PCVX - Sutro BioPharma: Good Stewardship Through Early Trials

2023-09-14 13:21:48 ET

Summary

• Sutro is developing mainly antibody-drug conjugates to address solid tumors.
• Their flagship molecule has shown both encouraging efficacy and concerning toxicity.
• The company has strengthened their balance sheet strategically, removing the short-term risk of dilution.

Topline Summary

Sutro Biopharma ( STRO ) is a late-stage clinical biotech developing antibody-drug conjugates for cancer, as well as a novel vaccine against pneumococcal disease. In their cancer program, they have some rather good signs of early efficacy, but also concerns about toxicity that the company is trying to mitigate in ongoing studies. But the signs are there, and the company is showing a lot of talent for cultivating partnerships to keep operations afloat. This is a tentative buy, assuming you're comfortable with the risk of their flagship crashing due to toxicity.

Pipeline Overview

Luveltamab tazevibulin

This antibody-drug conjugate is the most advanced of STRO's suite of drugs based on the XpressCF+ platform, which uses non-natural amino acids to link cytotoxic agents to pretty much any site on the antibody. STRO's hope is that this careful placement of the chemotherapy warhead will preserve the immunostimulatory effect of the antibody while optimizing delivery of the chemotherapy.

Luveltamab tazevibulin (abbreviated luvelta) is one such antibody-drug conjugate that targets folate receptor alpha, a cell surface target that controls folate metabolism, which itself has been exploited to dramatic success over the past 60 years using agents like methotrexate and pemetrexed.

There were several big pieces of news shared over the course of 2023 for luvelta. First, an update of the dose expansion cohort of their phase 1 study was provided at ASCO , including assessment in 44 patients with platinum-resistant ovarian cancer.

Neutropenia (reduction of infection-fighting white blood cells called neutrophils) was the most common adverse event with luvelta, with grade 3 or higher being observed in 70.5%. One patient died from sepsis after developing grade 4 neutropenia. Incidence of this adverse event appeared to be associated with higher dose, but so was efficacy. Patients receiving the highest dose of luvelta had a 43.8% response rate, compared with 31.3% observed in patients receiving a lower dose of 4.3 mg/kg. Median progression-free survival ranged from 6.1 to 6.6 months.

Based on these findings, STRO has initiated the REFRaME-O1 study, a phase 2/3 trial of luvelta in folate receptor-expressing, platinum-resistant ovarian cancer after 1 to 3 prior lines of therapy. In the first part of the study, women are receiving either the lower dose of luvelta, 4.3 mg/kg, or luvelta 5.2 mg/kg with GM-CSF support (to hopefully reduce the risk of neutropenia) for 2 cycles, followed by continuing luvelta at the reduced 4.3 mg/kg dose thereafter.

The company has divulged that they will be presenting further phase 1 data at this year's ESMO meeting, with a mini oral presentation being given on October 22. This one will focus on luvelta in patients with recurrent or progressive epithelial endometrial cancer.

Another thread hinting at future developments for STRO is a presentation at ASH 2022 using luvelta on a compassionate use basis for a highly refractory subgroup of patients with acute myeloid leukemia. This subgroup is exclusively seen in young children with AML (whereas normally this cancer is diagnosed in people of advanced age), and it is almost always fatal. 7 out of 16 patients who received luvelta either alone or in combination with chemotherapy had a complete response to therapy, providing an encouraging early signal that there may be some value to this agent in this population.

VAX-24

STRO owns an equity position in Vaxcyte ( PCVX ), which is developing VAX-24, a 24-valent conjugate vaccine intended to treat invasive pneumococcal disease. This is being developed using the XpressCF platform licensed from STRO, and the licensing agreement entitles STRO to a 4% royalty on the sale of this vaccine.

In June 2023, STRO announced it had sold its royalty to Blackstone from $140 million upfront and $250 million in future milestone payments. So suffice to say that STRO likely won't be making major gains on the fate of VAX-24, and it is mainly helping to shore up the balance sheet for some time to come.

