LIFE - aTyr Pharma: Admirable Strategy Yet Efzofitimod's Success Remains Unlikely

2023-07-19 18:41:11 ET

Summary

• aTyr Pharma is developing efzofitimod, a drug for chronic inflammation leading to fibrosis, which has received orphan drug and Fast Track designations from the FDA and the European Commission.
• Despite recent advancements, the company's stock was downgraded due to slow progress and potential delays in the Phase 3 trial of efzofitimod, leading to an 8% decrease in share value.
• aTyr Pharma has $117.6 million in cash and investments, expects its cash runway to extend into 2026.
• In my view, aTyr Pharma's slow and careful clinical progress is commendable, but efzofitimod remains very unlikely to bear fruit.

Introduction

aTyr Pharma ( LIFE ) is a biopharmaceutical company focusing on the discovery and development of innovative medicines derived from its proprietary tRNA synthetase platform. The company's primary emphasis is on the development of efzofitimod, a clinical-stage compound aiming to alleviate chronic inflammation leading to fibrosis, notably in interstitial lung diseases. Efzofitimod has gained orphan drug and Fast Track designations from the FDA for treating sarcoidosis and systemic sclerosis-associated ILD, and the European Commission granted it an orphan drug designation for sarcoidosis. After demonstrating safety and efficacy in earlier trials, aTyr is currently conducting a global Phase 3 trial and preparing to launch a focused Phase 2 study. Collaborating with KYORIN Pharmaceutical for its commercialization in Japan, aTyr continues to uncover the potential of efzofitimod in various inflammatory lung diseases.

In February, I examined aTyr Pharma's Phase 2 trial of efzofitimod, noting no significant difference in lung function change compared to the placebo. I attributed this to factors such as drug efficacy, patient population variability, or study design limitations. Given the lack of statistical significance, I predicted that efzofitimod was unlikely to meet its phase 3 trial goals, thereby marking aTyr Pharma as a "Sell." I highlighted the company's substantial losses since inception, suggesting that even at near-zero valuation, there was room for a further decline in its stock. Since my "Sell" recommendation, shares of aTyr trade 8% lower while the general market, SPY , is 9% higher.

Recent developments: Over the last month, aTyr Pharma received orphan drug designation from the European Commission for efzofitimod, its systemic sclerosis treatment. This designation could provide them with ten years of market exclusivity. However, Oppenheimer recently downgraded aTyr Pharma from Outperform to Perform due to a lack of immediate catalysts and potential delays in the Phase 3 trial of their primary asset, efzofitimod.

Q1 2023 Earnings & Stock Assessment

As of Q1 2023 , aTyr Pharma had $117.6 million in cash and investments, bolstered by $48.1 million from a public offering. It expects the cash runway to extend into 2026. Research and development expenses were $9.4 million, while general and administrative costs were $3.4 million. Their net loss was $11.9 million.

Taking a look at Seeking Alpha data, LIFE has exhibited an uneven performance, with a market capitalization of $105.87 million, cash reserves of $114.39 million, and total debt amounting to $14.29 million. This results in an enterprise value of $5.59 million. Sales projections indicate a decline in 2023, followed by a rise in 2024 and 2025, with noteworthy growth anticipated at over 321% in 2025. While the company's valuation scores a B+, its profitability is weak, with negative returns, which is typical for a clinical-stage biotech company. In terms of momentum, LIFE has performed poorly compared to the S&P 500, showing negative performance over the past 6, 9 months, and 1 year.

Investing in microcap firms like aTyr carries significant risks, largely due to their experimental nature. This could result in binary outcomes - significant gains if trials succeed, or substantial losses if they fail. Furthermore, microcaps often experience high volatility, influenced by factors such as limited liquidity and susceptibility to manipulation. aTyr's current financial position, ongoing trial uncertainties, and the previously disappointing Phase 2 results add to these inherent risks. Thus, an investment in aTyr should be approached with caution, bearing in mind the potential for significant loss.

aTyr Pharma: Strategic Progress and Scientific Potential

In Q1 2023, aTyr Pharma made notable strides in its clinical studies. The company continued enrollment for the global Phase 3 EFZO-FIT™ study, investigating efzofitimod's potential in treating pulmonary sarcoidosis, a complex and challenging disease. Simultaneously, aTyr advanced plans for a Phase 2 study for systemic sclerosis-interstitial lung disease (SSc-ILD), expected to commence in Q3 2023. Adding to these developments, a review article highlighted efzofitimod's anti-inflammatory properties, further positioning the drug as a potential game-changer for immune-mediated fibrotic lung diseases.

While these advancements are promising, Oppenheimer recently downgraded aTyr due to perceived slow progress, expecting a "fallow period" until 2024/25. However, I counter this concern by valuing aTyr's strategic and careful approach. The company's measured pace, focusing on thorough study design, careful patient selection, and targeted disease indications, demonstrates wisdom. Rushing trials can lead to flawed results or regulatory issues, whereas methodical progression ensures a more reliable path to discovery. Moreover, aTyr's operating expenses remain reasonable, indicating effective cost management during this crucial phase.

Despite Oppenheimer's downgrade, aTyr continues to advance its research agenda, showcasing its dedication to its mission. Its calculated patience might be the foundation for future breakthroughs, underlining that true innovation often requires time.

Ultimately, while financial metrics and stock performance are important, they should not overshadow the potential long-term scientific impact. If aTyr's trials prove successful, they could transform the treatment landscape for fibrotic lung diseases, creating significant long-term value. Therefore, it's critical to view aTyr Pharma's journey with a balanced perspective, considering both the immediate financial lens and the long-term scientific potential.

My Analysis & Recommendation

As we look ahead, investors should monitor aTyr Pharma's ongoing Phase 3 and planned Phase 2 studies, as these will provide crucial data about efzofitimod's potential in treating pulmonary sarcoidosis and SSc-ILD. The company's recent orphan drug designation from the European Commission also offers a glimmer of hope, adding a potential commercial edge in the European market.

Despite these promising developments and aTyr's careful approach to their trials, I maintain my "Sell" recommendation for the stock. This stance is primarily predicated on my earlier analysis , which suggested that efzofitimod is likely to fail in its pivotal Phase 3 trial for pulmonary sarcoidosis, given the lack of significant difference in the Phase 2 trial's lung function change compared to the placebo group despite baseline characteristics that, in my view, favored the drug over placebo.

Nonetheless, aTyr's continued advancement in its research agenda and strategic navigation until the Phase 3 results could potentially drive a temporary increase in its valuation. However, given the inherent risks and uncertainties in clinical trials, coupled with the company's financial position, my recommendation reflects a conservative stance in navigating this uncertain journey.

Risks to Thesis

When the facts change, I change my mind.

As with any investment recommendation, there are potential risks to my "Sell" position on aTyr Pharma. Firstly, there's the risk that the company's Phase 3 trial for efzofitimod exceeds expectations, demonstrating a statistically significant improvement in pulmonary sarcoidosis patients. Should this happen, the stock would likely see a significant uptick.

Secondly, the company's Phase 2 study for systemic sclerosis-interstitial lung disease (SSc-ILD) may also yield positive results, potentially transforming aTyr into a multi-product company with a broader potential market. This would also likely be a significant catalyst for the stock.

Lastly, aTyr Pharma may explore collaborations or partnerships that could infuse the company with additional capital or provide strategic benefits, which could improve the company's financial outlook and investor sentiment.

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