UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37465
Seres Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
200 Sidney Street – 4th Floor
Cambridge, Massachusetts
(Address of Principal Executive Offices)
27-4326290
(IRS Employer
Identification No.)
02139
(Zip Code)
(617) 945-9626
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Common stock, par value $0.001 per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant based on the closing price of the registrant’s common stock as reported on the
Nasdaq Global Select Market on June 30, 2016, was $570,583,861.
As of March 10, 2017, there were 40,368,128 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements
regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs,
timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking
statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,”
“intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar
expressions. The forward-looking statements in this Annual Report on Form 10-K are only predictions. We have based these forward-looking statements
largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and
results of operations. These forward-looking statements speak only as of the date of this report and are subject to a number of important factors that could
cause actual results to differ materially from those in the forward-looking statements, including the risks, uncertainties and assumptions described under the
sections in this report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in
this report. These forward-looking statements are subject to numerous risks, including, without limitation, the following:
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our status as a clinical-stage company and our expectation to incur losses in the future;
our future capital needs and our need to raise additional funds;
our ability to build a pipeline of product candidates and develop and commercialize drugs;
our unproven approach to therapeutic intervention;
our ability to enroll patients in clinical trials, timely and successfully complete those trials and receive necessary regulatory approvals;
our ability to establish our own manufacturing facilities and to receive or manufacture sufficient quantities of our product candidates;
our ability to protect and enforce our intellectual property rights;
federal, state, and foreign regulatory requirements, including FDA regulation of our product candidates;
our ability to obtain and retain key executives and attract and retain qualified personnel; and
our ability to successfully manage our growth.
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for
management to predict all risk factors and uncertainties.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K completely and with the
understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these
cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein,
whether as a result of any new information, future events, changed circumstances or otherwise.
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Item 1. Business
PART I
Overview
We are a microbiome therapeutics platform company developing a novel class of biological drugs, which we refer to as Ecobiotic® microbiome
therapeutics. The human microbiome is an ecology of microorganisms, including bacteria, fungi and viruses, that, when unhealthy, or dysbiotic, can leave the
body more susceptible to infections, metabolic disorders, allergies, autoimmune disease, inflammation and other serious conditions. Our drugs are designed to
restore health by repairing the function of a dysbiotic microbiome. We are initially focused on implementing our microbiome therapeutics platform to develop
Ecobiotic microbiome therapeutics that treat dysbiosis in the colonic microbiome, one of the most diverse microbial ecologies in the human body.
The human microbiome is one of the richest and most diverse ecosystems on earth, with a population of more than 100 trillion microorganisms that
live in our intestines, mouth, skin and elsewhere in the body. In a healthy, symbiotic state the colonic microbiome plays an important role in human health,
helping the body digest food, resist pathogens, regulate the metabolic systems, develop and regulate the immune system and synthesize essential nutrients and
vitamins. However, the colonic microbiome may change in composition for a variety of reasons, including in response to long-term or high-dose antibiotics or
following gastrointestinal infection. These changes in composition may result in the loss of key microbes, resulting in a state of dysbiosis. Dysbiosis
of the colonic microbiome is associated with a wide range of serious conditions and infections, such as gastrointestinal infection and inflammatory and
metabolic diseases.
While the study of the human microbiome is not new, the scientific community’s understanding of the microbiome, and the colonic microbiome in
particular, has been significantly advanced through metagenomics, which has enabled the broader understanding of the human microbiome at the organismal,
functional and community level. Scientific research has correlated dysbiosis in the colonic microbiome with numerous diseases and conditions in humans and
in animal models, including: infections, metabolic disorders, allergies, autoimmune disease, inflammatory conditions such as inflammatory bowel disease, or
IBD, and neurological disorders. Information regarding the impact of the colonic microbiome on various disease states continues to grow rapidly.
We are developing a new approach to treating disease by restoring a dysbiotic colonic microbiome to a healthy state using our Ecobiotic microbiome
therapeutics. Our approach is premised on the hypothesis that the proximal cause of many diseases is a dysbiosis in the natural state of the colonic
microbiome that perpetuates the conditions that allow disease to take hold and flourish. We believe that the restoration of a dysbiotic colonic microbiome
using rationally designed therapeutics represents a paradigm shift in the approach to treating the underlying disease. Our Ecobiotic microbiome therapeutics,
which are derived from our microbiome therapeutics platform, are rationally designed ecological compositions, consisting of discrete combinations of
beneficial microorganisms with designed functional properties that provide the ability to re-establish keystone features of a functional microbiome in settings
of disease. There are currently no FDA-approved therapeutics that are designed to restore the microbiome to a healthy state.
Our approach to discovery and design is based on an iterative bedside-to-bench-to-bedside drug discovery strategy that begins with data on the human
microbiome that we gather from clinical studies. From these data, we identify the microbiological and functional differences between a healthy and a diseased
microbiome, which we then use to rationally design potential Ecobiotic microbiome therapeutics. After further in-lab testing, selected Ecobiotic microbiome
therapeutic candidates are then studied in clinical trials. We apply a comparative genomic systems biology framework that leverages proprietary
computational, microbiological and screening capabilities to design lead candidates targeted at these microbiological and functional deficiencies. We are able
to apply this framework and experience to clinical data sets from published studies and those generated with our collaborators, as well as to the proprietary
clinical data set we have generated through our SER-109 clinical trials. We believe we can utilize our knowledge and data to design Ecobiotic microbiome
therapeutics to treat various medical conditions, such as inflammatory and metabolic diseases. We also have advanced capabilities in the production and
formulation of vegetative colonic bacteria spore forms of bacteria into therapeutics. We believe that the combination of experience, proprietary data and
proprietary know-how that comprise our microbiome therapeutics platform provides us with a competitive advantage in the design and development of
microbiome therapeutics. Further, our approach and platform, which enable the rational design, testing, optimization, manufacturing and formulation of
Ecobiotic microbiome therapeutics, provide a framework that we believe can significantly reduce the time typically required to advance therapeutics to the
clinic.
Using our microbiome therapeutics platform, we are developing our lead clinical product candidate, SER-109, which is designed to durably repair
dysbiosis in the colonic microbiome in the setting of recurrent Clostridium difficile infection, or CDI. CDI is most often caused by the use of broad spectrum
antibiotics which induce dysbiosis of the microbiome causing susceptibility to infection by Clostridium difficile, or C. difficile, a spore forming bacterium.
CDI may lead to debilitating diarrhea in infected
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individuals, but can also lead to more severe outcomes, such as inflammation of the colon (colitis), toxic megacolon and death. The U.S. Centers for Disease
Control, or CDC, has identified CDI as one of the top three most urgent antibiotic-resistant bacterial threats in the United States. It is the most common cause
of hospital acquired infection in the United States and has overtaken methicillin-resistant Staphylococcus aureus, or MRSA. CDI is responsible for the deaths
of approximately 29,000 Americans each year. Based on an epidemiological study conducted by the CDC, the incidence of CDI in the United States, based on
a positive toxin or molecular assay in patients who did not have a positive result in the previous eight weeks, was estimated to be 453,000 (95% confidence
interval, 397,100 to 508,500) (Lessa et. al., Burden of Clostridium difficile Infection in the United States, New England J. of Medicine, 2015). While the
epidemiological data are varied outside the United States, we believe that, due to the widespread use of antibiotics, CDI is a growing global disease. The
standard of care for CDI is to treat with antibiotics. In many cases, antibiotic treatments may resolve the acute infection caused by C. difficile. However, these
antibiotic treatments kill bacteria broadly, inducing a dysbiosis of the microbiome and potentially making patients more susceptible to a recurrence of CDI.
For those patients who experience a recurrence of their CDI, we believe it is this dysbiosis of the microbiome, not the presence of C. difficile, which is the
proximal cause of disease. Published data suggests that the risk of recurrence is approximately 25% after the primary CDI, 40% after a first recurrence and
greater than 60% for those experiencing two or more recurrences.
SER-109 is a bacterial spore ecology consisting of an average of approximately 50 bacterial species derived from healthy donors’ fecal matter. SER-
109 is designed to prevent further recurrences of CDI in patients suffering from recurrent CDI by restoring the dysbiotic microbiome to a state of health. If
approved by the U.S. Food and Drug Administration, or FDA, SER-109 could be a first-in-field oral microbiome drug. In our Phase 1b/2 clinical study of
SER-109 in recurrent CDI patients, 97% of patients achieved a clinical cure, which we defined as the absence of CDI requiring antibiotic treatment during the
eight-week period after SER-109 dosing; 87% of patients met the predefined endpoint of preventing recurrent CDI within eight weeks following
administration of SER-109. A subsequent randomized, double-blind, placebo controlled Phase 2 clinical study was conducted in 89 subjects to evaluate the
safety, tolerability and efficacy of SER-109 in adults with recurrent CDI. In that study, 44% of subjects (26 of 59) who received SER-109 experienced a
recurrence at the 8 week endpoint compared to 53% of subjects (16 of 30) who received placebo, a result that was not statically significant. SER-109 was
generally safe and well-tolerated in both the Phase 1b/2 and Phase 2 studies. The most common adverse events observed in the Phase 2 clinical study for
SER-109 and placebo, respectively, were diarrhea (25% vs. 14%), abdominal pain (22% vs. 14%), flatulence (12% vs. 3%), and nausea (10% vs. 10%). No
drug-related serious adverse events were observed. In order to understand the difference in outcome between the Phase 1b/2 and Phase 2 clinical studies, we
conducted an analysis of the available clinical, microbiome and chemistry, manufacturing and controls, or CMC data. This root-cause investigation looked at
the clinical trial population, study conduct, and diagnostic testing used for study inclusion and endpoint analysis, assessed clinical specimens for genomic and
metabolomic biomarkers that might give insight into SER-109’s efficacy and potency, reviewed manufacturing procedures and processes, performed
retrospective analysis using high-resolution whole metagenomics sequencing of Phase 1b/2 clinical study stool samples, and reviewed analytical methods to
identify factors that may have led to different outcomes between Phase 1b/2 clinical and Phase 2 clinical study. We have now identified specific factors that
we believe contributed to the Phase 2 clinical study results, including issues related to both the accurate diagnosis of C. difficile recurrent infection, and
potential suboptimal dosing of certain subjects in the study.
The SER-109 analyses were recently shared with the FDA. Based on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109
clinical study in approximately 320 patients with multiply recurrent C. difficile infection. Study participants will be randomized 1:1 between SER-109 and
placebo and will receive a dose that is approximately 10-fold higher than in the first Phase 2, administered over three consecutive days. Diagnosis of C.
difficile infection for both study entry and for endpoint analysis will be confirmed by C. difficile cytotoxin assay, compared to the first Phase 2, where most
patients were diagnosed by PCR. The new study will evaluate patients for 24 weeks and the primary endpoint will compare the C. difficile recurrence rate in
subjects who receive SER-109 verses placebo at up to eight weeks after dosing. The FDA has agreed that this new trial may qualify as a pivotal study with
achievement of a persuasive clinical effect and addressing FDA requirements, including clinical and statistical factors, an adequately sized safety database,
and certain CMC parameters.
