Seres Therapeutics(MCRB) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents Seres Therapeutics' unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets The balance sheets show the company's financial position, with increased assets and liabilities, and a shift to negative stockholders' equity | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total current assets | $214,394 | $194,764 | $19,630 | | Total assets | $367,699 | $348,784 | $18,915 | | Total current liabilities | $79,225 | $85,596 | $(6,371) | | Total liabilities | $382,822 | $338,001 | $44,821 | | Total stockholders' (deficit) equity | $(15,123) | $10,783 | $(25,906) | - The company's total assets increased by $18.9 million, primarily driven by an increase in cash and cash equivalents, and the introduction of collaboration receivable and inventories[21] - Total liabilities increased by $44.8 million, largely due to an increase in the long-term portion of notes payable and deferred revenue, net of current portion - related party[21] - Stockholders' equity shifted from a positive $10.8 million to a deficit of $(15.1) million, reflecting accumulated losses[21] Condensed Consolidated Statements of Operations and Comprehensive Loss The statements show a significant revenue increase for the nine months ended September 30, 2023, leading to a substantially reduced net loss despite continued losses | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total revenue | $310 | $3,444 | $126,261 | $6,153 | | Research and development expenses | $28,253 | $43,116 | $119,014 | $126,700 | | General and administrative expenses | $19,989 | $18,384 | $70,510 | $57,290 | | Collaboration (profit) loss sharing - related party | $(519) | $1,051 | $5,194 | $346 | | Net loss | $(47,854) | $(60,002) | $(72,476) | $(181,361) | | Net loss per share (basic and diluted) | $(0.37) | $(0.49) | $(0.57) | $(1.77) | - Total revenue for the nine months ended September 30, 2023, increased significantly to $126.3 million from $6.2 million in the prior year, primarily due to a $125 million milestone payment received upon FDA approval of VOWST[22][105] - Net loss for the nine months ended September 30, 2023, decreased to $(72.5) million from $(181.4) million in the prior year, reflecting the impact of higher revenue and reduced R&D expenses[22] - Research and development expenses decreased by $7.7 million for the nine months ended September 30, 2023, compared to the same period in 2022, mainly due to reduced VOWST program costs post-approval[22][197] Condensed Consolidated Statements of Stockholders' (Deficit) Equity The statements show a decrease in total stockholders' equity to a deficit, driven by net loss, partially offset by equity offerings and stock-based compensation | Metric | Dec 31, 2022 (in thousands) | Sep 30, 2023 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Common Stock | $125 | $129 | | Additional Paid-in Capital | $875,181 | $921,735 | | Accumulated Deficit | $(864,511) | $(936,987) | | Total Stockholders' (Deficit) Equity | $10,783 | $(15,123) | - Total stockholders' equity decreased by $25.9 million, moving from a positive balance to a deficit, primarily driven by the accumulated net loss of $(72.5) million for the nine months ended September 30, 2023[25][22] - Additional paid-in capital increased by $46.6 million, reflecting proceeds from at-the-market equity offerings and stock-based compensation expenses[25][84][90] Condensed Consolidated Statements of Cash Flows The statements show a significant reduction in cash used in operating activities, decreased cash from investing, and substantial financing cash flows | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash used in operating activities | $(69,855) | $(175,924) | | Net cash provided by investing activities | $11,459 | $76,502 | | Net cash provided by financing activities | $65,276 | $125,005 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $6,880 | $25,583 | | Cash, cash equivalents and restricted cash at end of period | $178,097 | $213,583 | - Net cash used in operating activities decreased significantly from $(175.9) million in 2022 to $(69.9) million in 2023, primarily due to a lower net loss and non-cash adjustments[28][241][242] - Net cash provided by investing activities decreased from $76.5 million in 2022 to $11.5 million in 2023, mainly due to lower sales and maturities of investments[28][244][245] - Net cash provided by financing activities decreased from $125.0 million in 2022 to $65.3 million in 2023, driven by the Oaktree Term Loan proceeds and equity offerings, partially offset by debt repayment[28][246][247] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations for the financial statements, covering business, accounting policies, fair value, investments, inventories, property, liabilities, leases, debt, equity, net loss per share, revenue, collaboration, commitments, taxes, related parties, and subsequent events 1. Nature of the Business and Basis of Presentation Seres Therapeutics is a commercial-stage microbiome company with FDA-approved VOWST and SER-155 in trials, recently implementing a restructuring plan to prioritize VOWST and SER-155, while facing going concern challenges - VOWST (fecal microbiota spores, live brpk) was approved by the FDA on April 26, 2023, and launched in June 2023 to prevent recurrent Clostridioides difficile infection (CDI)[31] - SER-155, a microbiome therapeutic