MCRB - Seres Therapeutics: Approved Drug And Nestle Partnership Make It A Buy

2023-09-01 14:03:22 ET

Summary

• Seres Therapeutics trades near its 52-week low and presents an asymmetric risk-reward profile.
• The company's lead asset, SER-109, has successfully concluded its Phase III clinical trial for recurrent Clostridioides difficile infection.
• Seres Therapeutics' partnership with Nestle provides financial backing and distribution support, highlighting the potential of its drug VOWST.
• Currently, MCRB faces no competition for VOWST and the product can reduce hospital expenses.

Biotech has always been one of my favorite spaces for investments. Biotech provides the possibility for incredible gains and substantial losses. The key to making profits in this sector is to limit the downside risk and maximize the upside potential.

Despite a high rate of cash burn, Seres Therapeutics’ (MCRB) shares present an opportunity to get in on the ground floor of the colonic microbiome business at a reasonable price. This combined with their co-commercialization with Nestle makes it a compelling investment but not without risks.

Seres Therapeutics, Inc. has become a notable player in the microbiome therapeutics domain, devoted to advancing therapeutic solutions centered around the modulation of the colonic microbiome. The company is spearheading the development of an innovative category of biological drugs meticulously designed to rectify disrupted microbiomes and restore them to a non-disease state, thereby promoting health restoration.

Notably, the company's lead asset, SER-109, an oral microbiome therapeutic, has achieved a significant milestone by successfully concluding its Phase III clinical trial targeting recurrent Clostridioides difficile infection. Additionally, Seres Therapeutics' pipeline boasts SER-155, an oral fermented microbiome therapeutic in Phase 1b clinical trials. This candidate exhibits promising potential for addressing gastrointestinal infections, bacteremia, and graft versus host disease in immunocompromised patients, particularly those undergoing allogeneic hematopoietic stem cell transplantation.

Seres Therapeutics recently had its first drug approval. The drug, VOWST, addresses the rising number of CLOSTRIDIOIDES DIFFICILE cases predicted to reach 156,000 by the end of 2023.

Typically, a drug approval is met with huge price gains and unbridled optimism. But in Seres’ case, the company's share price is currently approaching its 52 week low and currently trades at $3.51.

Nestle Partnership

The Nestle partnership provides this clinical stage biotech with financial backing, distribution support and sales support. The fact that Nestle was willing to provide a $125 million dollar milestone payment for 50% of profits and losses demonstrates the potential of Vowst. Nestle is expecting to make its money back and then some.

Recent Transcript Highlights

Lisa von Moltke - EVP and Chief Medical Officer

“Recurrent CDI is a serious disease that often results in hospitalization and can even lead to death. There are an estimated 156,000 recurrences in the United States per year and at least 20,000 deaths due to C diff infections.”

CFO, David Arkowitz:

“The net income in the second quarter of 2023 is primarily due to the $125 million milestone received from Nestle upon FDA approval of VOWST. VOWST net sales for the partial commercialization period during the second quarter was $1.6 million and based on 105 units of VOWST sold during the period.”

“In April, we announced that we had entered into a new 250 million senior secured debt facility provided by Oaktree. We drew the first launch of 110 million at closing, and after retiring our previously outstanding debt and deducting fees and expenses, the net proceeds to us were approximately $50 million.”

Eric Shaffe - CEO

“In addition, we were very happy with the label that we received, which includes all adult patients with recurrence CDI, including those with the first recurrence. We are now working to commercialize VOWST alongside our collaborator, Nestle Health Science.”

“The successful commercialization of VOWST is our top corporate priority, and the clear focus of our organization. Over time, we expect that VOWST will provide tremendous benefit to patients, and in turn, we anticipate this therapeutic will represent an important financial driver to Seres.”

My thoughts

As with any earnings call, an investor should take all information stated with a grain of salt. One of the primary goals of any earnings call is to control the narrative of the company and influence current and potential shareholders. That being said there were quite a few positives that became apparent.

The current market of 156,000 possible CDI occurrences presents a relatively large market with the potential to generate over a billion dollars in sales. Currently, Seres has no competition in this area and should benefit from first mover advantage. I would be concerned if Seres doesn't demonstrate some growth of sales in the 3rd and 4th quarter.