We progressed our drug discovery and development platforms with the successful initiation in July 2016 of a Phase 1b study for SER-262, a rationally
designed ecology of spore forming bacteria to be used following antibiotic treatment for primary CDI to prevent an initial recurrence of CDI. We believe
there are several advantages to using a synthetic approach to developing microbiome therapeutics. Synthetically derived product candidates can be scaled up
to meet global demand in a reliable and reproducible manner, with well-defined characteristics. Based on our metagenomics expertise, proprietary in silico
algorithms, extensive proprietary bacterial library, and advanced manufacturing capabilities, we believe we can design synthetically produced microbiome
therapeutic candidates for specific target indications. We believe, our capabilities provide us with a competitive advantage in developing synthetically
produced microbiome therapies. SER-262 was designed based on clinical insights from our SER-109 program and an understanding of the mechanism by
which the microbiome protects against gastrointestinal infections. The strains included in SER-262 were selected based on criteria that included analysis of
human microbiome data, efficacy in animal models of CDI, and bacterial strain level characterization for safety characteristics and microbial function. We
screened over 100 drug candidates in a mouse model of C. difficile and the final composition was also evaluated for manufacturability. These data were
submitted to the FDA as part of our Investigational New Drug, or IND, which was cleared in June 2016. The Phase 1b study, a randomized, placebo
controlled dose
5
escalation study was initiated in July 2016. The study is expected to enroll up to 60 patients who have experienced a first episode of CDI. The primary
endpoints of the study are to evaluate the safety and tolerability of SER-262 in subjects with primary CDI and to compare the CDI recurrence rate between
the SER-262 and placebo groups up to 8 weeks after treatment. Top-line data from the SER-262 Phase 1b study is expected in the second half of 2017.
We initiated our Phase 1b clinical study for our IBD drug candidate, SER-287, in December 2015 and are enrolling subjects with active mild to
moderate ulcerative colitis, or UC, a form of IBD, to evaluate the safety and efficacy of SER-287 added to standard of care treatment. The randomized,
placebo-controlled multiple dose Phase 1b study of SER-287 is expected to enroll up to 55 subjects with active mild-to-moderate UC, who are failing current
therapies. The clinical development of SER-287 to treat UC is supported by preclinical studies in multiple animal models of colitis that provide evidence that
SER-287 administration results in reduced pathology. Published clinical reports furthermore suggest that modulation of the microbiome through repetitive
fecal microbiota transplants may lead to meaningful clinical response in certain UC patients. The primary endpoints of the study are to evaluate the safety and
tolerability of SER-287, compare the change in the microbiome composition versus placebo, and determine engraftment of SER-287 bacteria following SER-
287 treatment. The study will also evaluate clinical response, complete remission, and endoscopic improvement, as well as metabolomic, and immunological
findings. Top-line data from the SER-287 Phase 1b study is expected in the second half of 2017.
We are also designing and developing SER-301, a synthetic Ecobiotic microbiome therapeutic candidate for the treatment of IBD. The design is being
driven by insights from successful fecal microbiota transplants for UC conducted by our academic collaborators and will leverage microbiome and
metabolomic data gained from the ongoing Phase 1b study of SER-287. The SER-301 program also benefits from what we have and will learn about
synthetic Ecobiotic microbiome therapeutic development in our SER-262 program.
In addition to our CDI and IBD product candidates, we are utilizing our microbiome therapeutics platform to develop SER-155 for the prevention of
transplant-related mortality (due to infection and graft versus host disease, or, GvHD) in allogeneic hematopoietic stem cell transplant, or allo-HSCT,
recipients. Published clinical evidence from our collaborators at Memorial Sloan Kettering Cancer Center shows that allo-HSCT patients with reduced
microbiome diversity primarily due to antibiotic exposure are far more likely to die due to infection and/or lethal GvHD (Taur et al., Blood, 2014; Jenq et al,
Biology of Blood and Marrow Transplantation, 2015). Notably, in one patient who participated in the SER-109 Phase 1b/2 clinical study, drug-resistant
organisms and other potentially pathogenic species were eliminated from the patient’s gastrointestinal tract (Khanna et al., Journal of Infectious Disease,
2016). The potential role of the microbiome in immuno-oncology therapies has also been reported on in recent publications on studies conducted in humans
and animal models (Dublin K. et al., Nature, 2016; Vetizou M. et al., Science 2015; Sivan A. et al., Science 2015). We are also applying our platform to
potentially develop Ecobiotic microbiome therapeutics to enhance the safety and efficacy of immune-oncology agents including checkpoint inhibitors used in
cancer treatments. We are also researching Ecobiotic microbiome therapeutics for the treatment of metabolic diseases, such as early-stage, non-insulin
dependent diabetes, non-alcoholic steatohepatitis (NASH), obesity and metabolic syndrome. Research in these indications is focused on developing Ecobiotic
drugs that address specific functional defects in the microbiome, including the specific metabolic products made by the microbes. We believe this approach
may enable pursuit of a range of disorders including various forms of liver disease and rare genetic diseases of metabolism.
The following chart summarizes our current product pipeline:
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We have assembled a world class group of scientists, clinicians, directors and investors, who have established our leadership in the field of
microbiome therapeutics. We were co-founded by Drs. Noubar Afeyan, David Berry and Geoffrey von Maltzahn of Flagship Pioneering, the innovation
foundry of Flagship Ventures, which has founded over 25 life sciences companies. Through Flagship Pioneering’s contribution of foundational scientific
concepts and intellectual property, assembly of our management team and critical early-stage support, we launched as the first company focused on the
ecological nature of the microbiome. Led by Dr. Roger Pomerantz, our Chairman, President and Chief Executive Officer, our experienced management team
possesses core capabilities in microbiome therapeutics, infectious disease, drug development, commercialization, CMC, public company management and
finance. Dr. Pomerantz, an infectious disease physician-scientist, has extensive experience in infectious disease drug development and commercialization,
licensing and acquisitions gained over a 10-year career in senior executive positions at Merck & Co, Johnson & Johnson and Tibotec Pharmaceuticals. Dr.
Pomerantz led the development and commercialization of ten FDA-approved infectious disease drugs in his career. Collectively, our management team has
successfully developed 18 approved pharmaceutical drugs in infectious disease and other indications. Our management team has extensive experience in
microbial ecology, microbiology and live biologicals, with over 25 years’ experience studying the microbiome and over 60 published papers on the science of
the microbiome. Additionally, our team has extensive experience in building out commercial capabilities in specialty diseases and has a track record for
success in the commercialization of vaccine products, which have analogous manufacturing processes to that of Ecobiotic microbiome therapeutics.
In January 2016, we entered into a Collaboration and License Agreement, or the License Agreement, with Nestec Ltd., or NHS, for the development
and commercialization of certain of our product candidates in development for the treatment and management of CDI and IBD, including UC and Crohn’s
disease. The License Agreement will support the development of our portfolio of products for CDI and IBD in markets outside of the United States and
Canada, or the Licensed Territory, and is expected to provide substantial financial support for our ongoing worldwide research and development. We have
retained full commercial rights to our entire portfolio of product candidates with respect to the United States and Canada, where we plan to build our own
commercial organization.
Under the License Agreement, we granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed Territory,
certain products based on our microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262, SER-287
and SER-301, or, collectively, the NHS Collaboration Products. Upon mutual agreement, one or more other products based on our microbiome technology for
CDI or IBD may be added to the License Agreement in lieu of or in addition to the then-existing NHS Collaboration Products. NHS’ exclusive license in the
Licensed Territory to develop and commercialize NHS Collaboration Products extends to any indications for which the parties agree to develop such
products. We also granted to NHS a non-exclusive license to export, develop and make NHS Collaboration Products in the licensed fields worldwide solely
for commercialization in the licensed fields and in the Licensed Territory. Additionally, the rights to develop and commercialize a given Collaboration
Product in certain non-EU countries within the Licensed Territory may revert to us if NHS either elects not to pursue commercialization of such Collaboration
Product in such country, or fails to meet certain agreed upon milestones for commercialization of such Collaboration Product in such country. If the licensed
rights in any country revert to us in this way, then we would pay to NHS a royalty in the mid-single digits on net sales of such Collaboration Product in such
country.
The License Agreement sets forth our and NHS’ respective obligations for development, commercialization, regulatory and manufacturing and supply
activities for the NHS Collaboration Products with respect to the licensed fields and the Licensed Territory. Under the License Agreement, our and NHS’
development activities will be governed by global and regional development plans, including the conduct of additional clinical studies. We agreed to
manufacture and supply NHS Collaboration Products to support development and commercialization of NHS Collaboration Products in the licensed fields
and in the Licensed Territory. We also agreed to use diligent efforts to develop NHS Collaboration Products under a global development plan and to obtain
approval for such NHS Collaboration Products in the European Union, or EU.
In exchange for the license, NHS made an upfront cash payment of $120 million in February 2016. NHS has also agreed to pay us tiered royalties, at
percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory. Additionally, NHS has
agreed to pay us up to $660 million for the achievement of certain development and regulatory milestones and up to an aggregate of $1.125 billion for the
achievement of certain commercial milestones related to the sales of NHS Collaboration Products. We received a $10 million milestone payment in 2016
associated with the initiation of our Phase 1b study for SER-262 in CDI.
For the development of NHS Collaboration Products for IBD under a global development plan, we are obligated to pay the costs of clinical trials of
such products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the
remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, we will pay the costs of such activities to support
approval in the United States and Canada, and NHS will bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed
Territory.
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With respect to development of NHS Collaboration Products for CDI under a global development plan, we agreed to pay all costs of Phase 2 clinical
trials for SER-109 and of Phase 3 clinical trials for SER-109. We agreed to bear all costs of conducting any Phase 1 or Phase 2 clinical trials under a global
development plan for NHS Collaboration Products other than SER-109 for CDI. We agreed to pay 67% and NHS agreed to pay 33% of other costs of Phase 3
clinical trials conducted for NHS Collaboration Products other than SER-109 for CDI under a global development plan. For other clinical development of
NHS Collaboration Products for CDI, we agreed to pay costs of such development activities to support approval in the United States and Canada, and NHS
agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.
The License Agreement continues in effect until terminated by either us or NHS on the following bases: (i) NHS may terminate the License
Agreement in the event of serious safety issues related to any of the NHS Collaboration Products; (ii) we may terminate the License Agreement if NHS
challenges the validity or enforceability of any of our licensed patents; and (iii) either we or NHS may terminate the License Agreement in the event of the
other party’s uncured material breach or insolvency. Upon termination of the License Agreement, all licenses granted to NHS by us will terminate, and all
rights in and to the NHS Collaboration Products in the Licensed Territory will revert to us. If we commit a material breach of the License Agreement, NHS
may elect not to terminate the License Agreement but instead apply specified adjustments to its payment obligations and other terms and conditions of the
License Agreement.
The License Agreement contains customary representations and warranties, intellectual property protection provisions, certain indemnification rights
in favor of each party and customary confidentiality provisions and limitations of liability.
Our goal is to become the leading biopharmaceutical company developing and commercializing microbiome therapeutics to address significant unmet
medical needs. The critical components of our strategy include:
Our Strategy
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Rapidly advancing the development of our lead product candidate, SER-109, for the prevention of further recurrences of CDI in patients
with recurrent CDI. SER-109 has been granted both Orphan Drug and Breakthrough Therapy designation by the FDA for the treatment of
CDI. Breakthrough Therapy designation provides for intensive guidance from the FDA in an effort to expedite the drug development process.
