Seres Therapeutics, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in U.S. dollars, with financial figures converted from thousands to millions where appropriate.
Business context
Seres is a clinical-stage microbiome therapeutics company with no product-sale revenue. Its lead candidate, SER-109, targets recurrent Clostridium difficile infection (CDI); SER-287 is being developed for ulcerative colitis (UC). Other programs include SER-262, SER-301 and SER-155. Collaboration revenue is generated under the related-party license agreement with Nestec Ltd. (NHS), an affiliate of a significant stockholder. Seres retains U.S. and Canadian commercial rights and licensed certain rights outside those markets to NHS.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $23.0m | $13.0m | $29.0m | $18.7m |
| Research and development | $22.2m | $24.1m | $65.4m | $61.7m |
| General and administrative | $8.1m | $8.0m | $25.3m | $24.2m |
| Operating loss | $(7.3)m | $(19.1)m | $(61.6)m | $(67.2)m |
| Net loss | $(6.9)m | $(18.7)m | $(60.4)m | $(66.3)m |
| Basic and diluted loss per share | $(0.17) | $(0.46) | $(1.49) | $(1.67) |
- Q3 revenue included a $20.0m NHS milestone recognized upon initiation of the SER-109 Phase 3 study; the comparable 2016 quarter included a $10.0m SER-262 milestone. Remaining revenue principally reflects recognition of the $120m NHS upfront payment over an estimated ten-year performance period. Revenue is therefore milestone- and collaboration-dependent, and margins are not a straightforward measure of product economics.
- For the first nine months, revenue rose $10.3m year over year, while operating expenses increased $4.8m. Net loss narrowed by $5.9m. R&D increased $3.7m, including higher platform spending, partly offset by lower SER-109 costs; G&A increased $1.1m.
- Cash, cash equivalents and investments totaled $171.3m at September 30, 2017, down from $229.9m at December 31, 2016. This comprises $46.0m cash and cash equivalents and $125.3m current investments. Total assets were $211.9m; current assets were $176.6m and current liabilities $27.0m.
- Operating cash flow was $(54.9)m for the nine months, versus $64.7m provided in 2016. The prior-year inflow reflected the $120m NHS upfront payment and a $10m milestone; the 2017 period included a $9.0m reduction in deferred revenue. Investing activities provided $46.3m, principally from investment maturities and sales; financing activities provided $0.1m.
- Accumulated deficit was $234.6m. The balance sheet reports no conventional borrowings; liabilities include $99.8m deferred collaboration revenue and lease-related obligations. No off-balance-sheet arrangements were reported. Management expects cash, cash equivalents and investments to fund operating and capital needs through 2018, subject to assumptions and excluding future business-development cash flows.
Operating developments, outlook and risks
- SER-109: The 2016 Phase 2 study did not meet its primary endpoint: recurrence occurred in 44% of treated subjects versus 53% on placebo, a difference reported as not statistically significant. Seres cited diagnostic and potential dosing issues in its investigation. A Phase 3 study began in June 2017, planned for approximately 320 patients, with a roughly tenfold higher dose and cytotoxin-assay confirmation rather than the predominantly PCR-based diagnosis used in Phase 2.
- SER-287: On October 2, 2017, after quarter-end, Seres announced positive topline Phase 1b results in mild-to-moderate UC. The filing reports no clear numerical efficacy result; microbiome analyses were still pending. It reported no imbalance in adverse events versus placebo and no drug-related serious adverse events.
- SER-262: The Phase 1b study continued; topline results were expected in early 2018. Seres expected R&D and other expenses to increase as it advances clinical programs, expands research and manufacturing capabilities, and meets collaboration obligations. It expects continuing losses and may need additional financing; no committed external funding source was identified.
- Collaboration and accounting: NHS may owe development, regulatory and commercial milestones and royalties, but these are contingent on achievement and commercialization. Seres planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method. It expected a change in the timing and pattern of NHS revenue recognition, but had not yet quantified the impact.
- Key risks and contingencies: Clinical and regulatory uncertainty is elevated given the prior SER-109 Phase 2 result and the unproven microbiome approach. Other risks include financing needs, clinical enrollment and manufacturing/supply dependence, reliance on NHS outside the U.S. and Canada, and intellectual-property disputes. A securities class action concerning SER-109 disclosures was pending; Seres could not reasonably estimate potential losses, and a court decision on its motion to dismiss was expected by early 2018. Seres also opposed a University of Tokyo European patent; the outcome remained uncertain.
- In October 2017, CARB-X selected Seres for up to $2.461m in SER-155 research funding, with potential for an additional $3.119m on milestones. The company reported effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- Progress, enrollment, safety and primary-endpoint results for the SER-109 Phase 3 study, including whether the revised diagnostic approach and dose address the Phase 2 issues.
- The complete SER-287 Phase 1b efficacy and microbiome analyses, beyond the qualitative topline statement.
- Cash use and updated runway assumptions against the stated funding-through-2018 expectation, particularly as clinical and manufacturing spending changes.
- The quantified transition adjustment and ongoing revenue-recognition effects of ASC 606, and the extent to which reported revenue depends on NHS milestones.
- Developments in the securities lawsuit and patent opposition, including any change in potential financial exposure.