Via SeekingAlpha.com

I continue to be on the lookout for small-cap biotech stocks that are dramatically undervalued. Those that have proven platforms that trade at a significant discount and are prime for a big move. My last article published April 27th featured MEI Pharma (MEIP) which in my opinion was underappreciated following a large partnership deal. Within a month of my article, the stock was up ~30% as investors started to realize the value of the partnership. An almost identical situation has emerged with Selecta Biosciences (SELB) and investors that take advantage of the current weakness should be nicely rewarded.

Usually deals involving small-cap biotechs are very light on upfront payments, and instead, are back-end loaded on milestones so that little risk is taken by the buyer. Therefore, it is extremely rare, as in almost never, that small-cap companies pocket $100 million or more upfront. MEI Pharma was able to do it a couple months ago and now immune modulatory gene therapy company Selecta Biosciences has matched it. The deal is with rare disease company Sobi for ex-China rights to the tolerogenic ImmTOR immune tolerance platform with pegadricase, also known as SEL-212, which is in clinical development for the treatment of gout. However, this deal stands out to me because of the hefty $75 million upfront cash payment combined with a $25 million stock investment at a massive ~80% premium to the current price. In addition, the ability to get an additional $630 million more in milestone payments and double-digit tiered royalties on net sales.

This deal was a homerun for Selecta. It de-risks their ImmTOR platform by adding another partner and provides a nice cash injection which also allows them to participate in upside with milestones and royalties with a partner with an established track record in rare disease. Small-cap biotechs do not have the experience or resources to bring drugs to market and execute commercially against the big time players. Obviously, some have done it, but it is an anomaly. To increase shareholder value, small-cap stocks position themselves either for an acquisition or partnership. These partnerships provide not only proof of concept for additional deals but also revenue to fund their growth that allows for the probability of either more partnerships or an acquisition. This is the cycle and this deal Selecta pulled off provides both.

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On announcement of the deal, the stock initially traded up ~10% in after-hours trading. However, with little explanation, the stock is now down ~35% following the deal to settle at a ridiculously low market cap of under $230 million. Since the stock is not followed by many analysts, there were only two that commented on the deal. Stifel analyst Derek Archila placed a Hold rating on the stock with a sort of odd reasoning that there would be few catalysts left for the stock in the short term even though phase 2 clinical trial results of SEL-212 are expected to be released in Q3 2020, and of course, Selecta needs the drug to succeed to receive the milestone payments. However, he did put a $4 price target on the stock which represents 50% upside. More bullish is H.C. Wainwright analyst Raghuram Selvaraju who upgraded the stock to Buy and slapped a $10 price target on the stock, representing 280% upside citing the attractive terms of the deal and the quality of partner in Sobi in the rare disease space.

In my opinion, Selecta Biosciences is a steal at the current valuation with now ~$150 million of cash on hand, a solid technology platform, a big-time partnership and an attractive takeover target as gene therapy continues to gain momentum. With multiple shots on goal, I think the stock could easily double or triple from current levels.

Potential of ImmTOR as a Platform is Massive

The ImmTOR platform developed initially at MIT helps mitigate one of the biggest problems in biologics therapy development such as gene therapy and monoclonal antibodies, of eliciting an immune response to the treatment. The body’s reaction to these therapies is to develop neutralizing antibodies which minimizes the efficacy of the treatment and its duration of effectiveness. A lot of drugs fail clinical trials because of this impact and over 100 drugs currently on the market have immune related side-effects on their labels. The potential is massive. The nano-particle based platform encapsulates specific compounds, such as rapamycin, that helps regulate the immune response and allows the drug or therapy to be tolerated with efficacy increased and side-effects decreased. They have initially deployed the technology in a few disease states and likewise inked several partnerships.

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*Image from 2020 Company Presentation

The technology is suited extremely well for gene therapy with the commonly used adeno-associated vectors (AAV) because the body develops neutralizing antibodies against the vectors, causing the therapy to lose effectiveness. The development of antibodies is also the reason gene therapy treatments cannot be done a second time. ImmTOR inhibits the immune response to the vector allowing it to work properly. In addition, Selecta is the first company to show evidence to support the potential to re-dose patients with gene therapy. This is extremely important for pediatric conditions where the gene therapy expression is diluted over time. Therefore, the ImmTOR platform could re-dose individuals who prove to have been under-dosed initially and restore expression in growing pediatric patients over time.

*Image from 2020 Company Presentation

The first evidence of the ability of the ImmTOR platform to allow re-dosing and increase gene expression was recently published by Selecta. They utilized the ImmTOR technology with a gene therapy for alkaline phosphatase expression and illustrated not only the immediate benefit of the first dose but a 4-fold increase in transgene expression following a repeat dose, whereas the control without ImmTOR provides minimal transgene expression over time.

*Image from 2020 Company Presentation

The promise of the ImmTOR technology for gene therapy has resulted in partnerships with Spark Therapeutics for Hemophilia A for $30 million upfront, consisting of $15 million cash and $15 million stock along with milestone payments. At the end of 2019, Selecta partnered with AskBio for using ImmTOR with AAV gene therapy for the treatment of Pompe disease, consisting of $7 million upfront and over $200 million in milestone payments. I consider these more proof of concept type partnerships with more to come based on the re-dosing data that emerges. However, the recent deal with Sobi with $100 million upfront solidifies the technology potential.

Why did Sobi pony up $100 million?

It’s not everyday a small biotech can get $100 million upfront for a treatment that hasn’t even entered Phase 3 yet. The SEL-212 data illustrates the flexibility of the platform. Currently, pegylated uricases are approved therapies for the treatment of gout that bring in over a billion dollars a year in sales. However, their efficacy and safety are limited due to anti-drug antibodies that the body develops over time. Simply, using ImmTOR in combination with uricase could solve the antibody issue and only requires monthly dosing instead of bi-weekly like the standard of care. Data from the Phase 2 dosing study illustrates the ability to stop anti-drug antibody development as well as relief of flares over time. Top line data from the Phase 2 clinical trial in head to head with standard of care (COMPARE) will be available Q3 2020.

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*Image from 2020 Company Presentation

Financials and Risks

Investors in small-cap biotech stocks know risks are high, as prices regularly swing wildly in either direction based on catalysts. With a stable of partnerships and a large cash position, I believe the risk at current levels is buffered. With already nearly $75 million of cash on hand, and now the addition of another immediate $75 million, Selecta is well-funded out to 2023. The company has a relatively low cash burn rate for a biotech at $10-15 million a quarter which should now decrease with Sobi overtaking development costs of SEL-212.

Conclusion

Selecta Biosciences is significantly undervalued following their partnership with Sobi. This is a technology platform company that has now solidified its value with this partnership. The number of indications ImmTOR could help treat is tremendous and the value substantial. It is trading at almost cash levels with several partnerships and a recently signed lucrative partnership with Sobi that gives Selecta a good chance of getting SEL-212 to market and commercially successful. The stock is currently trading at a ridiculously low market cap of only ~$230 million. I don’t think it will be undervalued for long.

Disclosure: I am/we are long MEIP, SELB. 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.