Evelo Biosciences, Inc. is a clinical-stage biotechnology company that has been at the forefront of exploring a new class of oral medicines designed to act on immune cells in the small intestine and produce systemic therapeutic effects. The company's journey has been marked by both successes and challenges as it navigates the complex landscape of drug development and regulatory approval.
Business Overview and History
Evelo Biosciences was incorporated and commenced operations in 2014 with the goal of harnessing the power of the small intestinal axis (SINTAX) to develop innovative therapies for a wide range of inflammatory diseases. The company's approach is based on the premise that immune cells and other cells in the small intestine act as sentinels, constantly sensing the contents of the gut and relaying messages to the rest of the body that can modulate systemic immunity.
Since its inception, Evelo has devoted substantially all of its resources to developing preclinical and clinical product candidates, building its intellectual property portfolio, process development and manufacturing function, business planning, raising capital, and providing general and administrative support for these operations. The company has historically financed its operations primarily through the issuance of common stock, previous sales of convertible preferred stock to equity investors, and borrowings under loan and security agreements. From its inception through September 30, 2023, Evelo has received gross proceeds of $545.6 million from such transactions, including a net $45 million borrowed under debt facilities.
In 2017, Evelo amended an existing licensing agreement with the Mayo Clinic, under which the Mayo Clinic granted the company exclusive, worldwide, sublicensable licenses to certain intellectual property and microbial strains. This agreement required Evelo to pay certain upfront, milestone, and royalty payments.
To attract and retain talent, in 2018, Evelo's board of directors adopted and its stockholders approved the 2018 Incentive Award Plan, under which the company may grant cash and equity-based incentive awards to its employees, officers, directors, consultants, and advisors. The company has also established an Employee Stock Purchase Plan to provide eligible employees with the opportunity to purchase the company's common stock.
Over the years, Evelo has made significant strides in advancing its pipeline of product candidates. The company's lead investigational medicine, EDP1815, is a pharmaceutical preparation containing a mixture of whole cells and extracellular vesicles (EVs) from a specific, single strain of bacteria. EDP1815 has been studied in more than 800 patients to date and has displayed a safety and tolerability profile comparable to placebo.
In September 2021, Evelo announced positive data from a Phase 2 trial of EDP1815 in psoriasis, where the trial met its primary endpoint, with 25% to 32% of patients across the three EDP1815 treated cohorts achieving a PASI-50 or greater reduction at week 16 compared to 12% on placebo. The company also initiated a Phase 2 trial of EDP1815 for atopic dermatitis treatment in February 2022, although this trial ultimately did not meet its primary endpoint.
More recently, in October 2023, Evelo announced that the top-line results from the Part B Phase 2 clinical study with EDP2939, its first EV product candidate, in moderate psoriasis did not achieve the primary endpoint. Given these results, the company decided to cease development of EDP2939 and has initiated a process to explore strategic alternatives.
Financials and Liquidity
As of September 30, 2023, Evelo reported cash and cash equivalents of $17.3 million and an accumulated deficit of $588.0 million. The company's net loss for the nine months ended September 30, 2023 was $58.8 million, compared to a net loss of $91.0 million for the same period in 2022.
Evelo's financial position has been a source of concern, as the company has historically relied on equity and debt financing to fund its operations. In December 2022, the company entered into a loan agreement with Horizon Technology Finance Corporation, borrowing $45.0 million. However, with its current cash resources, Evelo will be unable to meet its future debt repayment obligations to Horizon unless it is able to raise additional capital or restructure its existing debt, which may be on unfavorable terms, if available at all.
The company has also undertaken several cost-saving measures, including a reduction in workforce and the termination of its sublease for its principal office and research and development space, in order to preserve cash and prioritize investment in its core clinical programs. Evelo's ability to continue as a going concern remains uncertain, and the outcome of the strategic review process will be crucial in determining the company's future direction.
For the most recent fiscal year (2022), Evelo reported no revenue, a net loss of $114,527,000, operating cash flow of -$101,235,000, and free cash flow of -$101,857,000. In the most recent quarter (Q3 2023), the company reported no revenue, a net loss of $12,364,000, operating cash flow of -$10,408,000, and free cash flow of -$10,455,000.
Evelo's liquidity position remains challenging, with a current ratio and quick ratio of 0.48 as of September 30, 2023. The company's debt-to-equity ratio is not applicable due to negative equity. The outstanding loan balance with Horizon Technology Finance Corporation stood at $45 million as of September 30, 2023, although the company has subsequently amended the loan agreement, including paying down $5 million of the principal amount and Horizon converting an additional $5 million into equity.
Research and development expenses decreased from $62.5 million in the first nine months of 2022 to $37.4 million in the same period of 2023, primarily due to lower spending on inflammation programs and personnel costs. General and administrative expenses also decreased from $24.9 million to $15.8 million over the same comparative periods.
Regulatory Challenges and Setbacks
Evelo's journey has not been without its regulatory challenges and setbacks. The company's product candidates, which are designed to act on the small intestinal axis, represent a novel approach to therapeutic intervention, and the regulatory pathway for their approval has yet to be fully established.
The failure of the EDP1815 Phase 2 trial in atopic dermatitis and the recent disappointing results for EDP2939 in the Part B Phase 2 trial for moderate psoriasis have highlighted the inherent risks and uncertainties associated with drug development. These setbacks have forced Evelo to halt further development of these product candidates and explore strategic alternatives, which could include partnerships, licensing agreements, or even the potential sale of the company.
Evelo has faced other operational challenges as well. In 2021, the company identified a material weakness relating to an insufficient process for confirming final approvals for the release of reviewed and approved documentation prior to filing such documentation with the SEC. In 2022, the company identified instances of non-compliance with provisions of its loan agreement, which resulted in events of default that were not identified or prevented on a timely basis. These material weaknesses did not result in any financial statement modifications, and the company has been working to remediate them.
In early 2023, Evelo implemented cost reduction initiatives, including a reduction in workforce of 48 employees, or approximately 45% of its headcount as of January 31, 2023, in order to preserve cash and prioritize investment in its core clinical programs. The company subsequently announced the discontinuation of its EDP1815 program in atopic dermatitis and its EDP2939 program in moderate psoriasis, as the results from the respective clinical trials did not meet the primary endpoints. As a result, Evelo no longer has any ongoing clinical trials or development programs.
Outlook and Conclusion
Evelo Biosciences' story is one of both promise and challenge. The company's novel approach to harnessing the power of the small intestinal axis has the potential to address a wide range of inflammatory diseases, but the road to regulatory approval and commercialization has proven to be arduous.
With the recent setbacks and the company's uncertain financial position, Evelo's future remains unclear. The outcome of the strategic review process will be crucial in determining the company's path forward, whether it is through a strategic partnership, a sale, or a shift in focus to its remaining pipeline assets.
Investors in Evelo Biosciences will need to closely monitor the company's progress and the results of the strategic review process, as the decisions made in the coming months could have a significant impact on the long-term viability of the company and the potential value of its technology. The company's ability to secure additional funding or restructure its existing debt will be critical in addressing its ongoing financial challenges and determining its ability to continue operations.
As Evelo Biosciences navigates this pivotal period, the biotechnology industry and investors alike will be watching closely to see how the company's innovative approach to inflammatory disease treatment may yet find a path forward in the competitive landscape of drug development.