Right. Welcome, everyone, to this session of the Morgan Stanley Global Healthcare Conference. I am Judah Frommer, one of the Smith Biotech analysts here. We are very excited to have Lee and Shelia from Q32 representing the company. Maybe let me just start with a quick disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. With any questions, reach out to your Morgan Stanley sales representative. With that out of the way, I thought we could start with a bit of background on the company. How was Q32 founded and how your pipeline came to be focused on IL-7?
Yeah.
Sure. Shelia, want to take that?
Thanks very much for hosting us today. Q32 Bio was formed back in 2017, just about nine years ago. It was really formed based on the concept of developing therapeutics that would target pathways that were fundamental to driving a number of inflammatory and autoimmune diseases. We were keenly interested in those pathways that if you inhibited them, would allow you to restore or remodulate the immune system, really providing homeostasis as opposed to general broad immunosuppressing agents. Initially, we brought forward tissue-targeted regulators to the complement system. Those are now in clinical development. But two years into the company, we had the opportunity to in-license a second asset that is known now as bempikibart. It is an IL-7 receptor alpha subunit antibody. We were particularly drawn to this asset for a couple of really important reasons.
One was the underlying biology, and the other was because we recognized at that time that this was likely a best-in-class asset because there were other companies that were going after this receptor pathway. What we knew about it was that bempikibart binds to the IL-7 receptor alpha subunit at a region that is shared and required for binding and signaling by two very different cytokines. That includes IL-7 as well as TSLP. IL-7 is a really important mediator of T cell biology. It regulates the generation of pathogenic T effector cells, and it lowers the threshold for T cell receptor signaling on these cells in the context of autoimmune disease. Essentially what it is doing is it is causing these T cells to now respond in what should otherwise be a low antigen microenvironment.
It's also a pretty important cytokine for regulating the proliferation and survival of antigen-specific T memory cells. TSLP is on the other side of the inflammatory cascade, where it's a modulator of TH2 responses, particularly where you have an epithelial barrier. We knew that this one antibody had bifunctional activity, and if it worked, it could generally probably go pretty broadly. The other thing that was unique about the biology was that we could see from the data that had been generated at BMS and what was in the literature, was that it had been shown that you could dose in preclinical animals for a period of time, allow the drug to wash out of circulation, and have these long-term durable responses. The biology looked really intriguing to us. The other side of things was that it looked like it was a best-in-class asset.
I say that for a few reasons. One was that we looked at the PK/PD properties. We could see that this was an antibody that you could probably administer low doses by subcutaneous administration, get good coverage of the target in circulation and in the tissue. As we've taken the program forward, we've actually illustrated that this is really the case, so it continues to be a best-in-class asset, in large part because of PK/PD properties, but also because it was engineered to be effectorless which we felt was important for this class of therapies. The other important point was that it was a fully human antibody.
There was concern in the field back when we were in-licensing this that there was a class effect, and you wouldn't be successful developing an antibody that had low ADA, and we're experiencing very, very minimal ADA, especially you can see in our alopecia trial. That's the history of how we brought the program in. We took it forward in a phase I study in healthy volunteers, then we took it forward in phase II studies in atopic dermatitis and alopecia, and it was in that initial alopecia Part A that we could see that we were seeing some really interesting signal. We were seeing that we were regrowing patients' hair, but also that there were really strong indications that there was a durable response.
That led us to then complete our Part B trial. Where we are landing today is that now that we see that we have such profound efficacy in alopecia patients, which is a T cell-mediated disease, it really opens up the door for us to think about indications where similar biology is in play.
Okay. Great. Maybe let's go a little bit deeper on alopecia. Like you said, your lead indication is alopecia areata. What led you to this indication, and what are the purported roles of IL-7 and TSLP in AA? We have seen ample evidence for IL-7, but maybe remind us, and then what helps your confidence that TSLP is additive here?
Yeah. It is a good question. When we think about alopecia, I think we all think about this as largely a T cell-mediated disease.
A lot of that comes from actually looking at the histology of the hair follicles in these patients. There is quite a bit of work that has been done where if you look at the immunostaining of cells that are infiltrating the bulb of those hair follicles and leading to that cellular destruction, because normally the hair follicle is in an immune-privileged environment, but that gets broken down. The T cells are infiltrating and producing these pro-inflammatory cytokines. You get destruction of the hair follicle and then the loss of hair. What is it that you can do here to restore that? Quite a bit of data that has been generated, with JAK inhibitors, that have showed that if you take biopsies from patients before and after treatment, you can see that you resolve that inflammation.
