Seres Therapeutics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Seres is a clinical-stage microbiome therapeutics company with no product sales to date; revenue primarily comes from collaborations and grants. Financial amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $6.0; six-month revenue $14.2 | Q2 2019: $12.5; six-month 2019: $19.9 |
| Operating expenses | $26.6; six-month total $54.5 | Q2 2019: $23.5; six-month 2019: $55.4 |
| Operating loss | $(20.5); six-month loss $(40.2) | Q2 2019: $(10.9); six-month 2019: $(35.5) |
| Net loss | $(20.7); six-month loss $(40.6) | Q2 2019: $(10.8); six-month 2019: $(35.1) |
| Net loss per share, basic and diluted | $(0.28); six-month $(0.56) | Q2 2019: $(0.24); six-month 2019: $(0.81) |
| Operating cash flow | Six-month use: $(49.8) | Six-month 2019 use: $(44.2) |
| Cash, cash equivalents and current investments | $63.9 at June 30 | $94.8 at December 31, 2019, excluding restricted investment |
| Debt | $24.9 note payable, net of discount | $24.6 at December 31, 2019 |
| Current assets / current liabilities | $72.7 / $44.2; working capital $28.5 | At December 31, 2019: $100.2 / $46.0 |
| Total assets / total liabilities | $100.7 / $166.3 | At December 31, 2019: $132.4 / $180.8 |
Revenue is not product-sales revenue, and the filing does not report a meaningful product gross margin. The company reported an accumulated deficit of $500.2 million. Cash flow from investing was $27.1 million, primarily reflecting investment maturities and sales; financing provided $19.1 million, including $18.7 million net proceeds from ATM stock sales. Cash and cash equivalents declined by $3.6 million during the six months.
Material changes versus comparable periods
- Q2 revenue fell $6.5 million year over year, largely because Q2 2019 included a cumulative catch-up revenue adjustment following a SER-109 Phase 3 trial modification; there was no similar adjustment in Q2 2020. Six-month revenue decreased $5.6 million for the same principal reason.
- Q2 net loss widened by $10.0 million year over year as revenue declined and operating expenses increased $3.1 million. Six-month net loss widened by $5.5 million.
- Q2 R&D expense increased $2.2 million to $20.1 million, including higher SER-109 and SER-287 spending. Six-month R&D rose $1.1 million as lower platform costs were more than offset by higher program spending.
- Six-month operating cash use increased $5.6 million year over year. Deferred revenue declined $11.8 million as collaboration revenue was recognized.
- Debt interest expense was $1.4 million for the first half of 2020; there was no interest expense reported for the first half of 2019. No restructuring charge was recorded in the first half of 2020, versus $1.5 million in 2019.
Outlook, programs, risks and unusual items
- Liquidity and going concern: Management estimated existing resources plus proceeds received under the ATM after June 30 would fund operations, debt service and capital expenditures into Q2 2021. The filing does not state the amount of post-quarter ATM proceeds. Management concluded substantial doubt exists about the company’s ability to continue as a going concern. Additional capital, new collaborations and spending reductions are possible mitigations; success is not assured, and failure to raise funds could force clinical or research program cuts.
- Financing and debt: The company sold about 4.7 million shares through ATM programs in the first half at an average price of approximately $4.20, raising $18.7 million net. The Hercules facility bears interest at the greater of prime plus 4.40% or 9.65%, is secured by substantially all assets other than intellectual property, and includes a liquidity covenant expected to commence in October or December 2020 depending on milestones. Additional tranches are subject to conditions and lender approval.
- SER-109: The Phase 3 ECOSPOR III study stopped further enrollment because of COVID-19 with 182 of 188 intended patients enrolled. Top-line results were expected in August 2020. The smaller study may not meet the FDA’s evidentiary expectations or provide sufficient safety data; another Phase 3 study or additional safety data may be required.
- SER-287: The Phase 2b ulcerative colitis study was approximately 60% enrolled as of May 1, 2020. COVID-related site interruptions, including unavailable endoscopies, affected development. Seres was evaluating enrollment and design changes and planned FDA discussions.
- Other pipeline and collaboration: SER-301 lead candidate was nominated and early clinical development activities began; a $10 million Nestec milestone was contingent on first patient enrollment in its Phase 1 study. SER-401 Phase 1b readout timing was uncertain amid COVID-19. SER-155 development is supported by CARB-X funding, including potential additional funding subject to milestones. AstraZeneca preclinical research under its collaboration was curtailed in April 2020, with future research scope under discussion; Q2 collaboration revenue was only $28,000.
- COVID-19 and development risk: The pandemic affected clinical enrollment, site procedures and operations and could further disrupt trials, manufacturing, regulatory review and access to capital. The company expects continued losses and higher development spending; commercialization, if achieved, remains uncertain and no product has regulatory approval.
- Other items: Q2 other income included sublease-related income; the company recorded $0.5 million in other income for the quarter. No legal-contingency liability was accrued. An opposition concerning a University of Tokyo European patent remains on appeal; the filing does not identify a quantified loss exposure.
Most important facts for investors to verify
- Whether SER-109’s August 2020 top-line results supported the company’s expectations, and whether the FDA required another pivotal trial or additional safety data.
- Actual post-quarter ATM proceeds, subsequent cash burn, and the timing and terms of any additional financing needed to address the stated going-concern uncertainty.
- SER-287 enrollment progress, any agreed trial modifications, and the resulting clinical timeline and cost.
- Compliance with Hercules’ liquidity covenant and other loan conditions, including the applicable covenant start date and available borrowing tranches.
- Whether AstraZeneca collaboration activities resumed or were materially revised, and the effect on future collaboration revenue and research support.