candidate, is in a Phase 1b clinical trial to prevent enteric-derived infections and reduce Graft versus Host Disease (GvHD) in allo-HSCT patients, with 100-day topline results anticipated in Q3 2024[32] - A restructuring plan was approved on October 29, 2023, to reduce the workforce by approximately 41% (160 positions), significantly scale back non-partnered R&D (except SER-155 Phase 1b), and reduce G&A expenses[34] - As of September 30, 2023, the company had an accumulated deficit of $936.987 million and cash and cash equivalents of $169.912 million, raising substantial doubt about its ability to continue as a going concern without additional funding[36][37] 2. Summary of Significant Accounting Policies This section details the company's accounting policies, including inventory valuation at the lower of cost or net realizable value, expensing pre-approval manufacturing costs as R&D, and the use of estimates - Inventories are stated at the lower of cost or estimated net realizable value, using the first-in first-out (FIFO) method[43] - Costs for manufacturing drug product supplies incurred prior to regulatory approval are expensed as research and development costs[44] | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $169,912 | $163,030 | | Restricted cash, non-current | $8,185 | $8,185 | | Total cash, cash equivalents and restricted cash | $178,097 | $171,215 | 3. Fair Value Measurements This section outlines the company's fair value hierarchy, focusing on Level 3 warrant liabilities valued using a Monte-Carlo simulation model, which decreased to $956 thousand by September 30, 2023 | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Warrant liabilities (Level 3) | $956 | $0 | | Money market funds (Level 1) | $0 | $47,863 | | Commercial paper (Level 2) | $0 | $14,156 | | Corporate bonds (Level 2) | $0 | $2,957 | | Government securities (Level 2) | $0 | $17,855 | - Level 3 financial liabilities, specifically warrant liabilities, are valued using a Monte-Carlo simulation model, including the Black-Scholes option pricing model, which incorporates inputs like the company's stock price, contractual terms, maturity, risk-free rates, volatility, and term to sales targets[49][50] | Warrant Liabilities (in thousands) | Amount | | :--------------------------------- | :----- | | Balance as of December 31, 2022 | $0 | | Issuance of warrants | $2,100 | | Adjustment to fair value | $(132) | | Balance as of June 30, 2023 | $1,968 | | Adjustment to fair value | $(1,012) | | Balance as of September 30, 2023 | $956 | 4. Investments As of September 30, 2023, the company held only $1,401 thousand in restricted investments, a significant change from December 31, 2022, when it held $18,311 thousand in short-term investments - As of September 30, 2023, the company held restricted investments of $1,401 thousand, which approximates current fair value, and no other investments[52] | Investment Type | Amortized Cost (Dec 31, 2022, in thousands) | Fair Value (Dec 31, 2022, in thousands) | | :---------------- | :---------------------------------------- | :-------------------------------------- | | Commercial paper | $2,465 | $2,465 | | Corporate bonds | $2,958 | $2,957 | | Government securities | $12,898 | $12,889 | | Total Investments | $18,321 | $18,311 | 5. Inventories This section details the company's inventory capitalization post-VOWST FDA approval, with $18,525 thousand in raw materials and work in process as of September 30, 2023, and no write-downs | Inventory Component | Sep 30, 2023 (in thousands) | | :------------------ | :-------------------------- | | Raw materials | $3,532 | | Work in process | $14,993 | | Finished goods | $0 | | Total | $18,525 | - No inventories were capitalized as of December 31, 2022, as all manufacturing costs for product supplies were expensed as R&D prior to VOWST's FDA approval on April 26, 2023[54] - Pre-launch inventory expensed as R&D totaled $26,794 thousand for the nine months ended September 30, 2023[54] 6. Property and Equipment, Net Property and equipment, net, increased slightly to $23,566 thousand, reflecting additions to laboratory, computer, and office equipment, partially offset by accumulated depreciation | Asset Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--------------- | :-------------------------- | :-------------------------- | | Laboratory equipment | $29,133 | $24,533 | | Computer equipment | $4,134 | $3,557 | | Furniture and office equipment | $5,347 | $3,491 | | Leasehold improvements | $32,963 | $32,474 | | Construction in progress | $1,640 | $3,970 | | Total Gross Property and Equipment | $73,217 | $68,025 | | Less: Accumulated depreciation and amortization | $(49,651) | $(45,040) | | Property and Equipment, Net | $23,566 | $22,985 | - Depreciation and amortization expense was $4,611 thousand for the nine months ended September 30, 2023, compared to $5,002 thousand for the same period in 2022[56] 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities decreased to $54,158 thousand, primarily due to reductions in clinical and payroll-related costs, partially offset by new manufacturing and quality costs | Liability Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :----------------- | :-------------------------- | :-------------------------- | | Clinical and development costs | $1,491 | $6,717 | | Manufacturing and quality costs | $1,719 | $0 | | Payroll and payroll-related costs | $13,479 | $14,709 | | Collaboration payable - related party | $34,543 | $34,770 | | Facility and other | $2,926 | $3,644 | | Total | $54,158 | $59,840 | 8. Leases The company leases real estate, with total operating lease liabilities at $111,143 thousand and total lease costs significantly higher for the nine months ended September 30, 2023, reflecting new agreements | Lease Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------- | :-------------------------- | :-------------------------- | | Operating lease assets | $108,105 | $110,984 | | Operating lease liabilities | $111,143 | $111,543 | | Lease Cost Type | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :---------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating lease costs | $5,544 | $1,785 | $16,496 | $5,405 | | Short-term lease costs | $362 | $326 | $1,102 | $1,035 | | Variable lease costs | $1,699 | $1,135 | $5,643 | $3,437 | | Total lease costs | $7,605 | $3,246 | $23,241 | $9,877 | - The weighted average remaining lease term as of September 30, 2023, was 8.23 years, with a weighted average incremental borrowing rate of 13%[63] 9. Notes Payable This section details the company's debt, including the Oaktree Credit Agreement's $250 million Term Loan, with $110 million funded, an effective interest rate of 15.9%, and warrants issued to lenders - On April 27, 2023, the company entered into the Oaktree Credit Agreement for a $250 million Term Loan facility, with $110 million (Tranche A) funded at closing[70] - Approximately $53.380 million of the Tranche A Loan was used to repay the existing Hercules Credit Facility, resulting in a $1,625 thousand loss on extinguishment[71] - The Term Loan bears interest at three-month SOFR (2.50% floor, 5.00% cap) plus an applicable margin of 7.875%, with quarterly interest-only payments for the first three years[72] - Warrants to purchase 647,589 shares of common stock (Tranche A Warrant) were issued to Lenders, valued at $2,785 thousand and recorded as a discount to the Tranche A Loan[78][79] | Year Ending December 31, | Principal (in thousands) | | :----------------------- | :----------------------- | | 2023 (remaining 3 months) | $0 | | 2024 | $0 | | 2025 | $0 | | 2026 | $24,750 | | 2027 | $33,000 | | Thereafter | $52,250 | | Total | $110,000 | 10. Common Stock and Stock-Based Awards This section details the increase in authorized common stock, proceeds from equity offerings, and significant stock-based compensation expense due to performance achievements - Authorized common stock increased from 200 million to 240 million shares on June 27, 2023, following stockholder approval[83] - During the nine months ended September 30, 2023, 2,005,547 shares of common stock were sold through an at-the-market offering, generating approximately $11.730 million in net proceeds[84] | Stock Option Activity | Dec 31, 2022 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Outstanding shares | 14,940,034 | 16,370,123 | | Weighted average exercise price | $10.03 | $9.47 | | Weighted average remaining contractual term (years) | 7.25 | 6.78 | | RSU Activity | Dec 31, 2022 | Sep 30, 2023 | | :------------- | :----------- | :----------- | | Unvested RSUs | 1,549,540 | 3,826,695 | | Weighted average grant date fair value | $9.37 | $6.23 | | Stock-based Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Research and development expenses | $4,744 | $3,474 | $16,326 | $9,500 | | General and administrative expenses | $3,929 | $2,890 | $12,689 | $8,691 | | Total | $8,673 | $6,364 | $29,015 | $18,191 | 11. Net Loss per Share This section presents basic and diluted net loss per share, which were identical due to the anti-dilutive effect of potential common stock equivalents | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to common stockholders (in thousands) | $(47,854) | $(60,002) | $(72,476) | $(181,361) | | Weighted-average shares outstanding - basic and diluted | 128,289,871 | 122,527,275 | 127,297,667 | 102,380,700 | | Net loss per share - basic and diluted | $(0.37) | $(0.49) | $(0.57) | $(1.77) | - Potential dilutive securities (stock options, unvested restricted stock units, ESPP shares, and warrants) were excluded from diluted EPS calculation as their effect would be anti-dilutive[92] 12. Revenue from Contracts with Customers This section details revenue from Nestlé collaboration agreements, including a $125 million VOWST FDA approval milestone payment and deferred revenue balances reflecting unsatisfied obligations - Under the 2021 License Agreement with Nestlé, the company received a $125 million milestone payment in May 2023 following FDA approval of VOWST[95][105] - The 2021 License Agreement grants Nestlé a co-exclusive license to develop and commercialize VOWST in the United States and Canada, with the company sharing equally in commercial profits and losses post-launch[93][94] - Under the 2016 License Agreement, the company has received $80 million in development milestones from Nestlé for various product candidates (VOWST, SER-262, SER-287, SER-301) in markets outside the US and Canada[108][109][113][214] | Revenue Type | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Collaboration revenue - related party | $310 | $3,444 | $126,261 | $6,153 | | Contract Liabilities (in thousands) | Dec 31, 2022 | Sep 30, 2023 | | :---------------------------------- | :----------- | :----------- | | Deferred revenue - related party | $96,689 | $95,428 | 13. Collaboration Profit and Loss This section details the accounting for VOWST commercial profit and loss sharing with Nestlé, including inventory transfers and pre-launch expenses, resulting in $0.5 million collaboration income for Q3 2023 - The company and Nestlé share equally in the commercial profits and losses of VOWST, including commercial and medical affairs expenses, starting from the first commercial sale in June 2023[122] - Collaboration (profit) loss sharing also includes profit on the transfer of VOWST inventory to Nestlé and collaboration loss related to pre-launch activities[123][124] | Collaboration Component (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Share of VOWST net loss | $6,463 | $0 | $8,604 | $0 | | Profit on transfer of VOWST inventory to Nestlé | $(7,295) | $0 | $(8,568) | $0 | | Collaboration (profit)/loss related to pre-launch activities | $313 | $1,051 | $5,158 | $346 | | Total collaboration (profit) loss sharing - related party | $(519) | $1,051 | $5,194 | $346 | 14. Commitments and Contingencies This section addresses the company's commitments related to leases and indemnification agreements, noting no accrued legal contingencies as of September 30, 2023, or December 31, 2022 - The company provides indemnification to vendors, lessors, business partners, and directors/officers, with maximum potential amounts often unlimited, but has not incurred material costs to date[126] - No liabilities related to legal contingencies were accrued as of September 30, 2023, or December 31, 2022[129] 15. Income taxes The company did not provide for income taxes due to cumulative net losses and a full valuation allowance against deferred tax assets - No income taxes were provided for the three and nine months ended September 30, 2023 and 2022[130] - A full valuation allowance has been recorded against deferred tax assets due to the company's history of net losses and uncertainty of realizing future tax benefits[130] 16. Related Party Transactions This section details transactions with Nestlé, a significant stockholder, covering revenue from license agreements, deferred revenue, and collaboration receivables - Nestlé is an affiliate of one of the company's significant stockholders, Société des Produits Nestlé S.A.[131][132] | Related Party Revenue (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | 2021 License Agreement | $0 | $1,497 | $126,975 | $3,678 | | 2016 License Agreement | $310 | $2,475 | $(714) | $6,153 | - As of September 30, 2023, there was $16,857 thousand in Collaboration receivable - related party due from Nestlé[131] - Deferred income - related party of $9,465 thousand as of September 30, 2023, represents inventory transferred to Nestlé that has not yet been sold or transferred to customers[131] 17. Subsequent Events The Board approved a Restructuring Plan on October 29, 2023, to prioritize VOWST and SER-155, reducing workforce by 41% and expecting $75.0-$85.0 million in annual cash savings in 2024 - A Restructuring Plan was approved on October 29, 2023, to prioritize VOWST commercialization and SER-155 Phase 1b study, reducing costs and supporting long-term sustainability[134] - The plan involves a 41% workforce reduction (approximately 160 positions) and significantly scaling back non-partnered research and development activities[134] - Estimated restructuring costs are $5.0 to $5.5 million, primarily for workforce reduction, expected in Q4 2023[135] - Annual cash savings of approximately $75.0 million to $85.0 million are expected in 2024, with $35.0 million from workforce reduction[145] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, and liquidity, highlighting VOWST's launch, SER-155 development, and the recent restructuring plan Overview Seres Therapeutics, a commercial-stage microbiome company, launched VOWST in June 2023, is advancing SER-155, and approved a restructuring plan to achieve $75-85 million in annual cash savings in 2024 - Seres Therapeutics is a commercial-stage microbiome therapeutics company, with VOWST (formerly SER-109) approved by the FDA on April 26, 2023, and launched in June 2023 for recurrent CDI[139][140] - The company is evaluating SER-155 in a Phase 1b study for patients undergoing allo-HSCT, with 100-day topline results for cohort 2 anticipated in Q3 2024[142] - Net loss for the nine months ended September 30, 2023, was $72.5 million, with an accumulated deficit of $937.0 million[144] - A restructuring plan approved on October 29, 2023, includes a 41% workforce reduction (160 positions) and scaling back non-partnered R&D, expecting $5.0-$5.5 million in restructuring costs in Q4 2023 and $75.0-$85.0 million in annual cash savings in 2024[145] VOWST VOWST, the first FDA-approved oral microbiome therapeutic, launched in June 2023 for recurrent CDI, with 506 units sold and $7.6 million in net sales in Q3 2023, and 934 new patient starts since launch - VOWST was approved by the FDA on April 26, 2023, and launched in the United States with Nestlé in June 2023, as the first orally administered microbiome therapeutic for recurrent CDI[148][149] - The company received a $125 million milestone payment in May 2023 following FDA approval and shares equally in VOWST's commercial profits and losses with Nestlé[149] | Metric | Q3 2023 | | :---------------- | :------ | | VOWST units sold | 506 | | VOWST net sales | $7.6M | | Estimated gross-to-net reduction | 14% | | Total collaboration loss | $12.9M | | Company's share of VOWST net loss | $6.5M | - Since launch, 1,513 completed prescription enrollment forms were received, leading to 934 new patient starts, with 698 unique healthcare providers prescribing VOWST[151] - VOWST received seven years of orphan-drug exclusivity starting April 26, 2023[155] Infection Protection and SER-155 The company's Infection Protection approach uses microbiome therapeutics, with SER-155 in a Phase 1b study for allo-HSCT patients, showing successful engraftment and pathogen reduction, with cohort 2 results expected in Q3 2024 - The Infection Protection approach, validated by SER-109 data, aims to use microbiome therapeutics to decolonize pathogens and reduce infections in medically compromised patients[159] - SER-155 is being evaluated in a Phase 1b study in allo-HSCT recipients to prevent enteric-derived infections, bloodstream infections, and GvHD[160] - Phase 1b cohort 1 data showed successful engraftment of SER-155 bacterial strains and a substantial reduction in pathogen domination, with a favorable tolerability profile and no serious adverse events attributed to SER-155[163] - Enrollment for the randomized, double-blind, placebo-controlled cohort 2 is ongoing, with 100-day topline results anticipated in Q3 2024[165] Intellectual Property The company maintains an extensive patent portfolio for its microbiome therapeutics, with key IP rights for VOWST extending through 2034, SER-155 through 2041, and SER-301 through 2040, and VOWST benefiting from 12 years of reference product exclusivity - The company has an extensive patent portfolio covering rationally designed ecologies of spores and microbes, including 24 active patent application families and 30 issued U.S. patents[167] - Intellectual property rights related to VOWST extend through 2034, SER-155 through 2041, and SER-301 through 2040[167] - VOWST has a 12-year period of reference product exclusivity in the United States, starting April 26, 2023[168] - The company pays a 2.5% royalty on net sales of VOWST, minimum annual royalties, and milestone payments (e.g., $1.0 million upon first commercial sale, $2.5 million at $100 million annual sales, $10.0 million at $500 million annual sales) under an exclusive license from Memorial Sloan Kettering Cancer Center[167] Financial Operations Overview This section overviews the company's financial operations, including collaboration-driven revenue, operating expenses expected to decrease post-restructuring, and interest income/expense, with no income tax benefits due to accumulated losses Revenue Revenue is primarily from collaboration agreements, with VOWST net sales recorded by Nestlé and the company recognizing its 50% share of net profits or losses as collaboration (profit) loss sharing - Revenue is primarily derived from collaboration agreements[171] - Post-VOWST commercial launch (June 2023), net sales are recorded by Nestlé, and the company records its 50% share of net profits or losses as collaboration (profit) loss sharing[171] Operating Expenses Operating expenses, comprising R&D, G&A, and collaboration profit/loss sharing, are expected to decrease in 2024 due to the restructuring plan and VOWST commercialization Research and Development Expenses R&D expenses, including costs for research, development, clinical trials, and manufacturing, are expensed as incurred and are anticipated to decrease in 2024 due to the restructuring plan's scale-back of non-partnered R&D - R&D expenses are expensed as incurred and include costs for third-party agreements (CROs, CMOs), personnel, consultants, lab supplies, and regulatory compliance[173][176] - An overall decrease in R&D expenses is anticipated beginning in 2024 due to the Restructuring Plan, which significantly reduces non-partnered R&D activities, excluding the SER-155 Phase 1b study[175] General and Administrative Expenses G&A expenses, covering salaries, stock-based compensation, legal, professional, and facility costs, are expected to decrease in 2024 due to workforce reductions and office consolidation from the restructuring plan - G&A expenses include personnel costs (salaries, stock-based compensation), legal fees, professional fees (accounting, auditing, consulting), insurance, travel, and facility-related expenses[176] - G&A expenses are expected to decrease starting in 2024 due to the Restructuring Plan's workforce reduction and consolidation of office space[177] Collaboration (Profit) Loss Sharing - related party This line item reflects the company's net share of VOWST's commercial profits or losses with Nestlé, including commercial and medical affairs expenses, inventory transfers, and pre-launch activities - This line item includes the company's share of VOWST net profits or losses, commercial and medical affairs expenses, profit on VOWST inventory transfers to Nestlé, and collaboration loss related to pre-launch activities[178][179] Other Expense, Net Other expense, net, includes interest income from cash, interest expense from loan agreements (including Oaktree Term Loan discount accretion), and other income/expense from investment amortization and warrant fair value changes Interest Income Interest income is generated from the company's cash, cash equivalents, and investments - Interest income is derived from interest earned on cash, cash equivalents, and investments[180] Interest Expense