Seres Therapeutics, Inc. (MCRB) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Seres Therapeutics Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Carlo Tanzi, Head of Investor Relations. Please begin.

Thank you and good morning. A press release with the company's second quarter 2016 financial results and our progress update became available at 7 AM Eastern Time today and can be found on the Investors and Media section of the company's website. Before we begin, I would like to point out that we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements about our future expectations and statements regarding SER-109 including our continuing review and assessment related to the interim results of our Phase 2 clinical trial of SER-109. Our valuation in consultation with the FDA, our future development plan of SER-109, our development of microbiome therapeutics, the ability of microbiome therapy to treat disease, the timing and results of our clinical trials and our available cash to fund operations in the future. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed under the risk factors section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 16, 2016 and our other reports filed with the SEC. Any forward-looking statements made on today's call represent our views as of today only. We may update these statements in the future, but we disclaim any obligation to do so. On today's call, I am joined by Dr. Roger Pomerantz, Seres' President, CEO and Chairman; and Eric Shaff, Chief Financial Officer. I will now pass the call over to Roger.

Thanks Carlo. And thank you all for joining us. I'd like to review recent event and I'll begin by discussing the recently reported SER-109 Phase 2 interim results which did not meet its primary efficacy endpoint. We were disappointed with this initial data which were highly expected given the favorable prior SER-109 Phase 1b results, as well as other supportive clinical and preclinical data. To briefly recap, the objective of the SER-109 Phase 2 study was to evaluate the efficacy and safety of SER-109 compare to placebo in patients with multiply recurrent C diff infection. The study enrolled 89 patients at 37 centers around the US with 59 patients randomized to SER-109 and 30 subjects randomized to placebo. Dosing with either SER-109 or placebo followed the completion of antibiotic treatment for the qualifying C diff recurrent. The available results reflect the top line 8 weeks study data including the primary efficacy endpoint for the intent to treat study population. Based on 8 weeks data the relative risk of C diff infection recurrent for placebo population compared to the SER-109 population was not statistically significant. From a safety perspective, there was no imbalance and adverse event frequency or type in patients receiving SER-109 compared to those receiving placebo, and no drug related serious adverse event were observed. The Phase 2 efficacy results are surprising and clearly discord with the prior Phase 1b data. Since we first obtained the result, our priority has been to complete a detailed review of each aspect of the study utilizing a root cause analysis. We are carefully evaluating all differences between the Phase 2 study and the prior Phase 1b study to ascertain if any of the changes between these studies may have led to the difference in the study results observed. We've also begun to perform key experiment to evaluate the data from the Phase 2 trial. As noted, a comprehensive root cause analysis on the Phase 2 study is ongoing. We've formed dedicated working team who are responsible for the analysis of each facet of the study including team focused on, one; microbiome, two; CMC, three; study data for steady execution and four, translational medicine. We have a skilled team in place with significant experience in performing clinical study root cause analysis. Regarding the Phase 2 SER-109 drug product, a few manufacturing and formulation modifications were implemented prior to the study to purify and concentrate SER-109 bacterial spore. We are now seeking to ascertain if any of these changes had an adverse impact on drug product. We will carefully examine each step of the CMC process as well as the final Phase 2 SER-109 drug product. We also continue to gather and analyze Phase 2 microbiome data and how the microbiome changes observed in the subject participating in Phase 2 study compared to the changes observed and quantify in the previous Phase 1b trial. These are only a few of the numerous aspects of the study that we are evaluating. Our expectation is to have completed much of our investigations before the end of the year and we intend to transparently communicate our finding once we have a definitive result to report. I'd like now to transition and spend just a few minutes discussing other areas where the company has made recent progress. Let's begin with SER-262 program. We announced the initiation of SER-262 Phase 1b study to prevent recurrent of patients with primary C diff infection. The primary C diff population being targeted by SER-262 represents a sizeable patient segment with estimated annual incidents between 640 and 820,000 patients in the US alone. SER-262 is manufactured by a synthetic process that is fundamentally different than that used to generate SER-109 and does not require human donor material. SER -262 contains a consortium of 12 selected bacterial strain in four form that were selected from the Seres still leading greater than 14,000 strain bacterial library. The strain selected for SER-262 were rationally chosen based on multiple criteria including silico, in vitro and in vivo modeling and the final composition of the optimized product was selected from over 100 different consortia that were evaluated. In choosing bacterial strains for SER-262 we considered human microbiome data, the result from C diff preclinical studies and the individual characteristics of each bacterial strain including in the drug. We intend to utilize the general approach for rationally selecting microbiome product candidate as we identify and develop additional microbiome drug for serious diseases in new and multiple therapeutic area. The SER-262 Phase 1b- is a 24-week, randomized, placebo-controlled dose escalation study. The study is planned to include approximately 60 patients who have experienced a first episode of CDI. We are currently enrolling patients and we expect to obtain study result in 2017. Turning to our SER-287 program. We continue to execute or SER-287 Phase 1b study in patients with mild-to-moderate ulcerative colitis. The rationale for evaluating microbiome therapy in this indication is supported by a number of controlled clinical studies which demonstrated that repetitive fecal microbiota transplantation led to meaningful clinical responses. We've continued to make good progress with the Phase 1b study by opening new study clinical site and increasing enrollment. We look forward to SER-287 study results in 2017. During the quarter Seres also is continuous to make significant progress advancing our strategy of collaborating with leading global experts. As we work to advance our pipeline in new diseases across our three franchise areas of infectious disease, immunology and metabolic diseases. Seres recently entered into a sponsored research agreement with the investigators at Mayo Clinic’s Center for Individualized Medicine to focus on identifying new microbiome therapeutics candidates for liver diseases, specifically Seres and the Mayo Clinic will collaborate on clinical and preclinical study to identify novel microbiome therapeutic candidate for primary sclerosing cholangitis and orphan indication characterized by bile duct inflammation and reduction in bile acid flow. This research will provide mechanistic insight into the role of the microbiome in additional liver condition such as non-alcoholic steatohepatitis or NASH. Seres also initiated collaboration with researchers at Massachusetts General Hospital of the Harvard Medical School, focused on obesity and metabolic syndrome. In this agreement, Seres and MGH investigators will collaborate to obtain clinical data on the impact of fecal microbiota transplantation derived from lean individual on body weight and glycemic control of adults suffering from obesity and metabolic disorders. Seres will analyze patient samples to determine metagenomics signatures, metabolic markers and other key clinical biomarkers. We believe that this research will provide insights to support the development of future microbiome therapeutics for obesity. Finally, Seres also entered into an agreement with Emulate, a private company developing a micro-engineered, living-tissue-based system that models the human intestine. Seres intend to use the Organs-on-Chips technology to support our efforts towards identifying novel bacterial combination with therapeutic potential in serious human diseases. I'll now pass the call to Eric to review our recent financial performance.

