IO Biotech (IOBT) faces increased near-term uncertainty after reporting that the US Food and Drug Administration recommended it not submit a biologics license application for cylembio in melanoma after a phase 3 trial fell narrowly short of statistical significance, Morgan Stanley said in a Tuesday report.

The biopharmaceutical company said Monday it will continue discussions with the FDA on the design of a potential new registrational study for cylembio and hold talks with EU regulators regarding a path to submission in the EU.

IO Biotech also said it is implementing a plan to conserve capital, including a workforce reduction of about 50% in full-time employees, and anticipates a non-recurring charge of $1 million to $1.5 million in Q3 2025. The company also said it expects its current capital to fund operations into Q1 2026.

Morgan Stanley downgraded the stock to equal weight from overweight, saying it believes the FDA's recommendation together with the company's limited cash drives uncertainty and creates near-term challenges for its lead melanoma program.

The investment firm said it didn't downgrade to underweight as it believes cylembio holds potential in melanoma as well as for other indications including squamous cell carcinoma of head and neck and non-small cell lung cancer.

The investment firm also slashed its price target to $0.39 from $4.

Shares were down 1.1% in recent trading.