Kezar Life Sciences: Key Catalysts Ahead
Summary
- Kezar Life Sciences, Inc. is down some 70% since its lone clinical asset, autoimmune fighter KZR-616, underwhelmed the Street with a Phase 1b readout in May 2019.
- As such, it was compelled to raise cash at $2.60 a share in late January 2020 after it IPO’d at $15 in June 2018, doubling the number of shares outstanding.
- Three Phase 2 trials will decide the company’s fate with the first interim readout due 4Q20.
- With a first-in-class molecule for underserved indications and significant insider buying, this busted IPO merited further investigation.
- An investment analysis is provided in the paragraphs below.
- I do much more than just articles at The Busted IPO Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
A civilization is not destroyed by wicked people; it is not necessary that people be wicked but only that they be spineless." - James Baldwin
Today, we take an in-depth look at a 'Busted IPO' whose stock has behaved better of late. This concern has several important trial milestones on the horizon. A full analysis follows in the paragraphs below.
Company Overview
Kezar Life Sciences, Inc. (NASDAQ:KZR) is a South San Francisco-based clinical-stage biotechnology concern focused on developing therapeutics to treat autoimmune diseases. The company has one asset in the clinic, KZR-616, which is being investigated in three Phase 2 trials for five autoimmune indications. Kezar was founded in 2015 and went public in June 2018, raising net proceeds of $77.6 million at $15 per share. After executing a secondary in early February at $2.60 a share, the shares have roughly doubled and sport an approximate $200 million market cap currently.
KZR-616
The company's only clinical asset is KZR-616, a small molecule selective immunoproteasome inhibitor. Currently approved proteasome inhibitor therapies have demonstrated activity in the treatment of autoimmune diseases but are non-selective, which results in immunosuppression and consequent systemic toxicities and peripheral neuropathy. So far, in Phase 1 studies, KZR-616 has largely avoided those adverse effects, posting low infection rates.
Source: Company Presentation
Proteasomes regulate intracellular protein degradation and play a vital role in cell division, cell differentiation, and cytokine production. There are two types of proteasomes: constitutive, which are predominant in tissue cells, and immunoproteasome, which are found in immune system cells. They perform similar functions but utilize different active sites. There are three approved proteasome inhibitors for the treatment of multiple myeloma: Takeda's (TAK) Velcade, Amgen's (AMGN) Kyprolis, and generic Ninlaro. These are all dual inhibitors of both the immunoproteasome and the constitutive proteasome, which make them effective against multiple myeloma but lousy against autoimmune diseases owing to their side effect profiles. In fact, Velcade has demonstrated clinical activity in several autoimmune diseases but is not considered a candidate for chronic treatment of these conditions.
Owing to the shortcomings of dual inhibitors and other therapies, autoimmune diseases represent a significant unmet need. Approximately 50 million Americans suffer from more than 100 diagnosed autoimmune diseases, where the body's immune system attacks healthy body tissue. Many autoimmune indications have no approved drugs except for corticosteroids and other immunosuppressive regimens.
Source: Company Presentation
Clinical Trials
Kezar is currently directing its clinical efforts toward severe orphan autoimmune indications, for which there are limited treatment options. Specifically, three Phase 2 trials for KZR-616 for five autoimmune indications are currently ongoing.
Source: Company Presentation
MISSION - In the Phase 2 portion of a Phase 1b/2 trial (MISSION), KZR-616 is being evaluated in 64 patients with active proliferative lupus nephritis, inflammation of the kidney caused by systemic lupus erythematosus (SLE). The patients are being split into three dosage arms and one placebo arm and will receive once-weekly subcutaneous KZR-616 for 24 weeks. Primary endpoints are safety and tolerability, while secondary endpoints include efficacy measures such as complete and partial renal response rates, amongst others. Interim data are expected 1H21 with final data expected 2H21. If approved, it would be the first such treatment for lupus nephritis, from which ~150,000 Americans suffer.
Source: Company Presentation
In the Phase 1b portion of MISSION, which evaluated patients with SLE without nephritis, KZR-616 demonstrated improvement as measured by seven parameters, dose proportional pharmacokinetics, and broad anti-inflammatory gene expression response. Of the 16 patients completing at least 13 weeks of treatment, 94% had a numerical improvement on at least four measured parameters of disease activity and 75% had at least a two-point decrease (0-105 scale) in Systemic Lupus Erythematosus Disease Activity Index 2000.
