REPL - Replimune: Skepticism Is Priced In Ahead Of Long-Awaited CERPASS Data (Rating Upgrade)

2023-11-05 10:05:05 ET

Summary

• Replimune's fiscal health and clinical progress are being closely watched, with upcoming combination data for its lead candidate RP1 seen as a critical juncture.
• The company's Q2 earnings showed increased expenditures and a widening net loss, raising concerns about its financial health.
• Replimune has a strong balance sheet and ample liquidity, suggesting a low likelihood of requiring additional financing in the next year.
• Replimune's therapies are facing high efficacy barriers and fierce market dynamics that warrant caution amongst the investment community.

At a Glance

Replimune ( REPL ) fiscal health and clinical progress have been previously analyzed in the context of its potential in the biotechnology sphere, with specific emphasis on RP1, its lead oncolytic immunotherapy candidate. Since then, the CERPASS trial has progressed to a stage where upcoming data will serve as a critical juncture, testing the validity of prior positive indications in treating CSCC. Any variance from earlier positive trial results, which suggested a competitive edge over existing therapies, could shift the investment perspective significantly. The imminent trial outcomes will therefore not only offer scientific insights but will also be instrumental in shaping Replimune's market valuation and addressing the sustainability questions underscored by its net loss trajectory. This critical phase for RP1 could either bolster confidence in its clinical and commercial promise or invite a reevaluation of Replimune's strategic direction and financial health.

Q2 Earnings

To begin my analysis, Replimune's Q2 earnings revealed an upswing in expenditures, with R&D costs climbing 37% to $40.4M and SG&A expenses up 33% to $15.2M, culminating in a heightened operating loss of $55.6M from the previous $40.9M. The net loss widened to $49.6M despite a slight mitigation from other income. Investors should scrutinize the November 10 Q3 report for further expense growth, any signs of moderating losses, and additional share dilution, which has already expanded the share count from 54.2M to 66.4M.

Financial Health

Turning to Replimune's balance sheet , the aggregation of 'cash and cash equivalents' at $106.5M, 'short-term investments' at $432.6M, sums up to $539.1M in liquid assets. The current ratio, derived from dividing total current assets by total current liabilities, is approximately 17.1, indicative of a solid liquidity position.

The monthly cash burn, calculated from a net cash used in operating activities of $48.6M over three months, is about $16.2M. This burn rate implies a cash runway of approximately 33 months, assuming no changes in cash flow patterns or capital injections. However, these are historical figures and might not predict future performance accurately.

Considering the ample liquidity and manageable burn rate, the odds of Replimune requiring additional financing within the next twelve months seem low, barring any significant operational shifts or unexpected expenditures.

Market Sentiment

According to Seeking Alpha data, Replimune's market capitalization at $837.75M suggests market skepticism, particularly given the large amount of cash on hand and total addressable markets. Growth prospects appear significant with revenue projections escalating from negligible in FY 2024 to $184.71M in FY 2026, indicating analyst confidence in RP1's market penetration. Stock momentum is bearish, underperforming the SPY with a decline of -26.95% over a year. The short interest is substantial at 20.34%, implying investor doubt or speculation on forthcoming adverse outcomes.

Technically, REPL displays a bearish trend as it's trading below the 50-day and 200-day moving averages, suggestive of a sustained negative sentiment. With an RSI at 43, it's not in the overbought or oversold territory. The MACD under the signal line hints at bearish momentum, albeit with signs of convergence that may indicate waning selling pressure. The slight uptick in recent activity does not yet signal a reversal of the downward trajectory.

Institutional ownership is high at 92.74%, with new positions (1,767,272 shares) outweighing sold-out positions (1,105,008 shares), showing continued institutional interest. Notable institutions include Price T Rowe Associates with a 4.32% increase in shares held and Redmile Group, which heightened its stake by 15.964%. Insider trades over the past three and twelve months exhibit net positive activity with 57,672 and 381,306 more shares purchased than sold, respectively, suggesting insider confidence in the company's future.

Evaluating RP1's Efficacy in Cutaneous Carcinoma Treatment

RP1 by Replimune is an investigational oncolytic immunotherapy for Cutaneous Squamous Cell Carcinoma (CSCC) and other skin cancers. Its mechanism of action is attributed to its design, which enhances the tumor-killing potency of the virus and augments systemic anti-tumor immune responses . RP1 is a genetically modified herpes simplex virus that encodes a fusogenic GALV-GP R- protein and GM-CSF, enhancing the tumor-killing ability and boosting immunogenic cell death??.

