SQZ: Something New to Squeeze Into Your Portfolio

By John Vandermosten, CFA

NYSE:SQZ

READ THE FULL SQZ RESEARCH REPORT

We are initiating coverage of SQZ Biotechnologies Company SQZ with a current valuation of $30.00 per share. This present value is based on our estimates for a successful development of the Antigen Presenting Cell (APC), Activating Antigen Carrier (AAC) and Tolerizing Antigen Carrier (TAC) platforms in HPV positive solid tumors and other indications including hepatitis B, celiac disease and type 1 diabetes.

By serendipitous circumstance while attempting to shoot compounds into cells using a miniature gun, SQZ CEO, Armon Sharei, and his team at Massachusetts Institute of Technology discovered that the membranes of cells passing through a tight constriction would perforate and allow desired cargo to enter. This realization opened up new frontiers in drug delivery that had not been possible using other popular technologies such as viral vectors, lipid nanoparticles and electroporation. Each of the other leading delivery technologies present shortcomings in terms of particle type, cell viability or delivery efficiency that can potentially be effectively addressed by the Cell Squeeze technology.

SQZ has developed a relatively simple device that may not require cleanroom capacity in its ultimate form. After withdrawing cells from a patient, the cell squeeze process passes them through a constriction in solution with the desired antigen or cargo. As the cells pass through the narrow channel, mechanical deformation disrupts the membrane sufficiently to allow antigens to enter into the cell through diffusion. In the APC platform, the presence of the antigen inside the cell enables its efficient MHC-I presentation which stimulates an antigen specific CD8 T cell response. The TAC platform squeezes antigens of interest with red blood cells which, when phagocytosed, produce antigen-specific tolerance and tolerization against damaging immune responses. The AAC platform is similar in design to the TAC platform in that it squeezes material into red blood cells, but also adds an adjuvant. A next-generation approach, designated enhanced APC (eAPC), is now being developed in the lab and uses mRNA to produce desired antigens. Cell Squeeze is applied to one or more mRNA cargos which are delivered into target cells. The mRNA is then translated into the desired antigen or protein, which can then express multiple signals to improve T cell response.

SQZ expects to enter into multiple confirmatory trials over the next two years. As there are no approved therapies in many SQZ' anticipated indications and settings, we expect expedited treatment by the FDA. SQZ has two clinical-stage programs, one using the APC and the other using the AAC platform. Each of the platforms has a candidate targeting HPV+ solid tumors being investigated in Phase I trials. The third most advanced candidate is the subject of an investigational new drug (IND) application which is in development for clinical work with enhanced APCs (eAPCs) and is expected to be submitted before year end. Other programs that are in preclinical development include TAC efforts in celiac disease and type 1 diabetes (T1D) as well as infection disease targets in hepatitis B virus (HBV) and human immunodeficiency virus (HIV).

Roche has joined SQZ in its development of APCs in cancer indications. In 2015 Roche entered into its first collaboration with SQZ. Another deal was signed in 2017 which included a $5 million upfront and additional reimbursement and milestone funds. The original agreement was expanded in 2018 where Roche was granted option rights for an exclusive license to develop oncology products using the APC platform. The 2018 agreement included a $45 million upfront, follow-on milestones that may exceed $1 billion and royalties on products sold by the large pharma partner. Several of the earliest milestones on the first antigen related to trial launch have already been paid and other milestones are expected in the near term.

SQZ offers a platform technology that is applicable to a broad variety of diseases. The company's most advanced efforts are in oncology, specifically in HPV positive solid tumors. The Cell Squeeze pipeline also offers earlier stage opportunities in KRAS mutant solid tumors, chronic hepatitis B virus, rapid response vaccines, celiac disease, type 1 diabetes and many other cancers and infectious diseases once the platform is validated. In contrast to other autologous cell therapies which can require multiple weeks of manufacturing, Cell Squeeze requires only 24 hours. SQZ is working on a closed-loop, point of care system which will even further reduce the vein-to-vein time for the therapy and the number of required sterility and other release testing panels.

If Cell Squeeze proves to be successful in its initial indications, its ability to work in multiple cell types, deliver a broad selection of cargos and the capacity to be scaled make it a formidable entrant in the therapeutic space. If it can prove the concept in HPV positive cancers, we anticipate a rapid move into KRAS and other cancers to take advantage of this low cost and straightforward approach to cell therapy and immunotherapy. Future work can expand into autoimmune disease, infectious disease and immune tolerance.

Our valuation approach assumes a modest penetration into a number of markets including HPV positive tumors, HVB, celiac disease and T1D assuming a reasonable probability of success guided by historical precedent.

On September 30, 2021, SQZ held $164.3 million in cash on its balance sheet augmented by a $55.6 million contribution in net cash from financing year to date. The company holds sufficient cash to fund operations until the first half of 2023. SQZ will be eligible for additional milestones from Roche upon the start of the combination with checkpoint inhibitors in its clinical trial and a decision by Roche to advance an HPV candidate with the APC platform. SQZ holds no debt. We expect the company to consume approximately $20 million in cash per quarter for the remainder of 2021 with modest growth in 2022 to reflect the funding of additional programs.

Key reasons to own SQZ Biotech shares:

➢ Cell Squeeze offers solutions in multiple conditions

◦ Cancer

◦ Autoimmune Disease

◦ Infectious Disease

➢ Cell Squeeze provides advantages vs conventional delivery methods

◦ Reduced cell toxicity and off-target effects

◦ Minimal disruption of cellular function

◦ Editing efficiencies with preserved function

◦ Minimal effect on viability, baseline gene expression & cell function

◦ Fewer limitations on diversity of cargo

➢ Rapid turnaround time

◦ High volume of throughput and 24 hour treatment manufacturing time

◦ Vein to vein time of one week

◦ Potential for point of care Cell Squeeze instrument

➢ High levels of scalability

◦ Billions of cells can be engineered in a manufacturing run

➢ Enhanced APCs (eAPCs) offer next generation features

◦ Multiple mRNA as cargo

◦ Broader antigen repertoire

◦ Potential for combination-like functionality

➢ Inexpensive, high-yield process

➢ Global agreement with Roche for candidate development

In our initiation we provide a background on cell therapy, review the Cell Squeeze technology, elaborate on SQZ' three platforms and discuss its leading indication in human papillomavirus (HPV)-related solid tumors. The report provides detail on the two active Phase I trials and their design and data generated to date. The arrangement with Roche will also be detailed. Discussion of SQZ' intellectual property, peers and competitors, recent financial and operational results, milestones and management profiles is included. We then outline the risks pertinent to biotech companies and SQZ specifically prior to our discussion of the assumptions behind our valuation.

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