Axcella Technologies, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Axcella is a biotechnology company focused on developing novel therapeutics for complex diseases, primarily using its proprietary endogenous metabolic modulator (EMM) compositions to target dysfunctional metabolism.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Axcella’s moat is currently weak, rated 2/5, primarily due to its reliance on a novel and unproven technology platform. While the potential of their EMM compositions is significant, the company is in a pre-commercial stage and faces substantial hurdles in terms of clinical development, regulatory approval, and competitive threats. Here’s a detailed breakdown of the moat rating:

Proprietary Technology (2/5): The company’s use of EMM compositions is proprietary, giving them a potential advantage in addressing metabolic dysfunctions. However, there is no clear indication that the EMMs are superior to competing therapies. Axcella is still in clinical trial phase and thus does not yet have market validation for their technology, creating a high risk environment. In this type of environment, it is tough to see how that can represent a moat, until they receive all the approvals and reach commercialization. Furthermore, competitors with similar drugs and/or treatments can steal market share from the company. The lack of patents around their EMM platform also makes it less durable of a moat.
Switching Costs (1/5): Due to the clinical nature of Axcella’s therapeutic development, there are practically no switching costs for current patients. They have the option of trying multiple alternatives and switching from one to another if there is something better out there.
Network Effects (1/5): Network effects are not a driving force for Axcella’s business model. The value of their product is not tied to the number of users it has.
Cost Advantages (1/5): Axcella has no current cost advantage. Its products have yet to be commercialized which means that it has not developed supply chain scale and efficiencies that could benefit it.
Intangible Assets (2/5): Axcella does have intangible assets in the form of intellectual property, and patents, however, these may be hard to defend over the long run, and there is not an impressive history of innovation that may provide a large patent portfolio that may protect the business from competition.

Risks to the Moat and Business Resilience

Axcella faces several significant risks that could erode its existing weak moat:

Clinical Trial Failures: Axcella’s reliance on a novel technology means that there is a high possibility that the clinical trials will fail or show lower efficacy. Any major trial setbacks could have severe ramifications for its business. Axcella does have multiple clinical trials running at once, so it is slightly diversified in that manner.
Regulatory Hurdles: Securing regulatory approval can be long, costly, and does not guarantee commercialization.
Competitive Landscape: Axcella operates in a competitive biotechnology sector, where there are new therapies and medications always being explored and brought to market. Even if Axcella finds some success, there is the threat of competition bringing competing or better products to market.
Financial Instability: Axcella is currently a loss-making business, and it is uncertain when profitability will be achieved. It currently uses debt and equity to finance its operations, making it vulnerable to adverse market conditions and difficulties in future financing.
Management and Execution Risk: As seen on exhibit 12.2 on pg. 48 of the latest 10-Q report (Form 10-Q for the quarterly period ended March 31, 2024) Axcella has been rapidly reducing its staff since 2020, with many executives and employees being terminated. It’s unclear what implications this may have for the business.

Business Overview

Axcella Technologies, Inc. is a clinical-stage biotechnology company focused on developing treatments for complex diseases by targeting underlying metabolic dysfunctions. The company’s proprietary endogenous metabolic modulator (EMM) platform is designed to modulate multiple biological pathways in a coordinated fashion, rather than a single target, thus seeking a more holistic approach to addressing diseases. The core operating philosophy, according to management, is that if human biology is complex and multi-systemic, than diseases are, and this requires more than single target drug treatment.

Revenue Distribution and Trends

Pre-Revenue Stage: Axcella currently does not generate any revenue from product sales, as it has no commercialized products. It relies solely on grant income and other funding sources. As of March 31, 2024, Axcella’s revenue was $333,000, with total grants of $4.7 Million, up by nearly 2 million dollars YoY. They have a research collaboration and license agreement with Nestlé and they have secured funding for a joint research program, but that revenue stream is still yet to be realized.
Market Opportunity: Axcella targets a wide range of diseases where metabolism plays a central role, such as nonalcoholic steatohepatitis (NASH), a huge market opportunity. They are also targeting other indications like long COVID, and cachexia.
Industry Trends: The biotechnology industry is seeing a push towards personalized medicine and targeting the underlying causes of the diseases. Axcella’s metabolic focus makes it fit into these trends.

Margins

No commercial stage products: Axcella does not have any information regarding their margins because they are not producing any products. In the financial statement, their losses are largely attributed to R&D activities.

