A handful of trendy biotech stocks in early August got swept up in meme-stock mania. Relay Therapeutics (RLAY) wasn't one of them -- but it still surged.
The unheralded drug developer uses artificial intelligence, machine learning, and a supercomputer to design precision medicines.
The biotech stock saw daily trading volume of roughly 1.5 million shares during the final full week of August. That isn't much, but it was 50% up from the stock's 30-day average daily volume. The shares jumped nearly 30% during the week, before coughing up the gains with the rest of the market.
No meaningful news for Relay Therapeutics broke during this short-term rally, which suggests that the move may not prove durable. But investors willing to adopt a long-term mindset will find plenty to like about the Cambridge, Mass., company's technology platform and drug pipeline.
Disrupting the Disruptor
Decades ago, an emerging drug developer set out to prove that the industry was going about its business all wrong.
Companies large and small would stumble across new chemical compounds with drug-like potential using a technique known as combinatorial chemistry.
The process involves synthesizing thousands of molecules in hopes that one might make sense to study in clinical trials for a particular disease.
It was the industry equivalent of throwing spaghetti at the wall and seeing what, if anything, stuck.
The startup argued that the industry should instead use rational drug design. The idea was drug development should begin by understanding the structure of a molecular target driving a disease, then designing chemical compounds that could latch onto that structure.
This is sometimes called structure-based drug design.
Success didn't happen overnight -- far from it -- but that little company was proved correct. In fact, Vertex Pharmaceuticals (VRTX) is a $72 billion drug developer today, one of only a handful ever to reach that valuation.
Relay Therapeutics is far from that valuation milestone, but it was founded with a similar ambition.
Can Protein Motion Develop Better Drugs?
Relay Therapeutics argues structure-based design is no longer sufficient. Instead, drug developers need to understand how molecular targets move over time.
This is increasingly important considering most molecular targets are proteins, which are very large, complex molecules that drive health and disease.
Relay calls this new approach motion-based drug design. The company starts with an accurate 3D structure of a protein, then simulates how the protein moves over several microseconds. The result is a 4D structure of a protein, where the fourth dimension is time. This is sometimes called dynamic protein structure.
Is this really necessary? Well, emerging clinical data suggest Relay Therapeutics is onto something.
Its lead drug candidate, RLY-4008, was designed to inhibit the FGFR2 protein. On the one hand, it's a great target. It's involved in many different types of cancers and only patients with liver tumors have treatment options. On the other hand, there are multiple proteins in the FGFR family. And they all look very similar.
That creates a challenge for drug developers. A chemical compound with activity against FGFR1 will raise phosphate levels in a patient's blood, while activity against FGFR4 often causes diarrhea.
In fact, FGFR inhibitors currently or soon-to-be approved cause elevated phosphate levels and diarrhea in at least 90% and 24% of patients, respectively. That's because none are selective for only FGFR2.
Relay Therapeutics used motion-based design to understand structural differences between FGFR1 and FGFR2. It discovered that a flap on FGFR1 opened more frequently. So, it designed a chemical compound that would tuck itself into the unique pocket of FGFR2.
Preliminary Phase 1 results were impressive.
- RLY-4008 caused elevated phosphate levels and diarrhea in only 14% and 10% of patients, respectively. For perspective, only side effects with 20% prevalence are required to be listed on drug labels. If those rates of adverse events hold, this could be the first FGFR inhibitor without these side effects on its label.
- RLY-4008 achieved a partial response rate of 62% in individuals with FGFR2-altered liver cancer. In this context, a PR was defined as tumor shrinkage of at least 30%.
- A PR rate of 62% is astounding. Pemazyre, an FGFR inhibitor from Incyte (INCY), achieved a PR rate of 36% in a late-stage clinical trial. Futibatinib, an FGFR-inhibitor from Taiho Oncology, achieved a PR rate of 42% in its pivotal study.
Relay Therapeutics reported that 100% of individuals given the highest dose tested achieved a partial response or better. That dose is now being investigated in a pivotal Phase 2 clinical trial.
The word "pivotal" means the FDA has agreed to accept the resulting data as approval criteria, potentially negating the need for a Phase 3 study.
Investors shouldn't expect a PR rate of 100% in a larger group of patients, but there's plenty of wiggle room between the asset and the next-closest competitor.
The company is eager to study RLY-4008 in multiple types of FGFR2-altered cancers, many of which have no treatment options. It'll be a few years before the drug candidate reaches market -- assuming it does at all -- but it would mark an important validation for the technology platform and motion-based drug design.
Well Positioned for Important Derisking Events
Relay Therapeutics ended June 2022 with $838 million in cash, which is enough to fund operations into at least 2025. That greatly reduces the risk of a major dilution event in the near term, enabling investors to focus on derisking events from the pipeline.
The development of RLY-4008 will be important, but the AI drug developer also has an emerging asset portfolio focused on breast cancer.
Each protein target in the portfolio could benefit from motion-based design – and each represents a wide-open market opportunity. That includes PI3K-alpha, the most commonly mutated protein in solid tumor cancers that has no treatment options available.
So, sure, the recent rally in shares of Relay Therapeutics may fade. Wider worries over an aggressive Federal Reserve could punish this biotech stock back to all-time lows set months ago.
But when investors zoom out and focus on the long term, then they'll probably find that paying closer attention to this technology platform is worth the effort.