Thank you, Roger. And good morning, everyone. Today I will review our second quarter financial results. I will also provide an overview of our operating expenses as well as provide an update on our balance sheet. We reported a net loss of $27.9 million for the second quarter of 2016, as compared to a net loss of $12.6 million for the same period in 2015. The increase in net loss was driven primarily by continued growth in clinical and development expenses as well as increased headcount, and ongoing development of our microbiome therapeutics platform. Research and development expenses for the second quarter were $22.2 million, as compared to $8.8 million for the same period in 2015. The increase in R&D expense was primarily due to expenses related to our microbiome therapeutics platform, and the clinical development of SER-109, SER-262 and SER-287. G&A expenses for the second quarter were approximately $9 million, as compared to $3.6 million for the same period in the prior year. The increase in G&A expense was due to increased headcount and facility expansion to support overall growth, as well as other costs associated with operating as a public company. We ended the second quarter with $272.4 million in cash, cash equivalents and investments. We continue to expect that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements well into 2018. This estimate excludes net cash flows from potential future business development activities. In addition, we expect that the specifics of future SER-109 related activities could impact capital requirements, and thus our cash projections. Notably, we expect that Seres is well resourced to fund operation through the anticipated 1b readout for both the SER-287 and SER-262 program. The reduction in cash balance during the quarter was approximately $30.8 million. This reduction in cash including $5.4 million of expenditures related to the company's new headquarters including laboratories, office space and importantly a new pilot manufacturing facility. We expect that facility related expenditures will continue into the fourth quarter of this year. I'll now turn the call back over to Roger.

