Seres Therapeutics, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. Seres is a clinical-stage microbiome therapeutics company and had generated no product-sales revenue.
Key financial results
Amounts below are in millions of dollars, except per-share data. Margins are not especially informative for this development-stage company, whose revenue is primarily collaboration and grant revenue.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.4 | $7.0 | $15.7 | $26.9 |
| Research and development expense | $23.9 | $18.3 | $65.7 | $59.1 |
| General and administrative expense | $7.6 | $5.9 | $20.2 | $19.0 |
| Operating loss | $(30.0) | $(17.2) | $(70.2) | $(52.7) |
| Net loss | $(30.3) | $(16.4) | $(70.9) | $(51.5) |
| Net loss per share | $(0.36) | $(0.23) | $(0.93) | $(0.99) |
| Operating cash used | Not separately presented | Not separately presented | $(75.7) | $(62.5) |
- Q3 revenue fell $5.6 million year over year, mainly because recognized NHS collaboration revenue and AstraZeneca collaboration revenue were lower; grant revenue increased by $1.3 million. Nine-month revenue declined $11.2 million, principally from lower NHS collaboration revenue.
- Q3 net loss widened by $13.9 million as revenue fell and operating expenses rose. Nine-month net loss widened by $19.4 million, despite the prior-year period including $1.5 million of restructuring expense.
- Cash, cash equivalents and short- and long-term investments totaled $320.3 million at September 30, 2020, versus $94.8 million at December 31, 2019. Current assets were $308.0 million and current liabilities $45.8 million. Cash and equivalents alone were $207.3 million.
- Net cash used in investing was $83.6 million, largely reflecting purchases of investments; financing provided $301.4 million. Financing included approximately $243.7 million net from an August public offering, $19.9 million from a concurrent Nestlé placement, and $24.8 million from ATM sales.
- Outstanding debt had a $25.0 million principal balance and $25.0 million carrying value at September 30. It bears interest at the greater of prime plus 4.40% or 9.65%; interest-only payments run through December 2021, subject to possible extension. The loan is secured by substantially all assets other than intellectual property.
Material changes, outlook and risks
- SER-109: Seres reported positive topline Phase 3 ECOSPOR III results in August. Recurrence by eight weeks was 11.1% with SER-109 versus 41.3% with placebo; the reported absolute reduction was 30.2 percentage points. The FDA indicated a safety database of at least 300 patients is needed, and the company was enrolling an open-label study to expand it. Regulatory approval is not assured.
- Other programs: SER-287 Phase 2b enrollment was over 75% of target, but COVID-19-related site and endoscopy disruptions affected development. SER-401 trial-readout timing was uncertain amid the pandemic. Seres said the first patient entered the SER-301 Phase 1b study in November 2020, after the quarter; the filing also records a $10 million NHS milestone-related transaction-price increase and $4.6 million cumulative catch-up revenue in Q3. SER-155 remained in development, with CARB-X funding subject to milestones.
- Management expected operating losses and negative cash flows to continue, but believed September 30 cash and investments would fund operations, debt service and capital expenditures for at least 12 months from issuance of the financial statements. Funding beyond that period depends on raising additional capital; management’s estimate is based on assumptions and subject to loan covenants.
- R&D expense increased 12% for the nine-month period, including higher SER-109 and early-stage program spending. Management expected R&D costs to continue increasing as programs advance. Shares outstanding rose from 70.1 million at year-end 2019 to 91.2 million at quarter-end, reflecting equity financing and other issuances.
- COVID-19 created risks to enrollment, trial conduct, site availability, manufacturing and capital access. Other principal risks include clinical and regulatory failure, uncertain manufacturing scale-up and supply, reliance on collaborators and third parties, competition, and the need for further financing.
- No restructuring expense was recorded in the 2020 nine-month period. No legal-contingency accrual was recorded; the filing describes an appeal in a European patent opposition involving a University of Tokyo patent. The IRS was examining the company’s 2018 tax year. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Final ECOSPOR III data, safety-database progress, FDA requirements and the timing and contents of any SER-109 filing.
- Whether COVID-19 continues to delay SER-287 or SER-401 trials, and the status and results of SER-301 and SER-155 development.
- Actual cash burn versus management’s 12-month runway estimate, financing needs, and compliance with Hercules loan covenants.
- Terms and timing of contingent NHS milestones, including the SER-301 milestone, and the future scope of the AstraZeneca collaboration.
- Effects of additional equity issuance and the outcome of the European patent appeal and IRS examination.