Seres Therapeutics: Microbiomics Pioneer Smashed by Shorting, but Interesting

The dangers of being out in front, but pursued by shorters

A fun doodle that reminds me of the creatures that live in our gut

I promised that I’d mix my coverage of energy and transport transitions, with periodic returns to biotech, which helped shape me and remains an area of great interest for me. I was born with an appetite for risk, which is essential in biotech whether it be as a researcher or investor. I’m a big fan of breaking new ground and I’m acutely aware that the path to success can be long and tortuous. This can be hard for investors, unless you do what I do and have a bottom drawer for investments that have great promise but which are early and have an unknown path to success, and a timeline that can take forever. I’ve discovered that it helps to work out when an emerging scientific area is investment-worthy as I’ll show in this report. The other thing I emphasise is that issues that have no relationship to the science can create chaos, but also lead to business opportunity. The issue I cover here in this regard is shorting of a stock.

In this report I summarise my interest in the emerging field of Microbiomics, and Seres Therapeutics (NASDAQ:MCRB) which I consider to be the key company that may turn the tide of commercial failure in this field. I’ve covered Seres with 20 articles on Seeking Alpha since 2016 (first article 2016 “Microbiome Company Seres Therapeutics: Interesting Science Aggressively Pushing Towards Commercial Application”), with most recent coverage in May 2023 “Seres Q1 Earnings; Major News For Investors”.

Microbiomics

In one of my early articles I made the following observation : “It isn't every day that a hot dinner party topic is about swapping poop with your neighbor. The conversation becomes more palatable if the reality is cloaked in the next -omics buzzword.” This kind of sums up the beginnings of Seres.

The emerging field of Microbiomics, is the study of our microbial friends whose world is our intestines (or skin, mouth or nasal passages etc). It has been known for some time that we share good and bad times with the microbes that are found in our gut. The bad news is that if things get disturbed (e.g. by taking antibiotics which creates chaos for our gut microbes) nasty things can happen, like CDI (Clostridium difficile Infection) which causes diarrhea. On the other hand, good things have been observed by transplanting fecal extracts from healthy people into patients with diseases like CDI; hence the “swapping poop” comment.

The field of Microbiomics has become respectable as it is now recognised that the health of our gut has implications for many aspects of our health and well being. The same is true for our mouth, our skin and the vagina. Although microbial ecology dates back to the early 1800’s, the US National Library of Medicine’s PubMed records the first publication concerning a modern view of the microbiome in 1956 and it wasn’t until 2002 that 100 publications were recorded in this area. In 2023, 27,883 publications have microbiome as a key word! The human gut microbiome started to be seriously researched around the time that Seres Therapeutics was founded (2011). In 2023 there were 5,912 papers referred to in PubMed concerning the human gut microbiome.

Path to commercial success in Microbiomics

Seres is an East Coast US VC startup, that is the brainchild of Flagship Partners. Flagship is known as the company which backed Moderna (NASDAQ:MRNA) which developed one of the key COVID vaccines based on a new approach to vaccine production. If there is interest, I can give my take in another article on the key innovations and corporate partnerships that led to the Moderna and Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX) COVID vaccines that saved millions of lives and made fortunes for Moderna, BioNTech and Pfizer investors.

Flagship’s model is to look for an area of biotech that, if successful, would transform an area of medicine. Microbiomics is an obvious choice, but how to go from mad science to commercial success turned out to be a long road for Seres. The approach was typical US VC: lots of cash, the best scientists and experienced biotech company management. It is a recipe for spending big (Seres has cost $billions to get where it is). As an Australian biotech entrepreneur I continue to be astonished at the cash available to US biotech startups.

The point is that most of the bugs in our intestines are not well known because they grow without oxygen and hence are tricky to culture. Seres set out to understand our gut microbiome (and other human microbiomes) in wellness and disease. This is charting a new field and involves not only difficult lab work, but also it becomes a major informatics project to make sense of all of the data. Non-technical investors often get impatient about the cost of doing the hard work, but the reality is that without this knowledge base there can be no products.

Seres was founded in 2011. I found the early days a bit hyped with the share price closing above $50 on NASDAQ listing in 2015. Things looked promising until a clinical trial failed in the second half of 2016. The share price crashed to ~$11 and then drifted slowly lower to ~$4.50 until August 2020. A good clinical trial result meant share price boost to $34 followed by slow decline until July 2021 when more bad news brought the share price back to ~$7 in mid-2021. It has drifted lower since 2021 with a big Short push trying to destroy the company. You can purchase shares in Seres for ~$1 today.

Setbacks along the way

The above path is not unexpected for a new field of biology because first the science needs to be understood (as least in part) before ideas about commercial success can be charted. Then, given novelty of the science, it is almost certain that problems will be encountered on the way to FDA approval of a new drug.

Seres almost succeeded not long after it was listed on the NASDAQ, but a combination of spending too much, probably some arrogance and hence “tall poppy syndrome”,  and the difficulty of succeeding on a significant disease treatment have led to the short attack. When a very large percentage of a company’s shares get shorted (bets that the price of the stock will fall) there ends up being a huge interest by the shorters to drive the stock price down. And that is what has happened to Seres.

I’ve catalogued Seres travails in a series of articles in Seeking Alpha. It is complicated, with downsides being an overly ambitious program (but had they been lucky it could have worked), but there is also a lot to like. This includes a partnership with Nestle which has been looking to build a clinical side to its business and Microbiomics seems a good fit. Unfortunately Nestle’s first attempt was a program on peanut allergy which didn’t end well. Nestle recently acquired a company with a big focus on gastroenterology, so they know the human gut field and have 150 people involved. This makes a strong commercial partnership for Seres and allows it to focus on research and product development (which involves stabilising living bacteria for long shelf life).

