Seres Therapeutics (NASDAQ:MCRB) is a microbiome company founded in 2010 which is on the cusp of proving whether the "bugs as drugs" concept is viable. Results of fifteen years of research and clinical trials are expected by year end. Investors who want to bet on a paradigm shift that could result in shares doubling by year end should consider initiating a position in Seres.
Seres Therapeutics is focused on a concept called dysbiosis, where the bacteria that live in and on our body are out of balance. Dysbiosis is characterized by a loss of diversity of flora, a lack of beneficial bacteria, and an overgrowth of harmful bacteria. There is increasing evidence in the scientific literature that imbalances in bacteria can cause serious disease. Seres is developing a new class of medicines that are composed of a selection of bacterial spores carefully curated to restore a healthy microbiome and cure diseases such as ulcerative colitis and cancer. The company has expertise in isolating microbes and a "library" of healthy strains of bacteria from healthy donors from which they try to identify organisms that can improve the microbiome of patients suffering from a variety of diseases including cancer and ulcerative colitis.
SER-109 for C. difficile - Will it be the first approved microbiome product?
One of the diseases Seres is focused on is recurrent C. difficile infections. C. difficile is a toxin bearing bacteria that causes diarrhea, nausea, and fevers when it overgrows in the colon. This type of infection can occur after the use of broad spectrum antibiotics and can usually be treated with antibiotics targeting the C. difficile bacteria. However, 20-30 percent of the patients subsequently present with reoccurring infections. An "altered colonic microbiota, primarily due to antibiotics, is the underlying cause of C. difficile infections." According to the American College of Gastroenterology, currently, "the most effective treatment is fecal microbiota transplant (FMT) also known as a stool transplant. In studies, this has been effective in over 90% of patients who received the treatment." This treatment is what it sounds like - stool from a donor is transplanted into the colon. Researchers have found that "superdonors," those whose stool has the greatest efficacy, tend to have the most diverse microbiomes and contain specific strains of bacteria. These "keystone" bacteria are what Seres believes they have identified. The cure rate of FMT, over 90 percent, validates that altering the microbiome in the colon can cure this infection. Seres has a much more palatable and straightforward way to achieve a cure - an orally administered cocktail of purified bacterial spores, SER-109.
Enrollment in a Phase 3 trial using SER-109 for recurrent C. difficile infections was completed on March 30, 2020. Results are due in mid 2020. Investors should be warned that the Phase 2 trial did not show any statistically significant improvement in patients receiving SER-109. Thus, for Phase 3, the company is using 10x the dose used in Phase 2 because they believed that the engraftment of the new bacteria did not occur quickly enough to prevent a C. difficile reoccurrence. Additionally, they believed that some of the patients did not have active C. difficile infection so they changed the study protocol to use a more stringent test to ensure the patients actually had the infection. In retrospect, using PCR testing in Phase 2 was a very poor choice because people can be asymptomatic carriers of C. difficile. Detecting the DNA rather than the toxin doesn't prove patients have an active C. difficile infection. This error in study design is concerning but it was made long ago and new management is in place including a new CEO and a new Chief Medical Officer.
Figure 1 Source: Seres Corporate Presentation, April 2020
Drug development often is an iterative process and time will tell if the changes made will lead to meeting the primary endpoint of the Phase 3 study which is a reduction in C. difficile recurrence at 8 weeks. A key risk in the short term is a poor readout for SER-109. This may bring into question whether the Seres approach is a viable strategy. However, if it is effective, SER-109 could be the first microbiome product approved in the US and could, hopefully, prevent some of the 29, 000 deaths from C. difficile infections that occur annually.
If SER-109 is efficacious and thus approved, SER-109 is likely to become a good choice for recurrent C. difficile infections because there have been hospitalizations and deaths from fecal transplants. Fecal transplants are a burdensome and risky procedure. The FDA has issued a safety alert because donors may have viruses (such as the one linked to COVID-19), pathogenic bacteria or parasites that could be transmitted to a recipient. SER-109 offers an advantage because its manufacturing process carefully ensures the purity of the product and inactivates pathogens thus offering a safer alternative to a fecal transplant. Additionally, patients will likely find a capsule a much more palatable alternative to an invasive procedure.
