Gossamer Bio
Edited by Jared Alexandria
In 2019, Gossamer Bio was flying high in a tailwind of momentum. The company came in hot onto the scene, boasting the 3rd largest IPO of the year with a star-studded management team, a deep pipeline, and a multi-billion dollar valuation.
Today, Gossamer Bio finds itself left for dead, seemingly a shell of its former self. With one of the most hated and controversial management teams in the industry, the company currently trades at a meager $130 million valuation and has only one asset left in the pipeline. Fortunately for Gossamer, this asset has the potential to be a mega blockbuster and we think it’s going to be.
Enter Gossamer Bio: The Revenant of Biotech – One last hand to play for a comeback and it’s a strong one. Its hand? A potential blockbuster cardiovascular asset with $390 million in cash, and the opportunity for Gossamer Bio to have best in class drugs in two multi-billion dollar markets.
We think Gossamer Bio’s data indicates that their lead asset could become the cornerstone of a major pulmonary franchise. Meet Seralutinib – Gossamer Bio’s asset for the treatment of Pulmonary Arterial Hypertension (PAH) and Pulmonary Hypertension related to Interstitial Lung Disease (PH-ILD).
Overview
We are bullish on Gossamer Bio for the following reasons:
- Phase II trial data, although initially poorly received, showcases an excellent safety profile with a strong and sustained deepening of efficacy.
- Seralutinib, by Gossamer Bio, is uniquely poised to perform better than its main competitor, Sotatercept by Merck, due to Seralutinib’s superior:
- Long term deepening of efficacy
- Safety profile
- Administration method
- Ability to heal right heart health
- Ability to address a larger patient population
- Bullish sentiment from the clinical community
- Bullish operational indicators:
- Gossamer Bio’s hiring of Bob Smith, coordinator of pre-launch work for Seralutinib’s competitor, Sotatercept by Merck
- Large insider buying from Gossamer Bio’s CEO and CFO
- Recent partnership with the Chiesi Group
We will also address reasons for the company’s current valuation disconnect, and prove why we believe Gossamer Bio is a mispriced and undervalued asset due to:
- A major catalyst desert
- Distrust towards management
- Fears of Sotatercept
- Enrollment concerns
Finally, we will show that a deep dive into the Gossamer’s balance sheet showcases a strong company that has the runway necessary to easily focus on their PAH program until top line results next year and further validate their PH-ILD program next year and into 2026.
Seralutinib will have a Phase 3 readout in the Q4 of 2025 for the treatment of PAH. That gives us time to really dig deep and consider the data leading up to the expected catalyst. Let’s consider the initial data, the likelihood that Seralutinib has a successful Phase 3 trial, the competitive landscape, the value disconnect, and the opportunity for Gossamer Bio to have best in class drugs in two multi-billion dollar markets.
Let’s look at the data
In late 2022, Gossamer Bio released results from its Phase II study - Torrey - for the treatment of PAH. The trial enrolled patients with both WHO Class II PAH (less severe patient population) and WHO Class III (more severe patient population).
The placebo adjusted PVR improvement (primary endpoint in P2 study) came in at just 14%, with a P-value of 0.03. The patients on Seralutinib showed a 6MWD improvement (primary endpoint in ongoing P3 study) of just 6.5 meters versus the placebo arm.
Yes, the data was objectively disappointing. The market reflected as such:
Impressively, Seralutinib managed to show a 37m, placebo adjusted 6MWD improvement with the WHO Class III patients. Unfortunately for Gossamer Bio, its competitor, Merck, simply had cleaner data at the time.
Merck set a very high bar in their phase 3 study after acquiring Acceleron Pharma for $11.5B. Their drug, Sotatercept, showed a placebo adjusted PVR improvement of 31.8% and a placebo adjusted 6MWD improvement of 29 meters.
However, the company’s data came with significant caveats. We will show you that a closer look will make it clear that at just a $133M market cap, Gossamer Bio’s Seralutinib has the superior asset versus Merck’s Sotatercept at an $11.5B valuation.
