Generation Bio's Collaboration With Moderna Will Either Be Seismic, Or Disastrous

Investment Overview

Generation Bio (NASDAQ:GBIO) IPO'd in June 2020, issuing ~12m shares of its common stock at a price of $19 per share, raising ~$230m.

It was a good time for biotech companies such as Generation to be going public thanks to the optimism generated by the messenger-RNA COVID vaccines being developed by Moderna (NASDAQ:MRNA) and Pfizer (PFE) and BioNTech (BNTX), which would go on to become the dominant vaccines of the COVID era.

These vaccines used a non-viral delivery system known as Lipid Nanoparticles ("LNPs") to deliver their messenger-RNA payloads to target cells. Generation Bio was looking to take this technology to the next level using its non-viral genetic medicine platform.

Generation breaks down its 3-pronged platform as follows in its 2022 10K submission:

Our non-viral genetic medicine platform incorporates our high-capacity DNA construct called closed-ended DNA, or ceDNA; our cell-targeted lipid nanoparticle delivery system, or ctLNP; and our highly scalable capsid-free manufacturing process that uses our proprietary cell-free rapid enzymatic synthesis, or RES, to produce ceDNA

The company adds:

Using our approach, we are developing novel genetic medicines to provide targeted delivery of genetic payloads that include large and multiple genes to a range of cell types across a broad array of diseases. We are also engineering our genetic medicines to be redosable, which may enable individualized patient titration to reach the desired level of therapeutic expression and to maintain efficacy throughout a patient's life.

At the time of its IPO, Generation identified its lead programs as liver targeted therapies for hemophilia A and phenylketonuria ("PKU"), an inherited neurological disease caused by genetic mutations that can lead to irreversible brain damage and intellectual disability.

Generation said the funds raised by its IPO - and a prior $100m Series C private round - would be used to complete pre-Investigational New Drug ("IND") application studies and identify product candidates to move into Phase 1 studies. The IND applications were promised for 2022, and further INDs submitted for additional programs - i.e. Gaucher Disease and Wilson Disease for 2023.

Fast forward almost three years, however, and Generation notes in its 2022 10K that:

All of our research programs are still in the research or preclinical stage of development, and their risk of failure is high...we may never identify any product candidates or advance to clinical-stage development.

Generation further notes that:

Since inception, we have incurred significant operating losses. Our net losses were $136.6 million, $119.2 million, and $80.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $444.8 million.

Perhaps it's hardly surprising then that the company's share price has fallen from a November 2020 high of ~$48, to just $4.7 at the time of writing - down >60% since IPO.

The issue for Generation seems to have been its inability to make its LNP-DNA delivery system work. The thesis was that using an LNP approach would prove more effective than the more traditional adeno-associated virus ("AAV") approach widely used by numerous gene therapy drug developers.

The company says that:

We have produced ceDNA constructs of 8 kilobases, or kb, using RES, which have almost two times the 4.7 kb capacity of adeno-associated virus, or AAV, gene therapy approaches.

But in fact there are multiple problems with the LNP approach - which was proven to work so well with messenger-RNA by Moderna and Pfizer / BioNTech - when it comes to the "nuclear translocation" of DNA, which needs to get inside the nucleus to work - something that LNP's may not be able to achieve (the issues are succinctly discussed in a prior note on Generation by a fellow SA contributor).

As of December 2022, Generation reported a cash position of $279m and a net loss for the year of $137m. In short, with not a single product candidate having yet been developed, the outlook appeared grim. By the beginning of this month, Generation's shares hit an all-time low of $3.44, and its market cap dropped to ~$200m. Generation was beginning to look like a busted flush.

Moderna To The Rescue - Why The MRNA Giant Is Investing In Generation Bio

While Generation Bio failed to generate any momentum over the past three years, Moderna achieved success beyond its wildest dreams as its SpikeVax vaccine generated revenues for the company of >$18bn in 2021, and >$19bn in 2022.

Moderna's share price achieved its all-time high valuation of $450 in September 2021, which gave the company a market cap valuation not far off $200bn.

Briefly, it seemed as though anything may be possible with mRNA technology, but despite developing a pipeline of ~50 candidates, through preclinical to late stage Phase 3 studies, Moderna is yet to win approval for any drug product besides its original COVID vaccine, two omicron variant vaccines and a pediatric COVID vaccine

Although nobody at Moderna will be panicking - there are vaccines targeting RSV, CMV, and influenza all at the Phase 3 stage, potentially a double-digit billion revenue opportunity if all three were to be approved - the company and its CEO Stéphane Bancel are highly ambitious and have a long stated ambition to be "more than just a vaccine company."

