Description

Pyxis Oncology (PYXS)                 

Executive Summary

Trading substantially below cash with a possibly important inflection points ahead this year, Pyxis Oncology (PYXS) would seem to be a baby thrown out with the bathwater during this overdue correction in the biotechnology sector.  The key differentiator here vs. many other small biotechs trading below cash is not just the assets but a very experienced management team (led by a former Pfizer exec) that I believe will deploy its cash balance intelligently to create value.  Its current programs are very early stage but it does not seem reasonable to price this company as if its R&D will only destroy value (as is implied by its negative enterprise value).  Were it simply to trade at its cash balance, the stock would more than double and it could be worth multiples with any excitement about its pipeline (full of novel but not unique targets).  The company went public in the fall of last year at $16.00 versus an approximate $3 price today despite broadening its pipeline.  The low valuation could perhaps be in part because it is a “pre-clinical company” but there could be two IND filings this year and possible two next year which could alter this perception. Obviously, earlier stage projects are more likely to fail and the ultimate capital requirements increase dramatically the more advanced they become. Thus this investment is in part predicated on the ability of the strong team to simultaneously move the current assets forward while prudently adding new assets but also effectively communicating and getting valuation credit for its assets such that it can continue without devastating dilution.  Finally, the company has an average daily trading value of around $1 million but has seen more illiquid days as well lately. 

Company History and Management:

Pyxis Oncology is a biotech company with two immune-oncology (IO) programs and three antibody drug conjugate (ADC) programs, all pre-clinical. It has three different drug discovery platforms as well.  Founded in 2018 with meaningful operations beginning in mid-2019, PYXS is a young company but managed to raise over $170 million across two private rounds before going public in a $150+ million IPO in October 2021.  Today it has an approximately $100 million market cap and $231 million of cash with no debt.  The company projects its cash balance to fund its operations through the third quarter of 2024.  Along with its excellent CEO, its team has been involved with 88 drug launches (43 in oncology). 

PYXS was originally founded on a drug discovery platform licensed out of the University of Chicago but attained critical mass when in early 2020 Pfizer decided to spin-its non-core ADC platform into the company (called “FACT”).  Instrumental to this deal (announced in December 2020) was CEO Lara Sullivan, herself a former Pfizer executive who also coordinated the spinout of SpringWorks in September 2017 (more recently panned by biotech specialist and, at least titularly, snack food aficionado sabordesoledad in May).  Sullivan had joined Pyxis in December 2019 and gotten to work in broadening its programs.  Concurrently, she licensed another ADC asset from a South Korean pharma called LegoChem.  The $150 million Series B concluded in March 2021.  The company also established a 50/50 joint venture in March 2021 with Alloy Therapeutics called Voxall Therapeutics for access to its antibody platform.  In the first half of 2021 the company spent $36 million on R&D and as of September of last year had 39 employees.  With 2 ADC programs from Pfizer and a third form LegoChem, PYXS filed its S-1 in September 2021.  On the basis of those 3 preclinical assets and its various discovery platforms, it went public in October.  Since June 30, 2021 the company has spent another $48 million on R&D and as of May of this year had 69 employees. Post-IPO, in March 2022 the company licensed an IO compound from Chinese company Biosin.  The company also revealed its first internally generated IO compound (based on the U Chicago platform).   

There have been delays on 2 of the programs present at the IPO with a possibly negative update on the third (although it also has two more IO programs with an upfront cash outlay of only $10 million since then as well).  From the IPO until today, one of the three ADCs went from an IND submission timeline of “Mid-2022” to “End of 2022” while a second went from also having an IND submission date of “Mid-2022” to “Update by Mid-2022” depending on the outcome of some additional tox work.  The third initially had an IND submission date of “2023” and now it has been narrowed down to “2H23.”  In addition the two IO compounds were added to the pipeline: the one licensed-in currently has an IND filing target of “2H22” while the internal one in “2H23”  Across the same period the stock declined over 80% vs. a 20% and 33% decline in the IBB and XBI indexes, respectively.  For the company to have a negative cash balance, I would expect there to be a funding gap to milestones (such as IND) but again the company is funded through 3Q24. Obviously this will not carry the company through product approvals but success in something that it is working on should create opportunities for an improved valuation.   

