Seres Therapeutics, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Seres is a clinical-stage microbiome therapeutics company with no product sales. Its lead candidate, SER-109, targets recurrent C. difficile infection (CDI); SER-287 is in clinical development for ulcerative colitis. Other candidates include SER-262 and SER-301.
Key financial metrics
Amounts below are in millions, except per-share data. Balance-sheet figures compare March 31, 2016 with December 31, 2015.
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $2.71 | $0 in Q1 2015 |
| Research and development expense | $15.42 | $5.56 in Q1 2015 |
| General and administrative expense | $7.21 | $2.61 in Q1 2015 |
| Operating loss | $(19.92) | $(8.17) in Q1 2015 |
| Net loss | $(19.70), or $(0.50) per share | $(7.97), or $(1.15) per share, in Q1 2015 |
| Cash, cash equivalents and investments | $303.28 | $205.08 |
| Total assets | $324.47 | $216.90 |
| Total liabilities | $134.64 | $11.51 |
| Accumulated deficit | $102.32 | $82.61 |
Operating cash flow was positive $101.42 million, versus cash use of $8.34 million in Q1 2015. The 2016 inflow primarily reflects receipt of the $120 million Nestec upfront payment, most of which remained deferred revenue; it should not be viewed as recurring operating cash generation. Investing activities provided $17.72 million, principally reflecting investment maturities exceeding purchases; financing activities provided $0.16 million. Cash and cash equivalents alone were $193.23 million, with investments of $110.05 million.
The company reported no product revenue, so product-level gross margin is not applicable; the filing does not provide a meaningful operating margin measure for this development-stage business. It had repaid its Comerica loan in September 2015 and reported no outstanding debt at quarter-end. Deferred revenue from Nestec was $117.29 million, including $12 million classified as current. Stockholders’ equity was $189.83 million.
Material changes versus the prior comparable period
- Q1 revenue increased from zero to $2.71 million, entirely from the Nestec collaboration. The company received the $120 million upfront payment in February and recognizes it over an estimated ten-year performance period.
- R&D expense rose $9.86 million, led by platform and pipeline activity, SER-109 clinical development, and SER-262 and SER-287 programs.
- G&A expense increased $4.60 million, primarily from higher personnel costs, professional fees, and facility expenses.
- Net loss widened by $11.73 million. Q1 2015 other income included a $0.21 million warrant revaluation gain; there was no corresponding warrant liability in Q1 2016.
- Cash and investments rose substantially following the collaboration payment. Property and equipment increased to $16.08 million from $7.75 million, reflecting build-out of the new Cambridge headquarters and laboratory space.
Outlook, management commentary and risks
- Management expected existing cash, cash equivalents and investments to fund operations and capital expenditures well into 2018, while cautioning that estimates depend on assumptions and funds could be used sooner. The company expects losses and rising R&D and G&A costs and may need additional capital.
- Management expected SER-109 Phase 2 results in mid-2016, SER-287 Phase 1b results in 2017, and initiation of a SER-262 Phase 1b study in mid-2016. It anticipated $30 million of 2016 Nestec milestone payments tied to specified study starts; these are contingent, not assured revenue or cash.
- The Nestec agreement grants exclusive development and commercialization rights for specified CDI and IBD products outside the U.S. and Canada; Seres retained U.S. and Canadian commercial rights. Potential development, regulatory and commercial milestones total up to $1.785 billion, plus tiered royalties, but depend on development, approvals and sales. The filing describes total potential upfront and milestone value above $1.9 billion only if products are approved and successfully commercialized.
- Seres bears substantial development costs under the agreement, including all global-plan SER-109 Phase 2 and Phase 3 costs; cost sharing applies to certain other trials. Development spending is expected to increase, and EMA guidance could result in two SER-109 Phase 3 studies for EU approval.
- Key risks include uncertain clinical and regulatory outcomes, enrollment and manufacturing constraints, reliance on third parties and Nestec, the unproven microbiome therapeutic approach, intellectual-property challenges, and possible need for further financing. The changed SER-109 formulation for its Phase 2 study had not previously been clinically tested.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective at the reasonable assurance level as of March 31, 2016.
Important facts for investors to verify
- Whether SER-109 Phase 2 results support advancement, and whether FDA or EMA requirements entail one or two Phase 3 trials.
- Whether the planned SER-262 study starts on schedule and the anticipated $30 million in 2016 milestones is achieved and collected.
- How actual cash burn and clinical/manufacturing commitments compare with management’s “well into 2018” runway estimate.
- The assumptions behind the ten-year Nestec revenue-recognition period, future cost-sharing obligations, and any changes to collaboration milestones or rights.
- Clinical progress and results for SER-287 and whether the company can scale reliable manufacturing and maintain adequate supply.