MRNA vaccines do not enter the cell nucleus, therefore they're not considered to be gene therapies, and since they do not make permanent changes to a cell's DNA, they cannot provide the "one and done" functional cure that a gene therapy can, if designed well enough. "One and done" therapies are the holy grail for gene editing companies but delivery of the gene editing materials is one of the biggest obstacles to success.

In general, it's easier for a gene therapy to be administered ex vivo i.e. cells are extracted from a patient or donors' body, genetically engineered in a lab, and reintroduced to the patient. Crispr Therapeutics' (CRSP) Sickle Cell Disease therapy Exa-Cel works like this, for example, and is likely to be the first Crispr gene editing therapy to be approved.

Ex Vivo therapies are challenging for patients who have to undergo preconditioning before their cells can be extracted. Preconditioning is similar to chemotherapy, while there's a risk that once cells are reintroduced into the patient's body, their immune system will reject the new cells - a potentially fatal complication.

A successful in-vivo therapy is therefore ultimately preferable to an ex-vivo therapy, and several have been approved - according to Frontiers in Genetics:

Neovasculgen, Glybera, Defitelio, Rexin-G, Onpattro, Eteplirsen, Spinraza, Kynamro, Imlygic, Oncorine, Luxturna, Macugen, Gendicine, Vitravene as well as Zolgensma directly injected into their target tissue or organ.

These therapies are typically highly expensive - Zolgensma, for example costs in the region of $1.8m for a single course of therapy and is administered via an injection directly into cerebrospinal fluid ("CSF"). Zolgensma uses AAVs, as does the retinal disease therapy Luxturna and Glymera, indicated for lipoprotein lipase deficiency.

There are four recognised approaches to in vivo delivery in total, defined as follows in an article from Nature.com:

The vast majority of nucleic acid therapeutics that are either already approved or currently in late-stage clinical evaluation rely on four platform technologies: Chemically-modified antisense oligonucleotides (ASOs), N-acetylgalactosamine (GalNAc) ligand-modified short interfering RNA (siRNA) conjugates, lipid nanoparticles (LNPs), and adeno-associated virus (AAV) vectors

As we can see above, Spinraza - approved to treat Spinal Muscular Atrophy ("SMA") - uses an ASO approach, Givlaari, developed by Alnylam (ALNY) for acute hepatic porphyria, uses GalNAc-sIRNA, and Onpattro, also developed by Alnylam for treatment of polyneuropathy of hereditary transthyretin-mediated (hATTR) amyloidosis uses an LNP approach.

Generation Bio argues in 2022 10K however that gene therapies today are "cost prohibitive and not available on the global scale," and adds:

We believe non-viral DNA-based genetic medicine is the future of therapeutics, and we are developing our platform to provide durable, redosable treatments for potentially hundreds of millions of patients living with rare and prevalent diseases.

To my mind, that type of ambition and sentiment dovetails very precisely with Moderna's own outlook and ambition, to bring gene therapies to the masses - and by doing so, create enormous wealth for itself and its shareholders.

The Terms Of Moderna's Deal With Generation Bio

Moderna needs to find a way to translate the success it has had with mRNA vaccines into a new and even more powerful field of medicine in gene therapy, where permanent cures are possible and the patient population runs into the hundreds of millions.

Moderna is cash rich and likely has a double-digit billion M&A budget should the right company and technology emerge, therefore it's intriguing that last week, Moderna announced that it had entered into a strategic collaboration with Generation Bio.

According to a press release announcing the collaboration:

Under the terms of the agreement, Moderna may advance two immune cell programs, each of which may use a jointly developed ctLNP to deliver ceDNA. In addition, Moderna may advance two liver programs, each of which may use a liver-targeted ctLNP developed by Generation Bio to deliver ceDNA. Moderna retains an option to license a third program for either immune cells or the liver.

Generation Bio will receive a $40 million upfront cash payment and a $36 million equity investment issued at a premium over recent share prices. Moderna will fund all collaboration work, including a research pre-payment. Generation Bio is also eligible for future development, regulatory and commercial milestone payments, as well as royalties on global net sales of liver-targeted and immune cell-targeted products commercialized under the agreement.