Thanks Eric. As I conclude I'd like to emphasize that our underlying belief in the promise of the microbiome therapeutics remains strong. We continue to note that there is compelling scientific and clinical evidence linking dysbiosis to the microbiome with C diff and other human diseases. Based on this robust evidence we deeply believe in the fundamental principals on which Seres was founded, i.e. it is possible to use microbiome therapeutics to modify the human microbiome and as a result to meaningfully impact the course of serious human disease state. As an organization, we remain determined and energized in our efforts to drive this pioneering field forward as the leader of this new field in biomedicine. Our priority is to complete our analysis of the SER-109 study with alacrity and vigor, and continue to drive our R&D pipeline forward. I want to thank you for your continued interest in and support of Seres and the microbiome. And I look forward to continuing to communicate our progress as rapidly but as thoughtfully as possible. Operator, let's open the line for questions.

[Operator Instructions] And the first question will come from Ritu Baral of Cowen. Your line is open.

Hi, guys. Thanks for taking the question. Roger as you look at your ongoing 262 study and the five doses in that dose escalation design, how might what you find from the root cause analysis impact that? I know we had discussions and have had client discussions about potency from the reformulation. Do you think it may impact how you view the dose is selected in the formulation in 262 Phase 1b study?

Thanks Ritu for that question. So, yes, when we got this data on 109 we of course looked at the other trials. We at this point see no reason for either 287 or 262 to change them, but clearly we left the data drive us. When we find something in 109 that will help us interrogate these diseases better or find the root cause issue that could conflate with 262 we will of course adjust the study. At this point, we don't see anything. With the study is moving forward and will again give us a little time. Right now we don't see the need to stop that trial or advancement.

Got it. And just one quick related follow up. In discussing the root cause you mentioned CMC microbiome execution and transplantation, can you clarify what the transplantation investigation is -- [Multiple Speakers]

Yes, transplantation is just if you need animal modeling, that's usually what we consider transplantation science, this other thing so it is suit to not root cause analysis. Just like how you design a drug and get and develop a drug, that's how you look at a root cause. And so we have all parts of the company looking at this. As I said before certain things rise closer to the surface even though we have a long list of root cause possibilities, clearly CMC study design and diagnosis are on our top list at this point.

Understood. Thanks for taking the question.

Yes. I do want to say that we are in the point I did, we are really hypothesis generating what I say today is all hypothesis as we generate data. And we think that's important.

Thank you. The next question will come from Tazeen Ahmad of Bank of America. Your line is open.

Hi, good morning, guys. Thanks for taking my question. Maybe one on 287, so this is something that can have a really large potential market opportunity. I know it's early and you have time to do some initial work on it but maybe can you talk to us about based on what you know so far what could be some potential advantages of using SMP in an indication such as this one where there are currently approved drugs and there are many others using multiple different types of mechanism of actions under development but what do you think could be a particularly differentiating factor in that SMP use here?

Yes. So, again, thanks for a really important question. So, clearly just to remind you there is reason we went ulcerative colitis and pivoted and develop 287 is based on true fecal transplant data. One fecal transplant doesn't work but now four groups around the world, if you give a fecal transplant once a week, 6 to 8 weeks you have meaningful effects on Mayo Clinic score as well as in remission rate. When we saw that it became clear that it was a natural area for us to develop a drug in. And because of the ability to make 287 with low cog and dose easily we have arms as you know with once a day as well as once a week for the 8 weeks. And we are very interested and excited in this phase because remember although there are lot of drug, many of the patients that we are treating who are the patients who fail first line therapy by they are say plus minus steroid end up going into immunosuppressive drug whether they are monoclonal or standard chemotherapy. The beauty of what we think this approach assuming good data which show like fecal transplant is that there will be a patient friendly easy to take oral drug propelling UC patients that keeps them out monoclonal, keeps that out of immuno suppression and we do not expect immuno suppression with a microbiome agent. If those hit the target product profile, it is an important advance.

And then maybe can you just remind us how many patients you are hoping to enroll when all this been done?

