This is a deep dive into the mechanics of immune tolerance to introduce the company's technology platform and upcoming asset-centric de-risking events. The next article will dig into the nuances of the pipeline, recent changes quietly tucked into an investor presentation (a partner dropped out), and the SEL-212 data readout.

If you invest in the same trendy stocks as everyone else, then your returns will follow the same trends as everyone else. As Cathie Wood and the inexperienced analysts thrust into decision-making roles at Ark Invest have shown in recent years, that's not always a good thing.

The Ark Genomic Revolution Fund is now losing to the S&P 500 since its inception in 2014, as well in the last one-, three-, and five-year periods. For all the talk of CRISPR and cell therapy and liquid biopsies and genetic testing and genomics and disruptive innovation, investors would've been far better off simply buying a boring ETF that tracks the broader stock market.

Stock gains driven by hype and momentum usually aren't durable. You can't pay your rent or mortgage with innovation and disruption. Stock gains driven by execution, on the other hand, can drive durable success and valuation increases.

One problem is that real-world innovation – solving pain points encountered by customers or an entire industry, not just appearing on a slick slide deck – is not always sexy, easily understood, or an SEO term that can be abused by the financial media. Impactful innovation can go underappreciated for long periods of time. Immune tolerance checks all the boxes of addressing sticky challenges in biologic drug development – including being an under-the-radar opportunity among investors. But that could change within the next few weeks pending the results of the first-ever phase 3 data readout from Selecta Biosciences.

What Is Immune Tolerance?

Whereas a vaccine works by provoking an immune response to a specific trigger, immune tolerance aims to coax the immune system into a passive response to a specific trigger. Nerds in lab coats call these molecular triggers antigens.

Antigens are usually a foreign substance and often from a foreign invader, such as a bacterium or virus. In the biological arms race known as survival, our immune systems have evolved complex safeguards to quickly identify antigens, neutralize them, and store memory of the encounter for future surveillance.

A simplified sequence of events:

• Dendritic cells are the judge of the immune system that determine if a substance is an antigen. Dendritic cells play PAC-MAN by engulfing molecules they encounter and displaying them to other parts of the immune system. This is why dendritic cells are called antigen-presenting cells (APCs).
• At any given time, the immune system randomly creates trillions of variations of naïve T cells, each with a T cell receptor (TCR) for a specific antigen. This includes antigens that have never before been encountered (crazy, right?).
• If the substance engulfed and presented by a dendritic cell is an antigen, then naïve T cells with the corresponding TCR will become active. This can trigger an immune response that rallies other cells in the immune system to seek out the antigen threat, neutralize it, and memorize it. This is an immunogenic response.
• If the substance engulfed and presented by a dendritic cell is not an antigen, then naïve T cells with the corresponding TCR will become regulatory T cells (Tregs) that tolerate the presence of the substance in the body. The rest of the immune system is not activated against the molecule captured by the dendritic cell. This is a tolerogenic response.

This works great when the antigen is a legitimate threat, such as a protein from a respiratory virus. For a timely example, coronavirus vaccines provoke an immune response to the spike protein expressed by SARS-CoV-2 viruses. This step occurs after the insertion of the microchip.

Unfortunately, the "shoot first and ask questions later" directive of the immune system can backfire when harmless molecules are identified as antigens. This is why pollen kicks our ass. Similarly, autoimmune disorders are caused by the immune system incorrectly labeling the body's own proteins as antigens (referred to as autoantigens in this case) and attacking the cells and tissues where they're located.

Immunogenicity also throws a wrench in the safety and efficacy profiles of biologic drugs.

The immune system correctly identifies biologic drugs as foreign substances, but incorrectly assumes they're threats. The result: neutralizing antibodies (NAbs) often form, reducing the effectiveness of biologic drugs by, well, neutralizing them. NAbs are sometimes referred to as anti-drug antibodies (ADAs).

