Seres Therapeutics (NASDAQ: MCRB) released the much anticipated results of a Phase 2 trial of its microbiome therapy, SER-109 in the treatment of recurrent Clostridium difficile infection (CDI). The study failed to meet its primary end point of a significant relative reduction in CDI compared to placebo (Link to press release). The results differed markedly from an earlier Phase 1b study and the stock fell 75% as a result. Sell-side analysts reiterated bullish ratings on the company after the study results.
The purpose of this article is to analyze the results of the Phase 2 study, provide hypotheses for the likely failure of this study and provide an updated valuation of the common stock for the company in light of this new development. We have earlier initiated coverage on the company with a Buy rating (Link to article).
We are reiterating a Buy rating on the common stock of Seres Therapeutics with an updated price target (intrinsic value based on enterprise DCF method) = $12.32.
Figure 1: Seres Therapeutics, common stock price chart (source: Bloomberg.com)
Analysis of Phase 2 study results of SER-109 in the prevention of recurrent CDI and why the study differed from the earlier Phase 1b study?
The Phase 2 study of SER-109 was done in patients who had three or more occurrences of CDI within nine months. It is apparent that this was a very sick and hard-to-treat patient population, which had failed treatment with multiple other antibiotics. The relative reduction in recurrence of CDI did not achieve statistical significance compared to the placebo after eight weeks of follow-up after single dose administration of the microbiome therapy. In patients with age more than 65 years, SER-109 resulted in statistically significant relative reduction in incidence of CDI compared to the placebo. However, this primary endpoint was not met in the overall population as well as patients with age less than 65 years.
Some likely explanations for these unexpected results of the study are given below.
In the Phase 1b study, there were two patient cohorts in the study drug arm. The first patient cohort was given the microbiome therapy over 2 days, while the second patient card was given this therapy in a single day. The cure rate was similar in both patient cohorts. In the Phase 2 study, a different formulation of SER-109 was used. The concentration of bacteria spores was increased in order to decrease the total number of capsules given to the patients. Although the management does not think that a change in the SER-109 formulation could have caused different study results, more details of the microbiome from the Phase 2 study (types of bacterial species, etc.) is awaited.
Another surprising result was the stratification of results by patient age. It is to be noted that most patients with multiple recurrences of CDI are usually of advanced age since the immune response decreases with increasing age. It is possible that elderly patients have 'immune senescence' that is suppression of the immune system. Microbiome therapy like SER-109 may activate the lymphoid tissue in the gut and activate the immune system.
This might explain why the study results were significant in elderly patients with age more than 65 years. This still offers hope for elderly patients with multiple recurrences of CDI who could be a candidate for this therapy. Moreover, these elderly patients may be poor candidates for colonoscopy and fecal material transplantation (FMT), which is the only current available therapy in CDI with multiple recurrences. Cardiac risk factors and poor hemodynamic status due to severe CDI may prevent these patients from being ideal candidates for colonoscopy. Oral administration of SER-109 capsules in combination with other antibiotics might be a safer treatment option for these patients.
Another reason for the discrepancy in study results could be the placebo effect, which was especially dominant in patients with in the age group of less than 65 years. CDI recurrence rate was lower in the placebo arm in this age group.
The management has not released complete details of the study results. The study results released last week were interim after 8 weeks of follow-up. An open-label extension phase of the study is ongoing with a follow-up period of up to 24 weeks after administration of the microbiome therapy. It is also unclear if patients were continued on other antibiotics like oral vancomycin after a one-time treatment with SER-109. Multiple courses of antibiotics may in fact sometimes be the precipitating factor for recurrence of CDI by altering the gut flora. Stopping all antibiotics and trying to restore the normal gut flora through therapies like SER-109 may be a better approach in these patients.
Inadequate sample size for the study can never be ruled out as the reason for failure to reach statistical significance, especially when there is a positive trend in favor of the study treatment. It should be again kept in mind that this is a very sick and hard to enroll study population. Based on the epidemiological data for recurrence rate for CDI, only 4% of all patients with primary CDI may have disease severe enough to have three or more occurrences within a year. A larger sample size in the ongoing extension phase of the study may throw more light on this.
Another recent Seeking Alpha article (link to article) hypothesized that patients in the Phase 2 study were given a one-day gap between gastric decontamination and administration of SER-109. We find this hard to believe since the ideal approach to FMT is to stop all antibiotics, decontaminate the bowel using cleansing therapies, keep the patient fasting overnight, and administer the microbiome therapy the next day. We doubt that this protocol was violated in the Phase 2, randomized, placebo-controlled study but more details might emerge if the study results are published in detail.
It is also possible that higher doses of bacteria spores in capsules may be needed to ensure adequate delivery to the distal colon. Significant differences in CDI cure rates have been seen with FMT through nasogastric tube, rectal retention enema, and colonoscopy. Colonoscopic FMT has been shown to have cure rates in recurrent/refractory CDI of 89-100 percent. Cure rates with retention enema have been lower, ranging from 70 to 93 percent.
