Relay Therapeutics (NASDAQ: RLAY) gave investors a hurried and unenthusiastic rundown of its ESMO 2022 data presentation for RLY-4008. Management seemed like it had better things to do.

Then again, with an objective response rate (ORR) of 88% for your lead drug candidate that more than doubles the next-best response from the competitive landscape, what the fuck else is there to discuss?

There weren't any negative surprises in the additional details provided in the corporate data presentation. In fact, there was room for additional optimism. That may quickly get squeezed out of shares considering the company announced a public offering of common stock. Solt DB has updated its price targets (all lower) as a result.

Post-ESMO 2022 Update

I recently provided longitudinal analysis of RLY-4008 using the ESMO 2022 abstract published on September 8. I won't review those details here.

The most recent analysis explained the rationale for the lead drug candidate, how it's being developed, and what questions remained unanswered from the abstract alone. Some questions can only be answered in future data updates, but investors now have general timelines for when to expect those data disclosures and answers to the rest. There are also new insights into the prevalence of FGFR2-altered cancers that could fundamentally alter the long-term economic opportunity of RLY-4008.

The ESMO data disclosure (it may be referred to as the "September 2022 data disclosure" in the future) included new details from the ongoing phase 1/2 clinical trial for RLY-4008 in FGFR2-fusion cholangiocarcinoma (CCA) without prior FGFR-inhibitor treatment.

• As of the data cutoff, 15 of 17 (88%) individuals receiving the optimized dose of 70 mg per day achieved a partial response or better. A partial response in this context is defined as tumor shrinkage of at least 30% from the beginning of treatment. By comparison, ORR for approved and late-stage FGFR inhibitors ranges from 23% to 42%.
• All individuals achieved tumor reduction of at least 15%.
• A total of 15 individuals remains on treatment. The two individuals who discontinued treatment both achieve partial response, including one who achieved tumor shrinkage of over 80% who had their tumors removed with curative intent.
• The ESMO data disclosure reveals two separate individuals had tumor reductions of nearly 100%, which is oh-so-close to a complete response.

The selectivity of RLY-4008 for FGFR2 over other proteins in the FGFR family could allow individuals to receive higher doses of treatment (70 mg per day is the highest dose tested) for longer, potentially allowing them to achieve deepening responses over time. The ESMO data suggest that's occurred since the last data disclosure in June 2022.

As for safety and tolerability, there were no negative surprises. Relay Therapeutics shared treatment-related adverse event data from 89 individuals who have received the pivotal 70 mg per day dose. The most common side effects include stomatitis (42%), nail toxicity (43%), hand-foot syndrome (35%), dry mouth (25%), alopecia (26%), dry eye (12%), and altered taste (16%). Most of these are on-target side effects from whacking FGFR2.

Notably, hyperphosphatemia (elevated phosphate levels in the blood) (FGFR1) and diarrhea (FGFR4) only occurred in 12% and 4% of individuals, respectively. These side effects were calculated using 195 individuals receiving any dose of RLY-4008, including doses lower than the pivotal dose. For comparison, approved and late-stage FGFR inhibitors experienced hyperphosphatemia and diarrhea in 90% to 94% and 24% to 47% of patients, respectively.

• A drug label typically only includes adverse events that occur in 20% or more patients.
• Interestingly, each side effect occurred at a lower frequency for individuals receiving 70 mg per day (89 individuals) compared to all doses combined (195 individuals).
• Roughly 42% of individuals receiving the pivotal dose (89 individuals) encountered dose interruption, although some of that was intentional to collect additional data (3 weeks on treatment, one week off treatment was explored).
• Roughly 27% of individuals encountered dose reductions and one individual (1/89) experienced dose discontinuation. That may be the individual who had surgery to remove their tumors. By comparison, 23% to 74% of individuals receiving approved and late-stage FGFR inhibitors needed to reduce or discontinue dosing.

Additional Updates

Relay Therapeutics expects to reach full enrollment of at least 100 individuals in the pivotal cohort by the second half of 2023. That suggests full data won't be available until 2024 and FDA approval may not occur until 2025 at the earliest. Additional cohorts -- different FGFR2-alterations, different tissue types, individuals who have received prior FGFR inhibitor treatment, and so on -- may earn approval at later dates.

That sets expectations for the regulatory and commercial timeline. Additional updates include:

Pardon the Distillation: I purposely focused company updates to date on individuals in the pivotal cohort, or individuals receiving doses of 70 mg per day. It's important to acknowledge that the complete data picture remains valuable for at least two reasons.

First, it establishes proof of concept for lower doses of RLY-4008, including in individuals who require gentler doses to manage side effects. The ORR across all dose levels (38 patients) was a respectable 63%, while 92% of individuals achieved tumor shrinkage. Meaning, individuals who start with 70 mg per day and reduce dosing can still have a favorable outcome.

Second, the overall data picture helps to build the safety database for RLY-4008, which will be needed for future regulatory submissions. Perhaps the best way to describe to the importance of the safety database is to point investors to the microbiome drug developer Seres Therapeutics. The company announced positive phase 3 study results for SER-109 in C. difficle infections in August 2020, but doesn't expect to launch the product until the first half of 2023 – nearly three years later! The culprit: Seres Therapeutics didn't have enough patients in the safety database for SER-109.

Companion Diagnostic: Relay Therapeutics announced a collaboration with Foundation Medicine (Roche) to develop a companion diagnostic for RLY-4008. The genetic screening tool will help to identify individuals with FGFR2 alterations including fusions, amplifications, and mutations.

