MCRB - Seres Therapeutics: VOWST's Time To Shine

2023-08-03 15:37:39 ET

Summary

• Seres and Nestlé launched the first oral drug to prevent recurrence of Clostridioides difficile infection (CDI).
• CDI treatment wrings high costs from the healthcare system and individual patients, ensuring broad insurance coverage in the next few months.
• There is little current competition and no apparent rivals lurking in the space for the near future.
• The CDI market is significant, and may be understated by management.

Seres Therapeutics ( MCRB ) is a small ($615 million market cap) commercial-stage company developing microbiome therapeutics (Figure 1) for serious diseases. On June 5, Seres and 50-50 partner Nestlé ( OTCPK:NSRGY ) launched VOWST (live fecal microbiota spores), the first orally administered microbiota-based therapeutic to prevent recurrence of Clostridioides (Clostridium) difficile infection ('CDI') in adults following antibacterial treatment. Recurrent CDI ('rCDI') is a deadly ( 30,000 annual U.S. fatalities ) and costly burden to the U.S. healthcare system ($2.8 billion rCDI inpatient costs) and individual patients (around $13,000 out of pocket spending). Developing an impactful answer to this high unmet need led to Seres being profiled as one of the TIME100 Most Influential Companies on June 21. The huge market combined with Nestlé’s sales force will likely lead to a successful launch.

Figure 1. Seres Pipeline

How Big is the Unmet Need?

To a health plan, estimated per-patient per-year costs ranged from $93,979 for a second rCDI to a staggering $231,149 for third or greater rCDI, which is the study population of Seres’ pivotal ECOSPOR III trial. Those figures are in 2022 inflation-adjusted US$, even with capped hospitalization reimbursement. Compared to that, the VOWST 3-day oral regimen costs $17,500 . Furthermore, since health plans already reimburse hospitals for far less than the resources consumed to treat rehospitalizations due to rCDI, leading to $5,000-$14,000 losses per patient (in 2018 $), hospitalists may likely be incentivized by administration to discharge patients with VOWST prescriptions after the first recurrence, passing the cost back to the insurer (or the patient if not covered).

But why would any insurer want to cover VOWST? Simple math. According to the U.S. Centers for Disease Control and Prevention (‘CDC’), the incidence rate of CDI in 2021 was 110.2 cases per 100,000 persons. Assuming 35% of initial CDIs recur and 60% of these further recur, a plan with 100,000 will expect 39 first, 23 second, 14 third and 8 fourth rCDIs, respectively. Without prevention, the rCDIs will cost the plan around $2.2 million to treat the second, $3.2 million for the third, and $1.9 million for the fourth rCDIs, respectively. VOWST trials only went to 24 weeks, but assuming VOWST only prevents half of annual cases, it makes much more sense for any plan to allow every rCDI patient to receive VOWST (total cost = $675,000) and save $3.6 million (net savings = $3 million). This doesn’t even consider any benefits to the members’ quality of life, loss of productivity, etc.

Financials and Takeaways

The stock has been especially volatile after April 27 when the Food and Drug Administration approved VOWST and shares tanked 17%. Seres received Nestlé’s $125 million milestone payment for FDA approval on May 30, sparking a two-week 31% rally. The TIME article was the last hurrah; shares have been recovering but are still down 16% since. Seres had $106.5 million in cash as of March 31, then drew the first tranche of $110 million in April from a new $250 million senior secured debt facility from Oaktree Capital Management. Q1 net loss was $71.2 million; with the milestone, Seres' operations is set for at least a year with no further need of financing.

No one should expect much VOWST sales in Q1. Analysts seem to concur that Seres’ revenue would mostly consist of the milestone, with the average at $125.67 million . As of mid-July, only two national pharmacies were supporting the launch. Most independent pharmacies and retail chains don’t contract with specialty sources. Therefore, the main risk to a successful early launch is access (how/where to get the drug), although availability will likely improve in the future.

Competition is another risk, but there are no other advanced rCDI drug candidates on the horizon. Finch Therapeutics Group ( FNCH ) discontinued the CP101 PRISM4 Phase 3 trial. Thus, the remaining rivals are the invasive fecal microbiota transplantation (‘FMT’) and Ferring Pharmaceuticals’ Rebyota (live fecal microbiota), which was approved by the FDA in November. FMT or Ferring’s single-use enema may be appropriate for some, such as patients with difficulty swallowing, but oral capsules are definitely more convenient. Given a choice, VOWST is likely to be more effective; Rebyota was modeled as having 70.6% chance of no diarhhea from CDI for 8 weeks after treatment, compared to 57.5% for placebo. In ECOSPOR III, actual (not modeled) CDI recurrence was lower (12.4%) in the VOWST group vs the placebo group (39.8%).

To conclude, Nestlé has the marketing muscle ( 150 gastrointestinal specialists and a 20-man hospital team) to fill the urgent rCDI need that has few options. Health plans will eventually cover VOWST, but 3 months after approval is too soon to check if the drug is covered now. From past formulary reviews of different launches, Elevance Health ( ELV ) is usually a very early adopter of new drugs. With a membership of 47.5 million U.S. lives, they will have an estimated 18,000 members experiencing rCDIs yearly. From the above model, Elevance stands to save more than $1.4 billion by covering VOWST. Conversely, a mere 30% penetration of this segment represents $100 million in annual VOWST revenues. This is just from one health plan with a 7.27% market share in 2021.

CDC incidence rates and a U.S. population of 331 million calculates to 365,000 rCDI cases per year, all of whom will require antibiotics. Thus, Seres’ given total addressable market (‘TAM’) of 156,000 appears conservative. The magic number for blockbuster status is 57,200 patients, or a little above a third of Seres' TAM estimate. How doable is this and how soon? Back in 2019, Ferring's vice president of microbiome research, Ken Blount, said of Rebyota: "we can easily envision 50,000 patients within the first year benefiting from this therapy, if you look at the current treatment paradigms.” If an enema was expected to easily achieve that level, certainly a pill can.

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