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Reflecting on the life sciences/medical sector it’s apparent that very different kinds of companies live under this umbrella. Big pharma involves huge companies with deep pipelines and outcomes that result in evolutionary change. At the other end of the spectrum are the biotech startups that take good ideas from basic science and seek to build a transforming company. I’ve recently looked at big pharma company Novartis (NVS) and also Seres Therapeutics (MCRB) as an example of a company pioneering a new direction, the microbiome, in medicine. Seres is on the cusp of having the first significant FDA-approved microbiomic product. This is a live product, a mixture of gut bacteria, to address reinfection by C.difficile which is the major bacterial infection in hospitals and aged care facilities. Sitting beneath the Seres Therapeutics story are many young biotech companies that are making up the future and striving for that breakthrough therapy that will portend fame and success.
Many investors are wary of the hype and the dreams of these companies with little past and lots of promise. Having lived in the industry and been a part of some new directions, I’m attracted to this space because the upside is big when the stars align. One way into this area is to follow companies that have been grown in an entrepreneurial environment by venture capital companies that make a living from seeing good science and helping founders try to turn a good idea into a business. The company behind Seres Therapeutics is Boston-based Flagship Pioneering whose Founder and CEO Noubar Afeyan has an interesting track record as Cofounder and Chairman of Moderna (MRNA) and the mRNA vaccine revolution that transformed the approach to the COVID-19 pandemic. We live in uncertain times and this has meant that companies that are yet to define products, where many Flagship-supported companies sit, are challenged, and if they have gone public their stock price has suffered. One of the things about US VC supported companies is that they often have lots of cash. I’m wondering if having lots of cash and being down the path toward successful products might be a fertile area for biotech investment (as opposed to biotech companies starved for cash). To give a flavor of the opportunity I explore here one such Flagship company, Sana Biotechnology (NASDAQ:SANA). I think it is certainly worthwhile for biotech investors who are not risk averse to explore this area, although in the case of Sana the odds seem stacked against the company at this time.
Show me the money
My history in biotech is in Australia, which is a dry country where things get done in spite of cash being tight. I never cease to be amazed at the burn of some US biotech companies. Sana is a case in point. As of September 2022 the company had total current assets of $511 million (and this does not include $59 million of intangible assets and $141 million of Goodwill). The picture looks less happy when it’s noted that the company has $332 million of liabilities. Sana’s R&D burn was $76.7 million in Q3 2022, up from $53.2 million in Q3 2021. The net loss for Q3 2022 was $85.1 million as against $83.3 million loss in Q3 2021. For the nine months to end of September 2022 stock-based compensation was $27.7 million as against $15.0 million for the nine months to end of September 2021. Cash /cash equivalents/restricted cash at end of September 2022 was $173.8 million, which is a long way below the September 2021 position of $442.5 million. The February 2021 IPO on Nasdaq produced net proceeds of $624.4 million.
Not surprisingly the 10-Q Q3 2022 earnings summary pointed to the need to source additional funding as a significant risk. Indeed in August 2022 the company entered an agreement with Cowen & Company LLC to sell shares valued at up to $150 million from time to time. As of the end September 2022 only $0.7 million had been raised through this facility.
The above seems to me very vulnerable in these tricky times. Companies like Sana need to address their cash burn if they want to survive. In good times this can be done by issuing more shares, but this can be highly dilutionary in tough times.
Sana’s pitch
Like many companies in the Flagship stable, Sana’s founders have very ambitious goals. The tagline for the company is “Engineered Cells as Medicines.” They see that Sana can impact the area of cell engineering, fixing diseases by altering DNA. This is hugely ambitious and what’s proposed needs to be thought through. I suspect that much of the high level possibilities are never going to be practical. But there are some areas where medical miracles could be wrought with the approach that Sana is planning.
To start with, if you want to do cell engineering you need to be able to change the DNA of individual cells. This means either changing cells taken from the body and putting them back after the changes have been done, or having ways to change DNA in cells within the body. Core parts of the IP that Sana is accessing relate to these technical goals, which need to be solved before any medical marvels can be attempted.
Other issues about companies in the Flagship portfolio
Sana has been formed to seek to make it happen. Flagship operates to identify areas ripe for practical medical intervention. The huge burn is about demonstrating practical reality, giving shape to and executing on a couple of IP packages.
The IP comes at a price if the company is successful. In the case of Sana, the upside for investors has several caveats as there are success payments for three acquired technologies. It’s pretty certain that Flagship scoured the discovery landscape in bringing Sana to life. The 3 technologies no doubt have a good protected intellectual property base. They are :
1) Cobalt Biomedicine acquisition:
This involves the February 2019 100% acquisition of Cobalt Medicine Inc for its fusogen technology, which is about delivering DNA into cells. The sting in the tail is a $500 million Contingent Consideration involving a success payment of up to $500 million payable in cash or stock. The success payment triggers if at specified trigger dates the market capitalisation exceeds $8.1 billion and Sana is using Cobalt’s fusogen technology in a clinical trial which is geared for an investigational new drug application. The Cobalt Success Payment can be triggered over a 20-year period. The current market cap is $896 million, so triggering this reward is a long way off. If Sana is acquired and the company has an active fusogen technology program then the Cobalt Success Program will be reduced in proportion to a market capitalisation below $8.1 billion.
