Seres Therapeutics, Inc. — FY2018 Form 10-K
Business context and reporting period. Seres is a clinical-stage microbiome therapeutics company developing products intended to restore dysbiotic microbiomes. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below are for Q4 2018. The company had no approved products and generated no product-sales revenue.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $28.3 million | $32.1 million |
| Operating expenses | $128.6 million | $123.5 million |
| Operating loss | $100.3 million | $91.4 million |
| Net loss | $98.9 million | $89.4 million |
| Net loss per share, basic and diluted | $2.43 | $2.21 |
| Cash from operating activities | -$62.9 million | -$75.5 million |
- FY2018 revenue included $26.9 million of related-party collaboration revenue and $1.35 million of grant revenue. Revenue was primarily from the Nestec Ltd. (NHS) license agreement; there were no product sales.
- FY2018 R&D expense rose 7% to $96.0 million, chiefly reflecting increased SER-287 and SER-109 spending. G&A fell 4% to $32.6 million.
- Q4 2018 revenue was $10.6 million, operating expenses $32.3 million, operating loss $21.7 million and net loss $21.3 million. Q4 2017 revenue was $3.1 million, operating expenses $32.8 million and net loss $29.0 million. Revenue comparisons are materially affected by the accounting change described below.
- At year-end, cash and cash equivalents were $85.8 million, investments were zero, working capital was $50.6 million, and total assets were $120.5 million versus liabilities of $168.5 million. Stockholders’ equity was negative $48.0 million. The company reported no long-term debt.
- Cash used in operations was $62.9 million. Cash increased by $49.7 million during the year primarily because investments were sold or matured; investing activities provided $112.3 million. This should not be read as cash generated by operations.
- Operating leases totaled $30.2 million in future payments, including $6.3 million due within one year. The company reported $137.3 million of deferred revenue related to NHS at year-end.
Material changes and accounting
- Net loss widened by $9.6 million from 2017, while operating expenses increased $5.1 million and reported revenue declined $3.8 million.
- Seres adopted ASC 606 in 2018 using the modified retrospective method. It changed recognition of NHS collaboration revenue from a straight-line/milestone approach to a cost-to-cost method over a combined performance obligation. FY2018 reported collaboration revenue was $26.9 million; the filing estimates it would have been $52.2 million under ASC 605, with net loss of $73.7 million rather than $98.9 million. Adoption did not change operating cash flow.
- Seres received $40 million in NHS milestone payments in December 2018 after starting the SER-287 Phase 2b study, following a November letter agreement that revised milestone timing and certain cost-reimbursement terms.
Programs, outlook and key risks
- SER-287 for ulcerative colitis: Phase 1b results were encouraging, including 40% remission in the vancomycin-pretreated, daily-dose group versus 0% in the placebo group (6/15 versus 0/11; reported p=0.0237). The trial enrolled 58 patients, so results are preliminary. The Phase 2b ECO-RESET trial began in December 2018, plans to enroll about 200 patients, and has a primary remission endpoint at 10 weeks. Seres expected to complete enrollment by mid-2020; FDA feedback indicated the study could be one of two pivotal trials.
- SER-109 for recurrent C. difficile infection: The ongoing Phase 3 trial planned about 320 patients and uses a higher dose and toxin assay after the earlier Phase 2 failed to show a statistically significant benefit (recurrence 44% with SER-109 versus 53% with placebo). Enrollment was affected by the use of unapproved fecal microbiota transplantation (FMT) and the required diagnostic test; Seres was considering study-design changes to expedite results. SER-109 has FDA Breakthrough Therapy and Orphan Drug designations, which do not assure approval.
- SER-401: A Phase 1b study with MD Anderson and the Parker Institute began in metastatic melanoma patients receiving checkpoint inhibitors. Seres expected results in 2020.
- Other programs: SER-301 remained in preclinical discovery and process development. SER-262 Phase 1b results showed no significant overall recurrence-rate difference versus placebo; development plans for SER-262 and SER-155 were still under evaluation.
- Liquidity and going concern: Management and the auditor disclosed substantial doubt about Seres’ ability to continue as a going concern. Year-end cash was expected to fund operations only into Q4 2019. Additional financing, collaborations or spending reductions were needed; none was assured. Failure to obtain funding could delay, scale back or end clinical programs.
- Strategy and restructuring after year-end: In February 2019, Seres announced a focus on SER-287, SER-109 and SER-401, with continued focused preclinical work on SER-301. It planned to reduce headcount by about 30 employees/contractors (approximately 30% of the workforce) and estimated $1.5–$2.0 million in one-time termination costs. At year-end 2018 it had 145 employees.
- Other risks and contingencies: All candidates remain investigational; clinical, regulatory, manufacturing, donor-material, enrollment, intellectual-property, reimbursement and competitive risks are substantial. The University of Tokyo narrowed claims in a European patent opposition proceeding; Seres expected an appeal. The filing reports no other material legal proceedings.
Most important facts for investors to verify
- Whether Seres secured financing after the filing and how its cash runway compares with the disclosed Q4 2019 estimate.
- Enrollment progress, design changes and eventual results for the SER-109 Phase 3 trial, including the impact of FMT and toxin-based testing.
- SER-287 Phase 2b enrollment and efficacy, and whether FDA requirements for a second pivotal study remain unchanged.
- SER-401 trial progress and results, and whether the February 2019 restructuring delivered the expected savings without impairing execution.
- The effect of ASC 606 on revenue trends, deferred revenue and the timing of future NHS cost reimbursements and milestone payments.