MRNA - Seres Q1 Earnings: Major News For Investors

2023-05-23 14:14:06 ET

Summary

• Good preliminary results with a second generation product in blood bacterial infections.
• The Ulcerative Colitis program is still alive.
• Excessive cash burn in Q1 2023 explained in part by the manufacture of VOWST. Review of cost savings across the business is underway.
• FDA approval of VOWST covers all recurrences of C.diff (including the first) and the approval gives VOWST a three-year shelf life.
• Many of the things that critics have complained about are being addressed. Share price falling further below pre-FDA approval of VOWST makes even less sense.

As an Australian, I'm a fan of Aussie Rules football. Where else in sport can one see 100 minutes of aerial combat, with players running with the ball, kicking it 40 yards to a teammate who catches the ball 10 feet in the air? The art of catching the ball reminds me of the current situation that Seres Therapeutics ( MCRB ) finds itself in. The player must be paying attention to what is happening down the field. He (or she these days) then must position himself and indicate to the player with the ball that he's up for catching it. Then, when the ball is in the air, he has to estimate the trajectory and jump up at the right time to catch it. Meanwhile, the other side is doing everything it can to mess things up, while the player who plans to catch it focuses only on the ball.

I see Seres as the player aiming to catch the ball. The company is focused on its job, while chaos breaking loose around it. While I wrote an article about Seres at the beginning of this month which addressed the Seres stock price fall with FDA approval of VOWST, much has changed with Q1 2023 reporting, despite the share price falling further. Here I update on a number of significant developments that indicate that Seres has its eye on the ball. It's an amazing time and a huge opportunity for investors who do the work to make sense of what's going on.

Key issues surrounding the VOWST FDA approval

In the Q1 2023 reporting Seres management indicated that it was happy with the label for VOWST approved by the FDA. Notably, the approval is for all adult patients with recurrent CDI (C.diff infection). This includes those with a first recurrence. VOWST is thought to facilitate restoration of the gut microbiome after antibiotic treatment of initial C.diff infection. The VOWST treatment is simple with four tablets taken daily over three days. Laxative is used to facilitate removal of residual antibiotics in the gut during the treatment period. Full details concerning VOWST are available.

The FDA approval provides a lot of scope for VOWST sales. Also of critical importance is that the FDA gave VOWST a multi-year shelf life. This indicates that the FDA was convinced that VOWST is a robust product. The shelf life data came in two aspects. Firstly the FDA gave multi-year approval concerning shelf life of the drug intermediates and secondly, the final product achieved a three-year shelf life. Obviously, long shelf life gives flexibility concerning the location of manufacture and storage, so it aids supply chain development, etc. Another big deal is the likely impact on (lowering) cost of VOWST production. This commentary about manufacture came in the context of other areas where substantial savings will be made in the cost structure of the business. This includes reducing outsourcing of for example donor medical testing, consolidating office facilities, etc.

Both of the above elements of the FDA approval improve the case for a successful launch of VOWST next month.

VOWST market preparation

The Q1 2023 reporting indicated that market release of VOWST is well advanced due to substantial spend on VOWST manufacture and also in building the partnership with Bacthera on scale up of manufacture to be able to meet all anticipated uptake scenarios. VOWST will be available in June and Bacthera will begin production in 2024 for release in 2025 to manage expanded need for product. The long-term partnership with Recipharm continues to ensure future supply capacity.

The Nestle customer-facing teams received training on the final package insert and core materials for VOWST, with customer meetings started in the first week of May. The medical and commercial teams of both Seres and Nestle attended the DDW (Digestive Disease Week) in Chicago (May 6-9) and presented new data that the ECOSPOR IV Phase 3 open label trial that showed 95% of VOWST patients free of disease at eight weeks continued to be disease free at week 24. CEO Eric Shaff reported that customers are primed for a launch in June with broad awareness of VOWST at the DDW meeting. Seres reports that the work done by the Nestle customer teams has had a very positive response, including consideration of pricing.

The next step in Seres infectious disease program, SER-155, a defined product

SER-155 is a next generation, cultured bacterial pill which aims to stop pathogens and drug resistant bacteria from dominating in the gastrointestinal tract as a result of antibiotics or other insults (e.g., chemotherapy) causing the loss of beneficial gut microbes. Seres has provided a useful presentation concerning SER-155 in relation to its current Phase 1b trial aiming to reduce gut pathogen abundance and infection for at-risk patients. Note that Seres has an ongoing seven-year partnership with Memorial Sloan Kettering Cancer Center concerning the role of the microbiome in HSCT (Hematopoietic Stem Cell Transplantation) and autoimmune diseases. Seres also has a collaboration with the University of Cologne to look at bacteria whose disappearance is associated with a reduced risk of bloodstream infections. Particular pathogens dominating the microbiome are a significant risk factor for pathogen infection and GvHD (Graft vs. Host Disease). This provides an angle for approaching addressing these dangerous clinical developments. This is complex as another aspect studied is which bacteria get established in the gut after being taken by tablet. 140 strains of bacteria representing almost 100 species have been screened in different combinations to establish which combinations look promising for preventing complex bloodstream infections. It's complicated and expensive to do this work.

To preface the remarks on the SER-155 Phase 1b trial it's very important to understand that the numbers in the Cohort 1 study are very small. They were between nine and 13 of the 15 enrolled patients, depending on the different aspects of the study, noting that discontinuations were not SER-155-related in the very ill patient cohort.

