Seres Therapeutics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Amounts below are in millions of dollars unless otherwise noted.
Business context
Seres is a clinical-stage microbiome therapeutics company with no product sales to date. Its lead candidates include SER-109 for recurrent C. difficile infection (CDI) and SER-287 for ulcerative colitis; SER-262 is also in clinical development. The company recognizes collaboration revenue primarily under its license agreement with Nestec Ltd. (NHS), an affiliate of significant stockholder Nestlé Health Science.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4.6 | $3.0 | $8.6 | $6.0 |
| Research and development expense | $24.1 | $23.1 | $47.5 | $43.2 |
| General and administrative expense | $8.7 | $8.4 | $17.5 | $17.1 |
| Operating loss | $(28.1) | $(28.4) | $(56.4) | $(54.3) |
| Net loss | $(27.8) | $(28.0) | $(55.7) | $(53.5) |
| Basic and diluted loss per share | $(0.68) | $(0.69) | $(1.37) | $(1.32) |
- Revenue was collaboration and grant revenue, not product sales. Six-month revenue increased $2.6 million year over year, while operating expenses increased $4.7 million and net loss widened $2.2 million.
- R&D increases were concentrated in SER-109 (up $4.2 million for the half year) and SER-287 (up $1.9 million), partly offset by lower platform and SER-262 costs.
- Cash, cash equivalents and investments totaled $96.1 million at June 30, 2018, down from $150.0 million at December 31, 2017. Cash and cash equivalents were $58.0 million; investments were $38.1 million.
- Operating cash use was $52.4 million for the first half, versus $51.3 million a year earlier. Investing activities provided $74.4 million, mainly from investment maturities and sales; financing activities used $0.1 million.
- Total assets were $133.0 million and total liabilities were $146.2 million; stockholders’ deficit was $13.3 million, compared with equity of $60.7 million at year-end 2017. Accumulated deficit was $346.1 million.
- The balance sheet reports no debt balance. Deferred revenue related to NHS was $115.9 million, including $18.0 million current and $98.0 million non-current.
Material changes and accounting
Seres adopted ASC 606 on January 1, 2018 using the modified retrospective method. The standard changed the timing of collaboration revenue recognition. For the six months, reported revenue was $1.95 million higher and net loss $1.95 million lower than under prior guidance; reported liabilities at June 30 were $24.9 million higher. The filing’s year-over-year revenue comparisons therefore are not fully comparable.
Under ASC 606, the company recorded a $26.9 million cumulative-effect increase to accumulated deficit at adoption. No prior-year figures were recast.
Outlook, risks and unusual items
- Going concern: Management states that current resources and its forecasted operating plan are expected to fund operations into the second quarter of 2019. The company concluded that substantial doubt exists about its ability to continue as a going concern within one year of issuance. It expects to seek equity or debt financing, new collaborations and/or spending reductions; none is assured. Without adequate funding, clinical programs may be delayed, reduced or discontinued.
- Potential milestone: Seres could receive a $20 million NHS milestone for initiating the planned SER-287 Phase 2b study, but it had not been earned and was excluded from the going-concern assessment.
- Clinical execution: SER-109 Phase 3 ECOSPOR III enrollment was ongoing, with more than 100 sites open. Enrollment was affected by the required cytotoxin diagnostic test and competition from unapproved fecal microbiota transplantation. The trial uses a higher dose than the prior Phase 2 study; that Phase 2 study did not meet its primary endpoint.
- SER-287: Management planned to initiate a Phase 2b study later in 2018, subject to execution and funding.
- SER-262: The small Phase 1b study showed no significant overall recurrence-rate difference versus placebo and was not powered to detect such a difference. No drug-related serious adverse events were observed; additional analyses remained ongoing.
- Other risks: Product candidates remain investigational, and the microbiome therapeutic approach is unproven. Clinical, regulatory, manufacturing, patient-enrollment, intellectual-property and financing risks could materially affect development. The company relies on third parties for manufacturing and trials and reported no redundant source for certain SER-109 and SER-287 supplies.
- Legal matters: A putative securities class action concerning SER-109 disclosures was dismissed in March 2018; the plaintiff did not appeal. A European patent opposition filed by Seres remained unresolved.
- Management reported effective disclosure controls as of June 30, 2018 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash runway assumptions, financing progress and whether the going-concern uncertainty is resolved.
- ECOSPOR III enrollment pace, protocol execution and eventual efficacy and safety results.
- Timing and financing implications of the planned SER-287 Phase 2b study and any related NHS milestone.
- Effects of ASC 606 on collaboration revenue, deferred revenue and comparisons with prior periods.
- Clinical supply availability, manufacturing readiness and any material developments in the European patent opposition.