It's worth pointing out Roche has an existing therapeutic collaboration with Relay Therapeutics. The pharma titan owns the rights to RLY-1971, now GDC-1971, a SHP2 inhibitor. It has initiated multiple studies exploring the combination potential with its KRAS G12C inhibitor and blockbuster PD-L1 inhibitor. In other words, the decision to choose Foundation Medicine among the crowded field of companion diagnostic providers likely wasn't a mistake. #hinthint

Is FGFR2 More Prevalent? Investors should resist speaking in absolute terms, but there isn't much that can derail an eventual U.S. Food and Drug Administration (FDA) approval for RLY-4008. It'll probably earn Breakthrough Therapy designation soon. Although the asset provides validation for motion-based drug design (MBDD) and the technology platform, it represents a relatively limited economic opportunity.

Or does it?

A study published in Nature in August 2022 suggests FGFR2 alterations are important drivers of multiple cancers. Researchers found FGFR2 alterations were often paired with more prevalent oncogenes such as PIK3ca (precursor to PI3K-alpha), MYC, CCND1, and others. These represent the second-, third-, and seventh-most common mutations in solid tumor cancers, respectively.

Not all these oncogenes require FGFR2 alterations, but researchers estimate the prevalence of FGFR2 might be at least twice as common as currently expected. That would mean 16,000 to 40,000 new diagnoses per year in the United States. That could increase the value of RLY-4008 and the companion diagnostic with Foundation Medicine. #hinthint

This is eerily similar to Loxo Oncology's pursuit of RET inhibitors, which were found to be much more prevalent only after the asset reached pivotal studies and earned FDA approval. Right place, right time kind of thing. Eli Lilly acquired Loxo Oncology for $8 billion in January 2019.

Stock Offering: Relay Therapeutics is keen to maintain a healthy cash balance. The business ended June 2022 with $838 million in cash representing a runway into at least 2025. The announcement to raise an additional $345 million in gross proceeds may seem unnecessary, but it follows "leave-nothing-to-chance" capital raises from Sarepta Therapeutics, Cerevel Therapeutics, Kymera Therapeutics, and other top-tier drug developers. Why head into an economic downturn with "only" three years worth of cash? Big aspirations come with big cash burn.

Price Targets

(Updated to reflect dilution.)

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

• Current valuation (market close September 12):  $3.136 billion / $28.80 per share
• Attractive Near:                 $2.5 billion / $20.36 per share
• Prioritize Below:               <$2.0 billion / $16.29 per share
• Caution Above:                  $3.0 billion / $24.43 per share

Relay Therapeutics reported 108.9 million shares outstanding as of July 29, 2022. The price targets above assume 122.8 million shares outstanding to reflect the public offering of common stock announced on September 12, 2022.

The previous price targets were $22.94 per share (Attractive Near), $18.35 per share (Prioritize Below), and $27.52 per share (Caution Above). These were based on identical market valuations but 109 million shares outstanding.

• When Solt DB officially launches all historical price targets for each company in our coverage ecosystem will be listed for transparency. I intend to display price target ranges and changes on stock charts for each company on its respective landing page. Highcharts for the win.
• Please remember the initial price targets were set on June 6, 2022 when Relay Therapeutics traded at $15.20 per share. A higher probability of success (POS) across the pipeline and success for RLY-4008 were already factored into the initial price targets.
• This remains my largest overall position at 15% of my portfolio.

Price Targets Rationale

The price targets were updated to reflect dilution from the just-announced public offering of common stock. The offering hasn't been priced as of this writing (will likely be announced prior to market open on September 13), but I'm assuming Relay Therapeutics offers close to 13.8 million shares (including the 15% overallotment) at $25.00 per share. Note the valuation targets have remained the same.

At a high level, a $3 billion market valuation for a precommercial drug developer at the maturity level of Relay Therapeutics represents a generous premium. Investors may not like what's coming from Mr. Market between now and mid-2023, which may include a severe economic downturn that cuts down biotech valuations. Hey, I didn't do it.

In the long run, Relay Therapeutics is well-positioned to emerge as a top-tier drug developer, if it hasn't already. It could earn a market valuation approaching or exceeding $10 billion by the middle of the decade. That doesn't mean investors should abandon valuation discipline or a bottom-up approach in the meantime.

Investors are encouraged to keep emotions in check and remain grounded. There are several upcoming events that could change price targets in either direction.

1. Development of the SHP2 inhibitor: What are Roche's (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)? Roche 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. Perhaps that's the reason for the latest raise, although a deep emerging pipeline in breast cancer will be cash-hungry, too.
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 PI3K-alpha drug candidate that's more selective, which is a soft signal to lower expectations for the initial asset.
3. Is FGFR2 More Prevalent? The recent Nature study is a good starting point for further investigation, but academic papers require years to translate into real-world commercial outcomes, if they do at all. An expanded patient population can only represent positive upside for RLY-4008, but it won't be realized until the back half of this decade following combinations with assets across the industry. Perhaps Relay Therapeutics can start shopping RLY-4008 around to developers of MYC and CCND1 assets sooner than later.

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

Further Reading

• July 2022 research note discussing data disclosure for RLY-4008
• August 2022 study published in Nature (external group) suggesting FGFR2 alterations are more common than previously known
• September 2022 company update discussing data disclosure for RLY-4008 within abstract for ESMO Congress 2022
• September 2022 abstract for ESMO Congress 2022
• September 2022 press release announcing public offering of common stock
• September 2022 press release announcing collaboration with Foundation Medicine (Roche) to develop companion diagnostic for RLY-4008