Relay Therapeutics (NASDAQ: RLAY) continues to build upon promising initial data for its lead drug candidate. Preliminary data from an ongoing phase 2 clinical trial suggest RLY-4008 has the potential to dominate the treatment landscape for FGFR2-altered cancers. Although the study remains far from the finish line, these data are important for two reasons:

1. The U.S. Food and Drug Administration (FDA) has agreed to treat the phase 2 clinical trial as a pivotal study. That means the company can submit a regulatory filing requesting approval once the study concludes – it doesn't need to conduct a phase 3 clinical trial.
2. Each successive update includes a larger enrolled patient population, yet the data continue to impress across key metrics.

Relay Therapeutics intends to enroll 100 individuals in the pivotal cohort of its phase 2 clinical trial. Specifically, eligible patients will have:

• Cholangiocarcinoma (CCA), a rare type of liver cancer driven by FGFR2 alterations. Cancers originating in bladder, breast, endometrial, and at least six other tissues can also be driven by FGFR2 alterations. They'll need to be studied in separte cohorts in the pivotal phase 2 clinical trial.
• Tumors with FGFR2 fusions, the specific alteration in the gene. We often lazily say "mutation," but a mutation is actually a type of alteration. There are mutations, fusions, and amplifications (damn scientists) – all of which will require separate cohorts in the pivotal phase 2 clinical trial and separate regulatory approvals.
• Tumors that are FGFR-inhibitor naïve, meaning individuals haven't been treated with another FGFR inhibitor before. Prior treatment could change the molecular make up of the tumor, which would muck up data analysis. You can probably guess where this is heading: Individuals who have previously received an FGFR inhibitor will be enrolled in a separate cohort in the pivotal phase 2 study.

Many of these separate cohorts are currently enrolling patients, too.

The previous update from June 2022 included data from evaluable patients as of April 19, 2022. The ESMO abstract includes data from evaluable patients as of August 1, 2022. The number of evaluable patients in the pivotal cohort – those with FGFR2-fusion, FGFRi-naïve CCA receiving 70 mg of RLY-4008 per day – increased from four to 17 in that span. That's an encouraging development demonstrating great execution enrolling and retaining patients.

At that time of the June 2022 disclosure, all four evaluable patients in the pivotal cohort achieved a partial response defined as tumor reduction of at least 30% from the beginning of treatment.

At the time of the September 2022 disclosure, 15/17 (88%) evaluable patients in the pivotal cohort achieved a partial response or better. That includes one individual who had a complete response, as their tumors were surgically removed with curative intent. They appear to remain cancer free as of May 31, 2022, although details weren't provided in the abstract.

The enrolled patient population is now large enough to begin compiling additional metrics that provide hints of the drug candidate's safety, efficacy, and durability. These calculations are still based on a very small number of individuals, but so far, so good.

• Objective response rate (ORR): This is the number of individuals who achieved at least a partial response. ORR was 88% for the first 17 individuals enrolled.
• Ongoing response: This is the number of responders who continued to benefit from treatment at the data cutoff. All 15 responses (100%) were ongoing.
• Disease control rate (DCR): This is the number of individuals who at least see their tumors stabilize in volume from the beginning of treatment. All 17 individuals (100%) had at least stable disease at the data cutoff.
• Remain on treatment: This isn't technically the official statistic, but it's an indirect measure of dose reductions and treatment discontinuation. The abstract notes 15 individuals (88%) remained on treatment at the data cutoff.

There is still room for negative surprises.

First, the "remain on treatment" metric will be important to keep an eye on. Relay Therapeutics is starting all patients with the highest once-daily dose ever tested. That provides room to reduce doses in patients who require gentler treatment to manage side effects. At the time of the June 2022 data disclosure investors learned that 55% of individuals receiving 70 mg per day had dose interruptions and 36% had dose reductions. No patients in previous studies discontinued treatment due to drug dosing. These rates were not updated in the abstract, but will surely be updated in the data presentation September 12.

The safety profile appears relatively manageable, but too many dose reductions or discontinuations could impact longer-term outcomes. That leads to…

Second, the median duration of response (DOR) could not be measured in the pivotal cohort because not enough time has elapsed. That's generally a good sign. If many patients continue to respond, then you can't calculate the median DOR. However, the median DOR across all dose levels was 6 months. That's not bad, but it's not much better than less selective FGFR inhibitors. This could be a metric scrutinized by Wall Street and the FDA nonetheless.

Third, Wall Street obsessed over a relatively small rate of hyperphosphatemia (elevated phosphate levels in the blood) and diarrhea in the phase 1 clinical trial. These rates were not given in the abstract. The June 2022 data disclosure reported hyperphosphatemia occurred in 14% of individuals and diarrhea in 10%, again across all dose levels. However, these rates likely will be higher in individuals receiving the 70 mg per day dose.

I'll provide more analysis of these three key metrics following the investor presentation on Monday, September 12.

Price Targets

(No change, explained below.)

The current risk/reward for adding new shares of Relay Therapeutics is considered unfavorable. This is considered a Growth (Quality) position. Current model for the company are as follows:

• Current valuation (market close September 8):  $3.42 billion / $31.37 per share
• Attractive Near:                 $2.5 billion / $22.96 per share

Relay Therapeutics reported 108.9 million shares outstanding as of July 29, 2022. The price targets above assume 109 million shares outstanding, which doesn't include additional dilution.

So, um, what the fuck?

Well, look. The data for RLY-4008 continue to impress. They help to validate the company's motion-based drug design (MBDD) approach and the Dynamo technology platform broadly.

But there are still some unknowns described above that could give Wall Street analysts heartburn and drive volatility. We can assign a reasonable probability of that occurring, so why get caught on the wrong side of it? You know how they get.

Additionally, FGFR2-altered cancers represent a relatively small patient population. The first ("potential") approval in FGFR2-fusion, FGFRi-naïve CCA represents fewer than 1,000 patients in the United States. Include all FGFR2-altered cancers and the total U.S. patient population rises to a range of only 8,000 to 20,000 individuals. RLY-4008 is only likely to generate moderate levels of revenue by 2030.

Improving patient outcomes is very important. Validation of the approach is important. However, the ability to achieve a higher probability of success (POS) across the pipeline and earn a premium valuation is already baked into the price targets above.

Keep in mind there are two large unknowns capable of impacting the company's valuation in the near term.

1. Development of the SHP2 inhibitor: What are Genentech's development goals for the SHP2 inhibitor? Will Relay Therapeutics opt-in to co-develop the asset (it already has rights to combine it with its wholly-owned programs)? Genentech walking away could dent the valuation for a brief period, while opting in could reduce the company's cash runway and require a capital raise.
2. Development of PI3K-alpha inhibitors: These are by far the most important programs for Relay Therapeutics. An ongoing phase 1 clinical trial for RLY-2608 should yield results by the first half of 2023. The company has already started development of a second drug candidate that's more selective, which is a soft signal to lower expectations for RLY-2608.

Celebrate the winning streak for RLY-4008, but keep emotions in check.

Further Reading

• June 2022 research note discussing prior data disclosure for RLY-4008
• September 2022 abstract for ESMO Congress 2022
• (upcoming) September 2022 data presentation and discussion from ESMO Congress 2022

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