Merus: Great European Oncology Developer, But Properly Valued

seekingalpha08-15

Merus NV has seen a significant increase in market cap from $852mn to $3.46bn in the past year.Merus is a leader in developing multispecific antibodies with promising lead candidates petosemtamab and ...

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(NASDAQ:MRUS) is a Dutch company that has seen its stock nearly triple since I covered it in April last year. At that time, I had some doubts about its lead molecule zenocutuzumab, a HER2 and HER3 targeting bispecific molecule targeting NRG1+ cancer as monotherapy. My doubts came from the small and early stage nature of the registrational trial, earlier adverse event profile including a stage 5 AE, i.e., patient death, a small market with a strong competing pipeline drug in Seribantumab from Elevation Oncology, and generally early stage nature of the admittedly diverse pipeline. That was when MRUS had a market cap of $852mn. Today, its market cap is $3.46bn. So, in these ensuing months, did MRUS manage to derisk itself. If so, how? About Merus Merus is a leader in developing multi-specific antibodies that have multiple binding domains and can attach to multiple cell surface receptors simultaneously. They claim that this multi-specificity provides \"a variety of mechanisms of action, including simultaneously blocking receptors that drive tumor cell growth and survival and mobilizing the patient's immune response by engaging T cells, and/or activating various killer cells to eradicate tumors.\" Their Biclonics platform has produced more than 4 molecules, including petosemtamab targeting solid tumors and zenocutuzumab currently targeting solid tumors that harbor Neuregulin 1 (NRG1) gene fusions. Pipeline The current lead candidate is petosemtamab, whose bispecific targets are EGFR and LGR5. EGFR is primarily involved in cell signaling that can lead to cancer progression, while LGR5 is linked to the identification and behavior of cancer stem cells. According to the company, \"Petosemtamab is designed to exhibit three independent mechanisms of action including inhibition of EGFR-dependent signaling, LGR5 binding leading to EGFR internalization and degradation in cancer cells, and enhanced antibody-dependent cell-mediated cytotoxicity and antibody-dependent cellular phagocytosis activity.\" The idea is that if EGFR is internalized (endocytosis) and degraded through LGR5 binding, cell proliferation may be negatively impacted, thereby controlling the tumor. The molecule is in a phase 3 trial in 2/3 Line Head and neck squamous cell carcinoma (HNSCC), and in phase 1/2 trials in 1L HNSCC with a PD1 inhibitor and 2L metastatic colorectal cancer with standard chemotherapy. A second candidate, Zeno, which is higher in the regulatory timeline, is \"an antibody-dependent cell-mediated cytotoxicity (ADCC)-enhanced Biclonics that utilizes Merus' Dock & Block mechanism to bind to HER2, and bind to and disrupt the interaction between HER3 and ligand, neuregulin (NRG1) or mutated form NRG1 fusion, in solid tumors.\" That description is clear enough. Zeno works by targeting two key proteins, HER2 and HER3, that are involved in the growth and resistance of certain cancers. HER2 is often found in high amounts in solid tumors and is linked to poorer outcomes. HER3, when activated, can make tumors grow and resist treatment. In cancer cells, HER2 and HER3 pair up, which drives the cancer's progression. A substance called NRG1 binds to HER3, making the cancer more resistant to treatments targeting HER2. Zeno works in two main ways. One, it blocks tumor growth by stopping HER3 from interacting with NRG1, and two, it boosts the body's immune cells to more effectively destroy cancer cells. Additionally, Zeno may be especially effective for a rare group of patients whose cancers have a genetic change called an NRG1 fusion. This genetic change is a strong driver of cancer cell growth and makes the cancer more aggressive. Petosemtamab data In ex vivo studies of petosemtamab, the molecule was compared to another well-known anti-EGFR molecule, cetuximab (erbitux, approved for metastatic colorectal cancer and head and neck cancer). Petosemtamab was able to inhibit growth and show more selectivity than cetuximab. In preclinical studies, petosemtamab demonstrated superior growth inhibition of patient-derived CRC organoids and selectivity vs. the EGFR-targeting mAb, cetuximab. Petosemtamab was also highly selective for tumor-derived organoids, showing 100x greater activity than on normal tissue. The company says that in contrast, \"the activity of cetuximab was similar to the activity of petosemtamab on normal colon organoids and 20 to 100 times less than the activity of petosemtamab on tumor organoids.