Revolution Medicines: An Expensive Shot At A Massive Market Opportunity (NASDAQ:RVMD)

Investment Overview

Redwood, California-based Revolution Medicines (NASDAQ:RVMD) IPO’d in February 2020, raising ~$238m via the issuance of ~14m shares priced at $17 per share.

Across the past 4 years, although none of the specialist drug developer’s active programs have progressed beyond the Phase 1 clinical study stage, Revolution’s share price has made an overall 30% gain, giving the company a market cap valuation of ~$6bn at the time of writing.

That may seem high for an early stage, oncology focused drug developer. However, Revolution is pioneering a unique, precision-based approach to its programmes – as per the company’s 2023 annual report / 10K submission:

Our research and development pipeline comprises RAS(ON) inhibitors that bind directly to RAS variants, which we refer to as RAS(ON) Inhibitors, and RAS companion inhibitors that target key nodes in the RAS pathway or associated pathways, which we refer to as RAS Companion Inhibitors.

Our RAS(ON) Inhibitors are designed to be used as monotherapy, in combination with other RAS(ON) Inhibitors and/or in combination with RAS Companion Inhibitors or other therapeutic agents. Our RAS Companion Inhibitors are designed primarily for combination treatment strategies centered on our RAS(ON) Inhibitors.

We are advancing a deep pipeline of RAS(ON) Inhibitors, including both our innovative RAS(ON) multi-selective inhibitor (RMC-6236) and a series of mutant-selective inhibitors (led by RMC-6291 and RMC-9805). Together, we consider these three development-stage candidates as the first wave of RAS(ON) inhibitors that we are advancing through clinical development.

According to an abstract article shared by Nature.com:

Ras genes are mutated in ~20% of all human cancer cases. There are three Ras genes that generate four almost identical proteins: HRAS, NRAS, KRAS4A and KRAS4B. Despite their similarity, KRAS is far more frequently mutated in cancer.

KRAS was once believed to be “undruggable”, however, in recent years both Amgen (AMGN), the California based Pharma, and Mirati Therapeutics – acquired by Bristol Myers Squibb (BMY) in a $5.8bn deal last year – have developed drugs that successfully target the protein, and been approved for commercial use.

With that said, Amgen’s Lumakras, awarded an “accelerated approval” by the FDA in May 2021, to treat KRAS-G12C mutated non-small cell lung cancer (“NSCLC”), was rejected by the Food and Drug Agency (“FDA”) for full approval in December last year, who have asked Amgen to complete a further study confirming the clinical benefit of the drug. The drug has not been commercially successful, either, earning revenues of $197m in 2023 – down 11% from the $222m earned in 2022.

Meanwhile, Mirati reported nine-month revenues from Krazati of $36m in the same indication of KRAS-G12C mutated NSCLC last year, although the drug was only approved in December 2022, and may still secure a full approval, while BMY has submitted a supplementary New Drug Application to the FDA, requesting approval in the indication of colorectal cancer.

There is no denying the potential of RAS / KRAS targeted cancer therapies, given oncogenic mutations are expressed in ~20% of cancers (or 30%, if you believe Revolution’s most recent investor presentation), however, equally, the target is elusive and to date, Krazati and Lumakras have struggled to win over the doubters.

Bearing all of this in mind, we may conclude that, while its science and technology is complex, the challenge that lies ahead of Revolution is relatively straightforward – to show that its drug candidates are capable of overcoming the limitations that have held Amgen and Mirati’s drugs back.

Succeed, and Revolution will unlock approval opportunities in a variety of different, mostly solid tumor candidates, and may become an acquisition target for a Big Pharma with a double-digit billion price tag. Fail, and the market could very quickly lose interest in Revolution’s pipeline, sending the stock price into a downward spiral.

Revolution’s Pipeline

As we can see below, Revolution has guided five drug candidates into in-human clinical studies, whilst it is preparing to submit Investigational New Drug (“IND”) applications to the FDA (requesting approval to begin in-human studies) for another three programs, with a further candidate to be named in time.

Development of Revolution’s SHP2 inhibitor is now in Amgen’s hands after partner Sanofi walked away from a partnership in 2022, while the company states in relation to RMC-5552:

We are supplying RMC-5552 to the Regents of the University of California on behalf of its San Francisco campus (UCSF) for an investigator-initiated Phase 1/1b trial by UCSF of RMC-5552 in patients with recurrent glioblastoma.

Early Phase 1 studies of these RAS-targeting candidates has thrown up some intriguing results. For example, RMC-6236 achieved one complete response (“CR”), 14 partial responses (“PR”), and 19 cases of stable disease (“SD”), across various doses in 40 patients with NSCLC, achieving an objective response rate of 38% (15 patients).

