Seres Therapeutics, Inc. annual report, FY2017

Seres Therapeutics, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed March 8, 2018. The filing includes fourth-quarter data, but is an annual report. Seres is a clinical-stage biotechnology company developing microbiome-based therapeutics. It had no product sales and reported collaboration revenue only.

Financial performance and liquidity

Metric	FY2017	FY2016
Revenue	$32.1 million	$21.8 million
Research and development	$89.5 million	$82.0 million
General and administrative	$34.0 million	$32.6 million
Total operating expenses	$123.5 million	$114.6 million
Loss from operations	$91.4 million	$92.8 million
Net loss	$89.4 million	$91.6 million
Net loss per share, basic and diluted	$2.21	$2.30
Cash used in operating activities	$75.5 million	Cash provided: $43.9 million

FY2017 revenue included a $20 million milestone for starting the SER-109 Phase 3 trial; FY2016 included a $10 million SER-262 milestone. The remaining revenue principally reflected amortization of the $120 million NHS upfront payment. Revenue is from a related-party collaboration, not product sales.
R&D expense rose $7.5 million, mainly from platform spending, partly offset by lower SER-109 program costs. Net loss narrowed by $2.2 million; operating expenses increased $8.9 million.
At December 31, 2017, cash and cash equivalents were $36.1 million and investments were $113.9 million, for combined liquidity of approximately $150.0 million. Working capital was $123.5 million; total assets were $189.5 million and stockholders’ equity was $60.7 million.
No long-term debt was reported. The filing gives no meaningful product gross margin or operating margin measure for this pre-commercial business.
Management expected available cash, cash equivalents and investments to fund operations and capital expenditures through the first quarter of 2019. This forecast depends on assumptions and excludes future business-development proceeds; additional financing is required to fund longer-term plans.

Programs, changes and outlook

SER-109, recurrent C. difficile infection: The Phase 2 trial failed its primary endpoint: recurrence occurred in 44% of treated participants versus 53% on placebo, with no statistically significant difference. Seres began a Phase 3 trial in June 2017, planned for approximately 320 patients, using a higher dose over three days and a toxin assay intended to improve diagnosis. The filing says the FDA indicated one Phase 3 study could be sufficient if results show a persuasive clinical effect and specified requirements are met. SER-109 had FDA Breakthrough Therapy and Orphan Drug designations.
SER-287, ulcerative colitis: Topline Phase 1b results were positive. In the vancomycin pretreatment/daily SER-287 arm, clinical remission was 40% (6/15) versus 0% (0/11) in the daily placebo arm under the reported missing-equals-failure analysis (p=0.0237). Safety events were balanced, with no drug-related serious adverse events. The company planned another clinical study and was discussing its design with the FDA. FDA granted pediatric UC Orphan Drug Designation in December 2017.
SER-262, prevention of initial CDI recurrence: Early Phase 1b cohorts showed no drug-related serious adverse events, but no relevant recurrence-rate difference versus placebo; the study was small and not powered to establish efficacy. Recurrence was 4% with vancomycin plus SER-262 versus 31% with metronidazole plus SER-262, a reported subgroup difference (p=0.0049); interpret cautiously. The final multiple-dose cohort was still enrolling.
Management identified SER-287, SER-109 and the SER-401 immuno-oncology program as near-term priorities. It planned a SER-401 Phase 1b study with MD Anderson and the Parker Institute, while SER-301 and SER-155 remained in development or preclinical research. A CARB-X award could provide up to $2.5 million plus a potential additional $3.1 million tied to milestones.
In November 2017, Seres and collaborators announced work evaluating SER-401 with checkpoint inhibitors. The MD Anderson arrangement included an exclusive option to license specified intellectual property. Seres also had an NHS license covering certain CDI and IBD candidates outside the United States and Canada, with royalties and contingent development, regulatory and commercial milestones.

Risks, contingencies and unusual items

Seres had an accumulated deficit of $263.6 million, ongoing operating losses and no approved products. Its business depends on successful clinical trials, regulatory approval, manufacturing scale-up, commercialization and access to additional capital.
The microbiome therapeutic approach is unproven; the SER-109 Phase 2 setback underscores clinical and diagnostic uncertainty. Trial enrollment, safety, regulatory requirements, manufacturing quality and third-party supply are material risks. The filing notes there was no redundant source for finished SER-109 or SER-287 product.
A shareholder class action concerning alleged statements about SER-109 trials was pending; Seres was awaiting a court decision on its motion to dismiss and could not reasonably estimate potential losses. Seres also opposed a University of Tokyo patent in the European Patent Office; the outcome was uncertain.
Seres expected adoption of ASC 606 on January 1, 2018 to produce an estimated approximately $25 million cumulative-effect adjustment, increasing related-party deferred revenue with a corresponding accumulated-deficit impact. The estimate was preliminary and subject to change.
FY2017 cash from operations differed sharply from FY2016, when collaboration receipts, including the NHS upfront payment, supported positive operating cash flow. The company recognized milestone revenue when achieved, while recognizing the upfront payment over an estimated ten-year performance period.
The independent auditor gave an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of year-end; the auditor did not audit internal control.

Investor verification priorities

Check subsequent SER-109 Phase 3 enrollment, results, endpoint performance, safety and any updated FDA requirements, given the failed Phase 2 primary endpoint.
Verify the full SER-287 Phase 1b dataset, including analysis populations, missing-data handling, endoscopic results and the design and status of the next trial.
Assess cash burn, financing needs and actual runway against management’s first-quarter 2019 estimate; distinguish milestone and upfront collaboration revenue from recurring product revenue.
Review the final ASC 606 transition adjustment and its effects on deferred revenue, accumulated deficit and future collaboration revenue recognition.
Track the shareholder litigation, patent opposition, NHS collaboration milestones and obligations, and the availability and qualification of manufacturing supply.