Seres Therapeutics, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Seres is a commercial-stage microbiome therapeutics company. Its first approved product, VOWST, was FDA-approved on April 26, 2023 to prevent recurrent Clostridioides difficile infection (CDI) in adults following antibacterial treatment, and launched with Nestlé Health Science in June. Nestlé leads U.S. commercialization; Seres supplies the product and shares commercial profits and losses equally. The pipeline includes SER-155, in a Phase 1b study, and earlier-stage programs.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $126.5 | $1.2 | $126.0 | $2.7 |
| Operating expenses | $76.9 | $64.5 | $147.0 | $121.8 |
| Operating income (loss) | $49.5 | $(63.3) | $(21.0) | $(119.1) |
| Net income (loss) | $46.6 | $(64.7) | $(24.6) | $(121.4) |
| Operating cash flow | Not presented separately | Not presented separately | $(10.6) | $(116.3) |
- Q2 revenue was overwhelmingly driven by a $125.0 million Nestlé milestone following VOWST’s FDA approval, rather than recurring product sales. H1 collaboration revenue also included recognized license-related services.
- VOWST launch data reported by Nestlé: 105 units sold and $1.6 million net sales in Q2, with an estimated 15% gross-to-net reduction. Seres recorded a $2.1 million share of VOWST’s net loss and a $1.3 million profit on inventory transferred to Nestlé.
- Q2 operating income and net income reflect the milestone and are not representative of recurring profitability. The resulting Q2 operating margin is not a meaningful measure of underlying commercial performance.
- Research and development expense was $46.8 million in Q2, up $2.9 million year over year; general and administrative expense was $28.1 million, up $7.7 million. H1 expenses were $90.8 million and $50.5 million, respectively.
- At June 30, cash and cash equivalents were $229.5 million; total current assets were $251.2 million and current liabilities $77.9 million. Working capital was approximately $173.3 million. Cash, cash equivalents and restricted cash totaled $237.7 million.
- H1 cash increased $66.5 million, supported by $63.8 million financing cash flow, including Oaktree borrowing and ATM stock sales. Operating cash use was $10.6 million.
- Oaktree debt had a $100.7 million carrying value at June 30 and $110.0 million funded principal; maturity is April 2029. It bears floating-rate interest (three-month SOFR, subject to a 2.5% floor and 5.0% cap, plus a 7.875% margin) and is secured by substantially all company assets, including intellectual property, subject to exceptions. Additional tranches are conditional or, for $50 million, at Oaktree’s discretion.
- Total operating lease liabilities were $112.2 million. Stockholders’ equity was $22.6 million; accumulated deficit was $889.1 million. Common shares outstanding were 128.0 million at June 30 and 128.2 million as of August 4, 2023.
Material changes versus prior comparable periods
- Q2 and H1 revenue rose sharply from 2022 primarily because of the $125 million FDA-approval milestone; product commercialization began only in June 2023.
- Q2 net income of $46.6 million contrasted with a $64.7 million loss in Q2 2022. H1 net loss narrowed to $24.6 million from $121.4 million, but Seres continued to incur substantial operating expenses.
- H1 operating cash use declined to $10.6 million from $116.3 million, while cash and cash equivalents increased from $163.0 million at year-end 2022 to $229.5 million.
- Seres refinanced its Hercules facility with the Oaktree term loan in April 2023, repaying approximately $53.4 million of Hercules debt; it recorded a $1.6 million extinguishment loss. The company also raised $11.7 million net through its ATM program in H1.
- Following FDA approval, Seres began capitalizing eligible commercial inventory; June 30 inventory was $5.3 million. Previously expensed pre-launch inventory costs remain in R&D expense.
Outlook, commentary and risks
- Management expects June 30 cash and cash equivalents to fund operating expenses, capital expenditures and debt service for at least 12 months from issuance of the statements. Management said this outlook assumes expected VOWST supply payments and equal profit-and-loss sharing with Nestlé. Funding beyond that 12-month period depends on raising additional capital; losses and negative cash flows are expected to continue.
- Seres describes VOWST commercialization as a key business dependency. Through July 27, Nestlé reported 610 completed prescription enrollment forms and 282 new patient starts; approximately 57% of those starts were reimbursed through patients’ drug benefit. The company expected larger health-plan coverage policies during H2 2023.
- SER-155 cohort 1 showed bacterial engraftment and reduced pathogen domination, a biomarker associated with infection risk; no serious adverse events were attributed to treatment. The small, open-label cohort does not establish efficacy. Enrollment in placebo-controlled cohort 2 was ongoing, with 100-day topline results anticipated in mid-2024.
- Key risks include uncertain VOWST adoption, reimbursement and profitability; reliance on Nestlé for commercialization reporting and execution; clinical, regulatory and manufacturing uncertainty; dependence on third-party suppliers and donor-derived materials; and continued need for capital. Oaktree debt carries a controlled-cash covenant, restrictive terms and default remedies.
- VOWST has seven years of U.S. orphan-drug exclusivity from April 26, 2023. Seres reported no legal proceedings and stated disclosure controls were effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether VOWST prescriptions convert into sustained paid starts, broader payer coverage and improving net sales—and how launch spending affects Seres’ 50% collaboration economics.
- Whether the $125 million milestone is clearly separated from recurring revenue when assessing future performance.
- Cash runway assumptions, future financing needs and any dilution from equity issuance or additional borrowing.
- Oaktree’s interest burden, cash covenant compliance, security interests and the sales thresholds required to access conditional debt tranches.
- Final and controlled SER-155 cohort 2 results, as well as subsequent clinical and regulatory updates.
- Manufacturing capacity, supply reliability, inventory costs and the obligations under the Bacthera agreement, which calls for at least CHF 256 million (approximately $277 million) over its initial term.