I remember my sense of shock some half-dozen years ago when I read a recommendation to sell shares of a company. The recommendation was not based on any long-term fundamentals. Rather, it was that over the next six months the funds could be employed more profitably elsewhere. – Phillip Fisher (The Father of Growth Investing)
As a lucrative endeavor, bioscience investing has extremely high market volatility. A negative market sentiment can cause significant market decline across the life science sector. If you’re unfamiliar with the intrinsic behavior of this sector, you can suffer great losses. Conversely, if you’re able to anticipate unfolding events, there are mega profits to be made. Over 90% of the time, the shares of a fundamentally robust company will rebound to the new high subsequent to a temporary depreciation. With the recent resignation of the FDA Commissioner (Dr. Scott Gottlieb), the market went into a “panic mode.” Consequently, many strong companies tumbled, thereby trading at a deeper bargain to their intrinsic value. Remarkably, therapeutic innovators like Merus (MRUS) seemed to be “immune” to the latest market hiccup. As a result, I’ll take a deep dive analysis into its fundamentals and share with readers my insight.
Figure 1: Merus chart (Source: StockCharts)
About The Company
Headquartered in the Netherlands, Merus is focused on the development and commercialization of novel medicines to cure different cancers. The company is tinkering with the antibody therapeutic platform coined Biclonics. As bispecific antibodies, Biclonics harnesses the power of the full-length IgG antibody. This translates into good efficacy and safety in preclinical and clinical investigations. The key strengths of Biclonics are long half-life and low reactivity with the immune system (i.e. favorable immunogenicity).
Figure 2: Biclonics (Source: Merus)
As depicted in Figure 3, Merus is advancing a robust pipeline of bispecific antibodies. The lead molecule, MCLA-128, is currently being assessed in a Phase 2 combination trial for advanced (i.e. metastatic) breast cancer. Moreover, it is concurrently being studied in a Phase 1/2 trial for stomach (i.e. gastric) and non-small cell lung cancers (NSCLC). The other molecule, MCLA-117, is being studied in a Phase 1 trial for the blood cancer known as acute myeloid leukemia. Furthermore, Merus is determining whether MCLA-158 is efficacious in treating solid tumors (metastatic colorectal cancer) in a Phase 1 trial. That’s not all! The company is collaborating with Incyte Corporation (NASDAQ:INCY) in developing MCLA-145 to suppress two cancer targets. One target is the well-known immune checkpoint inhibitor (PD-L1). The other target is yet to be disclosed.
Figure 3: Therapeutic pipeline (Source: Merus)
Lead Bispecific Antibody Franchise MCLA-128
Since the value of a young biotech company depends on its lead molecule, we’ll analyze the prospects of MCLA-128. Interestingly, this drug has a mechanism of action (“MOA”) dubbed DOCK & BLOCK. As an antibody-dependent cell mediated cytotoxicity (“ADCC”), MCLA-128 “docks” on the human epidermal growth factor receptor 2 (“HER2“) which is highly expressed on various cancer cells. The docking mechanism enables MCLA-128 to inhibit (i.e. “block”) a neighboring target HER3 that, in and of itself, halts the heregulin-stimulated growth of tumor cells. Ultimately, the result is tumor eradication and improved survival.
Despite its sound MOA, there are always setbacks associated with any cancer treatment. In my view, the most important limitation is that these rogue cells evolve rapidly, thereby rendering most treatment obsolete over time. The fast cellular division and thus evolution causes treatment relapse. For instance, breast cancer cells can change their cellular targets like HER2 by evolving. Therefore, most therapies directed against HER2 will be ineffective when these cells mutated and modified HER2 beyond target recognition. Merus believes that their Biclonics can overcome the aforementioned problem,
MCLA-128 is designed to overcome the inherent and acquired resistance of tumor cells to HER2-targeted therapies using two mechanisms: 1) blocking growth and survival pathways to stop tumor expansion and 2) recruitment and enhancement of immune effector cells to eliminate the tumor.
In the Phase 2 (open-label, multi-center, international) clinical trial, investigators are gauging the efficacy and safety of MCLA-128 in combinations with other medicines (trastuzumab, vinorelbine, and endocrine therapy) as illustrated in Figure 4.