On the other hand to have any indication of success at day 100 is really important in thinking about whether Seres VOWST is a primitive (i.e., fecal derived) "one shot product" for Seres or whether it's a prelude to defined products. SER-155 is a product that contains 16 different bacteria that have been cultured. Its development rests heavily on the SER-109 (VOWST) history. SER-155 is a defined product that can be much better controlled than a product derived from fecal material.

The market for SER-155 is not small and preventing these infections and graft-versus host disease will address nearly half of all mortality associated with these conditions.

Ulcerative Colitis

Once again in the Q1 2023 reporting Seres management reaffirmed that the company has tangible leads to indicate that they are on a path to success with Ulcerative Colitis (UC) treatment, at least with a subset of UC sufferers. This isn't surprising as UC is likely to have more than one basis for the clinical symptoms. Success with even one form of UC would take Seres beyond treating serious infectious disease into the realm of inflammatory bowel diseases, and beyond that the possibility of treating other inflammatory conditions, including neurological conditions where the microbiome may have a role. Parkinson's disease looks like a really interesting area to investigate. This would be truly transforming.

Note that as some have noted Seres has failed in its initial clinical approach with a fecal-derived product (SER-287) and it has pulled back from an UC trial with a defined product (SER-301) manufactured with a mixture of cultured bacteria. I merely note that the history of success with VOWST approval had initial failures in the clinic as the product was refined. The point about Seres, and part of the reason for its huge cash consumption, is that Seres collects data on how its products impact on the microbiome as well as their impact on patient biomarkers. This gives the company a way to refine their products. The development of SER-155 (see above) results from the trials which produced SER-109 (now VOWST). I suggest that Seres is using the same approach in its UC programs.

Seres cost structure

No doubt all investors are concerned about the massive costs incurred by Seres because they're clearly not sustainable in the long term without a substantial product pipeline.

Note that Nestle will soon provide a $125 million milestone payment concerning FDA approval and Seres has the opportunity to earn a further $225 million in sales target milestones.

The Q1 2023 transcript made clear what I had suspected. A significant part (~$16 million) of the $70.6 million Q1 2023 loss resulted from VOWST manufacture (which was included in the R&D expenses) in preparation for quick market entry (in June). This will be recovered. Clearly, financial reporting is being reconsidered and this will make clear that the ever increasing R&D spend has actually included product manufacture in the recent quarter. If the ~$16 million for product manufacture is removed from the loss, the loss comes out slightly less than for Q1 2022. Management made clear that R&D spend is expected to decline.

The Q1 reporting also made clear that many aspects of the business are being reconsidered. The focus is on reducing R&D spend and other areas are under consideration for cost efficiency. The next earnings call will provide a more structured commentary on the cost base for the business.

The bigger picture

As far as I can make out, the market doesn't love Seres because it thinks the company is a "one-shot" opportunity with a product that's destined to be overtaken by more sophisticated products. Sage Advisors have recently made the case for that kind of a future for Seres. I have a different view and the very recent results from the Q1 2023 earning transcript support my take on what is going on.

As I indicate above, I think VOWST is an amazing first significant product to open up the field of microbiomics. I also report on SER-155, the next sophisticated (defined) product that Seres has in early-stage clinical trial. This must be seen in the context of opening up microbiomics as a major new kind of medical product area. Seres has done the work, spent (too much) money and is positioned to benefit from being involved in new products down the track. An example of a big medical problem that might end up having a microbiomic product as part of the solution is Parkinson's disease where a common gut bacterium Desulfovibrio may have a role in the development of the disease. To address this one needs to work out how to manage the presence of Desulfovibrio in the gut. This will require the kind of knowledge that Seres has accumulated. It's very early days, but make no mistake this bigger picture is part of the reason that I'm a Seres investor.

To give an indication as to how this works, another company from the Flagship portfolio (which helped launch Seres), Moderna ( MRNA ) is showing how one technology innovation leads to more. Moderna was one of the leaders in the development of mRNA-based COVID vaccines, which led to a revolution in vaccine development. It's going beyond vaccines to use mRNA to address diseases with a protein deficit. This idea of protein replacement therapy, using mRNA injection to get the body to make the lacking protein, is an amazing new direction. Moderna has just reported early clinical success in treating children with a rare genetic disease, Propionic Acidemia, which leads to toxic metabolites accumulating. Moderna's mRNA-3927 delivers the information to make the missing protein.

Conclusion

In this report, I've provided an optimistic view of Seres' position, but make no mistake, this is an unprofitable biotech that burns a huge amount of cash. It's a risky business for investors until it is not. I maintain that it makes no sense that the current share price for Seres ($4.92) remains below its value ($6.40) as it received FDA approval for VOWST, but there are reasons why it isn't $30 (or more). The Q1 2023 earnings clarified a number of things that in my view change the likely future trajectory of the Seres business. It shows that Seres is on track not to be a one-trick pony with only a single primitive fecal-derived microbiomic product. Of course, there's a way to go but the prospects for SER-155, which is made by culturing bacteria, look very promising. Success with this product will open up a significant market. And Seres is not backing off from the possibility of developing a product for treating Ulcerative Colitis, which would have a huge market. My appetite for risk is probably off scale for many investors, but it does mean that when things work out, the returns are pretty interesting. I'm not selling at $4.92 even though my Seres investment has produced a happy uplift in the short time I've been an investor.

I'm not a financial analyst or advisor, but I know biotech and I'm learning how to benefit from risky investments. I hope that my commentary is of interest to you.

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