug designation for treatment of BPDCN, and has presented a manageable toxicity profile to date, with no grade 4 or above incidents reported. CD-123 is a competitive space for CAR-T therapies, with one approved treatment for BPDCN, Stemline's Elzonris, which made sales of $43.2m in FY19.

Finally, Mustang has paid COH $0.8m and will contribute R&D costs of up to $2.4m for MB-104, a CS1 (NK cell receptor regulating immune functions) targeting treatment for multiple myeloma, whilst MB-103 is undergoing phase 1 trials at COH for metastatic breast cancer, using the human epidermal growth factor receptor 2 ("HER2"), with Mustang contributing $0.3m towards R&D as part of a wider $14.9m deal, plus mid-single digit royalty payments.

As mentioned in my intro, Mustang and its parent Fortress are more likely to reward the patient investor, although, owing to the regular news flow from trials and progress with regulators, there are generally short-term price catalysts for more active traders to consider.

Regular fund-raisings and dilution can be frustrating, but Mustang's strong management team has the experience and know-how to be able to convert promising early stage candidates into late-stage ones, in my view.

Mustang has no fewer than 8 "shots at goal", plenty of funding, and an influential Board that is practicing a similar development strategy - acting as a middleman between research and medical institutions and regulatory authorities and big pharma - at a host of other companies, some of whose share prices have demonstrated very strong upside as its candidates have blossomed.

CAR-T candidates are particularly difficult to develop and haven't set the market on fire in recent years, but there is no doubt that the major pharma companies will still be prepared to pay a huge premium to acquire promising treatments - the cost of a successful treatment being acquired by a rival is almost as great as the cost of purchasing a treatment that ultimately fails to make it to commercialization.

Since I have some faith in Mustang's/Fortress approach and based on the progress of the candidates' described above, and the very low current price of Mustang shares compared to their Nasdaq trading debut, I recommend that risk-on biotech investors carefully consider opening a position.

Analysts are setting a consensus price target of $10. I would be surprised if this was achieved within the next 12 months, but I would also be surprised if the share price has not doubled in that period on slow and steady progression towards later stage trials for a handful of its candidates and the increasing likelihood of an approval for an XSCID treatment.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MBIO over 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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Mustang Bio: Slow, Steady Progress Towards Multiple Gene And CAR-T Therapy Goals - Seeking Alpha