Selecta Biosciences prepared investors for a pair of phase 3 data readouts in the first quarter of 2023. The precommercial drug developer kept everyone waiting until late March, but at least the asset delivered.

It might be difficult to tell from the stock price.

Despite a muted reaction from Wall Street, the preliminary data suggest SEL-212 is well positioned to compete in chronic refractory gout. That's a good thing considering the only drug on the market, Krystexxa from Horizon Therapeutics, generated $716 million in full-year 2022 revenue. The competitor expects it to generate peak annual sales of at least $1.5 billion, up from a prior forecast of $1.0 billion. The company originally envisioned peak annual sales of only $250 million.

SEL-212 is unlikely to dislodge Krystexxa as the market leader (or even come close), but it boasts a clear advantage in convenience and could relatively easily compete on price. The drug product should generate peak annual sales of at least $500 million.

Questions remain about the competitiveness of SEL-212 on other key metrics, which can only be answered when secondary endpoints are available later this year. But Sobi is preparing for a regulatory filing in the first half of 2024. The preliminary results and regulatory timing suggest Selecta Biosciences is likely to monetize its royalty stream, and potentially the remaining $65 million in development and regulatory milestones, to reduce financing risk.

Phase 3 Results, Explained

A quick review of gout and the goal of treatment.

• What is gout? Gout is caused when uric acid accumulates in the blood ("serum"). High serum uric acid (SUA) levels can lead to the formation of urate crystals in joints called tophi, which can trigger painful gout attacks or gout flares. The most severe form is called chronic refractory gout. Elevated SUA levels are also associated with high blood pressure, kidney disease, cardiac disease, and increased mortality.
• What is the leading therapeutic modality? Uricase enzymes are highly effective at breaking down uric acid in the blood. Both SEL-212 (pegadricase) and Krystexxa (pegloticase) are powered by uricases. Some individuals treated with Krystexxa for 12 months can even shrink or dissolve their tophi. Similar data for SEL-212 should be available later this year.
• What are the limitations of the therapeutic modality? Uricase enzymes are highly immunogenic. Patients often develop neutralizing antibodies to uricases, which reduce responses to treatment over time.
• How can immunogenicity be addressed? SEL-212 includes nanoparticles of rapamycin called ImmTOR to mitigate the formation of neutralizing antibodies through immune tolerance, while Krystexxa can be dosed with a chemotherapy drug to have a similar effect through immune suppression.

Selecta Biosciences conducted two phase 3 clinical trials to determine the efficacy of SEL-212 in chronic refractory gout. A response was defined as achieving SUA levels of less than 6 mg/dL for 80% of the time during month 6 of treatment.

That might seem like a silly way to determine efficacy, but it's important to prove patients maintain responses when being treated with highly immunogenic therapies such as uricase enzymes. If a sufficient number of individuals are still responding during month 6, then it's a strong signal ImmTOR is keeping neutralizing antibodies in check. Selecta Biosciences also directly measured neutralizing antibody titers as one of the secondary endpoints of the studies, although data aren't yet available.

The company studied two formulations of SEL-212 in both studies: a low dose containing 0.10 mg/kg of ImmTOR and a high dose containing 0.15 mg/kg of ImmTOR. Both formulations contained 0.2 mg/kg of pegadricase. Sobi is likely to commercialize the high dose formulation due to its higher efficacy and clean safety profile.

All individuals were administered treatment or placebo via intravenous (IV) infusion once every four weeks. Among the high-dose groups:

• 56% of individuals had responses in DISSOLVE I (the U.S. study), compared to only 4% treated with placebo
• 47% of individuals had responses in DISSOLVE II (the global study), compared to only 12% treated with placebo

The difference in response rates can be primarily explained by more severe cases in the global study, less genetic diversity in the global study, and regional differences in healthcare access and diet. The heightened role of these factors is indirectly supported by age-related efficacy.

Older individuals typically have higher response rates to uricase enzyme treatment. However, this trend wasn't observed in the global study despite a higher proportion of older individuals enrolled. Among the high-dose groups:

• 65% of individuals 50 years or older had a response in the U.S. study (66% of enrolled individuals were in this age group)
• 48% of individuals 50 years or older had a response in the global study (76% of enrolled individuals were in this age group)

Both studies met all primary endpoints, which compared SEL-212 to placebo – an easy bar to clear. How does the drug candidate compare to Krystexxa?

SEL-212 vs. Krystexxa

Clinical data can be explained with math and with words. Attempts to bridge the two aren't always frictionless – and that likely explains the muted response on Wall Street.