Yes. So we are looking at it about 20 sites around 40 patients. Remember, this is going to be a very intensive study, patients getting full endoscopy with biopsy both upfront and after therapy. There are number of biomarkers including with endoscopy looking at mucosal healing and biomarkers in the microbiome and in inflammatory biomarkers. We expect this data to be very helpful in understanding the mechanism not only an effect but the mechanism of action of this new modality.

Thank you. The next question is from Bill Tanner of Guggenheim Securities. Your line is open.

Hey, Roger, good morning. Thanks for taking the question. I had one just on the sort of looking back on and maybe some of the modifications were made on SER-109 production. And I am guessing and I don't know how much detail you really want to provide at this point in time. But I am assuming that it's really perhaps a question of potency if not maybe if you correct it me on that, but I guess my question, one is understand wanting to go back and look at the material perhaps the people who dosed with but I mean can you not just fast forward to looking at the patient samples to see what kind of --

It's a great question. And I can't answer some of it. So just to remind everyone main changes were just on increased concentration, increased purity went from 15 to 30 capsules to four, all the release facts that we worked out with FDA look good. But clearly when something has a problem in Phase 2, you always look at CMC, we are looking at it. We are looking both at the drug in comparison but also as you point out looking at the effects on the microbiome. We have patient samples from every patient before, during and after therapy. We will measure their microbiome using 16S ribosomal as well as shock and sequencing for full genome amount. That will help tell us as well how well the CMC new product work. Because we do have a comparator in 1b where we know the microbiome for each of those 30 patients. And again one of the things I want to remind you that also makes it complex is that we not only didn't hit the primary efficacy endpoint but we had interesting data as we said on the previous call. One is that it worked much better ending greater than 65 and less 65 patients. That's a pre secondary endpoint; it's not something that was done post talk. It was built into the trial. And there was huge placebo effect in the less than 65. This is somewhat complex data which may or may not be due to CMC or other factors including the clinical trial itself. So that's what we'll do with CMC. We expect there to be an answer. I always -- when we put a hypothesis out in science, it has to be falsifiable otherwise it is not science. So good thing about all the hypothesis we are generating now is that answers will be obtained.

Thank you. And the next question will be from Vernon Bernardino of FBR. Your line is open.

Hi, good morning. Thanks for taking my question. So you have stated that you continue to gather and analyze the data through the coming months. I just wondered if you could share if you have already provided the results obviously you have the results that it did not achieve the primary endpoint. And if you have on what feedback you have done.

Yes. So of course the first day we announced this. We also sent the letter and had informal offline discussions with FDA. We have not provided them any more data. We are still in the root cause analysis. They are open to meeting with us when we are ready. And we will do that. And we'll try to do it as I said with alacrity and sensitivity to setting up all the data set not doing a piece meal. But again we feel we have a good partner in the FDA. And we will get to them when we have data in our hands that provides answers.

Thank you. The next question is from Carol Werther of H.C. Wainwright. Your line is open.

Hi, thank you. So you are evaluating the bacteria or the microbiome of the patients. Are you also evaluating any viruses in microbiome or is it just bacterial?

So, remember, in our drug there are 50 bacteria in four forms. We expect there to be no viruses in there. If you are asking about the endogenous viruses including stages in the microbiome, we are not evaluating those. It is not clear how they actually affect most of the microbiome very early studies on that. Clearly, we are open to understanding the microbiome in compendium not just the spores, not just the vegetative bacteria but any other viruses and protozoa that are there. But again the research there seems very early and it's difficult to analyze at this point.

Thank you. The next question is from Joseph Schwartz of Leerink Partners. Your line is open.

Thanks very much. Now that you had some time to regroup after reporting the top line results. I was wondering if you could walk us through the general hierarchy of hypothesis you will be testing to determine the root cause of the surprising results of ECOSPOR? And how much data do you have on hand already versus do you need to collect from the sites? What parts of this exercise will take the shortest versus the longest? And then what is your philosophy for balancing rapid versus thoughtful communications to the [street]? If you see something jump out from the earlier analysis of the data you have on hand. Will you wait until every potential piece of information you can obtain has been proceeds or is there the possibility that you might communicate something that looks provocative along the way. Thank you.