Competitive Landscape

Biopharmaceutical Industry: Axcella operates in a highly competitive space against other biopharmaceutical companies in similar therapeutic areas. However, Axcella is using a novel method. Many competitors may be further along in development, with many of them being fully commercialized, and thus, this represents a difficult hurdle that Axcella needs to surmount.
Emerging Players: Many emerging players are coming to market at a fast pace, which means that competition will be ever growing.
Partnership Landscape: The partnership with Nestle is important to understand. Even though it is not a fully commercial partnership, it could become extremely important to Axcella’s revenue in the future.

Differentiators

EMM Platform: The company’s EMM platform, which aims to modulate multiple metabolic pathways, is different from traditional drug development. Whether it is superior to other technologies is unproven.
Focus on Metabolism: Axcella’s focus on metabolic drivers of diseases represents a focused strategy within a diverse disease landscape.

Financials In-Depth

Axcella’s financials reflect the profile of a pre-commercial biotechnology company, characterized by high research costs and low, or no, product revenue. Here’s an analysis based on the information provided from their 10-Qs and 10-Ks:

Revenue: Axcella’s revenue is based mainly on research and development revenue, along with grants. Their revenue is not consistent, and has greatly fluctuated YoY.
Operating Expenses: Operating expenses consist mainly of research and development costs, which are directly tied to their pipeline. R&D expenses have historically been the largest component of their expenses, as they attempt to advance their programs.
Profitability: Axcella is not profitable as of yet. A large net loss is posted YoY due to the significant operating and administrative expenses, as well as the lack of revenues from product sales. They stated in a recent earnings call that they expect a positive EBITDA in 2025.
Capital Structure: Axcella is financed through a combination of debt and equity offerings. This means that they depend a great deal on investor sentiment to operate. The recent spike in share price, may be an indicator of positive sentiment regarding their business.
Cash Burn Rate: As an unprofitable pre-commercial company, Axcella will continue to burn cash at a considerable rate. As such, any changes to that burn rate could have implications for the company’s ability to operate.

Their 10-Q report (Form 10-Q for the quarterly period ended March 31, 2024) has a lot more detailed information about their financials:

Their Q1 2024 net loss was $35.5 Million compared to 14.1 million during the same time last year, more than doubling the net loss.
They have a very high cash burn rate, they used $58 million in cash during the 3 months ended March 31, 2024.
They do not have much cash left on hand, 45.4 million at the end of Q1 2024. With an extreme cash burn, investors should worry how long their cash runway will last if their burn rate isn’t slowed down.
From March 31, 2024 to June 30th they plan on reducing their workforce, and restructuring their financial profile, so it seems like a new strategy may be on the horizon.

Understandability

Axcella’s business model is moderately complex, requiring some effort to understand:

Scientific Complexity: The mechanism behind Axcella’s EMM platform is highly scientific, making it harder for those without a background in biology to understand.
Unproven Technology: The company’s use of their EMM technology is different and not easily understood by the average investor. This platform is novel, with no established product history and clinical success.
Business Model: While the business model is straightforward—drug development—understanding the regulatory and operational hurdles associated with clinical development requires insight.
Clinical and Regulatory Processes: The numerous stages of clinical trials, and the need for regulatory approvals increases complexity of the operations.
Lack of Commercial History: Because Axcella is a pre-revenue company, the lack of commercial history makes it difficult to use traditional financial analysis to evaluate the business.

Therefore, an understandability score of 3/5 is a fair representation of the business complexity.

Balance Sheet Health

Axcella’s balance sheet is currently unhealthy with a rating of 2/5, mainly due to limited cash and large liabilities. Here’s a breakdown:

Cash Reserves: As of March 31, 2024, Axcella’s cash balance was only $45 million. Given the large cash burn, this is something that should be monitored.
Debt Load: With $142.1 in outstanding debt from their credit facilities, this represents a large portion of their liabilities that they need to pay.
Shareholder Equity: The company’s large losses over the last few years have reduced its shareholder equity considerably.
Financing Needs: Axcella will need to raise additional capital in the coming year, potentially diluting existing shareholders.

Summary

Axcella Technologies is an early-stage biotechnology firm with novel technology that shows promise, but also faces many challenges and a high degree of risk. While their EMM platform is innovative, it does not yet constitute a wide moat and they face significant risk in the future. Investors should closely follow this company and their financials, as the company continues its long trek toward commercialization and future profitability.