Relay Therapeutics, Inc. quarterly report, Q2 FY2021

Relay Therapeutics, Inc. — Q2 2021 Form 10-Q

Business context and reporting period. Relay is a clinical-stage precision-medicine company developing drugs using its Dynamo computational and experimental platform. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Its lead programs were RLY-1971 and RLY-4008 in first-in-human trials, with RLY-2608 in IND-enabling studies. The company had no approved products and no product-sales revenue.

Financial performance and position

Metric	Three months ended June 30, 2021	Six months ended June 30, 2021
Revenue	$0.8 million	$1.8 million
Research and development expense	$45.1 million	$75.8 million
Net loss	$193.4 million	$235.6 million
Net loss per share, basic and diluted	$2.10	$2.58
Operating cash flow	+$18.5 million for the six months

Revenue came from the Genentech collaboration, principally RLY-1971 research services and, in the first quarter, transfer of API. No product revenue was generated. Product gross margins are not applicable.
At June 30, cash and cash equivalents were $260.1 million and investments were $411.2 million, totaling $671.2 million. Including restricted cash, cash and cash equivalents were $262.6 million.
Total assets were $714.4 million; total liabilities were $95.9 million; stockholders’ equity was $618.5 million. The company reported no debt outstanding.
Operating cash flow was positive despite the net loss, reflecting substantial noncash charges and working-capital changes, including collection of the $75 million Genentech receivable. Investing activities used $207.6 million, including net investment purchases and $25.1 million of cash paid for the ZebiAI acquisition; financing activities provided $3.2 million.
The accumulated deficit was $639.8 million at quarter-end. There is no meaningful operating margin comparison for a pre-commercial company.

Material changes versus the prior comparable periods

Q2 revenue rose from zero to $0.8 million; first-half revenue rose from zero to $1.8 million.
Q2 research and development expense increased $23.5 million to $45.1 million; first-half expense increased $32.4 million to $75.8 million, driven mainly by employee costs, outside services and clinical-trial activity.
Net loss increased to $193.4 million in Q2 from $26.7 million, and to $235.6 million for the first half from $51.6 million. The increase primarily reflects ZebiAI acquisition accounting, as well as higher R&D and general and administrative costs.
Q2 included $123.0 million of acquired in-process R&D expense and an $11.9 million loss on initial consolidation of ZebiAI. These were acquisition-related, not recurring clinical operating costs.
General and administrative expense rose to $14.4 million in Q2 from $6.1 million, and to $27.2 million for the first half from $10.8 million. Stock-based compensation also increased; first-half stock-based compensation was $25.8 million versus $5.5 million.

Outlook, management commentary, risks and unusual items

Management estimated that $671.2 million of cash, cash equivalents and investments would fund planned operating expenses and capital requirements into 2024. This estimate depends on assumptions that may prove incorrect; Relay expects significant future losses and says it will need additional financing to continue development and potentially commercialize products.
The company expects expenses to increase as it advances RLY-4008, develops RLY-2608 and other programs, expands operations and supports public-company requirements. It planned to initiate a first-in-human RLY-2608 study in the first half of 2022.
Genentech paid $75 million upfront and a $5 million milestone in 2021. Relay may receive up to $20 million in additional near-term milestones, plus further development, commercialization and sales milestones and royalties, subject to the agreement’s terms. Genentech assumed subsequent RLY-1971 development; it initiated a combination-trial cohort in July 2021. Relay’s U.S. profit/cost-share option entails different potential economics.
In April, Relay acquired ZebiAI for approximately $20 million cash and 1.88 million shares, with up to $85 million in stock milestone payments and a contingent cash earnout of up to $100 million tied to certain platform-related receipts. The acquired early-stage IPR&D had no alternative future use and was expensed. The recorded contingent consideration liability was $48.5 million at June 30; its valuation involves significant uncertainty.
In August 2021, after quarter-end, Relay entered a discovery collaboration with EQRx. The parties expect to share costs and, subject to opt-out rights, profits from any approved collaboration medicines; clinical development and commercialization are assigned to EQRx.
COVID-19 precautions could affect trial timing, enrollment, vendors or operations, although management reported that enrollment in the ongoing RLY-1971 and RLY-4008 trials had continued and it did not then anticipate enrollment interruptions.
Key risks include clinical failure or delays, patient recruitment and safety, regulatory approval, reliance on third-party trial and manufacturing providers, single-source API suppliers, competition, intellectual-property protection, and reliance on D. E. Shaw Research and its Anton 2 supercomputer. The Genentech agreement may be terminated by Genentech for convenience.
Relay reported effective disclosure controls as of June 30, 2021, no material change in internal control over financial reporting, and no litigation then considered probable to have a material adverse effect. It also disclosed a new 10-year lease for additional Cambridge laboratory and office space; rent commencement depends on construction and delivery.

Important facts for investors to verify

Trial progress, safety, enrollment and timing for RLY-1971 and RLY-4008, and whether RLY-2608 reaches human testing on the stated timeline.
Cash burn and the assumptions underlying management’s runway estimate into 2024; the timing and terms of any additional financing.
Genentech’s RLY-1971 development decisions, milestone eligibility, royalty terms and Relay’s decision on the U.S. profit/cost-share option.
ZebiAI milestone and earnout triggers, contingent-consideration valuation, and whether the acquired platform generates development or collaboration outcomes.
Potential effects of COVID-19, third-party manufacturing and trial execution, the DESRES relationship, and the additional lease on costs and program timelines.