MRTX - Mirati: The High Stakes Of Krazati's Market Performance Amidst Dwindling Cash (Rating Downgrade)

2023-05-20 04:46:48 ET

Summary

• Mirati Therapeutics has achieved significant success with its FDA-approved cancer drug, Krazati, but the company's recent financials reveal potential challenges ahead.
• Despite earning $6.3M in product revenue from Krazati in Q1 2023, rising operational expenses have put a strain on Mirati's financial resources, resulting in a net loss of $184.6M.
• Mirati's cash reserves decreased drastically in Q1 2023 and the company forecasts a high net cash burn between $525-$580M for 2023.
• Mirati's stability depends on Krazati's revenue growth to cover increasing costs, especially in marketing, sales, and clinical trials.
• The current recommendation shifts from "Buy" to "Hold" due to these financial uncertainties and Krazati's crucial market performance.

Introduction

Mirati Therapeutics ( MRTX ) stands tall as a commercial biotech powerhouse, focusing its efforts on designing innovative treatments for cancer by addressing the genetic and immunological factors at play. Their first triumph is FDA-approved Krazati (adagrasib), a drug dedicated to helping adults with KRAS G12C-mutated advanced or metastatic non-small cell lung cancer who have previously undergone at least one round of systemic therapy. An orally administered medicine, Krazati, is currently under trial for use both independently and in conjunction with other treatments. Beyond Krazati, Mirati has its hands full with further research endeavors to develop selective kinase inhibitors and targeted inhibitors for specific cancer-causing molecular drivers.

In my past assessment , I projected a bright future for Mirati's Krazati, which I believed had the potential to claim a significant chunk of the 2L KRAS G12C-mutated NSCLC market, expected to cross the $1 billion mark in the near future. Despite its resemblance to Amgen's Lumakras, Krazati stands out with its unique pharmacological properties, which could influence outcomes across varying cancer types. Besides, Mirati is underway with clinical trials for the drug's first-line use, with KRAS featuring in a range of other cancers. In light of these considerations, I suggested buying Mirati's stock, as Krazati had all the makings of a blockbuster drug.

Following my endorsement in late March, Mirati's stock enjoyed a 8% spike - on par with the overall market ( SPY ).

On May 9th, Mirati unveiled its 1Q 2023 earnings, which represented Krazati's inaugural quarter in the market, following its fast-tracked approval in December.

The following article serves to update investors in light of Mirati's most recent financial report, discussed in detail below.

Mirati's Financials

At the close of March 2023, Mirati reported a reserve of about $0.9 billion in cash, cash equivalents, and short-term investments. The first quarter of 2023 marked a notable jump in product revenue, which clocked in at $6.3 million from Krazati, compared to zero product revenue in 2022. In addition, licensing and collaboration revenue saw a minor increase to $0.9 million, thanks to the agreement with Zai Lab, up from $0.7 million in 2022.

The expense sheet for Q1 2023 listed a product revenue cost of $0.8 million, primarily associated with Krazati's manufacturing and distribution, along with some non-cash amortization expenses. This was a new addition, as there were no product revenue costs during the same period in 2022.

Research and development costs took a dip, settling at $126.7 million, down from $131.0 million in 2022, mainly due to a decline in clinical development expenses for sitravatinib, and reduced clinical manufacturing costs. However, these savings were partially offset by cost escalations for early-stage clinical programs and a surge in salaries and other employee-related expenses.

In contrast, selling, general, and administrative expenses saw an increase, reaching $73.5 million, up from $54.0 million in 2022, primarily due to inflated costs related to headcount, share-based compensation, salaries, and expenses supporting Krazati's marketing and sales operations.

The company reported a net loss of $184.6 million, or $3.18 per share, a slight improvement from the net loss of $188.4 million, or $3.40 per share, during the same period in 2022.

The decrease in cash and equivalents amounted to $181.5 million, including 2022 bonus payments and a one-time payment to Pfizer. The company anticipates a net cash burn in 2023 between $525 million and $580 million.

Financial Analysis

While Mirati Therapeutics continues to pave the way with its groundbreaking innovation, Krazati, a closer look at the company's financial health reveals certain warning signs. With the current operational expenses, specifically tied to marketing, sales, and ongoing clinical programs, the company's expenditure is hefty. With a cash balance of around $0.9 billion as of March 2023, Mirati's financial runway looks somewhat precarious unless there is a dramatic increase in Krazati's revenues.

The company's cash and equivalents took a significant hit, reducing by $181.5 million in 1Q 2023, suggesting a net cash burn for the year between $525 million and $580 million. This is a cause for concern, even for investors in the biotech industry, which is known for its high expenditure due to intensive R&D requirements. The need for Krazati to perform robustly in the market becomes crucial in this context. If the drug's revenue does not see substantial growth, Mirati's capacity to cover its elevated expenses could be compromised, possibly impacting its ambitious research programs.

My Analysis & Recommendation

In conclusion, Mirati Therapeutics' Q1 2023 financial results reveal a precarious fiscal situation despite the potential of its FDA-approved drug, Krazati. Rising operating expenses and dwindling cash reserves highlight the company's dependence on Krazati's market performance. Specifically, escalating costs related to marketing, sales, and clinical programs underscore the urgent need for a boost in Krazati's revenues.

The sharp decrease in cash reserves this quarter, along with an expected high net cash burn for the year, is concerning. Though high burn rates are common in the biotech sector, Mirati's situation presents a unique challenge. The company's future—both in terms of scientific advancement and financial stability—hinges on Krazati's commercial success.

If Krazati's revenues fall short of expectations, Mirati may resort to debt financing or equity dilution, which could impact the company's balance sheet and share value. This situation presents a dual risk: immediate financial instability if Mirati can't maintain operations, and potential disruption to research programs due to budget constraints.

Given these factors, while my previous recommendation was a "Buy," the current uncertainties warrant a reassessment. I now advise investors to "Hold" their positions, closely observing Krazati's market performance and Mirati's financial health in the coming quarters before further investment decisions.

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