We are suckers for a good biotech turnaround story. You know the narrative: a once-ridiculed company that seemed headed toward certain failure or extinction, only to resuscitate itself with a new strategy and/or asset. We have written about several of these companies over the years, two notable examples being Delcath Systems (Nasdaq: DCTH) and Nektar Therapeutics (Nasdaq: NKTR). So when a fund manager friend recently suggested we take a look at one of his favorite turnaround ideas, we happily obliged.
This time last year, Equillium (Nasdaq: EQ) announced that the FDA declined to grant Breakthrough Therapy designation or support an Accelerated Approval pathway for its lead compound, itolizumab, for graft-versus-host disease. At the time, the company had a paltry $15 million market cap, approximately $14 million in cash, faced Nasdaq delisting, and, after a regulatory roadblock with itolizumab, was practically unfinanceable. Things got so bleak for Equillium that a few months later, it issued a press release announcing it was adopting a “cryptocurrency treasury reserve strategy.” The press release screamed desperation. Yet today the company trades at a $240 million valuation and has $65 million in cash, not crypto, in its treasury. This is a story about a turnaround, centered on the belief that aryl-hydrocarbon receptor (AHR) agonism is a validated mechanism for treating immunology and inflammation (I&I) disorders. The once-derided Equillium now has a compelling thesis with exciting optionality, which has us thinking we may be only in the early innings of this turnaround.
Queue The Turnaround
A week after its ill-advised crypto press release, ADAR1 (Sheep on X) and Janus Henderson led a $30 million financing in Equillium to support the company’s pivot away from itolizumab (and crypto) and toward its newly acquired AHR agonist, EQ504. To understand why a syndicate of specialist investors stepped up at that moment, it helps to look at what was happening in parallel at Abivax (Nasdaq: ABVX).
Heading into Abivax’s July 2025 Phase 3 readouts for ulcerative colitis (UC), the company positioned its lead drug, obefazimod, as a first-in-class oral miR-124 enhancer. Their Phase 3 UC studies were a resounding success, making Abivax one of the top-performing biotech stocks for the year. However, behind the scenes, there was an ongoing scientific debate among investors about whether obefazimod’s true mechanism of action is different — specifically, whether it is an AHR agonist, with miR-124 upregulation a downstream byproduct rather than the primary driver of efficacy.
In our view, that distinction matters more than it first appears. AHR agonism, unlike a first-in-class mechanism, has meaningful human validation in I&I. Organon’s VTAMA is FDA-approved (topical, for psoriasis and atopic dermatitis). Indigo naturalis, a Chinese herbal medicine and known AHR agonist, has shown activity in UC across several published clinical studies. Believing obefazimod’s mechanism to be AHR agonism clearly emboldened certain investors to play the binary Abivax Phase 3 readout last year, which proved highly profitable. ADAR1 was a top-three holder of Abivax heading into the Phase 3 data and, less than a month later, is leading a financing in Equillium. Something tells us they are believers in AHR agonism. So, viewed through an AHR lens, the Abivax Phase 3 result was a third significant data point — alongside VTAMA and indigo naturalis — supporting AHR agonism as a validated mechanism for I&I.
But First
Before jumping into recent additional investor validation, let’s spend a few sentences on UC and EQ504. UC is a chronic inflammatory bowel disease that, as the name suggests, is characterized by ulcers in the colon. UC patients generally start with generic 5-ASA and/or oral steroids, then graduate to branded oral S1P modulators, and, for most, move on to biologics. The belief is that Abivax’s obefazimod could become the go-to oral pre-biologic treatment for UC, with an addressable market of $7.5 billion that could grow to $15 billion with label expansion.
***Abivax’s March 2026 Corporate Presentation
EQ504 is an oral, colon-targeted AHR agonist currently in preclinical development. Although it’s far too early to compare EQ504 to obefazimod or any other UC therapy, Equillium believes one of its key differentiating factors could be its ability to preserve barrier function and promote mucosal healing in the colon. The company has indicated it will initiate its Phase 1 healthy volunteer study mid-year and expects results in early 2027. Importantly, the study will include colon biopsies, which could provide early evidence of target engagement by measuring biomarkers such as CYP1A1, IL-10, and IL-22.
New Floor
ADAR1 and Janus made the bold move to finance Equillium when most investors had written the company off. For that bold move, they were rewarded with attractive terms that included a first closing of $30 million (52 million shares at $0.57) and a potential second closing of $20 million (35 million shares at $0.57) triggered if/when Equillium reaches certain milestones. This second closing is essentially a warrant that is triggered once the company starts its Phase 1 study AND the stock trades at a volume-weighted average price per share of $2.50 for 10 consecutive days within 30 days of Phase 1 initiation.
As we mentioned above, this was the transaction that started Equillium’s turnaround. However, what really caught our eye was last month’s announcement that RA Capital was investing $35 million into the company at $1.85 a share. With this new capital, the company states that it has pro forma cash of approximately $65 million, providing runway into 2029. In our opinion, this RA deal set a new floor for the stock. The question is, where does the upside come from here?
Palatable, But…
Whether it is obefazimod, VTAMA, or indigo naturalis, AHR agonism appears efficacious in I&I. So there is good reason for enthusiasm around EQ504. Yet the company is still very early and is unlikely to have data from UC patients treated with EQ504 until 2028. This makes the biopsy data from the company’s soon-to-start Phase 1 study critical for near-term value creation. For some, an investment in Equillium today is a bet that enthusiasm and confidence in the AHR mechanism, combined with positive Phase 1 biomarker results for EQ504, will entice investors to push the equity meaningfully higher. This is a palatable thesis in our opinion, but we question how much upside there is in the biomarker data on its own without some external stimulus.
External Stimulus
What tipped the scales for us to own Equillium, and we suspect for many others as well, is the Abivax optionality. Abivax is expected to report obefazimod maintenance data from its Phase 3 UC study in June. They should also have top-line obefazimod induction data from a Phase 2b Crohn’s study before year-end. Whether it’s reaffirming obefazimod’s efficacy in UC or demonstrating the product’s broader I&I potential in Crohn’s, positive data from these studies could unquestionably benefit Equillium. But the optionality that most excites us, and we suspect many others, is the possibility of an Abivax acquisition.
For the past several months, media and investors have speculated that Abivax was in play. In January, La Lettre reported that Lilly was preparing to make a $17.5 billion offer for Abivax. Last month, the same French news outlet reported that AstraZeneca was considering a bid for Abivax. Although the company has denied these rumors, in biotech M&A, where there’s smoke, there’s often fire. If Abivax is acquired, Equillium’s stock could soar.
Formula That Works
To be clear, owning Equillium for the probability of Abivax being bought isn’t our thesis; it is our optionality. Our thesis is that AHR agonism appears to work in UC. Equillium has an asset, albeit early, with attributes that suggest it could eventually be a meaningful player in the multi-billion-dollar oral pre-biologics UC treatment paradigm. Within the next year, the company will share biomarker data that could provide early validation of EQ504’s activity. Abivax will also share data this year, which could provide evidence of AHR agonism’s broader I&I potential. Finally, we have the validation of specialist life-science capital — the syndicate that took the contrarian shot on Equillium at $0.57, and RA Capital’s recent step-up at $1.85. All of the above give us comfort that owning Equillium here, at an approximate $240 million market cap, is a reasonable bet with “good” upside potential. Combine this thesis with the optionality of an Abivax acquisition, and you have a formula that works for us.