Want an email alert every time a Finch Trade goes live? Sign up in your profile.

This is simply a part of my ongoing, long-term position building for Relay Therapeutics.

My long-term goal within Finch Trades is to build a position of 10,000 shares or more before the business begins to ramp commercially. I have now purchased 4,077 shares (41% of goal) since Finch Trades started in April 2024. My cost basis for Relay Therapeutics Finch Trades is $4.84 per share or a market valuation of $813.1 million based on the current number of shares outstanding.

Maybe it's not that simple this time.

I had communicated my intention to deploy my entire Roth IRA contribution limit for the calendar year ($7,000) to Relay Therapeutics, but I might have gotten too cute. I figured the stock might dwindle to an even $4 per share. Instead, it rose above $4.50 per share. And when rumors broke that Eli Lilly was considering buying Scorpion Therapeutics for up to $2.5 billion, the stock nearly touched $6 per share before triggering an automatic halt.

By the time the halt was lifted, shares sank to the low $4 per share range. My order wasn't quite filled in time for those prices (due to triggering a second trading halt), but I didn't want to compound my mistake of getting too cute by placing a limit order that might not have been filled.

My expected cost basis for my 10,000 share position was originally $14 per share, so I'm trending well below that. We'll see what tomorrow's (January 14, 2025) JPMorgan Healthcare Conference presentation entails. Relay Therapeutics snagged a favorable 7:30am PT slot – the earliest possible slot and on the second of four days – which could precede a big announcement or update.

The Trade

Relay Therapeutics is considered a Growth (Quality) position. I purchased 1,621.12 shares at $$4.318 per share on January 10, 2025.

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.

Partnering the breast cancer portfolio

I expect Relay Therapeutics will seek help to commercialize not just RLY-2608, but the broader breast cancer portfolio. In that scenario, the business snags at least $500 million in cash upfront (including a possible equity investment) to develop RLY-2608 (PI3K-alpha inhibitor), RLY-2139 (CDK2 inhibitor), and RLY-1013 (oral SERD). It could snag $1 billion or more upfront given recent developments in the competitive landscape.

Scorpion Therapeutics sells STX-478 for up to $2.5 billion

Although the initial reports were that Eli Lilly was buying Scorpion Therapeutics in its entirety, the JPMorgan Healthcare Conference update specified that the world's largest drug developer was only buying the pan-mutant PI3K-alpha inhibitor STX-478. The company's remaining assets and employees will be retained in a newly formed company owned by Scorpion's existing shareholders.

In other words, a less mature and so far equally powerful PI3K-alpha inhibitor to RLY-2608 is worth at least $1 billion upfront and as much as $2.5 billion if later stage development milestones are achieved. That's a steal for Eli Lilly – and a huge boon for existing PI3K-alpha inhibitor developers. If liver toxicity doesn't derail its potential when combination studies start coughing up results.

How does RLY-2608 compare to STX-478?

It's tempting to read the recent data readouts from Scorpion Therapeutics and think STX-478 is better. But it's not quite so simple.

For example, the data available for STX-478 are from a monotherapy dose escalation study. Although the asset showed a hyperglycemia rate of only 23% (any grade) in its recently-reported data, a dose escalation study will consistently underestimate side effects. Investors might be tempted to think RLY-2608 is at a disadvantage because the recently-reported doublet data show a hyperglycemia rate of 42%. However, at an equivalent point in development, RLY-2608 monotherapy dose escalation reported a hyperglycemia rate of just 17%.

This makes sense.

Consider that the lowest dose of STX-478 tested to date was 20 mg. The maximum tolerated dose (MTD) was 100 mg. That means the dose escalation data – and the 22% hyperglycemia rate – include patients being dosed at what is likely 1/5 of the phase 2 dose. Of course they'll have lower rates of side effects.

Another important detail is that the STX-478 phase 1 study is the first in the competitive landscape to include patients taking type 2 diabetes medications. Patients receiving these medications are by definition controlling their risk of hyperglycemia, which will result in lower incidence in the reported population. These patients represent 14% of the total reported patient population for STX-478 so far.

This isn't meant to undercut STX-478. It very well might end up being the better asset. After all, even if it's equivalent to RLY-2608, Scorpion's asset is dosed once daily vs. Relay's twice-daily requirement.

On the other hand, STX-478 monotherapy is the only pan-mutant PI3K-alpha inhibitor that's shown grade 3 and grade 4 liver toxicity. That could complicate combinations with oral SERDS (up to 15% liver toxicity) and CDK inhibitors (double-digit liver toxicity), which is key to serving HR+ / HER2- breast cancer patients.

How am I approaching this position?

As they say, you can share your research, but you cannot share your conviction.

Well, I've deployed $14,000 of capital to Relay Therapeutics since November 20, 2024. Hopefully that's a strong signal of my conviction in this business and investment.

Relay Therapeutics is my primary target for 2025. I expect to deploy between $12,000 and $20,000 into this position in 2025, including this Finch Trade for $7,000. That would get me to about 67% of my targeted 10,000 share goal.

Outperformance Scenarios

Investing in individual stocks can be reduced to a simple question: "If I invest $1 in this individual stock at this price, will it outperform an equal passive investment in the S&P 500 at this level?"

If you keep emotions and expectations in check, then you might be surprised to learn you don't need to swing for the fences.

Here's how shares of Relay Therapeutics will need to perform for the money invested in this Finch Trade to outperform passive investing in the S&P 500 in the next five years.

Assumptions:

• The S&P 500 index gains 10% per year with dividends included – its historical average since 1990.
• Relay Therapeutics averages 14.2% dilution per year in the next five years – equivalent to a standard 17.5% dilutive event every 18 months. This is the historical average for precommercial and newly commercial drug developers.
• S&P 500 closing level on January 10, 2025 = 5,836
• Relay Therapeutics closing price on January 10, 2025 = $4.318 per share

Margin of Safety & Allocation

Relay Therapeutics is considered a Growth (Quality) position. The current modeled fair valuation for the company based on my 2025 model is below:

• Market close January 13: $4.78 per share
• Modeled Fair Valuation: $15.65 per share
• Allocation Range: Up to 15%

Relay Therapeutics reported 167.383 million shares outstanding as of November 1, 2024. The modeled fair valuation above assumes 175.752 million shares outstanding, which is equivalent to 5% dilution by the end of 2025.

Further Reading

• December 2024 research note evaluating if Relay Therapeutics is about to partner its breast cancer portfolio