RXDX - Prometheus Biosciences A Buy On Positive Phase 2 Data

Summary

• On December 7, Prometheus Biosciences, Inc. announced positive Phase 2 data for PRA023.
• Prometheus also announced a proposed Public Offering.
• PRA023 and the pipeline are promising, but risks remain for Prometheus, and competition is intense.

Prometheus Biosciences, Inc. ( RXDX ) is a clinical-stage biotechnology company specializing in immunological diseases, including UC (ulcerative colitis) and CD (Crohn's disease). On December 7, 2022, Prometheus reported positive Phase 2 results for PRA023 and that it intended to proceed to Phase 3 trials. The stock rose from about $40 per share before that to a close of $95.80 on the 7th. Then it rose again on Thursday, November 8 to over $115 per share. This article will examine the data, the announcement of a new public stock offering, and the Prometheus discovery platform, before giving my opinion on the value of the stock.

PRA023 Phase 2 Results

PRA023 is an antibody that inhibits TL1A or TNF-like ligand 1A, also known as vascular endothelial growth inhibitor. In the Phase 2 study of patients with moderate to severe ulcerative colitis, 26.5% of patients reached the primary endpoint of clinical remission, compared to <2% for the placebo arm. For the secondary endpoint of endoscopic improvement, 36.8% of patients showed improvement. Safety was good as there were no serious adverse events. This data was from the first cohort of 68 patients. A second cohort is being enrolled with results expected in Q2 2023.

In the open-label (not placebo-controlled) Phase 2a study of PRA023 for moderate to severe Crohn's disease, 70.9% of patients in the study had previously been treated with biologics without success. But despite that, 26.0% of patients treated with PRA023 achieved an endoscopic response and 49.1% achieved clinical remission. Historical expected placebo rates were 12% and 16%, respectively. Again, safety was not an issue. See PRA023 results for further details.

These are very good results. It was already clear that diseases like UC, CD, and IBD are complex and that different patients may respond to different treatments. PRA023 still needs Phase 3 studies. One good factor is that these studies are looking at patients over a 12-week period. That means Phase 3 studies could be conducted quickly, at least compared to the multi-year trials necessary in some disease indications.

Public Offering and Dilution

Despite having adequate funding for now, Prometheus Biosciences decided to take advantage of investor enthusiasm over the new data by announcing a public stock offering . $250 million is to be raised. At a price of $115 per share, that would imply issuing about 2.2 million shares, with the option to increase that by about 15%. The number of shares listed at the end of Q3 was 41.2 million, so the dilution is about 5%. Given the jump in the stock price, I think it is a good time to raise cash to conduct the Phase 3 trials and set up for commercial sales.

Prometheus Biosciences Q3 2022 Earnings Results

For Q3 2022, Prometheus reported collaboration revenue of just under $1 million, about flat from year-earlier. Operating expenses were just over $39 million, while other income was $1.1 million. The GAAP net loss was $37 million, which is likely the minimum burn rate going forward, given that Phase 3 trials are more expensive than Phase 2 trials. The cash and investments balance was about $260 million. Unless the burn rate increases significantly, that would appear to be adequate into 2024, which matches the company estimate of being funded into mid-2024.

With the results on November 9, Prometheus reported that PRA052 had begun a Phase 1 trial. It is monoclonal antibody blocking the CD30 ligand. CD30 is a costimulatory molecule implicated in IBD (inflammatory bowel disease).

Platform and Pipeline Overview

The Prometheus360 data science platform is used to identify new entities that can be targeted by new antibodies and other modalities to treat gastrointestinal, immune-related diseases like IBD, UC, and CD. It also can produce companion diagnostics for the disease targets. In addition to PRA023, discussed above, it has generated PRA052, which is now in Phase 1 trials for UC and IBD. There are an additional three potential therapies in the Prometheus Biosciences pipeline , all in preclinical development. All three are currently simply listed as targeting immune-mediated diseases; specific targets would likely be announced when applications are made to the FDA to start Phase 1 trials. PR300 is a small molecule that modulates GPCRs , a common drug target. PR1100 is an antibody that targets cytokine receptors. PR2100 is an anti-inflammatory cytokine antibody.

Risks

Positive Phase 2 results do not always lead to positive Phase 3 results. To some extent, the probability of future failure can be estimated from the statistical significance of the Phase 2 results, but it is never zero. In particular, adverse events may show up in larger trials that were missed in Phase 1 or 2 trials. If results are good and the FDA and other regulators grant approval, there is still the commercialization struggle to consider.

I have seen many projections of future sales by CEOs turn out to be overly optimistic. While there is certainly unmet medical need for UC and CD, many patients have seen their disease controlled by therapies already on the market. If approved for sale, PRA023 will be competing in the UC market with infliximab (Remicade), tofacitinib (Xeljanz) and adalimumab (Humira), among others. The costs of commercialization may be significant in a competitive market. Another risk is valuation. Sometimes investors are overenthusiastic and the stock price, well before an FDA approval is granted, assumes a sales level that may not be reachable.

Analysis

The positive PRA023 results are a good thing. They greatly increase the chances that the therapy will eventually produce revenue and perhaps even profits. The figure to look at is market capitalization. At $115 per share the market capitalization is about $4.9 billion. That is for a company that currently has no commercial revenue.

What is the potential revenue if Prometheus can wrestle market share from existing therapies? And against any other potential UC and CD therapies in other companies' pipelines? The different mechanism of action should mean that physicians are willing to try it on patients who have not responded to other therapies. If a diagnostic test is approved by the FDA that would also drive sales. The number of patients suffering from these conditions is large, so revenue potential is high if market share becomes high. Compare to Xeljanz (which is a JAK inhibitor) sold by Pfizer, first approved in 2012, and which had sales of $2.4 billion in 2020, for multiple indications.

Longer run, there is likely value in the Prometheus Biosciences, Inc. platform and the pipeline it generates. Despite the risks, the opportunity is big enough that I see Prometheus Biosciences as a good strategic investment for those who have a long-term outlook.

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