Many enzymes are derived from bacteria. Although enzymatic therapies might initially relieve symptoms in, say, metabolic diseases, the gradual increase in NAbs can significantly reduce the benefit a patient receives within weeks of beginning treatment. An enzymatic therapy could be completely ineffective within months.

Meanwhile, most gene therapy modalities shuttle genetic material into cells with inert viral capsids. The most common is an adeno-associated virus (AAV) vector. However, AAV capsids are highly immunogenic. The strong immune response and surge in NAb formation creates two primary challenges.

1. First, immunogenicity is the reason AAV gene therapy is a "one-and-done" treatment. It's not because the treatment represents a cure, but because subsequent doses would be ineffective (due to NAbs) and dangerous (due to follow-on immune responses). As a result, drug developers only get one chance to administer an AAV gene therapy and generate a therapeutic response, which leads to high doses being tested. High-dose gene therapy can drive liver toxicity and has been responsible for patient deaths in clinical trials and marketed products.
2. Second, adenoviruses circulate during cold and flu season. As a result, between 20% and 60% of Americans have pre-existing immunity to the most-used AAV capsids, again due to the existence of NAbs. These individuals are generally ineligible for gene therapy treatment due to efficacy and safety concerns.

The immunogenicity of biologic drugs is one of the primary reasons clinical trials fail in biopharma (under the guise of safety or efficacy challenges), but that doesn't mean approved drug products make it to market unscathed. Take the world's bestselling drug, the antibody Humira (adalimumab), as an example.

• One study found 70% of healthy volunteers develop NAbs to Humira after a single dose.
• Among rheumatoid arthritis patients who developed NAbs, only 3.9% achieved long-term remission.
• Among rheumatoid arthritis patients who didn't develop NAbs, roughly 34% achieved long-term remission.

Wouldn't it be great if every individual had a chance to receive the full benefit of Humira, or an enzyme therapy, or a gene therapy?

Immune tolerance is an emerging field of drug development aimed at coaxing the immune system into a passive response to specific antigens. In other words, immune tolerance focuses on the creation of Tregs that tolerate a specific molecule of interest, whether a biologic drug or autoantigen. There are two ways to induce immune tolerance:

• Ex vivo approaches engineer Tregs in the lab and administer them to patients as cell therapy. Private startups are developing Treg cell therapy to treat everything from type 1 diabetes to rheumatoid arthritis.
• In vivo approaches aim to trigger the formation and/or expansion of Tregs inside the body. The challenge is to selectively induce tolerogenic responses to specific antigens or autoantigens, rather than subduing large parts of a patient's immune system.

Selecta Biosciences is developing a technology stack based on the in vivo approach for applications ranging from enzymatic therapies to gene therapies.

How Does Selecta Biosciences Approach Immune Tolerance?

There's a good amount of criticism to go around for Selecta Biosciences, especially past development decisions or management's addiction to dilution. But the new management team has refocused the technology platform on the most valuable opportunities while building out the technology stack and cash balance.

• ImmTOR is the foundation of the tech stack. This tool comprises the immunomodulator drug rapamycin encapsulated in nanoparticles. Rapamycin is widely used in organ transplant procedures to broadly subdue a patient's immune system, which would be unsuitable for immune tolerance tools. However, the nanoparticle formulation is preferentially shuttled to the body's lymphoid system for interrogation (that's how we evolved defenses against viruses, nature's nanoparticles), which is exactly where dendritic cells travel when presenting a potential antigen. That allows ImmTOR to induce antigen-specific Treg formation when dosed together with biologic drugs such as enzyme therapies and gene therapies.
• ImmTOR-IL is a next-generation formulation that combines ImmTOR and interleukin-2 (IL-2). Whereas ImmTOR induces antigen-specific Treg production, IL-2 helps to expand Tregs already present. The synergistic effect can drive a 3x increase in total Treg formation. Early studies suggest the next-gen tool could reduce the frequency of dosing and/or increase the potency of lower doses. In fact, the company was surprised to discover ImmTOR-IL had an effect at doses thought to be below the therapeutic window of ImmTOR alone. If Selecta Biosciences ever becomes a trendy biotech stock and snags a valuation over $1 billion, then ImmTOR-IL will be the driving factor.
• Whereas ImmTOR and ImmTOR-IL reduce NAb formation from the dosing of biologic drugs, Xork takes aim at pre-existing immunity. Xork is an immunoglobulin G (IgG) protease that temporarily chews up NAbs already present in the body with the goal of creating a brief window for administering biologic drugs. The tool will initially be used as a pretreatment regimen for AAV gene therapies for individuals with high pre-existing NAb titers who would otherwise be ineligible. This next-gen IgG protease appears to have advantages over imlifidase from Hansa Biopharma, which was the first to be licensed for AAV gene therapy indications. Somewhat confusingly, IgG proteases are themselves immunogenic, but Xork has the lowest immunogenicity in the global pipeline.