2) Beam Therapeutics (BEAM) license and collaboration agreement:
This involves a non-exclusive licence to use BEAM’s proprietary CRISPR Cas12b nuclease editing technology in relation to certain targets in Sana’s allogenic T cell programs, as well as certain BEAM human cells types. Sana paid BEAM $50 million for the year ended December 2021. Sana has additional obligations to pay BEAM up to $65 million for each licensed product as specified developmental, commercial milestone payments and royalties on licensed products.
3) President and Fellows of Harvard College:
In February 2019 Sana entered into an exclusive license agreement with Harvard University to access intellectual property for the development of hypoimmune cells (basically cells which survive immune surveillance). This involves up to $175 million in success payments based on increases in Sana’s stock price. The original issue price is $4 and payments are due for increases of between 5x and 40x, with events and timelines specified for review. The Sana stock price is currently $4.76.
The above agreements are part and parcel for many biotech startups, but investors need to consider what they mean as they may significantly dent their upside. Currently the value of the above agreements is substantially below what their value could be if the company becomes successful. The good news is that Sana is accessing critical IP that may make it successful.
How is Sana positioned?
You can be sure that almost all of the Flagship stable of companies are tapping into some of the brightest brains on the planet and the companies exist because another set of brains looked at the science and helped define a way to monetize the innovation (if it proves to be viable). These two underlying assumptions allow an investor to then think about the execution. Another key part of the game is pulling together the best team and getting them to work together effectively. At the end of the day there’s some luck as to whether it can all come together, but one thing than can be controlled but rarely is in the US, is cash discipline.
A feature of the Flagship companies is that they don’t mess around with small ambitions. They burn a lot of cash because they have multiple bets on various diseases being tested in parallel. This is fine when there’s plenty of cash, but perhaps the broad number of programs could be trimmed to result in a more modest consumption of cash? For me they have too many programs for today’s funding environment.
What about the science?
Sana brings together three different invention areas, seeking to find ways to leverage them, but mostly they’re different emerging technologies that all relate to engineering cells to make them cancer fighters. Part of that means ensuring that the engineered cells themselves don’t get killed by the body seeing them as foreign. The science is brilliant and it might work, but it’s as close to “rocket science” as you get in biotech. This area of getting the body to fight cancers is right at the frontier of the possible. Amazing results have been obtained in this area but it’s still pretty new terrain and the success rate is not 100%. The goal is to make the treatments more robust and not so expensive to manufacture. There’s a lot of activity in this space. Sana represents a typical Flagship company with an outrageous set of goals.
Sana has three broad aspirations : i) repair and control genes in any cell; ii) replace any cell in the body; iii) make cell-based therapies more accessible. These are big goals. I won’t cover the details of Sana’s pipeline here. Suffice to say, there are a lot of programs.
At the end of January Sana achieved a significant milestone with FDA clearance for its IND (Investigational New Drug) application for a first in human study of T cells SC291 in patients with various B-cell cancers. B cells are blood cells that make antibodies. This is the beginning of proving that the company is on the right track.
What does the market think?
Perhaps because of its pedigree as a Flagship company, Sana has attracted interest from some Wall Street analysts, with one strong buy, one buy and two hold recommendations in the past 90 days. Seeking Alpha authors have ignored the company with no coverage in the past 30 days. Seeking Alpha has a “hold” quant rating and a more positive view than three and six months ago. I’m not sure why the Seeking Alpha quant rating is more positive than in the recent past. Perhaps that relates to Sana’s success in having the FDA clearing Sana’s IND for SC291?
The share price history is tough, being down 39.7% in the past 12 months. However there has been some recovery in share price in the past month, up 30%, but this was mostly a beginning of the year recovery and not much change since mid January. As often happens with biotech listings, the share price today is a shadow of the $40-plus spike on listing. Of course this is what attracts risk takers.
Conclusion
The Sana story is certainly not for the faint hearted as there are lots of reasons that the basic premise of the company won’t make it through the travails of defining and getting a successful product approved (or to attract the interest of a big pharma for a partnership or eventual acquisition). The company spends too much money and pays too much in stock compensation for my liking. Making losses at the rate of ~$85 million each quarter is a big ask in today’s market. On the other hand, the Flagship Pioneering team makes a point of seeking to do the impossible. Investors looking for a safe investment should not look here. Those with the stomach for a wild ride might think about Sana. My own approach to this area is to try to get a sense as to when the breakthroughs might mean that a path can be seen to success. As I’ve indicated in my coverage of another Flagship company Seres Therapeutics (Microbiomics), the trick is to invest when the sturm and drang shows signs of subsiding, if of course the company of interest actually gets to that situation. Regarding Sana’s situation, I can’t but wonder if the company might face reality, put some programs on hold, and trim its cost structure. If management thought about the cash drain in terms of spending their own cash it might change the spend. A friend once described a biotech start up in terms of driving a car at a brick wall, with survival being the capacity to keep moving the wall back. To be clear, the upside is huge for successful biotech breakthrough (look no further than Moderna), but it’s a high wire act and sometimes it is best to come later as an investor. Sana seems too early to make that kind of strategic investment at this stage.
I’m not a financial advisor but I follow the creative end of biotech and look for investment opportunities. I hope that my comments about Sana Biotechnology help you and your financial advisor as you consider your own investment appetite for the wild end of biotech.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
