MGNX - MacroGenics: Non-Dilutive Funding Propels Drug Candidates (Rating Upgrade)

2023-05-29 02:47:12 ET

Summary

• MacroGenics demonstrates promise with its drug lorigerlimab for mCRPC treatment, despite a recent 18% stock price drop.
• Q1 2023 showed financial growth for the company, with doubled revenue and a narrower net loss compared to Q1 2022.
• FDA's approval of Zynyz, the company's third product, contributes to its financial strength and operational longevity.
• The company's financial stability and product pipeline suggest a "Buy" rating, highlighting potential growth from successful clinical trials.

Introduction

MacroGenics ( MGNX ) is a cutting-edge biopharmaceutical firm dedicated to creating novel treatments for cancer and autoimmune diseases. The company, established in the year 2000, has been progressively building an extensive array of product prospects in differing developmental stages since its inception. The product offerings of MacroGenics heavily lean on their unique Fc optimization technology and the Dual-Affinity Re-Targeting (DART) technological platform.

In my earlier appraisal of MacroGenics, I expressed optimism about the performance of its drug, lorigerlimab, particularly for treating patients with mCRPC who have undergone extensive prior treatment. I found the drug's unique mode of action and its satisfactory safety profile promising, providing a potentially compelling alternative to existing treatments. I noted the company's plans to initiate a phase 2 trial later in the year and that their mCRPC data had piqued considerable interest within the prostate cancer community. However, I also highlighted the need for additional clinical trials to validate these findings and to evaluate the drug's efficacy and safety among a larger patient base. Subsequently, my rating on MacroGenics was "Hold". Since my analysis, stock of MacroGenic's trades 18% lower.

The following article provides an update in light of recent developments, discussed in detail below.

Q1 2023 Financials

In Q1 2023, MacroGenics reported a rise in cash, equivalents, and marketable securities from $154.3 million at the end of 2022 to $241.7 million, not accounting for an additional $30 million milestone payment tied to Tzield approval. Revenue for the quarter, primarily from collaborations, doubled to $24.5 million compared to the $11.1 million reported in Q1 2022. Research and development expenses saw a decrease from $61.4 million in Q1 2022 to $45.9 million, as a result of decreased costs in vobramitamab duocarmazine development and halted studies, although this was partially offset by increased expenses in discovery projects, preclinical molecules, and lorigerlimab-associated clinical costs. Selling, general, and administrative expenses reduced to $13.5 million from the previous year's $16.3 million, mainly due to decreased legal and consulting costs. MacroGenics reported a net loss of $38.0 million for the quarter, a reduction from the $66.4 million loss in Q1 2022. With 61,838,565 outstanding common shares, MacroGenics projects its current cash balance of $241.7 million, along with expected future revenues, to sustain operations through 2025, considering anticipated expenses for upcoming clinical and preclinical trials, including the Phase 2 TAMARACK trial and the lorigerlimab mCRPC study. Per Seeking Alpha, the company's financial position, indicated by a market capitalization of $318.47 million, total debt of $34.55 million, and cash reserves of $241.66 million, corresponds to an enterprise value of $111.36 million.

Q1 2023 Earnings Call Review

During the most recent earnings call , MacroGenics' management expressed their delight over the US FDA's approval of the third product emerging from their pipeline, Zynyz (retifanlimab), developed in collaboration with Insight for treating advanced Merkel cell carcinoma. This addition to their portfolio, along with Margenza and Tzield, has made them eligible for over $1 billion in milestone payments, contributing to their non-dilutive capital of $270 million and extending their cash runway through 2025.

They went on to discuss vobramitamab duocarmazine, an antibody-drug conjugate targeting the B7-H3 molecule, emphasizing its broad application across multiple solid tumor types. The Phase 2 TAMARACK study on vobra duo was initiated in late 2022, and recent modifications have been made to the study protocol due to changes in the treatment landscape for patients with metastatic castration-resistant prostate cancer. They expect to start enrollment under the revised protocol this quarter, with clinical updates anticipated in 2024.

