What happened

Shares of Selecta Biosciences (NASDAQ:SELB) fell more than 25% today as investors signaled their lack of confidence in the company's trajectory. Yesterday, the biopharma announced it had licensed its lead and only drug candidate to Swedish biopharma Sobi. The licensing agreement essentially monetizes the late-stage asset and allows the company to focus on new gene therapy programs and partnerships, the first of which is expected to begin clinical trials before the end of 2020. 

But Stifel Nicolaus analyst Derek Archila cautioned investors to remain grounded. He downgraded Selecta Biosciences stock from a buy rating to a hold rating and reduced his price target to $4 per share. Ironically, that's roughly where the stock price rested at market close yesterday, but investors are taking their money and putting it elsewhere.

As of 11:56 a.m. EDT, the small-cap stock had settled to a 24.1% loss.

A rising chart that takes a sudden turn down.

Image source: Getty Images.

So what

Selecta Biosciences is developing SEL-212 as a treatment in chronic refractory gout. The drug candidate is expected to begin a phase 3 clinical trial in the second half of 2020. Rather than pursue a go-it-alone development strategy, the company decided to partner with Sobi to push the late-stage asset over the finish line.

Under the licensing agreement, Selecta Biosciences will receive upfront payments of $100 million, including a $25 million equity payment at $4.62 per share. The company will conduct the phase 3 study on behalf of Sobi, which will be paid for with a portion of the upfront payments. Selecta Biosciences is eligible to receive up to $630 million in milestone payments and double-digit royalties on commercial sales should the drug candidate earn marketing approval. 

Despite the analyst downgrade, the licensing deal is a wise move. It immediately monetizes SEL-212 and, even if the drug candidate fails the upcoming phase 3 study, provides enough additional cash for Selecta Biosciences to complete its pivot to gene therapy programs. The company believes its technology platform can be used in combination with specific types of gene therapies to improve their efficacy, including the potential to dose patients multiple times. That could prove pretty lucrative if the tools can be applied broadly across the industry's gene therapy pipeline.

There's no guarantee genetic medicines will pay off in the long run, but investors can be confident the business has the financial flexibility to navigate the next year or so. The company ended March with $72 million in cash.

Now what

Selecta Biosciences hasn't accomplished much with its technology platform. Could this time be different? It's possible. Management wisely moved to immediately monetize SEL-212 and fund the pivot to gene therapy programs. If the company's technology platform proves successful in reducing immune responses against specific viral vectors, then it could become an important tool with broad potential to make gene therapies more effective.

Given all of the moving parts and the uncertainty of the coronavirus pandemic on clinical programs, most investors are probably better off keeping this small-cap stock on their watchlist for now. Those with an above-average appetite for risk and a long-term mindset might be content with staking a small position in the biopharma, but the payoff could be years away.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.