Seres Therapeutics, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
Seres is a clinical-stage microbiome therapeutics company with no product sales to date. Its lead candidate, SER-109, is being developed for recurrent Clostridium difficile infection (CDI). Other programs include SER-262 and SER-287; SER-301 and SER-155 remain in earlier development. Collaboration revenue comes from a license with Nestec Ltd. (NHS), an affiliate of a significant stockholder. Seres retained U.S. and Canadian commercial rights and licensed certain CDI and inflammatory bowel disease programs outside those markets.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.0 | $3.0 | $6.0 | $5.7 |
| Research and development | $23.1 | $22.2 | $43.2 | $37.6 |
| General and administrative | $8.4 | $9.0 | $17.1 | $16.2 |
| Operating loss | $(28.4) | $(28.1) | $(54.3) | $(48.1) |
| Net loss | $(28.0) | $(27.9) | $(53.5) | $(47.6) |
| Net loss per share, basic and diluted | $(0.69) | $(0.70) | $(1.32) | $(1.21) |
- All reported revenue was related-party collaboration revenue, principally recognition over time of the $120 million NHS upfront payment. The filing reports no product revenue.
- For the six months, operating cash use was $51.3 million, versus $76.1 million of operating cash provided in 2016, when the $120 million NHS upfront payment was received. Investing activities provided $30.4 million in 2017, mainly from investment maturities and sales; cash and cash equivalents declined $20.9 million.
- At June 30, cash and cash equivalents were $33.6 million and investments were $141.5 million, totaling $175.2 million. Current assets were $176.1 million and current liabilities $25.7 million.
- Total liabilities were $128.4 million, including $102.8 million of deferred NHS revenue and lease-related obligations. The balance sheet does not report conventional borrowings or debt.
- Accumulated deficit was $227.7 million. No gross profit or operating margin is presented; as a pre-commercial company, Seres remained loss-making.
Changes versus comparable periods
- First-half revenue increased $0.3 million year over year, while net loss widened $5.9 million. Operating expenses rose $6.6 million.
- First-half R&D increased $5.6 million. Platform spending rose $10.6 million, partly offset by a $6.0 million decrease in SER-109 expenses. G&A increased $1.0 million; higher personnel and facility/IT costs were largely offset by lower professional fees.
- Q2 net loss was broadly unchanged year over year. Higher platform R&D was substantially offset by lower SER-109 costs and lower G&A professional fees.
- Operating cash flow shifted from a $76.1 million inflow in first-half 2016 to a $51.3 million outflow in first-half 2017, largely reflecting the prior-year upfront collaboration payment and current-period operating burn.
Outlook, developments, and risks
- Management estimated that June 30 cash, cash equivalents, and investments would fund operating and capital expenditure requirements through 2018. This estimate excludes future business-development cash flows, depends on assumptions that may prove wrong, and the company said additional financing will be needed to support continuing operations.
- Seres initiated the SER-109 Phase 3 ECOSPOR III study in June, targeting approximately 320 patients with multiply recurrent CDI. The study uses a cytotoxin assay for diagnosis and an approximately tenfold higher total dose than the Phase 2 study. The prior SER-109 Phase 2 study did not meet its primary recurrence endpoint: recurrence was 44% for SER-109 versus 53% for placebo at eight weeks, a difference that was not statistically significant.
- The filing anticipated SER-287 Phase 1b results in the second half of 2017 and SER-262 Phase 1b results in early 2018. Management expected R&D and potentially G&A spending to rise with clinical development, manufacturing investment, and preparation for possible commercialization.
- Subsequent event: In July 2017, Seres recorded a $20 million NHS milestone upon initiation of the SER-109 Phase 3 study. This was after the quarter-end and is not included in Q2 revenue or June 30 cash balances.
- Key risks include the failed SER-109 Phase 2 primary endpoint, clinical and regulatory uncertainty, manufacturing and raw-material dependencies, reliance on third parties and NHS, and the need to raise additional capital. No external funding source was committed.
- A putative securities class action concerning alleged statements about SER-109 trials was pending; Seres was defending the claims and could not reasonably estimate possible losses. The company also challenged a University of Tokyo patent in a European Patent Office opposition; the outcome was uncertain.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2017; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Progress, enrollment, safety, and results of ECOSPOR III, including whether the revised diagnostic approach and higher dose address issues identified in Phase 2.
- Whether SER-287 and SER-262 meet the stated development timelines and whether their results support further trials.
- Actual cash burn, investment balances, and the assumptions behind the stated runway through 2018, including the effect of later-stage trial and manufacturing costs.
- Recognition and collection of the July $20 million milestone, remaining NHS deferred revenue, and any further milestone or cost-sharing payments.
- Developments and potential financial or operational effects of the securities litigation and European patent opposition.