Finch Therapeutics (FNCH - $652M) is a microbiome therapeutics company developing a range of treatments. It’s lead candidate CP101 is an orally administered pill that was fast tracked by the FDA for the treatment of C. difficile.

The microbiome is an exciting area of medical research that could help treat digestive problems, auto-immune diseases, skin conditions, Parkinsons, autism and more. There are numerous companies in the microbiome space and some are likely to make big returns.

What Is The Microbiome?

The microbiome is the genetic material of all the microbes that live on and inside the human body. These include bacteria, fungi, protozoa and viruses.

Scientists believe the microbiome contains 10 million genes (200 times more than the number of genes in the human genome) and they think that there are around 100 trillion bacteria per person. Most of these microbes are found in the large intestine and referred to as the gut microbiome.

Source: Draxe.com

Fecal Transplantation

For at least 15 years, scientists have been using fecal transplantation to study the effects of the gut microbiome. In 2006, scientists gave an obese person’s stool to a mouse and that mouse developed obesity. When scientists gave mice the stool from a lean person the mice remained lean.

More recently, fecal transplantation has been used to treat the harmful bacteria C. difficile. C. difficile is a major antibiotic resistant threat which kills 44,000 patients a year in the US at a cost of ~$5 billion.

C. difficile is typically treated with antibiotics such as vancomycin or fidaxomicin. These treatments can work for primary C. difficile but not when it recurs. The other problem with antibiotics is that they destroy all bacteria, good and bad. They do not treat the cause, only the symptoms.

Fecal microbiota transplantation (FMT) allows the patient to receive stool from a healthy microbiome and leads to the restoration of their own microbiome ecosystem. This treatment has a 90% cure rate for C difficile which is an incredible success rate over antibiotics.

Although fecal transplantation has been proven to be effective, its implementation can be hazardous. Finch Therapeutics is therefore developing a class of orally-administered drugs, based on the same microbiome principles, to combat C. difficile and a range of other diseases.

What Is CP101?

The company’s drug CP101 is a convenient, one-time pill that can cure cases of C.difficile. It was recognised as a breakthrough therapy by the US FDA and given fast track designation. The drug is currently in the third phase of trials with results expected in mid-2021.

According to Phase 2 results, CP101 achieved a 33.8% risk reduction for CDI recurrence over 8 weeks. 74.5% of patients with CP101 were cured after 8 weeks compared to 61.5% with a placebo. 

As well as CP101, Finch therapeutics has other promising treatments in the pipeline including treatments for Ulcerative Colitis, Crohn’s Disease, Autism and Hepatitis B. Treatments for Ulcerative Colitis and Crohn’s Disease are being developed in partnership with the largest pharmaceutical company in Asia, Takeda Pharmaceuticals. Finch receives investment from Takeda in the form of upfront payments.

The microbiome has incredible effects on metabolism, immunity and cognition but there is still a lot we do not know. In one interesting example, a patient who received a fecal transplant for the treatment of C. difficile found that it cured their Alopecia and all their hair grew back. 

Harnessing the microbiome will continue to be an exciting area of future research and has the backing of big pharmaceuticals such as Pfizer, GlaxoSmithKline, Takeda and also Nestle. 

As can be seen in the following graphic, the number of clinical trials evaluating FMT has been increasing at a rapid rate, underlining the growing interest into this type of research:

Competition

An investigation into Finch Therapeutics cannot be completed without a discussion of the major competitors. Right now, there are numerous biotechs and startups wanting to get in on the market for microbiome treatments including Vedanta Biosciences, Seres Therapeutics, Second Genome, Mirobiotica, Enterome, Intralytix, Rebiotix and others.

A major competitor to Finch is Seres Therapeutics (MCRB) which has a similar treatment for C. difficile and is further along in trials. Seres Therapeutics’ stock jumped four fold on it’s positive phase 3 results which showed a 30% reduction in recurrent CDI. 

