Description

Long SELLAS Life Sciences (SLS): The Ultimate Biotech 'Baby with the Bathwater' Trade. 

Current Price c. $1.4 p/share; 1-year Target Price $43 p/share (i.e. c. 30x upside); Hard catalyst in the coming weeks and limited science risk.

Last year, we got long a stock called Soleno (SLNO), which popped c.700% in one day in Sept. '23 when the company released it's long-delayed Phase 3 trial results in an area of unmet medical need (illnesses where there are no current FDA-approved drugs).

While that was fun, we hadn't sized the position since (i) we couldn't take a conviction view on the trial outcome and (ii) Soleno was a monoproduct company, like most nano-cap biotechs, leaving significant downside if the trial didn't go to plan.

The Sellas investment, contrary to initial appearances, suffers from neither of those deficiencies; in fact, we argue Sellas can be 'Soleno on steroids' for one's portfolio, while doing some good in the world to boot. We also think this idea should be relatively accesible to non-specialists (this author is an interested generalist). 

I. Brief Intro to AML & SLS

AML (acute myeloid leukemia) is a relatively common, aggressive, and difficult-to-treat blood cancer, the key feature of which is the massive overproduction of certain white blood cells in the bone marrow, leading to various deleterious downstream effects. There are about 20k diagnoses in the US annually, which is about 1% of all cancer cases. The treatment paradigm has been stagnant for a decade now, and 5-year survival is fairly low at 29.5%. 

Sellas's two drugs treat different stages of AML:

(i) Galinpepimut-S, or GPS, the late Phase 3 asset which reads out imminently, is a cancer-immunotherapy or 'cancer vaccine', which prevents or delays the cancer from returning once remission has been achieved (referred to as a 'maintenance therapy' which maintains the remission state;

(ii) SLS009 (formerly GFH009), in Phase 2 currently, is a selective CDK9 Inhibitor, which treats the active-disease state by clearing the overproduced white cells in a reasonably precise way, avoiding the toxicities which have been an issue with previous attempts at CDK9 Inhibition.

Sellas has flown under-the-radar, with little support from noted Biotech specialists or the Sell-Side, but it's worth noting their science is rather elite, with high-quality trials being run by star medics from Sloan Kettering and MD Anderson; we see potential for a rapid reevaluation once the street catches on.

II. Why Sellas's Phase 3 is not a 'Coin-Flip'

The core of our thesis is that a mosaic of evidence points to GPS meeting the trial's endpoint - it's not a 50:50 flip as sell-side analysts typically model these situations (since the pass rate of Phase 3 trials overall is 50%). GPS's trial needs to show extended survival compared to the Best Available Therapy (‘BAT’), and patients are allocated 50:50 to either the treatment (GPS) arm or the control (BAT) arm. The details of BAT are left up to individual patients’ physicians, but crucially no new treatments have become available during the trial period, so BAT is a fixed target. According to various studies/sources, BAT life expectancy is not more than 8 months at absolute most - these patients are very sick; by comparison, patients in GPS’s Phase 2 trial in this AML setting achieved 21 months of median Overall Survival (mOS). A varierty of data points suggest that this outcome will replicate in the larger Phase 3 trial:

• P3 Patients Known to be 'Living Too Long': In late-2022, Sellas was forced to modify the protocol of their Phase 3, because the patients in the trial were simply living too long - this is clearly a good thing. The trial is blinded, so this statement is based on the trends for the entire pooled patient population, but in this case it is simply not credible that BAT is the cause of the overall outperformance - these patients are very late stage with limited options (one of the treatment options listed for BAT is 'observation', which we do not think will be sufficient to move the needle here, clearly!). BAT is a fixed target here, and any reasonable scenario points to GPS meeting the primary endpoint (and likely the trial being halted for efficiency at the imminently expected Interim Analysis stage). We show two scenarios below - to be clear, 10.5 months OS for BAT would be something close to a medical miracle, it's really a very conservative case. 

• Six Other Trials Show Also Outperformance: GPS has had a relatively long development life, allowing a multitude of studies to be conducted in the meantime. In every case, GPS shows consistent benefits above other approved and experimental agents in AML (and other cancers). While one could argue those trials are not placebo-controlled, against this, the endpoint here is rather objective: survival benefit. It’s not the same beast as, for example, an Alzheimer’s trial with patients being asked about how clear-minded they feel. We also feel confident that the trial is well-designed, and being run in a rigorous way, so it's really a case of waiting for the Phase 3 to complete (any day now really), to tick the controlled-trial box.

• Key Trial Doctors Baldly State 'The Drug Works' in Public: In January 2024 update call, one of the key trial doctors commented that (i) he has personally enrolled over 10% of the patients into the Regal trial and (ii) he strongly believes that the trial will meet its primary endpoint; this is slightly paraphrased of course, as he's working under an NDA, but the transcript of this call is still available online, and his wording is unambiguous. It’s difficult to be more clear than he was in stating that GPS is effective, and he has a better-informed perspective than Sellas management themselves.

• Study Management Body Language: While Sellas itself is blinded, trial decisions can be informed by the evolving unblinded data (via the IDMC and steering committees); Sellas’s decision to reduce the number of events needed to reach interim and final analyses was a bullish indicator – the implication is that GPS is outperforming, and that initial statistical bar to demonstrate superiority had been set too low. Similarly, the recent decision to stop enrolment can be seen as bullish - it suggests management believes a trial halt for efficacy is likely, and that extra patients too reach the completion milestone of 80 events/patient deaths faster was not a priority. (Generally, studies need to be fully-enrolled, before they can be stopped for efficacy reasons).

