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Well, there's nothing cute here. My personal investing strategy includes a healthy dose of Relay Therapeutics through at least the end of the decade. I expect the company to be my largest position at any given time and my longest-term position.

I'm going to continuously add shares as I add new money to my portfolio, especially when the price is favorable for my investing horizon.

The Trade

Relay Therapeutics is considered a Growth (Quality) position. I purchased 159.36 shares at $6.275 per share on May 29, 2024.

Scenario Analysis

My modeling is based on valuing assets, contextualizing competitive landscape dynamics, and weighing the probabilities of favorable and unfavorable scenarios. This trade was driven by the following considerations.

Relay Therapeutics Isn't Like the Other Girls (positive)

My job as an analyst can be relatively boring for long stretches, but once every few years or so a business checks all or almost all the boxes within my investing frameworks. They're not always obvious at first glance, and the trick is you must wade through hundreds of companies every few years to find just one, but it's important to appreciate the opportunities when you stumble across them.

Relay Therapeutics is one of those rare opportunities.

The Dynamo technology platform is differentiated. Only a handful of drug developers are using protein motion data to refine drug discovery. It's also a different type of computation. The Anton-2 and Anton-3 supercomputer architecture runs on ASIC chips. A supercomputer built on GPUs or TPUs or anything-PUs cannot perform the same simulations. In other words, you could have all the NVIDIA chips in the world and not recreate the Anton-3.

The technology platform is clinically validated. Relay has no-doubter clinical data for lirafugratinib as the leading FGFR2 inhibitor, while RLY-2608 has indeed proven to be more selective for PI3K-alpha as intended. Not every program will advance and there will be failures, but the probability of success is much higher for Dynamo than the industry.

Relay designs impressively complex clinical trials. The company's phase 1 studies evaluate more than 100 patients, which gives the company orders of magnitude more data than the average drug developer during early development. That informs if it should focus on or abandon certain tumor types, mutations, patient populations, and so on before it moves to mid-stage development.

This makes phase 2 studies more efficient, saves money if an asset needs to be terminated quickly (vs. advancing it because there wasn't enough data to see a problem earlier), and puts the company in good standing with regulators (which could snag some Breakthrough Therapy designations that save 1-3 years of development time).

By comparison, many drug developers evaluate a handful of patients in phase 1 studies and use phase 2 to generate the same quality of data as Relay in phase 1. But most drug candidates fail in phase 2 with this approach -- and it's more expensive to fail later in development.

Management is reasonable (so far). Relay is led by individuals with experience at some of the world's top drug developers, including a healthy smattering of former Vertex employees. For better or worse the team has resisted attaching itself to "TechBio" or "tech-enabled drug discovery" or "AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI AI."

Relay has never overextended itself. The pipeline and development strategy has always been manageable. When the industry's hot streak cooled the leadership proactively paused development of several programs, despite having over $1 billion in cash at the time. That decision means the business could have excellent timing supporting its ability to fund an ambitious long-term strategy. If lirafugratinib earns approval, then it could generate cash to help early-stage programs.

Simply put, I don't see any other precommercial drug developer deploying a strategy that's even remotely close to Relay's.

Built-In Optionality (positive)

Relay Therapeutics has meaningful economic opportunities spread across nine unique named assets, over five additional unnamed research targets (in addition to the three new programs disclosed in June 2024), and four specific therapeutic areas. That makes it a more resilient investment.

Migo. Relay can earn $675 million in milestone payments and low-to-mid teen royalties on migoprotafib, the SHP2 inhibitor licensed to Genentech. Importantly, the business can earn about $300 million in milestones from development and regulatory progress in the next few years.

Lira. Relay has tremendous optionality for its lead drug candidate lirafugratinib in FGFR2-altered tumors. It could continue developing lira in a tumor-agnostic phase 3 trial, or maybe announce a path to expedited approval and lower costs. Depending on how it evaluates different opportunities, the business could choose to monetize the asset by selling its rights to a larger drug developer or, a new trend that seems to be in vogue, sell a royalty on future sales.

Breast cancer. Relay has recently taken steps to diversify its aim, but it still has many eggs in the breast cancer basket. The backbone of the ambitious portfolio would be the PI3K-alpha inhibitor RLY-2608. Combinations with hormone receptor degraders and next-generation CDK inhibitors could amplify the overall market opportunity.

Disappointment in PI3K-alpha Could Be Devastating (negative)

A healthy focus on developing a portfolio of breast cancer treatments could backfire, too. Disappointing data readouts for RLY-2608 in the next few months could wash out the more than $5 billion opportunity before other assets even enter clinical trials.

That said, the value of lirafugratinib alone justifies the company's current market valuation, but Relay Therapeutics would become a less exciting investment if the breast cancer strategy fell apart.

Luckily, RLY-2608 has multiple paths to success. It can boast better efficacy, a better safety profile, or both. The preliminary safety data published to date suggest it already has the best tolerability in the field. That's important because the primary value driver for a PI3K-alpha inhibitor will be its combination potential.

The tricky part is that Relay will need to wrestle a unique and favorable endpoint measuring hyperglycemia from the FDA for future studies. If it doesn't, then development might take a little longer. If it does, then that's huge – and I'll be able to more confidently account for significantly more of the asset's future value in my modeling.

Margin of Safety & Allocation

Relay Therapeutics is considered a Growth (Quality) position. The current modeled fair valuation for the company based on my 2024 model is below:

• Market close July 3: $6.27 per share
• Modeled Fair Valuation: $23.51 per share
• Allocation Range: Up to 15%

Relay Therapeutics reported 132.742 million shares outstanding as of April 26, 2024. The modeled fair valuation above assumes 152.653 million shares outstanding, which is equivalent to 15% dilution.

Further Reading

• June 2024 press release announcing three new programs
• June 2024 press release announcing RLY-2608 combination with Pfizer's next-generation CDK inhibitor
• May 2024 press release announcing cash position and business update for Q1 2024
• February 2024 research note looking at the year ahead

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