In our randomized, double-blind, placebo controlled Phase 2 clinical study, 44% of subjects (26 of 59) who received SER-109 experienced a
recurrence at the 8 week endpoint compared to 53% of subjects (16 of 30) who received placebo, a result that was not statistically significant.
Based on a detailed analysis of clinical, microbiome and CMC factors that may have contributed to the outcome of this study, as well as a
comparison to our earlier Phase 1b/2 clinical study, we are involved in ongoing discussion with the FDA. Based on feedback received from the
FDA, we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with multiply recurrent C. difficile infection.
Study participants will be randomized 1:1 between SER-109 and placebo and will receive a dose that is approximately 10-fold higher than in
the first Phase 2, administered over three consecutive days. The FDA has agreed that this new trial may qualify as a pivotal study with
achievement of a persuasive clinical effect and addressing FDA requirements, including clinical and statistical factors, an adequately sized
safety database, and certain CMC parameters.
Advancing the clinical development of SER-262 to be used following antibiotic treatment of primary CDI to prevent an initial recurrence of
CDI. We are developing SER-262 as a therapeutic to be used following antibiotic treatment of primary CDI to prevent an initial recurrence of
CDI. SER-262 contains bacteria that are a subset of the bacterial ecology comprising SER-109, however, SER-262 is not derived from human
stool and, in contrast, is rationally designed based on in vitro and in vivo screening data and made in bacterial fermenters. Pre-clinical studies of
SER-262 have demonstrated efficacy in a mouse model of CDI, similar to pre-clinical studies of SER-109. In July 2016, we initiated a
randomized, placebo-controlled dose escalation Phase 1b study. The study is expected to enroll up to 60 patients who have experienced a first
episode of CDI. The primary endpoints of the study are to evaluate the safety and tolerability of SER-262 in subjects with primary CDI and
compare the CDI recurrence rate between the SER-262 and placebo groups at up to 8 weeks after dosing. Top-line data from the SER-262
Phase 1b study is expected in the second half of 2017.
Continuing clinical development of SER-287 for the treatment of IBD, including ulcerative colitis. The clinical development of SER-287 to
treat UC is supported by preclinical studies in multiple animal models of colitis that provide evidence that SER-287 administration results in
reduced pathology. Published clinical reports furthermore suggest that modulation of the microbiome through repetitive fecal microbiota
transplants may lead to meaningful clinical response in certain UC patients. In December 2015, we initiated a Phase 1b clinical trial evaluating
SER‐287 in patients with mild‐to‐moderate UC. The randomized, placebo-controlled multiple dose Phase 1b study of SER-287 is expected to
enroll up to 55 subjects with active mild-to-moderate UC who are failing current therapies. The primary endpoint of the study will evaluate the
safety and tolerability of SER-287 and the change in the microbiome composition and engraftment of SER-287 bacteria following SER-287
treatment. The study will also evaluate clinical response, complete remission, and endoscopic improvement, as well as metabolomic and
immunological findings. Top-line data from the SER-287 Phase 1b study is expected in the second half of 2017.
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Developing SER-301 for the treatment of IBD. We are designing and developing SER-301, a synthetic Ecobiotic microbiome therapeutic
candidate for the treatment of IBD. The design is being driven by insights from fecal microbiota transplants and will leverage information from
SER-287, including changes to the microbiome in patients with UC, a form of IBD.
Developing SER-155 for the prevention of transplant-related mortality. We are designing and developing SER-155, a synthetic Ecobiotic
microbiome therapeutic candidate for the prevention of transplant-related mortality (due to infection and GvHD) in allo-HSCT recipients. The
design is being driven by insights from our collaborators at Memorial Sloan Kettering Cancer Center into the microbiome composition of
patients following allo-HSCT.
Leveraging our leading microbiome therapeutics platform to develop additional innovative and novel Ecobiotic microbiome therapeutics
across a range of serious medical conditions with high unmet need including infectious disease, metabolic disease, inflammatory disease,
rare genetic disease, and applications in immuno-oncology. We believe that the combination of experience, proprietary data and proprietary
know-how related to the microbiome and of the production of microbial strains provides us a competitive advantage in the design and
development of microbiome therapeutics. Our platform enables us to build upon our existing and growing clinical experience to rationally
design treatments for acute and complex chronic diseases. We intend to leverage this advantage to develop additional innovative Ecobiotic
microbiome therapeutics.
Commercializing our Ecobiotic microbiome therapeutics, including SER-109, if approved, directly in the United States and Canada and
with collaborators outside of North America. In January 2016, we entered into a strategic collaboration with NHS for microbiome-based CDI
and IBD therapies in markets outside the United States and Canada. We have retained the worldwide rights for therapies developed outside of
these indications. We believe the market for recurrent CDI is sufficiently concentrated to permit us to effectively commercialize SER-109 in the
United States with a highly focused and specialized sales force of less than 100 individuals. To the extent we are able to commercialize SER-
109 in the United States, we will leverage that experience to further build our direct sales force to address the larger patient population to be
addressed by SER-262.
Developing manufacturing capabilities sufficient to support commercialization of any approved Ecobiotic microbiome therapeutic
candidates. Ecobiotic microbiome therapeutic manufacturing will require capabilities that are distinct from other biologic drugs. We have made
strategic investments in manufacturing capabilities to help ensure that we maintain control of our know-how and also because we believe these
capabilities will be necessary and highly advantageous for the development of future Ecobiotic microbiome therapeutics such as SER-109,
SER-287, SER-262, SER-301 and SER-155. Our bioprocess and manufacturing personnel are focused on creating a platform of manufacturing
expertise that will set the stage for further advances in the emerging field of microbiome therapeutics.
Understanding the Microbiome and Its Impact on Disease
The human microbiome is one of the richest and most diverse ecosystems on earth with a population of approximately 40 trillion microorganisms that
live in our intestines, mouth, skin and elsewhere in the body. These microbial ecologies have numerous beneficial functions necessary to supporting health,
such as digesting food, preventing disease-causing bacteria from invading the body, regulating our immune system and synthesizing essential nutrients and
vitamins. Among the various microbial ecologies in the human body, the colonic microbiome is one of the most diverse microbial communities with up to
100 billion to one trillion cells per milliliter. In a healthy, symbiotic state the colonic microbiome enables the body to function normally. However, the colonic
microbiome can change in composition, such as in response to long-term or high-dose exposure to antibiotics or following a gastrointestinal infection. As a
result, there can be a loss of key microbes that results in a state of dysbiosis. Dysbiosis of the microbiome is associated with a wide range of disease and
infections.
Although bacteria are often associated with infection and disease, much of the bacteria that colonize the human body are essential for life. Until
recently, few scientific studies focused on the benefits of the bacteria comprising the microbiome. In 2005, the National Institutes of Health funded the
Human Microbiome Project, or HMP, which had as one of its goals the characterization of the microbiome with enough specificity to enable the study of
variations in the microbiome and their influence on disease.
Historically, researchers studied microbes in patients by isolating pathogens and growing them in culture. This process typically identifies only a
limited diversity of microbial species. The HMP used metagenomic sequencing technologies to analyze 5,000 samples, representing more than 3.5 terabases
of genome sequence data, to identify specific genetic sequences found only in bacteria. HMP researchers estimate that 500 to 1,000 unique bacterial species
occupy the human ecosystem, and these researchers believe they have characterized the normal range of microbial variation in the U.S. population.
Importantly, HMP researchers have discovered that different consortia of microbes may accomplish the same metabolic activity, and the presence of those
metabolic activities is more important than the exact species of microbe providing the function. Results from the HMP have provided a robust baseline
microbiome against which disease states can be compared.
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Compared to the baseline data developed by the HMP, numerous scientific studies are emerging in both animals and humans, suggesting that many
human diseases can be correlated with dysbiosis of the microbiome. These include infections, such as CDI or vancomycin-resistant Enterococcus, or VRE;
metabolic disorders, such as early-stage, non-insulin dependent diabetes, obesity and non-alcoholic fatty liver disease, or NAFLD/NASH; allergies;
autoimmune disease; inflammatory diseases, such as UC, Crohn’s disease and pouchitis; and cancer, including immune-oncology related applications.
Examples of some studies include:
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A study published in PLOS Pathogens in 2012 suggested that a mixture of six different bacteria found naturally in the gastrointestinal system of
mice, when isolated from stool and reintroduced into the infected mice, was effective at suppressing CDI (Lawley et al., PLOS Pathogens,
2012). Researchers in the study found that a single treatment of the bacteria was sufficient and that the suppression lasted for months.
A placebo-controlled, randomized, blinded clinical study published in Gastroenterology in 2015 showed that repetitive fecal microbiota
transplant, or FMT, delivered via enema weekly for 6 weeks could induce clinical remissions in patients with active UC (Moayyedi et al.,
Gastroenterology, 2015). This study used an established measure of colonic mucosal healing to assess the efficacy of FMT compared to
placebo, thus demonstrating the role of the microbiome in treating active UC. A subsequent randomized, placebo controlled, blinded study of
FMT delivered 5 days per week for 8 weeks demonstrated similar clinical and endoscopic response rates (Paramsothy et al., Lancet, 2017).
Data from cancer patients undergoing allo-HSCT show the influence of the microbiome on patient survival. An observational study of allo-
HSCT patients following allo-HSCT demonstrated that 3-year survival in patients with a low diversity microbiome was 36% whereas survival
in patients with a medium to high diversity microbiome was ≥60%. Excess mortality in the low diversity subset was driven by deaths due to
infection and GvHD, not the underlying cancer itself (Taur et al, Blood, 2014). A follow up from the same researchers looked at allo-HSCT
patients receiving transplants who are at highest risk of GvHD and showed a greater than 5-fold increase in mortality was correlated with
microbiome composition. (Jenq et al., Biol of Blood and Marrow Transplant, 2015).
A placebo-controlled, randomized, blinded clinical study published in Gastroenterology in 2012 showed that administration of FMT derived
from lean donors to obese subjects with metabolic syndrome could transiently increase insulin sensitivity (Vrieze et al, Gastro, 2012). This
study furthermore identified changes in the microbiome of the small intestine that might have caused the effect.
Two studies in mouse cancer models, both published in Science in 2015, demonstrated that the anti-tumor response to immunological
checkpoint inhibitors could be enhanced by altering the microbiome (Velizou et al., Science 2015; Slvan et al., Science 2015). In addition, a
prospective study in melanoma patients receiving anti-CTLA4 therapy for their cancer showed that a difference in the microbiome prior to
treatment correlated with the subsequent development of colitis, a major side-effect of anti-CTLA4 treatment (Dubin et al., Nature, 2016). Most
recently, researchers at MD Anderson Cancer Center have reported that the diversity and content of the microbiome may determine the efficacy
of treatment with checkpoint inhibitors (Gopalakrishnan, et al., 2017 ASCO-SITC Clinical Immuno-Oncology Symposium). Taken together,
these results suggest that microbiome therapies might improve the safety and efficacy of checkpoint inhibitors in immuno-oncology treatments.
A study published in the Journal of Clinical Investigation in 2015 demonstrated that the microbiome of mice could be engineered to treat
hyperammonemia, a clinical consequence of a set of rare genetic diseases known as Urea Cycle Disorders (Shen et al., JCI, 2015). In this
preclinical model, gut microbes that lack a functional urease gene were able to alter ammonia balance in the blood, suggesting a new route to
novel therapeutics.
