MRK - Gossamer Bio: Merck's STELLAR Data Impressive But Game Not Over For Seralutinib

2023-04-02 04:12:42 ET

Summary

• Merck's Sotatercept showed significant improvements in PAH patients in Phase 3 STELLAR trial with a primary endpoint of improvements in pulmonary vascular resistance, 6-minute walk distance, and NT-proBNP levels.
• Gossamer Bio's seralutinib showed clear efficacy in the Phase 2 TORREY trial, albeit not meeting expectations, and is moving forward with a revised Phase 3 trial.
• The PAH market is competitive, and while Sotatercept demonstrated greater benefits, seralutinib targets a different mechanism of action, and there may be potential for combination therapy.
• We maintain a buy rating as Gossamer Bio's current valuation is attractive (under cash value), and we see seralutinib as an approvable candidate in PAH.

March update: Merck's Sotatercept phase 3 data update during March's ACC

Merck & Co.(MRK) published detailed data on Sotatercept during ACC in March 2023. Merck's Sotatercept is a novel activin receptor-like kinase 2 (ALK2) inhibitor for the treatment of PAH. The Phase 3 STELLAR trial evaluated the safety and efficacy of sotatercept in PAH patients. Based on the data published during ACC, Sotatercept achieved its primary endpoint of significant improvements in i) pulmonary vascular resistance ((PVR)) vs. placebo, ii) key secondary endpoints such as 6-minute walk distance (6MWD) and iii) N-terminal pro-B-type natriuretic peptide (NT-proBNP) levels.

The key data from ACC are summarized below:

Source: Evaluate Pharma

We remind readers that Gossamer Bio's (GOSS) Phase 2 TORREY trial evaluated the safety and efficacy of seralutinib in PAH patients. Albeit the trial did not meet expectations of i) >20% PVR reduction and ii) 6MWD >15-20m, it showed a clear efficacy signal in patients who are in WHO FC III subgroups. We believe the disappointing results could be due to the subgroup of patients with less severe disease conditions and patient group imbalances in WHO FC subgroups. However, the data had some positive signs that may indicate a potentially positive prospect if the drug moves into phase 3; during the phase 2 TORREY trial, the drug demonstrated a statistically significant reduction in NT-proBNP levels and improved key measures of right heart health (~1-point improvement in REVEAL 2.0 risk score vs. baseline) in ~54% of patients at 24 weeks mark. We note that REVEAL 2.0 risk score has shown an association with a reduction in the relative risk of death (of around 23%) and a relative risk of clinical worsening (of around 20%). GOSS envisages proceeding with the seralutinib Phase 3 trial with a revised approach that is more likely to produce favorable results on the 6-minute walk distance (6MWD) primary endpoint.

PAH is a multibillion-dollar market that can foster multiple blockbuster agents

Despite the impressive Phase 3 STELLAR data, we believe it won't dilute Gossamer's seralutinib market opportunity as much as some of the market participants believe. We emphasize that TKIs such as seralutinib target a different and complementary mechanism of action compared to sotatercept; therefore, there will be a market for both agents, potentially as a combination treatment.

Risks

1. Clinical trial risks: The success of GOSS depends heavily on the outcomes of their clinical trials. If their Phase 3 trial for seralutinib does not meet expectations or if there are delays in the trial, it could negatively impact the stock price.
2. Competition risks: The PAH market is highly competitive, with multiple companies vying for market share. If GOSS is not able to effectively compete against other PAH therapies or if the market potential for seralutinib is smaller than anticipated, it could negatively impact the stock price.
3. Regulatory risks: The approval of GOSS's drugs by regulatory agencies such as the FDA is crucial for their success. Any regulatory hurdles or delays could impact the stock price.
4. Funding risks: While GOSS currently has a robust cash balance, they may need to seek additional funding in the future. If they are unable to secure additional funding or if there are dilution risks associated with securing funding, it could negatively impact the stock price.

Conclusion

We maintain a buy rating due to the following reasons: Firstly, the stock is currently trading below its cash value (although not negative EV due to debt), and with low market expectations, any positive news should drive the stock price up to at least above the cash value. Secondly, despite the Phase 2 TORREY trial not meeting expectations, seralutinib has shown an "approvable" level of PVR improvement and some degree of 6MWD benefits. If the Phase 3 trial focuses on the right population, there is a reasonable chance that the drug can receive approval. Thirdly, the company has a robust $255M CASH balance, which should be enough to complete Phase 3 without the need for external funding, thereby de-risking the potential dilution risk. While it is true that Merck's sotatercept demonstrated greater PVR reduction and statistically significant 6MWD benefits, the difference in mechanism of action and the convenience of an inhaled formulation over infusion should position seralutinib well in the market. Albeit, the market potential may not be a blockbuster opportunity as some investors were hoping for, given that AV-101 is advancing faster than seralutinib with a straightforward inhaled imatinib that may or may not demonstrate better efficacy than seralutinib. Furthermore, there may be an opportunity for combination therapy (seralutinib and sotatercept) due to their different mechanisms of action, which the Phase 3 trial may investigate by adding a sotatercept arm.

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