Summary
- Gossamer's TORREY showed stat sig PVR improvement, but the 6MWD was under what investors were hoping for; this led to a +70% decline in share price.
- Seralutnib is entering phase 3 with an adapted design (with more severe patients); although the success is less clear, any positive surprises can lead to a meaningful stock rally.
- Gossamer has a strong balance sheet with $300M cash, and it is trading around ~$140M EV, which offers a good risk/reward set-up at this point to enter.
- We are initiating Gossamer with a speculative buy rating based on the compelling risk/reward set-up at this point for an option-sized position.
Background
Gossamer Bio ( GOSS ) is a US-based, clinical-stage SMID cap biotech focusing on small molecule inhibitors in therapeutic areas such as cardiology and CNS-related indications. Based on the progress of the drug development, we believe the key driver of the company's valuation is seralutinib, a TKI similar to Novartis's Imatinib, but targeting slightly different receptors (in-vitro data demonstrated more potent action around PDGFRb, c-kit, and CSF1R compared to imatinib), currently being studied in the pulmonary arterial hypertension (PAH) space. After the disappointing TORREY readout , the company's valuation has collapsed more than 70%, and now the stock is trading under its cash value of $300M.
GOSS Pipeline overview (Company)
The phase 2 Torrey trial data was disappointing, but it wasn't an absolute failure
The problem wasn't that seralutinib totally failed the phase 2 Torrey trial, as it met the primary endpoint (PVR: statistically significant placebo-corrected improvement of 14.3%). Interestingly, the key issue was that the 6MWD (6.5 meters of 6MWD, where 15m was the bar for approval) was under what some investors were expecting. On the bright side, the management indicated that when the subgroup analysis was conducted, seralutinib showed significant improvements in patients with more severe disease states (in patients subgroups with WHO functional class III disease, seralutinib showed a reduction of 21% in PVR and around 37m 6MWD improvement when compared with the placebo group) although the data were nominal and wasn't statistically significant. Furthermore, we note that the phase 2 Torrey trial had some misbalances in the disease severity (more mild patients enrolled into the active arm vs. placebo), which may have contributed to the lackluster performance. Based on this subgroup analysis, the company plans to initiate a pivotal phase 3 study during 2H 2023 with trial design modification (enroll patient population with functional class 3 or class 2 (with higher risk scores) and lower 6MWD and higher PVR baseline characteristics compared to phase 2).
Risks
Clinical risk: as seralutinib has not been approved; there is a reasonable chance that the drug may not pass the threshold for FDA/EMA approval (especially with the launch of Merck's sotatercept increasing the bar for approval). Financing risk: as the company is not yet cashflow positive, there is a probability that the company may have to raise additional capital to fund its operation. Competitive risk: with the compelling data that Merck's sotatercept has shown recently, and with Aerovate's ( AVTE ) AV-101 potentially reaching the market faster than seralutinib, the market opportunity can be lower than what some investors expect. Commercial risk: if Gossamer is marketing the product in-house, there is a probability that the sales ramp could be slower than what the market expects.
Conclusion: Why are we initiating with a BUY rating
We are initiating Gossamer Bio with a contrarian BUY rating because of three reasons, i) the stock is trading under cash value (albeit not negative EV due to debt they hold), and the market expectation is rock bottom, and any positive news should drive the stock at least above the cash value, ii) although lower than expected, seralutinib has shown "approvable" level of PVR improvement and some degree of 6MWD benefits, and if phase 3 focuses on the right population, there is a reasonable chance that the drug can be approved, and iii) the company's robust $300M cash should be enough to finish the phase 3 without external funding, de-risking potential dilution risk. It is true that Merck's sotatercept showed both greater PVR and stat sig 6MWD, and it will be launched during 1H 2023; we believe the difference in mechanism of action and the convenience from the inhaled formulation over infusion should position seralutinib well into the launch, albeit, the market potential may not be a blockbuster opportunity as some investors were hoping for with AV-101 advancing faster than seralutinib with a straightforward inhaled imatinib which may or may not show better efficacy vs. seralutnib. Furthermore, there could be some combination opportunity (seralutinib and sotatercept) that Gossamer may be able to pursue considering the different mechanisms of action, which we believe phase 3 may investigate by adding a sotatercept arm.
For further details see:
Gossamer: Disappointing Phase 2 Results But Too Cheap To Ignore