Selecta Biosciences has also tapped Ginkgo Bioworks to develop next-generation AAV capsids with lower immunogenicity, higher capacity, and improved tissue targeting. Those tools are in earlier development, but could round out the immune tolerance tech stack in gene therapy. The portfolio of tools could be mixed and matched to address specific challenges across therapeutic modalities and indications.

For example, Selecta Biosciences and its collaborators could use Xork to address pre-existing immunity in a patient population to chew up existing NAbs, provide an initial dose of an AAV gene therapy combined with ImmTOR-IL to prevent the formation of new NAbs, and then if necessary provide subsequent doses of AAV gene therapy and ImmTOR-IL to drive optimal responses in all patients over time.

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.

Recent developments suggest Selecta Biosciences is steering closer to this best-case scenario today than 12 months ago. The company has now licensed three different tools to four different partners:

• Sobi acquired rights to SEL-212, an enzymatic therapy combined with ImmTOR, for the treatment of gout. Topline data from two phase 3 clinical trials are expected within the next few weeks.
• Sarepta Therapeutics is exploring the use of ImmTOR for multiple muscle-directed gene therapy programs.
• Takeda has licensed ImmTOR for multiple liver-directed gene therapy programs in lysosomal storage disorders and has hinted at using ImmTOR across its gene therapy pipeline. SEC filings refer to this as the "initial" license agreement. Takeda could emerge as a potential suitor, especially as it navigates pressure from shareholders to solidify long-term growth opportunities.
• Astellas Gene Therapy has licensed Xork as a potential preconditioning agent to address pre-existing immunity to the viral vector used in its Pompe disease gene therapy candidate AT845.

Solt DB Invest expects ImmTOR-IL to replace ImmTOR, which appears to have been the R&D focus in the last 12 to 18 months. The next-generation immune tolerance tool is still being optimized and developed, but the first licenses could be doled out in 2023.

It's important to note two companies have licensed and subsequently abandoned ImmTOR for liver-directed gene therapy applications: Spark Therapeutics and AskBio (this has not been announced yet). These are two of the leading companies in gene therapy, having invented AAV gene therapy and created know-how that led to the first regulatory approvals. Astute investors will observe that both licenses appear to have been terminated by the same individual, Dr. Kathy High, who led Spark Therapeutics and later joined AskBio.

Forecast & Modeling Insights

To be provided in the next article.

Margin of Safety & Allocation

(No change.)

Selecta Biosciences is considered a Growth (Speculative) position. The current Margin of Safety for the company is below:

• Current Price (market close January 13):  $1.69 per share
• Modeled Fair Valuation:    $2.03 per share
• Allocation Range:              Up to 5%

Selecta Biosciences reported 153.031 million shares outstanding as of October 28, 2022. The margin of safety above assumes 172.3 million shares outstanding to account for dilution from outstanding warrants.

Further Reading

• January 2023 press release providing a business update and early outlook for the calendar year
• January 2023 investor presentation
• January 2023 article from BioPharma Dive discussing European regulators weighing new safety guidance on Novartis' Zolgensma after patient deaths
• August 2020 article in Nature about high-dose AAV gene therapy deaths in clinical trials

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