It is a big story which goes well beyond what I can cover in this article. Seres website helps cover the territory.

VOWST: addressing recurring C.diff infections

Seres decided early on that the low hanging fruit might be getting a mix of bacteria which make life difficult for a particularly nasty bacterium C.difficile which is hard to treat because it has a resistant stage that keeps coming back. They started looking at gut bacteria and deciding what sort of package might be stable as a product and might be able to stop C.difficile getting out of control. The thing is that C.difficile infection is well controlled with antibiotic treatment, but C.difficile makes resistant spores and when you stop the antibiotic treatment, the infection comes back. This pattern of multiple reinfections is debilitating and lethal. VOWST is the bacterial mixture Seres came up with to treat a patient after antibiotic treatment. Because the bacteria are hard to grow in fermenters, the initial VOWST product is actually made by purifying bacteria from faeces. So it is a first generation product that has required a lot of work to make it safe and stable. The FDA is happy with the product that has multiple years of shelf life. Seres has next generation products under development that are composed of mixtures of bacteria grown in commercial fermenters.

The development of VOWST has been hard because initial versions of the product failed in Phase 2 trials. This caused share price setbacks, but Seres did the hard yards of understanding which bacteria to use and how to treat them so that they stayed alive and got established in the gut after being delivered through taking a tablet. VOWST is a historic Microbiomic product because it is the first tablet form product to be approved by the FDA. This is a big achievement which has been overshadowed by an aggressive short attack.

SER-155 for treating serious blood-borne infections

Seres second major clinical program involves a second generation mixture of bacteria grown in a fermenter. Like VOWST it is formulated as a tablet. The aim of SER-155 is to address antibiotic resistant infections in patients undergoing stem cell transplantation, organ transplants and some cancers. This is a specialised product but it addresses a lethal problem. It is early on the FDA approval path, but results so far look promising.

The blue sky

Microbiomics can clearly contribute to addressing disease associated with mess up of the human gut by having the wrong balance of bacteria. Seres, with VOWST, is well down the path towards addressing the biggest hospital and aged care infectious disease problem (recurring C.diff infections). This is really important as anyone who knows about C.diff can testify, but is also represents the very beginning of Microbiomic approaches to medical problems.

There is a lot of evidence that gut health impacts on many aspects of human disease (eg diabetes), but the big one for me is the brain because it has been an intractable area. Dementia is a huge issue and it is becoming clear that the microbiome has a role in human dementia (which itself has a lot of complexity). For those with an appetite for technical stuff a recent publication (“Gut microbiota, circulating cytokines and dementia; a Mendelian randomization study”) gives an insight into where the science of dementia is going. I think Seres is a company that will be able to help translate the basic research into medicines, if it gets a chance to survive and prosper. I’m hanging in there despite the dark side trying to mess things up (see next section).

Short attack

Where I come from, shorting stocks is a case of the triumph of making money over building stuff. The point about shorting is that it is a deliberate attempt to destroy a company. The easy way is to choose a company pre-earnings and destabilise it. Shorters play for keeps because the downside of shorting is pretty unlimited losses. You borrow shares to give them  back at a later date. If the price falls you make money, but if the share price goes up, you pay the higher price. The losses are not capped… When double digit percentages of a company’s shares are shorted, that means that a lot is stake for the shorters if the share price goes up. So you get what I call market manipulation to make sure the price goes down. In Seres case it had the first ever oral (tablet) microbiomic product approved by the FDA and the share price went down (quite dramatically)!

The Shorters made sure that Seres had to cut its costs and this has meant a lot of damage to critical programs. For example currently there is a pause in efforts to develop Microbiomic products for inflammatory bowel diseases (eg Ulcerative Colitis). This means a major potential upside for Seres is on hold.

The current Seres share price of $1.06 (market cap $154 million) makes no sense for the company leading a huge new area of medicine, with a product FDA-approved and going to market with Nestle that addresses the major hospital (and aged care home) infectious disease problem. Of course such a new product doesn’t open up a $billion market overnight, but my take is that there is good initial acceptance. The shorters went on and on about poor market acceptance within a month or so of the product launch!

While shorting is a problem for vulnerable biotech stocks, the damage is much more widespread and I’m always puzzled how stock shorters get away peddling misleading/untrue information to drive a short attack. A short attack is currently underway concerning major big battery energy storage company Fluence (NASDAQ:FLNC).

Conclusion : Will Seres survive and prosper?

Seres’ focus is now firstly on success for its VOWST microbiome tablet (a mixture of bacteria) for preventing recurrence of C.diff infection, and secondly for clinical trials for treatments to address serious systemic blood-borne infections. These are two important areas of medicine and successful products in these areas would almost certainly ensure that Seres has an opportunity to continue/recommence currently stalled programs in inflammatory bowel disease (which is a huge market). This would also mean becoming more ambitious especially in relation to the brain, not only in relation to dementia, but also mental health.

I’ve voiced my unhappiness with stock shorting, but while it continues to happen, one way to think about it is to see it as an opportunity to purchase a stock that interests you at a significant discount. My entry price for Seres is $4.23. You can get shares today at a 75% discount to what I paid. I’m not selling because if Seres survives, then $4.23 is going to look very cheap down the track. The key question is “if” Seres survives because the shorters have caused a lot of damage to the company.

I’m not a financial advisor, so this article is just relating my approach to investment in the field of Microbiomics. I hope that my comments are of interest as you and your financial advisor think about risky biotech investing generally, and possibly investment in Seres Therapeutics.