Frequency Therapeutics: FX-322 Top Line Data From Exploratory Study Proves Promising

Summary

• Frequency Therapeutics reported its first-quarter 2020 results displaying continued ample liquidity.
• The company simultaneously updated the market with promising results for FX-322 from its exploratory study.
• FX-322, which aims to tackle sensorineural hearing loss, offers huge upside opportunity as it has the ability to offer a solution to a large market.
• FX-322 is currently in phase 2a of its trial and expects to report top line data in H2 2020.

Frequency Therapeutics (NASDAQ:FREQ), which is a biotechnology company that focuses on harnessing the body's innate biology to repair or reverse damage caused by a broad range of degenerative diseases, most recently reported its first-quarter results and provided top line data from its exploratory study. The top line data confirmed that FX-322 was delivered to the intended target within the cochlea with drug levels that could be directly measured, while it was also predicted to result in therapeutic activity. This can be seen as promising initial results from the company's exploratory study conducted in Germany. This means that one of the key elements in FX-322 development has been met, which is the effective delivery to the target tissue, as outlined in the company's May update presentation. I remain bullish on the prospects of FX-322 and how transformative it can be for both hearing loss and for Frequency Therapeutics as an entity.

The company CEO and co-founder David Lucchino highlighted the importance of this milestone in the Q4 report:

“The cochlea is one of the most privileged and difficult-to-reach sites in the body. Quantifying drug concentrations of a potential restorative medicine in the cochlea represents an important advance in inner-ear drug discovery,”

Mr. Lucchino continued:

“This advance furthers Frequency’s leadership in hearing regeneration and our enthusiasm for the potential of FX-322 to benefit the millions of individuals suffering from sensorineural hearing loss.”

Carl Lebel, chief development officer, also highlighted the significance of these findings:

“When we consider these new findings, together with the hearing signal observed in our earlier Phase 1/2 study, we believe we have developed the first known evidence of a pharmacokinetic/pharmacodynamic effect of a potential hearing restoration therapeutic.”

It is clear to see that FX-322 has continued to deliver so far in its relative tests; Phase 1/2 study and then the new findings, leading to increased optimism from the board. The current Phase 2a study objective is to further establish the hearing signal that was observed in the Phase 1/2 study, where this statistical signal was observed in a biological system that usually once it starts to degenerate, it never improves.

The market

FX-322 aims to tackle sensorineural hearing loss (through activating progenitor cells in the ear which in turn regenerate damaged auditory cells and repair hearing loss). This is the most common form of hearing loss and offers an opportunity to treat a substantial patient population within the United States. There are currently around 40 million patients that experience sensorineural hearing loss in the US, and that number is expected to grow by 20% by 2030

Source: Frequency Therapeutics May Presentation

FX-322 has the ability to treat both patients with and without hearing aids, allowing Frequency Therapeutics to offer FX-322 to the broader hearing loss market.

The development of drugs to treat SNHL has proven very challenging, and if Frequency Therapeutics could provide a breakthrough in this market, the upside would be large, with the company looking to provide the first-in-class regenerative treatment to restore hearing. Frequency Therapeutics currently has the US rights retained for FX-322. There are currently no approved therapeutic options for sensorineural hearing loss.

The hearing aid market is large and continues to grow within the US, with a recent report by Acumen Research and Consulting forecasting that the total market size is expected to reach $13.54 billion by 2026, with FX-322 potentially having the ability to address this market with a new solution.

Astellas collaboration and financial position

As is crucial for a biotechnology company that is still in the clinical stage with no revenues in the near term coming from FX-322, the liquidity and cash position are crucial, and following a recent IPO combined with the Astellas (OTCPK:ALPMF) collaboration, this puts Frequency Therapeutics in a strong financial position. Astellas is regarded as a world leader in regenerative medicine and the second-largest pharmaceutical company in Japan.

