What happened

Shares of Selecta Biosciences (NASDAQ:SELB) rose over 24% on Thursday without any company-specific news. But an article on Seeking Alpha by an anonymous source appears to be driving interest in the drug developer. The primary argument is that the stock is undervalued after a recent plunge.

Last week, shares of Selecta Biosciences tumbled when a Wall Street analyst downgraded the stock from a buy rating to a hold, and adjusted his price target to $4 per share. Even with today's pop, the small-cap stock is trading at roughly $3 per share. 

As of 12:59 p.m. EDT on Thursday, shares had a 21.3% gain.

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Image source: Getty Images.

So what

Selecta Biosciences essentially has one clinical-stage asset, SEL-212, which is being developed as a treatment in chronic refractory gout. The company licensed the rights to the drug candidate to Swedish biopharma Sobi in return for up-front payments totaling $100 million. The asset is currently in phase 2 development and is expected to move to a phase 3 clinical trial before the end of 2020.

Why out-license the only drug candidate in a pipeline? Selecta Biosciences is forging ahead with plans to study its broader technology platform in combination with gene therapies that utilize adeno-associated virus (AAV) vectors. Monetizing SEL-212 now, no matter the outcome of phase 2 or phase 3 studies, is a wise move within the context of the company's long-term strategy.

There's intriguing potential. Adenoviruses are one of many types of viruses that cause the common cold. As such, many individuals have antibodies to adenoviruses from environmental exposure, which means the immune system tends to go on defense when exposed to AAV-based gene therapies. It's considered one of the largest obstacles to generating consistently effective results from gene-therapy drug candidates across patient populations, and is the primary reason many AAV-based gene therapies can only be dosed once. 

If Selecta Biosciences can develop ways to desensitize the immune system's response to AAV-based gene therapies, then it could make genetic medicines safer and more effective, including creating the ability to administer multiple doses to drive curative effects. Of course, there's little real-world evidence for investors to go on right now.

Now what

The Seeking Alpha article is correct in pointing out that the stock's recent tumble was likely a bit exaggerated. The market seemed to have misinterpreted the value of the collaboration deal with Sobi, which immediately monetized a late-stage asset regardless of study outcomes. While Selecta Biosciences can receive up to $630 million in milestones and double-digit royalties, that's not really the important part of the transaction (nor are the payouts guaranteed).

Despite the progress and potential, investors must remember there's a long way to go before the company proves its technology platform can make AAV-based gene therapies safer and more effective. Selecta Biosciences now has the financial flexibility to generate data proving just that, but investors need to see those results before getting too carried 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.