EVLO - Circling Back On Evelo Biosciences

2023-08-04 03:32:21 ET

Summary

• Today, we put Evelo Biosciences, Inc. in the spotlight for the first time since June of last year.
• The stock has delivered a litany of bad news for shareholders in 2023 including discontinuation of development around its previous lead drug candidate.
• Can the company turnaround?  An updated analysis on Evelo Biosciences, Inc. follows in the paragraphs below.

There are no facts, only interpretations .”? Friedrich Nietzsche

Today, we are circling back on Evelo Biosciences, Inc. ( EVLO ) for the first time since our piece on it late in the spring. I recently got a question around this name from a Seeking Alpha follower. Since no articles have been published here on the site since we last looked at this small cap concern, it seemed a good time to circle back on Evelo Biosciences, Inc. An updated analysis follows below.

Company Overview:

Evelo Biosciences, Inc. is a small clinical stage biotech concern based just outside of Boston in Cambridge, MA. The company is focused on discovering and developing oral medicines that act on immune cells in the small intestine with systemic effects. The stock currently trades around $11.00 a share and sports an approximate market capitalization of just north of $200 million. The company recently executed a reverse 1:20 stock split.

The company is developing drug candidates using SINTAX biology on thesis that drug action in the small intestine could lead to clinical benefits.

Recent Developments:

Things have not been good on the news front for shareholders in recent months. In addition to the reverse stock split that was announced late in June, in late February, the company announced that its atopic dermatitis candidate EDP1815 failed to meet its primary endpoint in a Phase 2 trial. Management partly blamed a large placebo response rate for this failure and noted that data from a fourth cohort of the study would be out in the second quarter of this year. However, not wanting to take chances and to preserve its financial flexibility, leadership also implemented cost saving measures including layoffs to extend its ' cash runway '.

In late April, that fourth cohort, also failed to meet the primary endpoint of the study. Not surprisingly, leadership immediately discontinued development of EDP1815. In July, Evelo terminated a lease arrangement for just over 40,000 square feet of space it was leasing to further conserve cash.

The discontinuation of EDP1815 leaves Evelo one asset past very early stages of the development. This is EDP2939, which is the first bacterial type extracellular vesicle or EV product candidate. Currently it is the only orally delivered microbial extracellular vesicle to make it to mid-stage development for the treatment of a systemic inflammatory disease. Results from a Phase 2 study evaluating EDP2939 to treat moderate psoriasis should be out in the fourth quarter of this year.

Leadership believes based on pre-clinical data that EDP2939 could deliver greater efficacy than EDP1815 in regard to safety and tolerability. However, given that EDP2939 is derived as a pure active substance from EDP1815 and given that candidate's recent trial failures, I would take that with a grain of salt at this point in time.

Analyst Commentary & Balance Sheet:

The only analyst firm rating that has come out since the stock's reverse split was from Morgan Stanley last week who reissued their Hold rating and $10 price target on the shares.

Approximately three percent of the outstanding float in EVLO is currently held short. A beneficial owner bought just under half of the recent secondary offering that raise approximately $25.5 million in proceeds last month. There has been less than $25,000 worth of insider sales collectively so far in 2023.

The company ended the first quarter with just over $27 million worth of cash and marketable securities on its balance sheet against just under $45 million of total debt after posting a net loss of just over $25 million during the first quarter. The debt consists of three years of interest only payments followed by a two-year amortization period.

Verdict:

It is hard to find much good news for Evelo or its shareholders so far in 2023. The trial failure and development discontinuation of EDP1815 was quite disappointing to say the least. Especially as management had hoped that this compound would turn out to be a ' Pipeline in a Product ' and potentially effective against other inflammatory diseases besides atopic dermatitis such as IBD and asthma. That hope is now extinguished.

Evelo Biosciences seems fully in ' survival mode ' given the recent failure of its primary drug candidate. It has instituted layoffs, discontinued development work and terminate a key lease. The company still hasn't updated its website to account for the discontinuation of development of EDP1815.

In my first article around Evelo Biosciences I expressed several doubts around company and passed on any investment recommendation. Given the litany of bad news the company has delivered so far in 2023, I would continue to avoid the shares.

No two persons ever read the same boo k.”? Edmund Wilson

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