\" The same data was observed in in vivo human-derived xenograft models. Here's interim data from a phase 1/2 trial in HNSCC: In April 2023, we presented interim clinical data as of a Feb. 1, 2023, data cutoff, from the ongoing phase 1/2 trial of petosemtamab in previously treated HNSCC at the American Association of Cancer Research (AACR) Annual Meeting 2023, in Orlando, Fla. As of Feb. 1, 2023, data cutoff date, 49 previously treated HNSCC patients (pts) were treated with petosemtamab at the recommended phase 2 dose of 1500 mg intravenously every two weeks. 43 pts were evaluable for efficacy, receiving ≥2 treatment cycles (≥8 weeks) with ≥1 post-baseline tumor assessment or experiencing early progressive disease. Overall responses rate (ORR) in the 43 evaluable pts was 37.2% (16/43; 95% CI 23%-53.3%) by RECIST 1.1. per investigator assessment, including 15 confirmed partial responses (PRS') and 1 confirmed complete response (CR') (ongoing after 20 months). Disease control rate (DCR') (CR + PR + stable disease) was 72.1% (31/43; 95% CI 56.3%-84.7%). Median time to response was 1.8 months (range 0.8-3.5). Median duration of response was 6.0 months (95% CI 3.7-NC), with 10 of 16 (62.5%) responders ongoing, and 12 of 43 (27.9%) patients overall ongoing at the time of the data cutoff. Median progression-free survival was 5.3 months (95% CI 3.7-6.8); with 29 of 43 pts progressing and 14 of 43 pts censored. Median overall survival was 11.5 months (95% CI 7.2-20.6); with 29 of 49 pts still alive at the data cutoff date. Petosemtamab's ORR of 37.2% is quite promising, particularly when compared to cetuximab monotherapy, and is comparable to the ORR observed with cetuximab combined with chemotherapy. The DCR for petosemtamab is higher than that typically seen with cetuximab, indicating that a larger proportion of patients achieve either a response or stable disease. Again, the median PFS for petosemtamab is higher than that seen with cetuximab monotherapy and comparable to cetuximab in combination with chemotherapy. Petosemtamab shows a notably higher median OS compared to cetuximab monotherapy and even surpasses the typical OS when cetuximab is combined with chemotherapy. (sources for cetuximab comparison data - various, including the following - one, two, and three). Zeno data Last year, the company presented interim data from Zeno's phase 1/2 trials of NSCLC and PDAC. Zeno advanced NRG1 fusion-positive (NRG1+) non-small cell lung cancer (NSCLC) data was as follows: In 78 evaluable patients the overall response rate (ORR) was 37.2% (29/78; 95% Cl: 26.5-48.9) per RECIST v1.1 by investigator assessment, 61.5% (95% CI: 49.8 - 72.3) clinical benefit rate, 14.9 months median duration of response (DOR) and 20 patients were continuing treatment as of the data cutoff. And the PDAC data: In the 33 evaluable patients with advanced NRG1 fusion-positive (NRG1+) pancreatic ductal adenocarcinoma (PDAC), the ORR was 42.4% (95% CI, 25.5-60.8) per RECIST v1.1 by investigator assessment; 1 (3%) patient achieved a complete response, and 13 (39%) patients achieved a partial response. 