ZNTL - Zentalis: Latest Market Sell-Off Looks Justified With Data Catalysts Long Way Off

2023-11-14 10:35:54 ET

Summary

• Zentalis is a biotech company focused on developing Azenosertib, a Wee1 inhibitor, for ovarian cancer.
• The company has faced stock sell-offs due to mixed data from clinical trials of Azenosertib in combination with chemotherapy, and as a monotherapy.
• Zentalis believes Azenosertib has potential and plans to submit a New Drug Application in 2026, but analysts have downgraded expectations.
• The long wait for further data updates is somewhat troubling, as is the uncertain route to approval, with recent drug approvals in Ovarian cancer clouding the picture for Zentalis.
• There may be a contrarian buy opportunity in play as some data looks promising, but a high cash burn and mixed data suggests the share price may sink lower ahead of any recovery.

Investment Overview: Zentalis Believes 'Pipeline-In-A-Pill" Azenosertib Will Soon Make Grade In Ovarian Cancer

Zentalis Pharmaceuticals, Inc. ( ZNTL ) is a clinical-stage biotech headquartered in New York that was listed on the Nasdaq in April 2020, raising ~$165m via the issuance of ~9.2m shares priced at $18 per share.

At the time of its IPO, the company's lead candidate was ZN-c5, an oral selective estrogen receptor degrader ("SERD") for estrogen-receptor-positive, HER2-negative breast cancer. In July 2020, Zentalis announced it was working with Pharma giant Eli Lilly and Company ( LLY ) on testing its candidate alongside Lilly's CDK4/6 inhibitor Verzenio (which earned ~$2.5bn of revenues in 2022), but in August 2022, the company revealed it had opted to discontinue development of ZN-c5, and another candidate, ZN-e4, an EGFR inhibitor, in favour of, according to a press release :

investigating the full potential of its lead clinical candidates ZN-c3, its Wee1 inhibitor, and ZN-d5, its BCL-2 inhibitor, as monotherapies and in combination across a wide range of cancers

ZN-c3, now known as Azenosertib, is described as follows in Zentalis' latest annual report / 10-K submission :

Azenosertib is a potentially best-in-class and first-in-class oral, small-molecule Wee1 inhibitor. As illustrated in the figure below, the inhibition of Wee1, a DNA damage response kinase, drives cancer cells into mitosis without being able to repair damaged DNA, resulting in cell death and thereby preventing tumor growth and potentially causing tumor regression.

Wee1 is not an especially well-known or well-developed drug target. There are no FDA-approved Wee1 inhibitors, and according to Zentalis' latest investor presentation , its candidate is "years ahead of other agents against this target". Aprea Therapeutics, Inc. ( APRE ), and privately held Debiopharm, Impact Therapeutics, Shouyao Holding, and Schrödinger, Inc. are listed by Zentalis as rival companies developing drugs against Wee1, although none has made it beyond a Phase 1 clinical study.

Zentalis itself is running 10 different clinical studies of Azenosertib, 5 of which are in patients with gynecologic malignancies, namely ovarian cancer and uterine serous carcinoma ("USC"), with 4 of these being Phase 2 studies. The company believes that Azenosertib has "broad franchise potential" and expects to submit its first New Drug Application ("NDA"), requesting approval to market and sell the drug commercially, in 2026.

Meanwhile, there are several key data readouts arriving in 2024 and 2025, and the company's cash balance of $517m is expected to last into 2026. Ovarian cancer is an area of high unmet need, in which ~47.5 patients in the US are diagnosed every year, and ~32k fatalities occur. Zentalis says that "Approximately 80% of women with advanced stage disease who respond to first-line chemotherapy will relapse", and that the "single-agent chemotherapy response for heavily pretreated platinum-resistant/refractory ovarian cancer is 10-15%".

Market Sees Data As Underwhelming, Sells Off Zentalis Stock

In December 2021, Zentalis stock reached its all-time high of ~$84 per share, valuing the company at >$5bn, but the share price tumbled in April 2022, in response to the company's first release of Phase 1 data from a study of Azenosertib in combination with standard chemotherapies in platinum-resistant or -refractory ovarian cancer ("PROC"). According to a press release at the time:

The study consists of four combination dose cohorts: ZN-c3 + PLD, ZN-c3 + carboplatin, ZN-c3 + paclitaxel, and ZN-c3 + gemcitabine, and is enrolling a more advanced patient population, with the inclusion of platinum-refractory patients and higher prior rates of bevacizumab treatment, than similar trials that included a Wee1 inhibitor.

At the time of the data cutoff on January 28, 2022, 56 patients - which were enrolled across three of the cohorts - were evaluated for safety, the primary endpoint, and 43 were response-evaluable. The fourth cohort, ZN-c3 + gemcitabine, had not begun enrollment at the time of the data cutoff.