Interest expense includes costs incurred under the Hercules Capital and Oaktree loan agreements, as well as the accretion of the discount on the Oaktree Term Loan - Interest expense includes costs from the Hercules Capital and Oaktree loan agreements, and accretion of the Oaktree Term Loan discount[181] Other Income (Expense) Other income (expense) primarily consists of the amortization of premiums or accretion of discounts on investments and changes in the fair values of warrant liabilities associated with the Oaktree Term Loan - Other income (expense) primarily includes amortization/accretion of investment premiums/discounts and changes in fair value of Oaktree Term Loan warrant liabilities[182] Income Taxes The company has not recorded any U.S. federal or state income tax benefits due to a history of net losses and uncertainty regarding the realization of deferred tax assets - No U.S. federal or state income tax benefits have been recorded due to a history of net losses and uncertainty of realizing deferred tax assets[183] Critical Accounting Policies and Significant Judgments and Estimates No material changes occurred to critical accounting policies and significant judgments and estimates during the nine months ended September 30, 2023, except as detailed in Note 2 - No material changes to critical accounting policies and significant judgments/estimates occurred during the nine months ended September 30, 2023, except as detailed in Note 2[185] Results of Operations This section compares financial performance for the three and nine months ended September 30, 2023 and 2022, analyzing revenue, operating expenses, and other income/expense, highlighting VOWST's impact and restructuring efforts Comparison of Three Months Ended September 30, 2023 and 2022 For Q3 2023, total revenue decreased to $0.3 million, while net loss decreased to $(47.9) million, driven by reduced R&D and collaboration income, partially offset by increased G&A and interest expense | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Total revenue | $310 | $3,444 | $(3,134) | | Research and development | $28,253 | $43,116 | $(14,863) | | General and administrative | $19,989 | $18,384 | $1,605 | | Collaboration (profit) loss sharing - related party | $(519) | $1,051 | $(1,570) | | Net loss | $(47,854) | $(60,002) | $12,148 | Revenue Total revenue for the three months ended September 30, 2023, decreased to $0.3 million from $3.4 million in the prior year, primarily due to the completion of VOWST regulatory approval services - Total revenue decreased by $3.1 million for the three months ended September 30, 2023, compared to the prior year, due to the completion of VOWST regulatory approval services[188] Research and Development Expenses R&D expenses decreased by $14.8 million to $28.3 million for Q3 2023, mainly due to reduced VOWST program costs and lower personnel-related costs, partially offset by increased microbiome therapeutics platforms and SER-155 expenses | R&D Category | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Microbiome therapeutics platforms | $10,172 | $9,347 | $825 | | VOWST | $274 | $12,372 | $(12,098) | | SER-155 | $1,935 | $1,308 | $627 | | Early stage programs | $382 | $152 | $230 | | Personnel-related | $15,490 | $19,937 | $(4,447) | | Total R&D expenses | $28,253 | $43,116 | $(14,863) | - VOWST program expenses decreased by $12.1 million due to capitalization of manufacturing costs into inventory, reduced consulting, and lower clinical trial costs post-commercialization[190] - Personnel-related costs decreased by $4.4 million, mainly due to capitalization of labor costs into inventory, partially offset by increased salaries and stock-based compensation[190] General and Administrative Expenses G&A expenses increased by $1.6 million to $20.0 million for Q3 2023, primarily due to higher personnel-related costs and increased facility-related and other costs, partially offset by decreased professional fees | G&A Category | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Personnel related | $9,048 | $7,663 | $1,385 | | Professional fees | $4,964 | $6,832 | $(1,868) | | Facility-related and other | $5,977 | $3,889 | $2,088 | | Total G&A expenses | $19,989 | $18,384 | $1,605 | - Personnel-related costs increased by $1.4 million, driven by higher salaries, bonuses, and stock-based compensation due to achieved performance conditions[195] - Facility-related and other costs increased by $2.1 million due to higher IT, rent, license, and office supply expenses[195] Collaboration (Profit) Loss Sharing - related party Collaboration (profit) loss sharing resulted in $0.5 million income for Q3 2023, a shift from $1.1 million expense in 2022, driven by profit on VOWST inventory transfer offsetting VOWST net loss and pre-launch expenses | Collaboration Component (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Share of VOWST net loss | $6,463 | $0 | | Profit on transfer of VOWST inventory to Nestlé | $(7,295) | $0 | | Collaboration (profit)/loss related to pre-launch activities | $313 | $1,051 | | Total collaboration (profit) loss sharing - related party | $(519) | $1,051 | - The shift from $1.1 million expense in 2022 to $0.5 million income in 2023 was due to the commercial launch of VOWST and related profit sharing[192] Other Expense, Net Other expense, net, decreased to $0.4 million for Q3 2023, primarily due to increased interest income and other