There are currently no microbiome therapeutics approved by the FDA. We believe that the ability to develop drugs that are able to modulate the
microbiome and return a dysbiotic microbiome to its healthy state presents a significant opportunity to improve human health.
Our Microbiome Therapeutics Platform
We are developing a new approach to restoring health in settings of microbiome dysbiosis by using our microbiome therapeutics platform to develop
Ecobiotic microbiome therapeutics. Our microbiome therapeutics platform is premised on the hypothesis that the proximal cause or significant contributor to
multifactorial diseases is a dysbiosis of the colonic microbiome. We believe this represents a paradigm shift in approaching the way the underlying disease is
defined and can be treated. Our microbiome therapeutics are a novel class of biological drugs designed to treat disease by restoring a dysbiotic microbiome to
a state of health. They represent rationally defined ecological compositions, consisting of discrete combinations of beneficial microorganisms with designed
functional properties that provide the ability to re-establish keystone features of a functional microbiome in settings of disease.
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Our microbiome therapeutics platform integrates genomic and related functional data sets, proprietary algorithms and computational analysis, an
extensive library of screened and characterized human commensal bacteria, clinical and mechanistic insights into diseases of interest, and advanced
manufacturing capability. This platform allows us to rationally design, test, optimize, formulate and manufacture Ecobiotic microbiome therapeutics. Our
microbiome therapeutics platform provides a framework that we believe can significantly reduce the time typically required to advance therapeutics to the
clinic.
Clinical Trials and Cohort Studies
Our discovery process begins with human data derived from clinical trials and cohort studies, which we use as a basis for designing our Ecobiotic
microbiome therapeutics. This allows us to compare the colonic microbiome of healthy normal individuals to those in a dysbiotic state, revealing the
ecological and functional signatures of microbiome differences that we target using our Ecobiotic microbiome therapeutics. Additionally, our experience with
SER-109 and clinical data generated with collaborators serves as a critical dataset for humans, instructing us on how the introduction of certain keystone
microbes can facilitate and augment the restoration of a dysbiotic colonic microbiome for other indications. Using these insights generated by our proprietary
design, we test therapeutic lead candidates. By using our genomic data sets and our proprietary tools combined with our experience with SER-109, we
integrate clinical results into bench research to design our Ecobiotic microbiome therapeutics.
Ecobiotic Candidate Design
We have developed a candidate design program to assist us in identifying the keystone structural and functional elements of healthy microbiomes, the
deficiencies present in disease states and the functional profile of a microbial ecological network that can return the microbiome to a healthy state. The
following diagram depicts the steps in our candidate design program:
Our candidate design program applies computational comparative genomics and systems biology methods to analyze existing clinical data sets, such
as those derived from SER-109 clinical studies and from studies with collaborators, to elucidate the structure and function of a healthy microbiome relative to
a microbiome in a disease state. The structure is defined in terms of the organisms that comprise the ecology of the microbiome while the function is defined
in terms of the genes and metabolic pathways inherent to the organisms that comprise that ecology. Structural and functional properties of a microbiome are
determined using our proprietary algorithms that derive actual ecological networks that characterize the microbiome of subjects with a particular disease or
that are in a state of health. Our algorithms define those organisms that impact the structure of the microbial communities and the health of the microbiome,
which we refer to as keystone organisms, and their associated critical, functional biological pathways. Keystone organisms and their associated critical,
functional biological pathways may exist in low, moderate, or high abundance in an ecology of microbes, but are often missing or at reduced levels in an
individual with disease. By comparing the ecologies in healthy and disease states, we are able to identify the ecological deficiencies and missing keystone
components that characterize the disease state and are the target of our Ecobiotic microbiome therapeutics.
Ecobiotic microbiome therapeutics are rationally designed to solve for the microbiome ecological deficiencies identified between disease and health
states. Rational design involves the determination, prioritization and optimization of microbial network ecologies with the greatest therapeutic potential based
on critical factors, such as the evolutionary relationships of the microbes, theoretical and empirically defined functional capabilities, safety profile of strains
and various bioprocessing parameters. We maintain a proprietary design and discovery database that captures and integrates key information about microbial
strains. Our design algorithms in combination with our functional screening capabilities enable us to identify lead candidate compositions that possess the
necessary functional profile to restore the ecological deficiency that causes the dysbiosis.
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Strain Library Screening and Lead Optimization and Ecobiotic Candidate Nomination
To facilitate the screening of network ecologies and individual strains, we have developed and maintain proprietary know-how on the isolation,
cultivation and fermentation of microbial strains. Our proprietary library comprises over 14,000 strains isolated from healthy donors. Using information from
our strain library, we develop and execute moderate- to high-throughput in vitro and ex vivo screens that evaluate the efficacy and functional properties of
candidates and individual microbial strains that comprise the lead candidate ecologies. Once we have a lead candidate we optimize its efficacy and functional
properties by screening variants in disease relevant models, including in vivo models on a reduced set of candidates that are relevant to the disease indications
we are investigating. The final candidate that meets our predefined safety and efficacy criteria is nominated for clinical development.
Metabolomics
In addition to genomic analysis, we integrate metabolomic methods to identify the small molecules made by the microbiome. Integration of genomic
and metabolomic data enable an understanding of which organisms are responsible for particular changes in the gut that may affect health and disease. These
functional data can be further studied in vitro and in animal models to assist in the design of novel microbiome drugs.
Bioprocess and Formulation
Our Ecobiotic microbiome therapeutics in development consist of combinations of bacteria and/or bacterial spores rather than single strains. As a
result, we must be able to produce, purify and formulate multiple strains of bacteria economically and be able to test the composition of a combination
product for quality control. Our bioprocess development and manufacturing processes are designed to address each of these elements.
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Fermentation: We employ platform fermentation processes as starting conditions for current good manufacturing processes, or cGMP,
production schemes and, when required, develop strain specific process parameters.
Purification: Similar to fermentation, we use small-scale purification operations to complete bench-scale manufacturing and quickly assess the
final process yield, quality and robustness.
Formulation: Our Ecobiotic microbiome therapeutics are combinations of bacteria and/or bacterial spores and can be administered orally to
effect the primary goal of delivering viable bacteria or spores to the intended location in a condition where they are able to replicate and correct
dysbiosis.
Analytical: We address quality control requirements for our Ecobiotic microbiome therapeutics using proprietary microbiological and sequence-
based testing schemes, including high-throughput quantitative analytics to assess the identity, potency and purity of the final product.
Pre-clinical and Clinical Testing
One of the key competitive advantages of microbiome therapeutics is that we believe they will not need to undergo the same pre-clinical testing that
other modalities such as small molecules require. Because the components of our Ecobiotic microbiome therapeutics are found naturally in the body, we do
not expect to need carcinogenicity studies or studies designed to evaluate how our Ecobiotic microbiome therapeutics interact with other drugs. Clinical
pharmacokinetic studies are performed to examine the absorption, distribution, metabolism and excretion of a drug under investigation typically in healthy
volunteers. Because our Ecobiotic microbiome therapeutics are not absorbed and, therefore, remain in the colonic microbiome, we believe such trials will not
be necessary and we expect to proceed directly to patients with the disease that we are studying. These pre-clinical and clinical studies are costly and time-
consuming and the ability to proceed in development without them provides an advantage as compared to traditional drug development. For example, based
on our correspondence with the FDA, further pre-clinical studies will not be needed for SER-109. We were also not required to perform traditional pre-
clinical toxicology studies on SER-287, our investigational product for UC, or for SER-262, our Ecobiotic drug candidate for primary CDI. We believe many
of the same requirements may apply across our future product candidates.
Our Product Pipeline
We believe our Ecobiotic microbiome therapeutics represent a novel approach with potential application across a broad range of human diseases. Our
most advanced drug development program, SER-109, focuses on recurrent CDI. SER-109 has been designated as a Breakthrough Therapy and an Orphan
Drug by the FDA. Based on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with
multiply recurrent C. difficile infection. Study participants will be randomized 1:1 between SER-109 and placebo and will receive a dose that is
approximately 10-fold higher than in the first Phase 2, administered over three consecutive days. The FDA has agreed that this new trial may qualify as a
pivotal study with achievement of a
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persuasive clinical effect and addressing FDA requirements, including clinical and statistical factors, an adequately sized safety database, and certain CMC
parameters. SER-262 is an Ecobiotic drug candidate under development for treatment of dysbiosis following primary CDI, in order to prevent recurrence, and
is currently in a Phase 1b study in the United States. SER-287 is under development for the treatment of active mild-to-moderate UC and is also in a Phase 1b
study in the United States. We expect to report top-line data for the Phase 1b studies of SER-262 and SER-287 in the second half of 2017. We are designing
SER-301, a designed Ecobiotic microbiome therapeutic candidate, for the treatment of IBD, and SER-155, a designed Ecobiotic microbiome therapeutic
candidate, for the prevention of transplant-related mortality (due to infection and GvHD) following allo-HSCT. We are also researching potential Ecobiotic
microbiome therapeutics for the treatment of metabolic disorders, such as early-stage, non-insulin dependent diabetes non-alcoholic steatohepatitis (NASH),
obesity and metabolic syndrome, and for enhancing the safety and efficacy of immuno-oncology agents including checkpoint inhibitors used in cancer
treatment. Research in these indications is focused on developing Ecobiotic drugs that address specific functional defects in the microbiome, including the
specific metabolic products made by the microbes. We believe this approach may enable pursuit of a range of disorders including various forms of liver
disease and rare genetic diseases of metabolism.
Our CDI Product Candidates
SER-109 is a bacterial spore ecology consisting of an average of approximately 50 bacterial species derived from healthy donors’ fecal matter. SER-
109 is designed to prevent further recurrences of CDI in patients suffering from recurrent CDI by restoring the dysbiotic microbiome to a state of health. In
our open label Phase 1b/2 clinical study, results demonstrated that 87% of patients (26 of 30) met the predefined endpoint of preventing recurrent CDI within
eight weeks following administration of SER-109. 97% of patients (29 of 30), achieved a clinical cure, which we defined as the absence of CDI requiring
antibiotic treatment during the eight-week period after SER-109 dosing. SER-109, our lead product candidate, is designed to reduce the recurrences of CDI, a
debilitating infection of the colon and, if approved by the FDA could be a first-in-field oral microbiome drug. A subsequent randomized, double-blind,
placebo controlled Phase 2 clinical study was conducted in 89 subjects to evaluate the safety, tolerability and efficacy of SER-109 in adults with recurrent
CDI. In that study, 44% of subjects (26 of 59) who received SER-109 experienced a recurrence at the 8-week endpoint compared to 53% of subjects (16 of
30) who received placebo, a result that was not statically significant. SER-109 was generally safe and well-tolerated in both the Phase 1b/2 and Phase 2
clinical studies. The most common adverse events for SER-109 and placebo, respectively, were diarrhea (25% vs. 14%), abdominal pain (22% vs. 14%),
flatulence (12% vs. 3%), and nausea (10% vs. 10%). No drug-related serious adverse events were observed.
In order to understand the difference in outcome between the Phase 1b/2 and Phase 2 clinical studies, we conducted an analysis of the available
clinical, microbiome and CMC data. This root-cause investigation looked at the clinical trial population, study conduct, and diagnostic testing used for study
inclusion and endpoint analysis, assessed clinical specimens for genomic and metabolomic biomarkers that might give insight into SER-109 efficacy and
potency, reviewed manufacturing procedures and processes, performed retrospective analysis using high-resolution whole metagenomics sequencing of the
Phase 1b/2 clinical study stool samples, and analytical methods that may have differed between Phase 1b/2 and Phase 2 clinical studies. We have now
identified specific factors that we believe contributed to the Phase 2 clinical study results, including issues related to both the accurate diagnosis of C. difficile
recurrent infection, and potential suboptimal dosing of certain subjects in the study. The SER-109 analyses were recently shared with the FDA, and we are
actively discussing the design of a new clinical trial for SER-109.
SER-109 has been granted Breakthrough Therapy designation by the FDA for the treatment of recurrent CDI. Breakthrough Therapy designation is
intended to expedite the development and review of drugs or biologics that treat serious or life-threatening diseases or conditions and where preliminary
clinical evidence indicates the drug candidate may be a substantial improvement over existing therapies. In addition, SER-109 has received Orphan Drug
designation from the FDA for the treatment of recurrent CDI. Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic
intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects
more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making the product available in the
United States for the disease or condition will be recovered from sales of the product. Orphan designation must be requested before submitting a BLA.
Orphan designation does not convey any advantage in or shorten the duration of the regulatory review and approval process, though companies developing
orphan products are eligible for certain incentives, including tax credits for qualified clinical testing and waiver of application fees.
We are also developing SER-262, a rationally designed ecology of spore forming bacteria, to be used following antibiotic treatment of primary CDI to
prevent an initial recurrence of CDI. Pre-clinical studies of SER-262 have demonstrated efficacy similar to SER-109 in mouse models of CDI. The Phase 1b
study, a randomized, placebo-controlled dose escalation study was initiated in July 2016. The study is expected to enroll up to 60 patients who have
experienced a first episode of CDI. The primary endpoints of the study are to evaluate the safety and tolerability of SER-262 in subjects with primary CDI
and to compare the CDI recurrence rate between the SER-262 and placebo groups up to 8 weeks after dosing. The subjects will be followed for 24 weeks
after treatment. If approved, we believe these two product candidates will enable us to provide an alternative and safer treatment for preventing the
recurrence of CDI than the current standard of care.
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Clostridium difficile Infection, or CDI
C. difficile is a Gram-positive, toxin-producing, spore forming bacterium may cause debilitating diarrhea in infected individuals, but can also lead to
more severe outcomes, such as inflammation of the colon (colitis), toxic megacolon and death. C. difficile bacteria express toxins that disrupt the structural
architecture of cells causing leakage of fluids through the gastrointestinal epithelium. The cells disrupted by these toxins eventually undergo apoptosis and
die, releasing their contents into the colon, resulting in inflammation of the colon, severe and persistent diarrhea and, in the most serious cases, death.
CDI is most often associated with the prior use of antibiotics, although age and poor immune status are important risk factors as well. Antibiotics are
thought to decrease resistance to CDI by causing dysbiosis in the microbiome. Since C. difficile spores are able to survive for long periods of time outside the
body, and because healthcare settings are often sites of significant antibiotic use, CDI transmission rates in hospitals, long-term acute care facilities and
nursing homes have been increasing. CDI is also a cause of morbidity and mortality among hospitalized cancer patients and bone marrow transplant patients
as their immune systems are suppressed by cytotoxic drugs, which are drugs that inhibit or prevent the function of cells including cells of the immune system,
and they may be heavily treated with antibiotics to prevent or treat infections. More recently, the rise of community-acquired CDI has been recognized as a
growing problem.
The CDC has identified C. difficile as one of the top three most urgent antibiotic-resistant bacterial threats in the United States. It is the most common
cause of hospital acquired infection in the United States, having overtaken MRSA. CDI is responsible for the deaths of approximately 29,000 Americans each
year. CDI is also costly to the healthcare system. According to a study published in Clinical Infectious Diseases, the economic burden of CDI in 2008 in U.S.
acute care facilities alone was estimated to be as much as $4.8 billion. In addition, a summary of studies published in 2009 in The Journal of Hospital
Infection, calculated that the treatment cost per episode of primary CDI was as much as $5,000 and as much as $18,000 per recurrence of CDI (Ghantoji et al.,
2010). Further, according to a 2014 article in the American Journal of Infection Control, from 2001 to 2010, incidence of CDI per 1,000 patients discharged
increased from 4.5 to 8.2 with an average hospital stay of eight days. Research suggests that the risk of recurrence is approximately 25% after primary CDI,
40% after a first recurrence and greater than 60% for those experiencing two or more recurrences (Higa & Kelly, New Drugs and Strategies for Management
of Clostridium difficile Colitis, J. of Intensive Care Medicine, 2013). Based on an epidemiological study conducted by the CDC, the incidence of C.
difficile infection in the United States, based on a positive toxin or molecular assay in patients who did not have a positive result in the previous 8 weeks, was
estimated to be 453,000 (95% confidence interval [CI], 397,100 to 508,500) (Lessa et. al., Burden of Clostridium difficile Infection in the United States, New
England J. of Medicine, 2015).
Current and developing treatment alternatives and their limitations
Patients with CDI utilize antibiotics, FMT, and unapproved over-the-counter probiotics. Several therapeutic antibodies and vaccines are also being
developed.
Antibiotics. According to the Infectious Disease Society of America, or IDSA, guidelines, the current standard of care for CDI is to treat with
antibiotics, such as metronidazole or vancomycin. Metronidazole has been found to be effective for primary CDI, but approximately 29% of patients
experience recurrence (Louie, et. al., Fidaxomicin versus Vancomycin for Clostridium difficile Infection, N. Engl. J. Med 364;5, February 3, 2011).
Vancomycin is recommended for severe disease, but is more expensive. In addition, fidaxomicin, an approved antibiotic for CDI, may have higher
initial efficacy compared to metronidazole, but it does not have a label claim to reduce or prevent CDI recurrence. No antibiotic therapeutics are
currently approved for treatment of recurrent CDI.
Recurrent CDI, defined as the presence of diarrhea and a positive C. difficile stool assay within two to eight weeks following the initial episode,
is not well addressed by any of the available antibiotics. When a patient has recurred two or more times after the initial occurrence, CDI recurrence
rates are greater than 60% and the probability of additional recurrences increases with successive cycles. Some physicians resort to pulse-taper
regimens of vancomycin lasting six weeks or more, but there are no well-controlled clinical studies that show such regimens are effective. In extreme
cases, patients are treated continuously for years with vancomycin, even while they continue to experience gastrointestinal symptoms including
diarrhea and abdominal discomfort.
The primary limitation of antibiotics is that their use appears to exacerbate dysbiosis, resulting in increased risk of future CDI. Recent research
in animal models has shown that antibiotic use not only eliminates many healthy bacteria in the gastrointestinal tract, but also leads to the release of
nutrients that facilitate the growth of C. difficile. Antibiotics have also been shown to change the ratio of primary versus secondary bile acids in the
colon by killing bacteria required to metabolize bile acids. This shift to a predominance of primary bile acids further facilitates the growth of C.
difficile, as it requires primary bile acids for germination of its spores. As a result, antibiotic use may induce a lasting dysbiosis that makes it possible
for C. difficile to colonize a person and then cause, or further perpetuate, disease.
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Fecal microbiota transplantation. FMT, also known as a stool transplantation, is a procedure during which donated stool, including fecal
microbes, is typically instilled via colonoscopy into a patient with CDI. We believe that the efficacy of FMT, which has resulted in cure rates for
recurrent CDI of 81% in a randomized controlled study reported in 2013 in the New England Journal of Medicine, supports the role of dysbiosis as a
cause of CDI recurrence. However, FMT presents several challenges for effective treatment of the disease. FMT has the potential to transmit infectious
or allergenic agents between hosts, involves the transmission of potentially hundreds of unknown strains of bacteria, fungi and viruses from donor to
subject, and is difficult to perform on a mass scale. Additionally, FMT is inherently non-standardized so that different desired and/or undesired
material may be transmitted in any given donation. FMT is not approved by the FDA and we believe that, as currently practiced by clinical centers in
the U.S., it may be unable to gain such approval since the product, to our knowledge, cannot be characterized according to current regulatory
requirements for identity, potency, purity and safety and has not been tested in rigorous, placebo controlled, randomized and blinded clinical studies.
Commercial providers of FMT must meet FDA regulatory requirements for a biologics license and must produce FMT material using current Good
Manufacturing Practices (cGMP).
Probiotic therapies. Probiotics represent a group of products typically available over the counter in supplements and in some foods, which
contain a small number of species of bacteria. However, to date there have been no clinical studies that have established the ability of probiotics to
repair a dysbiosis of the microbiome. Further, there is neither a legally recognized definition of, nor a standard of identity for, the term probiotic in the
United States or Europe. The European Food Safety Authority has rejected many of the claims of health benefits associated with probiotics because
the microbes had not been sufficiently characterized, the claimed effect was not considered beneficial and human studies in support of the claims had
not been made available. As a result, after December 14, 2012, food and nutritional supplements companies were no longer allowed to communicate
health benefits for their products on account of probiotic content in the EU.
Antibodies. Bezlotoxumab a fully human monoclonal antibody directed against C. difficile toxin B was approved in the United States in
October, 2016 and in Europe in 2017 for the treatment of CDI. The antibody demonstrated 10% absolute risk reduction in preventing recurrence of
CDI. Antibodies bind toxins to alleviate the symptoms of CDI, but they do not address the underlying dysbiosis of the microbiome, which we believe
is the cause of recurrent CDI. Bezlotoxumab requires intravenous infusion.
Vaccines. The efficacy of vaccines in treating CDI in humans currently remains under investigation. In addition, it is difficult to define and
access a target population for a CDI vaccine, given that the at-risk patient population is largely elderly individuals who typically respond less robustly
to vaccination therapies.
SER-109
SER-109 is an ecology of bacteria in spore form enriched from fecal donations obtained from healthy screened donors. SER-109 consists of an
average of approximately 50 bacterial species and is designed to reduce recurrences of CDI in patients suffering from recurrent CDI by restoring a dysbiotic
microbiome to a state of health. In our open label Phase 1b/2 clinical study of SER-109, we evaluated the effect of treatment with SER-109 in patients with
three or more occurrences of CDI in a 12-month period. Of the 30 patients enrolled in the trial, 87% of patients (26 of 30) met the predefined endpoint and
97% (29 of 30), achieved a clinical cure, which we defined as the absence of CDI requiring antibiotic treatment during the eight-week period after SER-109
dosing. A subsequent randomized, double-blind, placebo controlled Phase 2 clinical study was conducted in 89 subjects to evaluate the safety, tolerability and
efficacy of SER-109 in adults with recurrent CDI. In that study, 44% of subjects (26 out of 59) who received SER-109 experienced a recurrence at the 8-
week endpoint compared to 53% of subjects (16 out of 30) who received placebo, a result that did not show a statistically significant difference between the
two treatment arms. SER-109 was generally safe and well tolerated in both the Phase 1b/2 and Phase 2 clinical studies. In each study we also performed an
analysis of the microbiome using next-generation sequencing technology and microbiological analysis. These studies demonstrated a re-establishment of
keystone organisms and a rapid increase in bacterial diversity, which enable the restoration of the microbiome to a healthy state.
SER-109 is formulated as oral capsules for administration after completion of antibiotics. Four capsules of SER-109 is comprised of about 30 million
Colony-Forming Units that are delivered in four oral capsules. The spores in SER-109 are intended to germinate in the gastrointestinal tract and compete for
the same nutrients required by C. difficile.
15
Phase 1b/2 clinical study design. The Phase 1b/2 clinical study was a two-part trial designed to evaluate the safety and efficacy of SER-109 in
30 patients with recurrent CDI, defined as three or more occurrences of CDI in the previous 12 months. Part 1 of the study evaluated a single dose of
SER-109 administered orally in 30 capsules over two days, with the dose derived from approximately 75 grams of stool. Part 2 of the study evaluated
a single dose of SER-109 administered orally in a range of one to 7 capsules over one day. The target dose in Part 2 was 1x108 spores per dose, which
was approximately 17-fold lower than the mean dose in Part 1.
Cohort
1
2
Mean Dose
(spore units)
1.7x109
1.0x108
Male/Female
Age
Median (Range)
5 / 10
5 / 10
71 years (22 – 88)
58 years (39 – 83)
Number of CDI
Recurrences in
Prior 12 months
Median (Range)
3 (2 – 6)
3 (2 – 5)
Phase 1b/2 clinical study results. The primary efficacy measure was the absence of CDI (defined in this study as more than three unformed
bowel movements in a 24-hour period with laboratory confirmation of a positive C. difficile stool test) during the eight weeks after initiating therapy.
Twenty-six of 30 patients, or 87% of patients, in the Phase 1b/2 clinical study achieved the primary efficacy endpoint, consisting of 13 patients in each
of Part 1 and Part 2 of the study. Among the 26 patients was one patient who experienced an initial recurrence on Day 26 and was re-treated, per
protocol, with a dose from the same donor. Following re-treatment, this patient also achieved the primary efficacy endpoint. Of the patients who did
not meet the primary efficacy endpoint, one had a recurrence of CDI on Day 5 and did not receive a second treatment with SER-109 and the three
other patients were determined by their attending investigator to be recovering from their diarrheal episode by the time they submitted their stool
sample for CDI testing. The three patients were determined to be clinically CDI free at eight weeks. As a result, the clinical cure rate for the study,
which we defined as the absence of CDI requiring antibiotic treatment during the eight-week period after SER-109 dosing, was 97%, or 29 of 30
patients.
The primary safety measures were an evaluation of adverse events, laboratory values, vital signs and physical examination findings prior to and
after dosing with SER-109 over a 24-week time period. In Part 1 of the study, 80% of the patients experienced at least one adverse event, all of which
were treatment emergent adverse events, or TEAEs. A TEAE was defined as an adverse event that started or worsened at or during the time of or after
the date of the first dose of SER-109 through the final follow-up visit. Five, or 33%, of the patients were judged by the investigator to have a TEAE
attributable to SER-109 and all were mild or moderate. In Part 2, 100% of the patients experienced at least one adverse event, all of which were
TEAEs. Nine, or 60%, of the patients were judged by the investigator to have a TEAE attributable to SER-109 and all were mild or moderate. The
most common adverse events were gastrointestinal disorders and diarrhea. The majority of TEAEs were mild in severity and consistent with post-
antibiotic recovery from CDI. One patient in Part 2 had a severe adverse event of chest pain, which was not considered related to SER-109. Two
patients each in Part 1 and Part 2 had more than one serious adverse event, none of which was considered related to SER-109. There were no deaths in
Part 1 or Part 2.
Phase 2 clinical study design. The Phase 2 clinical study was a randomized, double-blinded, placebo-controlled, parallel-group two arm trial
that enrolled a total of 89 patients with a history of multiply-recurrent CDI, defined as 3 or more CDI episodes within 9 months. The Phase 2 clinical
study enrolled 89 subjects with multiply recurrent CDI, in a randomized, double-blind, placebo-controlled 24-week study conducted to evaluate the
safety and efficacy of SER-109. Subjects were randomized at a 2:1 ratio with 59 subjects receiving SER-109 and 30 subjects receiving placebo. SER-
109 was administered orally as a single dose of 1x108 bacterial spores, following the completion of antibiotic treatment for CDI. The study was
conducted at 36 centers across the United States. The primary endpoint was the absence of recurrence of C. difficile positive diarrhea requiring
antibiotic treatment up to 8 weeks following treatment with SER-109 or placebo.
Phase 2 clinical study results. The predefined study primary efficacy endpoint was the relative risk of CDI recurrence up to 8 weeks after
treatment with SER-109 compared to treatment with placebo. CDI recurrence was defined as diarrhea for 2 or more consecutive days, a positive CDI
test, and the requirement for antibiotic treatment. Based on 8-week data, CDI recurrence occurred in 44% of subjects (26 of 59) who received SER-
109, compared to 53% of subjects (16 of 30) who received placebo. The relative risk of CDI recurrence for the placebo population compared to the
SER-109 population was not statistically significant. As part of the prespecified design, subjects were stratified into two groups: less than 65 years old
and 65 years old and older . In subjects less than 65 years old, CDI recurrence occurred in 43% of subjects who received SER-109 (12 of 28) and in
27% of subjects who received placebo (4 of 15). In subjects 65 years and older, CDI recurrence occurred in 45% of subjects who received SER-109
(14 of 31), and in 80% of those who received placebo (12 of 15).
The most commonly reported adverse events in both the SER-109 and placebo arms were in the gastrointestinal category, and were diarrhea
(25% vs 14%), abdominal pain (22% vs 14%), flatulence (12% vs 3%), and nausea (10% vs 10%), for SER-109 and Placebo, respectively. No drug-
related serious adverse events were observed. The SER-109 analyses were recently shared with the FDA. Based on feedback received from the FDA,
we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with multiply recurrent C. difficile infection. Study participants
will be randomized 1:1 between SER-109 and placebo and will receive a dose that is approximately 10-fold higher than in the first Phase 2,
administered over
16
three consecutive days. Diagnosis of C. difficile infection for both study entry and for endpoint analysis will be confirmed by C. difficile cytotoxin
assay, compared to the first Phase 2, where most patients were diagnosed by PCR. The new study will evaluate patients for 24 weeks and the primary
endpoint will compare the C. difficile recurrence rate in subjects who receive SER-109 verses placebo at up to eight weeks after dosing. The FDA has
agreed that this new trial may qualify as a pivotal study with achievement of a persuasive clinical effect and addressing FDA requirements, including
clinical and statistical factors, an adequately sized safety database, and certain CMC parameters.
Based on the eight-week data, we did not observe any difference in the adverse event frequency or type in the subjects receiving SER-109
compared to those receiving placebo. The most commonly reported adverse events in both the SER-109 and placebo arms were in the gastrointestinal
category. The most common adverse events reported in the SER-109 arm were diarrhea, abdominal pain and flatulence. No drug-related serious
adverse events were observed.
Analysis of Phase 1b/2 and Phase 2 clinical study results.
In our Phase 2 clinical study, the study’s primary endpoint of reducing the
relative risk of CDI recurrence at up to 8 weeks after treatment was not achieved. In order to understand the difference in outcome between Phase 1b/2
and Phase 2 clinical studies, we conducted an analysis of the available clinical, microbiome and CMC data. This root-cause investigation looked at the
clinical trial population, study conduct, and diagnostic testing used for study inclusion and endpoint analysis, assessed clinical specimens for genomic
and metabolomic biomarkers that might give insight into SER-109 efficacy and potency, reviewed manufacturing procedures and processes, performed
retrospective analysis using high-resolution whole metagenomics sequencing of Phase 1b/2 clinical study stool samples, and reviewed analytical
methods, that may have differed between the Phase 1b/2 and Phase 2 clinical studies. We have now identified key factors that we believe contributed
to the Phase 2 clinical study results, including issues related to both the accurate diagnosis of C. difficile recurrent infection, and potential suboptimal
dosing of certain subjects in the trial.
The key factors include:
•
•
•
•
•
The diagnostic test for entry may not have differentiated subjects with active CDI disease from those with other disease but who had C.
difficile carriage (e.g., irritable bowel syndrome)
The diagnostic test for CDI recurrence during the study (the primary endpoint) overestimated recurrences, as PCR was the most common
test performed
The difference in recurrence rates by age in the placebo arm was confounded by the small number of placebo subjects (30) and the likely
inclusion of subjects with irritable bowel syndrome rather than recurrent CDI, or RCDI
The safety profile of SER-109, which includes diarrhea in the first week following dosing, led to SER-109 subjects presenting for
evaluation of recurrence at a time when they were likely to be colonized with C. difficile leading to mistaken diagnosis of RCDI
The dose and dosing regimen used in the study may not have been optimal in the Phase 2 clinical study based upon an assessment of the
microbiome response, which was less robust then that observed in a retrospective analysis of the Phase 1b/2 clinical study subjects (a
dose range of 700-fold).
We performed an analysis of the microbiome of our Phase 2 clinical study and a reanalysis of our Phase 1b/2 clinical study using whole
metagenomics shotgun sequencing and microbiological analysis to evaluate long-term changes in the microbiome, including the restoration of
bacterial diversity in the colon of patients. This demonstrated a rapid increase in bacterial diversity and a restructuring of the microbiome towards a
healthy state. Upon introduction, SER-109 appears to engraft its bacterial species into the microbiome, with some of these species persisting in the
patient’s gastrointestinal tract for at least 24 weeks after dosing. In addition, in some patients we noted the repopulation of organisms that were not in
SER-109 and had not been detected in the patient prior to treatment. We believe this phenomenon, which we refer to as augmentation, is an important
element for restoration of bacterial diversity and repair of dysbiosis. We did not observe any dose-dependent effect on engraftment, augmentation, or
the clinical resolution of CDI in the Phase 1b/2 clinical study.
The SER-109 analyses were recently shared with the FDA, and based on feedback received from the FDA, we plan to initiate a new Phase 2
SER-109 clinical study in approximately 320 patients with multiply recurrent C. difficile infection. Study participants will be randomized 1:1 between
SER-109 and placebo and will receive a dose that is approximately 10-fold higher than in the first Phase 2, administered over three consecutive days.
The FDA has agreed that this new trial may qualify as a pivotal study with achievement of a persuasive clinical effect and addressing FDA
requirements, including clinical and statistical factors, an adequately sized safety database, and certain CMC parameters.
Manufacturing. SER-109 is a purified ecology of spores produced through a process of extraction from a natural human stool source, obtained
from qualified, highly screened donors. The donor raw material is collected in a controlled setting, under a protocol that ensures that donors meet
appropriate qualification criteria.
17
Donors are required to be in good health, and to possess a medical history that minimizes the risk of exposure to and transmission of an
infectious disease. Donors are tested for infectious agents and screened for gastrointestinal and other health factors. After initial qualification, the
donor is eligible to donate for a defined period of time. Donors are monitored for health status changes during the donation period. At the end of the
donation period, the qualification assessment is repeated to help ensure the donor has maintained their health status. After successful completion of an
exit screening, donations are released for use in manufacturing.