Although Frequency Therapeutics has stated that its ambitious developments will require significant capital for development, the current funding is enough to secure the company's immediate near-term opportunities and should see it funded into 2022. The collaboration with Astellas provided $80 million in upfront funding, with other payments leading up to another $545 million in the future if certain milestones have been met. Some of these were outlined in the company's May 2020 presentation:

Development milestone payments to Frequency of $65.0 million and $25.0 million upon the first dosing of a patient in a Phase 2b clinical trial for SNHL in Europe and Asia, respectively.

$100.0 million and $40.0 million upon the first dosing of a patient in a Phase 3 clinical trial for SNHL in Europe and Asia, respectively.

The company's cash position at the end of the first quarter 2020 remained strong at $206 million, which was around $11 million lower than on December 31, 2019 and reinforced its presumption that cash would take them into 2022. However, if the trials are successful ex-US, then the company's cash position could be bolstered if milestones are met under the Astellas agreement, which could provide extra funding to potentially take it further than 2022. I do not believe that equityholders should be concerned about near-term significant dilution, as by mid-2022, Frequency Therapeutics could have the ability to be a completely different outfit following the Phase 2 trials. Costs have slowly been ramping up as the company's Phase 2a trial continues, particularly relating to external development costs and increased personal costs as its research & development organisation grows.

Expansion potential and other regenerative therapies

David Lucchino recently outlined at the Cowen and Company's 40th annual health conference that Frequency Therapeutics, although currently "80 per cent focused" on regenerative hearing, still has other opportunities as well, such as a Multiple Sclerosis discovery programme where Frequency is advancing to an IND filing by the end of 2021 - there are currently no drugs to heal post-attack effects.

Mr Lucchino also highlighted other opportunities for expansion:

We see many additional opportunities across multiple degenerative diseases and we also have a smart and savvy IP portfolio that we are folding together as we think about the overall opportunity in the broader market"

He went on to talk about long-term value potential:

We see opportunity in multiple ways to create shareholder value as we build this company out for long term success and value proposition.

It is clear that the company is primarily focused on FX-322, and that if that falls short, it can have material effect on shareholder value. However, if it is successful, the board has in place a strong expansion plan of potential new regenerative treatments that can be developed over time, with FX-322 potentially proving to be the start of a portfolio of regenerative treatments.

COVID-19 impact

As a biotech firm, the impact of the coronavirus is far less damning to Frequency Therapeutics than to other industries and sectors across the market. Frequency did highlight the effect the virus has had on its operations in the Q1 2020 results, and that the majority of its employees are working from home. However, in Massachusetts, biotechnology firms are exempted from lockdown orders, and so, all key experiments have been transferred to the company's Woburn, MA, offices, which means that progress can still continue to be made across the business. It’s clear that the board has acted well to mitigate the effects of the virus.

In terms of the clinical study impact, principal investigators have reported that patients currently enrolled in the study remain enrolled, though a number of the study sites have halted enrolment, and as of May 14, continue to do so. I don't believe this will have material effects on Frequency Therapeutics' business apart from costs potentially associated with delays to the time taken to conclude Phase 2a trials.

Conclusion

Frequency Therapeutics continues to remain a high-risk, high-reward play, with the results expected in H2 2020 after being given fast track by the FDA back in October 2019 (with a potential delay to that in regard to the coronavirus), share price movement will primarily be based on sentiment up until those results are released. However, the recent pullback from the peak of $27 might create a buying opportunity at these levels. Currently, revenue in relation to Astellas collaboration is limiting losses to a certain extent and allowing the company to maintain strong liquidity, while the collaboration has the ability to continue bolster the balance sheet into the future as well.

The viability of Frequency Therapeutics as an investment still remains event-driven on the results of its FX-322 trial. This is the company's leading drug, and although it is developing a Multiple Sclerosis treatment, it is still in the discovery phase. A lot is riding on whether FX-322 is successful. If it is so, the upside is very large from current levels. I remain bullish on a risk versus reward basis. If FX-322 delivers, we could be looking at a multi-billion dollar company, as it taps into a multi-billion dollar market with a revolutionary treatment.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.