It is concordant with the regrowth of hair, the restoration of the anagen phase follicles, as well as the resolution of inflammation. We do consider this to be a largely T cell mediated disease, and when we thought about where we might take bempikibart, it was a natural tendency to go into indications where there was a large T cell component. Having said that, it cannot be ignored that there are data that we hear of anecdotally with patients that have been treated with DUPI, as well as data that has been published with DUPI trial, that show that there are a subset of patients that are atopic by nature. These could be patients that are high in IgE. It could be patients that have comorbidities like atopic dermatitis or asthma, for instance, that do show a response to DUPI.
It may take them longer to get there, maybe more in that 48 weeks after treatment. But it argues that in a subset of patients, there may be this TH2 component that is contributing to this inflammatory environment that is further driving those cytotoxic T cells. For us, we think this is really important because we have demonstrated in atopic dermatitis as well as in alopecia, that we are having really profound effects on TH2 biomarkers, really showing robust reductions in classic things like IgE, eosinophils and TARC. If there is a component, we think that we would be covering both the TSLP as well as the IL-7 side.
Okay, great. That makes a lot of sense. How should we think about market sizing? Maybe help us with current market size for AA, both domestically and abroad.
Sure, it is a great question. It is one that we get asked a fair amount, and I think generally speaking, there is an under appreciation of how many patients are out there desperate for new treatment and new alternatives, and thus commercially, how substantial the market opportunity is. Today, there is about 700,000 AA patients in the U.S. That is the number we cite. That is what NAF cites. It is generally out there.
Epidemiology studies would probably put it a little bit above that, but 700,000 is pretty widely accepted. And we see that in the coming years growing to about 800,000. So that is 700 moving to 800. Of those patients, as you think about an advanced systemic therapy and the addressable population, obviously you have to think about excluding some of the more mild patients. So it is about 500,000 addressable patients in the U.S., and we could see that being about 300,000 or so patients who would be potentially treated with an advanced systemic therapy. So when you think about the commercial opportunity, obviously you can put a net price on that. We have said we believe it is at least a $5 billion opportunity. But when you think about that 300,000 number it is likely considerably more than that. So even that is probably understating the potential.
That is the U.S. alone. When you say abroad or international, it is going to depend on the different countries. The U.S. is still likely to be the dominant country, dominant market, but $5 billion at least in the U.S. and considerably larger when you think about going global. As we think about moving into phase III, we are very much thinking about this from a global perspective.
Okay, that is helpful. Maybe we will dig in a bit on standard of care. What does penetration from the currently approved JAK inhibitors look like? And where do you see unmet need that creates room for differentiation, given we do have approved therapies here?
We embarked on a fairly extensive market research project earlier this year in conjunction with our data. We partnered with IQVIA to really do a deep dive on this, in large part because revenues aren't always broken out. What we've been seeing, when we look at in the U.S. for the JAK inhibitors in AA alone for full year 2025 is about $350 million, and this year, it's annualizing run rate to about $500 million in net sales. It's growing quite substantially. That's a 30%-40% annual growth rate, but penetration is incredibly light.
Low double digits at best. We're seeing while growing, that it has barely touched the market. Part of it is the unmet need. There are significant challenges with the JAK inhibitors and where we think a biologic like bempikibart could make a huge difference. Having a drug that has a biologic safe profile, durable response. As we know, the JAK inhibitors have a black box warning, outlining the CV risk, the malignancy risk. Significant lab monitoring. All of these things limit uptake and limit patients who are staying on drugs. We think of biologic, as we've seen across, broadly speaking in the I&I landscape, that biologics are likely to be the dominant preferred first-line treatment option.
Okay, great. That's good background. Maybe moving into your phase II program, SIGNAL-AA, can you walk us through results from part A and then importantly, the changes you decided to make going into Part B as well as what informed those specific changes.
Sure. Shelia outlined some of the highlights from Part A. We saw statistically significant hair regrowth compared to placebo. We saw very nice durable responsiveness in the off-drug period. We had dose for 24 weeks, and then as we followed patients off drug through 36 weeks. We saw nice maintenance in that follow-up period. We also saw some remarkable case, at least one, of a latent response in a patient who saw really dramatic hair regrowth. As we were reviewing this data, we really were very confident in a signal that we were seeing, that we were incredibly encouraged by the totality of that data set. As we thought about moving forward, as in 2025 we were in a capital-constrained environment, we doubled down. We ended up selling a secondary program, ADX-097, to really focus our resources, our time, our efforts on advancing forward in bempikibart for AA.
