NVSEF - RayzeBio: Initiating Coverage With Buy Rating And A Price Target Of $43

2023-10-10 14:10:30 ET

Summary

• Initiating RayzeBio, Inc. coverage with a Buy rating and common stock price target of $43 based on my risk-adjusted NPV discounted cash flow model, representing a 110% upside.
• The company's radiopharmaceutical technology could revolutionize the cancer treatment landscape.
• RYZ801 has shown promise in GPC3 expressing hepatocellular cancers.
• CA9 in renal cell cancer is another promising product candidate.

Initiating RayzeBio, Inc. (RYZB) coverage with a Buy rating and common stock price target of $43 based on my risk-adjusted NPV discounted cash flow model, representing a 110% upside from its closing price of $21.

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Investment Thesis

The company's radiopharmaceutical technology could revolutionize the cancer treatment landscape

RayzeBio was founded in 2019 and is based in San Diego, CA. Its technology is based on radiopharmaceutical therapeutics, RPT using Actinium-225. RPTs are expected to be the next wave in cancer treatment. It also has advantages over competing radioligand therapies and antibody-drug conjugates, ADCs like higher efficacy and safety.

The company raised $358 million in a recent public offering last month and has raised a total of $750M in equity capital so far.

The lead candidate RZY101 could change the treatment paradigm of SSTR2 expressing tumors

RYZ101 in advanced/metastatic gastroenteropancreatic neuroendocrine tumors

Advanced/metastatic gastroenteropancreatic neuroendocrine, GEP-NET tumors have limited treatment options, and Novartis' (NVS) Lutathera was a major advance in the treatment of these tumors with an objective response rate, ORR of 13% and a progression-free survival of 21 to 40 months. SSTR2 is expressed in 80-90% of these tumors, and metastatic disease is present in 40-76% of cases.

The company's lead product candidate is RYZ101, a targeted radiopharmaceutical product candidate that delivers actinium-225, a potent alpha emitter to somatostatin receptor 2 (SSTR2) expressing tumors, and has been awarded orphan drug indication. Preliminary Phase 1b data showed an efficacy of 29%, which is higher than all currently approved treatments in this indication, and showed an efficacy that is 2.2x that of the currently approved radiopharmaceutical therapy in this indication, Novartis' Lutathera.

The Phase 1b portion of the ongoing ACTION-1 trial will compare RYZ101 in patients refractory to Lutethera, and the data is expected in H1, 2024. The Phase 3 portion of the ACTION-1 trial will test RYZ101 vs. the standard of care therapy, and the full data is expected in 2026.

The target market for GEP-NETs was $2.6 billion in 2020 based on a U.S. prevalence of 200K patients and an annual U.S. incidence of 18K patients.

RYZ101 in extensive-stage small cell lung cancers

High expression of SSTR2 is seen in 27% of extensive-stage small cell lung cancers, ES-SCLC. 2023 data from Lutethera monotherapy showed 20% PR (and stable disease in 80% of patients).

Preclinical data for RYZ101+chemotherapy in a mouse model of ES-SCLC showed efficacy and safety. The ongoing U.S. Phase 1b clinical trial will test RYZ101+chemotherapy, and the company plans to dose-escalate RYZ101 to optimize efficacy. The primary goal is to assess the durability of the response.

The target market in ES-SCLC is estimated at $1.4 billion and has an annual incidence of 100K patients. This is also a global trial, and the primary endpoint is overall survival. The interim data will be read out in H1, 2025, and the full data will be read out in H1, 2027.

Other possible indications for RYZ101

The company plans to extend RYZ101 in other indications with high SSTR2 expression and expand into earlier lines of therapy. These include the cancers shown in the figure below:

Intellectual property

Patents for RYZ101 extend till 2042.

RYZ801 has shown promise in hepatocellular cancers

Glypican-3, GPC3 is expressed in 75% of hepatocellular, HCC cancers and is associated with poor prognosis. Early human imaging data for RYZ801, another product candidate showed proof of concept. RYZ801 is planned for an IND filing in H1, 2024. The target market was $2.9 billion in 2020 with a global incidence of 900K patients. The U.S. annual incidence is 41K patients.

CA9 in renal cell cancer is another promising product candidate

There are other discovery programs, for example, CA9, a small molecule in renal cell cancer. CA9 antigen is expressed in 90% of clear renal cell cancers. Its human imaging data is expected in H1 2024.

Manufacturing

The company has its own 28,000 sq. feet R&D facility in San Diego, and a 63,000 sq. feet GMP facility in Indianapolis is expected to be operational by the end of the year.