We initially process the donor material in our Cambridge manufacturing facility, and then transfer the process intermediate to a contract
manufacturing organization, or CMO, to isolate and concentrate SER-109 for finishing to the oral capsule dosage form. The purified drug substance is
tested for identity, potency and purity, and subsequently formulated into drug product where it is again tested for identity, potency, purity, and
pharmaceutical properties in our Cambridge facility. The final drug product dosage form is four hard capsules for oral administration. Steps are
specifically built into the process to remove and kill non-spore microbes. We have conducted validation studies demonstrating the ability of the
process to inactivate and clear hypothetical extraneous pathogens of concern, and we believe we have sufficient data from these studies to support
ongoing and proposed clinical trials.
Raw materials, intermediates, drug substance and drug product are tested using cGMP assays developed with our know-how to assess the key
quality attributes of identity, potency and purity of the product. Identity testing has been developed to assure the presence of specific live spore forms
in the product. Potency assays assure the intended dose of spores, and assess stability of the spores during storage. Stability of the dosage form is also
confirmed. Proprietary microbiological purity assays have been developed to enable testing for microbial contaminants in the presence of the live
spore product.
We believe we can address market demand with a relatively small-scale manufacturing process. If approved, we anticipate that we will be able
to produce a sufficient commercial supply of SER-109 to meet estimated demand in the United States using donations from a modest number of
donors.
SER-262
We are developing SER-262, which is a synthetic fermented, multi-strain Ecobiotic microbiome therapeutic intended to be used following antibiotic
treatment of primary CDI to prevent an initial recurrence of CDI. We have designed SER-262 to increase and improve diversity in the colonic microbiome
after antibiotics treatment of primary CDI. The results of our Phase 1b/2 clinical study of SER-109 provided multiple insights in designing the spore ecology
used in SER-262, which consists of a subset of bacteria found in SER-109. Pre-clinical studies of SER-262 have demonstrated efficacy in mouse models of
CDI similar to those observed in pre-clinical studies of SER-109.
As part of our selection of SER-262 we screened multiple candidates for efficacy in animal models using SER-109 as a reference compound. SER-262
provided significant protection against CDI with reduced mortality, minimum weight loss and clinical score measures of efficacy. Strains in SER-262 have
met initial bioprocess specifications for spore titer and yield, and each organism has been characterized by whole genome sequencing and a battery of in vitro
tests and characterizations.
The result of testing in a pre-clinical mouse model of CDI are depicted in the diagrams below.
18
We filed an IND to initiate clinical trials with SER-262 in May 2016. The Phase 1b clinical study, a randomized, placebo controlled dose escalation
study was initiated in July 2016. The study is expected to enroll up to 60 patients who have experienced a first episode of CDI. The primary endpoints of the
study will be to evaluate the safety and tolerability of SER-262 in subjects with primary CDI and to compare the CDI recurrence rate between the SER-262
and placebo groups up to 8 weeks after treatment. Top-line data from the SER-262 Phase 1b clinical study is expected in the second half of 2017.
SER-262 represents the continued evolution of our platform and capabilities, validating our ability to extend our technology to new indications. SER-
262, unlike SER-109, is made in bacterial fermenters and in a rational in vitro design similar to a fixed dose combination of small or large molecules. We
intend to use this approach going forward for future Ecobiotic microbiome therapeutics, which may eliminate the need for ongoing human donors in the CMC
process. There are several advantages to using a synthetic approach to developing microbiome therapeutics. Synthetically derived product candidates can be
manufactured in a reliable and reproducible manner, with extremely well-defined characteristics. Based on our metagenomics expertise, proprietary in silico
algorithms, extensive proprietary bacterial library, and advanced manufacturing capabilities, we believe we can design synthetically produced microbiome
therapeutic candidates for specific target indications. We believe , our capabilities provide us with a competitive advantage in developing synthetically
produced microbiome therapies.
Manufacturing. To manufacture SER-262, bacterial components for formulation are fermented and purified as spores. The bacteria originate
from cell banks that have been manufactured starting from proprietary research strain banks. Research strain banks have been made by clonal isolation
and multiple rounds of streaking for purity from stool originating from healthy, medically screened donors, followed by banking and testing for
identity and purity. The strains are cultured in controlled fermentations to meet clinical study needs. cGMP material has been produced for the SER-
262 Phase 1b clinical study. cGMP drug product processing is similar to SER-109 for initial proof-of-concept clinical trial materials, with the addition
of a blending step to combine the individually fermented drug substances. Drug substance and drug product are tested for identity, purity, and potency,
and the material is placed on stability studies to support clinical storage and use. Optimization of the fermentation and purification processes, and the
dosage form are ongoing to refine manufacturing processes for future studies and commercial needs.
SER-287
Recently published third-party research reported changes in the microbiome in a cohort of patients with IBD, including UC, compared to healthy
individuals. The changes include higher levels of Enterobacteriaceae and lower levels of Clostridiales. The changes in these organisms are a form of
dysbiosis, and we believe that if we can repopulate keystone organisms and functional pathways we could restore the microbiome thereby treating UC. UC is
a serious chronic condition affecting approximately 700,000 individuals in the United States. The disease results in inflammation of the colon and rectum and
can result in debilitating symptoms, including abdominal pain, bowel urgency and diarrhea.
Based on this research and our experience with SER-109, we believe that we can use a complex spore ecology to restore the underlying dysbiosis of
UC. SER-109 is comprised of organisms in the class of Clostridiales, which engraft after treatment with SER-109. SER-109 has also been shown to reduce
the colonization of Enterobacteriaceae in CDI patients.
We initiated our Phase 1b clinical study in December 2015 and are enrolling subjects with mild-to-moderate UC to evaluate the safety and efficacy of
SER-287 added to standard of care treatment. The primary endpoints of the study are to evaluate the safety and tolerability of SER-287, compare the change
in the microbiome composition versus placebo and determine engraftment of SER-287 bacteria following SER-287 treatment. The study will also evaluate
clinical response, complete remission, and endoscopic improvement, as well as metabolomic and immunological findings. Top-line data from the SER-287
Phase 1b clinical study is expected in the second half of 2017.
Phase 1b clinical study design.
The broad objectives of the SER-287 Phase 1b clinical study are to determine the safety and tolerability of SER-287, and microbiome dynamics, in
patients with active mild-to-moderate UC.
The Phase 1b clinical study is a multicenter, randomized, double-blind, placebo-controlled multiple dose study utilizing weekly or daily dosing with
SER-287. We plan to enroll eligible subjects at approximately 20 sites in the United States. The Phase 1b clinical study is designed to enroll adults 18 years of
age and older who have mild-to-moderate UC as defined by a total modified Mayo score between 4 and 10, inclusive, with a modified Mayo endoscopic
subscore ≥ 1.
19
Patients will be randomized to one of four study arms:
•
•
•
•
Pre-treatment with placebo for 6 days, followed by weekly dosing of SER-287 for 8 weeks
Pre-treatment with placebo for 6 days, followed by daily dosing with placebo for 8 weeks
Pre-treatment with vancomycin for 6 days, followed by daily dosing of SER-287 for 8 weeks
Pre-treatment with vancomycin for 6 days, followed by weekly dosing of SER-287 for 8 weeks
The primary objectives of the study are to evaluate the safety and tolerability of SER-287 compared to placebo; to compare the baseline composition
of the intestinal microbiome to the composition at 8 weeks post-initiation of SER-287 or placebo; and to determine the engraftment of SER-287 bacteria into
the intestinal microbial community in each of the SER-287 arms compared to the placebo arm.
The secondary objectives of the study are to determine the proportion of subjects in each of the treatment arms who at eight weeks post-initiation of
treatment achieve a clinical response, complete remission, and endoscopic improvement; to assess changes in serum and fecal biomarkers from baseline
throughout treatment; to determine the complement of metabolic pathways; and to compare the changes in exploratory biomarkers from mucosal biopsies and
stool in each of the treatment arms from baseline through eight weeks.
This study will provide a safety profile of SER-287 compared to placebo for the UC population, describe the changes in the microbiome as a result of
treatment with SER-287 and provide potential predictive biomarkers for future studies. UC is characterized by a decrease in microbial diversity and richness,
with a lower prevalence of spore-forming organisms within the phylum Firmicutes. Preliminary data using FMT suggest that microbial interventions can
affect clinical outcomes in UC, and this study will evaluate whether the ecology of bacterial spores in SER-287 can correct the dysbiosis in UC, increase
microbial diversity and safely lead to a clinical response in UC patients with mild-to-moderate disease.
SER-301
We are designing and developing SER-301, a synthetic Ecobiotic microbiome therapeutic candidate for the treatment of IBD. The design is being
driven by insights from successful fecal microbiota transplants for UC conducted by our academic collaborators and will leverage microbiome and
metabolomic data gained from the ongoing Phase 1b study of SER-287. The SER-301 program also benefits from what we have and will learn about
synthetic Ecobiotic microbiome therapeutic development in our SER-262 program.
SER-155
We have an active pre-clinical program to discover and develop Ecobiotic microbiome therapeutics for other infectious diseases. The Phase 1b/2
clinical study of SER-109 provided initial evidence suggesting that Ecobiotic microbiome therapeutics have the potential to eliminate colonization by
potential microbial pathogens, such as VRE and Gram-negative Enterobacteriaceae, such as Klebsiella, Morganella and Proteus. These may be present at
low levels in the healthy colon, and like C. difficile, can overgrow after antibiotic use. Enterobacteriaceae can include multidrug resistant organisms, or
MDROs, that represent significant public health concerns. For example, carbapenem resistant Enterobacteriaceae, or CRE, is a significant problem in the
United States and has been identified as an urgent priority by the CDC. VRE, CRE and other MDROs colonize the gastrointestinal tract after antibiotic use
and can spread through contact with patients and healthcare workers both in institutional and in community settings.
We are currently designing and developing SER-155, an Ecobiotic microbiome therapeutic that may have activity against Gram-positive and Gram-
negative enteric bacterial pathogens. We expect to develop SER-155 for the prevention of transplant-related mortality in allo-HSCT recipients due to GvHD
and infection. The selection of the patient population will be based on pre-clinical data, and the assessment of our clinical development plan, regulatory path
and market opportunities. We plan to conduct studies in animal models as well as conduct further in vitro characterization of individual strains, in order to
define and nominate a composition for clinical development.
20
A significant portion of our operating expenses consists of research and development activities related to SER-109, SER-262, SER-287, SER-155,
SER-301 and the development of new Ecobiotic microbiome therapeutic product candidates. For the years ended December 31, 2016, 2015, and 2014, our
research and development expense was $83.2 million, $38.1 million, and $10.7 million, respectively. See “Management’s Discussion and Analysis of Results
of Operations and Financial Condition─Operating Expenses─Research and Development Expenses” for more information.
Research and Development
Sales and Marketing
In January 2016, we hired Wael Hashad as Chief Commercial Officer and Executive Vice President. Mr. Hashad is responsible for all activities related
to the anticipated commercialization of our products in development. If SER-109 is approved in the United States, we plan to commercialize it with our own
focused specialty sales force. We believe we can effectively commercialize SER-109 with a commercial team of 100 or fewer sales representatives that will
target gastrointestinal and infectious disease physicians, which are the two primary groups of physicians who treat multiply recurrent CDI patients.
