Evelo BiosciencesNASDAQ: EVLO

The most oversold stocks in the health care sector presents an opportunity to buy into undervalued companies.

Evelo's (EVLO) EDP2939 fails to achieve the primary endpoint in a mid-stage for treating moderate psoriasis. The company decides to cease clinical development on the candidate.

Evelo Biosciences' shares have tumbled 46% in premarket trading after the biotech firm revealed disappointing results in a phase II psoriasis trial for its next-generation drug, EDP2939. A resounding miss, the treatment failed to outperform the placebo, which has no therapeutic effect.

Following recent cash raise, EVLO has enough (barely) cash to the next catalyst, phase 2 readout in psoriasis. The event is binary and can make or break the company. Prior failure of EVLO's platform in atopic dermatitis is concerning. However, psoriasis is a different indication (different pathophysiology) and de-risked by positive results in a prior phase 2 study. Ongoing phase 2 trial in psoriasis is being conducted with a second generation candidate, EDP2939, which is expected to have better efficacy and now represents EVLO's sole clinical-stage candidate.

Evelo Biosciences (NASDAQ: EVLO ) stock is rising higher on Tuesday after the clinical-stage biotechnology company reached a new standstill agreement with Horizon Technology Finance (NASDAQ: HRZN ) last week. This agreement builds on the prior one the two companies reached back in December 2022.

Evelo Biosciences, Inc. (EVLO) might move higher on growing optimism about its earnings prospects, which is reflected by its upgrade to a Zacks Rank #2 (Buy).