Seres Therapeutics, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Amounts are in millions of dollars unless otherwise stated. The company is a development-stage microbiome therapeutics company and has generated no revenue.
Business context and development
Seres’ lead candidate, SER-109, is being developed to prevent further recurrences of Clostridium difficile infection (CDI); its Phase 2 study began dosing in May 2015. SER-262 and SER-287 were in preclinical development, as was SER-155. The company had no approved products and said future revenue depended on successful development and commercialization.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $9.850 | $2.466 | $24.195 | $5.658 |
| General and administrative expense | $4.711 | $1.113 | $10.873 | $2.211 |
| Operating loss | $(14.561) | $(3.579) | $(35.068) | $(7.869) |
| Net loss | $(14.620) | $(4.161) | $(35.146) | $(8.527) |
| Net loss per share | $(0.38) | $(0.68) | $(1.92) | $(1.42) |
Revenue and gross margins are not applicable because the company had no revenue. Operating expenses rose substantially as research programs and clinical development expanded, headcount and public-company costs increased, and stock-based compensation grew. Nine-month stock-based compensation was $6.907 million, compared with $0.700 million in 2014.
- Cash flow: Operating activities used $29.275 million in the first nine months of 2015, versus $6.243 million in 2014. Investing activities used $152.931 million, chiefly reflecting purchases of investments, partly offset by maturities; this largely reflects treasury allocation, not operating cash burn. Financing activities provided $137.723 million, principally from the IPO.
- Liquidity: At September 30, cash and cash equivalents were $69.702 million and short-term investments were $149.641 million, totaling $219.343 million. The company reported a $62.978 million accumulated deficit and stated that available cash, cash equivalents and investments were expected to fund operations and capital spending through at least the first half of 2017, subject to assumptions and risks.
- Debt: Seres repaid its Comerica loan in September, paying $1.765 million to settle $1.700 million of principal plus fees and accrued interest. It recorded a $0.140 million extinguishment loss. No notes payable remained at quarter-end.
- Balance sheet and capital: Total assets were $227.045 million and total liabilities were $4.846 million at September 30. The July IPO raised approximately $139.267 million net of offering costs; preferred stock converted into common stock. Shares outstanding were 39,055,767 at September 30 and November 6, 2015.
Material changes versus prior comparable periods
Q3 research and development expense increased $7.384 million year over year, including higher platform and SER-109 costs and new SER-262 and SER-287 activity. Q3 general and administrative expense rose $3.598 million, driven by personnel, professional fees and facilities. For the nine-month period, operating expenses increased $27.199 million and net loss increased $26.619 million. Loss per share improved for Q3 but worsened year to date; the post-IPO increase in weighted-average common shares materially changed the per-share comparison.
The IPO materially strengthened equity and liquidity. Preferred shares converted to common shares upon the June Nasdaq listing, and the preferred-stock warrant liability was reclassified to additional paid-in capital; therefore, no warrant revaluation charge was recorded in Q3 2015.
Outlook, risks and unusual items
- Management expected expenses to increase as it advanced SER-109, pursued clinical development of SER-262 and SER-287, developed additional candidates and expanded manufacturing and facilities. It anticipated needing additional financing beyond available resources and noted that financing might not be available on acceptable terms.
- Key uncertainties include clinical efficacy and safety, trial enrollment and timing, regulatory requirements, manufacturing supply and quality, intellectual-property protection, competition, and the ability to secure future capital. The filing notes that the SER-109 Phase 2 study uses a revised capsule formulation and manufacturing process not previously tested clinically; the FDA may require more than one Phase 3 trial.
- Subsequent to quarter-end, Seres signed a non-cancelable lease for 83,396 square feet of Cambridge office, laboratory and pilot-manufacturing space. The lease was expected to run from March 2016 through November 2023. Future minimum payments were estimated at $1.760 million in 2016, $5.544 million in 2017, $5.711 million in 2018, $5.882 million in 2019, $6.058 million in 2020 and $18.223 million thereafter. The landlord will contribute $12.509 million toward tenant improvements; Seres expects to provide a $1.400 million security deposit through a letter of credit.
- Management reported effective disclosure controls as of September 30, 2015, no material change in internal control over financial reporting during Q3, and no material legal proceedings. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress, results and safety of the SER-109 Phase 2 study, including the effects of the revised formulation and manufacturing process, and the FDA’s eventual pivotal-trial requirements.
- Actual operating cash use and whether the stated runway through at least the first half of 2017 remains supportable as trial, manufacturing and facility spending increases.
- Implementation and total costs of the new long-term lease, including the timing and terms of the tenant-improvement contribution and security letter of credit.
- Clinical and regulatory timelines for SER-262, SER-287 and SER-155, and the company’s ability to obtain reliable third-party manufacturing capacity.
- Potential dilution from outstanding equity awards and future financing; the filing reported 4,842,496 options outstanding at September 30, 2015.