MRUS - Merus: Remains At 'Prove It' Status Market Pricing In Further Downside

Summary

• MRUS has traded with wide-reaching volatility over the course of the past 2 years.
• A series of setbacks on its pipeline conversions has seen a number of rapid selloffs, each resulting in tremendous drawdown.
• The latest headwind sprouts from the FDA requesting more enrollments in MRUS' Zenocutuzumab trial.
• To us, this says MRUS needs to demonstrate the compound's sensitivity across a wider population to establish efficacy.
• Net-net, capital could be allocated more efficiently elsewhere at this point in time, hence, we rate MRUS a hold.

Investment Thesis Summary

The spate of recent trial and pricing momentum exhibited by numerous clinical stage immuno-oncology companies at the back end of FY22 has piqued our interest. This portion of the market caught a strong bid in the latter half of Q4, driven by a blend of sector beta and some company standouts. At the same time, some names weren't so fortunate, and experienced heavy downside to close out the remaining weeks in FY22.

One case in point was Merus (MRUS), after the FDA made recommendations on trials involving its investigational compound, Zenocutuzumab. The stock had gathered substantial attention in the first half of the year, however has since reversed course sharply. Alas, I'm back today in order to deliver our examination findings on MRUS, providing context on its investigational compounds at the same time. The FDA's recommendation has put a dent in the stock's upside potential in our estimation, and there's now downside risk that must be factored into the investment debate. Net-net, without a directional view on the market, we rate MRUS a hold.

Exhibit 1. MRUS price action during 2022. This is a high-beta stock that's been punished in the back end of the year.

MRUS recent developments with Zenocutuzumab

MRUS recently met with the FDA to discuss the potential filing of a biologics license application ("BLA") for Zenocutuzumab, ("Zeno"; also known as MCLA-128) a bi-specific humanized full-length immunoglobulin G1 antibody, in NRG1 fusion ("NRG1+") cancer.

Zeno is designed to inhibit the protein HER2, block ligand binding to the HER3 receptor site, and prevent HER2-HER3 heterodimerization and downstream signalling of tumorigenesis [for reference, HER2 and HER3 are proteins that help breast cancer cells grow at an accelerated pace]. It also has the ability to recruit natural killer effector cells through its enhanced antibody-dependent cellular cytotoxicity properties.

Following the meeting with the FDA, MRUS believes that a potential path to regulatory approval remains viable for Zeno, in a tumour agnostic indication for NRG1+ cancer, or separate applications for NRG1+ lung and NRG1+ pancreatic cancer. It believes this could then be followed by a potential tumor agnostic filing.

Exhibit 2. Description of Zeno

Exhibit 3. Zeno pharmacology

MRUS' clinical phase I/II eNRGy study is currently evaluating the potential of NRG1 fusions as targets for targeted therapy with Zeno. The majority of the eNRGy trial and early access program enrollment to date has been for NRG1+ non-small cell lung cancer ("NSCLC") and NRG1+ pancreatic cancer. We'd advise that NRG1 fusions, which occur at low frequencies in solid tumours [but are enriched in certain cancer types – such as KRAS wild-type pancreatic cancer, driver-negative non-small cell lung cancer, and the invasive mucinous adenocarcinoma subtype of lung cancer], are highly attractive therapeutic targets due to their oncogenic activity.

It's essential to highlight that, after its meeting with the company, the FDA has recommended that MRUS enroll additional patients under either a tissue agnostic or tumor-type specific approach, in order to obtain further supportive data for a potential registrational data set, as outlined in the FDA's draft guidance on Tissue Agnostic Drug Development in Oncology. For investors, it's important to know that the amount of data needed for a potential BLA filing will depend on:

a). the magnitude, and durability of responses, and

b). the overall risk benefit assessment.

In the meantime, MRUS says it is currently evaluating the impact of this guidance on the timeline for the potential BLA filing.

MRUS' MCLA-129 also garnering attention

Meanwhile, it's worth highlighting that MRUS continues with enrollment in expansion cohorts for its its investigational drug, MCLA-129. According to MRUS , MCLA-129 is "designed to inhibit the EGFR and c-MET signaling pathways in solid tumors". It too is a bi-specific humanized full-length immunoglobulin G1 antibody with enhanced antibody-dependent cellular cytotoxicity activity, albeit as a monotherapy treatment for NSCLC

It has recently announced the enrollment of patients in a phase 1/2 clinical trial of MCLA-129. As of October 2022, a total of 33 patients have been enrolled in the trial, which includes individuals with NSCLC and head and neck squamous cell cancer ("HNSCC"), as well as those with epidermal growth factor receptor ('EGFR") mutant NSCLC who have progressed on Tagrisso [osimertinib], a prescription medicine used to treat adults with NSCLC.

Exhibit 4. MCLA-129 characteristics

Initial data from 18 evaluable patients treated with MCLA-129 at various dose levels showed promising results, with two confirmed partial responses, and an additional four patients exhibiting more than 20% tumor shrinkage. MCLA-129 has demonstrated an acceptable safety profile in our opinion, with the most common adverse events being infusion-related reactions. Based on the pharmacokinetic and pharmacodynamic data, as well as the favorable safety profile, the dosage regime suggests a recommended phase 2 dose of 1500mg administered every 2 weeks.

MRUS technical studies to guide price visibility

In the absence of tangible earnings and sales growth we typically turn to various technical studies in order to gauge where the stock may head next. As you can see in the chart below, volatility is a constant in this name. MRUS has traded within a wide range across the past 2-year period, rallying as high as $33 and as low as $12.

For fundamentally driven investors, this picture isn't ideal, and there's nigh an argument to add on price weakness here in our opinion. In 2022, the stock rallied hard off a ~$13.50 base in May to the $31 apex shown. This was a key resistance level, as seen.

After this test it was rejected at this level and has continued its reversal at pace until the present day. Despite a snapback rally within the longer-term move, news of the FDA's recommendations mentioned above sealed the stock's fate for the time being.

Exhibit 5. Wide volatility with several attempts to break out above key resistance levels, failing at each attempt.

In addition, we'd note the trend looks to be bearish for the time being, with shares trading below cloud support, and both on balance volume and momentum studies indicating a lack of buying support.

Exhibit 6. Trading well below cloud support, lag line in close following, whilst trend indicators say there's a lack of buyers at this point.

Of equal concern, is that, after the latest thrust down from the previous highs, we now have downside targets as low as $1.30 on our point and figure studies. We aren't so confident this will materialize, but it does tell us to tread cautiously here, and that capital can perhaps be allocated more efficiently and effectively elsewhere.

Exhibit 7. Downside targets suggest to tread carefully and observe further developments for MRUS from the sidelines.

In short

MRUS remains at 'prove it' stage in our opinion, and it must deliver on advancing its pipeline in order to command investor attention. At the moment, the market is reacting violently to each setback in its pipeline conversion, and this presents as a key risk to holding the stock. Without the data present in its hypothesis testing, the FDA has indicated it requires more data in order to grant the BLA for Zeno. On that front, investors were obviously expecting better results from the Q3 earnings update in November, hence the rapid selloff from then to date. Net-net, we're happy observing MRUS from the sidelines for now.

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