MRTX - Mirati Therapeutics: EU Rejection Clouds Krazati's Prospects

2023-07-25 09:00:00 ET

Summary

• Mirati Therapeutics' expansion plan faces setback as European Medicines Agency denies authorization for lung cancer drug Krazati.
• Despite the EU setback, MRTX remains resolute in its commitment to Krazati, with promising results from Phase 2 trials.
• Amid uncertainties due to the EMA decision, investors are advised to "Hold", given potential growth if Krazati's performance improves and other treatments emerge.

Introduction

Mirati Therapeutics (MRTX), a commercial biotech firm, develops innovative cancer treatments. Their FDA-approved drug, Krazati, aids adults with KRAS G12C-mutated advanced lung cancer. They're also researching selective kinase and targeted inhibitors for specific cancer-causing molecules.

In my previous analysis of Mirati Therapeutics' Q1 2023 results, I noted their financial instability despite Krazati's potential. High operating expenses and depleting cash reserves emphasized the company's reliance on Krazati. Their future, scientifically and financially, depends on Krazati's success. Due to these uncertainties, I advised investors to "Hold". Since my rating downgrade, shares of MRTX are trading 30% lower.

Recent developments: The European Medicines Agency [EMA] panel rejected a conditional marketing authorization request for lung cancer drug Krazati.

The following article reassesses my thesis in light of the EMA's rejection.

Financial Performance

Let's first review Mirati's most recent quarterly earnings report. As of March 31, 2023 , Mirati had approximately $0.9 billion in reserves. Their Q1 product revenue was $6.3 million, largely from Krazati, and licensing revenue slightly increased to $0.9 million. Expenses included new costs for Krazati, and while R&D costs decreased to $126.7 million, selling and administrative expenses rose to $73.5 million. Mirati's net loss was $184.6 million, down from $188.4 million in 2022, and the company expects a 2023 net cash burn of $525-$580 million.

Stock Assessment

According to Seeking Alpha data, MRTX shows mixed results. Its 2023-2025 earnings estimates show gradual EPS improvement and significant sales growth. Most earnings revisions are positive, but the valuation is poor, with high EV/Sales and negative P/E ratios. Revenue growth rates are volatile, and profitability measures like ROE and ROA are negative. The stock has lost momentum, underperforming the S&P500 significantly over the past year.

Despite a considerable cash reserve of $907.67M, Mirati's market cap stands at $1.97B, and it carries a total debt of $51.13M.

Mirati's Krazati Denied in European Union

Mirati Therapeutics recently encountered a hindrance as the European Medicine Agency's Committee for Medicinal Products for Human Use [CHMP] declined the Conditional Marketing Authorization Application for their drug, Krazati (adagrasib). This therapeutic is aimed at treating patients suffering from advanced KRASG12C-mutated non-small cell lung cancer (NSCLC). Mirati, however, is set on appealing for a formal re-evaluation, standing by the drug's beneficial risk-profile and its potential synergy with other treatments.

This development is noteworthy because it may put a brake on Mirati's aspirations to broaden its reach within the European market. The European Union is traditionally more cautious in granting regulatory approvals compared to the United States, which can affect the speed at which new drugs enter the market. Recall, Krazati is only available in the US via its accelerated approval program and will require confirmatory data for full approval.

Despite this hurdle, Mirati is not disheartened and remains resolute in its commitment to make Krazati available to suitable European patients via individual requests from medical professionals, in compliance with local laws and regulations. Additionally, the company emphasizes that this decision will not influence its ongoing clinical trials. Anticipated Phase 3 trial outcomes, due in early 2024, are still on track.

From an analytical standpoint, the unfavorable verdict could temporarily impede Mirati's expansion plans and shake investor confidence. However, the company's tenacity and the promising results from the Phase 2 trials might potentially tip the scale in their favor during the re-evaluation process. The results of the upcoming Phase 3 trials will also play a pivotal role in determining Mirati's future course in the European market.

My Analysis & Recommendation

In conclusion, the recent rejection of Krazati by the European Medicine Agency's CHMP presents a hurdle for Mirati Therapeutics' expansion into the European market, a key strategic growth area. This may significantly affect the company's projected revenues and potential market size, which could dent investor confidence, particularly as the company's financial health relies heavily on Krazati's success.

However, it's important to note that this setback isn't definitive. Mirati's intent to seek a formal re-examination speaks to their belief in Krazati's efficacy and potential. Positive results from the ongoing Phase 3 trial could strengthen their case, offering hope for a potential overturn of the decision.

Looking at Mirati's financials, while they are burning through cash, a significant reserve remains. Although expenses are increasing, the revenues have started to grow, indicating a positive trend, provided the Krazati market performance continues to improve.

Mirati's stock performance, despite being subdued recently, reflects the potential growth from their innovative cancer treatments, particularly if Krazati gains traction in more markets. The significant sales growth projections from 2023-2025, coupled with steady EPS improvement, underscore this potential. However, the recent EU delay may require a recalibration of such projections.

Despite these uncertainties, there are positives. The company's commitment to continue providing Krazati in the EU demonstrates their resilience and dedication to patient care. Moreover, ongoing research into other potential treatments could yield fruitful outcomes down the line, diversifying their portfolio and reducing the company's dependence on Krazati.

Given the mixed outlook, I advise investors to maintain a "Hold" position for now. While there are risks involved, especially regarding the EMA's decision, there's also potential for growth if Krazati's performance continues to improve and if other treatments in the pipeline come to fruition. Therefore, it's prudent to monitor Mirati's progress in the coming quarters before making further investment decisions.

For further details see: