MCRB - Seres Therapeutics: Microbiome Therapeutics Amid High Operational Costs And Uncertain Profitability Path

2023-07-10 13:47:02 ET

Summary

• Seres Therapeutics and Nestlé Health Science received FDA approval for VOWST, a drug to prevent recurrent C. difficile infection, triggering a $125M payment from Nestlé to Seres.
• Seres reported a Q1 2023 net loss of $71.2M, up from a $56.6M loss in Q1 2022, with increased expenses due to VOWST development and manufacturing costs.
• The company also released promising safety and pharmacology data from a Phase 1b study of SER-155, an oral microbiome therapeutic aimed.
• However, given high operational costs, Seres's relatively low cash position, and the uncertain path towards profitability, I recommend a "Sell" rating for Seres Therapeutics.

Introduction

Seres Therapeutics ( MCRB ), a microbiome therapeutics leader, designs innovative biological drugs to restore healthy microbiome function. They have a robust drug pipeline with their first FDA-approved product, VOWST (previously SER-109), which treats recurrent Clostridioides difficile infection. The firm is also actively researching the "Infection Protection" approach, aiming to decolonize pathogens and minimize infections. The ongoing clinical trial of SER-155 intends to protect patients receiving stem cell transplants from potential complications. Furthermore, Seres Therapeutics is broadening its research into ulcerative colitis, cancer, and metabolic diseases, leveraging a unique reverse translational platform.

Recent events: In April 2023, Seres Therapeutics and Nestlé Health Science received FDA approval for VOWST, an oral therapy to prevent recurrent C. difficile infection by restoring the gut microbiome. Post FDA approval of VOWST, Seres Therapeutics received a $125M milestone payment from Nestlé Health Science. Both firms will jointly commercialize VOWST in the U.S. and Canada, sharing profits and losses, with Seres potentially earning up to $225M in sales milestones.

Q1 2023 Earnings

Seres Therapeutics reported a Q1 2023 net loss of $71.2M, up from a $56.6M loss in Q1 2022. Research and development expenses rose to $44M from $39.6M in Q1 2022, primarily due to VOWST development and manufacturing costs. General and administrative expenses increased to $22.5M from $18.6M in Q1 2022. The company closed Q1 2023 with $106.5M in cash and equivalents. In April, Seres entered a $250M debt facility with Oaktree Capital Management, drawing an initial $110M, part of which retired outstanding debt. After receiving a $125M payment from Nestlé for VOWST's FDA approval, the pro forma cash balance stood at approximately $282M.

VOWST: Promising Therapy for Preventing Recurrent CDI, but Challenges Ahead

In 2023, VOWST, an oral therapy containing live Firmicutes spores, received FDA approval for the prevention of recurrent Clostridioides difficile infection [CDI] in adults who have previously experienced at least two episodes. Clinical trials have shown promising results, with 79% of participants remaining free from CDI recurrence for up to 24 weeks after their last episode. However, UpToDate notes that further research is necessary to compare this innovative treatment with existing methods such as fecal microbiota transplantation, the newly approved fecal microbiota rectal suspension, and bezlotoxumab.

CDI poses a significant health concern in the United States, being one of the primary causes of hospital-acquired infections. Recurrence rates following initial antibiotic treatment are high, affecting up to "35%" of patients and resulting in substantial healthcare expenses.

Assuming a price of $17,500 per VOWST treatment and considering the approximately 175,000 annual cases of recurrent CDI in the U.S. , a high estimate, the total potential revenue could amount to $3.06 billion if VOWST were utilized for all cases. However, it is important to acknowledge that factors such as patient preference, prescribing practices of physicians, and insurance coverage may limit its widespread use. Assuming a conservative estimate of 20% of recurrent CDI patients opting for VOWST, the projected annual revenue would be approximately $612 million.

Multiple factors can impact these projections, such as the possibility of higher CDI prevalence due to an aging population or increased use of broad-spectrum antibiotics, the presence of alternative treatments in the market, and future pricing approaches. Therefore, it is advisable to consider more conservative estimates, such as a range of 5% to 10%, which would yield revenues between $153 million and $306 million. Considering the factors outlined above, I consider these cautious estimates to be the most optimistic scenarios. It is important to remember that Seres will share revenue with Nestlé.

