Akero Therapeutics, Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

Akero Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing transformative treatments for patients with serious metabolic diseases, marked by high unmet medical need, specifically nonalcoholic steatohepatitis (NASH).

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.

Business Overview

Akero Therapeutics is a biotechnology company that is trying to treat nonalcoholic steatohepatitis (NASH), a serious liver disease, through novel drug candidates. NASH is a liver disease characterized by excessive fat accumulation that is commonly found in people who also suffer from type 2 diabetes and obesity. It can cause inflammation, damage and scarring in the liver, eventually leading to cirrhosis, liver failure and death.

The company currently has no approved products and operates with a limited operating history. As a result, the company is highly dependent on its research, development, and regulatory efforts, which are subject to numerous risks.

Akero does not yet generate revenue from product sales, as its lead drug candidate, efruxifermin (EFX), is still in clinical trials. Their strategy is focused on the development and commercialization of innovative therapies which address metabolic diseases. Consequently, the company’s economic prospects are entirely tied to its drug development pipeline and regulatory success.

The biopharmaceutical industry is generally known for high research and development expenditures and considerable uncertainty in reaching commercialization. The company is particularly focused on the NASH indication, a field with a high unmet need and numerous companies vying for a solution.

Competitive Landscape

Akero faces a competitive landscape involving a range of established pharmaceutical companies, as well as biotech companies developing novel therapies for NASH.

Key competitors include companies developing similar therapies in NASH, such as Madrigal Pharmaceuticals, Viking Therapeutics, and 89bio. They also face competition from established players like Gilead Sciences and Novo Nordisk which have treatments in the same area.

In the biotech industry, clinical trial success does not guarantee market success. Also, competitors may gain earlier approval or more compelling results that impact the overall share of the market.

What Makes Akero Different

Akero’s differentiation strategy revolves around its specific drug candidate, EFX, which seeks to restore metabolic balance by directly acting on a hormone receptor on the liver called fibroblast growth factor 21 or FGF21 receptor which could cause more sustained beneficial results to patients. Their focus on EFX and the use of its innovative mechanism of action, positions the company as a potential leader in metabolic diseases.

EFX is a long acting engineered analogue of the native human hormone fibroblast growth factor 21 (FGF21). EFX works by binding to the FGF21 receptor on the liver and other tissues and promotes fat reduction, improved insulin sensitivity, and reduce hepatic inflammation and fibrosis. This mechanism of action is a major advantage to this company.

Financials Deep Dive

Income Statement Analysis

As a pre-revenue clinical stage company, Akero’s income statements reveal consistent operating losses, dominated by research and development (R&D) expenses. Given their stage, expenses can be very erratic, but a lot of the R&D goes into their lead drug candidate EFX.

  • Revenues: As a clinical-stage company, Akero has generated no revenue from product sales.
  • Operating Expenses: Research and development (R&D) is the largest expense for Akero. General and administrative (G&A) costs are also significant.
  • Net loss: Due to these operating losses, Akero has always generated losses and does not have any profits.

Balance Sheet Health

Akero’s balance sheets are characteristic of most clinical-stage biopharmaceutical companies. Here is an analysis of key components:

  • Cash and marketable securities: Akero’s cash position had declined substantially as of December 2022 to $153.8M from a peak of $469M in March of 2021, due to substantial R&D and G&A expenses related to the clinical trials of EFX. Recent fundraising efforts have increased cash, however, the current cash position remains less than it has historically been. The most recent cash and marketable securities amount to 387.8M.
  • Liabilities: Given the nature of their business, the majority of the liabilities stem from general and administrative expenses and legal obligations associated with their ongoing research and development. * Equity: The company’s shareholder’s equity is affected by ongoing losses as well as the issuances of new stock to finance the operations.

Akero’s cash burn rate is increasing as they move further into the clinical stage, that’s why future cash flows will depend on how their clinical trials proceed and any future regulatory approval. The current cash level of $387.8m should last them for the next 2 years, based on prior spending, as well as some extra funding from partnerships with other companies

Based on this I am giving a balance sheet rating of 3 / 5, there is enough capital for operations in the short term, but they will need more cash in the future. The company also carries a lot of risk, and it is not easy to get funding for those companies that will not show any promising results with their drugs.