That led us to Part B, as Shelia mentioned. We did learn some lessons from Part A, and implemented some changes that we felt would be most appropriate as we were advancing the program. First and foremost, and we may have been the first trial to do this, we implemented a central review process. Utilizing images, confirming that patients had AA, that they had severe and very severe AA enrolling in the trial, that was important. One of the things we learned from Part A is that we had an outlier duration of episode. We were five-plus years, and we know from the literature that as you go four years and beyond, responsiveness falls off a cliff. We did not do ourselves any favors in that trial.
With Part B, we brought the duration of episode in more in line with the contemporary trials of 2-3 years. That was the other thing that we've done. Then it was a different dosing paradigm. We introduced a loading regimen of weekly doses before moving into every other week dosing, and we extended it from 24 to 36 weeks, which is consistent with JAK inhibitor trials, where they've done it at 24 and 36, and also probably an appropriate time for a biologic. Those are some of the changes that we made when we went from A to B.
Okay, great. Now if we fast-forward to the Part B results, help us put into context the mean SALT reductions and specifically the SALT 20 rates across both the ITT and the modified ITT populations. Just remind us while you are doing that, why was there a modified ITT population and was that pre-specified?
Yep. The mean change was about 35%, so the mean change from baseline. The SALT 20, which is where most investors are focused and is the registrational endpoint, so that will be our primary endpoint for phase III. On a mITT, so modified ITT, it was 40%, and our SALT 20 rate on a full ITT, so across every single enrolled patient, we were just over 30%. So incredibly robust results that we saw. For transparency, we of course showed it on the full ITT.
All of it was pre-specified, so the mITT was our pre-specified endpoint. However, again, to try and be transparent, we presented also the full ITT basis. The only reason we do it is you have to handle somehow the missing data. There are different ways of doing so, but it has to be pre-specified, and so that is how we did it. Now, as we move to phase III, we will again intend to show things on the ITT and y ou have much more ability to do so as you scale up and have a larger trial.
Okay, great. Do you have a sense for how the loading dose change or inclusion criteria changes impacted efficacy versus Part A? At this point, does it not matter much? I will be curious to hear what experts and KOLs are telling you on that front.
Yeah. We get asked the question a lot about how impactful we thought the loading dose was. I think that any of the changes that we implemented could have an impact on what we are seeing. The way I think about the loading dose is that, as we say, every day counts for these patients.
You can change the inflammatory components in the hair follicle, but it is going to still take time for that hair follicle to restore itself and then see the regrowth. Every really day, every week counts. We wanted to take advantage of the fact that we could implement a loading dose and drive drug into the tissue as quickly as possible. We had the safety margins to do that. We are getting, with the loading dose, to steady state levels about 10 weeks earlier, but w e are also adding that additional 12 weeks of dosing from the 24 to the 36.
That, I think collectively, is a big portion of why we are seeing the deeper reductions, longer duration of dosing at the highest doses that we know for getting to steady state. The other components probably are also contributing to it as well. I think we think about the central review as really being very important here, making sure that you are actually enrolling patients with alopecia. But those are, to me, the biggies here.
Okay.
Anything, Lee, you would add to that?
No, I think that's exactly right.
Okay, great. As we approach 16-week off-drug data, just remind us of the timing for that. Are you looking for an increase in response rate or, like you mentioned, Shelia, in the preclinical data, just more durability when patients are off drug? How do you think about what a meaningful off-drug signal looks like heading into that registrational program?
All right. I think there's a few questions embedded in that. First, we can address timing. We've said In the second half of this year we will have the longer-term follow-up. We will be at EADV and be able to present this longer-term follow-up. As a reminder, we dosed for 36 weeks, and then there was a 16-week off-drug follow-up through week 52. That addresses, I think, the timing component.
Now, what are we looking for here? I think conceptually you take a step back, similar to what we saw in Part A. So nice durability of responsiveness. Patients who had a response, did they maintain the response? Did we see deepening of responsiveness? Patients who were in a response, did we see greater depth? Then in some cases, as we saw in Part A, patients who had not within the drug period, who had not met the criteria of response, do we then see in that off-drug period?
Those are sort of the different things that we will be looking at. All of this I would say would be in. We were very encouraged by Part A, and so I think we are thinking to recapitulate this, will be another point of differentiation versus the JAKs, where you see fairly quick hair loss when you stop treatment. I think just the final part of that question is you were mentioning the registrational study. This is not a gating factor.
Right.
We would expect our registrational study, the dosing paradigm, to have a lot of the components of the Part B dosing. This, while we are continuing to follow patients, is not gating anything as we move in towards phase III.
