IOBT - IO Biotech: A Phase 3 Company Getting No Respect

2024-01-03 03:04:32 ET

Summary

• IO Biotech is an immunotherapy biotech in phase 3 trials.
• Past failures of IDO as a target cast a pall on their potential data readouts.
• Nevertheless, the cheap stock price and upcoming catalysts make this an interesting play.

Topline Summary

IO Biotech ( IOBT ) is a clinical-stage biotechnology company specializing in developing novel approaches to immunotherapy. Their lead candidate is a combination therapy targeting PD-L1 and IDO, the latter being an immunotherapy target of significant interest almost a decade ago that failed to move the needle in many high-profile cases. Now, IOBT is being valued at microcap levels, despite being in phase 3 trials.

Pipeline Overview

IO102-IO103

The most advanced clinical product being developed by IOBT is actually a pair of vaccines, one targeting indoleamine 2,3-dioxygenase (IDO) and the other targeting PD-L1. PD-L1, of course, is a firmly established immune checkpoint target with wide use across solid tumor oncology (though using antibodies and not vaccines to target).

IDO, on the other hand, was once hailed as a potential game-changing stimulator of immune checkpoint activity and was the promise of several biotechs that have since flamed out in the wake of numerous trial failures . Notably, this was mostly using small molecule inhibitors of IDO, and not the vaccine approach that IOBT is taking.

Preamble aside, IOBT has IO102-IO103 in a few later-stage clinical trials. First is the phase 3 study in melanoma, which recently completed its accrual . IOBT expects that the primary endpoint of progression-free survival will be reached in the second half of 2025, but they will perform an interim analysis in mid-2024, putting potential results as early as ESMO later this year in September, at least by my estimation.

A prior phase 1/2 study combining IO102-IO103 with nivolumab in patients with metastatic melanoma showed an objective response rate of 80% , which suggests some favorable activity compared with first-line nivolumab alone (which had a 40% response rate). This also compares favorably with findings from the RELATIVITY-047 study, which showed a 32.6% response rate for nivolumab and 43.1% for the combination of nivolumab and relatlimab.

This is an interesting indication that IO102-IO103 has some legs, and it's worth paying attention to this late-stage trial. It is worth cautioning that these were cross-trial comparisons, and that phase 1/2 studies tend to have small patient populations, with a lot of potential for false positive results. It is unlikely that the 80% response rate is going to hold up. But even coming in that ballpark could yield game-changing outcomes for patients.

IOBT is also studying IO102-IO103 in a wider-ranging basket trial combining the combo with pembrolizumab in metastatic lung or head and neck cancer. Updates at IASLC World Lung and ESMO 2023 showed some early signs of activity, although the results remain immature at this time, so I don't want to belabor this analysis.

Finally, in late December 2023, IOBT announced that they've dosed the first patient in a phase 2 basket trial of IO102-IO103 as "perioperative" treatment in combination with pembrolizumab in patients with operable melanoma or head and neck cancer. The hope, as with all of these operable-setting trials, is to help prime the immune system against the tumor before removal, with the hope of being able to obtain a more robust immune response afterward and prevent recurrence. Immunotherapy itself may also yield tumor shrinkage, which could improve outcomes of surgery.

Preclinical pipeline

IOBT also has a few other vaccines in the very early stages of development. One targets arginase 1, and the other targets TGF-beta 1. We don't know much about these, let alone anything humans, so they are far on the horizon for the company and do not factor into my investment thesis at this time.

Financial Overview

Per IOBT's latest quarterly filing , total current assets sat at $168.3 million, almost all of which were cash and equivalents that totaled $165.5 million. Their operating expenses for the quarter were $23.5 million, and after interest and tax benefits, IOBT reported a net loss of $21.7 million.

With this cash runway and expenses, the company has approximately 7 to 8 quarters left to fund operations. Notably, this includes the proceeds from a private offering from back in August with a gross yield of $75 million, putting this company in the "still stinging" stage of a recent dilutionary event.

Strengths and Risks

IOBT presents a series of conundrums for me. On one hand, you have these promising phase 2 data suggesting the efficacy of their vaccine combination in melanoma. If they capture anything close to 80% response rate, then I think it's highly likely that their phase 3 trial is going to be a success. However, that was in an early study, and you can pore over the history of immune checkpoint trials to find drugs that looked like shoo-ins that then failed catastrophically. The IDO inhibitors of yore hold this unfortunate distinction.

So it's weird. IOBT's approach combines a bona fide target (PD-L1) using an unconventional, unproven approach (vaccine, not monoclonal antibody), with an unproven target (IDO) using a novel approach that might be more successful than small molecule inhibition. The mixture is really cloudy, with some promising early clinical data to go on.

Clinically, IOBT is a big gamble at this time, with the odds slightly in favor of the gambler, given the promising response rates we've seen. I will not be shocked to see their phase 3 trial fail to live up to these expectations, though. Their phase 2 basket study is interesting and has some tantalizing signals, but I wouldn't count on being able to bolster a bad phase 3 readout later this year if that should occur.

Financially, IOBT has a somewhat decent cushion. But I feel their cash position is a risk, given the operational expenses. Optimistically, IOBT will succeed in their phase 3 study's interim analysis in Q2/Q3 2024. But approval likely wouldn't come until after the study is completed in 2025. This means that the ~2 years of cash they have is almost certainly not going to last, and that means dilution is coming.

The main question would be, then, under what terms? If they have a positive interim readout, then an investment today would mean quite a few multiples of gain in valuation. But if it's from a position of weakness...there's a lot of downside potential even at this market cap.

Bottom-Line Summary

At a market cap of $124 million at the time of writing, IOBT is definitely cheap and carries little respect, despite being in the very late stages of clinical development. But I think they have a huge chance this year with their phase 3 readout. And if their recent executive share purchases are anything to go by (and I don't really think they are, honestly), there might just be some momentum building. That makes right now a potentially interesting time to take a small position. I'll emphasize that there is a lot of risk even at these levels, but the upside and near-term catalysts are too interesting to ignore. I'm a tentative buy on this particular stock, pending catalysts set to come later in 2024.

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