RAPT Therapeutics (RAPT) is a small-cap biotechnology company with a market cap around $646 million. RAPT filed its IPO in October of 2019, and thus is a fairly new company in the world as a publicly traded company. RAPT is a clinical stage company that is focused on discovering, developing, and (hopefully) commercializing oral small molecule drugs for oncology indications and inflammatory diseases. RAPT is lead by their President and CEO Dr. Brain Wong. Dr. Wong boasts over 20 year of experience and has come to RAPT from Five Prime Therapeutics (FPRX), and previously, Roche where he served as director in the Inflammation Disease Biology Area. Year to date, RAPT is slightly higher, however the stock has nearly doubled since we first added this holding to our trade ideas and designating it a core position. So lets take a closer look and see how we are playing it moving forward.
RAPT has around 24 million shares outstanding, of which, roughly 10.8 million shares are held by institutions, which equates to 44.5% of outstanding shares. The largest holder of RAPT stocks is the Column Group II, which holds approximately 6.8 million shares as of their February 2020 filing. This represent around 28% ownership in RAPT, which shows a great deal of confidence in the company. Looking at recent insider transactions, the majority of transactions in 2020 have been sales, option exercises, and shares awarded. There does appear to one large sale by a 10% owner (Topspin) in May of 2020, however closer evaluation shows that indeed these shares were not sold, but rather the shares were distributed to its various limited partners. This is reassuring and does not raise alarms as a traditional sale of shares would have.
RAPT has two clinical stage candidates as of this time. Both candidates target CCR4, which is known as the C-C motif chemokine receptor 4. This receptor is integrally involved in the body’s immune system. As such, this can be targeted for the treatment of various diseases that has interplay with the immune system. The first, and most advanced, is cancer.
The oncology candidate that RAPT is developing has been named FLX475. This candidate is an oral small molecule that blocks CCR4 on T regulatory cells. T regulatory cells are part of the immune system that tames our immune system. In a physiologically normal person, the cells help prevent the body’s immune system from inadvertently attacking itself. Furthermore, even if the body is correctly “attacking” foreign pathogens, it can get so aggressive that it hurts the body, and T regulatory cells are needed to regulate the response. However, in oncology, tumor cells seek to avoid the body’s immune system, specifically cells called CD8 T-cells (cytotoxic T cells) which can recognize tumors are foreign and attack them. Essentially, the goal is to increase the body’s immune system allowing it to fight and kill the cancer cells.
Broadly, this approach is the basis for development of blockbuster drugs like pembrolizumab and nivolumab. However, these agents are only available when given via an intravenous infusion. Furthermore, these agents work through a pathways known as the Programmed Cell Death Protein 1 (PD-1), and does not directly interact with T regulatory cells. RAPT has prioritized development of FLX475 for a subset of tumors that they refer to as “charged.” These tumors have high levels of the signalling molecules for the CCR4 receptor and T regulatory cells (meaning a high potential to stimulate T regulatory cells and blunt the body’s ability to attack the tumor) and high levels of CD8 cells (the immune system cells that attack tumors). In these tumors, the the proper machinery is present to attack tumor cells (CD8 cells), if T regulatory cells can be inhibited (by FLX475).
Interestingly, these charged tumors are often associated with viral infections (like HPV and EBV). Given this idea, RAPT has alluded to the idea that they could potentially pursue an accelerated approval in a tumor-agnostic indication for virally-associated tumors. This is an ambitious approach, however tumor-agnostic indications are becoming more popular for development. This approach relies on developing a treatment for tumors with a specific genetic mutation (like NTRK mutation, RET mutation, etc.) or characteristic (like the number of genetic mutations), and not developing a drug based on the specific type of cancer (like breast cancer, lung cancer, etc.). In this instance, the characteristic for RAPT would be viral-associated tumors that are “charged.”
I will underscore, this program is in the early stage of development (thus making it higher risk). Thus far, RAPT has completed a Phase 1 study in healthy volunteers, in order to determine the appropriate dose. Furthermore, they have completed a Phase 1 portion of the study in cancer patients to determine a safe and effective dose in patients receiving monotherapy (of FLX475) and in combination with a PD-1 inhibitor. So where are they going from here? The Phase 2 trial will be a proof of concept trial. Here, they are evaluating FLX475 as monotherapy and in combination with pembrolizumab (Figure 1). Results from this trial are expected in the second half of 2020, and as such will be a very large catalyst. An interesting patient population being evaluated is the CPI experienced populations (in the combination arms).
