RVMD - Revolution Medicines: A March Halted By 'Lackluster' ESMO Readout

2023-11-10 11:26:23 ET

Summary

• Revolution Medicines has presented positive data from their ongoing phase 1 study for their RAS(ON) inhibitors, showing promising response rates in patients with lung and pancreatic cancer.
• The market did not react positively to the data, leading to a correction in the company's valuation.
• Despite the volatility, the RAS-ON's approach looks promising and the company's financials are strong, making it worth considering as a potential investment.

Topline Summary and Update

Revolution Medicines, Inc. ( RVMD ) has had a busy few months, posting their Q3 results hot on the heels of a big acquisition and a critical data update. If you read investment headlines, you'll see that the market doesn't think much of their data for their flagship pipeline project, but in my opinion, this is just about what you want to see: a glimmer of activity in a tough tumor area. I'm upgrading my rating from SELL to HOLD at these levels, and I encourage you to read on for more details. RVMD is a company to watch, for sure.

Pipeline Updates

RAS-ON Inhibitors

The main pipeline product RVMD is continuing to push forward in the clinic is a molecule that can target the chaperone protein for KRAS, forcing the chaperone and KRAS to stick together and theoretically being able to shut down any variant of KRAS.

This is important since approved KRAS inhibitors only target the G12C mutation, which is not the dominant variant in cancers like pancreatic and colorectal.

Their most interesting product in the RAS-ON category is RMC-6236, and they announced a data readout of their ongoing phase 1 study at this year's ESMO meeting , one of the largest cancer conferences taking place every year. RVMD presented favorable tolerability findings, and an impressive 86 patients were evaluable for response among those with lung or pancreatic cancer.

In previously treated, KRAS -altered NSCLC, 38% of patients had an objective response to treatment, with disease control achieved in 85% altogether. For the pancreatic cancer group, 20% of patients had a response to treatment, with 87% of patients having disease control overall.

In my view, for a phase 1 trial, these are not bad results. The patients in these studies were fairly heavily pretreated, and the main objective of the study was not to assess the efficacy of the drug.

But the market did not judge these findings, as particularly enthralling, as the hype that was driven by some early signals of something big at the Triple Meeting led to a big spike in valuation, followed by a correction after the ESMO presentation, based on the perception that these data were "only" in line with expectations. Unfortunately, the apparent expectation of complete responses was not fulfilled.

In my view? These data are indeed in line with something promising you'd want to see coming out of phase 1, and I'm excited to see where they take it from here. These are challenging tumor areas to make progress in, and we're targeting molecules that have been considered next-to-impossible for decades. This is an important early signal of activity for RMC-6236.

Financial Overview

RVMD reported their Q3 2023 financial results recently, as well. The company ended the third quarter with $358 million in cash and equivalents, with another $455 million in marketable securities. Their loss from operations was $123 million for the quarter, up from $109 million in Q2. After interest and other income, the net loss for RVMD was $108 million.

This balance sheet does not reflect the just-completed acquisition of EQRx, which is set to bring in over $1 billion in cash and marketable securities at the cost of issuing 55 million shares of RVMD stock, a roughly 50% increase in the shares outstanding. With these funds in place, the company has a cash runway extending more than four years, assuming costs can be brought under control.

Strengths and Risks

This is a clear cut case of the challenge of buying into even promising biotechs. Hype generates so much volatility for these equities, that they get priced to insane levels that just can't ever match expectations. There was almost no chance that this phase 1 trial was going to justify pricing the company north of $4 billion in market cap. That's more like the valuation for a company with a really promising drug already approved, with the capital structure to start getting sales really quickly.

And it makes you wonder: is the company really worth the $2 billion it sits at today? That's a tough call to make. Their expenses are high, and they are only in phase 1 still, with few signs of picking up pace. These things do take time, after all.

But those data are compelling. You can't look at 20%-40% response rates and say there's nothing going on with their most exciting drug. This is as close to the "big data" I cited the company needing in my last article as you can get . But that hype-boom-bust cycle that these drugs can generate is something I view as a risk for someone looking to make an actual investment. Massive movements up and down without real justification can tempt you into making buy or sell moves you didn't want to. So RVMD is gearing up to be one of those stocks you need to be very disciplined in investing in, lest you make a bad mistake.

Bottom Line Summary

After seeing the ESMO data, I am intrigued with the RAS-ON approach. It looks promising, and it's absolutely a story that is worth watching. I booked RVMD as overvalued at $29 per share, but they're beginning to fall to a really interesting level. Considering they have a lot of backing for the share price and the cash runway to move their programs forward, I feel a hold at these levels is justified, and we're nearing an inflection point (if we haven't already reached it). This is a company very much worth putting on your watchlist and considering a price you'd be willing to buy into. But be very careful with navigating the trader waters of boom and bust. I doubt it will be the last time for this company.

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