ALXO - ALX Oncology: Major Caution Warranted Moving Forward

2023-12-22 23:22:55 ET

Summary

• ALX Oncology is a biotech focused on developing an anti-CD47 antibody for cancer therapy.
• The company's pipeline is primarily focused on combination therapies involving evorpacept targeting solid tumors.
• ALXO announced positive interim findings from a phase 2 study, but the CD47 approach remains risky, and further data are needed.

Top-Line Summary and Update

ALX Oncology ( ALXO ) is a developmental-stage biotech focusing most of its attention on development of an anti-CD47 antibody in cancer therapy. In my first article , I related grave concerns about this flagship approach being pursued by the company, with potential for massive risk to would-be buyers at those levels. In this article, I want to highlight why I think, despite the recent news and major rally of the stock, ALXO remains a very risky investment. Perhaps even more so now that the company has started to gain more attention and momentum. Let's take a look.

Pipeline Updates

Evorpacept

ALXO's entire pipeline is focused almost entirely on development of combination therapies involving evorpacept, a monoclonal antibody targeting CD47, which has long been hypothesized to help cancer cells avoid macrophage-based phagoctyosis . Arguably one of the big threads in oncology research for 2023 has been the sputtering and ultimately the termination of development of magrolimab , Gilead's own monoclonal antibody that was being studied in myelodysplastic syndromes. It came as a blow to a community of heme researchers who have had a lot of excited for anti-CD47 therapy for years now.

The ALXO approach has a different focus. Rather than myeloid malignancies alone, the company is training its eyes on solid tumors. In particular, evorpacept is being combined with different therapies available for treating head and neck squamous cell carcinoma, as well as esophagogastric cancer. These have a combined 3 phase 2 trials ongoing between them. Other studies in bladder cancer, breast cancer, and multiple myeloma remain in phase 1 or preclinical study.

While ALXO does tout the potential benefits of using an "artificial" construct to inhibit CD47 (eg, reduced molecular weight compared with an antibody, potentially better tumor penetration), it is worth reminding that the company has shuttered its own MDS and AML studies involving evorpacept to focus more on the solid tumor stories it's telling.

Now, the biggest update since my last article actually came shortly after its original publication. ALXO announced positive interim findings from the phase 2 ASPEN-06 study , which is evaluating evorpacept in combination with ramucirumab, paclitaxel, and trastuzumab in patients with HER2-positive esophagogastric cancer. They highlighted the following in their press release:

• 52% response rate among patients receiving evorpacept, compared to 22% for the control arm
• A duration of response not reached vs 7.4 months for control (median follow-up was not reported in the press release)

Now, one standard of care option in this setting is ramucirumab plus paclitaxel, which was shown in the RAINBOW study to yield a 28% response rate (in the intention-to-treat population; 36% of patients with measurable disease had a response), with median 4.4 months duration of response.

Obviously, there's very little we can actually make from comparing treatments across different studies, and that's especially true in this case where the RAINBOW trial did not specifically include or exclude HER2-positive patients. There was a subgroup analysis of the small population of patients in RAINBOW with prior exposure to HER2 therapy showing a response rate of 45% with ramucirumab plus paclitaxel. Very small numbers, but it does look less impressive set against the 52% seen with evorpacept.

On top of that, it's worth noting that trastuzumab plus ramucirumab plus paclitaxel is not a recommended regimen for patients with HER2-positive EG cancer after progression on frontline therapy. The preferred option now is trastuzumab deruxtecan. ASPEN-06 allowed patients to receive prior trastuzumab deruxtecan and pembrolizumab, but we don't know how many patients did so in the study yet. All in all, the study design of ASPEN-06 leaves a lot of questions unanswered. It looks positive, but these things have a way of being a bit deceptive.

Recall, for instance, that magrolimab plus azacitidine had a 91% response rate in first-line MDS and a 64% response rate in first-line AML, with survival and other markers of efficacy comparing favorably with then-standard regimens (across trials, of course). These findings did not pan out in randomized studies.

So it's anyone's guess as to whether there's really something here with the ASPEN-06 results, and I would strongly recommend not over-interpreting these findings. The company guides that we can expect a report of results in Q2 2024, so probably at either AACR or ASCO.

Various other trials that could inform the prospects of evorpacept in cancer therapy are expected to read out in the second half of 2024, including 2 phase 2 studies in head and neck cancer.

Financial Overview

Per their Q3 2023 filing , ALXO held $199 million in total current assets, including $19.6 million in cash and equivalents, and another $170.4 million in short-term investments. Meanwhile, their operating expenses were $53.3 million, with the increase quarter over quarter (in Q2 the OpEx was $36.8 million) driven by growth in research and development spending.

After interest income and expense, the net loss for the quarter was $51.0 million. This assessment does not take into account the approximately $50 million net proceeds from an October public offering . Considering this, the cash runway for ALXO is around 4-5 quarters, provided net losses do not significantly change.

Strengths and Risks

ALXO has successfully leveraged a favorable readout to strengthen their balance sheet. However, due to rapid rises in costs, they have about the same cash runway that I highlighted in my last article (minus a quarter). With about a year left, you can bet that they're going to continue to use data readouts to fund more equity raises in order to keep the lights on.

This is a risky proposition, because any dilution announcement could derail the momentum they've managed to build with a single positive interim readout. It has really been incredible to watch ALXO triple in price since my last article, where I was already cautioning people about evorpacept.

Unfortunately, the phase 2 readout doesn't negate my concerns about the CD47 approach, not without learning more. And if you jump in on the hype machine right now, there's a long way to fall.

Bottom-Line Summary

ASPEN-06 has been an important notch in favor of the investment thesis in ALXO. I do not believe that this readout deserves the run to a $650 million market cap on its own. We're going to continue to see more readouts in 2024, but those are very high-risk propositions. At $15 a share, there is too much momentum that could be lost. Obviously, there is substantial upside, so if you respect the risks here and nonetheless want to play the game, I can't blame you.

I just disagree. I think anyone sitting on gains should strongly consider taking some (or most) off the table, and I would strongly urge people sitting on the sidelines to wait for clearer signs to develop. A single interim, incomplete readout of a phase 2 study does not answer enough questions for me.

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