Shares of Seres Therapeutics (Nasdaq: MCRB), a research stage biotech company looking to treat gut related diseases by using the body’s own bacteria fell over 60% on July 29 as the company announced disappointing results of its SER-109 Phase II clinical trial against the disease causing gut bacteria Clostridium difficile (C. diff.). 

In my recent BTP article featuring Seres I asked: “What could go wrong? As with any biotech company at this stage of development, the clinical trials could go wrong, the Food and Drug Administration could reject any drug candidate, or management could lay an egg.”

 Unfortunately, the unthinkable happened and the company’s leading product failed in its highly publicized Phase II clinical trial.  This is the risk one takes when investing in research stage biotech companies and why it is important to include these speculative shares in a diversified portfolio.

According to the company’s press release, SER-109 did not perform better than placebo in the trial although 44% of those treated with SER-109 had a recurrence of C. diff. versus 53% of those who received placebo.  The results did not meet the study’s end point, were worse for patients under age 65, and overall were not statistically significant.  This is a major setback for investors and public health as C. diff. is a serious and growing problem that is likely to worsen over time as the bacterium develops further drug resistance to currently existing antibiotics.

It is not certain what this means for SER-109 or the company at this point. Seres is expected to compare the failed trial to its Phase I study which was impressive enough to garner FDA Breakthrough Therapy for the drug.  The company reports that it is working with the FDA and has not made a final decision about the study or SER-109 as a drug prospect.  There were no reported deaths in the study.

What went wrong?

There are two common factors that lead to the failure of clinical trials: a faulty premise and poor study design.  The premise behind the SER-109 trial is that the transplant of “good” gut bacteria into a colon that has received antibiotics and has been “cleared” of C. diff. has been proven to be sound by the good results that have come after colonoscopy administered fecal transplants.  That, in my opinion leaves the burden of proof on the study design, and perhaps on the method of delivery. 

The failure of the trial could be also be related to the patients chosen for the study, the makeup or the batch(es) of SER-109 pills used, whether the dosage is correct, and a host of other factors that could come into play,  not the least of which may be that pills may not work as a deliver method of healthy bacteria to colons suffering from recurrent C.diff.  infections.  In retrospect, the design might have included several groups of patients receiving different amounts of SER-109 instead of just one pill per patient. Another important that should be studied is whether the SER-109 pills were not properly absorbed by the patient’s guts due to previously unknown changes caused by C. diff and antibiotic treatment and other age related conditions. 

Because the premise of the treatment seems to be sound, it is not practical to give up on the company or on the concept just yet.  It is plausible that the study and the drug will be redesigned and that a new trial, or an adjusted trial will move forward.   But that is unknown and uncertain at this time.  A more troubling note is the analyst report of three insiders selling shares of MCRB two days before the announcement.  Especially troubling is the sale by company CEO Roger Pomerantz of almost $700,000 of company stock.  This looks bad no matter what the reasons for the sales may have been.  Even as the sales were reportedly part of automated sales plans, they are certain to raise questions among the deep pocketed institutional and individual investors that just took a big haircut.

As far as I can tell, given all that is known at this point, Seres may have been sloppy in the design of SER-109 by not using a diverse enough bacterial spore mixture when putting the drug together.  If this is true, and there is no proof or allegation of any wrongdoing at this point, it would be very disappointing on multiple levels, including ethics and perhaps more if the reports of insider sales are investigated and their timing is proved to be related to the announcement.  

According to the Lee Jones, the CEO of privately held Rebiotix Inc., a Seres competitor, in a Bioworld.com interview:  “It’s unfortunate for Seres that they suffered a setback, but I don’t think that’s going to affect all the rest of us who have worked to bring this [kind of] therapy forward.” Jones added that her company will be reporting favorable data on their firm’s phase IIb randomized, double-blind, placebo-controlled study with RBX2660 in October.  Rebiotix uses enemas to deliver the bacteria into the ill gut as compared to Seres which is using pills as its vehicle.

The Thin Silver Lining

The key to survival in the biotech research arena is money and having more than one drug candidate.  MCRB is well financed and has a $1.9 billion dollar funding agreement with Nestle in place.  The company also has $193 million on its balance sheet in cash, which is more than adequate to keep operations on track for some time.  More important, its Total Trailing Liabilities/Current Asset Ratio is 0.47, which means that it has more than twice the amount of money in the bank that it would cover a catastrophic event that would lead to a liquidation and closure of the company.  Seres also has several other ongoing clinical trials currently under way, which means that it is still in the hunt for a viable drug candidate. 

Stay Patient but Remain Engaged

The failure of this critical trial is not good news, but we don’t have enough information to make a buy or sell decision at this point.  The stock rebounded from its worst levels on July 29 and could rebound further as more information becomes available.  I recommend holding on to the shares for now as things develop. 

If you own the stock, as I do, you’re well under water.  This type of event is unfortunately part of the game.  But this is a bit complicated and there is no point in rushing into what could be a regrettable decision by selling on reflex at this point.  There are some very deep pockets involved in this company, including Nestle’, several prominent hedge funds, and at least two Fidelity mutual funds.  They will have questions. The FDA will have questions.  And there are almost certainly going to be some legal challenges raised by angry investors on this point as well. 

The responsible thing to do is to place a $7 sell stop under the shares if you own the stock and to avoid buying any shares at this point, whether you are a current stockholder or whether you have not opened a position.   We will know more when the company makes its earnings announcement and holds a conference call August 4-August 8 and as any new developments break. 

Hold Seres.  Place $7 sell stop.

Disclosure:  I own shares in MCRB.