RLAY - Relay Therapeutics: Market Is Underestimating Lirafugratinib's Potential (Rating Upgrade)

2023-11-06 02:05:59 ET

Summary

• Relay Therapeutics has maintained clinical momentum in its Phase 1/2 ReFocus trial for RLY-4008, showing promise for FGFR2-altered cholangiocarcinoma.
• The company's financial health is strong, with ample short-term liquidity and significant assets covering debts.
• Market sentiment is skeptical, with high short interest and the stock's underperformance relative to the S&P 500, but prominent institutions show confidence in the company's long-term prospects.
• Recommendation: Speculative Buy on Relay stock based on RLY-4008's clinical promise, despite financial risks and market doubt.

At a Glance

Relay Therapeutics ( RLAY ) has reached a critical phase, juxtaposing strong financial foundations against increasing operational costs, which I have previously analyzed in depth. Since my last evaluation, lirafugratinib's clinical momentum has been maintained in the Phase 1/2 ReFocus trial, showing significant promise for FGFR2-altered cholangiocarcinoma, although Relay has observed a notable cash reduction from $1 billion to $810.6 million. Despite the market's hesitancy, intensified by a sharp stock dip post-RLY-2608 preliminary data, I view the strategic R&D investments as a reinforcement of long-term prospects, contingent on ongoing clinical success. As Relay maneuvers through precision oncology's complex landscape, my updated analysis discerns a speculative optimism rooted in the company's sustained clinical strategy and judicious fiscal management.

Q3 Earnings

To begin my analysis, looking at Relay Therapeutics' most recent earnings report , the company displayed a significant uptick in license and other revenue, jumping to $25.2M for the quarter, a stark increase from $0.344M in the prior year. However, operating expenses surged, with research and development costs hitting $81.49M. The net loss narrowed to $65.73M or $0.54 per share, down from $84.17M or $0.76 per share year-over-year, indicating some cost control. Share dilution is evident, with the weighted average shares outstanding increasing from 110.9M to 122.2M.

Financial Health

Turning to Relay Therapeutics' balance sheet , the aggregation of 'cash and cash equivalents' at $151.3M and 'investments' at $659.3M totals approximately $810.6M in liquid assets. Their current ratio, calculated as total current assets over total current liabilities, stands at approximately 16.4, indicating ample short-term liquidity. The total assets of $906.9M contrast with total liabilities of $128.6M, suggesting a robust balance with significant assets covering debts of all categories.

Over the last six months, the net cash used in operating activities is approximately $211.1M, resulting in a monthly burn of roughly $35.2M. By dividing the total liquid assets by the monthly cash burn, Relay Therapeutics' cash runway is estimated to be approximately 23 months.

Given the current cash runway exceeds the one-year mark, the odds of requiring additional financing within the next twelve months could be considered medium, depending on operational adjustments and revenue generation moving forward. However, it is critical to note these values and estimates rely on historical data and may not reflect future performance, which is subject to operational efficacy and market conditions.

Market Sentiment

According to Seeking Alpha data, Relay Therapeutics’ market capitalization of approximately $927 million, coupled with a high short interest of 16.19% and a beta of 1.86, indicates a market that harbors skepticism about the company's short-term performance prospects. This is accentuated by the stock's underperformance relative to the S&P 500 ( SPY ), as Relay has experienced sharp declines over the past year, which diverges from SPY's positive trend over similar timeframes. The short interest, involving 13.77 million shares, underscores a notable bearish sentiment and could represent a risk of a short squeeze given the days to cover stands at 12.37.

Technically, RLAY shows a bearish trend with the price trading well below both the 50-day and 200-day moving averages, indicating sustained downward momentum. The recent upturn with increased volume suggests a potential short-term reversal or pullback. The RSI near the neutral 50 may imply some indecision or consolidation. The MACD indicates negative momentum, although the lines are converging, hinting at a possible slowing in selling pressure. Investors might wait for confirmation of a trend reversal before considering entry.

Institutional ownership shows active management with increased positions by 91 holders totaling 12,246,117 shares, which is closely countered by 63 holders decreasing their positions by 12,667,091 shares. New positions opened amount to 2,843,183 shares while sold-out positions encompass 2,505,134 shares. Prominent institutions such as SB Investment Advisers, Vanguard Group, and BlackRock reflect confidence, with increases in their holdings, suggesting a belief in the company's value proposition over the long term.

Insider trades reveal zero open market buys and eight sales in the past three months, with the twelve-month picture showing more activity: eight buys and 41 sells, leading to a net activity of -9,614 shares recently but a positive net of 391,169 shares over the year. This trend may reflect insiders' mixed convictions about the company's near-term stock price trajectory or personal financial management decisions.

