Seres Therapeutics, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Seres is a clinical-stage microbiome therapeutics company; it had no approved products and no product-sales revenue.
Financial performance and position
- Revenue: $21.8 million in 2016, versus none in 2015. Revenue came from the Nestec/Nestlé Health Science collaboration: $10.0 million for a SER-262 milestone and approximately $11.8 million recognized from the $120.0 million upfront payment over the estimated ten-year performance period.
- Expenses and loss: Research and development expense was $82.0 million, up from $38.1 million; general and administrative expense was $32.6 million, up from $16.8 million. Operating loss was $92.8 million and net loss was $91.6 million, compared with a $54.8 million net loss in 2015. Basic and diluted net loss per share was $2.30, versus $2.33.
- Margins: Product-sales margins are not meaningful because Seres had no product sales. Collaboration revenue did not cover operating expenses.
- Cash flow: Operating activities provided $43.9 million, principally reflecting the collaboration upfront and milestone cash receipts; investing activities used $65.5 million, including $21.5 million for property and equipment; financing activities provided $2.1 million, largely from option exercises. Cash and cash equivalents decreased by $19.4 million during the year.
- Liquidity and debt: At year-end, cash and cash equivalents were $54.5 million and investments were $175.5 million, totaling approximately $230.0 million. Working capital was $167.9 million. The company reported no long-term debt at year-end; total liabilities were $140.0 million, including deferred collaboration revenue. Management expected existing cash, cash equivalents and investments to fund operations and capital needs through 2018, subject to assumptions and excluding future business-development cash flows.
Material changes and business developments
- Annual net loss increased by $36.8 million as operating expenses more than doubled, reflecting expanded platform and clinical-development activity, hiring, and new laboratory and manufacturing facilities. R&D expense rose across the platform and SER-109, SER-262 and SER-287 programs.
- SER-109’s randomized Phase 2 trial did not meet its primary efficacy endpoint: recurrence occurred in 44% of treated subjects (26 of 59) and 53% of placebo subjects (16 of 30), a difference that was not statistically significant. This contrasts with the earlier open-label Phase 1b/2 results, which reported 87% meeting the predefined recurrence endpoint.
- Seres planned a new Phase 2 SER-109 study of approximately 320 patients, with a roughly tenfold higher dose over three days and cytotoxin testing to confirm diagnosis. The FDA indicated the study may qualify as pivotal if it produces a persuasive effect and addresses specified clinical, statistical, safety-database and manufacturing requirements; this is not a guarantee of approval.
- SER-262 entered Phase 1b in July 2016 for prevention of initial CDI recurrence; SER-287 was in Phase 1b for ulcerative colitis. Top-line results for both were expected in the second half of 2017. SER-301 and SER-155 remained in development before clinical testing.
Outlook, risks and unusual items
- Management expected expenses to increase as trials advance, the pipeline expands, manufacturing capabilities develop and commercialization infrastructure is prepared. Seres stated that additional capital would be needed over time and that funding might not be available on acceptable terms.
- The Nestec agreement licensed specified CDI and IBD candidates outside the United States and Canada. It provides potential development and regulatory milestones of up to $660 million, commercial milestones of up to $1.125 billion, and tiered royalties; most potential payments depend on future milestones, approvals and sales. Seres retained North American commercial rights and bears substantial portions of specified development costs.
- Key risks include clinical failure or delay, uncertain regulatory requirements for this novel therapeutic approach, patient enrollment, manufacturing scale and quality, reliance on outside providers, intellectual-property challenges, competition, and the need for additional financing. No product candidate had received marketing approval.
- A putative securities class action, amended in February 2017, alleges misleading statements concerning SER-109 disclosures from June 2015 to July 2016. Seres is defending the case and said it could not reasonably estimate potential losses or assess whether an adverse outcome would be material.
- An unusual tax item: a $0.9 million Massachusetts job-creation tax incentive was reversed and recorded as a current liability after Seres determined it had not met the job-creation commitments; future treatment was under discussion with the program administrator.
Most important facts for investors to verify
- Whether the redesigned SER-109 trial starts as planned, satisfies FDA conditions, and produces a persuasive result; confirm the trial’s enrollment, diagnostic criteria, dosing and endpoint.
- Whether SER-262 and SER-287 deliver the anticipated 2017 data and support further development.
- Cash burn, capital expenditure and the assumptions behind the stated runway through 2018, especially as trial and manufacturing costs rise.
- How much collaboration funding is actually received and recognized, the cost-sharing obligations, and whether future milestones or royalties are achieved.
- Developments in the securities litigation and the disposition of the $0.9 million state incentive liability.