Editor's Note: This article was amended on 04/22/2024 to reflect reduced MOIC by diluted share count, lowering MOIC from 9x to 6x.
SELLAS Life Sciences Group, Inc. (NASDAQ:SLS) is a late-stage biotech company offering us a GPS lottery ticket with an estimated 9x return and 44% probability of success. The ticket is time-sensitive, as their leading drug candidate Galinpepimut-S (GPS) phase 3 clinical trial interim report is scheduled to be read out in the upcoming days/weeks.
As quick overview, Sellas has two clinical stage cancer drugs that could provide solutions to areas of unmet need. Fortunately for us, my investment thesis can be made on their leading candidate alone, of which I'll focus this write-up on.
The Problem - AML
AML, Acute Myeloid Leukemia, is a type of cancer in which the bone marrow starts to produce a large amount of abnormal blood cells and it is the most common type of acute leukemia in adults. Unfortunately, it has a depressing median overall survival rate of 8.7 months and the current set of treatments provide a ~30% 5 year survival rate.
The Product
GPS is Sellas's innovative maintenance immunotherapy drug that targets the Wilms Tumor 1 (WT1) antigen, of which is overexpressed in 80% of acute myeloid leukemia patients according to this study and in 97% according to Sellas. GPS is engineered to promote the patient's immune response (immunotherapy) to target and kill the AML cancer cells expressing the WT1 protein.
The Market
There are 77,000 patients a year diagnosed with AML, 21,000 of those being in the USA and 97% expressing the Wilms Tumor 1 WT1 protein of which Sellas’s GPS drug targets. Global Data estimates the AML market size to be $3.1 Billion.
The Price of Immunotherapy Drugs like GPS
The cost of immunotherapy drugs according to this study often cost more than $100,000 per patient and a newer study by Prime Therapeutics found the average cost to be more than $700,000 with some cases exceeding $1,000,000. I'll use $100,000 as my estimate for valuing GPS below.
The Strategy
Sellas's strategy is to gain expediated GPS approval by targeting the subset of patients without a therapeutic solution, the AML patients in their 2nd remission.
Their ongoing GPS Regal phase 3 trial is measuring the patients' overall survivability, and its endpoint is to extend rates materially past the current standard of care. Looking back at the results of GPS’s phase 2 study, the current standard of care provides a median survival rate of ~5 months. GPS patients survived 21 months.
While Sellas's initial Regal study focuses on a niche, and what my valuation is based on below, they have two more ongoing clinical studies with + Nivolumab - Merck (MRK) and Pembrolizumab - Bristol-Myers Squibb (BMY) that, if successful, will continue to expand GPS' market size.
The Regal study Market Size
The GPS phase 3 Regal study focuses on AML patients in their 2nd remission. On average, 77,000 new AML patients are diagnosed each year with 80-97% expressing the WT1 protein, of which 30-35% need a second round of therapy, of which 12-15% make it to a second remission. For my GPS valuation below I use 2,496 patients a year, derived from the USA domestic average of 20,800 AML patients of which I estimate 12% get to a second remission.
The Timing
The GPS REGAL phase 3 trial stopped enrollment in March, and the interim analysis is expected to be shared by the independent monitoring committee by the end of the month (April 2024). Sellas stated the 60 deaths needed for their analysis is estimated to be completed by the end of July, and the 80 deaths needed for the final analysis by the end of December.
According to the BIO Industry Analysis (2006-2015) the average filing to approval time of a biologics license application for Oncology is 1.1 years. Thus, in my analysis below I used a 3-year timeline to commercialization: 1 year to finish the study, 1.1 years for NDA approval, and 0.9 years to commercialize.
The POS
The probability of success as defined by phase three oncology studies making it to approval is 44% and 92% from NDA/BLA submission to approval.
The Margin
In 2014, Sellas licensed the WT1 peptide vaccine aka GPS from Memorial Sloan Kettering Cancer Center for a few payments and a "tiered royalty in the mid-single digits in the event of commercial sales." Thus, for modeling purposes, I'll use a 90% gross margin for GPS.
The Dilution
I estimate the dilution needed to get GPS to market in 3 years to be 29%, or $50M. The raise is estimated to happen after the phase 3 Regal studies success and done at an increased valuation that accounts for the POS improving from 44% to 92%.
The Valuation
The estimated value of GPS as defined by the Regal study and my notes above is estimated to be $0.7 Billion, or 9x Sellas’ current market capitalization of $80M or 6x their diluted market cap of $144M.
The Formula
My formula and inputs are as follows:
GPS Value = USA AML Patients * % in 2nd remission * drug cost * POS * (1-dilution) * gross margin * discount rate * years to market * P/E
- 20,800 USA patients
- 12% of patients in 2nd Remission
- $100,000 cost per patient
- 44% Phase III Oncology Trial to Approval Probability of Success
- 31% dilution needed to get to commercialization
- 90% gross margin
- 15% discount rate
- 3 years to market
- 15 Price to Gross Earnings ratio.
The Risk
Sellas is pre-revenue micro-cap and has a cash runway of about 9 months after raising another $9M in January and $20M in March as their 2023 burn rate was $3 million per month. It goes without saying that one of Sellas' potential outcomes is bankruptcy.
Conclusion
The upcoming interim readout for the GPS Regal trial is scheduled for April and if strongly positive, the average probability of success could increase from 44% to 92%. This is the lottery ticket available to us today that could increase the valuation from $0.7 billion to $1.5B, or a multiple on invested capital of 6x to 12x. On the flip side, if the initial readout proves the trial to be a failure, the downside estimate of their product GPS could be $0.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Stephen Read
Mr. Stephen Read is the manager of the hedge fund HIT Capital. When he isn’t fathering or out exploring you'll likely find him reading, coding, writing or catching up with his buddies.Stephen grew up on a corn, soybean and cattle farm along the Illinois River and graduated from Missouri S&T with a B.S. in Mechanical Engineering in 2007. He worked for ConocoPhillips out of college, with a leave of absence, summer of 2008, in which he played professional baseball. In 2012 while working at ConocoPhillips he launched HIT Investments followed by HIT Capital. In 2018 he reached financial independence and in 2020 retired from ConocoPhillips to focus on HIT and his family.One of Stephen’s favorite quotes is from 2 Corinthians 9:6 “Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously.”
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SLS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Stephen Read is the founder of HIT Investments, the general partner of HIT Capital, which has a beneficial long position in SLS through stock ownership. More disclosures can be found at https://www.hitinvestments.com/disclaimer/ and within HIT Capital's Offering Documents.
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