Okay, great. That is helpful. Then there is an OLE connected to Part B. Maybe just outline for us who is eligible for that OLE. What are you looking to learn from that component of the trial, and how will those data inform how bempikibart could be used commercially in terms of maintenance dosing maybe?
Patients who are eligible are those who have shown some hair regrowth in Part B. It will, again, continue to help build a further data set, continue to build the safety data set as well, but also be informative for a longer-term chronic maintenance dosing. We absolutely believe that we will be able to, for longer-term dosing, have something with less frequent dosing. Perhaps it is every month, perhaps it is even less frequent than that. Now, just to be clear, commercially, that is how we see it. But again, just to be crystal clear, that is not gating for the registrational endpoint of a 36-week trial.
Okay. Got it. We get this question from time to time. I guess, just in terms of breaking out data by JAK experience and JAK-naïve patients, how are you thinking about data breakdown? Then just mechanistically speaking, should we expect lower response rates if patients did not respond to JAKs?
Yeah, it's a question we get fairly frequently. We look forward to sharing more. I know we're pretty eager to share more on this. Maybe just to reiterate, we're one of the few trials that enrolled JAK-experience. 40% of our patients had been on an oral JAK inhibitor, so we think it's a really good data set. We think commercially, it's an off-ramp for patients who are on a JAK, most of whom would love to get off. Fundamentally, we still see ourselves as being positioned to be a preferred first-line treatment.
Right.
Shelia, maybe you can address the mechanistic part of that question.
Yeah, I think again, we'll be releasing more at EADV. Mechanistically, it would make sense if you're not responding to a JAK, you're less likely to respond to IL-7 because it goes through the JAK1/3 signaling. The TSLP also goes through JAK1/2. So mechanistically, it would make sense that you would not. There are all sorts of explanations for why this happens in patients. Sometimes they can be having chronic disease, even if the episode is not particularly long, but they've had chronic disease. They get sort of a fibrosing sort of environment or clonal expansion. But mechanistically, you probably might expect you're not going to respond.
Okay. Maybe just sticking to the JAK theme. We did see some impressive data from RINVOQ in AA. Both the UP-AA studies hit their primary endpoint, SALT 20s in the 44%-55% range, I think at week 24. It was approved in Europe in July. How do you think about how RINVOQ could affect the market here? Does it expand the addressable population, or does it primarily compete for the existing JAK-penetrated patient pool? Where does bempikibart fit within that context?
So probably both, right? As always, with another agent into the marketplace, it probably continues to increase greater awareness and continues to increase overall treatment numbers. However, nice efficacy data, but at the end of the day, it is another JAK.
Yeah.
So it has the same black box warning. It has the similar concerns that all of the other JAKs have. So from that perspective, we would imagine there is going to be a market share shift within the JAKs.
Yeah.
And we'll probably also see continued growth of that class. But down the line, as I mentioned earlier, we'll see biologic entry, and as biologics enter, that probably will be the bigger driver of expanding the market, of expanding the treatment rates. Ultimately we think while it's good to see new options, it doesn't address the limitations where we think the biologic will really come into play here.
Okay, great. Maybe a few questions on potential phase III design elements. I'm not sure how much you can share, but maybe to start, what's your thinking on whether a single or two studies might be necessary for phase III?
There's a fair amount of precedent. We're seeing within AA and now in I&I more broadly of single phase III. We definitely think that that's something that could certainly be the case here as well. We're pretty confident there. Now, whether there is some permutation of that, we've also seen precedent of a slightly different trial design that would also be a very reasonable, efficient approach. Certainly something that we would also consider. But no, we don't think we would be obligated to do two trials.
Okay. Then maybe help us with just how you're thinking about exploring maintenance dosing in the pivotal study or studies. You're going to have OLE data, I think, back half of next year, right? So would you build a maintenance arm into the pivotal study program? Would you rely on the Part A OLE and Part B off-drug data from phase II? How are you thinking about approaching FDA on that front?
Yeah. I think the pivotal trial, the trial that we would seek for licensure, would be fairly straightforward, and again, would leverage what we've learned from Part B. So again, we're thinking it's a 36-week endpoint. Now, we may very well continue to dose patients longer. That would be consistent with what we've seen in other trials. But no, we would imagine it to be a straightforward pivotal trial. In parallel, we will have multiple OLEs, which we'll continue to generate that data. So in parallel, we will also be generating that maintenance dosing.
Okay, that's helpful. Then you mentioned the 40% JAK-exposed patients in phase II. How are you thinking about that JAK-exposed population and the right balance as you head into pivotals?
As far as whether we would enroll patients?
Yeah. Enrollment. Yep.