III. Why Does SLS009 (Sellas's #2 Candidate) Look Equally as Strong as GPS?

SLS009, Sellas's CDK9 Inhibitor for treating active disease (recall GPS is a maintenance therapy, for those already in remission), has this year reached the inflection point where there is sufficient clinical data to confidently see that it is both safe and efficacious. While the market has so far not remotely priced this development, these are significant results which point to important new treatment coming online where none currently exists. 

The goal of treatment here is to generate a Complete Remission (CR) - there is a technical medical definition for this which is specific to AML, which essentially states that the patient's blood looks normal or very close to normal. This is a hard thing to accomplish in AML, and the FDA bar for approval is set at only 20% CR-rate, fairly low. SLS009 has to date achieved CR in 4/4 patients who have a certain mutation (ASXL1), as well as positive results in patients who don't. ASXL1 is relatively recently discovered, occurs in 20% of AML cases, and is negatively prognostic. Even if the 100% CR-rate in ASXL1 declines as more patients are added, it would still be a very strong candidate for accelerated approval from the FDA on the basis of this biomarker, and the unmet medical need. That suggests SLS009 could likely be commercialised in 2025, around the same time as GPS (without the need for a Phase 3 trial).

IV. What Happened Here? Why Does the Mispricing Exist?

• Reverse Merger into Galena, a low-reputation failure which still lingers unfairly: Sellas became public via this route in a competitive process, which it succeeded in due to the apparent synergy as both entities were pursuing cancer vaccines. Galena itself had acquired an exceptionally poor reputation in the market, after a string of executives were sanctioned by the SEC for illegal stock promotion, a reputation which carried over to Sellas. Note that all of Galena’s drug candidates have subsequently been discontinued, and development is entirely focused on GPS & SLS009.

• Biotech Bear Market: Biotech has been in it’s most severe bear market by a number of measures, as many companies came public too early on in their development. Generalists have exited the sector, and have no incentive to return as they outperform benchmarks avoiding the space, while specialists are very focused on larger capitalisation names unless they were in from an earlier stage; they are generally not picking over the wreckage of the many small market cap names. We also note the prevalence of FTDs, especially around offerings, and suspect Sellas’ brokers have been less than fully-supportive in all circumstances

• Big Pharma’s Shifting ‘Taste’: Both Cancer Vaccines (GPS) and CDK9 Inhibitors have suffered setbacks in earlier clinical trials, and it seems both were off the menu for Big Pharma’s shopping list for development funding and acquisitions as executives risk-manage by trying to avoid blame for ‘predictable failures’; interestingly cancer vaccines are starting to come back into focus now, following the recent frenzy for ADCs. Regardless, FDA-approval should cut through any hypothetical arguments about what actually benefits patients

• AML Being a Backwater: Since this is the largest of the main blood cancers, it sits between Haematology and Oncology. The endpoints and terminology is subtly different, the conferences and community is somewhat seperate. We suspect these kind of results in a solid cancer-setting would have been picked up by the market before now.

• Aggressive Short Tactics: Trading in Sellas has, for a long time, been marked by high numbers of Failures-To-Deliver (FTDs), a common indicator of naked short-selling. It's noteworthy that a large holder of Sellas (per Bloomberg), who acquired their stake via an offering earlier this year, recently paid two fines to the SEC in relation to their trading in other stocks - one for undisclosed payments to apparently independent short researchers, and another for manipulative naked short-selling. We speculate that the price is so low, in part, because it has been artificially depressed.

V. Valuation

We value GPS at c. $3.5bn based on 10% penetration of the US annual AML incidence of 20k patients, pricing of $250k pa, and OS of two years, and an assumed sales multiple of 3.5x. (This is potentially conservative, allowing for upside from (i) the world that is not the US (ii) expansion to earlier lines of AML over time (higher TAM penetration) and (iii) expansion into other cancers Keytruda-style; we know that WT1 (GPS’s molecular target) is the #1 ranked target according to the National Cancer Institute).

We value SLS009 at c. $1bn; Kura is relevant comp here, with a c. $1.1bn EV; Napkin-math results in a similar figure if you apply a 50% discount for a Phase 2 asset. (Kura treats a specific AML subset with broadly equivalent overall CR-rate to Sellas in their own Phase 2).

V. Risks & Conclusions

Near-term, the biggest risk appears to be that either the Phase 3 trial is delayed again (it needs to reach 60 patient deaths to conduct the Interim Analysis, a timeline which is not within Sellas's control), although this seem unlikely based on management's statement in March that the Interim was 'imminent' and the most recent corporate presentation noting that Interim Data was expected in 2Q24. It's also possible that GPS doesn't quite clear the hurdle needed to halt the trial at the interim stage (we think the benchmark is GPS mOS being double the mOS of the BAT/control arm). That would require the trial to continue on until 80 deaths are reached (exposing the company to a risk of moderate further equity issuance). The endgame would appear to be an acquisition by Big Pharma - indeed the company eliminated the CCO position in January, so going it alone on commercialisation appears to be off the table. In the upside scenario, the market prices the value of GPS and SLS009 in combination - which offer the potential buyers strategic control of the AML market for the forseeable future using the drugs as a 1-2 punch. Extended survival could lead to AML becoming a rapidly growing.

Overall, we think this a compelling opportunity in need of a few more eyeballs. If the above is even half right, many of you will owe us a beer - feel free to reach out here or on Twitter/X (@ContraMundem).

Catalyst

Phase 3 Trial Results are due before the end of Q2 '24, as discussed.