While we continue to speculate about why the study results were unexpectedly different, the study data is being analyzed for more details, and a full review of the study has not been completed yet. Microbiome therapeutics is still a new field and first generation microbiome therapies (like SER-109) may be replaced by second-generation microbiome therapies like SER-262, which is a synthetic microbiome therapy (unlike SER-109, which uses fecal material from healthy donors).
SER-262 may become a standard of care adjunct therapy in severe cases of primary Clostridium difficile infection:
SER-262 is being tested in primary CDI, which is a huge healthcare burden (causing more than 700,000 cases per year in the US alone), and $3.2 billion of annual costs in the U.S. Current first-line therapies for primary CDI like oral metronidazole in non-severe cases and oral vancomycin in severe cases are inadequate. About 20-30% of patients with primary CDI have recurrence of the infection after being treated with the first line antibiotics.
About 45 to 65% of cases with first recurrence of CDI have second recurrence. On the other hand, cure rates of more than 90% have been seen with FMT, even in recurrent CDI where 45-65% of cases have recurrence with antibiotic treatment. Microbiome therapies like SER-262 may find use as an adjunct therapy with oral vancomycin in cases of severe primary CDI, which constitutes about 20% of primary CDI cases (about 140,000 cases annually in the U.S. alone).
Valuation of the common stock:
SER-109 in elderly patients with one or more recurrences of CDI:
About one-third of total primary CDI and two-thirds of healthcare facility-associated primary CDI occur in the elderly population and 20% have first recurrence. An estimated market size in the U.S. is about 70K cases per year. SER-109 is an ideal adjunct therapy to be combined with antibiotics like metronidazole and oral vancomycin in these cases. The cost per patient for oral vancomycin is $680 and for oral fidaxomicin is $2800 (10-day therapy). We assumed per patient cost = $1000 for SER-109 and the probability of reaching the market = 60% at present (successful Phase 2 results have been shown in elderly population). We assumed peak market penetration = 60%.
Peak annual sales of oral vancomycin in the U.S. alone were $332 million. Annual sales of fidaxomicin, another antibiotic that is used as a third line agent were $51 million in the U.S. one year after launch. Annual sales of fidaxomicin have lagged behind oral vancomycin since it is more expensive ($2800 per patient vs. $680 for oral vancomycin) and the recurrence rate is similar for both antibiotics.
SER-262 in severe cases of primary CDI as adjunct therapy with oral vancomycin:
About 20% cases of primary CDI can be classified as severe cases. These cases have higher chances of relapse, and often need to be hospitalized. SER-262 is an ideal candidate as adjunct therapy with oral vancomycin in these cases. This represents a huge potential market for SER-262 (about 140K cases per year in the U.S. alone). In our DCF valuation spreadsheet, we assumed peak market penetration = 60% in this indication, cost per patient = $10K and probability of reaching the market = 10% (average for drugs about to enter Phase 1). As the drug achieves more success in clinical trials, the probability of reaching the market will increase adding a significant future revenue stream from this indication.
SER-287 and SER-301 in inflammatory bowel disease like ulcerative colitis:
This clinical indication could represent the significant revenue driver for Seres Therapeutics in future. About 1.8 million cases of IBD exist in the U.S. alone with about 128,000 cases added per year. Since this is a chronic disease, each treated case could represent a significant revenue driver. We assumed annual cost per patient = $5K, the probability of reaching the market = 10% (molecules are going to enter Phase 1), and peak market penetration = 10%.
Even using these conservative estimates, we calculated the fair value per common share of Seres Therapeutics = $12.32 using the enterprise DCF method (discount rate = 15% for first 5 years, then decreased to 12% and 10% close to patent expiry in 2033). This represents about a 26.6% upside from the closing price of $9.73 as of 8/1/2016 close. The spreadsheet for this calculation can be downloaded here.
Additional experimental clinical indications like adjunct therapy with cancer immunotherapy, prevention of gut bacterial translocation after bone-marrow transplantation and metabolic diseases like diabetes could also add to future revenue. The company had cash/cash equivalents = $193.2 million and additional short-term investments = $110 million at the end of first quarter 2016 (total cash reserves of about $304 million) to advance its R&D programs (enough to last till 2018), and has a licensing deal with Nestle Health to develop and commercialize SER-109, SER-262, SER-287 and SER-301 outside the U.S. and Canada.
In conclusion, we remain optimistic about future prospects of Seres Therapeutics' product pipeline and consider the results of this Phase 2 study as growing pains in the young field of microbiome therapeutics. Even with these study results, SER-109 could find clinical use in elderly patients with one of more recurrent episodes of CDI. Second generation microbiome therapies like SER-262 may have higher clinical efficacy than first generation therapies like SER-109. We expect the major revenue drivers in future as SER-262 in severe cases of primary CDI and SER-287/SER-301 in inflammatory bowel disease. We consider the common stock as undervalued at the current price and are reiterating a Buy rating with a price target (intrinsic value) = $12.32.
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Disclosure: I am/we are long MCRB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial advisor before making any investment.