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Roche Shows Interest in This Small-Cap Biotech. Should You?

An emerging therapeutic area continues to draw interest from large drugmakers.

The first half of 2022 hasn't been kind to biotech stocks, but the pain has been especially acute for the smallest drug developers with the earliest-stage pipelines. Although corrected valuations have led many to suggest increased levels of mergers and acquisitions are ahead, that hasn't happened yet. That means small-cap biotech stocks need to rely on the next-best thing for a financial lifeline: collaborations.

There's been no shortage of deals for investors to pore over. On the first day of June, Repare Therapeutics  (RPTX) announced a new partnership with global titan Roche  (RHHBY) . The up-and-coming drug developer will hand over the rights to its lead drug candidate in return for an upfront cash payment of $125 million and the potential to receive up to $1.2 billion in additional milestones over the next decade-plus.

The collaboration is just the latest for Repare Therapeutics and the emerging therapeutic area it pinned its hopes on. Considering some of the world's largest drugmakers are investing in synthetic lethality, should investors start paying attention?

What Is Synthetic Lethality?

Cancer is the uncontrolled growth of tumor cells. Often caused by mutations that give tumor cells an edge ("gain-of-function") for evading a patient's immune system and treatments, cancer can also gain a foothold when protective genes stop working ("loss-of-function"). Cells sometimes destroy themselves when these protective genes cease activity, but not always. For example, some of the most common and lethal types of breast cancer are caused by loss-of-function mutations in the BRCA1 and BRCA2 genes, which normally help to repair damaged DNA.

Mutations in protective genes present a unique challenge for drug development. How do you increase the activity of a faulty or dormant gene – and in the immediate time frames required for treating cancer? Luckily, cells have a lot of redundancy built-in. Life wouldn't have survived 3 billion years if one broken gene would throw a wrench in the process.

Scientists have discovered that when cellular killswitches fail to activate due to one loss-of-function mutation, the loss of two protective genes may do the trick instead. It may seem counterintuitive, but it might be possible to destroy cancer cells by intentionally inhibiting a second protective gene. This is called synthetic lethality.

The challenge is finding the correct gene to complete the lethal pair. Sticking with the example above, cancers caused by mutations in BRCA genes can sometimes be treated by inhibiting PARP, another protective gene. Cells cannot handle the loss of both genes and are programmed to shut down.

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The success of PARP inhibitors created a buzz around synthetic lethality. Lynparza from AstraZeneca  (AZN)  and Merck  (MRK)  generated $2.75 billion in 2021 revenue, while Zejula from GlaxoSmithKline  (GSK)  generated $534 million. Rubraca from Clovis Oncology  (CLVS)  is struggling to compete, but it still generated $149 million in 2021 sales.

What Does Repare Therapeutics Offer?

Repare Therapeutics is developing a technology platform that screens the human genome for potential lethal pairs. It uses the well-known DNA editing tool CRISPR to turn off genes one by one and observe how that may impact the growth of cells with a specific, cancer-causing mutation. Keep in mind that in this case CRISPR is used in the lab as a screening tool, not administered to patients.

The small-cap biotech's recent collaboration with Roche coughs up development rights to RP-3500, which was the most-advanced drug candidate in the pipeline, for $125 million upfront and up to $1.2 billion in additional development, regulatory, commercial, and sales milestones. That's a big number, but most of the value is backweighted and unlikely to be realized. That's just the reality of these deals.

Nonetheless, the deal provides a healthy boost to the company's cash pile, which registered at $311 million at the end of March 2022. It also marks the second deal with a pharma leader following the May 2020 partnership with Bristol Myers Squibb  (BMY) . The cash balance and deals with industry leaders help to de-risk the company's early trajectory.

Roche's interest is the latest sign the field of synthetic lethality is in demand among global drugmakers.

  • In June 2020, GlaxoSmithKline handed $120 million to IDEAYA Biosciences  (IDYA)  for one of its pipeline assets, with additional payouts and royalties possible.
  • In December 2020, Merck provided $30 million upfront to privately-held Artios in a deal that could be worth up to $860 million -- and it didn't even have to give up rights to its two most advanced assets.
  • In April 2022, Pfizer  (PFE)  invested $25 million in privately-held Zentalis Pharmaceuticals to support the emerging company's development.

What's Next for This Emerging Field?

As the sampling of activity above demonstrates, the competitive landscape for this emerging therapeutic area has little elbow room. The early-stage nature of these R&D pacts and next-generation programs (many are years away from reaching clinical trials) should also be considered among investors. Additionally, synthetic lethality may allow "undruggable" cancers to be treated, but the drug candidates developed often have serious side effects that could limit their commercial potential.

The best path forward for investors is to evaluate opportunities and challenges on a case-by-case basis, weighing competition among cancer targets and the value of individual partners, which may provide the potential to create unique combination treatments. For now, synthetic lethality is still very early. Let clinical data in the next few years dictate your next move.