Finch Therapeutics Group, Inc. (FNCH) is a microbiome technology company that has pivoted its focus to realizing the value of its robust intellectual property (IP) portfolio and microbiome assets. The company's journey has been marked by both successes and challenges, but its determination to capitalize on its innovative technology continues to drive its strategic initiatives.

Business Overview and Historical Perspective

Finch Therapeutics was incorporated in 2017 as a Delaware corporation, formed through a merger and recapitalization of Finch Therapeutics, Inc. and Crestovo Holdings LLC in September of that year. Since its inception, the company has primarily funded its operations through various means, including equity financing, debt financing, and collaboration revenue. Finch successfully raised an aggregate of $118.8 million in net proceeds from its initial public offering and approximately $177 million from the sale of convertible preferred stock. Additionally, the company generated $14 million in collaboration revenue under an agreement that was later terminated in 2022.

In May 2022, Finch secured a $15 million loan from Hercules Capital, Inc. However, as part of its strategic shift in January 2023, the company voluntarily paid off all outstanding amounts under this loan agreement. This move was a crucial component of Finch's "Strategic Reprioritization," which marked a significant turning point for the company.

The Strategic Reprioritization, announced in January 2023, involved Finch's decision to wind down its development efforts and focus on realizing the value of its intellectual property estate and other assets. This strategic shift led to substantial changes in the company's operations, including the liquidation of certain assets, termination of vendor contracts, and a significant reduction in headcount. These actions were taken to streamline Finch's operations and align them with its new focus on its intellectual property portfolio and other assets.

Throughout its history, Finch has faced significant challenges, including incurring substantial operating losses and not recognizing any product revenue since its inception. Prior to the Strategic Reprioritization, the company's business model centered around research and development activities. The shift in focus necessitated various restructuring efforts, including one-time severance payments, healthcare coverage, and outplacement services, which were incurred during the first quarter of 2023.

Financial Performance and Liquidity

Finch Therapeutics' financial performance has been heavily impacted by its strategic pivot. For the year ended December 31, 2023, the company reported total revenue of $107,000, a significant decrease from the $861,000 reported in the previous year. This decline was primarily due to the termination of a collaboration agreement in 2022.

The company's net loss for the year ended December 31, 2023, was $74.75 million, compared to a net loss of $114.65 million in the prior year. The reduced net loss was largely attributable to the company's efforts to significantly scale back its operations and focus on realizing the value of its intellectual property and other assets.

For the six months ended June 30, 2024, Finch reported no revenue, compared to $110,000 in the same period in 2023. The decrease in revenue was due to the termination of the collaboration agreement that had generated revenue in the prior year. Research and development expenses decreased from $7.20 million in the first half of 2023 to $0 in the same period in 2024, reflecting the company's decision to wind down its clinical development efforts. General and administrative expenses also decreased from $18.49 million to $11.27 million over the same period, primarily due to reductions in professional fees, facilities and supplies, and personnel expenses as a result of the company's cost-cutting measures.

As of June 30, 2024, Finch Therapeutics had $16.04 million in unrestricted cash and cash equivalents, which the company believes will be sufficient to fund its operating expenses and capital expenditure requirements into 2025. However, the company has expressed substantial doubt about its ability to continue as a going concern, citing the recurring losses from operations and the uncertainty surrounding its ability to successfully realize the full value of its intellectual property estate and other assets.

The company's liquidity position as of December 31, 2023, showed a debt-to-equity ratio of 2.04, a current ratio of 3.87, and a quick ratio of 3.87. These figures reflect the company's efforts to manage its financial position in light of its strategic shift.

Intellectual Property and Litigation

Finch Therapeutics' primary focus has shifted to realizing the value of its robust intellectual property portfolio, which includes several key patents related to microbiome-based therapies. The company's intellectual property estate has become the foundation of its strategic initiatives, as it seeks to generate revenue through licensing agreements and enforcement of its patent rights against third parties.

In December 2021, Finch Therapeutics became embroiled in a patent infringement lawsuit against Rebiotix Inc. and Ferring Pharmaceuticals Inc. The lawsuit, filed in the U.S. District Court for the District of Delaware, alleges that Rebiotix and Ferring have infringed on several of Finch's patents, including the 309, 702, 107, 406, and 413 patents, as well as three patents owned by the University of Minnesota and exclusively licensed to Finch.

After a series of amendments and counterclaims, the case has been narrowed to focus on a total of five asserted patent claims from three patents. In August 2024, the case went to trial, and on August 9, 2024, the jury rendered a verdict finding that Rebiotix had infringed the asserted claims, with the jury awarding royalty damages to Finch and the University of Minnesota in the amount of a $25 million upfront payment and $0.81 million in running royalties for commercial sales of Rebiotix's microbiome-based therapy, Rebyota.

Finch Therapeutics and the University of Minnesota expect to seek enhanced damages, attorneys' fees, costs, and prejudgment interest, as well as post-judgment relief for Ferring's ongoing infringement. However, the final outcome of the lawsuit remains subject to inherent uncertainties, and the actual legal fees and costs, as well as the amount of recovery, if any, will depend on the ultimate resolution of the proceedings.

Challenges and Outlook

Finch Therapeutics' strategic pivot has not been without its challenges. The company's decision to discontinue its clinical development efforts and the subsequent delisting of its common stock from the Nasdaq Global Select Market have raised concerns about the company's long-term viability.

Additionally, the ongoing patent infringement lawsuit against Rebiotix and Ferring, while representing a potential avenue for revenue generation, also carries significant legal expenses and uncertainties. The company's ability to successfully realize the full value of its intellectual property estate remains a critical factor in its future success.

The company recognized significant one-time charges related to the Strategic Reprioritization, including $32.90 million in impairment of in-process research and development and $13.14 million in impairment of long-lived assets during the six months ended June 30, 2023. These charges reflect the substantial restructuring efforts undertaken by Finch as it shifted its focus away from clinical development.

Finch Therapeutics does not currently have any approved products for commercial sale and does not expect to generate any revenue from product sales in the near future. The company's future revenue, if any, is expected to be derived from enforcement and out-licensing of its intellectual property estate. This shift in strategy means that Finch no longer expects to be able to progress any product candidate through clinical trials or commercial approval.

Despite these challenges, Finch Therapeutics remains committed to its new strategic direction. The company's unwavering focus on its pioneering microbiome IP portfolio and its determination to enforce its patent rights against infringing parties suggest that it is taking proactive steps to navigate the current landscape and unlock the potential value of its assets.

As Finch Therapeutics moves forward, investors will be closely watching the progress of the patent infringement lawsuit, the company's ability to generate revenue through licensing agreements, and its overall financial performance and liquidity position. The company's ability to effectively manage its cost structure and capitalize on its intellectual property while addressing the substantial doubt regarding its ability to continue as a going concern will be crucial factors in determining its long-term success.