ALLK - Scratching The Surface: Allakos' Novel Take On Urticaria

2023-09-18 02:07:15 ET

Summary

• Allakos displays fiscal discipline with YoY reductions in R&D and G&A, suggesting resource reallocation to pivotal assets like lirentelimab.
• Lirentelimab's Phase 2a data is promising, particularly for omalizumab-refractory patients, but late-phase results are keys to the drug's validation.
• Investment Recommendation: Speculative "Buy" advised for bold investors. Initiate starter positions, closely monitor upcoming Phase 2b data and cash burn rate.

At a Glance

In my analysis of Allakos ( ALLK ), a microcap biotech specializing in immunomodulatory therapies, I observe an intricate blend of promise and peril. The firm demonstrates financial prudence by reducing YoY R&D and G&A expenses, hinting at possible resource reallocation to key pipeline projects like lirentelimab, a novel asset targeting Chronic Spontaneous Urticaria ((CSU)) via a unique Siglec-8 mechanism. Its Phase 2a data underscores clinical efficacy, particularly for patients refractory to current IgE-focused treatments. However, despite a solid cash position, the 21-month cash runway should be monitored, considering the high stakes riding on late-phase lirentelimab data. Efficacy in omalizumab-refractory populations will be a crucial inflection point, alongside the company's ability to mitigate its alarming 52% one-year stock decline.

Q2 Earnings Report

To begin my analysis, looking at Allakos' most recent earnings report for Q2 2023, a notable reduction in expenses stands out as indicative of cost management measures. R&D expenses decreased by $7.1 million YoY, largely driven by a $4.6 million cut in clinical costs related to lirentelimab, which raises questions about the future commitments to this asset. G&A expenses also dipped by $4.2 million, mainly due to lower employee compensation. A net loss of $35.1 million for the quarter, compared to a $49.1 million loss in Q2 2022, signals a more controlled cash burn. The decline in stock-based compensation by $2 million and depreciation expenses by $0.4 million further underscores a conscious tightening of the belt. This financial trajectory may allow for resource reallocation towards key pipeline projects, provided efficacy data remain compelling.

Cash Runway & Liquidity

Turning to Allakos' balance sheet , as of June 30, 2023, the firm holds cash and cash equivalents of $67.4M and investments of $153.7M, totaling $221.1M in highly liquid assets. Over the last six months, the company recorded net cash used in operating activities at $62.7M, averaging a monthly cash burn of approximately $10.5M. Based on this monthly burn rate, Allakos' cash runway stands at about 21 months. It's important to note that these values and estimates are grounded in historical data and might not accurately project future performance.

As for liquidity, Allakos appears to be in a strong position with no significant debt listed on its balance sheet. The company's existing liquid assets would suffice to sustain its operations for the near term without needing to secure additional financing. Nevertheless, the average monthly cash burn warrants monitoring as it could necessitate capital infusion down the line, either through equity financing or strategic partnerships. These are my personal observations, and other analysts might interpret the data differently.

Capital Structure, Growth, & Momentum

According to Seeking Alpha data, Allakos, with a market cap of $217.29M, resides in the microcap realm, exposing investors to liquidity and market volatility risks intrinsic to this category. However, the company's robust cash position of $221.1M minimizes immediate financing risks. On the growth front, Allakos is in the clinical stage, with key assets like lirentelimab showing promise in allergic and inflammatory conditions, though it's crucial to note that revenue is yet to materialize, aligning with analyst projections of zero in sales through 2025. Stock performance has been dismal, with a one-year loss of over 52%, lagging significantly behind the S&P 500.

The recent Jefferies upgrade might indicate a course correction, but it's a single data point. Given its microcap status, the company faces high risks including clinical trial failure, regulatory hurdles, and the need for continual capital.

