Despite trial disappointments and potential dilution risks, RLAY's promising pipeline and robust financials justify a "buy" rating for long-term investors.
Relay Therapeutics (NASDAQ:RLAY) is a clinical-stage biotech that uses its proprietary Dynamo drug discovery platform. This employs computational technology such as machine learning, physics-based molecular simulation, and structural biology to identify dynamic protein conformations for innovative therapies. Currently, RLAY's pipeline focuses on oncology and genetic diseases. In particular, the company targets treatments for patients with PI3Kα mutations. RLAY's flagship drug candidate is RLY-2608, with its primary indication being breast cancer. Other potential indications include vascular malformations and solid tumors in the early research stages. I believe RLAY's main risk is that future trials might yield disappointing data that contradicts earlier trials. However, the company does seem to have sufficient resources for the foreseeable future. Thus, I consider RLAY's prospects favorable enough to justify a "buy" rating for investors who understand the embedded biotech risks.
Relay Therapeutics is a biotechnology company headquartered in Cambridge, Massachusetts. It was founded in 2016 and develops precision medicines targeting dynamic protein conformations with its proprietary Dynamo drug discovery platform. This technology incorporates computational and experimental techniques like machine learning, physic-based molecular simulations, and structural biology to detect targets and outline effective drugs.
Furthermore, RLAY's pipeline looks relatively diverse. It's mostly focused on oncology and genetic conditions, but several drug candidates are in its pipeline. This is why I believe RLAY is well-positioned for precision medicine, particularly for patients presenting PI3Kα mutations. In my view, RLAY's flagship program is RLY-2608, which targets PI3Kα. This is a Phase 2 drug candidate targeting the α unit of the PI3K pathway, which is frequently mutated in breast cancer and promotes cancer cell growth.
So far, RLY-2608 seems to be progressing well towards pivotal studies. The company is attempting to evaluate it in combination with endocrine treatments like ribociclib. For context, ribociclib is a CDK4/6 inhibitor. There's also the potential for combination therapies with CDK4 inhibitors to improve treatment efficacy against HR+/HER2 metastatic breast cancer.
It's also worth highlighting that RLY-2608's target population is approximately 150,000 patients in the US with PI3Kα-mutated HR+/HER2- breast cancer. The drug can be applied as an adjuvant to reduce cancer recurrence. This means it could be useful for around 120,000 patients and also as initial therapy for 18,000 patients with metastatic illness. Lastly, RLY-2608 could help as second-line therapy for about 14,000 patients.
Moreover, the company has a genetic disease program focused on Fabry disease, which is in the preclinical stages. RLAY also has programs for vascular malformations in the preclinical and early clinical phases. Interestingly, for vascular malformation, RLY-2608 targets 170,000 patients in the US with conditions related to PI3Kα mutations. The company's IP is also promising for other cancer subtypes, suggesting it has broader market potential. For instance, the estimated patient populations for cerebral cavernous are about 65,000 patients, Lymphatic around 65,000 patients, venous approximately 25,000, and PIK3CA-Related Overgrowth Spectrum (PROS) about 15,000.
RLAY's solid tumors program also features an NRAS-selective inhibitor to target NRAS mutations. These mutations are frequently found in several types of cancer, which means this IP also has broad market potential. Here, RLY-2608 also has promising potential indications as monotherapy for solid tumors, which is in the early clinical stages. For context, this could target solid tumor populations linked to PI3Kα mutations of approximately 28,000 colorectal cancer patients, 20,000 for endometrial, 17,000 for bladder, 16,000 for prostate, 14,000 for Non-Small Cell Lung Cancer [NSCLC], and 9,000 for Head and Neck Squamous Cell Carcinoma [HNSCC].
Finally, it's also worth mentioning RLY-4008, known as lirafugratinib. This drug candidate binds and blocks FGFR2, which is essential to cancer proliferation. This drug is progressing to pivotal trials and looking for global commercialization partners. So RLAY's actions also suggest it's highly optimistic about its approval odds. If they secure a commercialization partner, it could act as a catalyst for the stock as it would validate its potential.
More recently, on September 09, RLAY's stock rallied 41% after announcing RLY-2608's positive Phase 2 data. As previously noted, RLY-2608's indication for patients with PI3Kα-mutated, HR+/HER2- metastatic breast cancer stands out. The study's key findings include a 9.2 median progression-free survival [PFS], showing the time the condition was controlled and stable in heavily pre-treated patients.
