Seres Therapeutics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless noted. Seres is a clinical-stage microbiome therapeutics company and had no product sales.
Financial performance and position
- Revenue: $3.0 million, up from $2.7 million in Q1 2016. All revenue was collaboration revenue from related party Nestec Ltd. (NHS), recognized over the estimated 10-year performance period of the license agreement.
- Operating expenses: $28.9 million versus $22.6 million, including research and development of $20.1 million (up from $15.4 million) and general and administrative expense of $8.8 million (up from $7.2 million).
- Loss: Operating loss was $25.9 million versus $19.9 million; net loss was $25.5 million versus $19.7 million. Basic and diluted net loss per share was $0.63, compared with $0.50. No income tax provision was recorded.
- Cash flow: Operating activities used $25.6 million, compared with $101.4 million provided in Q1 2016, when the company received NHS’s $120 million upfront payment. Investing activities provided $13.0 million, mainly from investment maturities; financing activities provided less than $0.1 million. Cash and cash equivalents declined by $12.6 million during Q1.
- Liquidity: Cash, cash equivalents and investments totaled $202.2 million at March 31, 2017. Current assets were $192.3 million and current liabilities $27.2 million. Management estimated existing cash and investments would fund operating and capital requirements through 2018, excluding future business-development cash flows; the estimate depends on assumptions and could prove shorter.
- Balance sheet and debt: Total assets were $244.9 million, total liabilities $133.4 million and stockholders’ equity $111.5 million. Liabilities included $105.8 million of deferred NHS collaboration revenue and lease-related obligations. The balance sheet does not show a borrowings line; it reports no amount for financial debt.
Material changes versus Q1 2016
- Net loss increased by $5.8 million as operating expenses rose by $6.3 million; collaboration revenue increased by $0.3 million.
- R&D expense rose primarily because platform costs increased $7.4 million, partly offset by a $2.7 million reduction in SER-109 costs. G&A increased $1.6 million, mainly from personnel and facility-related costs.
- Cash and cash equivalents were $41.9 million at quarter-end, down from $54.5 million at December 31, 2016. Total cash, cash equivalents and investments were $202.2 million.
Outlook, development updates and risks
- The prior SER-109 Phase 2 study did not meet its primary endpoint: recurrence by eight weeks was 44% (26 of 59) with SER-109 and 53% (16 of 30) with placebo, a difference that was not statistically significant. The company cited diagnostic and potential dosing issues identified in its review.
- Following FDA feedback, Seres planned a new Phase 2 SER-109 study in approximately 320 patients, targeted for mid-2017. The planned trial uses cytotoxin testing to confirm diagnosis, a total dose approximately 10 times higher than in the previous Phase 2 study, and a 24-week evaluation period. FDA indicated the study may qualify as pivotal if it achieves a persuasive clinical effect and meets specified requirements.
- Results from Phase 1b studies of SER-287 and SER-262 were expected in the second half of 2017. Management expected R&D and other expenses to increase as development and platform activities advance.
- The NHS agreement provides an upfront payment already received, potential development and regulatory milestones of up to $660 million, commercial milestones of up to $1.125 billion, and tiered royalties. These contingent payments depend on development, approval and commercial success; they are not assured. Seres retained U.S. and Canadian commercial rights.
- Key risks include the unproven microbiome therapeutic approach, clinical and regulatory uncertainty, manufacturing and biological-material supply constraints, dependence on third parties and NHS, and the need for additional capital. Seres has not generated product revenue and expects continuing losses.
- A putative securities class action concerning disclosures about SER-109 remained pending; Seres had moved to dismiss and said it could not reasonably estimate a possible loss. Separately, the company filed an opposition to a University of Tokyo European patent; the outcome was uncertain.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2017, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the redesigned SER-109 trial began on schedule, its protocol and enrollment progress, and whether results satisfy FDA requirements.
- Results from the SER-287 and SER-262 Phase 1b studies and their implications for future development spending.
- Quarterly cash burn, investment balances and whether the stated runway through 2018 remains valid under updated plans and assumptions.
- Progress and funding obligations under the NHS collaboration, including milestone conditions and the allocation of clinical-development costs.
- Developments in the securities litigation and European patent opposition, including any material change in exposure or intellectual-property position.