income, partially offset by higher interest expense - Other expense, net, decreased by $0.5 million, driven by a $1.7 million increase in interest income and a $1.0 million increase in other income (due to warrant fair value changes), partially offset by a $2.3 million increase in interest expense[194] Comparison of Nine Months Ended September 30, 2023 and 2022 For the nine months ended September 30, 2023, total revenue significantly increased to $126.3 million, leading to a substantial decrease in net loss to $(72.5) million, driven by a milestone payment and reduced R&D expenses | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Total revenue | $126,261 | $6,153 | $120,108 | | Research and development | $119,014 | $126,700 | $(7,686) | | General and administrative | $70,510 | $57,290 | $13,220 | | Collaboration (profit) loss sharing - related party | $5,194 | $346 | $4,848 | | Net loss | $(72,476) | $(181,361) | $108,885 | Revenue Total revenue for the nine months ended September 30, 2023, increased by $120.1 million to $126.3 million, primarily due to the $125 million milestone payment from Nestlé upon VOWST's FDA approval - Total revenue increased by $120.1 million, primarily due to the $125 million milestone payment from Nestlé upon VOWST FDA approval[196] Research and Development Expenses R&D expenses decreased by $7.7 million to $119.0 million for the nine months ended September 30, 2023, mainly due to reduced VOWST program costs, partially offset by increased microbiome therapeutics platforms and personnel-related expenses | R&D Category | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Microbiome therapeutics platforms | $36,942 | $26,740 | $10,202 | | VOWST | $15,331 | $37,384 | $(22,053) | | SER-155 | $5,578 | $3,218 | $2,360 | | Early stage programs | $1,208 | $1,658 | $(450) | | Personnel-related | $59,955 | $57,700 | $2,255 | | Total R&D expenses | $119,014 | $126,700 | $(7,686) | - VOWST program expenses decreased by $22.1 million due to reduced clinical trial costs, consulting, and capitalization of manufacturing costs into inventory post-commercialization[198] - Microbiome therapeutics platforms research expenses increased by $10.2 million, driven by higher facilities costs, lab supplies, and professional fees[198] - Personnel-related costs increased by $2.3 million, primarily due to higher salaries and stock-based compensation from achieved performance conditions, partially offset by payroll tax credits and capitalization of labor costs[198][199] General and Administrative Expenses G&A expenses increased by $13.2 million to $70.5 million for the nine months ended September 30, 2023, mainly due to higher personnel-related costs, legal expenses, and facility-related costs | G&A Category | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Personnel related | $28,848 | $22,999 | $5,849 | | Professional fees | $24,264 | $22,998 | $1,266 | | Facility-related and other | $17,398 | $11,293 | $6,105 | | Total G&A expenses | $70,510 | $57,290 | $13,220 | - Personnel-related costs increased by $5.8 million, driven by higher salaries, bonuses, payroll taxes, and stock-based compensation due to VOWST FDA approval[205] - Professional fees increased by $1.3 million, primarily due to $6.1 million in legal expenses related to VOWST FDA approval, partially offset by reduced consulting and recruiting fees[205] Collaboration (Profit) Loss Sharing - related party Collaboration (profit) loss sharing resulted in $5.2 million expense for the nine months ended September 30, 2023, an increase from $0.3 million in 2022, driven by VOWST net loss and pre-launch expenses, partially offset by inventory transfer profit | Collaboration Component (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Share of VOWST net loss | $8,604 | $0 | | Profit on transfer of VOWST inventory to Nestlé | $(8,568) | $0 | | Collaboration (profit)/loss related to pre-launch activities | $5,158 | $346 | | Total collaboration (profit) loss sharing - related party | $5,194 | $346 | - The increase in expense was primarily due to the company's share of VOWST net loss and pre-launch expenses following the commercial launch[201] Other Expense, Net Other expense, net, increased to $4.0 million for the nine months ended September 30, 2023, primarily due to a $5.0 million increase in interest expense, partially offset by increased interest income and decreased other expense - Other expense, net, increased by $0.8 million, driven by a $5.0 million increase in interest expense, partially offset by a $3.7 million increase in interest income and a $0.5 million decrease in other expense[203] Liquidity and Capital Resources This section discusses the company's financial position, including cash, accumulated deficit, and funding needs, detailing the Oaktree Credit Agreement, restructuring plan, collaboration agreements, and cash flow analysis - As of September 30, 2023, the company had $169.9 million in cash and cash equivalents and an accumulated deficit of $937.0 million, with a net loss of $72.5 million and $69.9 million cash used in operations for the nine months ended September 30, 2023[207] - The company received a $125.0 million milestone payment in May 2023 after VOWST FDA approval and is eligible for payments from Nestlé for VOWST supply and equal sharing of commercial profits/losses[208] - The Oaktree Credit Agreement provides a $250.0 million term loan facility, with $110.0 million (Tranche A) funded in April 2023, and additional tranches (B and C) available subject to VOWST net sales targets[209] - The company expects its cash and cash equivalents, combined with the Restructuring Plan, VOWST profit sharing, and the expected Tranche B Term Loan, to fund operations for at least the next 12 months[253] Restructuring Plan The Restructuring Plan, approved October 29, 2023, prioritizes VOWST commercialization and SER-155 development, involving a 41% workforce reduction and expecting $75.0-$85.0 million in annual cash savings in 2024 - The Restructuring Plan, approved October 29, 2023, prioritizes VOWST commercialization and SER-155 Phase 1b study, reducing costs for long-term sustainability[210] - Key components include a 41% workforce reduction (approx. 