Seres Therapeutics (NASDAQ:MCRB) is a pure play on microbiome therapies focused on:
- Infectious disease, such as Clostridium difficile infection - the most common hospital-acquired infection in the U.S.
- Inflammatory disease, such as ulcerative colitis
- Metabolic disease, such as liver disease and a form of diabetes
The first of the company's microbiome pills, SER-109, is designed to prevent further recurrence of Clostridium difficile infection (CDI) in patients with recurrent CDI; it is in Phase II trials. SER-262, to be used following antibiotic treatment of primary CDI to prevent recurrence, is expected to enter Phase I trials soon. SER-287, being developed as a potential treatment for ulcerative colitis, is in Phase I trials.
Source: Seres Therapeutics
SER-109: Potential U.S. Market Size and Revenues
Seres estimates 85,000 to 110,000 recurrent CDI patients in the U.S. (with a midpoint of 97,500); presumably, the range is the number of new patients each year. Because CDI is recurring in these patients, by definition the antibiotic treatment for the first occurrence was not enough for a complete cure. The closest alternative treatment to SER-109 may be fecal microbiota transplantation (FMT) - e.g., see www.openbiome.org. The cost of FMT was pegged in a journal article last year at about $1,700. Just as one theoretical upper bound revenue scenario, if SER-109 won FDA approval and were prescribed for 97,500 patients per year at $1,700 per course of treatment, the annual revenues would be about $165 million. Note that if SER-109 reduced recurrent CDI, it could also reduce sales of Shire's (NASDAQ:SHPG) oral vancomycin for treating CDI, the cost of which has been pegged at $3,800 per treatment.
SER-262: Potential U.S. Market Size and Revenues
Seres estimates 640,000 to 820,000 new primary CDI patients in the U.S. each year - i.e., patients who suffer CDI for the first time. SER-262 is designed to be administered to these patients following antibiotic treatment for CDI to prevent CDI recurrence. Just as one theoretical upper bound scenario, if all patients with primary CDI received a treatment course of FDA-approved SER-262, and it worked with 100 percent effectiveness, by definition it would eliminate recurrent CDI. If there were no recurrent CDI, there would be no need for Seres's other pill, SER-109. Therefore, I model an FDA-approved SER-262 as ultimately displacing an FDA-approved SER-109, and having the same annual revenues in the U.S. as SER-109 originally had.
A Note About Hospital Infection Control
C. difficile infection is often acquired in hospitals. The bacteria's spores get onto surfaces, where they are touched by hands and spread. Hospital infection control practices - such as the World Health Organization's meticulous six-step hand-washing process, contact precautions, and disinfection with an effective agent - can limit the transmission of C. difficile. Thus, broader adoption of best practices for infection control would limit the number of primary C. difficile infections, reduce the number of patients needing therapeutic treatment, and reduce revenues for SER-109 and SER-262, if they reach the market.
SER-287: Potential U.S. Market Size and Revenues
Seres estimates that about 700,000 patients are affected by ulcerative colitis in the U.S.; this is a total for the entire population, not an annual rate of new diagnoses. Assuming an average lifespan of 70 years, this implies that 10,000 new cases are diagnosed per year. SER-287 is intended as an induction therapy for colitis patients - i.e., an initial course of treatment - for those who are not cured with first-line therapies, which Seres estimates at half of all patients. (Seres is also developing a follow-up maintenance therapy.) A 2014 journal article reported an estimated cost of $680 million per year for colitis drugs in the U.S. Just as one theoretical revenue scenario, if SER-287 earned FDA approval and was prescribed for half of the 700,000 U.S. colitis patients, that would imply initial sales of 350,000 treatments, and annual sales thereafter of 5,000 treatments (for those newly diagnosed, and not cured with first-line therapies). Suppose this induction therapy garnered an amount equal to the current annual cost of colitis drugs: that would imply one-time revenues of $680 million, and annual revenues of 1/70th that amount, or about $10 million.
Estimated Clinical Trials Cost and Timeline
Based on information from the PhRMA trade association and the FDA, I estimate the following clinical trial costs and timeline:
Remaining Clinical Trial Costs
Estimated Market Entry Date, if Approved by FDA
On its last quarterly analyst call, Seres reported about $303 million in cash, including a $120 million upfront payment from Nestlé Health Science. Seres also expects $30 million in milestone payments from Nestlé Health Science in 2016 for launching the Phase 3 study of SER-109 and the Phase 1 study of SER-262. With an annualized SG&A cost of $29 million, Seres should be able to complete the SER-109 clinical trials without issuing stock or debt. If SER-109 is approved, revenues from that product will help pay for clinical trials for subsequent drug candidates. If not, Seres may need to issue stock or debt, depending on the actual clinical trial costs and the milestone payments forthcoming from Nestlé Health Science.
Converting Revenues to Market Value
An approximate approach to convert potential revenues to potential market value is to multiply annual revenues by the price-to-sales ratio for the industry - in this case, the U.S. pharmaceutical industry. That ratio, provided on the website of NYU Finance Professor Aswath Damodaran, is 4.37. So if all the theoretical scenarios here were realized, beginning with FDA approval of SER-109, SER-262, and SER-287, and with no improvement in hospital infection control, Seres could be worth $765 million ($165 million plus $10 million, times 4.37) on the basis of sales of these three treatments in the U.S. alone. (The company valuation impact of initial sales of SER-287 is not estimated.) The company's current market value is about $1.15 billion. (Note that Seres has an agreement with Nestlé Health Science for the development and commercialization of all three drugs outside of the U.S. and Canada.)
Caution/disclaimer: Do not rely on any part of this narrative, or the headline, in making any investment decision. Owning individual stocks is inherently risky. No investment recommendation is being made here. Seres Therapeutics stock may become worthless at any time, e.g., if the company goes bankrupt. Or the stock price could soar, or do anything in between. Before making any investment decision, consult a financial adviser and read and understand the company's 10-K and 10-Q reports, the company's financial statements, and transcripts of the quarterly conference calls; then make your own decision. Revenue and valuation scenarios presented are simply possible scenarios, not projections. The author is merely an amateur individual investor, with no financial training, and the headline and narrative above may have substantive errors, omissions and/or misinterpretations. In fact, the author wrote this article largely in the hope that other Seeking Alpha readers would identify any such errors and point them out in the comments section. Scenarios presented use points, not ranges, for ease of analysis and discussion. These points are influenced by readily available data, are unlikely to represent the ultimate outcome, and sometimes represent the most optimistic scenario possible, to serve as an upper bound value. In fact, a wide range of values is possible for each data point, including zero, such that revenues for any or all products could be zero. Moreover, company circumstances may change at any time, and any such information will not be updated by this author. For these reasons, do not rely on any part of this narrative, or the headline, for any investment decision.
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