Investment Thesis

Relay Therapeutics share price performance since IPO

(Source: TradingView)

Investors looking to place a bet on the next big biotech trend may want to take a close look at Relay Therapeutics (RLAY), a novel drug discovery startup with a strong management team, access to one of the world's most powerful supercomputers, and nearly $1 billion in funding, having completed the third-largest biotech IPO of all time in mid-July.

Relay's upsized IPO raised $400 million after the company sold 20 million shares for $20 - above the marketed range of $18-19 - to complement the $520 million it had already raised across 3 private funding rounds from backers including the SoftBank Vision Fund, Google Ventures, the Biotechnology Value Fund, and Third Rock Ventures. Shares traded up by 75% on the first day of trading, closing at $44, but have declined slightly and are currently available at a price of $35.3.

Relay's high-profile backers are supporting a brains trust comprising computational chemists, biophysicists, data scientists and drug development experts with access to the Anton 2 supercomputer developed by D.E. Shaw Research, whose founder, David E. Shaw, is also one of Relay's founders, alongside Matthew Jacobson, a faculty member in the Department of Pharmaceutical Chemistry at the University of California, Dorothee Kern, Professor of Biochemistry at Brandeis University, and Mark Murcko, a Senior Lecturer at MIT and formerly chief technology officer at Vertex Pharmaceuticals (VRTX).

The company has developed a proprietary platform, Dynamo, which it is using to pioneer a novel drug discovery paradigm based on generating insights into protein motion, a concept the company refers to as Motion Based Drug Design ("MBDD"), leveraging techniques including crystallography, cryoEM, molecular simulations and machine learning.

These techniques allow Relay to gain access to harder to reach targets with small molecules, such as the allosteric sites on proteins, which are responsible for regulating many of a protein's activities. The company's initial focus is on oncology, specifically the treatment of solid tumours, although Relay is confident its techniques may be adapted to treat genetic and other diseases.

Relay's pipeline is early-stage, and consists of 3 candidates, designed to inhibit protein tyrosine phosphatase SHP2, tyrosine kinase receptor FGFR2 and cellular signalling pathway regulator PI3K, respectively, with SHP2 inhibitor RLY-1971 currently undergoing a phase 1 dose escalation study.

Although it is hard to assign a target price to such an early-stage biotech, there are reasons to believe that an investment into Relay at this time may result in gains over the long term.

Thanks to advances in technology, allosteric drug discovery looks set to become an increasingly important and potentially lucrative market within the pharma industry.

Traditionally, drug developers target the more accessible active site of proteins, known as the orthosteric site, but most of the "low-hanging fruit" targets have already been claimed, and treatments developed by early-stage biotechs and Big Pharma, meaning drug developers are having to widen their search and look deeper and with more penetration at alternative targets.

For example, in July 2018, biotech Revolution Medicines (RVMD) licensed an allosteric SHP2 inhibitor to Novartis (NVS) for a $50 million upfront fee, plus up to $500 million of milestone payments, and in 2016, Gilead (GILD) paid $400 million up front and agreed to milestone payments worth $800 million to acquire Nimbus Therapeutics' allosteric Acetyl-CoA Carboxylase (ACC) inhibitor program.

Research suggests that the allosteric sites on proteins offer drug developers the chance to identify and develop safer and more effective treatments, but these treatments are also more expensive to develop. What may give Relay a significant head start is its powerful technology (as described in the video below), which can be leveraged to identify targets with a theoretically higher chance of treatment success, and its advantageous funding position.

With one candidate already in the clinic and two set to follow, investors ought to benefit from regular news flow in the shape of data readouts, investigational new drug ("IND") and biologics license applications ("BLAs"), and potentially, lucrative development and commercial agreements with major pharmas, whilst the field's high barriers of entry ought to keep the competition at bay.

In the rest of this article, I will take a closer look at Relay's team, candidates, strategy and addressable market. Backing Relay may require a leap of faith and patience, but the opportunity to acquire shares at a discount to their IPO price may not exist for long, whilst the financial strength of Relay's backers limits the downside case, in my view, although the company's high cash burn of $84 million in FY19 and $26 million in the first 3 months of 2020 should be noted.

Relay Therapeutics is based in Cambridge, Massachusetts, and was spun out of the biotech accelerator Third Rock Ventures in 2015. Third Rock has backed numerous Nasdaq-listed biotechs, such as bluebird bio (BLUE), Editas Medicine (EDIT), Global Blood Therapeutics (GBT), Sage Therapeutics (SAGE) and Constellation Pharmaceuticals (CNST), with decidedly mixed success to date.

Listed Third Rock Ventures seeded companies share price performance over 5-year period

(Source: TradingView)

I would put the disappointments down to the experimental nature of many of the companies. Sage, for example, looked set to commercialise a novel CNS treatment until a high-profile trial failure decimated its share price, while bluebird bio operates in the gene therapy space, which has failed to make the impact to date that many experts felt it would.

