Although shares of Epizyme (NASDAQ:EPZM) are trading at a fraction of the all-time high achieved shortly after the initial public offering in 2013, the company's current market valuation of $1.2 billion is close to a high-water mark. Investors can thank a surge in stock dilution (which keeps the market cap elevated) as well as signs of tangible progress (which have sent shares soaring recently). 

The stock has more than doubled since the beginning of the year on the heels of growing optimism for the lead drug candidate, tazemetostat, which was placed on a clinical hold by the U.S. Food and Drug Administration (FDA) not long ago. The regulatory body has since accepted a new drug application (NDA) for the drug candidate, and could give it a stamp of approval as early as January 2020. 

While that puts Epizyme on the path to commercial operations, it may not provide the financial boost the business needs to achieve sustainable operations. Here's what could be ahead for the business in the next year for investors considering buying the stock.

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Getting up to speed

Epizyme's tazemetostat inhibits an enzyme called EZH2 that allows certain cancer cells to proliferate. The enzyme isn't present in all cancer cells, but the drug has the potential to treat various forms of Non-Hodgkin Lymphoma (NHL) and several types of genetically defined solid tumors. That potential diversity could pay off for shareholders down the road, as could the drug candidate's potential as both a maintenance therapy (intended to keep cancers from progressing) and an earlier line of treatment (intended to shrink tumors). 

The FDA placed a partial clinical hold on tazemetostat in April 2018 after a pediatric patient receiving the drug compound developed a secondary lymphoma. Epizyme provided a response including data arguing that the risk-to-reward profile favored continued development, and regulators lifted the clinical hold several months later.

Shortly thereafter, Epizyme reported results from a phase 2 trial evaluating tazemetostat as a treatment for epithelioid sarcoma (ES) in 62 adults. The drug candidate achieved an objective response rate (ORR) of 15% and a disease control rate (DCR) of 26%. That may not seem like much, but it's relatively significant for a patient population with limited treatment options. Nonetheless, some investors have been unsure that it will prove sufficient to earn the drug marketing approval.

While Epizyme is conducting a phase 3 trial to confirm the results in ES, regulators agreed to allow the company to submit an NDA based on the mid-stage study. The FDA will approve or reject the application on January 23, 2020.

The company is also preparing to submit an NDA for tazemetostat as a treatment for follicular lymphoma, also based on data generated from a mid-stage study. Epizyme reported an ORR of 77% in patients with a mutated EZH2 enzyme and 34% in patients with a non-mutated form. The former group responded for a median time of 8.3 months, while the latter group reported a median duration of response of 13 months.

As development of tazemetostat continues as a stand-alone and combination treatment for various types of cancers at varying levels of progression, Epizyme is also beginning to look beyond the asset. The company plans to have at least three new drug candidates in clinical trials by the end of 2020, led by EZM8266 in sickle cell disease.

A paved road with years printed between the yellow dotted line.

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Where is Epizyme headed?

Epizyme sports an income statement typical of a clinical-stage pharma. The business reported an operating loss of $81.7 million in the first half of 2019, driven largely by a $67.8 million charge for research and development. Unfortunately, earning marketing approval for tazemetostat in ES won't bring much relief.

According to Biopharma Dive, Wall Street analysts see that indication topping out at just $100 million in revenue per year. Given the small economic opportunity, the initial increase in marketing and sales expenses from the transition to commercial operations will likely make the company's financial situation worse, especially considering the confirmatory trials in ES and follicular lymphoma will be larger and more expensive than the mid-stage trials underpinning regulatory applications.

Tazemetostat could still live up to its broad potential over the long run. Andrew Berens, an analyst at Morgan Stanley, estimates that the drug compound could reach peak annual sales of $2.1 billion by 2030. And if pipeline programs with GlaxoSmithKline, Celgene, and Boehringer Ingelheim progress, then Epizyme could earn milestone payments to help offset rising operating expenses.

So, where will Epizyme be in one year? Investors might not notice much difference from a financial standpoint, and should expect significant operating losses to continue. But if the company earns market approvals for tazemetostat and launches three new drug candidates into the clinic before the end of 2020 as expected, then shares could receive a bump as optimism grows. That said, the company's $1.2 billion market cap suggests Wall Street is taking a relatively cautious approach. Individual investors should likely do the same.