EQRX - Revolution Medicines: A Big Pipeline In Need Of Big Data

2023-09-25 15:24:12 ET

Summary

• Revolution Medicines, Inc. has a diversified pipeline of drugs but is still searching for its flagship project, making it a high-risk investment.
• The company is focusing on developing RAS(ON) inhibitors, which target the active form of KRAS, with several promising candidates in development.
• Revolution Medicines has a strong financial position with almost $2 billion in cash, but its current valuation may not be justified without meaningful clinical data.

Topline Summary

Revolution Medicines, Inc. ( RVMD ) burst onto the scene with an IPO back in early 2020, and they've pretty well held ground on a multi-billion-dollar valuation for almost 4 years. While they have an extremely diversified pipeline of drugs targeting a who's-who of classical signaling molecules, they're still doing a lot of feeling around for their big flagship pipeline project, and they're doing so at massive expense. Though they've defied bearish predictions so far, it's still a very high risk, relatively low reward proposition to invest at this time. Let me tell you why.

Pipeline Overview

RMC-4630

RVMD made its splash a few years ago with one of the first inhibitors of a phosphatase called SHP2 to be moved toward clinical trials. This drug candidate is called RMC-4630, and it showed some early promise in preclinical work and in an early clinical readout of RAS-addicted cancers . Adding RMC-4630 to the KRAS G12C inhibitor sotorasib showed modest response rates in patients with previously treated, KRAS G12C-positive non-small cell lung cancer, as well.

While RMC-4630 has moved furthest in RVMD's pipeline, it also has the most questions. Following a reappraisal by partner Sanofi, their developmental partnership was severed , and now per the company's latest guidance, any further development of this SHP2 inhibitor will be decided based on a complete readout of their ongoing RMC-4630-03 study . In their latest earnings call, RVMD all but distanced themselves entirely from their original pipeline, including RMC-4630, in favor of pursuing alternative KRAS therapies.

RAS(ON) inhibitors

RVMD has moved decisively toward the development of so-called "RAS((ON))" inhibitors. This refers to agents that preferentially inhibit the active form of KRAS, as opposed to the first generation of KRAS inhibitors (sotorasib and adagrasib) that bind to the inactive form, so-called "RAS((OFF))" inhibitors. This is accomplished by first binding a chaperone protein called cyclophilin A, and then forming a triplet complex including active KRAS, blocking its action on other molecules in the cell.

RVMD has an entire suite of different KRAS inhibitors, including RMC-6291, RMC-9805, RMC-0708, and RMC-8839, which target specific forms of mutant KRAS (G12C, G12D, Q61H, and G13C, respectively). They're also working enthusiastically on RMC-6236, which has been shown in preclinical studies to be able to block any mutation of KRAS, as well as wildtype protein.

Currently, RVMD are guiding that we can anticipate clinical data for their G12C drug (RMC-6291) and the pan-RAS inhibitor (RMC-6236) later this year, including findings that this year's AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics taking place October 7-10.

While these projects are young, the potential is very high here. Targeting KRAS G12C on its own represented a big accomplishment for oncology. It's taken over 30 years to arrive at an active drug available for patients to target this molecule, and sotorasib and adagrasib are limited only to this very specific form. Much more common mutations like G12D remain untouched, and this is important for diseases like colorectal cancer and pancreatic cancer.

While it's early days still, there's a lot to be excited for here.

Financial Overview

Per RVMD's Q2 2023 earnings report, the company held $380 million in cash and equivalents and $529 million in marketable securities, with total current assets reaching $922 million. This was up from $660 million in Q4 2022, owing largely to a $300 million infusion of cash from a public stock offering back in March 2023.

Another big recent event for RVMD was the acquisition of EQRx, Inc. ( EQRX ) in an all-stock transaction that will bring into play EQRX's $1.3 billion in cash and short-term investments to bolster the balance sheet further. The purchase was funded by issuance of RVMD stock, making this in one sense a massive, potentially definitive equity raise.

Because even with the large balance sheet they had, it's hard to offset the $109 million quarterly loss for operations, almost $98 million of which went to R&D. This is large outlay for a company that has only presented phase 1 data to date and has no clear indicators that any of their projects will move forward.

At this burn rate, and assuming costs do not grow from the acquisition of EQRX and other factors (or assuming that increases in losses can be offset by increases in interest income from investment activities), RVMD has something like 20 quarters of cash on hand, which they intend to take them deep into pivotal trials.

Strengths and Risks

You can't argue with almost $2 billion in cash by the time they close the acquisition of EQRX, although it's going to come at a pretty high level of dilution that has not yet been accounted for. If the company maintains its share price of $30, then that would mean that would mean a market cap of $4.3 billion. Is a phase 1 company really worth that if they have $2 billion on hand?

Likely, we'll see some share price decline to keep the valuation more consistent with what they have today, which remains at a premium. RVMD is trading more like a company that's gaining a lot of hype after a positive phase 2 readout.

Couple that with some quiet downplaying of the pipeline. The SHP2 project might as well be on its way out, the way the company talks about it. KRAS G12D would be a big deal to target, but we haven't seen it done before, so they're going to need compelling evidence.

Bottom Line Summary

Revolution Medicines, Inc. has a lot to prove just to justify its current valuation. They absolutely have some potential, and a number of interesting projects.

But that's before they've generated any meaningful clinical data. If this approach to KRAS inhibition doesn't pan out for patients in the trials, then RVMD is going to have a very hard time recovering.

Buying into this company right now carries a lot of risk of failure, with upside potential limited heavily by the high valuation. Yes, they have almost no risk of further dilution once the EQRX deal is finalized in November, but after that there aren't any catalysts that I can see driving the company value higher than where it is for several years. So watch and wait, and if you're sitting on a good gain right now, I'd take some of that off the table.

For further details see: