Technology stacks don't guarantee the success of a business, but they do provide optionality if properly built out. Financial markets and investors are still undecided on the "if" part for Selecta Biosciences.

The company has finally deprioritized wholly-owned gene therapy programs and is doubling down on ImmTOR-IL, which has been my best-case scenario for creating shareholder value since December 2021. The development, regulatory, and commercialization risks of adeno-associated virus (AAV) gene therapy assets simply outstrip the capabilities of a small precommercial company.

It's not all smooth sailing though. Ideally, Selecta Biosciences would find development and commercialization partners across the industry to advance the technology stack within AAV gene therapy. Although that potential remains intact, a shifting landscape presents new challenges and raises new questions about the market opportunity for this part of the company's portfolio.

Shuffling ImmTOR Licensees

Selecta Biosciences lost a couple of logos among ImmTOR licensees and potential licensees.

Autoimmune is In, AAV Gene Therapy is Out‍

• Takeda Pharmaceuticals, the most important ImmTOR licensee, made a strategic decision to terminate all internal AAV gene therapy development. The move impacted Selecta Biosciences, Codexis, and potentially Poseida Therapeutics.
• The partnership could have been worth up to $1.124 billion in total milestones plus commercial royalties. We previously considered Takeda as a strong potential suitor for Selecta Biosciences. #nailedit
• Takeda's strategic decision comes soon after the global drug developer forked over $4 billion for rights to a single autoimmune drug candidate from Nimbus Therapeutics – not an acquisition, merely the rights to a drug candidate. A similar portfolio led Merck to acquire Prometheus Biosciences for $10 billion last month, while drug developers such as DICE Therapeutics and Ventyx Biosciences have been two of the best investments in recent years.

A Different Approach in Muscle Tissues

• Sarepta Therapeutics had long been exploring ImmTOR's potential in muscle diseases with a research license. It had until June 2023 to opt-in for a clinical license in a formal deal, but made a no-go decision in March 2023.
• Immune tolerance will have greater value in tissues with high immunogenic responses (such as the liver) and little value in tissue with limited immune responses (such as the brain or eye). Skeletal muscle tissues can be immunogenic in certain conditions, although most safety issues for AAV gene therapy targeting muscle tissues arise when the drug payload enters the liver.
• Sarepta Therapeutics recently developed the MyoAAV vector with increased muscle selectivity, which reduces liver accumulation by 50%. That made immune tolerance tools like ImmTOR less valuable for the company's specific approach and pipeline focus.

Don't AskBio, Don't Tell

• ‍Although the collaboration with AskBio remains active according to SEC filings, Solt DB Invest's assessment concludes this partnership is essentially inactive. The duo agreed to explore the use of ImmTOR in certain rare and orphan genetic diseases, but AskBio has deprioritized these indications in favor of neuromuscular and central nervous system conditions where immune tolerance has limited value.
• AskBio is one of the most important companies in AAV gene therapy. Its founder, Dr. Jude Samulski, is the inventor of AAV vectors. The company's tech is a core part of gene therapy assets from Novartis, Pfizer, and Takeda (well, not anymore…).

Selecta Biosciences has also added a logo to its gene therapy partner roster in 2023.

• Astellas licensed the company's IgG protease, Xork, as a potential preconditioning regimen for its Pompe disease gene therapy candidate. The deal could be worth up to $340 million in total milestones (primarily post-commercialization) and single-digit royalties.
• Many individuals in the general population have neutralizing antibodies to adeno-associated virus (AAV) vectors used in gene therapy candidates because adenoviruses naturally circulate during cold season. These individuals – up to 20% of Americans – are ineligible for treatment.
• Xork temporarily chews up neutralizing antibodies that are already present in individuals, which could allow anyone to be eligible for AAV gene therapy. The Astellas partnership is valuable because Xork needs to proceed through initial clinical testing to validate efficacy and safety as a standalone agent, which would then allow it to be used as a preconditioning regimen for any AAV gene therapy. If successful, then the Astellas partnership could allow Xork to be licensed broadly across the industry – although this alone doesn't overcome the shifting landscape in AAV gene therapy.

Selecta Biosciences may pick up another logo soon. The company paused development of SEL-302, an AAV gene therapy candidate for methylmalonic acidemia (MMA), until it finds a partner for the asset. The phase 1 clinical trial was initiated at the end of 2022, but the first patient hasn't been dosed yet. Management decided dosing the first patient would be unethical if the business couldn't commit to the two-year study.

It's important to acknowledge the nuance and context of an early-stage AAV gene therapy asset. The ReiMMAgine study of SEL-302 is designed to enroll six patients in total, but with only one patient receiving treatment at a time.

• Patient 1 will be dosed and followed through Day 112. The individual will receive the AAV gene therapy, but not ImmTOR. They'll receive steroid prophylaxis instead.
• An independent data safety and monitoring board (DSMB) will review the data before Patient 2 is eligible for dosing. Patient 2 would receive the AAV gene therapy and a low dose of ImmTOR. They will be followed through Day 196.
• This sequence would continue for six patients receiving the same dose level of AAV gene therapy and two possible dose levels of ImmTOR through Day 672.
• The U.S. Food and Drug Administration (FDA) was open to amending the clinical trial protocol to study re-dosing of AAV gene therapy enabled by ImmTOR. This would likely only occur after the first three patients were dosed in Cohort 1, or after Day 336.

Due to the rarity of MMA and the study design, ReiMMAgine is a single-center clinical trial being conducted by the National Institutes of Health (NIH). The trial is already set up, clinical material has already been manufactured, and the specific NIH lab overseeing the study has the world's largest MMA patient database. That makes it likely for Selecta Biosciences to find a partner for the asset. (That doesn't mean the asset will be successful – this asset makes no contribution to our model at this time.)

Doubling Down on ImmTOR-IL

Selecta Biosciences is deprioritizing wholly-owned gene therapy programs to focus its limited resources on getting SEL-212 over the finish line with Sobi, completing the initial development work for Xork with Astellas, and developing ImmTOR-IL for autoimmune indications.

This is exactly aligned with our best-case scenario. As Solt DB Invest wrote when initiating coverage of Selecta Biosciences in January 2023 (bold in original):

Due to the increased development, regulatory, and commercial risks of gene therapy and the company's limited resources, Solt DB Invest's best-case scenario includes a deprioritization of wholly-owned gene therapy programs. More specifically, the optimal development path for increasing shareholder value includes licensing the tech stack to larger companies in gene therapy programs, while focusing the wholly-owned pipeline on enzymatic therapies and an emerging suite of autoimmune indications combining ImmTOR-IL and autoantigens.

Selecta Biosciences will initially focus ImmTOR-IL on autoimmune diseases of the liver, specifically those driven by T cell responses. Immune tolerance can potentially tamp down these responses by influencing dendritic cells.

There's an initial focus on three diseases:

• Primary biliary cholangitis (PBC)
• Primary sclerosing cholangitis (PSC)
• Autoimmune hepatitis

The company believes focusing on autoimmune diseases in the liver could eventually lay the foundation for a broader autoimmune portfolio including drug candidates targeting type 1 diabetes, multiple sclerosis, systemic lupus erythematosus (SLE), and other indications. It's interesting to note that interleukin-2 (IL-2) plays a key role in triggering type 1 diabetes – and ImmTOR-IL specifically utilizes an IL-2 protein as part of its immune tolerance mechanism.

All ImmTOR-IL work remains in preclinical development. Selecta Biosciences expects to initiate investigational new drug (IND) enabling studies in 2023, which suggests the first asset won't enter the clinic until late 2024 or early 2025.

Forecast & Modeling Insights

(No change.)

To be blunt, most of the technology stack from Selecta Biosciences is in the earliest stages of development. It would therefore be inappropriate to assign meaningful valuations to any of these tools, including Xork and ImmTOR-IL.

• Xork could contribute value to our models sooner. Hansa Biopharma is developing an IgG protease named imlifidase as a preconditioning regimen for AAV gene therapy. The drug is already approved for organ transplant indications and has been licensed to gene therapy developers, including Sarepta Therapeutics and AskBio, for longer. Positive news from its development could reduce development and regulatory uncertainty for Xork.
• The company is determining the best path forward for its IgAN program(s). Management confided that it's easier to deprioritize this part of the portfolio because it's for a singular indication, whereas ImmTOR-IL has broader potential in autoimmune indications.
• If the company is deprioritizing wholly-owned gene therapy programs, then it may also walk away from a collaboration with Ginkgo Bioworks for engineered AAV capsids. This would be good for Selecta Biosciences, which is on the hook for up to $207 million per project and up to $1.1 billion total. Payouts would include a hefty amount of dilution, too. Such a decision would be less favorable for Ginkgo Bioworks, as Selecta Biosciences represented over half of the company's milestone payment pipeline added in 2022, but it has many shots on goal.

Our model continues to reflect meaningful commercial potential for SEL-212 in chronic refractory gout and, importantly, significant potential to monetize the royalty stream closer to FDA submission or approval. This may be negatively impacted by additional data for secondary endpoints to be shared in the second half of 2023.

Additionally, investors should keep in mind the shifting landscape in autoimmune diseases. Novel cellular, genetic, and orally available therapeutic modalities could create a step-change in efficacy, safety, and convenience compared to existing treatment options. ImmTOR-IL may get squeezed out of certain indications (such as type 1 diabetes), although delivering in niche indications (PBC, PSC, lupus, and so on) could still represent a sizable collective opportunity. It's way too early to draw conclusions in either direction.

Margin of Safety & Allocation

(No change.)

Selecta Biosciences is considered a Growth (Speculative) position. The current Margin of Safety for the company based on our 2023 model, primarily reflecting the commercial value of SEL-212, is below:

• Current Price (market close May 3):  $1.15 per share
• Modeled Fair Valuation:               $2.61 per share
• Allocation Range:              Up to 5%

Selecta Biosciences reported 153.427 million shares outstanding as of April 28, 2023. The modeled fair valuation above assumes 172.300 million shares outstanding.

Further Reading

• March 2023 research note discussing the DISSOLVE I and DISSOLVE II clinical trial results
• January 2023 research note discussing the pipeline assets of Selecta Biosciences
• January 2023 research note discussing immune tolerance

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