On Thursday, Wolfe Research initiated coverage on Rapt Therapeutics (NASDAQ:RAPT), a clinical-stage biopharmaceutical company, with an Outperform rating and a price target (PT) of $39.00. The firm's initiation comes following a period of underperformance for Rapt Therapeutics' stock compared to the XBI index over the past year, attributed to an enrollment delay and a lack of significant catalysts in 2023.
Despite the previous year's challenges, Wolfe Research foresees potential for Rapt Therapeutics' stock to outperform in 2024. The optimism is based on two main opportunities: the anticipated Phase 2b trial results for their drug candidate in mid-2024, which the firm sees having a 70% probability of success (POS), and the growing market appreciation for oral dermatology products, as evidenced by increasing revenues from competitors like Dupixent and Rinvoq.
The analyst from Wolfe Research highlighted the significant positive reaction from investors to the initial Phase 1 data for Rapt's moderate-to-severe atopic dermatitis (AD) treatment. The stock had surged from $18 to $34 in early June 2021, maintaining a value above $30 for over six months. The upcoming mid-2024 could mark another pivotal moment for the company's valuation.
Furthermore, the coverage includes a detailed valuation scenario for Rapt's lead product, referred to as zel. Wolfe Research's base case scenario assumes zel will achieve moderate efficacy and safety, which could be sufficient for the drug to capture a substantial market share, even without demonstrating strong efficacy in AD. The base scenario includes a projected peak adjusted revenue of approximately $850 million, with zel being launched at a wholesale acquisition cost (WAC) of $3,000 per month and capturing market shares of 2.75% and 5% in the moderate-to-severe and mild-to-moderate AD populations, respectively.
Wolfe Research has incorporated a conservative approach in their financial model for Rapt Therapeutics, accounting for a 25% POS due to the early-stage nature of the product and a discount cash flow (DCF) valuation that includes a potential dilution from an additional 15 million share issuance. The price target of $39 is derived based on a weighted average cost of capital (WACC) of 9.1%. Additionally, the firm views Rapt's second asset, tivu, which has shown promising efficacy in cancer, as a potential upside that is not currently factored into the stock price, treating Rapt as a single-asset company with limited terminal growth.
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