Buy Solid Biosciences: Unpacking Its Main Value Driver (NASDAQ:SLDB)

Solid Biosciences Inc. (NASDAQ:SLDB) is a pre-revenue company focused on gene therapy innovation for neuromuscular and cardiac conditions. Its flagship one-dose drug therapy, SGT-003 for Duchenne muscular dystrophy [DMD], is expected to be tested in its first patient in Q2 2024, with initial data in mid-2024 and functional data in Q4 2024. If the results are positive, SLDB’s DMD drug could potentially become the company’s foothold in a sizeable market. Additionally, SLDB has a cardiac R&D program that addresses critically unmet needs in rare heart disorders. However, that portion of their product portfolio remains largely in the early stages of development. SLDB recently received additional liquidity from a PIPE investment, significantly improving its risk-reward equation. So, despite the inherent biotech risks present, I believe SLDB is a viable investment for those aware of the risks.

A Bet on DMD: Business Overview

Solid Biosciences Inc. (SLDB) is a life sciences company founded in 2013 and headquartered in Charlestown, Massachusetts. SLDB is in the early stages of developing gene therapies for neuromuscular and cardiac conditions. The company’s main value proposition is its research platform with a Capsid Library that delivers gene therapies in phase 1/2, with First in Human [FIH] data expected in Q3 2024. However, SLDB’s main value drive today resides in its potential solution for DMD, which essentially consists of using a modified vector to deliver a copy of the defective gene to muscle cells that cause the underlying disease. This, in turn, helps patients produce the dystrophin protein that they’re missing, which could significantly impact the progression of DMD.

The main part of SLDB’s product pipeline is its neuromuscular R&D program, mainly SGT-003. This is a one-time dose gene therapy indicated for Duchene muscular dystrophy [DMD], a genetic disorder characterized by progressive muscle degeneration and weakness. SGT-003 uses a designed capsid [AAV-SLB101] to deliver a DNA sequence encoding a shortened form of dystrophin protein [microdystrophin] that improves muscle function. The FDA designated it as Fast Track and Rare Pediatric Disease on December 7, 2023, and April 5, 2024, respectively. SGT-003 is starting its clinical stage in phase 1/2, and the first patient will be administered the medication in Q2 2024. SLDB expects initial safety data in mid-2024 and functional data in Q4 2024. Since this is likely SLDB’s main value driver for the foreseeable future, it’s promising that multiple potentially positive catalysts are lined up for the near term.

Additionally, SLDB’s other neuromuscular program is AVB-202-TT for Friedreich’s Ataxia [FA]. FA is a hereditary, progressive neurodegenerative disorder that produces neurological symptoms such as difficulty walking and speech problems. FA is also associated with heart conditions, diabetes, and skeletal deformities. However, AVB-202-TT is currently in the research/discovery phase. So, while this is also a potentially promising research program, it shouldn’t be considered a significant value driver for now.

On the other hand, SLDB also has a cardiac program. SLDB’s IP portfolio for cardiac applications is more diverse and includes four drug candidates: 1) SGT-501, 2) AVB-401, 3) SGT-610, and 4) SGT-701.

SGT-501 targets heart rhythm disorders potentially leading to fainting or even sudden cardiac death. This medication is in the research/discovery phase. It is indicated for modulating calcium in the heart cells when there are mutations in the Ryanodine Receptor 2 [RYR2] gene and the Calsequestrin 2 [CASQ2] gene. Such mutations produce Mediated Catecholaminergic Polymorphic Ventricular Tachycardia [CPVT]. The RYR2 gene encodes a protein that regulates calcium in the heart muscle cells to control normal heart contractions, and the CASQ2 gene provides instructions for making a protein that binds and stores calcium in heart cells to maintain the release of this mineral. These mutations disrupt calcium regulation, resulting in irregular heartbeats, which can lead to serious heart complications if left untreated.

Likewise, SLDB’s AVB-401 medication compensates for dysfunctional BAG3 gene mutations that produce Dilated Cardiomyopathy [DCM], which impairs the heart’s ability to pump blood effectively. This drug is currently in preclinical phase. As for SGT-610, which is also in the preclinical stage, this application aims to treat DCM caused by mutations in the TNNT2 gene, which encodes cardiac troponin T. This protein is crucial for heart muscle contraction. Lastly, SGT-701 is also in the preclinical phase, indicated for treating DCM caused by a mutation in the RBM20 gene. Such genes are involved in RNA splicing in cardiac tissues, so by correcting the effects of the mutation, the drug may improve the heart’s ability to pump blood, which was decreased due to dilation.

Pioneering Gene Treatments with Strong Financial Backing

Furthermore, SLDB’s pipeline covers multiple therapeutic areas with a range of drugs in early development that could be sustained by $123.9 million in cash as of December 31, 2023. They also have an additional $108.9 million from a private investment in public equity (PIPE) deal announced on January 8, 2024. However, I believe that most of SLDB’s short-term investment potential lies in its SGT-003 program and the overall potential of its Capsid Library.