Encouraging Safety and Pharmacology Data from Phase 1b Study of SER-155 Oral Microbiome Therapeutic

In other developments, Seres has released new safety and pharmacology data from the Phase 1b Cohort 1 study of SER-155, an oral microbiome therapeutic. The treatment exhibited favorable tolerability with no serious adverse events attributed to its administration. The study showed that SER-155 bacteria successfully engrafted into the gastrointestinal microbiome. The incidence of ESKAPE pathogen families was substantially lower than observed in a reference population of patients receiving allo-HSCT.

SER-155, a 16-strain, cultivated microbiome therapeutic, aims to prevent colonization and reduce ESKAPE pathogens in the GI tract to lower the risk of bloodstream infections and other complications such as GvHD in allo-HSCT patients. It also has the potential to impact antimicrobial resistance ((AMR)), including infections caused by CRE and VRE.

The ongoing SER-155 Phase 1b study includes two cohorts. Cohort 1 assesses safety and drug pharmacology, including the engraftment of drug bacteria in the GI tract. Cohort 2, currently enrolling, will further evaluate the safety, engraftment, and clinical outcomes in a randomized, double-blinded placebo-controlled design. Results from this study are expected in mid-2024.

My Analysis & Recommendation

In conclusion, Seres Therapeutics shows promise in several respects. Their innovative approach to using the microbiome to treat and prevent disease positions them at the forefront of a burgeoning field of medicine. The company's FDA approval for VOWST is a noteworthy accomplishment, potentially setting a precedent for future microbiome therapeutics. However, despite promising clinical trial results, significant hurdles remain before VOWST could secure a substantial market share. Furthermore, although the milestone payment from Nestlé and the Oaktree debt facility has boosted the company's cash reserves, the ongoing high operational costs cast doubt over Seres's ability to achieve long-term profitability.

The potential success of VOWST could be tempered by several key factors. These include competition with existing treatments, patient and physician preferences, and the intricacies of insurance coverage. Furthermore, the requirement to share revenue with Nestlé dilutes the financial benefits for Seres. A conservative estimate suggests that even under optimistic conditions, the total revenue from VOWST could range between $153 million and $306 million, hardly a windfall considering the cost of development and manufacturing.

Additionally, the company's research efforts, such as the SER-155 trial, while innovative and potentially significant, are still in the early stages. These endeavors require a substantial financial investment, contributing to increased R&D expenses, without any immediate return. Although the early safety and pharmacology data for SER-155 is encouraging, its potential to bring a significant revenue stream is hazy until later-stage trial results are available.

Given the high operational costs, Seres's relatively low cash position, and the uncertain path toward profitability, I recommend a "Sell" rating for Seres Therapeutics. While the company presents a captivating case in the field of microbiome therapeutics, the financials suggest a precarious position. Until Seres demonstrates a clear and feasible strategy for turning its pioneering research into sustainable profitability, I would advise investors to tread cautiously.

Risks to Thesis

When the facts change, I change my mind.

There are several potential risks associated with my "Sell" recommendation for Seres Therapeutics. Here are a few significant ones:

• Breakthrough Results: Seres Therapeutics is working on several innovative drug candidates, any of which could potentially deliver breakthrough results, leading to swift FDA approvals and subsequent commercial success. Such a scenario could drastically alter the company's financial picture and cause a significant increase in its stock price.

• Partnerships or Acquisitions: The company could enter into strategic partnerships or be the target of an acquisition by a larger pharmaceutical firm. Both scenarios could lead to an immediate increase in the company's stock price. The existing collaboration with Nestlé Health Science is an example of how a strategic partnership can lead to significant cash inflows.

• Insurance Coverage and Policy Changes: Changes in healthcare policy or insurance coverage could favor the use of Seres Therapeutics' drugs, specifically VOWST. If insurance companies decide to cover a substantial portion of the treatment cost, it could lead to increased adoption and thus, higher revenues than initially anticipated.

• Increased Demand: The demand for VOWST or other drugs in Seres' pipeline could end up being greater than expected. For instance, changes in the prevalence or recurrence rates of CDI could lead to higher demand for VOWST. Alternatively, the ongoing threat of antibiotic resistance could elevate the importance and demand for drugs like SER-155, which aims to impact antimicrobial resistance.

• Improvements in Operational Efficiency: The company might succeed in significantly reducing its operational costs without sacrificing its research and development efforts. Such improvements could move the company towards profitability faster than expected.

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