STRO-003

STRO-003 is another antibody-drug conjugate in development with a different target: the receptor orphan receptor kinase 1 (ROR1). This kinase has been shown to play roles in chemoresistance, epithelial-mesenchymal transition, and maintenance of stem-like properties. It is another in a line of cell surface molecules that is expressed in cancer cells but is highly restricted in normal tissues.

We have not seen any clinical data to date, but at AACR 2023, STRO presented a poster showing that treatment with STRO-003 could induce immunogenicity in different preclinical models of cancer, most notably lung and breast cancers, with potential synergy for immune checkpoint inhibitors. So we'll have to stay tuned as STRO takes this agent further into development.

MK-1484

The final drug in the pipeline I want to highlight today is MK-1484, an activator (agonist) of interleukin-2 (IL-2), which has been used for decades as a sort of brute-force immunotherapy with limited applicability. Note: it's limited primarily because high-dose IL-2 therapy is brutally toxic, and it has been used as a last-ditch effort for challenging solid tumors, particularly in the era before immune checkpoint inhibitors became available.

We don't know much about MK1484, other than it's being developed by STRO's partner Merck (MRK). And SEC filings show that phase 1 trials have been initiated. So it will be worth keeping an eye out for other developments in this line.

Others

STRO has other products in development, most notably a few "undisclosed" projects being worked on with Astellas (ALPMY), who paid STRO over $7 million in Q2 2023 as part of their collaboration. So it's a busy one, but we don't know much about what is bubbling under the surface.

Financial Overview

At the end of Q2, 2023, STRO held $235 million in cash and equivalents, $123 million in marketable securities, and $33.3 million in equity securities. Total current assets were $412 million at the end of the quarter. This included an upfront payment from Blackstone for the sale of future royalties from VAX024, with an additional $250 million in milestone payments possible in the future.

Meanwhile, revenues were down to $10.4 million, coming from collaborations with Astellas, Merck, and Bristol Myers Squibb. In all, the company recognized a total loss from operations of $46.2 million. The net loss was $38.4 million for the quarter.

Given these losses, STRO has between 8 and 10 quarters of cash runway left to fund operations.

Strengths and Risks

At a market cap of $280 million, STRO is trading well below their current assets, and they've managed to keep their cash burn relatively under control, given the large number of different drugs in the pipeline. That, coupled with pretty decent early signs of efficacy in their phase 1 trials so far, lend a lot of credibility to the STRO investment thesis. They've also demonstrated a strong track record of making deals with collaborators to help bring in revenue, giving a stronger-than-normal signal that they could obtain a lucrative partnership if one of their drugs shows more efficacy.

But their flagship molecule, luvelta, has some concerning signs of toxicity, as well. It appears that adding growth factor support can help deal with the high-grade neutropenia observed with this agent, but a lot of patients will still require dose reductions. And in the early studies, this appeared to correspond with reduced response rates.

So luvelta is a risky proposition due to that toxicity, and plenty of good-looking drugs have run into regulatory challenges due only to toxicity. The risk/benefit just isn't there, so the REFRaME-O1 study is going to be critical to follow. If you buy in today, settle in for a bit of a wait.

On the plus side, it is unlikely that you'd have to wait through a bad shareholder dilution. STRO guides that they have funds to carry themselves through early 2025, and from my rough calculations that may even be a conservative estimate, assuming losses remain relatively steady. This should be enough time to get a better signal of activity for luvelta, as well as more looks at the other shots on goal STRO is developing.

Bottom-Line Summary

It's still early days for STRO, but at this time there are no abnormal risks, and they're trading below what they hold. This suggests that the market is undervaluing what they've shown so far, which is: 1) Early (not definitive) signals of efficacy in platinum-resistant ovarian cancer; 2) A talent for partnerships; 3) The ability to move a drug into late-stage development.

Taken together, at this time, it's not hard to suggest a good hard look at STRO for a long-term play. Luvelta could run into intractable toxicity concerns, but they've also got a good shot to address an unmet need with this drug. So for those who are patient, this could be a diamond in the rough if you have the time to wait out further trial results.

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