The study showed an overall objective response rate ("ORR") of 30%, with a Disease Control Rate ("DCR") of 86%, and 13 partial responses in patients. From a safety perspective Zentalis noted:

As of the cutoff date, the most common treatment-related adverse events at all grades included nausea (48.2% of patients), neutropenia (41.1% of patients), thrombocytopenia (37.5% of patients), vomiting (30.4% of patients) and anemia (26.8% of patients)

Despite the bar for ORR being low in PROC, at ~12%, and ORRs observed in Azenosertib plus carboplatin and Azenosertib plus paclitaxel being 46% and 63% respectively, the market dumped Zentalis stock, which sank to a low of $20 by May 2022.

Fast forward nearly 18 months, and last week, Zentalis released data from its study of Azenosertib as a monotherapy, in heavily pretreated ovarian and uterine serous carcinoma patients. Updated analysis from this Phase 1 study showed an ORR of 37%, and median progression-free survival ("mPFS") of 6.5 months.

Once again, despite some apparently encouraging data, the market dumped Zentalis stock, which fell from ~$18, to ~$10 overnight. Zentalis CEO Kimberly Blackwell, M.D., commented in the press release that:

Azenosertib continues to show very encouraging monotherapy anti-tumor activity, safety and tolerability in both ovarian cancer and uterine serous carcinoma. We are executing our clinical strategy to advance this high-potential asset to patients with ovarian cancer and uterine serous carcinoma as quickly as possible and expand into additional indications where WEE1 inhibition has the potential to improve outcomes for patients.

In May, Zentalis had released updated data from its chemotherapy-combo study - according to a press release:

A total of 115 patients were enrolled in the study across all chemotherapy combination groups. At the data cut-off of April 10, 2023, 94 were efficacy evaluable. Across all dosing schedules, azenosertib plus paclitaxel demonstrated the highest ORR of 50.0% (mPFS of 7.4m), followed by an ORR of 38.5% (mPFS of 8.3m) for azenosertib plus gemcitabine. Azenosertib plus carboplatin demonstrated an ORR of 35.7% (mPFS of 10.4m), and azenosertib plus PLD demonstrated an ORR of 19.4% (mPFS of 6.3m).

A total of 82 response-evaluable patients had available Cyclin E1 expression data by immunohistochemistry ((IHC)). Cyclin E1+ status (H-score >50) was associated with a superior ORR and a longer mPFS across the total patient population (ORR of 40.0% vs 8.3%; mPFS of 9.86 vs 3.25 months, HR = 0.37; P = 0.0078), showcasing the potential synergy of WEE1 inhibition with chemotherapy in this patient population.

This update did at least lead to Zentalis stock growing in value from ~$20, to $30, but the gains were not sustained, and last week, analysts at the investment banks Leerink and Wedbush downgraded expectations for Zentalis, the former suggesting that the latest monotherapy data "lacked signs of incremental efficacy", and delays to key data readouts, and the latter citing "uncertainties around strategy".

In summary, there appears to be a clear disconnect between Zentalis' belief that it is in possession of a best-in-class drug with a pioneering mechanism of action ("MoA"), and the market's increasingly pessimistic outlook, which is creating a downward share price spiral.

The key question for investors is therefore, "who is right", because if Zentalis is on track for an approval in ovarian cancer, a market expected to be worth ~$8bn by the end of the decade, in 2026, and if the validation provided by that approval opens up opportunities across more solid tumors, as Zentalis management believes it will, then surely Zentalis' business is substantially undervalued at a market cap valuation of <$700m at the time of writing?

Zentalis/Azenosertib Under The Microscope - Evaluating The Investment Case

First of all, let's take a look at Zentalis' pipeline in full, as broken down in its latest investor presentation.

Probably the first thing to note is that Zentalis is essentially all-in on azenosertib, with only a single Phase 1 study ongoing for its only other clinical asset, the BCL-2 inhibitor ZN-d5, indicated for acute myeloid leukemia. This amounts to a very high level of single-asset risk - if azenosertib does not make the grade on safety and efficacy, Zentalis stock will be practically worthless.

Analysts may be right to point out that there are, following last week's supposedly underwhelming update, few notable catalysts on the horizon. It will be another 9 months at least until we have any updates in relation to a study in Platinum Sensitive Ovarian Cancer ("PSOC"). The PROC monotherapy study will not read out until 2025, and neither will the USC study, while solid tumor monotherapy data will not be available until 2H24. A study alongside Pharma giant GSK plc's ( GSK ) PARP inhibitor, ZEJULA ("niraparib"), in PROC patients who have failed PARPi treatment will read out data in the second half of next year.

