Drug developers of all sizes, therapeutic areas, and therapeutic modalities have announced pipeline prioritization plans in 2023. Many have paused or terminated programs to refocus resources. Others have closed their doors indefinitely.

Not all are as advantageously positioned as Selecta Biosciences, although it might not seem that way at first glance.

The immune tolerance pioneer has essentially transformed from a drug developer into a financial instrument. Whereas pre-commercial drug developers have been forced to pick and choose programs to squeeze an extra quarter or four out of their cash runways, Selecta Biosciences simply stopped developing drugs altogether. Instead, the business has seemingly staked its future on an exit, which is tied to the fate of SEL-212, which is in the hands of Sobi.

That's not a bad position to be in. The asset delivered positive results in a phase 3 study in chronic refractory gout and boasted convenience advantages over the leading therapy in the market, Krystexxa, which generated $716 million in full-year 2022 revenue.

Patient shareholders could be rewarded with a share gain of at least 100%, and potentially receive rights to share in the long-term commercial success of the asset.

A Numbers Game Favors an Acquisition

Selecta Biosciences is well positioned for an acquisition due to a few advantageous factors.

• Minimal pipeline: Despite building an intriguing technology stack in immune tolerance, Selecta Biosciences had been slow to advance discovery programs into the clinic. That has ironically turned into an advantage now, as the company's overall cost structure is low and pausing development of early-stage assets is relatively straightforward. It makes a potential acquisition cleaner, as a suitor wouldn't have to offload or unwind assets.
• Balance sheet: The business ended June 2023 with $115 million in cash, which, following the prioritization strategy announced in August 2023, should be enough to fund operations into 2027. That runway will depend on certain future milestone payments from Sobi.
• Milestone and royalty stream: Sobi licensed the commercial rights to SEL-212 in June 2020. The deal included $100 million upfront, lifetime milestone payments of up to $615 million (remaining as of November 2023), and tiered double-digit royalties on net sales.
• Commercial potential of SEL-212: Solt DB Invest expects the asset to have peak annual sales potential of at least $500 million (the company estimates at least $700 million). The lead competitor, Krystexxa, is expected to have peak annual sales potential of at least $1.5 billion.

From a clinical standpoint, the data are supportive of the asset's commercial potential. I previously pored over the phase 3 results for SEL-212, including carefully explaining how uric acid accumulation causes gout, how uricase enzymes such as SEL-212 (pegadricase) and Krystexxa (pegloticase), the challenge of immunogenicity and how to mitigate it, and the clinical results in the context of the competitive landscape.

Although SEL-212 doesn't appear to match Krystexxa in response rates among patients with gout, it can be dosed half as frequently. That's important considering both are administered via a time-consuming infusion. This is key to understanding the commercial opportunity.

From a financial standpoint, a capital light Selecta Biosciences could reap significant monetary rewards from the licensing agreement with Sobi. There's still no guarantee that Sobi will proceed with a regulatory submission in 2024, although in November 2023 it will take over all manufacturing and clinical operations for ImmTOR, the immune tolerance component of SEL-212.

It's important to call attention to one detail in particular. Selecta Biosciences made an unusual decision in 2021 to prepay taxes on future milestone and royalty revenue for SEL-212. That means the first $400 million in revenue from the Sobi licensing agreement, whether milestones or royalties, will be tax free. That could be attractive to a private equity fund or, say, Royalty Pharma.

Forecast & Modeling Insights

(No change.)

Solt DB Invest's model for Selecta Biosciences is based on the value of SEL-212. It assumes a fair valuation of roughly $450 million. After considering all outstanding warrants, the fair valuation for the company is equivalent to $2.67 per share.

A potential acquisition could value the business higher or lower depending on the terms and structure of a deal, including how much future value is reserved for existing shareholders. Given a cash balance of $115 million, the potential to earn near-term milestones of $50 million, and the ability to forgo taxes on the first $400 million in licensing revenue, the return on investment could be favorable even if SEL-212 reaches only 50% of our peak annual sales estimate.

If an acquisition is announced, then Solt DB Invest expects it will likely have to wait until Sobi formally submits a biologics license application (BLA) to regulators. That is expected to occur in the first half of 2024.

It should be noted Selecta Biosciences has also maintained support of a partnership with Astellas Gene Therapy to develop Xork, an IgG protease being developed as a conditioning regimen to address pre-existing immunity to AAV gene therapy capsids. Hansa Biopharma is developing a competing asset with additional licensing agreements, which suggests there's commercial interest across the industry for the drug class. Nonetheless, I'll let future developments and data force us to account for Xork's value.

Margin of Safety & Allocation

Selecta Biosciences is considered a Growth (Speculative) position. The current modeled fair valuation for the company based on our 2023 model is below:

• Market close November 2: $1.18 per share
• Modeled Fair Valuation: $2.67 per share
• Allocation Range: Up to 2.5%

Selecta Biosciences reported 155.203 million shares outstanding as of October 20, 2023. The fair valuation above assumes all outstanding warrants are exercised, which is equivalent to dilution of 21.2%.

Further Reading

• October 2023 press release announcing transitioning of ImmTOR manufacturing and clinical operations to Sobi
• August 2023 research note analyzing pipeline prioritization plans announced by Selecta Biosciences
• March 2023 research note analyzing phase 3 clinical data from SEL-212 in chronic refractory gout

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