Summary: Black Diamond Therapeutics (NASDAQ: BDTX) is developing novel oncology drugs targeting families of allosteric mutations that have previously been undruggable by classical targeted therapies. The company’s lead candidate, BDTX-189, is a pan-tumor drug going after genetically defined targets, giving it the ability to be a “master key” applicable to numerous tumor types.The drug is currently in Phase 1 testing with an expected 1H21 readout, and we view it as a possible future blockbuster (peak sales $1B+). Based solely on the commercial potential of ‘189, we value Black Diamond at ~$30/share vs. its current price of ~$40. However, we are most intrigued by Black Diamond’s MAPalgorithm, a CDx-guided precision oncology drug discovery engine that gives the company immense platform potential not reflected in the stock today. Though we won’t be buyers at today’s price point (we’d consider it in the low-30s), we view Black Diamond as an attractive longer-term opportunity to get in on the ground floor of a future innovative leader in an emerging area of oncology.
Drugs targeting allosteric mutations represent the next generation of precision oncology medicines, offering increased specificity and potency over traditional tyrosine kinase inhibitors (TKIs) that can only target single mutations in individual tumor types. Black Diamond’s proprietary “MAP” algorithm could be a powerful platform for developing pan-cancer drugs that can hit multiple mutations across multiple tumor types, giving them much broader therapeutic applications than TKIs.
Lead candidate BDTX-189 is currently in Phase 1 testing, targeting cancers with specific allosteric EGFR and HER2 mutations, and is expected to readout in 1H21. Positive safety/efficacy data would not only be great for ‘189’s commercial prospects, but would also help validate the broader MAP discovery platform, which is arguably a bigger deal for the company.
The company had ~$360M in cash as of 1Q20, which is expected to fund operations into 2023.
Our sum-of-the-parts (SOTP) valuation yields a per share value of $30 vs. the stock at ~$41 today. We note, however, that this disparity is partly driven by our conservative commercial assumptions for ‘189; we can justify a valuation of ~$40/share with more aggressive (but still reasonable) pricing and peak multiple assumptions.
Furthermore, we believe that the platform potential of Black Diamond’s MAP algorithm represents future upside that is not fully reflected in the stock today. A positive Phase 1 BDTX-189 trial readout could drive an outsized stock reaction based on its readthrough to the broader MAP platform and its ability to generate future pipeline hits.
Bottom line: ‘189 could be a blockbuster drug, but Black Diamond is still in the early innings of becoming a major oncology player with platform potential.
Drugs targeting allosteric mutant oncogenes could represent an entirely new class of TKI drugs.
Targeted oncology therapies have historically targeted single mutations in individual tumor types. Tyrosine kinase inhibitors, or TKIs, are drugs designed to target a single mutation in a specific protein; “traditional” TKIs generally act on classical ATP active site mutations in the kinase domain, which include validated targets such as EGFR, VEGF, BRAF, ALK, and more.
However, there’s a clear need for next-gen TKI drugs. Additional mutations at other areas of the protein like the extracellular domain can change the structure of the protein’s active site to create new mutant forms that are undruggable by existing TKIs. These are known as allosteric mutant proteins. Allosteric mutant proteins are present in up to 7% of certain cancer indications and have proven to be unamenable to existing TKI therapies- there’s a clear need for novel therapies here.
Black Diamond’s MAP engine is potentially a powerful allosteric drug discovery tool.
Though the concept of allostery has been known to scientists for years, the problem has been identifying allosteric mutants efficiently. Traditional biopharma assays have been designed to look for classical single mutation sites, so there is a need for a new systemic way of discovering allosteric mutants.
BDTX’s MAP platform (which stands for Mutations, Allostery, and Pharmacology) is a proprietary algorithm that uses genetic sequencing data to identify previously undiscovered families of allosteric mutations that drive growth across multiple tumor types. Black Diamond can then design a molecule that inhibits an entire family of mutations, leading to a therapy that can be applied regardless of tumor type, thereby creating what the company calls a “master key” that can treat numerous tumors.
However, it’s important to see some results before we hype up MAP any further.
BDTX-189 Phase 1 results will serve as the first validation of MAP.
BDTX-189, Black Diamond’s most advanced asset, is a small molecule drug designed to inhibit EGFR and HER2 allosteric mutant proteins. It is also expected to spare wild-type (unmutated) proteins, which should lead to a more favorable safety profile than traditional TKIs, which often do not distinguish between mutated and unmutated proteins.
Preclinical data has shown that ‘189 exhibits several key traits: 1) high binding affinity across a range of allosteric mutants (10x its affinity for wild-type proteins), 2) dose dependent regression of allosteric HER2 and EGFR PDX models, and 3) favorable safety outcomes vs. current TKIs in rats and dogs (no ocular or skin changes associated with inhibition of wild-type EGFR).
‘189 is currently in Phase 1 testing in locally advanced/metastatic solid tumors. ‘189 is targeting tumors with EGFR/HER2 allosteric mutations found in about 2-7% of certain solid tumor groups. We currently model ~20,000 patients across lung, breast, and other tumor types, representing an un-risk-adjusted peak sales opportunity of ~$1.2B. Results are expected in 1H21, likely at ASCO 2021.
If successful, ‘189 could be a best-in-class drug able to target multiple tumor types from the start. Furthermore, positive results would provide valuable validation of the MAP discovery platform and demonstrate its ability to generate legitimate allosteric drug targets.
GBM program offers future upside.
Glioblastoma multiforme (GBM) is a rare, aggressive form of brain cancer, accounting for ~15% of all brain cancers. Current treatment involves radiation, surgical resection, and chemo, but median survival post-treatment is only 12-15 months, reflecting a clear need for better therapies.
EGFR is known to be mutated in ~50% of GBM, but existing TKIs have been unable to target these mutations. This is in part due to their low brain penetrance but also due to the fact that, unlike EGFR mutations in other solid tumors, GBM EGFR mutants have variants that commonly occur in the extracellular domain, an area where no EGFR TKI has been able to hit.
Black Diamond is currently developing a molecule that would be able to hit multiple extracellular, allosteric EGFR isoforms. IND-enabling studies are underway, with an IND filing possibly taking place in late-2021.
Valuation and Peak Sales
We arrive at a price target of ~$30 using a SOTP peak sales multiple analysis. Using a conservative pricing assumption of $20k/month, our valuation reflects peak sales $460M in lung cancer (35% POS), $170M in breast cancer (25% POS), $660M in other solid tumors (20% POS), and $120M in GBM (10% POS). We apply a 2x peak sales multiple across the board, in-line with similar small molecule cancer drugs.
Clinical/regulatory failure. Black Diamond is exposed to the same set of clinical and regulatory risks as many of its biotech peers. The most immediate risk is the possibility that ‘189 demonstrates uncompelling clinical data or unacceptable safety outcomes in its Phase 1 trial. Future risks include negative regulatory feedback from the FDA or problems in the execution of manufacturing/commercialization activities.
Competitive risk. There are multiple molecules in development that are targeting allosteric EGFR/HER2 mutants. However, each of these drugs still targets specific allosteric mutants, in contrast to ‘189’s “master key” ability that is projected to allow for a tumor-agnostic approach. ‘189 also has the potential to demonstrate a superior safety profile vs. its peers.
We, WX Capital, a team of ex-life-science consultants running a trading and research firm,do not own shares of Black Diamond Therapeutics. This article expresses our own opinions, not Black Diamond Therapeutics’ or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.