Equillium: A Negative EV Biotech With Compelling Programs And Cash ‘Til At Least 2025 (2024)

Equillium - Overview

Equillium (NASDAQ:EQ) (the Company), is a microcap, development-stage biotech company with an asset optioned by Ono Pharmaceutical (OTCPK:OPHLY)(4528.T) and a portfolio of multi-cytokine inhibitors. Itolizumab is an anti-CD6 antibody being developed in a number of indications, the furthest along is acute graft-versus-host disease. Itolizumab was originally licensed from Biocon, an Indian drug company. The multi-cytokine inhibitor (“MCI”) portfolio came from its purchase of Bioniz Therapeutics, founded by Nazli Azimi. Two of the MCIs are in the clinic, EQ101 is in a phase 2 study for alopecia areata (hair loss from an immune reaction), and EQ102 is in a phase 1 study for celiac disease.

Figure 1: Equillium Pipeline (source: www.equilliumbio.com)

As of 3/31/23, the Company had approximately $62M in cash, or a little over $1.80 per share. Based on the current stock price of less than $0.60, it appears that the market assumes that the two unpartnered programs will only serve to drain the bank and create no future value, and ascribes little value to the potential option exercise and milestones from the Ono deal.

Ono Deal for Itolizumab

Itolizumab is an anti-CD6 monoclonal antibody that selectively targets the CD6-ALCAM signaling pathway. The mechanism of action, in theory, downregulates pathogenic T effector cells while preserving T regulatory cells, which are key to a normal immune response. Itolizumab is being studied in acute graft-versus-host disease (“aGVHD”), when the body attacks cells implanted into patients often used in leukemia therapy; and is being studied in systemic lupus erythematosus (“SLE”), an autoimmune disease where the immune system attacks its own tissues, creating inflammation and damaging tissues.

The Phase 3 study, “A Phase 3, Randomized, Double-Blind, Placebo-Controlled Multicenter Study of Itolizumab in Combination With Corticosteroids for the Initial Treatment of Acute Graft Versus Host Disease”, should have an interim read-out in late 2024. The Phase 1b study, “A Phase 1b Multiple Ascending-dose Study of EQ001 in Subjects With Systemic Lupus Erythematosus With or Without Active Proliferative Lupus Nephritis”, should have top-line data in the first half of 2024. Ono has 90 days following the receipt of these two data sets (interim for aGVHD, top-line for SLE) to exercise the option.

Equillium entered into an asset sale agreement with Ono Pharmaceutical for Itolizumab. Ono purchased the exclusive right to purchase the commercial rights to Itolizumab in the territories of the US, Canada, Australia and New Zealand. The upfront payment was 3.5B Yen ($26.4M). The option right, if exercised, would cost 5.0B Yen (~$37.2M). Additionally, there are 5 milestone payments that total and additional $101.4M if achieved. The Company redacted the details behind the milestones in the agreement, but they are linked to clinical advancement (which could include a third indication), approvals and commercial goals.

Assuming a discount rate of 15%, the Ono deal is probably worth around $137M with the R&D reimbursem*nt, option payment and assuming all milestones hit. Risk-weighting the option payment at 40%, including the R&D reimbursem*nt for 7 more quarters, splitting the 5 milestones across the next 10 years, and risk weighting the milestones to a 20% probability nets a NPV of $72M – far above the current market cap.

EQ101 in Alopecia Areata

Figure 2: EQ101 Mechanism of Action (source: www.equilliumbio.com)

EQ101 is an inhibitor of three different inflammatory cytokines - IL-2, IL-9 and IL-15. The program was part of the purchase of Bioniz. In theory, it blocks the binding of IL-2, IL-9 and IL-15 to the gamma chain receptor, while not blocking other cytokines like IL-4, IL-7 and IL-21. Each of these Interleukin cytokines have a different role in an immune response.

“Table 1: Actions of γ_c family cytokines

Abbreviations: EAE - experimental autoimmune encephalomyelitis; Ig - immunoglobulin; IL - interleukin; NK - natural killer; SLE - systemic lupus erythematosus; Tfh - T follicular helper; Th - T helper; Treg - T regulatory.”

Table Source: The γ c family of cytokines: fine-tuning signals from IL-2 and IL-21 in the regulation of the immune response

In a Phase 1 study, an IV infusion of EQ101 was shown to reduce levels of circulating Treg cells, NK cells and CD8 cells, but did not have an effect on CD4 cells, CD8 T cells, B cells and monocytes. Effects on Treg and NK cells was observed by Day 4, and CD8 cells by Day 15.