It is still early days for all of these companies, however, and we can also see from the chart above that all of these stocks are highly volatile, providing plenty of opportunities for risk-on investors who time the market right to make strong short- to medium-term gains. Relay is likely to reflect the same trend.

Relay has moved quickly to build a strong management team which is led by President and CEO Sanjiv J Patel, who joined from Allergan, where he was Chief Strategy Officer. Don Bergstrom, ex Merck, Sanofi and Mersana Therapeutics, where he specialised in antibody-drug conjugates, leads Relay's R&D, whilst Pat Walters, who spent 20 years at Vertex Pharmaceuticals, heads up Relay's Computation & Informatics division. Relay's General Counsel is Brian Adams, who joined from Keryx Pharmaceuticals.

The remainder of the senior management team have decades of biotech experience and an impressive array of skill sets, however I highlight the 4 staff above, as I see leadership, the drug-development / clinical trial process, computation and legal as perhaps the most important elements of Relay's strategy.

In order to succeed, the company will need to leverage its technology and the skill of its team to identify and purchase optimised compounds, and ensure the clinical trial process runs smoothly and that excellent relationships with the FDA and other authorities are maintained, whilst protecting its IP, particularly as and when drugs begin to approach the commercialisation stage.

Relay Therapeutics Presentation at AWS Events

(Source: YouTube)

The above video provides an insight into how Relay uses its Dynamo technology to search for and purchase the compounds it then uses to drug proteins.

Initially, the company uses a variety of different techniques to try to model the motion of proteins, attempting to create a more rounded and dynamic set of insights into its activity than can be achieved using the more traditional method of static imaging. In a recent interview, Relay founder Dorothee Kern explained:

In textbooks, the drug simply binds the protein, and then, game over, but in reality, binding is a series of conformational changes, with the compound changing the energy landscape of a protein. The idea is that different compounds can cause different changes. One molecule might shift the protein in a direction that shuts down the active site, while another might turn it on.

The company tries to look at both wild-type and mutant forms of the protein and uses, for example, room temperature X-ray crystallography and Cryo-EM, and the Anton Supercomputer to create a "movie" of how the protein might behave over time, based on calculating the forces between millions of atoms over a minute (slices of 2.5 x10-15 seconds). Compared to other drug developers, Relay says in its IPO prospectus that its simulations are based on a time scale that is 100x longer.

A 10 microsecond simulation of a 1 million atom benchmark protein (satellite tobacco mosaic virus), which requires one day of processing on the Anton 2, would require 271 days on conventional hardware (Nvidia V100). Quote from IPO prospectus.

Relay virtual screening process

(Source: Relay Therapeutics presentation at AWS Events)

Having identified a target protein, Relay then screens tens of billions of possible compounds, which are evaluated and scored according to their chances of being successful, based on characteristics such as potency, binding capabilities, bioavailability and selectivity. The company then purchases a selection of the top-ranked compounds from a "synthesis on demand" provider and proceeds to evaluate them in vitro.

Relay's platform compared to conventional drug discovery programs

(Source: IPO prospectus)

Relay has now developed 2 ready-for-the-clinic, plus 1 experimental candidate. Since the company's process is repeatable, its technology ought to improve over time as in vitro studies and human trials progress, which could lead to the development of drug franchises across a number of indications.

This gives Relay different options. It is sufficiently well-funded to progress candidates independently, which would pay off if one of its candidates is approved and starts to generate blockbuster (+$1 billion per annum) sales, but this is a risky and expensive process that could leave the company empty-handed, having burned through hundreds of millions of dollars.

The alternative option is to use the model favoured by many drug developers, which is to secure commercial partnerships with larger pharmas, who fund drug development programmes in part or often in full after a certain stage of progress has been reached, in return for the rights to market and sell the drug, with the drug-developer receiving a percentage - usually in the low double digits - of all sales, as well as milestone payments when certain key development stages are reached, i.e., a pivotal trial, submission of IND, etc.

The downsides here are the smaller revenues the company will generate (~90% less than when going it alone), and when a pharma signs an agreement in principle to partner on, for e.g., 3 candidates, but opts against taking up the option on candidates 2 and 3 when they are developed, which leaves the developer with nothing to show for its early-stage development work.

A good example of these types of companies and arrangements can be found in the field of RNAi-based treatments, for e.g., Dicerna Pharmaceuticals (DRNA), which has co-development agreements in place with Novo Nordisk (NVO), Roche (OTCQX:RHHBY), Eli Lilly (LLY), Boehringer Ingelheim and Alexion (ALXN), or Arrowhead (ARWR), which works alongside Janssen, a subsidiary of Johnson & Johnson (JNJ) and Amgen (AMGN).

Relay current candidates

(Source: Company website)

Relay's current candidates all address solid tumours and inhibit the signalling pathways of specific proteins to prevent the proliferation of cancerous cells, meaning they may be adapted to treat a wide range of cancers, including many of the most prevalent, for e.g., lung, breast, colorectal, liver and kidney.