The recent ARTACUS trial data , presented at the 38th Annual Meeting of the Society for Immunotherapy of Cancer, shows promising outcomes. RP1 monotherapy manifested an overall response rate (ORR) of 34.8% in the treatment of skin cancers in immunocompromised patients, with a good portion of them having CSCC. The safety profile was well-tolerated, similar to non-immunocompromised patients with advanced skin cancers. These results are indicative of the potential of RP1 monotherapy in a difficult to treat patient population, receiving chronic immunosuppressive treatment?.

Market opportunity for RP1 is significant given the high susceptibility of organ transplant recipients to skin cancer . A collaboration with Incyte ( INCY ) for a randomized Phase 2 trial, CERPASS, evaluating RP1 in combination with cemiplimab in CSCC is underway, aiming to achieve a "roughly 15% absolute difference in CRR and/or ORR", further amplifying the market scope if successful??.

The competitive landscape reveals a surge in immunotherapies for CSCC treatment. Key competitors include FDA-approved treatments like cemiplimab (Libtayo) by Sanofi ( SNY ) and Regeneron ( REGN ), Merck's ( MRK ) pembrolizumab , and an investigational therapy, cosibelimab , developed by Checkpoint ( CKPT ), which showed a notable ORR in its trials. Cosibelimab is an anti-PD-L1 antibody, with a unique mechanism aiming at higher tumor target occupancy to reactivate antitumor immune response, and inducing antibody-dependent cell-mediated cytotoxicity for enhanced efficacy in certain tumor types??.

Challenges for RP1 include the small sample size and open-label design in earlier-stage trials, which might warrant caution. The market acceptance and competitive standing of RP1 may be contingent on further robust trials, comparative efficacy, and safety data against existing and upcoming therapies, and the strategic collaborations to bolster its market position and reimbursement scenario.

In conclusion, the evolving data and trials around RP1 underline its potential in addressing unmet needs in CSCC treatment, amidst a growing competitive milieu and clinical challenges. The synergy of strategic collaborations, robust clinical evidence, and market access strategies would be pivotal in harnessing the market opportunity for RP1 in CSCC.

My Analysis & Recommendation

The nuanced dynamics unfolding within Replimune spotlight a tale of measured optimism tempered by clinical and market uncertainties. The anticipation surrounding the CERPASS data, whose delay into early Q4 2023 casts a protracted shadow of uncertainty, embodies a pivotal moment for investors. Its outcome could either vindicate or challenge the therapeutic promise of RP1, thereby significantly impacting Replimune's market valuation. The company's financial health, marked by a substantial liquidity position, juxtaposed against a widening net loss, sketches a scenario where the efficacy of RP1 becomes a linchpin for financial sustainability.

Investors should remain vigilant towards the forthcoming data disclosures, especially the CERPASS trial results. Diversification could serve as a prudent strategy to mitigate the inherent risks associated with clinical trial outcomes and market acceptance. This entails potentially allocating resources across a spectrum of biotech firms with varying clinical focus and market capitalization. Moreover, a close monitoring of institutional and insider trading activities could provide cues on the evolving sentiment within informed circles, which may influence investment decisions.

Despite the 28% stock decline since my "Strong Sell" recommendation in March, the upgraded "Sell" recommendation maintains a cautious outlook and acknowledges the market has, seemingly, "priced in" much of the downside risk.

Risks to Thesis

In reassessing my "Sell" recommendation, certain risks warrant a closer examination that may not have been fully addressed. The therapeutic potential and market opportunity for RP1, while promising, is subject to clinical trial outcomes that are currently indeterminate. If the CERPASS trial results are favorable, and RP1 demonstrates superior efficacy or safety compared to existing treatments, this could significantly enhance Replimune's market position and invalidate some of the bearish sentiment.

Another potential oversight could be the impact of strategic partnerships. Collaborations, like the one with Incyte, may not only offer additional financial resources but could also enhance market penetration capabilities, potentially altering the company's cash burn dynamics.

The high short interest ratio, while typically negative, can also lead to a short squeeze, propelling the stock upwards if the company releases positive news or if the broader market sentiment shifts, hence affecting the stock price contrary to my "Sell" recommendation.

Lastly, while institutional ownership reflects strong support, it's crucial to assess the quality of these institutions and their investment thesis. Should institutional investors reassess their positions based on new data, the stock could experience volatility.

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