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Readers who follow me will be aware of my enthusiasm about Seres Therapeutics (NASDAQ:MCRB), but just about everyone else is indifferent about this interesting opportunity in the beaten up biotech space currently. My most successful investments revolve around stocks that were not understood by the market when I invested. There are various reasons for this. I got in early with Enphase (ENPH) because I recognised that here was a company with superb technology filling a niche market that was about to explode. The downside was management that wasn’t coping on the financial front, but once that was fixed with superb management, the stock took off. My background is biotech, so I look at a lot of biotech stocks in search of upcoming outstanding performance before the market can see it. Here I refresh a favourite opportunity that has arisen because it is in a new field (microbiomics) that is yet to become firmly established. I’ve written three articles about Seres in 2022 as it fell into a hole and started to recover some ground. I feel that I made some good points in those articles and investors who bought shares in July are up ~50%, but the stock is still down 35% in 2022. Recently I’ve been relooking why Seres is so neglected and I’ve realised that there are additional reasons for it being unloved by the market. Here I explain why I think that good times are coming for Seres. Of course the path to redemption might still have some detours, but I like this stock a lot as it fits the characteristics I set for myself when deciding on investing in unloved stocks.
My earlier arguments for a turnaround for Seres
I’ve actually published 6 articles concerning Seres since September 2021. The first looked at the 5 elements of the Seres “Therapeutics Engine” and Seres failed Phase 2 trial on Ulcerative Colitis. The second considered new data on SER-109 for C. difficile reinfection, while the third addressed Seeking Alpha’s “Red Light” concerning risk of Seres performing badly (which did not deter me). The fourth described a key clinical publication and progress on the Ulcerative Colitis program, while the fifth discussed repricing by Piper Sandler for Seres from $32 to $7 amid gloom about biotech investing. I outlined reasons why I thought that SER-109 is on track for FDA BLA approval. The sixth article (in July of this year) addressed criticisms of Seres business from another Seeking Alpha author.
There is a lot of information in the above articles, and for investors who want more I’ve published 9 more Seeking Alpha articles on Seres dating back to May 2016. I’ve been interested in Seres for a long time because I see it as the company that started the commercialisation of the microbiome, which has still barely happened, but it is coming. I was not moved to invest in Seres until July last year and only in July 2022 did I get serious about taking a stake. I’m picky about my biotech investing because there are many reasons why biotech investments fail.
Why the above good news isn’t enough for the market
My take on the above is that Mr Market remains unconvinced about microbiomics as a major new direction in biotech. There are reasons for this scepticism, perhaps the biggest being that until something exists it hasn’t happened. Currently the FDA has not approved (Biologic Licence Application) any microbiomics products that consist of living organisms.
Microbiomics has emerged as a new field of biotech from the practice of “poo” transplants, where faeces from a healthy individual is (after cleanup) transplanted into an individual to correct a gut problem. It is clear that drugs based on cleaned up donor material is the first stage in the evolution of products based on mixtures of cultured bacteria. Such lab-based products will be easier to satisfy quality control criteria, but the field hasn’t matured to this stage yet. And so companies are seeking to produce products that can get FDA approval even though they are sourced from complex donor materials.
The challenge of pooled microbiomic drugs
The fact that the FDA is yet to approve a BLA (Biologic Licence Application) for any microbiomic drugs, may be because of the murky past of the source material of first generation microbiomic drugs. The FDA seems worried especially about pooling of donor material. For example in the era of COVID, there may be concern about SARS-CoV-2 virus contamination. Several companies have encountered problems with the FDA in seeking approval for their initial microbiomic products. In recent news MaaT Pharma’s microbiomic drug MaaT013 for treating steroid resistant graft-versus-host disease has been on hold for a year, causing a halt to its Phase 3 trial in the US. The reason revolves around clinical and manufacturing issues. Now the FDA has responded to MaaT’s submissions that the halt is not lifted. Trial activities continue in Europe for the MaaT013 drug, and this Phase 3 trial in Europe will be extended.
Finch Therapeutics’ (FNCH) C. difficile Phase 3 trial experienced similar difficulties with the FDA in March and although some difficulties have been resolved, its Phase 3 trial is yet to restart.
News from the company: Q2 2022 earnings call transcript
I like hearing the quarterly earnings commentary from the CEO. On August 3 CEO Eric Shaff updated on progress across the business, which included clinical developments, commercial readiness, manufacturing and strengthening the balance sheet.
Clinical developments
While FDA approval is always a big hurdle to overcome, and more-so when the product under consideration is the first in class of living microbiome products, Eric Shaff is confident that Seres is on track for FDA approval of SER-109. This confidence is based on Seres satisfying some key requirements by the FDA, including the clinical trial data surpassing FDA statistical thresholds and a safety profile that exceeded FDA’s expectations (326 patients with 24 week followup). This includes 77 patients with an initial C. difficile recurrence who showed 93.5% sustained clinical response, which was of specific interest to healthcare providers. This means that SER-109 has the potential to benefit all patients suffering from recurrent C. difficile infections. SER-109 has breakthrough designation and it expects priority review and hopefully FDA approval in H1 2023. Seres is exploring the possibility of SER-109 treatment not just in hospitals and aged care facilities, but also in an outpatient context.
In the Q2 2022 discussion, CSO Matthew Henn reported on developments concerning another infectious program for hematologic cancer patients at serious risk of bloodstream infection, especially from drug resistant bacteria. This Phase 1b program is for patients receiving allogeneic stem cell transplants who are not only at risk of bloodstream bacterial infections, but also graft versus host disease. The microbiomic product SER-155 has the potential to address both of these problems. This program collects a lot of biomarker data which provides evidence more generally for treating serious bloodborne bacterial infections. More importantly Seres sees SER-155 as the gateway product for a series of difficult bacterial infections. A lot of data is being collected which goes to getting rid of pathogens in the gut, and getting establishment of good bacteria. There is big interest in both gut and bloodstream infections.