In the second quarter of 2023, the company's net income was significantly influenced by the receipt of a substantial $125 million milestone payment from Nestle, a noteworthy event attributable to the FDA's approval of VOWST. On the one hand the payment has skewed current earnings higher and is a one-time payment. On the other hand, this development does underscore the strategic partnership between the company and Nestle and highlights the value of the product's regulatory clearance. During the same quarter, the partial commercialization phase of VOWST led to net sales amounting to $1.6 million. This modest figure reflects the initial traction of VOWST in the market, marked by the sale of 105 units during this period. The financial results suggest a significant revenue potential for VOWST, and its performance could be a key driver of the company's financial growth in the near future.

The company also strengthened its balance sheet by securing a new senior secured debt facility worth $250 million from Oaktree signifies a proactive step to enhance its financial position and address its capital needs. I take this as a promising sign. The initial drawdown of $110 million upon the facility's closing allowed Seres to retire debt and indicates a rapid utilization of funds to meet immediate requirements. The decision to retire prior existing debt, along with the deduction of associated fees and expenses, demonstrates a strategic approach to optimize the utilization of the new debt facility.

The net proceeds of around $50 million suggest a cautious approach to managing the company's financial commitments while ensuring that ample resources are available for ongoing operations and potential future investments. This debt facility action signifies the company's effort to manage its financial structure prudently and could potentially provide a positive impact on its financial stability and flexibility in the foreseeable future which are all positive signs.

They also have the ability to raise money by issuing shares. This could possibly be a concern if they decide to issue the 40,000,000 shares as stated here in the recent 10-Q , "On March 29, 2023, the Company’s board of directors adopted a resolution to amend the Restated Certificate of Incorporation, subject to stockholder approval, by increasing the number of authorized shares of the Company’s Common Stock from 200,000,000 shares to 240,000,000 shares (the “Share Increase Amendment”)."

The company's recent achievement of obtaining a favorable label for VOWST, encompassing all adult patients with recurrent Clostridioides difficile infection ((CDI)), underscores a significant milestone in its strategic development. This inclusive labeling broadens the potential patient population for VOWST and enhances its market reach, allowing the company to address a wider spectrum of CDI cases. Collaborating with Nestle Health Science further underlines the company's commitment to capitalize on this opportunity through a strategic partnership, leveraging each other's strengths for the successful commercialization of VOWST.

The emphasis on the commercialization of VOWST as the company's primary corporate priority showcases a clear and focused strategic direction. This approach demonstrates the company's intent to capitalize on the market potential of VOWST, not only for its clinical benefits but also for its potential financial implications. By prioritizing the successful introduction of VOWST to the market, the company aims to establish a strong market presence and drive significant revenue generation.

The anticipation that VOWST will deliver substantial patient benefits echoes the company's commitment to its mission of improving patient outcomes. The assertion that this therapeutic will also serve as a pivotal financial driver underscores the company's expectations for VOWST to have a notable impact on its financial performance. The alignment of patient well-being and financial viability underscores a holistic approach to the company's strategic objectives.

The alignment of strategic priorities, the favorable labeling, and the partnership with Nestle Health Science collectively portray a focused effort towards the successful commercialization of VOWST. The company's intent to harness the therapeutic potential benefits for both patients and its financial growth reflects a comprehensive strategy that underscores its commitment to enhancing both clinical outcomes and shareholder value.

Current Risks

• Regulatory Challenges: The successful commercialization of microbiome-based therapies like VOWST is subject to regulatory approvals. Any delays or rejections in obtaining these approvals could significantly impact the company's timeline and financial projections.

• Clinical Uncertainty: The efficacy and safety of microbiome therapeutics, including VOWST, might be challenged during clinical trials or after commercialization. Negative outcomes or adverse events could lead to reduced market acceptance, regulatory actions, or legal liabilities.

• Competitive Landscape: The field of microbiome therapeutics is rapidly evolving, with potential competitors working on similar treatments. Seres could face challenges from companies offering alternative therapies with better efficacy, safety, or pricing, impacting its market share and revenue potential.