Experienced management is an asset for effective pipeline execution

The CEO Ken has over 20 years of experience in the biopharma industry and is a serial entrepreneur. He co-founded Ablaze Pharma and was its CEO and President. He was also the President and CEO of Metacrine. He is also the co-founder and CEO of Ariossa Diagnostics, which was acquired by Roche. He was a venture capitalist at Venrock and a consultant at McKinsey. He has a B.S. degree from M.I.T. and an M.D. degree from UCSF.

Chief Medical Officer Susan also has over 20 years of industry experience and served as the Chief Medical Officer at QED Therapeutics, an affiliate of BridgeBio Pharma (BBIO), V.P., Head of Development at Puma Biotechnology and held senior positions at Millennium and Genzyme. She also held faculty positions at UPenn and Harvard.

Chief Financial Officer Kush has over 13 years of investment banking experience and served as a Managing Director in the investment banking team at Bank of America Securities, where he led over $12 billion in equity financings.

Senior V.P., Developmental and Operations Bischoff served as V.P. Development and Operations at Metacrine, Senior Director of Operations at Seragon Pharmaceuticals was involved in its acquisition by Genentech in a $1.7 billion deal. He also served as Director of Operations at Aragon Pharmaceuticals and was also involved in its acquisition for $1 billion by Johnson & Johnson (JNJ).

Senior V.P. Chemistry and Head of Discovery, Bhat served as the Senior V.P. and Head of R&D at Design Therapeutics, Chief Scientific Officer at Pyramid Biosciences, and R&D leadership roles at Ipsen and Pfizer (PFE).

Chairman of the Board of Directors, Heyman has over 25 years of industry experience. He served as the Chairman of Amunix Pharmaceuticals, which was acquired by Sanofi (SNY). He also serves on the Board of Directors for Oric Pharmaceuticals (ORIC) and PMV Pharma (PMVP). He is also the Vice Chairman of the Salk Institute and on the Board Foundation for the American Association for Cancer Research.

Prominent institutional investors hold the stock with recent insider buying

Prominent institutions like Viking Global, Venrock (6.6% stake), Redmile, Cormorant, and Perceptive Advisors hold the stock. Insiders have been adding to the stock recently after the IPO. A Director recently bought $8.5 million of stock. Viking Global, a 10% owner, recently bought $50 million of stock.

The stock is undervalued based on my risk-adjusted NPV, DCF method

Financials

Cash on the balance sheet is expected at $867 million. The operating cash use was $51 million year to date. The cash is expected to be enough for the next 12 months at the current cash use rate. There is no long-term debt.

Valuation

I estimate peak probability-adjusted peak U.S. revenue for the key product candidates as $786 million at patent expiry.

My estimate for peak probability-adjusted U.S. revenue for key product candidates at patent expiry is given below:

• RYZ101 in GEP-NETSs: $462 million
• RYZ101 in ES-SCLC: $275 million
• RYZ801 in GP3-HCC: $244 million
• Ca9 in RCC: $75 million.

The inputs in my valuation are:

• Average wholesale price, AWP for above product candidates: $230,000/year/patient (similar to Lutethera)
• Average sales price, ASP; 74% of AWP (average for biotech per Pharmagellen guide): $170,200/year/patient
• Annual ASP price increase: 3%
• Peak market share: 50%
• Probability inputs for each stage from the Pharmagellan guide
• Target markets for product candidates:

- GEP-NET tumors: 7,000 patients in the U.S.

- ES-SCLC: 27,000 patients in the U.S.

- GPC3-HCC: 23,500 patients in the U.S.

- Ca9 in RCC: 74,000 patients in the U.S.

I used a discount rate of 15% and a subsequent decrease to 8% at maturation as the product candidates come to the market.

Link to the DCF Model .

Near-term catalysts

- First half of 2024: Phase 1b longer-term follow-up data for RYZ801 in GEP-NET tumors.

- First half of 2024: IND filing for GPC2 in hepatocellular cancer.

- First half of 2024: Early human imaging data for CA9 in renal cell cancer.

- Second half of 2024: Phase 1b interim safety data for RYZ801 in extensive-stage small cell lung cancer.

- Second half of 2024: Early human imaging data for the next generation binder in SSTR2-expressing tumors.

- Second half of 2024: Interim assessment of compassionate use of human subjects for GPC3 in hepatocellular cancers.

- Second half of 2025: Phase 3 interim data for RYZ801 in GEP-NET tumors.

Rating: Buy with a price target of $43 (110% upside)

The stock is close to the IPO price and is a good buy here.

Disclaimer

Risks in this investment include lackluster data from ongoing trials, however, the data so far has shown promise. This report is my opinion and not a substitute for professional investment advice. Please conduct your own due diligence or consult a professional investment advisor before making any investment decisions. Investment in developmental-stage biotech stocks is risky and not suitable for all investors.

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