ALEC - Alector: Trading At Cash Despite Late Stage CNS Pipeline

Summary

• Alector, Inc. has a lot of cash for a small biotech, but it is also trading at cash.
• Alector, Inc. has a late-stage program in a CNS indication and major big pharma deals.
• The situation, to say the least, is confusing.

Alector, Inc. (ALEC) is a pioneering CNS disease company with a major GSK Plc (GSK) deal that should have phase 3 data this year. I think this statement nicely sums up the titles of my last three articles on this company, beginning from May 2021, with the last one being in April last year.

In the last few months, the consistent negative argument from the Street has been the slow movement of the Alector pipeline, while the defense has generally been that while it is slow, it is steady. At this early stage, though, it is easy to call a company slow on the one hand, while it is equally easy to say it is steady, until there's patient data. For a company that has large partnerships with GSK and AbbVie (ABBV), it does not look good that Alector, Inc. is trading nearly at cash. The sole reason for that is the early stage of the pipeline, and doubts surrounding the speed at which AL001 can proceed to the market.

The company's pipeline:

Microglia are a type of cells that act as the primary line of defense in the central nervous system. Alector's premise is that neurodegeneration is an autoimmune disease, where bad genes in the microglia cause neurotoxicity and inflammation, thereby causing neurodegenration. Since the exact etiology of neurodegenration is poorly understood despite decades of research, this theory is as good as any other, and equally logical. Alector is pushing its programs through trials to test this theory in the clinic.

Lead candidate AL001 is in phase 3 trial called INFRONT-3 targeting Frontotemporal Dementia with a granulin mutation and two other phase 2 programs with a C9orf72 mutation and ALS respectively. All these programs are licensed to GSK.

A mutation in progranulin causes various neurodegenerative diseases in childhood. In a phase 2 trial, AL001 was able to increase the level of PGRN back to normal in FTD-GRN patients. Patients also showed a decrease in plasma neurofilament light chain levels from baseline.

About the market potential, I wrote:

FTD affects 50,000 to 60,000 people in the United States and roughly 110,000 in the European Union. Between 10% and 20% of these patients have the two specific mutations being targeted by AL001. So the total number of target patients in these countries is between 18,000 and 36,000. According to the company , there are 15,000 symptomatic patients with PGRN mutations (FTD-GRN) and 24,000 patients with C9orf72 mutations (FTD- C9orf72). There are no FDA-approved treatments.

Interestingly for the INFRONT-3 phase trial, the primary endpoint happens to be this:

Evaluation of efficacy of AL001 as measured by the CDR® plus NACC FTLD-SB [ Time Frame: Through study completion, on average up to 96 weeks ]

Now, in the phase 2 trial, This same measure was used to assess cognitive, functional, behavioral and language impairments over time, and saw the score increasing 6.4 points from baseline in the matched (control) cohort, while it increased only 3.4 points in the drug cohort.

Here's an excerpt about this score from alzforum:

How does the CDR plus NACC FTLD do? Scores tracked reliably with diagnoses among 970 people with sporadic and familial forms of FTD who participated in the ARTFL/ LEFFTDS cohorts, now thankfully renamed ALLFTD ( Miyagawa et al., 2020 ). Compared to the CDR-SB, which did not show deficits among people with mild behavioral or language disturbances, the CDR plus NACC FTLD reliably picked up deficits-i.e., scored above zero- among people who had been separately diagnosed with mild FTD symptoms, such as sluggishness or a slight delay in finding words. The CDR-NACC-FTLD is the primary outcome measure in Alector's Phase 3 trial of its anti-sortilin antibody AL001 .

What this tells me is that this particular endpoint has been developed by key researchers in the field, and referencing Alector also tells me something about the importance of this trial to the community of patients and caregivers.

The microglia approach has also been validated by the huge $2.2bn GSK deal, $700mn of which is in upfront payment. In 2017, they had a pre-IPO, large-ish deal with AbbVie which involved $205mn in upfront payment and $985mn in milestones (AbbVie did recently abandon one of the programs from this deal, AL003 in Alzheimer's; the AL002 program is still on). However, the GSK deal surpasses even that, and coming at a time when there's more clarity on its programs, it looks like a good derisking of the company's programs.

Financials

ALEC has a market cap of $757mn and a cash balance of one million more, i.e., $758mn. If you ignore their $44mn debt - accounting that against their long term assets - this company is trading exactly at cash, despite such a late stage pipeline and two major deals. The stock has been on a steady downward trajectory since July 2021, when it peaked following the GSK deal.

Research and development expenses for the quarter ended September 30, 2022, were $48.3 million, while general and administrative expenses were $14.3 million. At that rate, Alector, Inc. has cash for more than 10-11 quarters, enough to see some of their lead programs through the regulatory process.

Bottomline

What can you say about a large company - which Wedbush last year called a "quality company" - which trades at cash, has a huge cash reserve, two major big pharma deals, a novel approach to CNS diseases, decent data, and a steadily declining stock?

I think the thought that comes to mind is, either this is a terribly undervalued company, or the market knows something we don't about Alector, Inc.

However that may be, since Alector, Inc. is trading at cash, there's not much to lose with a tight stop loss and a small investment with a window till 2023, when they release phase 3 data from AL001.

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