Gossamer Bio phase 2 Torrey study caveats
Caveat #1: Trial imbalance
The first caveat in the study was that there was a massive trial imbalance, favoring the placebo arm. The control arm consisted of 20 WHO Class II patients and 22 WHO Class III patients while the Seralutinib arm consisted of 30 WHO Class II patients and 14 WHO Class III patients. This was largely due to the timing of the study being during the COVID-19 pandemic, which made patient selection very difficult. The result of this was that many of the patients in the active arm had very limited walk impairment and as a result, the potential improvement was substantially limited.
The fact that Seralutinib showed a 37m improvement in the patients with WHO Class III is a strong signal that the drug works very effectively in a sicker patient population.
Caveat #2: Patients were heavily pre-treated
The patients in the Torrey study were also heavily pretreated and on a substantial amount of background therapy. For example, 57% of the patients were on triple background therapy. The high number of patients on background therapy combined with the high number of WHO Class III patients in the control arm caused the placebo arm to set a record score for a PAH trial in the 6MWD test. Overall, the study was very poorly designed, but it also provided the company with clear insights into how to mitigate these issues in a larger Phase 3 trial.
Advantages of Seralutinib over Sotatercept
Advantage #1: Long term deepening of efficacy
Gossamer Bio would eventually release open label extension (OLE) data for the patients that continued onto the extension part of the trial. The patient population consisted of 73/80 patients that had completed Torrey and one patient from the Phase 1B trial. This data would show a near 100% PVR improvement from week 24 to week 72. The patients also showed improvements in their 6MWD score but PVR is a much more objective measure for an open label study. This contrasts with the OLE data from Sotatercept (Pulsar study) which showed a significant reduction in PVR benefit. Gossamer Bio has the first study to date that has shown a continued improvement in efficacy going out 72 weeks. Other therapies have, at best, plateaued in efficacy over time.
Advantage #2: Seralutinib’s superior safety profile
The main issue with Sotatercept is the safety profile. Patients who take Sotatercept experienced elevated levels of Hemoglobin which potentially played a significant role in driving the efficacy data. Long term elevated hemoglobin levels are a substantial safety concern and can lead to blood clots and heart failure.
Recently, the EU denied Sotatercept an accelerated pathway due to safety concerns. The EU delay has caused many investors to give up on the belief that Sotatercept will ever be “The Home Run Drug” for patients with PAH.
(Editor’s Note: It is important to note that Sotatercept was approved by the FDA in March 2024 for Adults with Pulmonary Arterial Hypertension)
Conversely, Seralutinib has had an excellent safety profile compared to other PAH drugs both in the market and in the clinic. The safety profile for Seralutinib improved from week 24 to week 72 while other PAH therapies tend to show worse safety over time. Gossamer Bio has data from patients that have been on therapy for 4+ years which continues to bolster their excellent long term safety profile. Additionally, the ability to keep patients on Seralutinib for potentially 6+ years provides a substantial recurring revenue opportunity per patient that other therapies cannot provide.
Advantage #3: Seralutinib’s ease of administration
Seralutinib and Sotatercept have different mechanisms of action. Sotatercept is a once every 3-week injection while Seralutinib is a much more convenient, twice per day, inhaled dry powder therapy. The ability for the dry powder therapy to deliver the drug directly into the lungs allows for a rapid onset of action and helps avoid systemic adverse events that have been seen with other mechanisms.
Advantage #4: Seralutinib’s healing of the right heart
One of the most differentiating features of Seralutinib is the significant and sustained improvement seen in right heart health. Treatment of Seralutinib resulted in an NT-proBNP reduction of 408.3 ng/L mean difference from placebo vs. Week 24 (P=0.0012). The measure was statistically significant as early as week 12 and showed a near doubling of improvement between week 24 and week 72. NT-proBNP is the key biomarker for right heart stress.
Given that patients that have PAH die from right heart failure, the ability for Gossamer Bio to show this clear and sustained improvement in right heart health is a game changer.