Yes. Thanks for the question, Joe. I hate to speculate. What I like to do and with the company is doing is setting up hypothesis. We talked about some of them already. There are many in our spreadsheet but the one that rose to the top are CMC as I said before. And the clinical trial and diagnosis but short of that I think you have to give us time. We want to do it right. Certainly it maybe earlier but I don't want to promise time at this point. We want to get the answer correct. We wanted to get the answer, Joe, correctly not only for the company but this is an important drug for the whole space and will teach us not only about 109 but about microbiome drugs and clinical trials in the future. Remember, there are no comps for this. This is the first microbiome study that was done placebo controlled and blinded. It was actually the first study placebo controlled and blinded in the multiply recurrent phase. So we think there is a lot to learn in this new area. We are at the forefront and we need to gather this not only for the drug and the company but as we move forward for other drugs in the microbiome therapeutics as a field.

Thank you. And the next question is from Mark Breidenbach of ROTH Capital. Your line is open.

Hey, guys, good morning. Just another quick question about the formulation of SER-109. I realized that the total spore count used in the Phase 2 trial was the same as what was in the second cohort of the Phase 1b. However, more spores were active but you were still in the Phase 2 study. I was just wondering if you could discuss a little bit about what the impurity for that were marked out in the preparation and are you exploring whether you consider these were actually or could actually promoting spore germination?

So that is -- it is a cone down question in that is also on our spreadsheet to look at. I can tell you what are the impurities were there. Remember, when you make this drug it goes through a -- lies a step with ethanol that has no effect on the spores but lies is all the bacteria and the viruses that are present there. The impurities are mainly little bits of bacteria vegetative organism that are still there after their lies, is that important for sporulation, we will test that. But I don't -- it's not high on my list. But again it is on the list. So I think you bring up an important hypothesis. Right now there is no data that that happens in our hand but we'll an answer for you moving forward.

Thank you. The next question is from Bill Tanner of Guggenheim Securities. Your line is open.

Hi, Roger. Thanks for taking the follow-up. Just back on looking at the patient or the subjects that were in the trial, wondering I don't know if that I've ever heard the number of samples that have been taken. If you feel like the samples because obviously you are taking with the beginning of the end but I am wondering if you have adequate number of samples taken in the interim where you could really track I guess what's maybe I guess would be the bloom. And then doesn't -- is this not kind of Occam's razor that for simplest explanation right one when they are perhaps it didn't bloom at the pace that might have protected the subject.

Yes. So let's talk about that. Thanks for deep and interesting question. I think the most important; I had said to many people, I am an Occam's razor guy that's what medicine is about. But sometimes and I found in root cause analysis it can be more than one thing. One other thing that does not lend to that simple explanation that you point out. Just let me say we have some patients that have many samples. So we can look at the [connect it] and we will. So it's not just before and after, it's during some with more than others. But I think when you think about whether it's just that it didn't bloom early enough, we can look at that. It doesn't quite explain the data, the clinical data though because it's not just the protection issue, it is that we have this orderly data which shows a placebo effect that's out of line in the under 65 and a drug that seems to work more likely we are expecting in the above 65. So we have to take the data that we have in hand and see which of this hypothesis and explanations will generate an approach that actually subsume the data as we see it. So this is what makes it such an interesting series of experiment. It is an approach that will lend itself to just oh the drug didn't bloom. Anyone else?

Yes. We do have another follow up question from Carol Weather of H.C. Wainwright. Your line is open.

Hi, thanks for taking the follow -up. So listening to your commentary I am thinking that perhaps we might not get a real update on the trial result until next year. And to follow up just with that would it make sense to do another trial in just over 65 years old patients? Thanks.

Yes. So that's great. I just want to correct that we are not sure when it's going to be. We expect to be done by the end of the year. We will see where the data comes and how it drives us. And what we learned and it was speed. I've promised that we will come with thoughtfulness but alacrity as a street and to the public as we always done. I'd say that one of the important things to underline, your point of another trial is that the safety parameters will allow us we believe and talking to our FDA colleague to move into another trial. Without being burdened having a safety hit. This is very rare with drug. They usually have a safety hit of some type. And we consider this very important as we develop a trial to move 109 forward. Would we use it above 65? Again, we don't understand why that happened. Right now we are not willing to commit to a trial design there but and we will move forward based on the data.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect at this time. Good day everyone.