ERAS - Erasca: Potential Strong Upside Ahead

Summary

• Erasca, Inc. is a clinical-stage biopharmaceutical developer of therapies for patients with RAS/MAPK pathway-driven cancers.
• Shares were dragged down sharply by headwinds from the Fed's hawkish stance and other macroeconomic issues.
• Erasca has some positive catalysts that could help the stock price rally very strongly, but the market needs to take notice.

Erasca, Inc. Has Some Interesting Positive Catalysts Waiting to Be Noticed by the Market

As the chart below shows, positive momentum in U.S.-listed biotech stocks continues, helping the sector to outperform the broader U.S. market for an extended period over the past 12 months. The iShares Biotechnology ETF ( IBB ) is the benchmark for U.S.-listed biotechnology companies, while the SPDR S&P 500 Trust ETF ( SPY ) is the benchmark for the U.S. stock market.

Not all biotech stocks have contributed to the uptrend; instead, some have achieved the opposite. While most of these falling biotechs are best avoided due to their poor prospects and lack of incentives, it is still possible, like looking for a needle in a haystack, to find interesting investment opportunities represented by stocks with strong upside potential.

In the case of Erasca, Inc. ( ERAS ), it could arguably be a stock that has managed to remain unnoticed in the market. The very poor development of the share price does not reflect some positive catalysts related to this stock. Thus, if Erasca shares were purchased at current prices, the buyer would automatically be credited with the potential for a huge profit once the market recognizes the growth opportunities associated with this stock.

Erasca's portfolio contains some positive upside catalysts, including a license to develop and commercialize a cancer drug and expectations of positive results from certain clinical trials.

Erasca, Inc. in the Biotechnology Industry

Erasca, Inc., headquartered in San Diego, California, is a clinical-stage biopharmaceutical company focused on the discovery and development of precision therapies to commercialize for patients with RAS/MAPK pathway-driven cancers.

The RAS/MAPK pathway is a chain of proteins in the cell that transmits a signal from a receptor on the cell surface to DNA in the cell nucleus via an on/off switching mechanism.

When one or more of these signals get stuck in the “on” or “off” position due to a mutation in one or more of the proteins that make up the chain, the defect is what triggers cancer.

Erasca is developing drugs that aim at reversing the switch and thus act directly on the malfunction that causes cancer.

The Portfolio of Products Under Development

Erasca's portfolio includes the following main candidates:

• ERAS-007 , an oral cancer growth inhibitor for the treatment of non-small cell lung cancer, colorectal cancer and acute myeloid leukemia.
• ERAS-601 , an oral cancer growth inhibitor for the treatment of patients with advanced or metastatic solid tumors.
• ERAS-801 , a central nervous system penetrating epidermal growth factor receptor [EGFR] inhibitor for the treatment of patients with recurrent glioblastoma multiforme.

The EGFR protein is part of the process of controlling cell division and survival. Therefore, sometimes due to mutations in the EGFR gene, abnormal protein production occurs, which causes cancer cells to multiply rapidly.

• The exclusive global license to develop and commercialize Naporafenib , acquired from Novartis ( NVS ) on December 9, 2022. In exchange, Erasca will make one single upfront payment of $20 million in cash and transfer $80 million of common stock at $6.50 per share to Novartis. Novartis will also receive up to $280 million in cash upon the achievement of certain regulatory and commercial milestones as well as a small royalty of 1-4% on Naporafenib net sales.

Naporafenib is a safe, well-tolerated anti-cancer drug with preliminary proof-of-concept as a result of multiple clinical trials involving over 500 patients. The product has been administered to cancer patients alone or in combination with other immune-oncology therapies. Naporafenib aims to be used as a potential treatment for highly aggressive forms of malignant melanoma and other RAS/MAPK pathway-driven tumors.

The Targeted Diseases

Non-small cell lung cancer (NSCLC) includes several types, but they all have in common that malignancy originates in the tissues of the lungs. Smoking is recognized in the medical literature as a major risk factor for causing non-small cell lung cancer. 26 out of 100 NSCLC patients have a 5-year survival rate.

Colorectal cancer occurs when cells in the colon (the largest intestinal tract) or rectum (the passage that connects the colon to the anus) grow out of control. This cancer may be caused by a lack of exercise and a diet low in fruits, vegetables and fiber, but high in fat or processed meat. Being overweight and obesity are also predisposing factors for the disease. Colon cancer is highly treatable, primarily surgically, and often curable (about 50% chance). The disease can recur after surgery and lead to serious complications that can ultimately lead to death.

Acute myeloid leukemia is a cancer that affects the blood and bone marrow. This form of acute leukemia is very common in adults (most deaths occur in people between the ages of 65 and 84) and usually worsens very fast if left untreated. Cigarette smoke is a risk factor, as is the co-existence of other blood disorders. For all age groups, 29.5% of patients have a 5-year survival rate after diagnosis.

The company also targets advanced or metastatic solid tumors. A metastatic solid tumor is cancer that has spread to other parts of the body far from where the disease started. Advanced-stage cancer instead has a very low chance of being cured or controlled by treatment.

Recurrent glioblastoma multiforme is an aggressive brain tumor that does not generally spread to distant organs, although it can grow beyond brain tissue very quickly.