Figure 3: EQ101 Phase 1 Results (source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8317201/)

EQ101 was then studied in Patients with Large Granular Lymphocyte Leukemia (“LGL”) or Refractory Cutaneous T-Cell Lymphoma (“rCTCL”). The primary goal of the study is to observe safety over multiple doses, while gathering efficacy and biomarker data to support further development. In the 19 patient expansion cohort after the dose ranging, 1 patient had a complete response, 11 patients had a partial response, and 7 patients had stable disease. ORR was approximately 52%. Based on this small study, Bioniz mentioned the goal to move into a Phase 3 study. Given that the data was presented in December 2020, and that the next study had not begun prior to Bioniz being purchased in February 2022 for ~5.7M shares (approximately $24M in value at the time, but only worth $2.9M today) plus up to $307.5M in development and commercial milestones, it suggests that Bioniz had trouble finding investors who were excited to fund the Phase 3.

Figure 4: Phase 2 Results from Expansion Cohort @ 2 mg/kg Dose (Source: Company Presentation)

Interesting that EQ did not pursue the Phase 3 in CTCL, and chose to start a Phase 2 in Alopecia Areata (“AA”). The Company’s thesis behind AA is in-line with EQ101’s mechanism of action (“MoA”). In AA, activated CD8 attack hair follicles and mast cells increase the inflammation around the follicle. If the level of suppression of CD8 cell proliferation by EQ101 is enough to allow the hair follicles to recover, then there is a potential for a successful treatment.

Figure 5: AA Pathophysiology (Source: Company presentation)

In an AA mouse model, EQ101 was compared to ruxolitinib, a JAK1/JAK2 inhibitor. EQ101 appeared to perform better in the mouse model, pictures below. Concert Pharmaceuticals (CNCE) recently published Phase 3 data on deuruxolitinib, an oral JAK1/JAK2 inhibitor. 35% of patients in the high dose saw 90% or more hair regrowth. After publishing the data in September 2022, Concert stock drifted down by as much as 30% over the next few months, before recovering prior to the buy-out. Concert was purchased by Sun Pharma for $576M plus a $252M contingent value right based on the achievement of sales milestones.

Figure 6: AA Mouse Model (Source: Company presentation)

EQ101 currently requires IV administration, and should be easily shifted to a subcutaneous injection. In my opinion, to win in the market, EQ101 would need to provide substantially better efficacy than OLUMIANT®, or any of the other JAK inhibitors, to overcome the oral versus injectable patient bias as a first line. Given that less than 50% of patients showed a high response rate to a JAK inhibitor, because EQ102 is a different MoA, it could be well positioned to dominate the 2^nd line therapeutic option If that is possible, then the program should be worth at least half the ~$800M value ascribed to CNCE’s program in a January 2023 acquisition.

Figure 7: Competitive Landscape for AA (Source: Equillium Presentation)

EQ102 in Celiac Disease

Figure 8: EQ102 Mechanism of Action (source: www.equilliumbio.com)

EQ102 is designed to selectively inhibit IL-15 and IL-21. IL-15 is produced by epithelial cells and antigen presenting cells in celiac disease (“CeD”) patients in response to gluten. IL-15 triggers multiple pathways that destroy epithelial cells in the gut. Patients with CeD have higher levels of IL-21 when challenged with gluten. When IL-21 was blocked, those CeD patients had reduced T helper 1 cell levels and lower levels of interferon gamma. In theory, selectively suppressing IL-15 and IL-21, should reduce the level of epithelial cell destruction triggered by gluten exposer in patients who have CeD.

EQ102, in a cell model, matched the B-cell expression suppression of a combination of IL-15 and IL-21 antibodies, see Figure 9.

Figure 9: Pathophysiology of CeD (Source: Equillium Presentation)

The Company initiated a Phase 1 SAD/MAD trial in healthy volunteers in late 2022. I do not believe that any analyst is ascribing value to this program. Until there is clinical data, it is hard to give value to a program at this stage while there are more advanced programs in the Company.

There are multiple companies working on therapeutic programs for CeD, investigating multiple MoAs. EQ102’s MoA of EQ102 seems to align with the pathophysiology of the disease, so I look forward to seeing some data.

Figure 10: Competitive Landscape in CeD (Source: Equillium Presentation)

Management Team

The Company has a dedicated leadership team that has been with the Company since its founding in 2017. The Chairman, and many of the Directors, have large exits from other biotech companies.

The management team has been working together for years. They have executed on the Itolizumab program; from in-license, through clinical development, to asset acquisition. They know the process and can make the sausage. I do not believe that the market is assigning execution risk to the value of the Company. The bigger issue is likely the departure risk. All of their options are far under water.

Stock Price Story

Figure 11: EQ 4 Year Stock Chart (Source – Yahoo Finance)

Events which created large price movements and/or volume increase:

• July 13, 2020 – Biocon, EQ’s Partner, announced reduced mortality of hospitalized COVID 19 patients
• August 13, 2020 – EQ raised $35M @ $7.00
• February 4, 2021 – EQ raised $30M @ $7.00
• September 27, 2022 – Positive results in Lupus Nephritis study w/ Itolizumab
• December 6, 2022 – Asset sale option agreement with Ono Pharma

The slow decline in price following the asset sale option to Ono can be explained by how the analysts valued the deal. Their NPV of the future cash flows for the Ono deal were much less than the NPV assigned to the full life of the program, by as much as $500M, depending on the analyst model.

