KaloBios Pharmaceuticals, Inc. Earnings Highlighted by Potential for Two Trial Readouts Before Year End

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After the markets closed on Thursday, KaloBios reported fourth-quarter financial results and an update of clinical programs. While the financial results were a non-event, the company provided an updated clinical development timeline highlighted by the possibility of two potential data readouts by year end.

We highlight the ongoing Phase I/II trial with KB004 in hematologic malignancies, which was recently expanded to include patients with acute myeloid leukemia and myelodysplastic syndromes. We are encouraged by the progress with KB004, especially with the positive Phase I dose-response study conducted last year, which demonstrated a tolerable safety profile and showed early signs of efficacy. We also note the KB001-A program in cystic fibrosis continues as planned and data is still expected in fourth quarter 2014. Likewise, the partnered program with Sanofi (SNY $49.71) for KB001-A is also progressing as planned, and a Phase IIb trial will be initiated in ventilator-associated pneumonia in the second quarter of 2015. We believe the concurrent advancement of KaloBios’s proprietary and partnered therapeutic programs offers multiple shots on goal and the potential for nondilutive capital in the form of milestone payments. Exhibit 1, on page 2, provides an outline of upcoming events.

Management said operating expenses would continue to increase in 2014 as the company will spend money primarily on the clinical development of its lead compounds. We support this strategy and believe KaloBios has enough cash to take it into the middle of 2015, which is beyond the timeline for trial readouts with KB001-A in cystic fibrosis and KB004 in hematological malignancies. We believe this is crucial as it gives KaloBios two opportunities to demonstrate proof-of-concept with its compounds and to provide further validation of its technology platform. Exhibit 2, on page 2, provides a detailed variance analysis of the company’s operating results compared with our estimates. In exhibit 3, also on page 2, we show how we have slightly modified our financial projections to come more in line with operating trends.

With two potential trial readouts expected in 2014 and a roughly $40 million enterprise value, KaloBios remains undervalued, in our view. We therefore maintain our Outperform rating on KaloBios shares.

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