It is called recurrent because soon after the original cancer is treated, it may recur in the same part of the brain where the original tumor started or develop elsewhere in the brain. It can also occur several years after stopping treatment. After diagnosis, patients survive about 14 to 16 months. About 1% of patients can live with this disease for more than 10 years.

Malignant melanoma is a pigmented skin cancer that is dark or black in color due to the accumulation of melanin in the cells. Surgery is successful if skin cancer is detected at an early stage. This skin cancer has several triggers , including environmental and genetic factors, as well as exposure to ultraviolet ((UV)) rays from the sun, as well as those from tanning lamps and couches.

Financial Position of Erasca, Inc.

Erasca is not yet selling a treatment, so it is still in the clinical stage status.

The U.S. developer of innovative therapies against various types of cancer again reported a net loss in the third quarter of 2022. The net loss was $35.5 million or $0.29 per share in Q3 2022. In the same quarter last year, the net loss was $46.1 million (or $0.46 per share), including $17.5 million in charges related to the issuance of common stock to the Erasca Foundation.

Research and development expenses increased 41% year-on-year to $28.2 million in the third quarter of 2022, primarily due to expenses related to pre-clinical and clinical studies as well as discovery activities and consulting fees.

General and administration increased 27.5% year over year to $8.8 million in the third quarter of 2022, although the third quarter of 2021 also saw a $17.5 million increase in expenses related to the issuance of common stock for the Erasca Foundation in connection with the included Erasca’s initial public offering.

As of September 30, 2022, Erasca's balance sheet contained $365.5 million in cash and marketable securities, which the company believes is more than sufficient to fund ongoing operations through 2024. Not to mention the company can count on an additional $100 million as a result of issuing approximately 15.38 million shares of common stock at $6.50 each.

Catalysts for Higher Share Prices

Erasca has fallen sharply in the stock market for about a year, nearly 65%, heavily pricing in the succession of macroeconomic headwinds that determined the continuation of a stubborn bearish sentiment over this stock. Headwinds that have weighed heavily on the share price almost certainly include rate hikes by the U.S. Federal Reserve to counter runaway inflation, as these have led to increased investor aversion to riskier assets.

Erasca remains an asset that carries more investment risk than many other securities on the market right now, albeit much less than in 2022, given the significant year-over-year decline in its share price.

The stock could still fall under the impact of fresh rate hikes and indeed a 14-day relative strength indicator [RSI] of 47.92, showing a midpoint between oversold and overbought levels, suggests the stock price has space to fall further if the market wants to cause that kind of hassle.

But since early 2023, the stock appears to have stabilized at around $4.20 per share, which could anticipate a trend reversal if upward pressure emerges from some positive catalysts, while those that have previously provided negative sentiment continue to fade.

The first factor that could help the stock price to reach higher levels is Morgan Stanley's upgrade of Erasca, Inc. stock from Equal Weight to Overweight.

The analyst appears to have regained quite some confidence in this stock following Erasca's acquisition of Novartis' Naporafenib license. The firm also reiterated its price target of $15 per share, representing an increase of more than 3.5 times from current levels.

While the available data on Naporafenib is limited to product safety, the 500 or more patients who received the product to demonstrate proof-of-concept is a number that could boost market interest in Erasca. Judging by the trend of the 14-day RSI presented in the chart above, this information may be triggering bullish sentiment in Erasca right now.

In addition, Erasca received from the U.S. Food and Drug Administration approval to test its oral treatment, designated ERAS-349, for several common and deadly cancers, including lung cancers. The product has to be tested for the KRAS G12C mutation, as this mutation plays a key role in these solid tumors.

ERAS-3490 already demonstrated robust antitumor activity and dose-dependent survival benefits in a nonclinical model of non-small cell lung cancer [NSCLC] patients with central nervous system metastases, thanks to its superior ability to penetrate the blood-brain barrier than first-generation inhibitors.

In addition, Erasca is expected to begin a dose escalation study in the first half of 2023 to determine the best dose of ERAS-007 in combination with ERAS-601. The company is also expected to provide combination data for ERAS-007 in gastrointestinal malignancy and ERAS-601 in colorectal cancer without the targeted mutations.

An additional boost to Erasca's share price could come from a potential easing of the Fed's tightening monetary policy, as from now on the U.S. central bank is likely to factor in the cumulative impact of the multiple rate hikes it has so far implemented and the lags with which the tightening policies influence the economic activity and inflation.

The shares are trading low at the time of writing. They are trading below the 200- and 50-day simple moving average lines and well below the midpoint of the 52-week range of $3.60 to $12.80. These valuations increase the likelihood of a good return on this investment, should the described catalysts drive the share price up.

Conclusion

Erasca, Inc. is a biotechnology developer of innovative treatments for various types of cancer. Shares were dragged down sharply by headwinds from the Fed's hawkish stance. However, Erasca, Inc. stock has some positive catalysts that have the potential to propel the stock price to higher levels. For now, Erasca, Inc. shares appear to have stabilized, possibly heralding a reversal in stock prices in line with a bullish sentiment. It's worth trying to buy some Erasca, Inc. shares.

For further details see: