This small-cap biotech company has the potential to change the world of medicine.  Seres Therapeutics (NSDQ: MCRB) is a small biotech company focusing on the use of naturally occurring bacteria to treat increasingly prevalent and potentially deadly infections and inflammatory diseases linked to the human gut. The company is generating chatter in the biotech world and attracting big money from a global food company and institutional investors.

Seres Therapeutics is just moving out of the research-only phase and is starting to make sales. The company offers explosive potential and could generate $12 billion to $15 billion in sales by 2022.

I’ll tell you all about this intriguing company in the coming paragraphs. First, I’d like to share some important background information so you can appreciate the company and its potential.

The Infectious Disease Crisis

As a practicing medical doctor, I see crucial health problems that other analysts often are unaware of. Lately, one of those problems that I’m seeing in some of my patients, who have been treated with multiple rounds of antibiotics, is advanced infections. This happens more often because bacteria are becoming resistant to antibiotics. The problem stems from overuse of antibiotics and a dearth of new antibiotics, as the drugs aren’t profitable enough for pharmaceutical companies to develop.

Besides developing drug-resistant bacteria, antibiotic overuse has a serious side effect, and it’s the overgrowth of bad gut bacteria, known as Clostridium difficile (C. diff.), which affects some 850,000 patients and kills 30,000 people per year in the U.S. alone. It causes diarrhea, fever and abdominal cramping.

In my office in the last year, I have treated at least three patients with health problems related to this bacteria. To make matters worse, some strains of the bacteria are also antibiotic-resistant, and can’t be treated with conventional therapy.

  Bacterial resistance to antibiotics in some parts of the world has reached the tipping point. Recently, a U.K. government-funded study concluded: “If we don’t do something, we’re heading towards a world where there will be no antibiotics available to treat people who need them.”

Microbiome Therapeutics

Having no useful antibiotics to treat infectious diseases is frightening. But because of recent advances in research and our understanding of the human microbiome, there is new hope for alternative treatments.  The human microbiome is the genetic code of all the bacteria that coexist on and in humans, especially the microbes in the gut that help with the final stage of digestion. When this part of the microbiome malfunctions, people can develop a spectrum of symptoms that range from the cramping and pain associated with irritable bowel syndrome to potentially lethal conditions, such as C. diff colitis, and hereditary inflammatory bowel diseases, such as Chron’s disease and ulcerative colitis.

Microbiome therapeutics are administered via a medical procedure called fecal microbiota transplant. Essentially, bacteria from a healthy donor gut are sampled, harvested, processed and  “transplanted” to unhealthy guts to replace the bad bacteria with good bacteria through a colonoscopy—not a pleasant experience. When this works, the ill colon returns to normal health and function. The treatment has produced some excellent results.

Seismic Opportunity

Up until now the procedure has been administered on a per-case basis in which individual labs match donors and recipients as directed by a physician, limiting the treatment’s availability.

Through its research and clinical trials, Seres is working on mass-producing similar bacteria-transplanting treatments by putting them in pill form.

This could lead to a new wave of therapeutic options for diseases beyond those in the gut, such as skin diseases, including acne, and potentially some life-threatening infections.

Although Seres has many phase III trials underway, it recently started what could be a turning-point study: a 24-week, phase I, 60-patient clinical trial with a compound known as SER-262.

SER-262 combines 12 bacteria strains in spore form that are contained in a pill and is designed to fight C. diff.  The trial will see how the pill does stopping C. diff. after eight weeks compared to a placebo. If this trial succeeds, I expect more important developments in the next six to 12 months. The potential market for these products is huge, with global sales for Chron’s disease and ulcerative colitis nearing $8 billion and projected to rise to over $11 billion by 2022.  Expectations for the treatment of C. diff. infections are for $1.5 billion in global sales. The current treatments are limited to antibiotics and surgery in selected cases where the infection has reached a critical stage.

Some serious challenges exist for such treatments, as everyone’s microbiome is unique. Seres addresses this challenge through its library of 14,000 bacterial genomes, which is larger than the National Institutes of Health’s library. From its own library, Seres can create infinite combinations to treat multiple microbiome-related conditions.

This vast database of genes also offers the potential to eventually create individual treatments for irritable bowel diseases.

EBIS Assessment

The lifeblood of small biotech companies is money.  Only those with deep pockets can afford the research as well as the ups and downs of bringing products to market. Here, Seres is in excellent shape. It has a $1.9 billion pledge from Nestle Health Sciences through a development and commercialization pact for C. diff., ulcerative colitis and Chron’s disease products. Seres has already received $120 million thanks to this pledge. Nestle, which also has a stake in Seres, bought the U.S. and Canadian rights to four Seres products in clinical trials.

Seres gets a healthy +8 Buy rating from my Emergent Biotech Investment System (EBIS), which was originally designed for small, profitable companies. The system evaluates companies based on 10 criteria that are heavily tilted toward product development, revenue, profits and cash flow growth, as well as cash on the balance sheet.

Though Seres isn’t profitable, it has just turned cash flow positive, which is the precursor to profits. It also has a potentially multibillion-dollar global market and the support of a stout corporate backer in Nestle. With $193 million in cash as of March 2016 (Seres’s first quarter of revenue) and the potential for up to $1.9 billion more from Nestle, Seres has an excellent financial base to operate from. The company also controls its expenses well and spent just under $22 million per quarter in research and development and administrative costs. The best part of the balance sheet is that there is nearly 2.5 times enough cash (the ratio of trailing liabilities to current cash is 0.47) to cover all of the company’s liabilities in case of a big setback

What could go wrong? As with any biotech company at this stage of development, the clinical trials could go wrong, the Food and Drug Administration could reject any drug candidate, or management could lay an egg. Higher interest rates or a sudden worsening of the global economy could also hurt operations.  

Buy Seres up to $38.

The EBIS Score for Seres Therapeutics is + 8 (Buy)

Cash on hand: (+1) $193 Million

Cash on Hand growth (year over year): (+1) 428%.

Revenue (present or not): (+1): $2.71 million vs. 0.

Revenue growth (10% or greater): (+1) 100%

Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1).  0.47

Earnings (Present or Not Present  or Positive Cash Flow): (+1)

Net Income Growth (Year over Year): (+0) N/A

Products on the market: (+0) N/A

Pipeline Strength: (+1): Four major clinical trials

Late Stage Clinical Trials and Product Launches: (+1) N/A

The EBIS system consists of 10 fundamental criteria that are updated every quarter after the earnings results for each company are published. Each criterion gets a value of +1 or zero. A total of 8 or more points earn a BUY rating. A total of 5 to 7 points earn a HOLD rating. Less than 5 points delivers a SELL or AVOID rating. EBIS was introduced on June 15, 2015, and was developed by Joe Duarte MD.

*Companies at the research stage often have no income, revenue or products. These companies are evaluated on an individual basis based on subjective criteria, such as the potential for clinical trial success and overall strength of management and operations.