Seres Therapeutics, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited figures are presented in millions of dollars unless stated otherwise. Seres is a clinical-stage microbiome therapeutics company; it reported no product-sales revenue.
Business context and operating priorities
Following a February 2019 strategic reset and an approximately 30% workforce reduction, Seres prioritized SER-287 for ulcerative colitis, SER-109 for recurrent C. difficile infection (CDI), SER-401 in metastatic melanoma, and advancing SER-301 toward clinical development. The company reported approximately 100 full-time employees after the workforce reduction.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2019 | $7.0 | $26.9 |
| Revenue, 2018 | $9.1 | $17.6 |
| Research and development expense, 2019 | $18.3 | $59.1 |
| General and administrative expense, 2019 | $5.9 | $19.0 |
| Operating loss, 2019 | $(17.2) | $(52.7) |
| Net loss, 2019 | $(16.4) | $(51.5) |
| Net loss per share, 2019 | $(0.23) | $(0.99) |
Revenue was primarily collaboration and grant revenue. No gross margin is reported in the filing. At September 30, cash and cash equivalents were $49.3 and investments were $34.5, totaling $83.8; current assets were $89.6 and current liabilities $42.2. Total liabilities were $156.4, compared with assets of $124.2, leaving a stockholders’ deficit of $32.2. No debt facility borrowing was outstanding at September 30. Operating cash use was $62.5 for the nine months; investing cash use was $35.2 and financing cash inflow was $61.1. Accumulated deficit was $440.9.
Changes versus comparable periods
- Q3 revenue declined $2.0 year over year, mainly because Q3 2018 included a $20.0 million SER-109-related milestone in the collaboration transaction price that did not recur. Q3 2019 included $4.8 million of related-party collaboration revenue and $2.1 million from AstraZeneca.
- Nine-month revenue increased $9.2 year over year. Seres recognized a $6.8 million cumulative catch-up adjustment following a SER-109 trial modification, as well as $4.2 million of AstraZeneca collaboration revenue.
- Nine-month operating expenses fell $16.7, and net loss narrowed by $26.2. R&D declined $12.1 and G&A declined $6.1, reflecting lower platform, SER-109, SER-262, personnel, and facility costs; SER-287 R&D increased $4.9. The 2019 period also included $1.5 million of restructuring expense.
- A June public offering generated $60.5 million net proceeds and increased common shares outstanding from 40.9 million at December 31, 2018 to 70.0 million at September 30, 2019.
Outlook, financing, and principal risks
- Management expected September 30 cash, cash equivalents, and investments to fund operations and capital requirements for at least 12 months from issuance of the financial statements. Separately, management said that including the first Hercules loan draw, resources were expected to fund operations into Q2 2021, subject to loan covenants and assumptions; actual cash use could be faster.
- After quarter-end, Seres entered a Hercules facility of up to $50.0 million and received the first $25.0 million tranche on October 29, 2019 ($24.6 million net of closing costs). Two further $12.5 million tranches are conditional. The loan bears interest at the greater of prime plus 4.40% or 9.65%, is secured by substantially all assets except intellectual property, and includes covenants and a future liquidity covenant.
- Management expected SER-109 Phase 3 top-line data in mid-2020; the trial’s target enrollment was reduced from 320 to 188. The FDA had indicated that additional confirmatory efficacy evidence, potentially another Phase 3 trial, could be required if the result is insufficient for registration; reduced enrollment could also require more safety exposure.
- SER-287 Phase 2b top-line data were expected in the second half of 2020. SER-401 preliminary results were expected in the second half of 2020; SER-301 clinical development was expected to begin in early 2020. These are management expectations, not guarantees.
- Seres expects continued losses and negative cash flows and will need additional capital beyond its forecast runway. Risks include clinical-trial failure or delay, regulatory uncertainty for the novel microbiome approach, manufacturing and biological-material supply constraints, competition, and potential dilution or restrictive financing terms. SER-109 and SER-287 milestones and collaboration revenue are uncertain; a significant portion of reported revenue is tied to collaborations, including related-party NHS.
- No legal-contingency liabilities were accrued. The company disclosed an ongoing appeal relating to a European Patent Office opposition concerning a University of Tokyo patent. Management concluded disclosure controls were effective as of September 30, 2019.
Key facts for investors to verify
- Whether SER-109’s 188-patient Phase 3 design can deliver evidence sufficient for FDA approval, or whether another trial and additional funding will be needed.
- Progress and results for SER-109, SER-287, SER-401, and the planned SER-301 program against the stated timelines.
- Cash-burn assumptions underlying the Q2 2021 runway estimate, and compliance with Hercules covenants and conditions for later loan tranches.
- Collaboration revenue recognition, including the SER-109 cost-model catch-up adjustment, AstraZeneca reimbursements and installments, and deferred revenue balances.
- The effects of the June equity offering and any future financing on share count, dilution, and liquidity.