The market was underwhelmed with the efficacy results, and it did not help when two healthy subjects at the 60mg dose level were hospitalized, while the adverse event profile was characterized as being similar to Velcade. Discontinuation rates of 38% in the first two cohorts and 20% in the second two cohorts were in line or worse than other lupus drugs, but certainly no better. The stock dropped 41% on the preliminary data released May 28, 2019, and continued on its downward path until its recent rally. Kezar disagreed with the market's judgement, bleeding out additional results in June and November 2019, deeming them promising and citing that no prolonged hematologic adverse events or peripheral neuropathy - typically seen in dual proteasome inhibitors - were observed. Overall, the data supported advancement into other Phase 2 indications.
Source: Company Presentation
PRESIDIO - One of those trials is PRESIDIO, a Phase 2 study assessing KZR-616 in the treatment of dermatomyositis and polymyositis. Dermatomyositis is an inflammatory disease marked by muscle weakness and a distinctive skin rash, whereas polymyositis is characterized by muscle weakness and pain. Although their cause is technically unknown, both diseases are believed to be autoimmune in nature. Over a 32-week trial, patients will receive either 45mg KZR-616 or placebo for 16 weeks followed by a crossover to the other treatment arm. The primary endpoint is total improvement score in muscle function. Results are expected 2H21. KZR-616 did demonstrate improved muscle function in preclinical mice. If approved, an addressable patient population of ~70,000 would open up to Kezar.
MARINA - The other two indications for which KZR-616 is undergoing evaluation in a Phase 2 trial (MARINA) are autoimmune hemolytic anemia (AIHA) and immune thrombocytopenic purpura (ITP), disorders characterized by the destruction of red blood cells and platelets, respectively. Forty patients will receive either 30mg or 45mg of KZR-616 subcutaneously once weekly for 13 weeks, with 12 weeks of follow-up. Primary endpoint will be hematologic improvement from baseline. Interim data are due 4Q20, with final data anticipated 2H21. If approved for these indications, as many as 140,000 American lives could be improved.
Source: Company Presentation
Balance Sheet & Analyst Commentary
Kezar exited 2019 with $78 million in cash and marketable securities and no debt. It executed a secondary offering that priced on January 31, 2020, in which it raised net proceeds of $56.8 million at $2.60 a share - minus expenses. This funding essentially doubled the number of shares outstanding and included 2.9 million pre-funded warrants that are essentially equity in disguise. Pre-funded warrants, with a strike price equal to par value, are sometimes employed so institutional investors can work around ownership limits mandated by their charters, or so investors don't have to file Form 13 paperwork. Either way, the company now has a cash runway through 2021.
The company has received sparse coverage in 2020. H.C. Wainwright ($9 price target), Wells Fargo ($18 price target), William Blair, and Cowen & Co. have reissued Buy ratings on the stock over the past two months, however.
Insiders were equally bullish based on their activity on the company's secondary. Five top executives and a board member purchased nearly 219,000 shares at $2.60. Additionally, Morningstar Venture Investments, purchased 3.6 million shares, upping its total position to 6.1 million.
Verdict
Autoimmune diseases are a potentially very lucrative market for Kezar. Early clinical findings are mixed, but Phase 2 studies will provide clarity. With a market cap of ~$200 million -and ~$130 million in cash and marketable securities, the market isn't assigning much value to KZR-616. In fact, when the deal was priced at $2.60, it was trading at more than a ~$20 million discount to cash, so it was not surprising to see the recent snap back rally. Either way, KZR-616 is the only selective immunoproteasome inhibitor in the clinic, and if it excels in any of its Phase 2 trials, there will be a significant spike in market cap.
Between Street analysts and insiders, there is some optimism for this busted IPO. But with no catalysts until 4Q20, there will be ample opportunities to invest. For those with large risk tolerance, accumulating a small 'watch item' on this name within a well-diversified biotech portfolio seems prudent, given what appears to be a favorable but large risk/reward profile. Given the company really has only one viable clinical asset at the moment, it cannot be considered for a large holding.
Darkness dwells within even the best of us. In the worst of us, darkness not only dwells but reins."― Dean Koontz
Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KZR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (5)
"The stock dropped 41% on the preliminary data released May 28, 2020, and has continued its downward spiral since, now down 78% overall."
I assume you are talking about May 28, 2019