Cash Balance

When analyzing companies in the nanocap range, often they need cash asap. The risk of doing a bad financing usually outweighs the value of the business. In this instance, the Company has cash to fund operations into 2025. The Company burned approximately $8M in Q1 2023. Management told me that they expect their cash burn to fluctuate a little, based on the timing of R&D reimbursem*nt payments from Ono, but should hold steady around $8M for the rest of 2023.

Figure 12: Balance Sheet from Q1 2023 Press Release

Proforma Model

When modeling the Company, I have made the following assumptions:

• $100M in Ono Pharma Milestones parsed equally across 10 years post deal
• 300K AA patients, $20k per year, Launch in 2027
• 3M CeD patients, Launch in 2030, $0 revenue in base case model
• $52M per year in operating expenses, growing @ 3%, which is offset by the Ono R&D reimbursem*nt treated as revenue in 2023 and 2024, and reducing R&D after each approval
• Sales expenses initiate 1 year prior to launch of each new program

As a base case, assuming that the AA program has value, it is possible to ascribe a valuation of over $300M to the Company, or $9.00 per share. The Ono Pharma deal, assuming 100% vesting of milestones, is worth ~$130M of the non-risk-weighted valuation.

On a risk-weighted basis, assigning 20% to the downstream Ono milestones, and 25% probability of success of the AA program, the NPV is closer to ~$120M, or approximately $3.40 per share.

At the end of 2023, the Company should have initial data from the AA Phase 2, and the safety read-out of the SAD/MAD position of the CeD Phase 1. It is my hypothesis that analysts will assign a value to the new programs if there is positive top-line data in the AA study. Success in AA, and safety in CeD, will provide validation to the platform. This double positive outcome scenario could increase the stock over 10x from today’s valuation.

Alternatively, if the AA study is nebulous or negative, then the portfolio of multi-cytokine inhibitors will be deemed worthless. The value of the Company will be solely in the Ono Pharma deal and the cash on the balance sheet. There should be about $38M on the balance sheet (~$1.10 per share) and there could be an additional $37M coming in late 2024, risk-weighted at 40%, would equal another $0.40 per share. A negative AA study would leave a risk-weighted value + cash of around $1.50 at the end of 2023.

Given this NPV math, risk-weighted downside of $1.50 or risk-weighted upside of $3.40, it seems that a stock price of less than $0.60 has the potential for upside.

Analyst Coverage

The Company is covered by multiple analysts. Jefferies ($10 PT) and HC Wainwright ($5.50 PT) assign some value to the multi-cytokine inhibitor (“MCI”) assets. Cantor ($7 PT) and Stifel ($2.80) do not assign any value to the MCI assets.

Potential Risks and Potential Surprises

1. Financing: The Company burns approximately $8M per quarter, and that may rise as the Company moves into later stage trials for the MCI assets. The Company had $62 million in the bank as of 3/31/23, and has the potential for another $37M in late 2024. If Ono does not exercise the option for Itolizumab, then the Company will need to raise money in late 2024 or early 2025.
2. Valuation: Since the start of the pandemic, classical NPV valuation methodologies have been disconnected from public company market caps. This is especially true in the small cap space. In June 2022, 20% of biotech companies were trading for less than the cash on their balance sheet. This disconnect may persist for a long time. Therefore, the models used to generate the stock price estimates in this report should be seen as directional.
3. MCI Assets: Given that some analysts do not ascribe any value to the Company for the MCI assets, this is obviously seen as a large value risk. Until there is validation of the program, the science will be seen as a risk by some. A successful AA trial, would open up the value of the MCI pipeline.
4. Management: The management team has been together for 5 years. The stock price has cratered and their options are under water. Depending on the duration of their low valuation, there may be some changes, either because someone finds a better option, or the board decides to make some changes to prove to shareholders that they are indeed minding the shop (not always the case in microcap companies).

Conclusion

EQ has one sold program that has over $130M in potential future payments and has $62M in cash as of 3/31/22. The market cap is currently below $20M. The market has written off the Company as worse than worthless. Any positive news here could unlock a lot of upside. Below $0.60, this seems like a strong buy given that would be less than the amount of cash at the end of 2023 if everything failed. The axe would fall and the Company would be food for a private company. Below $1.10, it seems like a buy, given that there should be some value assigned to the Ono deal. In the event of positive AA data at the end of 2023, the stock could run past $3.00, representing a 5X upside from today, assuming valuations have relevance to stock prices. I believe EQ is worth accumulating at prices up to $1.10, and I believe the value inflection event will occur in Q4 2023.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Daron Evans