Description

This writeup is a little rough because the opportunity is now and I wanted to get it out there.

Selecta is being dropped from the R2000, the funny thing is it is not even in the Russell 2000.  SELB was dropped last year.  However, as of a couple weeks ago it was being added back (as one of the last rats onto the ship before departure), but now it seems that it is not making it, and the algos who bought in anticipation are selling, indiscriminately…

Russell 2000 rebalance happens every year in late June.  Friday, April 28^th is “rank day” where the valuation used to determine inclusion is measured.  As of Friday April 14^th, the estimate for the cutoff was $160m and Selecta was projected by many to be in.  However, I believe with the recent ­rally in many names Selecta is out and is now selling off rather dramatically as a result.  If you look to last year when Selecta actually got dropped from the R2000, it bottomed 3 days after the 2022 rank day (not a prediction it will rally next week like it did in early May of last year, as different market, blah blah blah)

The price action is an attractive opportunity because Selecta’s future is bright.

Selecta BioSciences (NASDAQ: SELB) is a $160 million market cap, clinical-stage biotech company focused on commercializing ImmTOR (Rapamycin embedded in a synthetic polymer (PLA-PEG) nanoparticle) which selectively (hence the company name) reduces unwanted immune responses which prevent otherwise effective therapies from being used. 

Selecta is currently pursuing ImmTOR across three broad use cases: 

1. Enabling the use of otherwise effective biologics where the biologic’s immunogenicity blocks adoption.
2. Enabling redosing of gene therapy and/or enabling gene therapy treatments in patients with a pre-existing immune response to the viral vector used to deliver the gene therapy.
3. Combining ImmTOR with a Treg selective IL-2 molecule (ImmTOR-IL) to be a "first-in-class" antigen specific IL-2 therapy for autoimmune disease.

SEL-212

We believe that recent Phase III data for Selecta’s lead drug candidate, SEL-212, for the treatment of uncontrolled gout, establishes SEL-212 as an approvable and clinically relevant drug.  We expect SEL-212 will become clinically and commercially relevant in the treatment of uncontrolled gout, likely both taking meaningful share from Horizon Therapeutics’ blockbuster Krystexxa ($870.5m consensus 2023 revenues having only penetrated ~10% of uncontrolled gout patients) and by expanding treatment penetration within the 160,000 estimated uncontrolled gout patients. 

SEL-212 is underappreciated by the market with analysts and investors uncertain of its commercial opportunity in competition with Krystexxa and Krystexxa in combination with Methotrexate given Krystexxa’s established market position, Horizon’s highly effective salesforce, and Krystexxa plus Methotrexate’s better efficacy (which we believe is of no moment).

Selecta has already out-licensed commercial rights to SEL-212 to Swedish Orphan Biovitrum AB (SOBI) a well-respected rare disease specialist.  The exact terms of the license are not public but we know Selecta is due double digit tiered royalties (which some believe go as high as 17%) plus development/regulatory milestones of $65 million and $550 million of commercial milestone opportunities. SOBI is solely responsible for submitting the BLA, and the costs of commercialization.  SELB has also pre-paid the taxes on royalties for SEL-212 up to a certain undisclosed very high amount (see page F-35 of the 10K).  Assuming an average 12% royalty and SEL-212 sales of $250m-$750, net income to Selecta could be $30m to $90m annually by the end of the decade.

DISSOLVE Trials

DISSOLVE 1 (in the US) and 2 (internationally) are the pivotal Phase 3 trials Selecta and SOBI will use for their BLA application.

Despite strong data, Selecta stock declined slightly (after an initial pop to $1.50) on the recent March 2023 release of top line data from the DISSOLVE1 and DISSOLVE2 Phase 3 clinical trials.  The lack of enthusiasm, ostensibly, is because efficacy slightly trails Krystexxa when given in combination with another drug, Methotrexate.  However, a response rate in-line or better than Krystexxa + Methotrexate was never expected.  Rather, SEL-212 is a clinically and commercially viable treatment because:

1. SEL-212 is more efficacious than Krystexxa alone,
2. Methotrexate is contra-indicated for many (if not most) uncontrolled gout patients, and so Kry+M’s better efficacy is of no moment for most uncontrolled gout sufferers.
3. Methotrexate is a nasty drug with both unpleasant side effects and non-trivial risk of death from overdose.  By taking SEL-212 uncontrolled gout patients can get better efficiacy than Krystexxa alone, and avoid
4. SEL-212 is more convenient.  SEL-212 requires half the infusion dosing frequency of Krystexxa (important for a 4-5 hour visit), a similar infusion safety profile and the ability to avoid the risks and side effects of taking Methotrexate. 

Efficacy Comparison

Against Krystexxa alone

SEL-212 did run a head-to-head trial (COMPARE) which while showing a better response rate (61% for SEL-212 to 47% for Kry), the trial failed to show statistically significant superiority.  SEL-212’s Ph3 response rate ranged between 47% (DISSOLVE II trial internationally) to 56% (DISSOLVE I trial in the US) which, cross trial, can be compared to Kry’s 39% response rate in Horizon’s MIRROR trial.

Against Krystexxa plus Methotrexate (Kry+M)

While Kry+M’s headline response rate is impressive at 71% compared to SEL-212’s 47%-56% response rate, SEL-212 allows the prescriber and patient to benefit from:

1. Less frequent infusions (1/month vs 1/biweekly) which is valuable given the infusion takes 2-3 hours and the patient needs to remain at the infusion site to protect against anaphylaxis for an additional 2 hours).
2. Avoiding Methotrexate which many gout sufferers cannot take, and which has difficult side effects, and can be fatal if taken improperly.