Revolution says that current standard of care, docetaxel, has an ORR of ~13%. With that said, Krazati was approved based on an ORR of 43% in its pivotal KRYSTAL-1 study, and a median duration of response (“DoR”) of 8.5 months, while Lumakras achieved an ORR of 36%, and DoR of 10 months.

In Pancreatic ductal adenocarcinoma (“PDAC”), RMC-6236 achieved 20 PRs and 31 SDs in a patient population of 46, with an ORR of 20%. Again, Revolutions suggests this may be superior to current standards of care, which consists mainly of a chemotherapy combo of nab-paclitaxel and gemcitabine. This seems to borne out by research shared in an abstract posted to PubMed in 2021, which concludes:

to date, chemotherapy remains the second-line standard of care, and neither personalized medicine nor immunotherapy has in fact provided important positive results in the treatment of pancreatic cancer.

Buoyed by its early work, Revolution plans to initiate a Phase 3 study of RMC-6236 versus chemotherapy in patients with previously-treated RAS mutant NSCLC, with endpoints of progression free survival (“PFS”) and Overall Survival, plus “patient reported outcomes”, enrolling 400 patients, and a Phase 3 study in previously-treated PDAC, in 500 patients, with RMC-6236 pitted against either nab-paclitaxel and gemcitabine, or mFOLFIRINOX (a combination of different chemo drugs).

Moving to its next candidate, unlike the “multi-selective” RMC-6236, RMC-6291 targets KRAS-G12C mutated cancers only. In studies in patients with NSCLC, an ORR of 50% achieved (5 patients) in previously treated (with a KRAS-G12C inhibitor) patients, and a 43% (3 patients) ORR in treatment naive patients. The study also apparently achieved disease control rate (“DCR”) of 100% (no patients experienced progressive disease). In studies in colorectal cancer, and ORR of 40% was achieved, with 8 PRs but no CRs, with a DCR of 80%.

The third clinical pipeline candidate, RMC-9805, which targets RAS G12D mutated cancers, has not shared results yet (although it has demonstrated anti-tumor activity in in vivo studies, management says). Meanwhile, Revolution is testing a combo of RMC-6236 and RMC-6291 “designed to overcome resistance and prolong durability in KRAS G12C mutated NSCLC”.

Market Opportunity & Competition

One of the most compelling reasons to investigate and target the RAS signalling pathway is the range of different cancers that express this oncogenic driver.

As we can see above, Revolution hopes its candidates will one day be able to target 30% of all cancers, including 29% of the lung cancer market, or 60k patients, 49% of CRC patients, or 75k patients, and 92% of PDAC patients, or ~53k patients.

As such, if any of Revolution’s candidates does make it to market, theoretically at least, Revolution would fully merit its current $6bn market cap valuation, and perhaps a double-digit billion valuation. Analysts still believe that Krazati can become a “blockbuster” drug, setting peak revenues expectations at ~$1.4bn in NSCLC alone.

With that said, the failure of Lumakras and Krazati to generate anything remotely resembling “blockbuster” (>$1bn per annum) revenues in their short time on the market may serve as a cautionary tale – Revolution cannot afford to match the efficacy / safety / durability profile of these two drugs, it very likely has to exceed them.

That has not quite been the case to date – in terms of ORR, CR, and PR, Revolution’s data does not seem to suggest drug candidates have “best in class status”, although that is not necessarily a reason for investors to panic – yet – larger, later stage studies will be required to determine if Revolution’s RAS-ON inhibitors can be more successful than rivals’ RAS-OFF inhibitors.

Meanwhile, the KRAS-OFF development market is teeming with potential competitors – in its 2023 10K Revolution states:

There are several programs in clinical development targeting KRAS G12C, including programs directed at KRAS(OFF) G12C being conducted by Amgen Inc., Betta Pharmaceuticals Co., Ltd., Bristol Myers Squibb, Chengdu Huajian Future Technology Co. Ltd., D3 BIO, Inc., Eli Lilly (LLY) GenEros Biopharma Ltd., Genhouse Bio Co. Ltd., Guangzhou BeBetter Medicine Technology Co., Ltd., HUYA Bioscience, Innovent Biologics, Inc. (licensed to GenFleet Therapeutics), InventisBio, Jacobio Pharmaceuticals Co. Ltd., Jiangsu Hansoh Pharmaceutical Group Co., Ltd., Merck (MRK), Sharpe & Dohme LLC, Novartis AG (NVS), Roche (OTCQX:RHHBY), Shanghai Junshi Biosciences Co., Ltd., Shanghai YingLi Pharmaceutical, Shouyao Holdings (Beijing) Co. Ltd., and Suzhou Zelgen Biopharmaceuticals.