This is a group of patients who have previously been on immuno-oncology agents (like pembrolizumab and nivolumab) and have progressed. Typically, once a patient progresses on this class of drugs, they do not receive or get benefit from trying a different drug in the class. Thus, if FLX475 can “re-sensitize” patients to immuno-oncology, that would represent an untouched market with a large addressable market. Remember, in 2019, pembrolizumab did $11 billion in revenue for Merck.
The second candidate in the RAPT arsenal is RPT193, which is being developed for allergic diseases. This agent also targets CCR4, however instead of aiming to tamper down T regulatory cells, this agent aims to reduced the migration of Th2 cells. These cells follow “signaling molecules” to various areas in the body. Once in these areas, Th2 cells produce pro-inflammatory signals, leading to inflammation and complications. The idea RAPT is testing is that by blocking the “signaling molecules,” the Th2 cells will not migrate to these areas and be stimulated to release pro-inflammatory cytokines.
The initial indications that RAPT is pursuing is Asthma and Atopic Dermatitis. Now, there are some agents approved that target the same pathway in these indications. However, none of these agents specifically target Th2 cells, the source of inflammatory signalling molecules, but rather target the signalling molecules individually. So where does RAPT stand and what should be expect? THe development of RPT193 is in even more early stages than FLX475. Currently, they are completing the Phase 1/1b trials in healthy volunteers and patients with Atopic Dermatitis to determine the safety and dosage of the drug. We can expect to get initial data from the Phase 1b portion by the end of the year in patients with Atopic Dermatitis, which will tell us if indeed the agent is safe and demonstrates early signs of efficacy.
Please note, timelines discussed in this section are subject to change due to any changes/delays incurred by the global pandemic of SARS-CoV-2.
RAPT has only signed one deal to date with regards to its candidates. This is great, as it allows them to retain commercial rights in key markets (United States, Europe, and Japan). The one license agreement signed was with Hanmi, granting them a license to development, manufacture, and commercialize FLX475 and related compounds in human cancer in the territories of Korea, China, Macau, and Hong Kong. As part of this agreement, RAPT was entitled to receipt of a $10 million payment, broken down into an initial $4 million and a milestone of $6.0 million, which was received in April of 2020. The agreement still has $108 million in eligible milestone payment, and double digit royalties on net sales if approved. RAPT intends to recognize this milestone period over the period of the Phase 1/2 trial. As such, the there remains $9.1 in deferred revenue associated with this agreement and initial payment.
As you can see, RAPT is a fairly young biotechnology company. As such, their expenses (and revenues) are quite low at this time. In the first quarter of 2020, the net loss was was $13.1 million, which is roughly 42% higher than the same period in 2019. Revenue in the quarter was $0.9 million, which is related to the collaboration signed with Hanmi in December of 2019. Moving into expenses, Research and Development expenses were $10.7 million, which increased over the same period in 2019 due to increased clinical costs associated with FLX475 development. Furthermore, the general and administrative expenses for the quarter were $3.3 million, again higher than the same period in 2019, largely due to increased stock-based compensation and increased expenses associated with being a public company. Furthermore, RAPT ended the quarter with $138 million in cash, cash equivalents, and marketable securities. As you can see, despite the increasing expenses, which are to be expected of a growing biotechnology company, RAPT has a healthy cash position to draw upon as it build out its clinical development. What is also encouraging to note is that RAPT lacks any debt facilities or senior notes on its balance sheet. Overall, I find RAPT to be in a very healthy financial position at this stage in development.
RAPT exhibits many qualities of a young, promising biotechnology company. It is still quite young in its development, thus making it higher risk. As this core position rose over 100% since we added it to our list, we have found it prudent to enjoy the profits. This is especially so given the extreme volatility the markets are experiencing with the SARS-CoV-2 pandemic countered by the Fed’s efforts to combat impacts to economy. We are minimizing the risk of opportunity costs by entering other core positions with key updates in the coming day to weeks (GRTS and BCRX). After these catalysts pass, we plan to re-assess the stock price, market environment, and price action to monitor for re-entry as we move toward the RAPT Data read-outs in 2H20.
We are long GRTS and BCRX.
This is in no form a recommendation to buy/sell securities.