Yeah. I mean, look, as we shared in July, we've seen good responses in patients with prior JAK exposure, including the SALT 10 that we mentioned. It's our intention to build as robust of a data set as possible. Again, we still think that we would be positioning ourselves to be the preferred first line, but I don't think that we're going to see a major shift as we move from Part B to phase III in that regard. The difference is going to be, as you think about it conceptually, probably more of a global footprint versus a more North America footprint that we had for Part B. So perhaps that will shift a little bit, but I don't think we'll see. We wouldn't expect any major fundamental changes there.
Okay. Then maybe one more just about how you are thinking about enrollment for the pivotal, given what we saw in the phase II program. So in SIGNAL-AA Part B, the very severe population SALT score 95 or higher made up about 24% of the mITT population. I think it was six out of 25 patients. In pivotal JAK studies, they seem to enroll more like 50% of very severe patients. How are you thinking about the very severe population in phase III? Can you help us understand what the real-world prevalence split looks like between severe and very severe, and how that affects the addressable market?
Based on market research, the incidence and the prevalence, it is not 50/50. There is more of the severe, so 50% to 95% versus 95% to 100%, just in the general population. So that is probably one thing to point out. Then the other thing, too, is as you will talk to many of the KOLs, they will tend to treat more of the complicated.
Yeah
Even they are saying they see much fewer. Over time, the severity is decreasing. The percentage of patients 95% to 100% walking in the door for the first time is significantly decreasing. Some of it is just over time, severity tends to decrease a bit. You see a little bit less of the 95% to 100%. Ultimately, we would imagine we will still have both, all the way from 50% to 100%, both of those pools. From a labeling perspective, it does not matter. If you look at the JAK labels, they are all for severe being 50% and above. We would imagine similarly same label, and it is largely a function of the available patients.
Okay, that makes sense. You were able to raise some capital after the very positive Part B data, so maybe just latest on cash runway, which operational activities should be included within that runway?
We are waiting for final confirmation of the trial. Again, it is going to be fairly straightforward, and we have a proposal, and perhaps there is a slight permutation. Either way, we are funded through phase III. With our funding in July, that gets us all the way through that with some runway beyond. Our cash runway on the cash that we have, we can get through that to phase III, in parallel building a robust safety database from our runway.
Okay, excellent. We have the CFO here, so we have to ask. We have gotten some questions on trajectory of operating expense and agency cost as you move into pivotal development. Anything you would highlight on the R&D and SG&A lines in particular as you move into this next phase of development?
I think you are asking about our operating expenses.
That is right.
And what I would say, over the next quarter or so, imagine it's going to be reasonably stable. We've said we'll be moving into a phase III in the first half of next year. As one would imagine, as that picks up, you're going to see an uptick in the R&D expense. You'll see some modest increase in SG&A, but not to the same magnitude. Again, it's going to be fairly stable, and then we're going to be moving into the phase III. As you get into next year, that's when you would start to see it increase.
Okay, great. That's all we have for the company-specific questions. We are doing a mini survey with all of our management teams across Biotech at the conference. Three kind of lightning round questions here. The first is on China's rise in biotech innovation. How are you thinking about competitive position here? Could this influence R&D or business development from internal perspective or potentially bringing assets in-house?
We believe quite strongly the fact that we have the best-in-class IL-7 asset. We feel really good in that regard. We also announced last month that we have a half-life extension, 914XL. I guess the way to think about that, it's sort of tying that back to your question, there's both offensive, we can use that for some other indications. We don't think it's necessary for AA specifically, although good to have, but it's also defensive, right? We are ring-fencing all of our activities around that. I think that in part ties to your question around-
Right.
... New molecules perhaps, and the impact of China.
Okay. Anything to add?
No, that's great.
Okay, excellent. Next is on how Q32 is leveraging AI internally, but maybe also if you see any potential for AI to disrupt the broader development space.
Probably more limited, but we are rolling out AI to maximize operational efficiency. We've brought in some expertise around that. We're doing company-wide training. The flip side of it, of course, is we've also rolled out a policy to ensure that we are using, while maximizing our efficiency, that we're also safeguarding our business and making sure that that's also protected as well.
Got it. Okay, excellent. Last one is just on the regulatory side of things. In terms of what's most impactful to the business at this stage, are changes at FDA, do you think about MFN pricing, tariffs? Is there a particular area on the regulatory side of things that is taking up most of your attention?
No doubt, a lot of volatility over the last year or so on all of those fronts. Thankfully, we've been fairly insulated. None of those to date have really had any material impact on our business, thankfully.
Excellent. All right. With that, I think we're just about out of time, so thank you again for being here, guys. This was great.
Thanks, Judah.
Thank you.