Breaking the IgE Mold: Lirentelimab's Fresh Approach

Lirentelimab is carving out a unique space in the Chronic Spontaneous Urticaria ((CSU)) treatment domain, particularly when juxtaposed with existing therapies like omalizumab, which relies on the neutralization of IgE. Lirentelimab's distinct mechanism of action involves targeting sialic acid-binding Ig-like lectin 8 (Siglec-8), allowing it to modulate the activity of mast cells and eosinophils without relying on IgE pathways. This could be invaluable for those who are refractory to existing IgE-centered treatments such as omalizumab.

Turning to Phase 2a trial data, lirentelimab shows promising clinical efficacy. UAS7 response rates in omalizumab-naive and omalizumab-refractory CSU patients were 77% and 45%, respectively. Furthermore, the 92% complete response rate in the omalizumab-naive cohort seems particularly significant. Yet, it's important to note the limitations of the data, including the small sample size across diverse patient cohorts, which could introduce variability and potential bias. Adverse events were primarily mild to moderate, such as infusion-related reactions and headaches, and there were no severe treatment-related adverse events, strengthening its risk-benefit profile.

As we approach the release of Phase 2b topline data, investors should key in on several facets. Efficacy measures like UAS7 scores and complete response rates in diverse patient groups will be scrutinized. Likewise, the safety profile remains a pivotal consideration; any data signaling serious adverse events could be a game-changer in a negative sense. Special attention should be paid to lirentelimab's efficacy in omalizumab-refractory patients, as positive results here could secure its position as an alternative therapy for this patient subset.

My Analysis & Recommendation

In conclusion, Allakos presents a complex investment narrative that pairs underlying value with considerable risk. The company appears undervalued relative to its therapeutic assets, particularly lirentelimab, which has demonstrated preliminary efficacy in CSU, an area with unmet clinical needs. The drug's distinct mechanism of action via Siglec-8 targeting sets it apart and could give it a competitive edge for omalizumab-refractory patients.

However, it's hard to ignore the stock's underperformance over the last year. Down 52%, it has been a laggard compared to broader indices, and while it's tempting to see this as an entry point, market sentiment is not to be dismissed lightly.

As we move forward, investors should look out for the upcoming Phase 2b results of lirentelimab, which will be crucial in confirming the drug's efficacy and safety profile. Efficacy in omalizumab-refractory populations will be particularly noteworthy, potentially establishing lirentelimab as a second-line treatment option. Watch the cash burn rate and the potential need for further financing. Though their current cash position is strong, the high monthly burn rate coupled with the microcap nature of the company will necessitate keen oversight.

If you're an investor with a higher risk tolerance, considering a speculative 'Buy' for Allakos could make sense—though caution is strongly advised. The recommendation here is to initiate only a starter position, keeping the portfolio exposure limited until the stock shows consistent upward momentum. This strategy serves to balance the promise of the company’s pipeline and current undervaluation against market skepticism and liquidity concerns. The stock will need to break its negative inertia and show a sustained uptick before full-scale investment is advised.

Risks to Thesis

While the "Buy" recommendation on Allakos aligns with several positive indicators, several risks should be considered:

• Clinical Uncertainty: Despite promising Phase 2a data for lirentelimab, Phase 2b results are pending. The therapeutic landscape is riddled with once-promising drugs that faltered in later-stage trials. It's worth noting that lirentelimab has faced setbacks in previous trials, such as its Phase 3 trial for eosinophilic gastritis and/or eosinophilic duodenitis. These past challenges underscore the importance of exercising caution and maintaining a critical eye as we anticipate the upcoming Phase 2b results for this candidate.
• Cash Burn Rate: Even with 21 months of runway, biotech R&D is unpredictable. The need for additional trials or extended timelines can strain finances.
• Market Capitalization: Being a microcap, Allakos is susceptible to extreme volatility and low liquidity, which can exacerbate downside risk.
• Lead Candidate Risk: Lirentelimab is the lead candidate, which increases the stakes. If it fails, the setback will significantly affect stock value.
• Regulatory Hurdles: A promising drug can still face FDA bottlenecks or fail to obtain necessary approvals.
• Market Penetration: Lirentelimab may face hurdles in physician adoption, given existing competitors like omalizumab.

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