Lirafugratinib's Potential in FGFR2-altered Cancers

The drug candidate lirafugratinib (RLY-4008) from Relay Therapeutics, is distinguished as a highly selective FGFR2 (Fibroblast Growth Factor Receptor 2) inhibitor, uniquely targeting primary alterations and resistance mutations, which induces tumor regression while sparing other FGFRs and their associated toxicities (e.g. diarrhea, hyperphosphatemia), showcasing a broad therapeutic potential. It's noted for its molecular dynamics-based method that interacts with a portion of the ATP pocket, untouched by prior generation inhibitors, marking it as a third-generation FGFR2 inhibitor. Its high selectivity is demonstrated by significant fold selectivity over FGFR1, FGFR3, and FGFR4, marking its biochemical and cellular potency with IC50 values below 100 nM.

The recent data from the Phase 1/2 ReFocus trial validates the initial promise of lirafugratinib, particularly in cholangiocarcinoma (52% ORR, 8.2 mDOR with 6/13 responses ongoing in 25 FGFRi-naïve CCA f/r patients) and other FGFR2-altered tumors, including HR+/HER2- breast cancer. The data underscores substantial response rates and durability across various sub-groups, with a 35% Overall Response Rate (ORR) in patients with FGFR2 fusions and a 40% ORR in patients with FGFR2-altered HR+/HER2- breast cancer . The efficacy in cholangiocarcinoma patients, both with FGFR2 fusions or rearrangements and mutations, is noteworthy, especially considering the varying pretreatment scenarios with FGFR inhibitors.

The oncogenic activation of FGFR2 in advanced solid tumors opens a rapid clinical development avenue for highly selective FGFR2 inhibitors like lirafugratinib. This precision oncology approach aims to deliver tangible clinical benefits to genomically-defined patient populations.

The competitive landscape is marked by other FGFR inhibitors; however, lirafugratinib stands out for its heightened efficacy and tolerability, as seen in cholangiocarcinoma cases against competitors like Taiho’s Lytgobi , which achieved accelerated approval in cholangiocarcinoma after demonstrating a 42% ORR with a 9.7 mDOR.

The trajectory of lirafugratinib, driven by its promising efficacy and tolerability, places it in a favorable light amidst a competitive market. The continued clinical evaluations and the anticipated updates in 2024 could further bolster its standing in the oncology therapeutic landscape.

My Analysis & Recommendation

The analysis on Relay Therapeutics elucidates a picture of a company with sound financial grounding, showcased by a robust balance sheet, albeit with a notable cash burn rate. The lead asset, lirafugratinib, emerges as a promising contender in the oncology therapeutic realm, particularly for FGFR2-altered tumors. Its selectivity and demonstrated efficacy in the ReFocus trial underline its potential to carve a niche in a competitive market. However, the bearish market sentiment, indicated by high short interest and Relay's underperformance against SPY, is a concern.

Investors should closely monitor the further clinical progression of lirafugratinib, any changes in operational expenses, and the market's reaction to Relay's upcoming financial disclosures. The high short interest suggests a cautious approach, possibly hedging through options or diversifying within the oncology sector to mitigate undue exposure. Relay’s current valuation near its cash position presents a potentially attractive entry point, albeit with a recognition of the inherent volatility.

The upgrade to "Speculative Buy" is cognizant of the compelling clinical focus on lirafugratinib juxtaposed against a backdrop of market skepticism. It's a speculative stance driven by the therapeutic promise tethered to lirafugratinib, yet tempered by financial and market dynamics. The anticipation surrounding forthcoming clinical updates and the market's reception thereof could be catalysts for stock momentum, either affirming the speculative optimism or necessitating a re-evaluation.

Risks to Thesis

In reviewing my recommendation for Relay Therapeutics, it's prudent to consider the inherent risks not fully explored in my analysis. The financials indicate a solid cash position, yet the elevated burn rate cannot be understated. If R&D yields slower than expected results, cash reserves may deplete quicker, escalating the need for financing, potentially at unfavorable terms.

The market's bearish stance, reflected in high short interest, suggests a misalignment with my bullish view, which could stem from an overestimation of lirafugratinib’s market impact, given the complexities in oncology drug development and approvals. It's possible that I underestimated the execution risk and the competitive landscape, especially as other players in the FGFR inhibitor space evolve.

On the clinical front, while lirafugratinib shows promise, I may have overlooked the risk of adverse events emerging in later trials, which could significantly impact its prospects. The reliance on interim data may also skew the perception of its efficacy and safety profile.

Lastly, insider selling patterns may hint at internal views on valuation that are less optimistic than public disclosures suggest.

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