Zacks Small Cap Research – AZTR: Get Some Skin in the Game – Technologist

By John Vandermosten, CFA

NYSE:AZTR

READ THE FULL AZTR RESEARCH REPORT

We are initiating coverage of Azitra, Inc. (NYSE:AZTR) with a target price of $4.00 per share. This value is based on our forecasts for the successful development and commercialization of ATR-12 for Netherton syndrome (NS). NS is a genetic rare disease that affects the skin, hair and immune system. It results from the production of a dysfunctional protein associated with mutations in the SPINK5 gene which encodes the serine protease inhibitor lympho-epithelial Kazal-type-related inhibitor (LEKTI). If LEKTI is absent, proteases run amok which stimulates inflammation and degrades skin and hair cells leading to the disease symptoms. Patients exhibit scaly or reddened skin, have thin or fragile hair that breaks easily and experience frequent skin infections. It is a rare disease affecting fewer than 5,000 individuals in the United States and 20,000 around the globe.

Azitra is a precision dermatology company developing a bacterial cell library guided by artificial intelligence and machine learning discovery. Its candidates are derived from a microbial genetic engineering platform that can produce molecules and peptides for precision dermatology. For its lead indication in NS, Azitra has developed ATR-12, a LEKTI-secreting Staphylococcus epidermidis (SE) strain of bacteria that can inhibit the overactive proteases through LEKTI fragment secretion.

The company’s lead candidate, ATR-12, is a topical ointment containing a lyophilized version of SE which produces an active fragment of the full-length LEKTI protein. It has received a pediatric rare disease designation from the FDA and is the subject of a Phase Ib clinical study to evaluate safety and clinical activity. Initial safety results from the study are expected to be available in late 2024 with full results expected in 2025. Assuming a reasonable timeline for development of a rare disease candidate, we anticipate that Azitra will be able to submit a biologics license application (BLA) in 2028 followed by regulatory approval the following year. First sales are expected to begin following approval and expand globally through the efforts of an as yet to be determined partner.

Azitra has conducted preclinical work on ATR-12 that has demonstrated the candidate’s ability to colonize human epidermis and confirmed that colonization can be controlled by restricting D-alanine. Animal studies show preclinical versions of ATR-12 inhibiting kallikrein-5 (KLK5) which is normally inhibited by LEKTI in NS and ex vivo animal studies showed that ATR-12 led to secretion of recombinant LEKTI. Ex vivo human studies show that ATR-12 administration can inhibit KLK5 at levels that are expressed in NS patients. This work along with other preclinical efforts supported the investigational new drug application (IND) and the start of the Phase Ib trial.

Azitra’s platform includes a microbial library of ~1,500 unique bacterial strains with unique therapeutic characteristics. Partnerships have provided access to an artificial intelligence and machine learning technology to analyze, predict and aid in the screening of drug like molecules. This platform also uses a licensed genetic engineering technology which can help modify strains to be therapeutic. The company has identified over 60 distinct bacterial species that may be engineered in this way.

Secondary platform candidates include ATR-04 and ATR-01. ATR-04 is a genetically modified strain of SE for treating the papulopustular rash experienced by cancer patients administered epidermal growth factor receptor inhibitor (EGFRi) targeted therapy. ATR-01 is an engineered S. epidermidis strain that expresses human recombinant filaggrin protein for treating ichthyosis vulgaris, a chronic skin disease. Outside of its pipeline, the company has signed a Joint Development Agreement with Bayer Consumer Care AG that is seeking consumer health candidates on behalf of Bayer. Azitra has been testing strains in its library that offer desired properties and has identified two strains to move forward into further development. Bayer has invested in Azitra’s stock and may also pay future milestones and royalties if candidates advance for these consumer health products.

The market for NS is small with less than 5,000 patients in the United States and approximately 20,000 around the world. However, rare diseases may benefit from expedited regulatory pathways that allow for smaller trials, financial incentives and access to registries that identify patients able to enroll in the trial. Biologics for rare diseases are able to command high prices in the market and require limited marketing budgets given the small population. Approved pediatric disease products qualify for the FDA’s rare pediatric disease priority review voucher program, which may grant its holder a faster FDA review process and that can be sold for a material sum.

Azitra participated in an initial public offering in June 2023 raising $7.5 million and held a follow-on public offering in February 2024 securing $5.0 million. Another capital raise completed last week brought in another $10 million. We anticipate that further capital raises will be needed next year to support the development of ATR-12. Azitra may also qualify for milestone payments from Bayer which can further support research and development activities. It has completed the majority of development and characterization work related to this arrangement and Bayer has an option to acquire an exclusive royalty bearing license. This option could be exercised in the near future and provide upfront cash sufficient to support further development of the pipeline.

The Phase Ib trial for ATR-12 is about to start with the first sites activated. Pre-IND work is also underway to develop ATR-04 and an FDA meeting recently confirmed the development strategy and requirements for IND submission. Success in both of these endeavors will lead to a Phase II trial for ATR-12 and a Phase I trial for ATR-04.

Key reasons to own Azitra shares:

➢ Established company in the development of live biotherapeutic candidates

➢ Pipeline of bacterial strains able to deliver missing proteins to the skin

o Gene engineering platform can enhance performance

o Artificial intelligence & machine learning tools to identify candidates

➢ Pipeline with multiple dermatology assets

o ATR-12: Phase I product for Netherton syndrome (NS)

▪ May qualify for pediatric priority review voucher

o ATR-04: preclinical product for EGFR inhibitor associated rash

▪ Opportunity for partnership with EGFRi sponsors

o ATR-01: preclinical product for ichthyosis vulgaris

➢ Joint Development Agreement with Bayer

o Potential for milestones & royalties

➢ Global rights to intellectual property

In our initiation, we provide background on precision dermatology, reviewing the microbiome, live biotherapeutic products and commensal bacteria. In subsequent sections, our focus narrows with a description and discussion of the technology and utility behind Azitra’s bacterial library. Next, is a review of the company’s lead candidate, ATR-12 which is a genetically modified strain of Staphylococcus epidermidis intended to treat NS. We continue with a description of the other pipeline candidates, ATR-04 and ATR-01 as well as a review of the Bayer collaboration.

The initiation report summarizes epidemiological details of NS including incidence and prevalence as well as causes, symptoms, diagnosis and treatment of the rare disease including both approved and in-development products. It further highlights the anticipated trial design for the Phase Ib study and hypothesizes the design of future trials assuming success at each stage.

Peers and competitors are reviewed in the dermatology space along with a focus on NS and EGFRi rash candidate sponsors. We also provide a historical review of Azitra and summarize last year’s initial public offering (IPO), recent capital raises and the latest financial results. Key senior management biographies are supplied and risks for life sciences companies in general and for Azitra specifically are discussed. We wind down our initiation report with valuation work and a discussion of the assumptions supporting our model. The target price assumes revenues and royalties for the United States and in other developed countries around the globe for ATR-12. The model also values a pediatric priority review voucher assuming ATR-12 is approved for pediatric use. We initiate on Azitra, Inc. with a valuation of $4.00 per share.

Pipeline

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