In March 2024, SLDB announced a non-exclusive license and collaboration agreement with Armatus Bio to develop treatments for Facioscapulohumeral muscular dystrophy [FSHD] using SLDB’s AAV-SLB101 capsid that reduce the toxicity of AAV gene therapy and improve its efficacy. AAV-SLB101 is the capsid for SLDB’s SGT-003 for Duchene. SLDB will provide the know-how to enable Armatus’ drug development and, in return, will receive upfront and milestone payments and tiered royalties on net sales. This agreement is part of the company’s strategy of out-licensing its technology for muscular disorders.

For context, Armatus’s drug candidate is ARM-201, a potential best-in-class, single-dose treatment that addresses the genetic causes of FSHD with a favorable safety profile obtained in preclinical studies. This collaboration underscores SLDB’s technological advantage and innovation in gene therapy, which expands its application beyond its internal pipeline and leads to additional revenue streams. This could become a significant value driver for the company if they generate extra revenue verticals from licensing or agreements based on their current IP. However, as of today, SLDB remains pre-revenues, so while this is promising, it’s still highly speculative to justify investing in the stock solely based on this possibility.

It’s also worth noting that overall, the Duchenne muscular dystrophy market was valued at $3.5 billion in 2023, and it’s forecasted to reach $11.7 billion. This implies a 13.16% CAGR from until 2033. Today, that market is mostly comprised of competitors such as Pfizer Inc. (PFE), Sarepta Therapeutics (SRPT), PTC Therapeutics (PTCT), and FibroGen Inc. (FGEN), among others. However, SLDB has positive differentiators due to its low-dose approach, which achieves high expression levels of therapeutic genes. Also, SLDB’s strategy of controlling all aspects of manufacturing in-house could provide better control over the quality of its products if done properly. On the other hand, the FDA’s Fast Track and Rare Pediatric Disease Designations for SGT-003 highlight the urgent need for this drug for DMD treatment.

Robust Financials and Cheap: Valuation Analysis

From a valuation perspective, it’s worth noting that SLDB currently trades at a $436.5 million market cap. Its balance sheet holds roughly $123.6 million in cash and equivalents against $26.3 million of total debt. I estimate its latest quarterly cash burn in Q4 2023 was approximately $20.9 million. I obtained this figure by adding its CFOs and Net CAPEX. If we annualize its latest cash burn, the implied yearly figure is $83.6 million. This would mean that the company’s cash balance supports roughly 1.5 years of cash runway, which is generally not terrible. However, as I noted before, SLDB does have access to the proceeds of the January 2024 PIPE investment. This significantly increases the cash balance to $232.5 million, along with its cash runway, which is 2.8 years. Such a cash runway should be sufficient to fund SLDB’s SGT-003 project in the foreseeable future.

It’s hard to estimate SLDB’s balance sheet post-PIPE investment, but if we assume only this cash investment, then the equity increased from $126.5 million to $235.9 million, assuming the cash increased SLDB’s book value by the same amount as the investment. Under this assumption, the stock’s P/B ratio would be 1.85. This is generally a reasonable P/B ratio, but compared to SLDB’s sector median P/B of 2.45, it suggests that the stock might be undervalued at current prices. Moreover, since the company’s main research program with SGT-003 is particularly promising for DMD and has FDA designations that show regulators are favorable, I’d lean bullish on the stock. Hence, I think a “buy” rating makes sense for SLDB based on SGT-003 and its low valuation relative to its peers post-PIPE investment.

Investment Caveats

Naturally, my investment thesis on SLDB hinges on SGT-003, which is inherently speculative. This is still a relatively early stages R&D project, but the FDA designations I mentioned before could expedite its progression and potential approval, assuming everything goes as planned. Moreover, if the company’s cash burn increases post-PIPE investmentment, we must re-evaluate the precise cash runway estimate. If it’s significantly shorter than my initial assessment, then the SLDB could need additional funds sooner than I anticipated, which would also worsen its investment appeal.

It’s also worth noting that SLDB’s product pipeline will compete with better-capitalized pharma giants and that market and pricing dynamics could significantly cap its revenue potential. However, note that SLDB’s approach differs because one-dose treatments have terrific patient appeal, which could quickly disrupt the market. This is good for short-term revenues if it gets the required FDA approvals, but it also limits its revenue potential for the longer run due to its limited repeat revenue potential. It’s highly speculative to delve into how market acceptance will play out. Yet, I think that, on balance, SLDB’s valuation today is too cheap relative to its potential, making it a viable investment for investors aware of the inherent risks.

Speculative Buy: Conclusion

Overall, I think SLDB is a promising biotech company, especially for investors looking for exposure to DMD treatments. Naturally, SLDB is highly speculative at this stage. Still, it has the ingredients for long-term success, especially after the recent cash infusion from the January 2024 PIPE investment. This increase in liquidity significantly improves its risk-reward equation, and despite my previously mentioned risks, it makes SLDB a viable investment for those aware of the risks.