The CDC estimates that there are a half million C. difficile infections and twenty percent reoccur so the market opportunity is about 100,000 infections annually. Pricing is unknown, but at $1500, a course of treatment that would produce 75 million in revenues annually if they captured a 50 percent market share. There are similar products in the pipelines of other companies, so this may present an additional challenge in the form of competition. More importantly, Summit Therapeutics (SMMT) has an antibiotic in Phase 3 trials for first-line treatment of C. difficile infections. The antibiotic looks very promising in that Phase 2 data has shown a reduction in the number of C. difficile infections that reoccur. The approval and use of this new antibiotic would reduce the market opportunity for Seres which is pursuing an indication for recurrent C. difficile infections. Given this, SER-109 is not very critical to the financials of the company. Approval would, however, provide a very modest revenue stream to propel the company forward as it pursues more lucrative products.
Will SER-287 change the way ulcerative colitis is treated?
The working hypothesis for all Seres's products is that if you can change the bacterial milieu, you can positively impact disease. SER-287 is, currently, being tested in a Phase 2b study of patients with ulcerative colitis. Ulcerative colitis is characterized by inflammation in the colon with symptoms of abdominal pain, diarrhea, and bowel urgency. The standard treatments are anti-inflammatory drugs that tend to suppress the immune system and have an unimpressive record in achieving remission. There is a legitimate need for more benign treatment options such as SER-287.
The theory Seres is working on is that the dysbiotic microbiome may be the cause of the inflammation leading to symptoms.
Mechanistically, our aim with SER-287 is to replace pro-inflammatory bacterial species that may be elevated in patients with ulcerative colitis, with nonpathogenic species found in healthy individuals and thus alter immunological tone in the gut leading to a decrease in inflammation."
That pathogenic bacteria cause UC is supported by the fact that scientists have been able to induce conditions like IBS in mice by giving them "bad bacteria." The most compelling evidence that gut bacteria play a role in diseases like inflammatory bowel disease is that humans do, in fact, respond to fecal transplants. In those who respond, the donor bacteria has been shown to have engrafted in the recipient's colon. In patients receiving fecal transplant, 25 percent had a remission of their inflammatory bowel disease vs. 5 percent for placebo.
The Phase 1 study of SER-287 found that 40 percent of the patients treated with SER-287 daily who first received vancomycin achieved remission vs. none of the placebo patients. Endoscopic results showed dramatic improvements in bleeding and ulceration in some patients who responded to therapy.
Figure 2: Source: Seres April 2020 Corporate Presentation.
Figure 3: Source: Seres April 2020 Corporate Presentation.
The bacterial species in SER-287 were detectable at significant levels even in the weeks following dosing in patients treated in the Phase 1b study. Furthermore, the patients that did achieve remission were patients whose samples showed a shift in the bacterial species towards the ones found in SER-287.
The controlled Phase 2b study will pre-treat patients with vancomycin which is an antibiotic or placebo. The antibiotic is intended to open up an ecological niche. Then patients are randomized to receive either high dose SER-287 or high dose SER-287 with a step down maintenance dose. These results should be available in the second half of 2020 and will be compared to a placebo group. However, there may be significant delays due to the coronavirus. The company has warned that because elective procedures such as endoscopies have been cancelled, there may be difficulties in completing the study which is approximately sixty percent enrolled.
Figure 4: Source- Seres April 2020 Corporate Presentation.
Nestle Health is collaborating with Seres on both SER-109 and SER-287 and has funded a significant part of Seres's costs for research and clinical studies. In return, they have rights to sell these products, should they be approved, outside of the US and Canada.
