MCRB - Seres Therapeutics: Binary Catalyst Unlocking

2023-04-05 15:43:51 ET

Summary

• Due to its volatility, Seres Therapeutics, Inc. is a stock that is not for the faint of heart.
• Seres Therapeutics stock dropped and popped substantially from the outcome of its previous clinical catalysts.
• The upcoming SER109 approval can substantially move the needles on Seres Therapeutics, Inc. stock.

Price is what you pay, value is what you get. - Warren Buffett.

In biotech investing, it's an exhilarating time to see your stock undergoing a "binary event." As a "make or break development," such a catalyst entails either an FDA approval or a big data release. If the outcome is positive, the shares usually but not always enjoy a robust rally. Conversely, the stock nearly always tumbles with a negative development. Now, if you have an edge in forecasting the binary catalysts, you can trade them to boost your portfolio profits amid this bear market cycle.

A byproduct of its binary development over the years, you can see that Seres Therapeutics, Inc. ( MCRB ) shares underwent huge peaks and valleys. As you know, the FDA will issue an approval decision for the lead drug (SER109) soon. Depending on the outcome, that will significantly move the needle of this stock. In this research, I'll feature a fundamental analysis of Seres while sharing with you my expectation of this upcoming development.

Figure 1: Seres chart.

About The Company

As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the next section. Based in Cambridge, Massachusetts, Seres Therapeutics, Inc. is focused on the innovation and commercialization of microbiome-based medicines to treat various infectious and inflammatory conditions.

The pipeline is divided into two segments: infection protection and immune modulation. As you can appreciate, infection protection has a highly intriguing microbiome drug (SER109). Designed to treat the dreaded infection Clostridium difficile (i.e., CDiff), SER109 is going to the FDA for an approval decision. That aside, the immune modulation business segment is powered by SER287 for ulcerative colitis, which is currently in a Phase 2b trial.

Figure 2: Therapeutic pipeline.

Clostridium Difficile Market

As you can appreciate, having a sizable market is crucial to an investment's success. For SER109, the drug can capture a sizable and significant CDiff market. Viewing the figure below, there are 156K current CDiff infection cases estimated for this year. On an annual basis, you can expect roughly 20K patients to die from CDiff infection.

In doing some rough calculations (i.e., 20K/156K), you're looking at a 12.8% mortality (i.e., death) rate. Additionally, the recurrence risks are paramount. It is estimated that the chances of recurring CDiff infection are as high as 40% to 50%.

Figure 3: Clostridium difficile infection.

Currently, the treatment for CDiff infection is with antibiotics. However, the antibiotics would wipe out both bad and good gut bacteria. To replace the beneficial bugs, docs would prescribe a "fecal transplant." You can see this is cumbersome and complex for patients and clinicians. Interestingly, there is a newly approved fecal microbiota product (Rebyota) from Ferring Pharmaceuticals. Nonetheless, this is also inconvenient. After all, it has to be taken via enema (i.e., the backend).

The Solution - SER109

Putting all that together, you can imagine that there is a robust demand for an efficacious and convenient treatment option for patients with the oral pill (SER109). As a consortium of microbiota spores, SER109 is best given to patients within the first two weeks of antibiotic treatments.

Given that SER109 will go through the small intestine, it'll deliver many therapeutic benefits to patients. As it moves through the gastrointestinal tract, the spores can rapidly germinate and reconstitute into the gut microflora in a process coined engraftment.

Supporting Clinical Data

As you know, all sound science and medicine would be meaningless unless SER109 can demonstrate its therapeutic prowess in clinical trials. In the high-quality, multicenter, randomized, placebo-controlled Phase 3 ( ECOSPOR III ) trial, the efficacy and safety of SER109 were assessed on 182 patients with recurrent CDiff infection (i.e, rCDI).

Remarkably, SER109 cleared its primary endpoint with flying colors. Precisely speaking, the drug prevented rCDI in 88% of patients compared to 60% of patients on the placebo. The safety profiles were similar between the placebo and SER109. Since the p-value were all less than 0.05, you can tell this is due to the drug rather than random occurrences.

Interestingly, over 2/3 of the rCDI occurred within the first two weeks of antibiotic treatment (i.e., the vulnerability period). As such, you should prescribe SER109 within those first two weeks to get the most therapeutic benefits.

Figure 4: Strong ECOSPOR III results.

Additionally, Seres conducted the ECOSPOR IV trial which is an open-label study of 263 patients. The data was published in a prestigious journal (i.e., JAMA). As shown below, treatment with SER109 substantially reduces the recurrence rate by 91%. The response rate is even higher at 94% for patients who had their first recurrence. Essentially, this data supports prior findings.

Figure 5: Supporting ECOSPOR IV data.

As you can appreciate, Seres has the Prescription Drug User Fee Act ((PDUFA)) for SER109 for CDiff set for April 26. Notably, SER109 already received the Orphan Drug and Breakthrough Therapy Designations. Hence, that allowed it to earn a Priority Review.

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the FY2022 earnings report for the period that ended on December 31.

As follows, Seres procured $7.1M compared to $144.9M for the same period a year prior. As you can see the substantial revenue from the prior year was from the Nestle collaboration. That aside, the research and development (R&D) for the respective periods registered at $172.9M and $141.9M. I viewed the 21.8% R&D increase positively because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.

Additionally, there were $250.1M ($2.31 per share) net losses compared to $65.5M ($0.72 per share) net declines for the same comparison. The higher R&D contributed to more bottom-line depreciation. As the company continues to ramp up commercial activity, you can expect the expenses to accelerate.

Figure 6: Key financial metrics.

About the balance sheet , there were $181.3M in cash, equivalents, and investments. Against the $253.6M annual OpEx, there should be adequate cash to fund operations into Q3 before the need for additional financing. Simply put, the cash position is a bit weak relative to the burn rate.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for Seres is whether SER109 would gain FDA approval. Given the binary nature of this event, a non-approval or delayed approval would cause the stock to drop over 50%.

Though the Nestle partnership boosted launch success, there is still a chance of a launch failure. As a small operator, Seres might quickly burn through its cash and thereby suffer from flow constraints. The company might also face extreme pressure from OTC probiotics.

Concluding Remarks

In all, I have issued a speculative buy recommendation on Seres Therapeutics, Inc. with a 4.8/5 stars rating. Seres Therapeutics is a story of triumph and resilience. After seeing its Phase 2 trial for SER109 as a treatment for CDiff flopped, the company made adjustments to run a new and successful Phase 3 study. Similarly, its UC franchise encountered a Phase 2 data setback. Nonetheless, the management pushed ahead with SER109 approaching its PDUFA date in less than a month.

From the clinical view, SER109 approval would offer a great solution for patients afflicted by CDiff, one that is much more convenient than the standard of care. Now, an approval itself would trigger a $125M payment which is over 17% upside from the current share price. Nonetheless, the "element of surprise" can galvanize Seres Therapeutics, Inc. stock much higher.

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