They also provided an update on lorigerlimab, a bispecific tetravalent PD-1 x CTLA-4 DART molecule. Following promising clinical results from a single-arm dose expansion study of lorigerlimab, they plan to start enrollment in a Phase 2 randomized study, in combination with docetaxel, for second-line chemotherapy-naive mCRPC patients in the second half of this year.

Next, they touched upon MGD-024, a next-generation bispecific CD123 x CD3 DART molecule that's being tested in a Phase 1 study in patients with CD123 positive relapsed or refractory hematologic malignancies. Moreover, they mentioned enoblituzumab, an Fc optimized monoclonal antibody targeting B7-H3, which demonstrated positive results in a Phase 2 study for high-risk prostate cancers.

Finally, they discussed their partnership with DRI for Tzield, for which they received an upfront payment of $100 million and are still eligible for a series of milestone payments. The recent approval of Zynyz resulted in a $15 million milestone payment from Insight, with more potential payments in the pipeline.

My Analysis & Recommendation

MacroGenics, viewed through the lens of its present circumstances and future prospects, appears poised for success due to its comprehensive product pipeline, strong fiscal health, and advanced technological platforms. Notably, their Fc optimization technology and DART platform have fostered the development of compelling drug candidates, with lorigerlimab and vobramitamab duocarmazine taking the lead. Lorigerlimab, in particular, holds potential in treating mCRPC, courtesy of its unique mechanism and solid safety profile.

Financially, MacroGenics stands strong. This is evidenced by their recent milestone earnings, increased collaborative revenue, and growing cash and marketable securities. Combined with a reduction in R&D and administrative expenses and a substantial decrease in net loss, the company showcases prudent financial management. Furthermore, with funding secured through 2025, they are well-equipped to tackle potential trials and developmental challenges ahead.

The approval of Zynyz, Tzield, and Margenza affirms the success of MacroGenics' drug development approach and their capacity to yield significant collaborative returns. The firm's ability to garner further milestone payments strengthens their non-dilutive capital base, fortifying their fiscal health.

Despite a recent 18% stock price dip, the company's bright future prospects should not be overlooked. MacroGenics' adept financial management, paired with a robust product pipeline, suggests a high potential for value creation in the future. Coupled with the potential of its wholly-owned drug candidates and future milestone payments from out-licensed drugs, MacroGenics seems increasingly undervalued as its enterprise value nears a meager $100 million. The current price could be a strategic entry point for long-term investors prepared to await the outcomes of drug development.

In conclusion, given its solid financial standing, MacroGenics seems well-prepared to withstand the biopharmaceutical industry's inherent risks and uncertainties. The success of upcoming clinical trials, especially those concerning lorigerlimab, will play a pivotal role in determining their growth trajectory. Favorably-disposed investors who are comfortable with risk might see the current price as an investment opportunity. Thus, I am moving my rating from "Hold" to a cautiously optimistic "Buy" for MacroGenics, urging continued close observation of clinical trial progress.

Risks to Thesis

When the facts change, I change my mind.

There are a few key risks that could upend my optimistic stance on MacroGenics:

1. Clinical Trial Risk: MacroGenics is heavily reliant on the success of its ongoing and forthcoming clinical trials, especially those pertaining to lorigerlimab. Should these trials fail to achieve their objectives or uncover significant safety issues, the company's future prospects and stock price could suffer significantly.

2. Regulatory Approval Risk: Even if clinical trials are deemed successful, there's no certainty that drugs will gain approval from regulatory bodies such as the FDA. Delays in approval or outright rejections can have a substantial negative effect on MacroGenics' financial situation and future growth.

3. Commercialization and Market Acceptance Risk: Assuming regulatory approval, there remains the risk that the medical community may not widely adopt MacroGenics' drugs. There may also be strong competition from other drugs already in the market. These factors could limit the potential revenue MacroGenics can generate from its products.

4. Sustained Financial Losses: Despite improved financial health, MacroGenics still reports significant losses. If the company fails to achieve profitability in the near future, investor confidence may falter, which could negatively impact the stock price.

5. Dependence on Milestone Payments: MacroGenics' financial health largely depends on milestone payments from its partnerships. If these payments are delayed, less than expected, or fail to materialize, this could severely affect the company's financial stability.

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