Moat Assessment: 1 / 5

Akero currently possesses a minimal moat. The most significant factor is that the company is still in the clinical stage and has not generated revenues. In addition, although the drug has a novel mechanism, there is no evidence to show that it will successfully compete with companies that have a broader portfolio of compounds or more established development capabilities.

In the absence of a revenue stream, and high competition, Akero’s main moat driver is their patents, which will be discussed later on.

  • Intangible Assets (Patents and Regulatory Approvals): Although EFX has some patent protection, patents have expiry dates, are challengeable, and might be overcome by competitors. Moreover, the regulatory approvals needed to commercialize EFX are not guaranteed, creating some uncertainty for Akero’s future.
  • Switching Costs: The biotechnology industry is very competitive, having no switching costs for their customers. Customers can easily jump ship to other available products in the market when they become available.
  • Network Effect: Network effects don’t apply to drug development.
  • Cost Advantages: Akero does not have a substantial cost advantage because it is still in a developmental stage.
  • Size: Given that Akero is a development stage company, it has a size disadvantage in contrast to more established peers in the market.

Therefore, based on a lack of clear defensible advantages, Akero is rated 1/5 for a moat.

Risks to the Moat and Business

Akero is subject to many risks, which will be separated in risks to the company and risks to the moat:

  • Clinical Trial Failures: The greatest risk facing Akero is potential failures in their clinical trials. Results that are not promising could lead to discontinuation of the product candidate, which would mean a significant loss on the investments they put into R&D, and that will further impact their ability to seek future capital.
  • Regulatory Hurdles: Obtaining regulatory approval from the FDA or other regulatory authorities is challenging, with no guarantee of approval. If a new drug candidate faces regulatory hurdles, the development time is prolonged, and additional costs may incur.
  • Competition: The competitive landscape of NASH is intense, with many players in the market trying to bring new therapies for the indication. Any of them can surpass Akero, both from a development timeline and efficacy standpoint.
  • Financing Needs: Akero is largely reliant on external financing to fuel operations. Any inability to secure sufficient capital would jeopardize their operations, and affect the value creation for shareholders.
  • Market Acceptance: Successful clinical trials and regulatory approval do not mean a product will have market acceptance. It depends on whether the product can meaningfully improve lives, and how much the market is willing to spend for it.
  • Patent Challenges: Although they have patent protections, it is not impossible to for competitors to challenge or bypass those patents, leading to a loss of exclusivity and competitive advantage.

Business Resilience

Akero shows some signs of business resilience. They have successfully completed a Phase 2b trial, they have generated positive results in clinical trials, and they have had partnerships with other major players. All these are great indicators that the team is working effectively, and their approach is having potential. However, the company’s reliance on a single product, and the challenging nature of the industry make it far from resilient, despite these positives.

The company’s financials and pipeline make the company susceptible to risks beyond its control.

Recent Concerns and Management Outlook

Management has acknowledged the market’s concerns regarding cash burn, and has emphasized that they are managing costs tightly and will be focusing the spending to progress the drug candidates quickly. They have also mentioned that their recent fundraising effort is a positive step for the company.

It’s important to monitor management’s ability to secure funding and progress their pipeline.

Understandability Rating: 3 / 5

Akero is moderately complex to understand. While the concept of targeting specific receptors and drug development may be relatively well understood among specialists in the industry, the details of the research, clinical trials, and regulatory pathways are complex to outsiders. The financial aspects are relatively easy to follow given the simple income statements, balance sheets and cash flows of clinical-stage pharmaceutical companies. Therefore it will get a rating of 3 out of 5.

The complexities lie in the science behind the drug, its mechanisms of action, and understanding the regulatory pathways and clinical trial results.

Conclusion

Akero Therapeutics is a high-risk high-reward play in the biotechnology space. It has some strengths in its approach, but still faces significant uncertainties over its ability to deliver returns to shareholders. It is not a value stock, but more a speculation based on their lead product candidate and their management. The outcome will depend on their pipeline, regulatory approvals, financial stability and competitive pressures from other similar companies.