Figure 4: Phase 2 trial of MCLA-128 (Source: ClinicalTrials.gov)
The therapeutic combinations will be dosed to two patient groups suffering from metastatic (advanced) breast cancer. As follow, Cohorts 1 consists of patients that are HER2 positive and amplified. Cohort 2 comprises of patients with estrogen receptor positive yet low HER2 expression. Accordingly, MCLA-128 is prescribed in two steps via doublet and triplet. Per ClinicalTrials:
Initially, MCLA-128 is given in combination with trastuzumab in the doublet. After the safety of the doublet has been assessed in 4-6 patients, MCLA-128 is given in combination with trastuzumab and vinorelbine in the triplet, in parallel to the efficacy expansion of the doublet. The doublet and triplet combinations are both evaluated in two steps with an initial safety run-in followed by a cohort efficacy expansion. In total, up to 40 patients evaluable for efficacy are included in both the doublet and triplet. In Cohort 2, MCLA-128 is administered with the same previous endocrine therapy on which progressive disease is radiologically documented. A total of up to 40 patients evaluable for efficacy are included in the Cohort 2.
In my opinion, the doublet and triplet combination is excellent because they provide more clinical insight. In other words, one can tease out the effects of doublet compared to triplet. Of note, the primary study endpoint is the clinical benefit at 24 weeks. Clinical benefits will be measured by the overall response rate (“ORR”) comprising of partial response (“PR”), complete response (“CR”), and stable disease (“SD”). That aside, Merus also checks other secondary endpoints like progression-free survival (“PFS”) at baseline and at every 6 weeks interval.
Quantitative Data Forecasting
I believe that the value of a development-stage bioscience company strongly correlates with its ability to demonstrate robust clinical results. Hence, I’ll conduct a clinical forecasting of the lead molecule, MCLA-128. Leveraging on Integrated BioSci framework of “molecule analysis” – that took into account different scoring variables, including available trial data (“TDV”), comparative molecular analysis (“CMV”), structural design (“SDV”), clinical trial setups (“TSV”), and disease specificity (DSV) – I prognosticated that there are over 65% chances that MCLA-128 will deliver positive primary outcome in the aforesaid Phase 2 trial. This translates into “more than favorable” chances of clinical success.
TDV and TSV factored substantially into this forecast. In my experience as a physician and scientist, I know that HER2 inhibition works for HER2 positive breast cancers. After all, trastuzumab (a HER2 inhibitor) is heavily utilized. And, I believe that HER3 inhibition is likewise efficacious. When administering those drugs with the approved chemotherapy venorelbine, I expect excellent efficacy even for advanced HER2-positive breast cancer. I approximated that Cohort 1 will post at least 50% ORR. My rationale is that these patients have high HER2 expression and Biclonics MOA is scientifically sound. For Cohort 2, I also anticipate positive clinical benefits, yet the low HER2 expression will reduce the ORR rate.
That aside, the qualitative variables (scientific novelty and unmet medical needs) scored high. The main reason is the ADCC is a “tried and true” approach. Notwithstanding, ADCC only scored high because it is well-known. In contrast, a molecule like CAR-T that is based fundamental shift would have scored higher on scientific novelty.
Qualitative Data Analysis for MCLA-128
Scientific novelty (product differentiation)
Unmet medical needs (therapeutic demand)
Ease of regulatory approval
Table 1: Qualitative metrics assessment (Source: Integrated BioSci Investing)
And due to the recent departure of the stellar FDA Commissioner (Dr. Scott Gottlieb), I lowered the “ease of regulatory approval” for nearly all novel therapeutics. I’m uncertain whether the new commissioner can promote excellent policy like Dr. Gottlieb. Under his reign, the Chief lowered the regulatory hurdles to deliver an unprecedented number of novel therapeutics as well as biosimilar to the market. This creates hopes for countless patients and families. As I get more information on the new commissioner, I’ll adjust the variables to reflect the anticipated change.