Seres Therapeutics also has a partnership with Nestle:

In exchange for the license, Nestlé made an upfront cash payment to us of $120.0 million. Nestlé also agreed to pay us tiered royalties, at percentages ranging from the high single digits to high teens, of net sales of Nestlé Collaboration Products in the Licensed Territory. Under the License Agreement we are eligible to receive up to $285.0 million in development milestone payments, $375.0 million in regulatory payments and up to an aggregate of $1,125.0 million for the achievement of certain commercial milestones related to the sales of Nestlé Collaboration Products.

From the company’s 10-K.

Seres Therapeutics has a higher valuation than Finch with a current market cap around $1.8 billion. But Seres is further along in its trials for Ulcerative Colitis as well and is a holding of Cathie Wood’s ARK fund. 

The following graphic shows products in the Seres Therapeutics pipeline:

Total Addressable Market (TAM)

The market for microbiome treatments is currently small with no therapies yet approved. However, the market is expected to grow rapidly over the next few years.

According to BCC Research the global market for microbiome therapeutics should grow from $141 million in 2021 to $1.3 billion by 2026, a CAGR of 56.4%.

This figure doesn’t quite take into account the impact that successful microbiome treatments may have on the market as a replacement for current treatments.

The Centers for Disease Control and Prevention, or CDC, has identified C. difficile as one of the top three most urgent antibiotic-resistant bacterial threats in the United States with an estimated annual cost of $5 billion. 

Moreover, surveys have found that oral microbiome treatments are perceived as having a high value with 78% of doctors saying they would either definitely or probably prescribe it.

Aside from C. difficile, Finch’s other treatments also possess high commercial value if they are successful. For example:

• 3.1 million people in the US suffer from inflammatory bowel disease at a cost estimated to be around $31 billion a year.

• 4.6 million in the US have are affected by autism at an annual cost of care of around $100 billion.

• 290 million people globally have chronic Hepatitis B with 900 thousand related deaths per year.

• The Ulcerative Colitis drug market is expected to reach $10.25 billion by 2027

• The Crohn’s disease drug market is expected to reach $13.72 billion by 2027. 

Competitive Advantages

In order to develop drugs for the treatment of diseases like C. difficile, Finch Therapeutics uses a machine learning platform known as Human-First Discovery™. Machine-learning algorithms mine clinical datasets to find the missing microbes that can cure debilitating illnesses. 

This is a fundamental way that Finch can set itself apart from the competition. The company also has 50 issued patents and over 130 patent applications and has an experienced management team in place.

Management

In Mark Smith, Finch has a CEO who has extensive experience in the world of fecal transplantation and microbiome.

Mark Smith co-founded Openbiome, along with his wife Carolyn. Openbiome is a nonprofit stool bank based in Massachusetts that has successfully supplied clinicians with life altering material for CDI treatment.

It was set up in 2012 after Smith watched a friend and family member suffer through 18 months of C. difficile and 7 rounds of vancomycin before finally receiving a successful, life-changing fecal transplant. 

Until now, it’s been about the promise of the microbiome. Now I feel like we’ve delivered on the first promise. The next step is figuring out how big this gets.

~ Mark Smith, CEO.

According to company documents, the Finch management team has collectively developed more than 40 approved therapeutics. 

• Mark Smith has authored over 50 peer-reviewed publications in the field.

• Gregory Perry, CFO, has more than 20 years experience managing teams at leading biotechs such as Transkaryotic Therapies, Eleven Biotherapeutics, and ImmunoGen.

• Chief Medical Officer, Zain Kassam, M.D., M.P.H., is a world-class clinical researcher in the microbiome field and has authored over 150 peer-reviewed abstracts and papers. 

• Dr. Kassam has collaborated on dozens of clinical studies investigating applications of the microbiome to treat disease.

The company also has a high level of insider ownership. 

• Company director Nicholas Haft purchased $15 million worth of stock on 25th March at a price of $17 per share.