Also, RLY-2608's overall response rate [ORR] was 33%, meaning patients obtained a substantial tumor size reduction. In my view, this proves that RLY-2608 is indeed effective with a durable PFS and promising ORR. Also, 53% of kinase mutation patients responded to treatment, making it potentially viable even for this subgroup. More importantly, clinical data suggests that RLY-2608's safety profile is comparable with similar therapies that have already been approved. So, on balance, I believe there's a reasonable pathway to regulatory approval if these results hold up in Phase 3 trials.
At this point, RLAY's trial data supports a pivotal second-line trial in 2025 to evaluate efficacy and safety in more patients. If that new trial yields similarly promising results, it could very well be enough to support regulatory approval. Additionally, RLY-2608 will be tested across various combinations and indications, so new potential markets might emerge depending on the results. Particularly, a combo for breast cancer will evaluate RLY-2608 with fulvestrant.
There are also potential triplet combinations. First, RLY-2608 with ribociclib, a CDK4/6 blocker, and fulvestrant will be tested in Q4 2024. After a safety assessment, this triplet will undergo a dose expansion trial in 1H2025. Another triplet combination to be studied will be RLY-2608 with atirmociclib (a CDK4 inhibitor) and fulvestrant, with a trial planned by yearend 2024. Another promising update is that by Q1 2025, RLY-2608 will be tested as monotherapy for vascular malformations influenced by PI3K pathway mutations. Solid tumors will also be tested with RLY-2608 as monotherapy by yearend 2024.
From a valuation perspective, RLAY trades at a $1.3 billion valuation, making it a mid-sized biotech in its sector. Its balance sheet holds $134.1 million in cash and equivalents and $554.3 million in short-term investments. This amounts to $668.4 million in available short-term liquidity against no financial debt. However, the company remains pre-revenues and has only generated $10.0 million in licensing revenues in 1H2024.
Moreover, I estimate the company's latest quarterly cash burn was $65.8 million by adding its CFOs and Net CAPEX. This implies a relatively healthy cash runway of about 2.5 years. For context, RLY-2608 for HR+/HER2 breast cancer is a major oncology market. The broader breast cancer drug market size is projected to reach $78.6 billion by 2033.
Moreover, RLAY could gain a foothold in this market by roughly 2026 or 2027. Assuming RLY-2608's Phase ⅔ trials go as expected in 2025, RLAY could potentially target FDA approval within its current cash runway. Likewise, RLY-4008's Phase 2 trials for FGFR2-altered cholangiocarcinoma and other solid tumors seem promising. Currently, RLAY is seeking a commercialization partner for RLY-4008, so if they reach FDA approval by 2026 or 2027, it could also create a sizeable revenue vertical. Cholangiocarcinoma's market size is forecasted to reach $1.6 billion by 2030, and the broader solid tumor market is also projected to reach $375.4 billion by 2034.
In my view, these are RLAY's main value drivers, and both RLY-2608 and RLY-4008 seem to be within the company's 2.5-year cash runway, so it's challenging to be bearish on the stock. In fact, I believe its current market cap of just $1.3 billion seems more than reasonable by comparison. Hence, I rate the company a "buy" for investors who understand this is a long-term commitment.
Nevertheless, the main risk with RLAY's thesis is its potential for further dilution. Recently, RLAY announced a $200.0 million public offering, and the shares retraced 6.4% after hours. It's possible that this dilutive event might cause a headwind in stock prices for the next few months.
However, these additional funds will bolster RLAY's cash runway by three extra quarters. That means my cash runway estimate (including the recent raise) would increase to 3.3 years. So, while this might be a short-term headwind for the stock price, I actually believe it's a positive long-term decision that secures the company's research progress. I also suspect that RLAY won't need additional equity raises for the foreseeable future after this.
Additionally, it's worth mentioning that RLAY's research could yield disappointing clinical trial results. This undoubtedly could hit the stock price as well. Likewise, if it faces regulatory setbacks, the company might be forced to initiate additional clinical trials, which are always costly endeavors. If this happened, their path toward FDA approval could be delayed, and another equity offer might be necessary. Yet, based on the data available today, I think RLAY has the ingredients to deliver promising results and enough financing for the foreseeable future. This is why I believe that its risk profile is somewhat mitigated at this juncture, and the recent pullback could offer a favorable entry price for new investors.
Overall, I believe RLAY is a reasonable investment based on the data available so far. There's a concrete pathway to regulatory approval for RLY-2608. If this product candidate is successfully researched and commercialized, it will also open several sizeable revenue verticals. Moreover, I think RLAY has more than enough resources to finance its research in the foreseeable future. The main risk is that future trials might yield disappointing data that contradicts earlier trials. Yet, so far, RLAY's prospects seem favorable and justify a "buy" rating for investors who understand the embedded biotech risks.