There are 700 thousand cases of ulcerative colitis in the US and only one-third achieve remission, so there is a very significant market opportunity. The benign side effect profile would make this a highly desirable therapy for patients to consider if efficacy is demonstrated. If approved, given the benign side effect profile, SER-287 may even become a first-line treatment for ulcerative colitis. Additionally, the company will be advancing SER-301, a new cocktail of bacterial spores designed to reduce inflammation and treat ulcerative colitis based on what they have learned about key bacterial species from human data sets.
Whether SER-287 will show meaningful efficacy when results of the phase 2 study are released is an unknown. A drug called Entyvio which is used for ulcerative colitis only achieved remission in 31 percent of patients yet sold approximately 2.5 billion last year. From the perspective of investors, Entyvio shows that there is tremendous upside if SER-287 is shown to be efficacious. Enytvio is approximately $40,000 for a year of treatment. Assuming similar pricing and modest market penetration, SER-287 could easily also become a 2.5 billion dollar product.
Data show gut flora can impact whether a patient responds to cancer treatments.
Partnering with MD Anderson Cancer Center and AstraZeneca (AZN), Seres is committing to exploring the effect of the microbiome on a patient's response to immunotherapy for cancer.
The impact of the gut microbiota on response to immune checkpoint blockade was first studied in mouse models, with landmark publications in Science in 2015 demonstrating that the composition of the gut microbiota could influence the response to immune checkpoint inhibitors targeting the cytotoxic T lymphocyte antigen-4 (CTLA-4) and the programmed death receptor-1 (PD-1)"
Only 20-30 percent of patients respond to checkpoint inhibitors for cancer. Dr. Jennifer Wargo of MD Anderson Cancer Center published a study showing that a higher diversity of gut bacteria including specific species could improve the response of melanoma patients to checkpoint inhibitors. In fact, the presence of some beneficial bacteria can be linked to longer remissions and other species can be linked to advancing tumors.
Figure 5: Seres April 2020 Corporate Presentation.
The microbiome provides many opportunities for Seres to potentially improve outcomes for cancer patients. Seres is working with Dr. Wargo on testing SER-401 to improve outcomes in melanoma patients receiving checkpoint inhibitors. SER-401 consists of some of the bacterial spores identified by Dr. Wargo as being present in patients who responded to immunotherapy for melanoma.
The study, which will be run with MD Anderson and the Parker Institute, will assess the effect of giving SER-401 in combination with Bristol-Myers Squibb's anti-PD-1 checkpoint inhibitor Opdivo. Investigators will pretreat all 30 patients enrolled in the trial with the antibiotic vancomycin for four days to prime the gut microbiome for engraftment of the oral microbiome study intervention. Beyond that, two-thirds of the patients will receive SER-401 and Opdivo, with the remainder taking a placebo on top of the checkpoint inhibitor. The trial has a safety-focused primary endpoint, but Seres is also looking to generate evidence that the bacteria in SER-401 take root in patients and affect key efficacy measures, including response and survival rates."
Patients are taking Opdivo for a variety of cancers, so SER-401 could potentially be tested in a variety of other cancers besides melanoma. Bristol-Myers Squibb (BMY) sold 1.8 billion dollars of Opdivo last year, so this is a large market should SER-401 prove to improve efficacy in any of the cancers for which it is used.
Seres has also committed to a broad collaboration with AstraZeneca to investigate the role of the microbiome in other cancers. Given checkpoint inhibitors like Keytruda by Merck (MRK) are multi-billion dollar drugs, there is significant opportunity should microbiome drugs prove to improve the efficacy of this class of drugs. It is a huge benefit to be able to partner with big pharma who could handle the marketing of SER-401.
There are 100,000 cases of melanoma, and cancer drugs are usually premium priced so this is a significant market opportunity. A much larger opportunity exists if it can be proven that altering the microbiome improves the efficacy of checkpoint inhibitors in cancers other than melanoma. Much more than a billion dollars in sales is very possible if efficacy is demonstrated in several types of cancer.
