The biotech correction has been especially painful to early-stage drug developers like Selecta Biosciences (SELB). Although the company has advanced one asset to phase 3 studies, nothing else in the pipeline has been tested in a single patient. That's not an advantageous position to be in when investors abruptly shun risky assets.
The tiny biotech saw the writing on the macroeconomic wall and issued a painful amount of dilution in April 2022. The timing was terrible. A greatly increased share count combined with the revaluing of the biotech sector pushed the stock all the way down to $0.65 per share in May 2022. That marked an 88% decline from the 52-week high.
There could be consequences. Selecta Biosciences was notified by the Nasdaq Exchange that it fell out of compliance with listing requirements and could be kicked off the exchange before the end of 2022. Such a move would reduce liquidity and visibility, potentially marking an unceremonious end to the business.
Despite the warning and sour sentiment, at least one Wall Street bank thinks a delisting is unlikely and slapped a $7 price target on the stock. What should investors make of the situation?
When Does a Stock Get Delisted?
Each exchange has slightly different requirements for remaining in good standing. On the Nasdaq at least, one way to fall out of compliance is for a stock to close below $1 per share for 30 consecutive days. Selecta Biosciences reached that milestone on May 27.
Companies don't get the boot immediately. The precommercial drug developer will have 180 calendar days to regain compliance, defined as achieving a closing price above $1 per share for 10 consecutive days. That gives Selecta Biosciences until November 28 – a relatively healthy cushion.
There are several options for remaining in the good graces of the Nasdaq Exchange.
- A company can conduct a reverse stock split that reduces the number of shares outstanding and increases the price of each individual share – the opposite of what Amazon and Google have done recently.
- A company can request an additional 180-day grace period to regain compliance, although there are a few hoops to jump through.
- A company can earn a higher share price with execution.
A handful of expected milestones on the horizon suggest Selecta Biosciences can earn a higher share price before it gets delisted, which is exactly what analysts at SVB Leerink think will happen. In fact, the next de-risking event is expected any day now, although investors don't know if the outcome will be positive or negative.
De-Risking Events To the Rescue
Selecta Biosciences is developing a tool called ImmTOR that allows gene therapies and biologic drugs to be safely administered multiple times. That could allow doctors to give multiple, lower doses of a gene therapy to drive deeper and more durable outcomes for patients. It could address one of the biggest limitations and the biggest safety concerns of gene therapy today.
The precommercial drug developer aggressively added partners in recent years by licensing ImmTOR to Sarepta Therapeutics (SRPT), Bayer subsidiary AskBio, and Takeda Pharmaceuticals (TKPHF) . Selecta Biosciences also acquired rights to emerging technologies from Genovis and Cyrus Biotechnology, while tapping Ginkgo Bioworks (DNA) to develop multiple new tools to round out its tech stack.
Although investors should expect volatility given the early-stage nature of the technology platform, it's safe to say the company has diversified risks and opportunities.
The next stock-moving event is expected any day now. Sarepta Therapeutics must decide this month whether to obtain a clinical license to ImmTOR for one or two gene therapy programs or decline its option to do so. If it proceeds, then Selecta Biosciences would receive option exercise cash payments and be eligible to receive milestone and royalty payments in the future. If the partner declines, then it could lead to more near-term turbulence for investors.
However, SVB Leerink thinks there are too many other de-risking events on the horizon to derail the penny stock. For example, Selecta Biosciences and Sobi expect to announce data from multiple phase 3 clinical trials in early 2023. While that's outside the initial 180-day window granted by the Nasdaq Exchange, it fits snuggly within an additional 180-day window, if needed.
The small-cap drug developer also expects to initiate a phase 1 clinical trial for its first wholly-owned gene therapy program in 2022. Meanwhile, SEC filings suggest Selecta Biosciences is likely to expand its license with Takeda. The initial agreement forged in October 2021 enables the company to ultimately earn up to $1.124 billion in milestone payments from the pharma leader.
Can This Penny Stock Recover?
Investors should be careful anchoring expectations to price targets. SVB Leerink's $7 price target is a bit too optimistic given the circumstances, implying a market cap of $1.2 billion when recently-issued warrants are accounted for. It's possible, but the company will probably need about 24 to 36 months to amass and announce the data needed to justify that valuation. Nonetheless, I do think the company is undervalued at the current market cap of $167 million, which represents a stock price of about $1.10 per share.
For now, investors can keep an eye out for the upcoming decision from Sarepta Therapeutics and 10 consecutive closing prices above $1 per share. The stock was on track to notch its fourth consecutive close above the required mark on June 10.