• Market Acceptance and Adoption: The success of VOWST hinges on healthcare providers' willingness to adopt the therapy and incorporate it into treatment protocols. If healthcare professionals are hesitant to adopt microbiome-based therapies or if the benefits are not well-demonstrated, it could limit market penetration.

• Commercialization Challenges: Successfully commercializing a new therapeutic product requires effective marketing, distribution, and sales efforts. Seres needs to ensure that it can effectively reach healthcare providers, educate them about VOWST's benefits, and secure reimbursement from payers.

• Intellectual Property Risks: The protection of intellectual property is crucial in the biopharmaceutical industry. If Seres' patents are challenged, invalidated, or not sufficiently broad, it could open the door for competition or reduce the company's ability to differentiate its products.

• Dependency on Partnerships: Collaborations, like the one with Nestle Health Science, expose Seres to risks associated with the actions and decisions of its partners. Disagreements, changes in partner priorities, or shifts in collaboration terms could impact Seres' commercialization efforts.

• Market Volatility: Biotechnology stocks can be highly volatile due to factors like clinical trial results, regulatory decisions, and market sentiment. Fluctuations in Seres' stock price could be significant and could impact investor confidence.

• Financial Uncertainty: The success of VOWST's commercialization is crucial for Seres' financial growth. Any unforeseen delays, lower-than-expected sales, or difficulties in reimbursement negotiations could negatively affect the company's financial performance.

• Technology and Research Challenges: Microbiome science is still relatively nascent, and Seres' therapies are based on complex biological systems. Continued advancements in research and technology are essential to improve understanding, which could impact the development of future therapies or refinements of existing ones.

Cash Burn

Continuous negative income is common in clinical stage developmental Biotech companies. In Seres' case, the question is whether the profits will accelerate quickly enough to turn profitable before the cash burn causes problems. With the current milestone payment and money from Oaktree, Seres should be able to bridge the gap. That doesn't mean it's clear sailing for Seres. Although Seres has never been more solid financially, they still have to demonstrate significant sales growth by 2024 or they will need additional financing.

Final Thoughts

Seres Therapeutics appears to present a compelling investment opportunity within the dynamic biotech landscape. Biotech, while known for its potential gains and risks, demands a keen strategy that balances potential rewards and downsides. Despite the company's notable cash burn rate, Seres' shares offer investors a chance to enter the emerging field of colonic microbiome therapeutics at a reasonable valuation. The company's serious approach to patient health, evident in its dedication to microbiome therapies, is reinforced by its collaboration with Nestle Health Science, a collaboration that adds another layer of attraction to its investment thesis, albeit not without its share of risks.

Adding to its allure, the partnership with Nestle provides Seres with essential financial backing, distribution support, and sales guidance. Nestle's willingness to back Vowst with milestone payments underscores the therapeutic potential, creating a partnership that could potentially lead to mutually beneficial outcomes.

The management's emphasis on commercializing VOWST is not just rhetoric; it serves as the cornerstone of Seres' corporate strategy. The alignment of patient well-being and financial performance is emphasized, indicative of a comprehensive approach that prioritizes clinical outcomes while acknowledging the potential financial impact. In this pursuit, Seres leverages its strengths and synergies with Nestle to drive commercial success.

VOWST alone could carry series. Even splitting a billion in revenue with Nestle would make them instantly profitable. This discounts all of the other drug platforms Seres is working on. Although I will save that for my next article.

It's crucial to note that Seres is not devoid of risks. The highly competitive biotech landscape, regulatory hurdles, and the challenge of successful commercialization remain potential obstacles. Furthermore, the company's near-term financials could be skewed by one-time payments, necessitating a closer examination of its earnings trajectory.

Seres Therapeutics presents a unique opportunity for investors seeking exposure to the evolving microbiome therapeutics arena. Its dedication to patient health, strategic partnerships, and clinical successes lend weight to its potential. Nevertheless, prudent investors should conduct comprehensive due diligence, carefully weighing the promised rewards against the inherent risks in the biotech sector. As the company strives to balance pioneering science with financial growth, its trajectory could potentially reward the patient investor. As always, please do your own due diligence before buying any position and good luck investing.

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