Advantage #5: Sotatercept only works really well in approximately 1/3 of patients
Sotatercept is known to work incredibly well in 1/3rd of PAH patients but not nearly as well in the other 2/3 of PAH patients. For patients with acute flare ups, Sotatercept will be the initial option to rapidly bring patients back to normal and then Seralutinib will likely be brought in to maintain and improve the patients health over a much longer period of time. This leaves a major initial unmet need for 2/3 of patients and an additional longer term need for the other 1/3 of PAH patients. Additionally, nearly all of the patients who have been on Sotatercept will be refractory to the drug by the time that Seralutinib hits the market. This will leave a tremendous amount of patients with a desperate need for a new mechanism of action.
Thoughts from the clinical community
Leading experts throughout the PAH community have praised Seralutinib. The difference between Wall Street’s perception of Seralutinib vs the clinical community is incredible.
Robert Frantz, MD, of the Mayo Clinic in Rochester, Minnesota was cited in an article by Medpagetoday with the following quotes about Seralutinib:
"When you think about what this compound is doing, and how it really does seem to be targeting activity that is important in the real world of pulmonary vascular disease -- and that it is showing a signal of efficacy in a heavily pretreated, heavily prevalent population with a median duration of disease of 8 years -- it is actually pretty mind blowing...I think the whole [landscape] is going to change, and we are finally going to have drugs that have effects on inflammation and proliferation..."
Also very important to note here is that Robert Frantz was involved in the Sotatercept trial and had a relationship with Acceleron before the takeover by Merck.
Combination of bullish indicators for Gossamer
Bullish Signal #1: Gossamer Bio’s hiring of Bob Smith from Merck
The company’s recent hiring of Bob Smith speaks volumes as he was previously doing the pre-launch work for Sotatercept. In a personal conversation with Bob Smith at the JPM Healthcare Conference through one of Alumni’s contacts, Bob stated that he had given up his role launching Sotatercept and a substantially larger salary at Merck because Seralutinib was the best drug that he’s seen in his 25 years in the PAH space.
Bullish Signal #2: Large insider buying from CEO and CFO
The company’s CEO, Faheem Hasnain, bought $1M worth of stock in March of 2023 at $1.14. He followed up by purchasing another $1M of stock at $1.82, in July of 2023. The stock currently trades at a fraction of these levels.
The company’s CFO, Bryan Giraudo, had purchased 55,000 shares at $1.02 in early 2023 and followed up by making his largest purchase ever (200,000 shares) at $0.56. The market seemed to react strongest to Bryan’s last purchase as he more than doubled his position and has always been conservative with his trading.
(Source: Form 4’s filed with the SEC: (1) (2) (3) (4) (5) (6) (7))
Bullish Sign #3: Partnership with the Chiesi Group
Gossamer Bio recently announced a partnership with privately held company Chiesi. The company had received more than their entire market cap in an upfront reimbursement payment of $160 million. Gossamer is also eligible for up to $146M in regulatory milestones as well as $180M in sales milestones. Gossamer was able to keep 50% of the U.S monetary rights to Seralutinib and is eligible for a royalty in the mid to high teens for ex-U.S rights.
Most importantly, this partnership allows Gossamer Bio to start directly into a Phase 3 trial for the treatment of PH-ILD, an even larger indication than PAH. The partnership will speed up the potential time to market by 4 years for Gossamer Bio. The company is adamant that PH-ILD is the perfect indication for Seralutinib and that it could quickly replace Tyvaso as the standard of care for the treatment of PH-ILD. Tyvaso is a rapidly growing blockbuster with $372.5m in sales last quarter. It’s notable that the bar for success in PH-ILD is substantially lower than in PAH. Additionally, Sotarcept’s MoA isn’t a fit for this indication.
Additionally, the partnership allowed Gossamer to maintain strategic interest in the U.S which makes it more likely that Gossamer will eventually be acquired.
Reasons for the valuation disconnect
Reason #1: Major catalyst desert
Gossamer Bio trades at a significant discount partially due to the lack of any significant catalysts until the Phase 3 data in Q4 of 2025. Smaller catalysts include completion of enrollment by Q1 of 2025 and Initiation of their PH-ILD study by mid-2025. A common question investors have is “Why own now?”.