It’s imperative for investors to keep tabs of ongoing development in your investment because a prospect does not remain the same. I believe that as more fundamental developments unfold, a stock can become “more or less” attractive. In Table 2, I track all catalysts pertaining to MCLA-128 development for you to get a sense of what’s to come. I believe that the most important event is that the development of the Phase 2 trial for MCLA-128. It’s great that the trial is enrolling patients in both U.S.A. and Europe. This covers a wider territory. And, investors will receive an update from Merus in 2H2019.
Latest developments for MCLA-128
Metastatic breast cancer
The Phase 2 trial is enrolling patients in the U.S. and Europe. Merus will update clinical progress in 2H2019.
MCLA-128 data presented at scientific conference
In October 2018, the firm presented data of the Phase 1/2 trial studying MCLA-128 in gastric cancer. The drug exhibits low risk of immunogenicity and good tolerability in the 97 treated-patients.
The company is advancing MCL-128 in HER2-positive metastatic gastric and gastroesophageal junction cancers. MCLA-128 monotherapy in patients with the aforesaid diseases (who are already on 1 to 3 anti-HER2 drugs) demonstrated highly promising results.
NSCLC, Endometrial, and Ovarian
It’s strategic that Merus abandoned the development for endometrial and ovarian cancers. These cancers have very high hurdles to success; therefore, it’s good that the firm is saving precious cash for other promising developments like NSCLC that is enrolling.
Table 2: Catalyst summary (Source: Integrated BioSci Investing)
It’s important for investors to check the financial health of a young bioscience company. The financial health determines whether there is enough cash to bring its developing drugs to the market. As follow, I’ll analyze the 3Q2018 earnings report for the period that ended on Sep. 30. Notably, Merus logged in €6.5M compared to €5.7 for the same period a year prior, thus representing a 14.0% increase. The revenues came predominantly from the collaborative development with Incyte.
The research and development (R&D) spendings for the respective periods came in at €11.9M and €8.0M. The higher R&D reflects an increase in manufacturing costs and additional spending related to preclinical and clinical advancement. I usually view a higher R&D for a young bioscience company positively, as the money invested today can turn into blockbuster sales in the future. That aside, there were €10.7M (€0.47 per share) net loss versus €13.4 (€0.69 per share) decline for the same year-over-year comparison. This equates to 31.8% bottom line improvement which pertains favorable currency gains and the adoption of IFRS accounting standard.
Viewing the balance sheet, I saw that Merus improved its cash position from €190.8M to €209.9M. The 9.0% cash increase is due to closing of the €44.8M private placement of 3.1M common shares initiated back in February 2018. Based on its current conditions, the company expects to have adequate cash to fund operations until 2Q2021. I concur with Merus’ approximation because the latest quarterly OpEx is only €18.5M. The cash runway should last 11 more quarters.
At this point in its growth cycle, the main risks to investing in Merus is whether the company can post positive clinical results of its lead franchise, MCLA-128. I determined that there are 35% chances of a negative clinical binary for the Phase 2 trial studying MCLA-128. The other risk is that the aforesaid trial does not use a comparator arm to tease out whether the efficacy is due to MCLA-128 or trastuzumab. With both drugs having similar MOA, the FDA likes to differentiate the effects of various active pharmaceutical ingredients (“APIs”). That said, the agency can give the company a hard time. Though I expect good efficacy, if Merus employs a comparator arm in that Phase 2 trial it will surely help with the design in the subsequent Phase 3 trial. There are also the risks that other assets might not procure positive clinical outcomes. As Merus is a developmental-stage bioscience company, any negative clinical results can cause the stock to tumble by 50% and vice versa. Despite its slim chance, Merus might overextend itself and thus runs into cash flow constraints.
In all, I recommend Merus a speculative buy with the three out of five stars rating. As an ADCC innovator, Merus is definitely brewing novel therapeutic with Biclonics which have the highly interesting mechanism of action, DOCK and BLOCK. I’m cognizant of the promising prospects of Merus. Nonetheless, I’ll wait for more clinical data prior to upgrading my recommendations and rating. As of now, I believe that the most value resides in the lead molecule, MCLA-128. Sometimes in 2H2019, Merus will provide an update of MCLA-128 development. By then, you should have a clearer picture and the direction of this highly interesting franchise.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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