72.7% (95% CI, 54-87) clinical benefit rate, 82% experienced tumor reduction and 9.1 months (95% CI, 5.5-12.0) median DOR; and six patients were continuing treatment as of the data cutoff. Of 27 evaluable patients for CA 19-9 values, 21 patients, (78%) showed a ≥ 50% decrease in CA 19-9 values from baseline. Zeno demonstrated a well-tolerated safety profile among the 189 NRG1+ cancer patients who were treated with Zeno 750 mg every two weeks monotherapy, with 6% of patients experiencing related grade 3-4 toxicities. I noted that Elevation Oncology, Inc. (ELEV) has a monoclonal antibody called seribantumab that targets only HER3 and is running a trial called CRESTONE in NRG1+ NSCLC/PDAC. Early data shows that in terms of efficacy, both Zeno and Seribantumab demonstrated promising overall response rates (ORR) in the range of 30%-42% for NRG1 fusion-positive cancers. Zeno's ORR might be slightly higher based on early data, possibly due to its bispecific nature that targets both HER2 and HER3. Both drugs exhibit high disease control rates (DCR), indicating that they're effective in controlling disease progression in a significant number of patients. The progression-free survival - PFS - for both therapies appears comparable, with Zeno potentially offering a slight advantage, although more mature data is required to confirm this. Regarding safety, both drugs share similar profiles with manageable side effects and no major differences in tolerability. Mechanistically, Zeno's ability to target both HER2 and HER3 might provide a broader range of action, which could lead to slightly better efficacy in certain patient subsets compared to Seribantumab, which targets HER3 alone. On the other hand, Seribantumab's specific focus on HER3 makes it a precise tool for disrupting the NRG1-HER3 signaling pathway, potentially reducing off-target effects. ELEV has had some recent bad luck, and its current market cap is just $44mn. It has been seeking a partner for seribantumab, which makes Merus' competitive space less hazardous for Merus. The difference in market cap is immense. However, while ELEV has become a near-dead company, Merus had its BLA for Zeno accepted in May under priority review, giving it a PDUFA date of Nov. 6, 2024. Financials, partnerships, etc. MRUS has a market cap of $3.49bn and a cash balance of $846.4 million cash, cash equivalents, and marketable securities, to which they recently added $460mn as gross proceeds from a secondary offering. They run a tight ship, and they spent $49mn and $22mn on R&D and G&A respectively in the previous quarter. At that rate, they have enough cash to last them until 2028. In March, Gilead Sciences, Inc. (GILD) signed a collaboration deal with Merus to discover antibody-based trispecific T-cell engagers, the companies announced Wednesday. MRUS received $56M upfront and a $25M equity investment, and will be eligible for up to $1.5B in milestone and option payments and tiered royalties from the commercialized products resulting from the programs. MRUS has earlier partnerships with Incyte, Eli Lilly and Ono. The Incyte deal, signed in 2017, produced $120mn in upfront payment, and may receive \"up to $100 million in future contingent development and regulatory milestones and up to $250 million in commercialization milestones, as well as tiered royalties ranging from 6% to 10% of global net sales.\" The Eli Lilly deal, signed in 2021, is worth up to $1.6bn, with $40 million in upfront payments. The 2014 deal with Ono was a small one. Risks The principal risk with Merus now seems to be that this ship has already sailed. A good time to buy would have been when I covered it last year, but hindsight is a pain. Its current market cap is less than what I would value it as if its first molecule is successfully approved, given the relatively small market size of that initial pair of indications. In my opinion, its current market cap not only assumes this approval, but also puts some value on its second asset in the pipeline. That's a lot of assumptions for a pre-market stage bio, and I'm not comfortable with this valuation. Bottom line MRUS is a nice company bringing in essential medicines for people, and as such, it deserves to be feted, sure. However, in the last 18 months, it has become a big company, and its valuation takes into account the pipeline. As such, it's perfectly valued, and any large bet is a bit of a risk with not a huge chance of appreciation in value. As such, I will avoid it.  Editor's Note: This article covers one or more microcap stocks. 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