Nevertheless, Zentalis faces little competition presently in the Wee1 inhibitor space, being years ahead of its rivals in terms of development - but could that hint at the fact the mainstream pharmaceutical industry does not see this drug class as worth persevering with?

Looking at the slide above you could arguably make the case that Zentalis is jumping the gun somewhat, assuming that there is a potential addressable market of >150k patients across mainly solid tumors, expressing Cyclin E1+, based on the company's observation that "preclinical data showed that high Cyclin E1 protein expression sensitized cancer cells to the anti-tumor effects of azenosertib".

When it comes to the monotherapy opportunity in PROC, the patient population was heavily pretreated, with either PARP inhibitors or VEGF inhibitors, and the small patient population may have skewed results somewhat, particularly around the durability of response, as we can see below, with one or two patients having a strong PFS, but the majority seemingly experiencing a poor one.

Zentalis also makes the case that azenosertib has an excellent safety profile compared to other therapies, but the reality may be that PARP inhibitors such as ZEJULA, and Lynparza, developed by Pharma giants Merck & Co., Inc. ( MRK ) and AstraZeneca PLC ( AZN ) have the edge on efficacy, meaning azenosertib, if approved at all, would be a treatment of last resort, meaning its revenue-generation capabilities will be severely restricted.

In a Phase 3 study , for example, Lynparza achieved a 72% ORR, and mPFS of 13.4 months, figures that azenosertib apparently cannot match. Zentalis does claim that late-line PROC treatment is a >40k patient market, although there is competition in this market in the form of ImmunoGen, Inc.'s ( IMGN ) Elahere, which achieved an ORR of 42%, and 5.62 months PFS in its pivotal study , outperforming chemotherapy. In USC, the later-line treatment patient population is just over 4k, Zentalis estimates.

In PSOC, there is a 21k patient population in first-line maintenance, but we will not hear about Zentalis' plans for that indication until the middle of next year. The chemotherapy combination studies, and a focus on cancers with "high genomic instability i.e., cyclin E1 overexpression, and BRAF + EGFR inhibition in colorectal cancer, is another potentially promising angle for Zentalis, given results showing chemo response was enhanced by azenosertib, and the preclinical suggestion that certain types of tumor respond well to treatment with the drug.

Concluding Thoughts - Is Zentalis Stock Undervalued After Latest Selloff?

At present, within the biotech industry optimism does not abound, and the savage biotech bear market of the past 18 months means that the promise - from a clinical-stage drug developer - of a "pipeline-in-a-pill" sends shivers down investor's spine, and sets red flags waving.

In Zentalis' case, there have been some notable advances in the treatment of its primary target, ovarian cancer, with the approval of the PARP inhibitors ZEJULA and Lynparza, which earned revenues of $463m, and $2.6bn respectively in 2022, and the antibody-drug conjugate ("ADC") Enhertu, >$1bn revenues in 2022.

It seems unlikely that Zentalis' can target blockbuster (>$1bn per annum) revenues from azenosertib as it seems most likely to be approved in later-line indications, and it is likely 3 years - and numerous risky data readouts - away from even that level of approval. In summary, Zentalis may have lost the development race, and will have to produce some outstanding data that is undeniably best-in-class to give itself a chance of an approval for its lead candidate.

It is possible to take the long view, and make the argument that some encouraging results in patients suggest that azenosertib could be a kind of "precision medicine" that will work very well in certain tumor types.

The corollary to this argument is that sometimes in precision medicine the company makes the case after the fact i.e., a patient makes an unexpected recovery, and the drug developer then studies the tumor's genetics and makes the argument - that does not necessarily follow - that their drug must work best in tumors of this type, expressing this or that protein.

In short, my research suggests not so much that the market has been punishing Zentalis' stock price without justification, but rather that the stock price may have risen far too high in the first place at a time when biotech markets were buoyant. The company is now worth only ~$200m more than its cash position, and made an operating loss of $231m in the first 9 months of this year. With cash disappearing at that rate, the revenue promise of azenosertib really needs to be a "blockbuster" one to support a >$600m market cap, in my view.

Although the data released by the company seems genuinely encouraging in some areas, it seems that the first-line maintenance opportunity may have been tied up by e.g., lynparza, so the approval shot Zentalis has is in late line therapy, and although Zentalis discusses an eventual patient population of 160k patients, the reality may be that the only realistic opportunity in sight is a patient population of a few thousand in USC or a larger one in PROC but with substantial competition in the market - either may not amount to a revenue opportunity of <$200m per annum, I would estimate.

As such, if I were holding Zentalis stock today, I'd consider selling, as I suspect the share price may sink a little lower, given the wait for a positive data readout looks to be a long one. If the price does drop, a contrarian "buy" opportunity may present itself - some analysts continue to maintain price targets >$10.

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