Furthermore, SEL-212’s response rate in patient’s over 50 years of age (which comprise the vast majority of gout sufferers showed a 65% and 48% response rate in the US and international trials.  SEL-212 US trial response rate in patients over 50 is very similar to Kry+M.

A recent Needham doctor survey (April 13, 2023) estimated that 43% of their uncontrolled gout patients would be on SEL-212.  Horizon estimates that the market opportunity for Krystexxa is $1.5 billion (which is only a 15% penetration of the uncontrolled gout population).  This is up significantly from several years ago and reflects the better response rates achieved with Kry+M over Kry alone.  We believe that SEL-212 will further expand the market, however assuming it does not, and achieves 41% of $1.5 billion would imply $615m annual revenues for SEL-212 and over $70m in annual net income for Selecta.

With the Phase III complete, the focus on SEL-212 shifts to SOBI.  Selecta has guided to SOBI submitting a BLA to the FDA in 1H 2024, which would imply approval in 1Q2025.  Selecta is eligible to receive $65m in development and regulatory milestones over the next two years, the majority of which I would expect on the delivery of the data package to SOBI this year.  Royalties should commence in 2025 with a slight lag to the commercialization of the drug.  Given this timeframe, we would not be surprised to see Selecta monetize some or all of its SEL-212 royalty rights to bolster its balance sheet.

Selecta’s Pipeline

In addition to SEL-212 Selecta has a deep and broad pipeline of drug candidates and partnerships as it develops its ImmTOR technology.  In total Selecta spent $45m in R&D outside of the development of SEL-212 in 2022.

In biologics, we believe SEL-212 is valuable as a proof of concept in using ImmTOR (and/or the next generation ImmTOR-IL) to enable the use of highly effective but intolerably immunogenic biologics. Selecta is currently in pre-clinical work to use ImmTOR in conjunction with an IgA Protease to target IgA nephropathy.

In Gene Therapies, Selecta started a Phase 1 trial for SEL-302 which targets Methylmalonic acidemia, a rare disease affecting less than 1 hundred live births annually in the United States.  Furthermore, Selecta has a number of pre-clinical collaborations: Astellas (Pompe disease), Sarepta Therapeutics (Duchenne muscular dystrophy and Limb girdle muscular dystrophy), Takeda (two indications for lysosomal storage disorders) which have the potential to drive licensing revenue and royalties. 

In Tolerogenic Therapies for Autoimmune disease, Selecta is studying ImmTOR-IL at the pre-clinical phase for numerous autoimmune indications and for an additional “undisclosed” indication.  While this is all very vague, this is a shoot the lights out category where success can mean billions of dollars in annual sales.

I don’t underwrite the pipeline.  I look at SEL-212 and say its worth more than thw whole company, even if they spend some material amount of SEL-212’s value on a failed exploration of the pipeline.  So effectively, you get the pipeline for free.

FINANCIALS

Cash

As of 12/31/22, Selecta had $144.4m of cash, sufficient to fund the company’s business plan through “mid-2024”. 

Debt

Selecta has a $25 million term loan with Oxford Finance LLC and Silicon Valley Bank which begins amortizing monthly in April 2023 as well as 1.25m of Letters of Credit.

No Revenues

While, Selecta’s did have material revenues of $110.8m in 2022 this was reimbursement from SOBI for the DISSOLVE trial expenses and will go away after 2023 as will the clinical trial expenses.

At-the-Money Offerings

Selecta does have a $75m ATM with SVB Leerink which through 2022 had been largely unused.  At these stock prices, we do not expect them to use it or pursue an equity raise.  Selecta did raise $38m by selling 27.4m shares and 20.57m warrants ($1.55 strike) for a combined price of $1.41(25% above current prices if you value the warrant at 10c) in April of 2022.

Selecta’s future financing needs will be largely driven by their expectations for receipt of the $65m in development and regulatory milestones from SOBI over the next two years as SEL-212’s BLA is prepared, submitted, and SOBI and Selecta await approval. 

Our expectation is that Selecta monetizes a portion of its milestones and/or SEL-212 royalties to extend its cash runway from “through mid 2024” to “through mid 2025” or “through end of 2026” rather than sell equity.  Selecta would need to raise approximately $50-$100m.  While the $65m SOBI regulatory and development milestones and collaboration license payments could meet these needs, we would not be surprised to see Selecta monetize a portion or all of its SEL-212 royalties and milestones.

RISKS

Horizon is studying Krystexxa +Methotrexate in a monthly infusion to come in-line with SEL-212’s dosing.  The trial is currently still enrolling and is expected to conclude in October 2023.  We do not have an opinion of the probability of success of Horizon’s trial, but even in-line dosing would not relieve patients of the burden of taking Methotrexate.

Selecta is a clinical stage biotech company with no commercial products and significant annual research and development expenses.  While cash needs and potentially profit may come from the development, approval and commercialization of SEL-212, or from collaboration license payments, dilutive equity offerings are always a risk.

Catalyst

Abatement of R2000 rebalance selling pressure over the next month

Surprise inclusion in R2000 over the next month

Sarepta collaboration license

SOBI development and regualtory milestone payments

Approval of SEL-212

Commencement of clinical trials for autoimmune indications

Disclosure of "undisclosed" tolerogenic therapy for an autoimmune disease

positive data from Ph1 trial in MMA

New collaborations and associated license revenue