160 positions) and significant scaling back of non-partnered R&D activities[210] - Estimated restructuring costs are $5.0-$5.5 million, primarily in Q4 2023, with expected annual cash savings of $75.0-$85.0 million in 2024[211] Collaboration and Manufacturing Agreements This section details key collaboration and manufacturing agreements, including Nestlé license agreements for product development and commercialization, and a long-term manufacturing agreement with Bacthera for VOWST production License Agreement with Société des Produits Nestlé S.A. (Nestlé) The 2016 License Agreement with Nestlé covers product development and commercialization outside the US/Canada, with $120 million upfront and $80 million in development milestones received, plus potential royalties and additional milestones - The 2016 License Agreement with Nestlé covers development and commercialization of product candidates (VOWST, SER-262, SER-287, SER-301) in markets outside the United States and Canada[213][214] - The company received a $120 million upfront payment and $80 million in development milestones under this agreement[214] - Nestlé agreed to pay tiered royalties (high single digits to high teens) on net sales and potential milestones up to $285 million (development), $375 million (regulatory), and $1.125 billion (commercial)[214] License Agreement with NHSc Rx License GmbH (Nestlé) The 2021 License Agreement grants Nestlé a co-exclusive license for VOWST in the US and Canada, with the company receiving a $175 million upfront payment and a $125 million FDA approval milestone, and sharing equally in commercial profits/losses - The 2021 License Agreement grants Nestlé a co-exclusive license for VOWST in the United States and Canada[218] - The company received a $175 million upfront payment and a $125 million milestone payment upon FDA approval of VOWST[221] - Since the first commercial sale of VOWST in June 2023, the company shares equally in its commercial profits and losses[220] Long Term Manufacturing Agreement with Bacthera The Bacthera Agreement outlines Bacthera's construction of a dedicated production suite in Switzerland and provision of manufacturing services for VOWST and other products, with the company committing to pay at least 256 million CHF over ten years - The Bacthera Agreement (amended Dec 2022) involves Bacthera constructing a dedicated full-scale production suite in Switzerland and providing manufacturing services for VOWST and other products[224] - The company agreed to pay Bacthera at least 256 million CHF (approx. $277 million) for construction and annual operating fees over the initial ten-year term[225] Indebtedness This section details the company's debt, including the repayment of the Hercules Credit Facility and the new Oaktree Credit Agreement, which provides a $250 million Term Loan secured by assets, including IP, with additional tranches contingent on VOWST sales Loan and Security Agreement with Hercules The Hercules Credit Facility, initially for $50 million and amended to $100 million, was secured by company assets (excluding IP) and fully repaid on April 27, 2023, using proceeds from the Oaktree Credit Agreement - The Hercules Loan Agreement was amended in February 2022 to a $100 million Hercules Credit Facility[230] - The Hercules Credit Facility was secured by substantially all company assets, excluding intellectual property[231] - The Hercules Credit Facility was repaid on April 27, 2023, using proceeds from the Oaktree Credit Agreement[231][232] Oaktree Credit Agreement The Oaktree Credit Agreement provides a $250 million Term Loan, with $110 million funded, additional tranches contingent on VOWST sales, a variable interest rate, and security interests in all assets, including IP, with the company in compliance with covenants - The Oaktree Credit Agreement provides a $250 million Term Loan facility, with $110 million (Tranche A) funded on April 27, 2023[232] - Tranche B ($45 million) is available until September 30, 2024, if VOWST net sales meet specific trailing six-month and quarterly growth targets[232] - The loan bears interest at three-month SOFR (2.50% floor, 5.00% cap) plus 7.875% (reducible to 7.50% if VOWST sales targets are met), with quarterly interest-only payments for the first three years[233] - The company's obligations are secured by first priority security interests in substantially all assets, including intellectual property[235] - As of September 30, 2023, the company was in compliance with all financial covenants, including maintaining at least $30.0 million in cash and cash equivalents in controlled accounts[237]