RLY-1971 is the most advanced candidate, and like the Revolution candidate I mentioned earlier that was acquired by Novartis, it is an allosteric inhibitor of the protein tyrosine phosphatase ("SHP2"), which helps cancerous cells to spread by relaying messages downstream from receptor tyrosine kinases ("RTKs"). To quote founder Kern again:

You can view an allosteric binder as a knob where you can dial in how much activation or inhibition you want. Nature has built these allosteric networks in for regulation. Lets take advantage of them.

RLY-1971 has only made it as far as a phase 1 dose escalation study with advanced or metastatic solid tumors, enrolling 52 participants, with the primary endpoint being to establish a recommended for a phase 2 trial, but the secondary outcome measures - plasma concentration levels, objective response rate ("ORR") and Disease Control Rate ("DCR") - and other outcome measures, including duration of response ("DOR"), progression free survival ("PFS") and tumor mutations, are highly intriguing and offer plenty of share price catalysts if early signs suggest RLY-1971 has an impactful effect on these measures.

SHP2 monotherapy and combination therapy addressable patient populations

(Source: Relay IPO prospectus)

RLY-4008 is an oral, small molecule, selective inhibitor of FGFR2, which is one of four members of the FGFR family. Whilst it's known that targeting FGFR2 in patients with intrahepatic cholangiocarcinoma has demonstrated clinical proof of concept, developers have only been able to produce non-selective, pan-FGFR inhibitors to date, which cause collateral damage by also inhibiting FGFR1, which causes hyperphosphatemia.

Prevalence of hyperphosphatemia in non-selective FGFR inhibitors

(Source: Relay IPO prospectus)

Relay has used its computational models to discover motion-based differences between the two protein types, making it easier to actively target FGFR2 without inhibiting the other family members. This is a great example of how the company's processing power can make the difference when targeting the more complex allosteric site over the orthosteric.

Finally, RLY-PI3K1047 is another signalling pathway regulator, targeting PI3K, which research has indicated may be the most frequently mutated kinase in cancer. Using Dynamo, Relay has been able to model the first full-length protein structure of PI3K, which is important, since prior attempts to inhibit the protein's functions have usually resulted in intolerable levels of toxicity. If the protein can be better understood and mapped, it may unlock the secret to a more effective and safer anti-tumor treatment.

Market value indication of PI3K inhibition

(Source: Relay IPO prospectus)

Relay says it is already leveraging Dynamo to produce 3 more precision oncology programs, and with most of the pieces in place - management, funding, technology and access to funding - required to operate a company successfully, there seems to be little standing in the way of the company rolling out many more candidates over the coming years.

Although there will be volatility in the short term, patience may be the key to holding Relay stock. The company's strategy is predicated upon developing computational analysis of proteins and their functions to new and higher levels of complexity, and generating superior insights, hence it does not want to get pressured into releasing candidates before they are ready purely in order to satisfy the market's demand.

Relay's cash burn - currently at ~$100 million per annum (based on Q120 spend of $26 million) is high and likely to increase substantially as the number of candidates increases and clinical trials begin in earnest. Having listed, fresh funding is likely to come from, and therefore dilute, investors once the current ~$800 million or so of funding is exhausted. This should not happen for at least 18 months at the earliest, however.

It can be very tricky for a layperson investor to get to grips with different drug developers' technologies and decide which are likely to succeed and which aren't, but it is possible (although not always advisable) to look at who else is invested in the company's success.

Relay Chairman and founding investor Alexis Borisy was the founder of Foundation Medicine, acquired by Roche for $5 billion. Another board member, Linda A Hill, is Professor of Business Administration at the Harvard Business School, whilst another, Douglas Ingram, is President and CEO of Sarepta Therapeutics, a commercial-stage biotech that has grown its share price by 344% over the past 5 years.

I would advise against an investment in Relay if you are not won over by the technology side of the business, but despite the fact it is still relatively unproven, and it may be years or even decades away from reaching its peak (based on the ongoing struggles of, for e.g., CAR-T therapy, gene therapy, and RNAi to make a significant impact on the global oncology or other disease markets), it seems a reasonable thesis to me that examining the activities of proteins in more detail can ultimately result in the development of superior treatments.

Since there ought to be no shortage of short-term catalysts as Relay and Dynamo start to reach full-throttle, and based on the overall performance of other Third Rock Venture seeded companies (which suggests a strong culture of good management, oversight and financial planning), I would consider Relay to be a reasonable investment opportunity at a price of $35.3, and as any experienced biotech investor will know, a positive set of data that suggests above standard-of-care efficacy can easily move a stock price by anything from 10% - >100%.

Longer term, Relay appears (in my view) to have an above average chance of graduating to a mid-stage biotech with commercialised products, which gives the current share price plenty of upside potential, in my view.

Gain access to all of the market research and financial analytics used in the preparation of this article plus exclusive content and pharma, healthcare and biotech investment recommendations and research / analytics by subscribing to my channel, Haggerston BioHealth.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RLAY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Excerpt from:
Relay Therapeutics: Heavily Backed Biotech Brains Trust Looks A Long-Term Buy - Seeking Alpha

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