Seres Therapeutics, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; financial amounts below are in millions of dollars unless noted. Seres is a clinical-stage microbiome therapeutics company and had no product sales.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Collaboration revenue | $13.0 | — | $18.7 | — |
| Research and development expense | $24.1 | $9.9 | $61.7 | $24.2 |
| General and administrative expense | $8.0 | $4.7 | $24.2 | $10.9 |
| Operating loss | $(19.1) | $(14.6) | $(67.2) | $(35.1) |
| Net loss | $(18.7) | $(14.6) | $(66.3) | $(35.1) |
| Net loss per share, basic and diluted | $(0.46) | $(0.38) | $(1.67) | $(1.92) |
- Revenue came from the Nestec/Nestlé Health Science collaboration: $10.0 million from a SER-262 Phase 1b initiation milestone recognized in Q3, with the remainder primarily from amortizing the $120 million upfront payment over an estimated ten-year performance period. The partner is a related party.
- R&D and G&A expenses rose substantially year over year, reflecting increased clinical and platform activity, headcount, facilities, and stock-based compensation. Q3 operating loss widened despite collaboration revenue. Product gross margin is not presented, and margins are not a meaningful measure of commercial performance at this development stage.
- For the first nine months, operating activities provided $64.7 million of cash, largely because of the $120 million upfront collaboration payment and $10 million milestone receipt, alongside a $66.3 million net loss. Investing activities used $85.2 million, including $15.8 million of property and equipment purchases; financing activities provided $2.1 million.
- At September 30, cash and cash equivalents were $55.6 million and investments were $200.9 million, totaling $256.5 million in cash, cash equivalents, and investments. Total assets were $297.5 million; total liabilities were $143.5 million; accumulated deficit was $148.9 million.
- Current liabilities were $31.9 million. Deferred collaboration revenue totaled $111.5 million, classified as current or long-term. The balance sheet reports no notes payable; the company says its prior loan was repaid in 2015. Lease-related obligations include a $10.7 million non-current lease incentive obligation and $1.4 million deferred rent.
Material changes and business developments
- On July 29, 2016, Seres reported that the ongoing SER-109 Phase 2 study did not meet its primary endpoint of reducing CDI recurrence through eight weeks. The company was analyzing the data and planned to adjust development plans in consultation with the FDA; it stopped enrolling patients in the associated expanded-access trial.
- SER-262 Phase 1b began in July 2016; SER-287 Phase 1b began in December 2015. Results from both studies were expected in 2017.
- Property and equipment increased to $34.6 million from $7.8 million at year-end 2015, primarily due to the new Cambridge headquarters and laboratory build-out. The company moved to 200 Sidney Street in April 2016 under a lease extending to November 2023.
- The Nestec agreement licenses selected CDI and IBD candidates outside the United States and Canada; Seres retained U.S. and Canadian commercial rights. Potential development, regulatory, and commercial milestones total up to $1.785 billion, in addition to the upfront payment, but are contingent and not assured. The agreement also includes royalties and cost-sharing obligations for certain trials.
Outlook, risks, and contingencies
- Management expected existing cash, cash equivalents, and investments to fund operating expenses and capital expenditures well into 2018. This estimate excludes future business-development proceeds and depends on assumptions, including the future SER-109 program; additional financing may be needed and may not be available on acceptable terms.
- The company expected losses and expenses to continue, with spending potentially increasing for clinical trials, manufacturing, research programs, and public-company operations. It had no product approvals or product-sale revenue.
- Key risks include the failed SER-109 Phase 2 primary endpoint; uncertainty of clinical and regulatory outcomes; reliance on third-party manufacturers and trial operators; manufacturing and supply risks; dependence on collaboration performance; competition; and the need for further capital. The microbiome therapeutic approach is unproven.
- A putative securities class action filed September 28, 2016 alleges misleading statements regarding SER-109 disclosures from June 2015 to July 2016. Seres said it was vigorously defending the case, could not estimate a possible loss, and recorded no accrual.
- Management reported effective disclosure controls as of September 30, 2016 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Subsequent SER-109 data, FDA discussions, and any revised development plan following the missed Phase 2 endpoint.
- Progress and 2017 results for SER-262 and SER-287, and the related clinical spending and milestone terms.
- Whether the stated runway into 2018 remains supportable given cash burn, capital expenditures, and development plans.
- How much collaboration revenue reflects upfront-payment recognition versus milestone receipts, and the timing and collectability of future contingent payments.
- Developments and potential financial or operational effects of the securities class action; the filing provides no estimable loss range.