Here is an article from January 2022 with more color on the CEO and PYXS: https://www.qgdigitalpublishing.com/publication/?i=731455&article_id=4176117&view=articleBrowser&ver=html5

Pipeline Overview:

While at this valuation the specifics of the programs in the pipeline are less important given how low the bar is, I will briefly lay them out with the qualifier that there is substantially more information/data available on the company’s website. 

The anti-Siglec-15 IO program called PYX-106 is an interesting target also being pursued by NextCure (see Mack885’s excellent write up of NextCure from last June).    PYXS believes its compound is superior due to its longer half-life (so it can be dosed less) and its 6-fold higher affinity. It is still not known if a patient must be a high expressor or not so the initial human trial will be a basket that does not require high expression.  This came from Biosin and again the IND in solid tumors is expected before year-end. 

PYX-201 is an ADC targeting EDB with Pfizer’s auristatin toxin. It is notable because EDB has been used for radiotherapy (so it works for targeting) and there is evidence that it is largely expressed in tumors and not healthy tissue (which is the point of the ADC concept: deliver otherwise hugely toxic compounds to tumors while sparing the host who would not be able to tolerate them otherwise).  A wrinkle here is that the auristatin is delivered “near” the tumor not “into” the tumor which may or may not be a problem.   There is generally proof-of-concept for this approach but 201 is the first ADC dropping poison off nearby (i.e. not inside).  This came from Pfizer and the IND in solid tumors is expected before year-end. 

PYX-203 targets CD123 for hematological malignancies (liquid tumors).  This target is validated by the approved Elzonris from Stemline/ Menarini.  There are a handful of other early stage competitive programs across modalities including Immunogen’s PVEK that is also an ADC in Phase 2.  This also came from Pfizer and the IND is projected to be 2H23.    

PYX-102 is the second immuno oncology program.  This compound targets KLRG1.  PYXS believe that this target, which is expressed on NK and T cells, can turn cold tumors hot and it works with a similar conceptual mechanism to the widely successful PD-1 checkpoint inhibitors.   This was internally generated with an IND project for 2H23.

Finally, PYX-202 is an ADC that is awaiting additional animal tox data to determine if the program will move forward.  It targets DLK1 to deliver toxin MMAE to tumors.  This came from Legochem with an update on the program shortly (Mid-2022).  ADC Therapeutics also has a preclinical DLK1 drug called ADCT-701.

Rough Valuation:

Trading below cash is a great place to start because minor improvements in the perception of a company’s pipeline / option value can drive significant valuation improvements so long as there is sufficient runway.  While valuing an early stage biotech is not hugely helpful, I have attempted something to indicate on an order of magnitude basis how one might think about it.  Beginning with the company’s rough peak sales estimate for each program, I applied a 5x sales multiple as an approximate pharma multiple to determine a gross unrisked future value of the program.  I then reduced the value by the royalties that will be owed to the original licensors of the technology.  I also subtracted the milestone payments that will be due, assuming most of it is back-end loaded as in common practice.  From that net unrisked program value, I assumed that it will take 10 years from IND filing to get approved and another 5 years to reach peak sales so I discount the value back for a whopping 15 years (I know that sounds ridiculous but this is an academic exercise for illustrative purposes).  I used an 8% discount rate.  To account for the reality that all of the programs are early stage, I first applied average phase 1 to approval success rates of immune-oncology and antibody drug conjugate programs of 12.4% and 10.5%, respectively.  (Source: Bio’s “Clinical Development Success Rates and Contributing Factors 2011–2020” available online).  Doing all of this leads to a pipeline value of ~$825 million.  As these are not yet phase 1 but they are close, I further risk adjust by 50%.  While there are 35.4m primary shares + unvested RSUs outstanding, I assume to do all of this the company must raise another $1 billion at an average price of $10 which increases the share count by 100m (again note that there will be $1.1 billion of milestone payments due but I am assuming they are largely sales based and can be paid out of revenue).  For the moment I have also excluded the 6.2m of options that strike at $10 per share.  In this scenario, I also give no credit for the cash on the balance sheet since it will be spent and I also give zero credit for the platform.  Perhaps humorously given the margin for error and the massive share count, this analysis suggests that the company is valued correctly (remember I have assumed 132m shares not 32m and assume the ~$7.50 of cash is spent).  With two compounds slated to begin human trials with 2H22 IND filings, the value of the pipeline with 2 phase 1 and 2 pre-clinical would be ~$5.25 per share.  Alternatively, if you adjusted the May 13, 22 cash balance for 2.5 more quarters of burn (~25m per Q) but included the remaining cash and used the current share count, the risk adjusted value per share after the two IND filings would be $26.00.  Obviously changing any of these assumptions could have a huge impact.             