The KRAS(ON) and KRAS G12D development fields are seemingly competitive also – as per Revolution’s 10K submission:

BridgeBio Pharma, Inc. has a KRAS(ON) G12C program in the clinic. There are also several clinical programs directed at KRAS G12D, including those being conducted by Astellas Pharma Inc., Bristol Myers Squibb, Incyte Corporation and Jiangsu Hengrui Pharmaceuticals Company Ltd. Other clinical programs directed at mutant RAS are being conducted, including those by Alaunos Therapeutics (TCRT), Boehringer Ingelheim, Chugai Pharmaceutical Co., Ltd., Elicio Therapeutics, Gritstone bio (GRTS) Moderna (MRNA), Quanta Therapeutics, RasCal Therapeutics, Shanghai YingLi Pharmaceutical, Silenseed Ltd. and Targovax ASA.

Where there are lucrative pharmaceutical markets in play, not to mention a high unmet need for better therapies for patients, there are inevitably billions upon billions of dollars being spent on developing and trialling new drug products, and the field of KRAS drug development is no exception.

The exception here, in fact, is that no one company has yet succeeded in developing a drug that is demonstrably superior to existing standards of care i.e., chemotherapies, or immunotherapies – like Merck’s Keytruda or Bristol Myers Squibb’s Opdivo. The prize for a first genuinely effective and safe RAS drug could be a double-digit billion market opportunity.

Concluding Thoughts – Consistency, Cash & Catalysts Save Revolution From A Downgrade – But I Am Not Buying At Current Price

In August last year, Revolution announced it had completed the acquisition of EQRx, a company whose mission to “revolutionise” drug pricing ended in failure, but with a large cash position of ~$1bn on its balance sheet.

Revolution’s acquisition was all about transferring that cash to its own balance sheet, which now boasts ~$1.9bn of cash – more than enough to stomach management’s guidance for losses of $480m – $520m in 2024.

Ultimately, it seems that drug developers in the “precision medicine” space, targeting specific mutated proteins, or genetically defined cancers, consume plenty of cash, and make slow progress through the clinic.

In this field, it’s possible to point to many “precision medicine” companies that have let shareholders down badly. Relay Therapeutics (RLAY) stock, for example, is down 84% since IPO, Black Diamond Therapeutics (BDTX) down >85%, and Repare Therapeutics down >85%.

That ought to serve as a cautionary tale – no matter how well funded a company may be, if it plans to burn through it all in pursuit of a highly improbable outcome – i.e. a breakthrough RAS targeting cancer drug, there is a high chance anyone buying shares in the company will realise a substantial loss.

With that said, every company’s technology and management is different, and it doesn’t follow that because one company underperforms in a tricky space, every company will – that is demonstrably disproven nearly every day when a biotech company’s valuation surges in response to a new and impressive set of data. Good examples of more successful precision medicine companies could include Blueprint Medicines (BPMC), or Nuvalent (NUVL) – both have delivered strong gains for investors.

Fortunately, Revolution is promising multiple upcoming readouts and new study initiations for this year, as shown below:

Personally, I believe there is enough happening at Revolution to support a “hold” recommendation at this time. Some of the Phase 1 study data has been impressive, if not breakthrough, which has helped Revolution to maintain a high valuation despite having no late stage assets. If Revolution’s pivotal studies are initiated and are successful, a genuine shot at commercial approval within a couple of years from now may result.

Ultimately, after a period in which Revolution has done not much more than it has to do to – using its unique approach to drug development, and insights about ON-RAS targeting, to bring candidates into the clinic and generate first in-human data – the real tests are about to begin, and it would not be fair, in my view, to dismiss Revolution’s pipeline at this stage of development, without waiting to see what results are like.

As such, if I were holding Revolution stock I’d be tempted to keep holding, so long as I was betting money I could afford to lose. Given Revolution is valued about the same as BMY valued Mirati when acquiring it for $5.8bn – a 52% premium to traded share price at the time – and given that Revolution has a broader portfolio of drugs, and has had the opportunity to learn from Mirati’s mistakes, and has plenty of cash, I can understand why it has kept hold of its substantial valuation.

Until we have later stage clinical data supporting an approval push, however, which ought to be value-accretive, even at a $6bn valuation, Revolution’s valuation has a “house of cards” feel about it that will likely put off risk-averse investors.