Seres Therapeutics, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited financial statements; dollar amounts below are in millions unless noted.
Business context
Seres is a clinical-stage microbiome therapeutics company with no product sales to date. Its programs include SER-109 for recurrent C. difficile infection (CDI), SER-287 for ulcerative colitis, and earlier-stage candidates. Collaboration revenue is principally from its agreement with Nestlé Health Science affiliate NHS, which has rights to develop and commercialize specified candidates outside the United States and Canada.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $9.1 | $23.0 | $17.6 | $29.0 |
| Research and development | $23.7 | $22.2 | $71.2 | $65.4 |
| General and administrative | $7.6 | $8.1 | $25.1 | $25.3 |
| Operating loss | $(22.2) | $(7.3) | $(78.6) | $(61.6) |
| Net loss | $(21.9) | $(6.9) | $(77.7) | $(60.4) |
| Basic and diluted loss per share | $(0.54) | $(0.17) | $(1.91) | $(1.49) |
- At September 30, cash and cash equivalents were $55.7 million and investments were $17.2 million, totaling $72.9 million in available cash and investments. Restricted cash was $1.5 million.
- Nine-month operating cash use was $75.5 million, compared with $54.9 million a year earlier. Investing activities provided $94.9 million, mainly from investment sales and maturities; financing activities provided $0.2 million. Cash, cash equivalents and restricted cash ended the period at $57.2 million.
- Total assets were $109.0 million, total liabilities $139.6 million and stockholders’ deficit $30.6 million. Current assets were $79.4 million and current liabilities $39.0 million. The filing does not show a borrowings balance; liabilities include deferred collaboration revenue and lease-related obligations.
- No meaningful product gross margin is reported because Seres had no product sales. Operating expenses substantially exceeded revenue.
Changes versus the prior comparable period
- Q3 net loss increased by $15.0 million year over year; nine-month net loss increased by $17.2 million. R&D spending rose, particularly for SER-109 and SER-287 over the nine-month period.
- Reported revenue declined in both comparisons. The 2017 periods included a $20.0 million SER-109 milestone. Comparisons are also affected by Seres’ adoption of ASC 606 in 2018, which changed the timing of collaboration revenue recognition. For 2018, revenue under prior ASC 605 would have been $3.1 million for Q3 and $9.2 million for the nine months, versus reported ASC 606 revenue of $9.1 million and $17.6 million, respectively.
- Cash and investments fell from $150.0 million at December 31, 2017 to $72.9 million at September 30, 2018, while cash and cash equivalents rose because investments were liquidated or matured. Accumulated deficit reached $368.1 million.
Outlook, commentary and risks
- Management estimated existing cash and investments would fund operating and capital needs into Q2 2019. The filing states that substantial doubt exists about Seres’ ability to continue as a going concern within one year of issuance. Management’s mitigation plans include raising equity or debt, pursuing collaborations and reducing spending; success is not assured. Without adequate funding, clinical trials and research programs may be delayed, scaled back or eliminated.
- On November 1, 2018, after quarter-end, Seres and NHS amended their agreement: initiation of the SER-287 Phase 2b study would trigger $40.0 million in milestone payments. The filing describes the study as planned, and the payment is contingent on initiation; the company’s runway estimate did not include unearned milestone payments. The letter agreement also allows NHS reimbursement of certain Phase 3 costs to be reduced or delayed depending on Phase 2b results.
- SER-109 Phase 3 enrollment continued, but management cited the required C. difficile cytotoxin test and competition from unapproved fecal microbiota transplantation as enrollment challenges. Seres was considering operational measures and possible study-design changes to expedite results. Its earlier SER-109 Phase 2 study missed its primary endpoint.
- The planned SER-287 Phase 2b design was reduced to a three-arm study of approximately 200 patients; FDA feedback was pending. SER-401 Phase 1b preparations were nearing completion. Management expected R&D expenses to increase as programs advance, subject to funding availability.
- Key risks include clinical failure or delay, uncertain regulatory requirements for microbiome therapies, manufacturing and supply constraints, reliance on NHS and other third parties, and the need for substantial additional capital. A European Patent Office opposition proceeding concerning a University of Tokyo patent remained unresolved. A shareholder class action had been dismissed, with the appeal period expired.
Important facts for investors to verify
- Whether Seres raises sufficient capital to address the disclosed going-concern uncertainty, and how updated cash-burn forecasts affect runway.
- Whether and when the SER-287 Phase 2b study is initiated and the $40.0 million NHS milestone is earned and collected; review the related cost-reimbursement conditions.
- SER-109 Phase 3 enrollment, any study-design changes, and the timing and quality of results, given the prior Phase 2 primary-endpoint miss.
- FDA feedback on the SER-287 study design and progress of SER-401 and other pipeline programs.
- The effect of ASC 606 on collaboration revenue trends and the extent to which reported revenue represents cash received versus recognition of previously deferred amounts.