Investment Positives:

Great CEO and team.  This is not a nano-cap management team.  Compared to other companies, PYXS gives me higher confidence that it can “figure it out.”  The team has proven it can raise capital and has deal making savvy.  I also like that the CEO owns ~8% of the company (assuming each option is worth 1 share which it isn’t) although it is through comp and not hard dollars invested.   

Multiple modalities within oncology (so far IO and ADC) and the team is open to bringing in anything.  The value of ADCs is highlighted by the MRK/SGEN potential transaction.

Trading massively below cash so not a lot has to go right.

Opportunity to invest at lower valuation then large biotech investors and at a discount to invested capital. 

Cash well into 2024 with multiple potential catalysts before then.

Sentiment on the sector is already terrible.

Chance for accelerated approval after phase 2 on some programs would decrease time, cost and risk. 

Investment Concerns: 

All of the assets are early stage and there will not be any revenue for very long time.  Some of the assets may qualify for accelerated approval after a phase 2 but phase 3s could also be required.  Put this together and there will be large capital requirements ahead.  There is a risk that this company gets stuck with a low valuation but enormous cash needs and that would not be a receipt for investment success.    

Since it is already trading below cash, there is no floor since the business plan requires a cash burn (call me Captain Obvious).

Non-R&D burn is on the higher side (collectively the four C-level officers make over $2.5 million in base + max bonus in cash on an annual basis) but that is the flipside of a strong team.

Things could take longer than expected.  Timelines already pushed out from Oct 21 IPO for INDs from Mid-2022 to 1H22 for 201 and TBD/Program Update Mid-2022 for 202 which could halt the program. 

Targets have some competition and some are not highly valued by the market either.  In particular Siglec-15 is the lead target for Next Cure which also trades below cash despite being in Phase 2.    

The team is great but you can’t fight mother nature.  Everything could fail – the IO compounds are named 102 and 106 so it is possible that whatever was 101, 103, 104 and 105 already failed. 

Most investors are underwater: stock was never higher than its first day of trading ($19 per share) and is below the two private rounds ($6.14 for the A and $10.44 for the B).  Even with progress, there could be a decent amount of selling pressure for a generally illiquid stock. Also if any of the biotech funds involved blow up the stock could go lower still. 

Somewhere down the road, there are large (almost $1.2 billion) and milestone payments due (presumably cash) to the licensors.  While these are probably largely related to achieving certain sales levels and would be a good problem to have, we don’t know how much is earlier in development.  While not a critical matter today, it is thus possible that there could be a cash crunch down the road if the valuation does not improve no matter what the company achieves. 

The company could raise money at the wrong time and/or in a dumb way or the company could do a value destroying deal.  I can only hope that my assessment of the management team helps to mitigate this risk.  The current cash is projected to last until 3Q24 but that means the company could be back in the market in fall 23 to dilute us. 

Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Advancing multiple compounds into Phase 1 trials. Improvement in sentiment. Positive business development or additional compounds internally generated.