Commercial readiness
Seres has in place a global alliance with Nestle Health Science (and in particular its gastrointestinal subsidiary Aimmune Therapeutics). The Nestle and Seres teams have been working together closely on both North American launch as well as in the rest of the world. This includes market education and payer engagement. Nestle knows this market well with other gastrointestinal products. Seres notes strong buy-in from the medical community as this is a major health problem with 170,000 cases without adequate treatment options and 20,000 deaths annually just in the US. Investors who want to get a feel for how the Seres-Nestle partnership has developed since 2016, it is worth looking at the Q&A for the Q2 2022 earnings transcript. This made me pretty comfortable that the SER-109 product rollout is already really well thought through and developed.
Manufacturing of SER-109
Seres has been working for some time on scale up of manufacturing of this complex product so that it can address not just the US and Canadian markets but also global markets for treating recurrent C. difficile. In addition to its in house activities it also has a major manufacturing partnership with Bacthera, which has deep experience of anaerobic organisms.
Strengthening the balance sheet
Seres burns a lot of cash in building these new generation microbiomic products and building up for rapid global product launches. It expects a $125 million milestone payment on FDA approval, but as a precaution against delay with FDA approval the company recently raised an additional $100 million. Cash position as of June 30 was $291 million which provides more than 12 months runway, with a further $125 million expected. This puts the company in a sound financial position, and allows for delays in FDA approval of SER-109.
Where Seres fits in the big picture
Those who share my interest in understanding context when considering investment in new fields might find a review of the origins of gut microbiome research in Europe helpful. In the late 1880’s there was a lot of interest in gut microflora. By the late 1950’s the first attempts to treat C. difficile infection were made using faecal enemas. So the recent progress with treating C. difficile reinfection has a 70+ year history.
The transformational change away from “poo” transplants towards a more structured approach to microbiome drugs became more formalised with the NIH funded Human Microbiome Consortium in 2007, which published 2 major articles in 2012 (“Structure, function and diversity of the healthy microbiome” and “A framework for human microbiome research”). This began to characterise the components of various human microbiomes (e.g. gut, skin, vagina). These studies were “big science” with genome studies identifying thousands of bacteria from hundreds of healthy adults.
Seres was founded in 2010 by successful biotech entrepreneurs Noubar Afeyan and David Berry around the time that the microbiome began to attract corporate attention. The company raised more than $130 million prior to listing in 2015 where it raised a further ~$134 million. The IPO was successful with closing price up substantially on the first day to give a market cap of $1.9 billion. Significantly ~ half of the pre-IPO investment came from Nestle Health Science and shortly after listing Seres announced a major marketing deal with Nestle Health Science to commercialise several product areas in a deal said to be worth $2 billion. This partnership is a key discriminator between Seres and other microbiomics companies.
There are now a number of microbiomics companies with a really strong intellectual base, but the scale up and productisation is mostly immature in these companies and preparation for sale of products even less well developed.
Conclusion
Biotech investing is not for the faint hearted. It involves product developments that can go on forever, leading to the need for a lot of patience and being able to cope with dilution as your company’s need for cash seems never-ending. Finding a sweet spot for closing out your investment can be tortuous as you balance the excitement of possibly participating in fabulous share price growth against getting out with a happy reward (or seeing your company disappear due to failure of a drug development). I have a small portfolio of great companies that are slowly beginning to show their true potential. I didn’t invest in Seres in the early days (2015) because my take was that it was overhyped, notwithstanding that it was making a good start at pioneering microbiomics, a new field in the biotech space. Sure enough the stock drifted after listing to crash in 2016 with the failure of a Phase 2 clinical trial for treating C. difficile reinfection. It struggled until mid-2020, when it had a successful Phase 3 trial concerning treating C. difficile recurrence, to put it back in the game. A year later (August 2021) another Phase 2 failure, this time involving treatment of Ulcerative Colitis led to another crash. It has struggled since despite another successful Phase 3 trial concerning recurrence of C. difficile. The recent signs of life relate to the prospects for FDA approval of SER-109, the C. difficile drug. I’ve descried why I think FDA approval and partnership with Nestle on global sale of SER-109 for treating the major hospital (and aged care facility) infectious disease is going to define the arrival of microbiomic drugs and also will most likely provide cash to keep going with new microbiomic drugs for difficult bacterial infections and also inflammatory bowel disease. I think we are less than 12 months away from events that will redefine the value of MCRB and hopefully make this the latest member of my outperforming stock portfolio, joining Enphase (ENPH) in the solar space and BYD (OTCPK:BYDDF) in the electrification of transport. Since June the share price has begun to recover from a dive to $2.50. Comparing this price with the mid-2015 price of ~$40 must hurt, but an entry price ~10 lower gives me some confidence that good times might be not too far away.
I am not a financial advisor but I pay attention to emerging technology areas, where outstanding returns are possible if an area is identified which has big upside, plus there is a stock that has the potential to be a major player and the timing is right. I write about investment areas that interest me and attract my investment, but these invariably involve emerging opportunities that involve risk. I hope that my commentary about Seres Therapeutics is of interest to you and your financial advisor as you consider the risky end of your portfolio, noting that I’m not giving you investment advice.
Editor’s Note: This article was submitted as part of Seeking Alpha’s stock catalyst competition which runs through August 31. With cash prizes and a chance to chat with the CEO, this competition – open to all contributors — is not one you want to miss. Click here to find out more and submit your article today!
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