Reason #2: Distrust towards management
Gossamer Bio became one of the most hated names on Wall Street after completing a $120M private placement in July 2022. The shareholders had entered into a lockup agreement which had expired two months before data was to be released. Given the subsequent crash in Gossamers stock, many investors felt that they were rug pulled by Gossamer’s management and top investors. Objectively, raising money at such a strong price pre-data was incredibly important for the future health of the company. We believe that the distrust created by this incident isn’t a fundamental concern and should be viewed as an opportunity given how heavily these concerns have been priced into the stock.
Reason #3: Fears of Sotatercept
Sotatercept has its caveats but it is also a fantastic drug and potentially life-saving for patients with acute flare ups. While we believe that Gossamer Bio has the better asset and an additional home run opportunity in PH-ILD, there is a fear among some members of the investor community that Sotatercept will saturate the market. We believe this is highly unlikely due to the many reasons described above and most importantly the safety profile which will cause the vast majority of patients to be refractory to Sotarcept by the time Seralutinib hits the market.
Reason # 4: Enrollment concerns
The investor community has also had significant concerns about the ability for Gossamer to enroll their study at a fast enough pace to keep up with their guidance for a Q4 2025 top line Phase 3 readout. These concerns have quickly started to evaporate as Gossamer is running approximately 70% of its enrollment sites outside of the U.S. Given the recent EU delay for Sotatercept, these concerns have been substantially reduced. Additionally, Gossamer's recent partnership with Chiesi will allow for enrollment to progress even more rapidly due to a more advantageous balance sheet and Chiesi’s expertise in Pulmonary and Cardiovascular diseases. Management is very confident in their ability to keep up with timelines and the recent EU delay for Sotatercept only amplified their confidence.
Market opportunities
Gossamer Bio has a big pharma size asset for a company with such a small market cap. Many analysts project Sotatercept sales to reach as high as $6B per year in PAH. With 30-50k patients in the U.S suffering from PAH, the opportunity for the company to take a significant portion of these sales is enormous.
While the nearer term opportunity in PAH is tremendous, the opportunity in PH-ILD has the potential to be an even larger, long term revenue driver. The PH-ILD market is approximately double the size of the PAH market in the U.S with an estimated 60-100k patients suffering from the disease. Additionally, the unmet need is substantial. The standard of care, Tyvaso, has generated incredible revenues but has also set a very low bar and the barrier to entry is even lower than in PAH.
While PAH is the near term driver of the company’s stock, the potential for Gossamer to generate an even larger and additional long term multi-billion dollar revenue stream in PH-ILD is very significant. As the company’s partnership with Chiesi group progresses, the pair will likely test Seralutinib in IPF - another multi-billion dollar indication where the mechanism of action for Seralutinib has an excellent rationale.
While the IPF opportunity is far out, it’s certainly something that a potential acquirer with substantially more resources would be interested in since they could rapidly accelerate this program and start a trial immediately. This adds even more long term strategic value to Gossamer and reinforces the view that Seralutinib is a deep pipeline in one product.
Strong balance sheet
Gossamer Bio is currently trading at a negative enterprise value (-$70M) as they sport a market cap of $130M, a strong cash balance of $396M (includes payment from Chiesi), and $196M of 5% 2027 Senior Unsecured Convertible Notes as per their most recent 10-Q. As of the end of Q1 2024, Gossamer Bio has indicated that they have a cash runway into 2027 that supports both their PAH program along with the beginning of their PH-ILD program next year. On top of that, the company recently settled their debt obligations in full under their credit facility with MidCap Financial.
While we generally aren’t fans of biotech companies with debt on their balance sheet, Gossamer Bio’s $196M of convertible notes are not a huge cause for concern for multiple reasons. The company has more than enough cash coverage on an obligation that is not due for another three years, their 5% semi-annual interest payments on the notes are fixed until maturity, the convertible feature is far out the money at $16.23, and no defaults have occurred even with the volatile nature of the company over the past two years.
As balance sheet strength can sometimes make or break any cash burning company, we believe Gossamer Bio’s current balance sheet position allows the company to easily focus on their PAH program until top line results next year and further validate their PH-ILD program next year and into 2026.