• Director Domenic Ferrante purchased $1.75 million worth of shares on March 25th at a price of $17 per share.

• Director Jeffery Smisek purchased $1.5 million also at a price of $17

• Crestovo Investor LLC purchased $12.5 million worth of stock on 25th March at a price of $17 per share.

Note that the stock is now trading roughly 20% below these purchase prices.

Numbers

Finch Therapeutics has no approved treatments and no revenues. In it’s March IPO the company raised $127 million which it intends to use for the continued development of CP101 and other treatments. Money has also been set aside for building a manufacturing facility and for the rollout of the product. In its latest report the company had $193 million in cash.

The company also has a partnership with Takeda Pharmaceuticals that gives the pharmaceutical giant the rights and license to FIN-524 and FIN-525 in return for upfront payments. If the other products in the pipeline show potential then Finch will likely need to raise more capital through additional equity offerings.

Valuation

Putting a valuation on Finch Therapeutics and CP101 is difficult since the company provides no details on pricing, expected reach or profit margins. Jefferies analyst Chris Howerton believes Seres’ competing product SER-109 could be a blockbuster with $1.5 billion sales a year for the treatment of C. difficile. 

A CP101 drug might therefore fetch a similar figure. Or if CP101 only captures a third of this figure that would be $500 million. With an enterprise value of $440 million, that puts Finch stock trading at 0.9 times expected revenues.

Essentially, if Finch’s microbiome treatments are all successful the company could be looking at multi billion dollars in yearly revenues. The company would also be highly rated and be a takeover target. 

Instead of attempting a valuation a more prudent approach is to consider the risk:reward that is on offer. An approval for the CP101 treatment looks reasonably likely based on the preliminary data. However, commercial success is not for certain since there are many factors that could derail the company’s prospects. 

The reward, however, is potentially billions of dollars of revenue from multiple products which could see the stock be a 5x or 10x winner over the long term. Based on this, the risk to reward favors taking a position with a view that the stock may provide significant returns with a long enough holding period.

Risks

As mentioned, Finch Therapeutics is a clinical stage biotech company with no revenues and no approved treatments. It therefore has multiple risks and is not suitable for all investors. The S1 filing details the numerous risk factors to take into account. I can summarise some of them below:

• Limited operating history, no approved treatments.

• Net losses and no revenues until the company can manufacture and market its products.

• High costs involved with product development and funding of operations. 

• High possibility of additional equity raising - diluting share count.

• Microbiome is an unproven approach with no approved therapies.

• Seres Therapeutics, Inc., Rebiotix, Inc. and Vedanta Biosciences, Inc. each have a product candidate being evaluated in clinical trials for recurrent CDI.

• No certainty that CP101 will continue to be effective or be commercially viable.

If microbiome therapies live up to the hype then this stock could be a big winner. But, even so, there are many things that could go wrong.

Final Thoughts

The microbiome is a fascinating area of research and the number of clinical studies and data coming out of them suggest that the industry is going to be an exciting place to be over the next few years.

Having said that, biotech companies are notoriously risky and I have been burned many times in the past. I’m no medical professional and I have limited experience in this corner of the market so you must act accordingly.

From what I can see, Finch Therapeutics has huge potential but there is a lot of risk too. Partly due to the microbiome data and partly due to the confidence of company insiders, I’ve taken a small position in Finch at a price of $13.93.

If CP101 is approved then I feel like the shares could double. If not, Finch still has a number of other treatments in the pipeline and a partnership with a major pharmaceutical company. I’m also taking a small position in Seres Therapeutics in order to diversify my risk.

To summarise, this is a low conviction, smaller trade for me. I’m willing to lose it all in hope of a big reward. I will be watching developments with interest.

Additional Reading

Google Talk
MIT
NCBI
FT
Persistence MR
Seres Therapeutics
Finch Therapeutics
Top 10 Companies In Microbiome
Nature Article
Openbiome

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Disclosure: I am/we are long FNCH, MCRB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.