There are two sources of confusion:

• looking back to the phase 2 study that compared SEL-212 to Krystexxa
• looking ahead to how these two drug products might compete in the market

Selecta Biosciences made the gutsy call to compare SEL-212 directly to Krystexxa in a mid-stage study -- and it almost paid off. The drug candidate failed to meet the primary endpoint of proving superiority. However, that doesn't mean SEL-212 is inferior to Krystexxa; that's not what the math says.

The drug candidate had significantly better response rates at individual timepoints and SUA reduction overall. It also had numerically better response rates overall, but missed the primary endpoint of statistical superiority by a single patient (p = 0.053).

Therefore, arguing SEL-212 has limited commercial competitiveness because it's inferior would be inaccurate.

Similarly, making the wrong comparisons between SEL-212 and Krystexxa based on the recent phase 3 results can easily lead investors astray. It's not advised to make direct comparisons between two separate studies. In this case, there are important differences in dose frequency and combination treatments.

So… let's make some comparisons.

Data Source: Clinicaltrials.gov, press releases, scientific literature.

Although SEL-212 will deliver a lower response rate than a combination of Krystexxa and methotrexate, it will be significantly more convenient. Individuals would only need a single IV infusion each month, compared to two per month for Krystexxa (at two hours each) plus the need to take pills daily and weekly. In general, the more complicated a treatment regimen the poorer the compliance.

A significantly more convenient treatment regimen will be more attractive to patients who are more active, still working, and live further from infusion centers. That may not help SEL-212 topple Krystexxa, but it should grab meaningful market share.

It will be important for SEL-212 to demonstrate the ability to reduce tophi. One of the primary goals of uricase treatment is to dissolve years of uric acid accumulation, which could reduce risks and severity of arthritis, kidney disease, and other comorbidities. A counterintuitive data point suggests the drug candidate may disappoint on this key metric.

Individuals in the phase 3 studies had no increase in gout flares while receiving treatment with SEL-212. That may sound like an advantage, but it's common to see an increase in gout attacks during the first three months of treatment with Krystexxa. The unfortunate side effect is thought to be a sign urate crystals are being dissolved.

Selecta Biosciences will report data for this secondary endpoint at an upcoming scientific meeting. Either SEL-212 has a unique mechanism of action (possibly from ImmTOR) that avoids an increase in gout flares while dissolving tophi, or the drug candidate isn't actually dissolving tophi.

Forecast & Modeling Insights

(Increased)

Solt DB Invest has increased the margin of safety range to account for the successful passing of this de-risking event. Some back of the envelope calculations to summarize our model for SEL-212:

• Prevalence: Chronic refractory gout affects an estimated 189,000 individuals in the United States.
• Identified Population: If only 20% are diagnosed, then the treatable population is 37,800 individuals.
• Market Share:If SEL-212 reaches a peak market share of 25% and boasts an average selling price of $50,000 per year ($4,200 per dose), then it would have peak annual sales of $472.5 million.
• Krystexxa has an average selling price of over 6x the conservative figure above.

Our best-case scenario includes monetizing the royalty stream for a significant upfront cash payment. Solt DB Invest now estimates an upfront cash payment could exceed $200 million, up from a prior estimate of at least $100 million. A combination of strong preliminary data, convenience advantages, and double-digit royalty rights owned by Selecta Biosciences provide high confidence in this valuation.

The company can earn $65 million in development and regulatory milestones in the next 24 months, plus an additional $550 million in long-term commercial milestone payments. These could also be monetized for upfront cash payments or credit financing.

Despite a favorable outcome for the SEL-212 de-risking event, our updated midpoint represents a market valuation of only $450 million. That's because of the immaturity and uncertainty of the remaining pipeline, which only has one asset in clinical trials. It should be noted that an acquisition could significantly exceed our midpoint valuation. Selecta Biosciences has above-average acquisition potential.

Margin of Safety & Allocation

(Increased)

Selecta Biosciences is considered a Growth (Speculative) position. The current Margin of Safety for the company based on our 2023 model is below:

• Current Price (market close March 24):  $1.41 per share
• Margin of Safety:               $2.61 per share
• Allocation Range:              Up to 5%

The previous midpoint was $2.03 per share.

Selecta Biosciences reported 153.319 million shares outstanding as of February 24, 2023. The margin of safety range above assumes 172.3 million shares outstanding to account for outstanding warrants, which will dilute your position when exercised.

Further Reading

• March 2023 press release announcing preliminary phase 3 data for SEL-212
• March 2023 presentation providing preliminary phase 3 data for SEL-212
• January 2023 article on phase 2 data for SEL-212, setting expectations for the phase 3 data readout, and insights into pipeline maturity
• January 2023 article describing immune tolerance