Summary
- $230 million market cap is extremely low after signing a $630 million agreement with Sobi, which gives $100 million upfront and tiered royalties for Gout indication.
- Potential of ImmTOR technology platform in a wide variety of gene therapy and biologic treatments is massive.
- Analyst price targets following deal represent 50-300% upside.
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.
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.