The agreement additionally provides Moderna with the right, subject to certain terms and conditions, to purchase additional shares of common stock in connection with a future equity financing by Generation Bio.

This is a deal that ultimately suits both parties, although perhaps more so Moderna than Generation. A $40m cash injection is small change to the former, and not enough to future-proof the latter, which faces running out of funding at the end of next year based on current cash burn.

Additionally, Moderna's $36m equity investment buys a much larger chunk of Generation that would have been the case when its share price was soaring >$40 per share. Based on Generation's current market cap of $278m, a $36m equity investment works out as a 13% stake.

If things work out as Moderna hopes they will, and the company is able to make Generation's delivery platform work, then perhaps it will make further equity investments and even complete a takeover of the company.

Normally, when a strategic collaboration such as this is announced, it's common for the two companies to reveal what the size of the future milestone payments may be - these payments are often referred to as "biobucks," and can run into the billions of dollars.

Announcing that it has entered into strategic partnership potentially worth $3 - $4bn in milestones is a great way for a smaller biotech to attract attention to itself and attract investment, lifting its share price and potentially allowing it to raise funds.

But perhaps Moderna does not wish that to be the case, and has a vested interest in Generation's share price being low, so it can continue to buy stock until one day it has a majority ownership.

Conclusion - Don't Underestimate Significance Of This Deal - Which May Work Out Better For Moderna Than Generation

Back in January last year I covered a strategic collaboration between Pfizer and a very small biotech, Codex DNA. Pfizer made a small $8m investment in Codex and its DNA and MRNA "writing" technology, promising another $70m in development milestone payments and $180m in sales milestones per exclusive product if things worked out.

Codex DNA is now known as Telesis Bio (TBIO) and its share price performance since that deal was announced has been dismal - shares are down ~70%. I mention this as, although there are many differences between the Pfizer / Codex deal and the Moderna / Generation Bio deal, it goes to show how a struggling biotech can collaborate with a larger pharma firm and still lose.

Moderna would like to get its hands on a successful delivery technology - as I have explained above, delivery, perhaps more than any other obstacle is hampering development of safe, effective and affordable gene therapies - but it seems to want to do so stealthily and without committing too much capital.

Generation Bio has a delivery technology platform that appears to have been developed on solid underlying principles, based on the potential power of LNP technology - but hasn't been able to make it work.

Moderna may have completed extensive due diligence into Generation and its platform - the two companies are neighbors in Cambridge, Mass., after all - or it may simply be taking a calculated gamble.

Generation's patents also may be interesting Moderna. Last year, Moderna and Pfizer were the subject of lawsuits filed by Alnylam Pharmaceuticals (ALNY) claiming that their use of LNP delivery technology in their COVID vaccines infringed upon Alnylam's patents around the LNP technology it used to successfully develop Onpattro.

Moderna called Alnylam's lawsuit a case of "blatant opportunism" and I suspect the most rational explanation for its collaboration with Generation is to try and see if it can take some promising technology and do what Generation, with limited resources and less experience, could not i.e. get some candidates into the clinic.

Taking all of the above together, the deal is intriguing in several ways. Generation has been desperately in need of a lift - in three years it has not delivered on pre-IPO promises to discover some candidates to work on.

Moderna wants to be in gene therapy but acknowledges that delivery is a major issue. The company may have seen something in Generation's technology it genuinely likes, or it may be taking advantage of a low share price and limited funding to lowball Generation for the rights to use its technology. If Moderna's scientists cannot make it work, they can walk away with no damage done.

The deal between the two companies has lifted Generation's share price by 20% - not much when we consider its potential significance - but perhaps Moderna is quietly pleased with that outcome. Predictably, it has scarcely affected Moderna's share price or valuation.

With that said, however, I believe this could end up being a deal of great significance for both companies in the long run. If Moderna cannot make Generation's platform work, then Generation faces an uncertain future, and as I have briefly discussed, there are some issues of real significance undermining the company's technology - DNA is not MRNA and LNPs may simply not be an appropriate delivery method.

Should Moderna work with Generation and make a breakthrough of significance, however, the implications could be seismic. If Moderna makes the technology work it could begin to custom design gene therapies for >10k different diseases and >100m patients. If the market sense the company has the power to do that, its share price will likely be roaring back into the $400's faster than you can say "nuclear translocation."

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