Management
The development of these bacterial products whether donor derived or synthetically has been an iterative process. Seres has stumbled along the way which isn't entirely surprising because the "bugs as drugs" concept is still considered futuristic. A new management team is in place which includes CEO Eric Shaff and the company has focused on completing clinical trials. There have been multiple Chief Medical Officers during the company's history and just this month Seres hired Lisa con Moltke, MD who has "extensive experience directing development programs, leading clinical teams and interacting with regulatory agencies." Given that these will be the challenges for the company going forward, these skills are crucial.
Financials
Seres ended the last quarter with 95 million in cash. Cash is expected to last through the second quarter of 2021. By that time, if SER-109 is approved, they could begin to have a modest revenue stream. At that time, SER-287 will have either failed Phase 2 testing or will have advanced to Phase 3 testing. SER-401 will be moving to Phase 2 if the data is positive. Dilution may be necessary if SER-287 and SER-401 move forward but good data readouts would be an excellent reason to require more cash. Nestle and Astra Zeneca will pay part of future costs limiting the need for large amounts of additional capital.
Grey Sky Scenario
Seres has been a public company since 2015 and it has surely been a long and winding road for early shareholders. The company is now well positioned at a pivotal point where clinical data is due this year that will transform the company for the better or for the worse. The promise of the microbiome is significant and the data supporting the role of gut flora is plentiful. However, the bet is on whether Seres has picked the right strains of bacteria in the right doses and is using the right protocols for engraftment. The microbiome and the complex interactions between species are poorly understood and only a fraction of the bacteria are spore forming and thus amenable to being placed in a capsule. Thus, it is a real possibility that the alterations in gut bacteria may not be significant enough to impact disease. It is a real possibility that all three of these products will fail to show efficacy and Seres stock will decline precipitously. The microbiome is a field that has no approved products so it is particularly difficult to assign a likelihood of success for these clinical studies.
Blue Sky Scenario
Seres offers an opportunity for investors who wish to speculate on a biotech company at a pivotal point which has a large upside if it is successful. The microbiome has vast potential to revolutionize how disease is treated and the potential to capture large markets for ulcerative colitis and cancers. Investors have to decide if the upside which is substantial is worth the downside risk. Should these studies have positive data readouts, the US market for ulcerative colitis is approximately 7 billion dollars so it is not hard to envision that SER-287 could become a multi-billion dollar product. Checkpoint inhibitors for cancer are hugely successful products with best sellers like Keytruda selling 7 billion last year. If SER-401 can enhance the efficacy of these type of drugs, this would potentially yield another multi-billion dollar product.
Valuation
Seres is trading at $3.50 per share and has a market cap of approximately 250 million. A positive readout for SER-109 would derisk the investment because it would confirm that manipulating the gut microbiome using bacterial spores can cure disease. Moreover, the revenue generated would limit the need to raise additional capital. Peak sales for Seres under the best-case scenario could be conservatively valued at 3 billion dollars. Using the rule of thumb of valuing the company at 4 times peak sales, we come to a 12 billion dollar market cap. This can be adjusted downward assuming only the standard 14 percent chance of achieving FDA approval for each product.
Given the positive data for Phase 1 in ulcerative colitis, it is reasonable to assign a higher likelihood than average for Phase 2 success. Given SER-401 contains bacterial spores already proven by MD Anderson to improve response to immunotherapy, it is reasonable to assign a better than average likelihood of success to the Phase 1 study. The success of SER-109 is not particularly critical given the small revenue it would generate.
We assign a 26 percent chance of SER-287 or SER-401 making it to approval based on available data. Given this, a 12-month price target of $7 is very reasonable assuming two of the three data readouts are positive.
Conclusion
Seres is a particularly high risk, high reward investment. Interest in the microbiome space plummeted after SER-109 bombed in Phase 2 and the same outcome would be expected should any of the trials fail to meet their endpoints. This year will be a pivotal moment of triumph or despair for Seres Therapeutics after a long ride for its investors. The upside is very significant if Seres is successful. However, it is a binary outcome and Seres has no obvious path forward should these drugs fail.
