Business context and reporting period
Seres Therapeutics, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The clinical-stage biotechnology company is developing microbiome-based therapeutics; it had no product sales. Its lead candidate, SER-109, targets recurrent Clostridium difficile infection (CDI).
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Operating margins are negative; conventional gross margins are not meaningful because the company had no product sales.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | 3.0 | — | 5.7 | — |
| Research and development | 22.2 | 8.8 | 37.6 | 14.3 |
| General and administrative | 9.0 | 3.6 | 16.2 | 6.2 |
| Operating loss | (28.1) | (12.3) | (48.1) | (20.5) |
| Net loss | (27.9) | (12.6) | (47.6) | (20.5) |
| Basic and diluted net loss per share | (0.70) | (1.45) | (1.21) | (2.64) |
- At June 30, cash and cash equivalents were $59.8 million; current and long-term investments totaled $212.6 million. Combined cash, cash equivalents and investments were approximately $272.4 million, versus $205.1 million at December 31, 2015.
- Cash from operating activities was $76.1 million for the first half, compared with $18.0 million used in the prior-year period. The 2016 inflow was principally from the $120.0 million Nestec upfront payment recorded as deferred revenue, not recurring operating profitability.
- Investing activities used $91.1 million, including $9.9 million for property and equipment. Cash and cash equivalents declined $14.1 million to $59.8 million.
- The company reported no outstanding borrowings; its Comerica loan had been repaid in September 2015. Total liabilities were $138.8 million, including $114.4 million of deferred collaboration revenue and a $9.1 million lease incentive obligation.
- Accumulated deficit was $130.2 million. The company remains loss-making and expects further losses.
Material changes versus the prior comparable period
- Revenue began in 2016 under the Nestec Ltd. (NHS) collaboration and license agreement: $5.7 million recognized in the first half, against no revenue in 2015. The $120.0 million upfront payment is being recognized over an estimated ten-year performance period; $114.4 million remained deferred at quarter-end.
- First-half operating expenses increased $33.3 million to $53.8 million. R&D increased $23.2 million, reflecting platform investment and higher SER-109, SER-262 and SER-287 development activity; G&A increased $10.0 million, including personnel, professional fees and facility costs.
- Property and equipment increased to $27.0 million from $7.8 million, largely due to the Cambridge headquarters and laboratory build-out.
- Loss per share improved versus 2015 despite a higher net loss, principally because weighted average shares increased substantially following the 2015 IPO and preferred-stock conversion.
Outlook, commentary and risks
- On July 29, 2016, after quarter-end, Seres reported that interim eight-week Phase 2 SER-109 results did not meet the primary endpoint of reducing CDI recurrence risk. The company was analyzing data and planned to consult the FDA on changes to development plans. It warned that this could alter cash needs and projections.
- On August 2, Seres notified its CRO partner that it intended to terminate work on the planned global pivotal Phase 3 SER-109 trial. The company had $0.69 million of related prepaid costs and expected to expense part during the remainder of 2016.
- Seres expected existing cash, cash equivalents and investments to fund operating and capital requirements well into 2018, excluding future business-development cash flows. This estimate was subject to assumptions and could change with SER-109 plans; additional financing may be needed.
- The company expected 2017 results from Phase 1b studies of SER-287 and SER-262. Management expected expenses to increase as clinical development, platform research, manufacturing capabilities and public-company operations continued.
- The NHS agreement grants exclusive development and commercialization rights in specified territories outside the U.S. and Canada for CDI and IBD candidates; Seres retained U.S. and Canadian commercial rights. Potential development, regulatory and commercial milestones are contingent, and the company expected a $10 million SER-262 milestone in 2016. The agreement also allocates some clinical development costs to Seres.
- Key risks include clinical and regulatory failure, the unproven microbiome therapeutic approach, reliance on third-party clinical and manufacturing partners, funding needs, intellectual-property challenges and the possibility that collaboration terms or partner performance could adversely affect development.
- Management reported disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter. No material legal proceedings or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Full SER-109 Phase 2 data, the FDA’s feedback, and any revised clinical plan, timeline or trial costs; also confirm the financial and operational effects of the planned CRO termination.
- Whether the expected $10 million SER-262 milestone was achieved and received, and the status and timing of SER-262 and SER-287 studies.
- Cash burn and runway after accounting for the nonrecurring Nestec upfront payment, future trial spending and collaboration cost-sharing obligations.
- The assumptions behind the ten-year recognition period for Nestec consideration, deferred-revenue balance and any subsequent changes in collaboration revenue estimates.
- Whether milestone payments, royalties or other collaboration receipts are achieved; headline potential payments are contingent, not assured revenue.