Seres Therapeutics, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated financial statements; amounts below are in millions of U.S. dollars unless noted.
Business context and reporting period
Seres is a development-stage microbiome therapeutics company with no product sales to date. Its lead candidate, SER-109, targets recurrent C. difficile infection (CDI). Other clinical programs include SER-287 and SER-301 for ulcerative colitis (UC) and SER-155 for infections and graft-versus-host disease in immunocompromised patients.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $126.7 | $1.4 | $137.7 | $15.7 |
| Research and development expense | $39.9 | $23.9 | $105.1 | $65.7 |
| General and administrative expense | $19.6 | $7.6 | $48.8 | $20.2 |
| Operating income (loss) | $68.4 | $(30.0) | $(15.1) | $(70.2) |
| Net income (loss) | $68.2 | $(30.3) | $(15.6) | $(70.9) |
| Operating cash flow | Not separately presented | Not separately presented | $58.6 | $(75.7) |
Q3 2021 diluted earnings per share were $0.72, versus a loss of $0.36 per share in Q3 2020. Nine-month loss per share was $0.17, versus $0.93 in 2020. Profitability and margins are not indicative of recurring product economics: Seres has not generated product revenue, and Q3 results included substantial collaboration revenue from a license transaction.
- Liquidity: Cash and cash equivalents were $227.5; short- and long-term investments were $125.7, plus $2.2 of restricted investments. Cash, cash equivalents and short- and long-term investments totaled $353.2 at September 30, 2021.
- Balance sheet: Total assets were $396.3, total liabilities $220.6 and stockholders’ equity $175.7. Current assets were $358.8 and current liabilities $94.6.
- Debt: Hercules term-loan carrying value was $25.5, including $9.3 current and $16.1 long term; outstanding principal was $25.0. Interest-only payments were due through December 1, 2021, followed by monthly principal and interest payments through November 2023.
- Cash flows: Nine-month investing activities provided $50.9, primarily from net investment maturities; financing activities provided $2.0. The $58.6 operating cash inflow was materially influenced by changes in operating liabilities, including amounts owed for SER-109 pre-launch activities.
Material changes versus the prior comparable period
- Revenue rose sharply, mainly due to the July 2021 Nestlé Health Science license agreement. Seres received a $175.0 upfront payment and recognized $131.3 of license revenue in Q3; $35.5 was allocated to pre-launch activities and recorded as a liability. The agreement also provides for up to $135.0 in regulatory milestones and $225.0 in sales milestones, subject to achievement.
- Q3 R&D expense increased $16.0 year over year, reflecting higher platform and SER-109 spending, partly offset by lower SER-287 expense. Nine-month R&D increased $39.4.
- Q3 G&A expense increased $12.0 year over year; nine-month G&A increased $28.6, driven principally by personnel, professional fees and facility-related costs.
- Nine-month net loss narrowed to $15.6 from $70.9, while operating cash flow changed from use of $75.7 to provision of $58.6. The cash-flow improvement included a $43.0 increase in accrued and other liabilities, including $33.8 related to Nestlé pre-launch activities.
Outlook, management commentary, risks and unusual items
- Management expected available cash, cash equivalents and investments to fund operating expenses, debt service and capital expenditures for at least 12 months from the November 10, 2021 financial-statement issuance date. Seres expects ongoing losses and states that additional capital will be needed to support longer-term operations; the runway estimate depends on assumptions that may prove incorrect.
- Seres intended to seek FDA agreement to begin a rolling BLA submission for SER-109 in the first half of 2022 and anticipated completing the submission with safety-database data in mid-2022. It reported that enrollment had reached 300 subjects across ECOSPOR III and IV, the targeted minimum for the safety database.
- SER-109 Phase 3 ECOSPOR III showed CDI recurrence at week 8 of 12.4% versus 39.8% for placebo; recurrence through week 24 was 21.3% versus 47.3%. FDA approval is not assured, and the filing notes regulatory, manufacturing and commercialization risks.
- SER-287’s Phase 2b study did not meet its primary endpoint: clinical remission was 10.3% and 10.6% in the two active-dose groups versus 11.6% for placebo. Seres closed the study’s open-label and maintenance portions and planned to reassess development after reviewing biomarker data.
- On November 8, 2021, after quarter-end, Seres entered a long-term Bacthera manufacturing agreement for a dedicated production suite and manufacturing services for SER-109 and potentially SER-287. Minimum payments for the initial term are CHF 240.0 million (approximately $262.0 million), with additional fees and potential adjustments. This is a significant future commitment.
- Other notable items: AstraZeneca’s research agreement termination became effective April 2, 2021; Seres discontinued further enrollment in the SER-401 melanoma study. The company cited COVID-19-related uncertainty affecting trials, sites, supplies and financing. It reported no accrued legal-contingency liabilities and disclosed an ongoing IRS examination relating to 2018 R&D tax credits.
- Disclosure controls and procedures were assessed as effective as of September 30, 2021; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How the $175.0 million Nestlé upfront payment was allocated and recognized, and the conditions and timing for potential regulatory and sales milestones.
- Whether SER-109 meets FDA requirements for its BLA, including the safety database, and whether the anticipated submission timeline remains achievable.
- Cash burn and runway excluding one-time collaboration proceeds and temporary working-capital benefits, alongside future development and manufacturing spending.
- The full payment schedule, adjustment provisions and termination obligations under the Bacthera agreement, and the effect on projected liquidity.
- Next steps for SER-287 after its Phase 2b failure, and clinical progress and costs for SER-301 and SER-155.
- Debt repayment requirements beginning after the interest-only period, covenant compliance, and the availability and terms of any additional financing.