In January 2016, we entered into an agreement with NHS for the development and commercialization outside of the United States and Canada of our
product candidates in development for CDI and IBD, including UC and Crohn’s disease. The agreement will support the development of our portfolio of
products for CDI and IBD in markets outside of the United States and Canada and provide financial support for our ongoing research and development.
Manufacturing
The production of live bacterial products is highly specialized. Owing to their hardiness and environmental persistence, production of spore-forming
organisms poses unique considerations for product, personnel, and facility protection. Manufacturing activities with spores are subject to specialized
regulations. We expect that a typical commercial fermentation will yield on the order of hundreds or thousands of doses per liter depending on the product and
its composition. Additionally, because a given total dose is split between several strains, the per-strain requirements for production may be even lower. As a
result, we believe the high productivity relative to the dose level will enable production scales for both clinical and commercial supply to be modest.
We have developed supply chains for producing and testing materials to ensure the availability of future clinical trial supplies. Our development
processes are designed to ensure that the raw materials, process technologies and analytical tests we use are scalable and transferable to a cGMP
manufacturing environment. These include the following core elements:
•
•
•
Fermentation. We are using microscale screening to optimize culture of the bacterial strains of interest in our current and foreseeable product
candidates. These screens can identify the fermentation platform that is best-suited for optimization and scale- up of the strains. Small-scale
fermentation systems (0.1 L to 50 L) enable the optimization of a wide variety of culture conditions and have been demonstrated to be scalable
to larger fermentation processes and enable technology transfer to clinical and final manufacturing sites. We employ platform fermentation
processes as starting points for cGMP production processes, and develop strain specific processes as required. To develop master cell banks,
working cell banks, and bulk drug substance for commercial product, we are using bacterial strains originating from a unique research cell bank
precursor, so we expect the research cell banks and final drug product should be genetically and physiologically similar.
Purification. Similar to fermentation, we believe small-scale purification operations are available for assessing large-scale cGMP
manufacturing of live cells, and to quickly assess downstream process yield, quality and robustness. For our oral products, purification is
typically less complex than for parenteral biologics such as monoclonal antibodies that must purify away very similar components from the
culturing process. Separation of viable microbes from soluble fermentation broth components is typically much simpler.
Formulation. Our Ecobiotic microbiome therapeutics are combinations of live bacteria and can be administered by a number of methods and by
different routes. The primary goal in developing a formulation is to deliver live bacteria to the intended location in a condition where they are
able to replicate and correct dysbiosis. Formulation development generally uses approved excipients and preservatives, and will include
screening of liquid, solid, and suspension formulations to maximize the opportunity for extended stability with minimal cold-chain
requirements. Dosage forms for oral products may be capsules, tablets, sachets, or liquid containers.
21
•
Analytical. We are addressing quality control requirements for our Ecobiotic microbiome therapeutics using proprietary microbiological,
chemical, biochemical, and molecular sequence-based testing schemes. We have available and are further developing quality control and in-
process analytical tools that can quantitatively measure the composition of spore, vegetative microbe and spore/vegetative combinations, which
we believe enable a wide variety of drug products to be manufactured. Throughout the bioprocess and formulation development platform we
use and will expand on high- throughput quantitative analytics to assess the identity, potency and purity of the final product.
We currently have two manufacturing facilities internal to Seres; a small-scale 7,000 ft2 unit at our Kendall Square location in Cambridge,
Massachusetts, where we conduct cGMP manufacture of Ecobiotic therapeutic candidates to support drug substance and drug product for early phase
and small-scale clinical supplies, and a larger 10,000 ft2 cGMP manufacturing facility at our headquarters, with the ability to perform both drug
substance and drug product manufacturing for early and late-phase clinical development and at larger scales of operation. We may establish further
manufacturing facilities that will serve late-phase clinical and commercial supply for our product candidates. We may do this by expanding our current
and planned facilities, or by purchasing or building additional facilities.
Intellectual Property
We strive to protect the proprietary technology that is important to our business, including seeking and, if granted, maintaining patents intended to
cover our product candidates and compositions, their methods of use and processes for their manufacture and any other aspects of inventions that are
commercially important to the development of our business. We also utilize regulatory exclusivity as well as trade secrets to protect aspects of our business.
We plan to continue to expand our intellectual property estate by filing patent applications directed to compositions, methods of treatment, methods of
manufacture and methods for patient selection created or identified from our ongoing development of our product candidates. Our success will depend on our
ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our
business, defend and enforce any patents that we may obtain, preserve the confidentiality of our trade secrets and operate without infringing the valid and
enforceable patents and proprietary rights of third parties. We also rely on know-how and continuing technological innovation to develop and maintain our
proprietary position and, in the future, may rely on or leverage in-licensing opportunities. We seek to obtain domestic and international patent protection, and
endeavor to promptly file patent applications for new commercially valuable inventions.
The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In
addition, the coverage claimed in a patent may be challenged in courts after issuance. Moreover, many jurisdictions permit third parties to challenge issued
patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. We cannot predict whether the patent
applications we are currently pursuing will issue as patents in any particular jurisdiction or at all, whether the claims of any patent applications, should they
issue, will cover our product candidates, or whether the claims of any issued patents will provide sufficient protection from competitors or otherwise provide
any competitive advantage.
Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months or potentially even longer, and
because publication of discoveries in the scientific or patent literature often lags behind actual discoveries and patent application filings, we cannot be certain
of the priority of inventions covered by pending patent applications. Accordingly, we may not have been the first to invent the subject matter disclosed in
some of our patent applications or the first to file patent applications covering such subject matter, and we may have to participate in interference proceedings
or derivation proceedings declared by the United States Patent and Trademark Office, or USPTO, to determine priority of invention.
Our patent portfolio includes patent applications in the early stages of prosecution and seven issued U.S. patents. For our pending Patent Cooperation,
or PCT, applications, we anticipate determining, in advance of the applicable deadlines, whether to pursue these applications and if so will pursue them in the
United States and selected ex-U.S. jurisdictions. We believe that issued claims will provide protection for SER-109, SER-262, SER-287 and SER-155.
22
Our patent estate leverages both offensive and defensive strategies. As of March 8, 2017, we owned a total of sixteen patent application families that
include Patent Cooperation Treaty, or PCT, applications and/or U.S. patent applications and ex-US patent applications. Some of these families are briefly
described below. Five of the patent application families that include only U.S. provisional applications that will not themselves be examined and for which the
deadline to file PCT applications and/or U.S. non-provisional applications have not yet expired. Issued patents and pending patent applications as of March 8,
2017 in six of the patent application families in our portfolio are described briefly below. We expect to pursue additional applications in these families over
time.
•
•
•
•
•
•
A family related to binary combinations of microbes that includes the following issued and pending applications: (i) an issued U.S. patent,
which claims therapeutic compositions that include selected binary combinations of microbes; (ii) two issued U.S. patents, which claim
methods of using such compositions to treat or prevent CDI; (iii) a continuation U.S. patent application and (iv) national stage applications
based on the PCT application in 14 ex-U.S. jurisdictions. Patents issuing from or based on these applications, if any, are expected to expire in
2033, assuming all required maintenance fees are paid and absent any applicable patent term extension or patent term adjustment. We expect
this patent application family to provide patent protection for SER-109, SER-262, SER-287 and SER-155.
A family related to combinations of bacterial spores that includes the following issued and pending applications: (i) three issued U.S. patents
that claim certain methods of treatment of gastrointestinal diseases, including Crohn’s disease and colitis, using combinations of bacterial
spores and (ii) one issued U.S. patent that claims compositions and a pending continuation application and (iii) national stage applications
based on the PCT application in 12 ex-U.S. jurisdictions claiming similar methods, as well as related compositions. Patents issuing from or
based on these applications, if any, are expected to expire in 2034, assuming all required maintenance fees are paid and absent any applicable
patent term extension or patent term adjustment. We expect this patent application family to provide patent protection for SER-109, SER-262,
SER-287 and SER-155.
A family that includes a pending U.S. and a European national stage application based on a PCT application related to compositions of matter
and methods for new combinations of microbes for treating gastrointestinal diseases. Patents based on these applications, if granted, are
expected to expire in 2034, assuming all required maintenance fees are paid and absent any applicable patent term extension or patent term
adjustment.
A family that includes pending national stage applications in the U.S. and Europe, related to quality control of Ecobiotic products and
characterization methods. Patents based on these applications, if granted, are expected to expire in 2034, assuming all required maintenance
fees are paid and absent any applicable patent term extension or patent term adjustment.
A family that includes pending national stage applications in the U.S. and six ex-U.S. jurisdictions, related to methods of restructuring of a host
microbiome using microbial populations identified using our network-based discovery platforms. Patents based on these applications, if
granted, are expected to expire in 2034, assuming all required maintenance fees are paid, and absent any applicable patent term extension or
patent term adjustment.
A family that includes pending national stage applications in the U.S. and ten ex-U.S. jurisdictions related to compositions of matter and
methods of treating disorders with compositions that include, for example, ternary combinations of microbes. Patents based on this application,
if granted, are expected to expire in 2034, assuming all required maintenance fees are paid and absent any applicable patent term extension or
patent term adjustment.
Patent term
The base term of a U.S. patent is 20 years from the filing date of the earliest-filed non-provisional, patent application from which the patent claims
priority. The term of a U.S. patent can be lengthened by patent term adjustment, which compensates the owner of the patent for administrative delays at the
USPTO. In some cases, the term of a U.S. patent is shortened by terminal disclaimer that reduces its term to that of an earlier-expiring patent.
The term of a U.S. patent may be eligible for patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984,
referred to as the Hatch-Waxman Act, to account for at least some of the time the drug is under development and regulatory review after the patent is granted.
With regard to a drug for which FDA approval is the first permitted marketing of the active ingredient, the Hatch-Waxman Act allows for extension of the
term of one U.S. patent that includes at least one claim covering the composition of matter of such an FDA-approved drug, an FDA- approved method of
treatment using the drug and/or a method of manufacturing the FDA-approved drug. The extended patent term cannot exceed the shorter of five years beyond
the non-extended expiration of the patent or fourteen years from the date of the FDA approval of the drug, and a patent cannot be extended more than once or
for more than a single product. During the period of extension, if granted, the scope of exclusivity is limited to the approved product for approved uses. Some
foreign jurisdictions, including Europe and Japan, have analogous patent term extension provisions, which allow for extension of the term of a patent that
covers a drug approved by the applicable foreign regulatory agency. In the future, if and when our product candidates receive FDA approval, we expect to
apply, if appropriate, for patent term extension on patents covering those product candidates, their methods of use and/or methods of manufacture.
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Trade secrets
In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. We typically utilize trade secrets to
protect aspects of our business. We protect trade secrets and know-how by establishing confidentiality agreements and invention assignment agreements with
our employees, consultants, scientific advisors, contractors and collaborators. These agreements provide that all confidential information developed or made
known during the course of an individual or entities’ relationship with us must be kept confidential during and after the relationship. These agreements also
provide that all inventions resulting from work performed for us or relating to our business and conceived or completed during the period of employment or
assignment, as applicable, shall be our exclusive property. In addition, we take other appropriate precautions, such as physical and technological security
measures, to guard against misappropriation of our proprietary information by third parties.
Competition
The development and commercialization of new drug and biologic products is highly competitive and is characterized by rapid and substantial
technological development and product innovations. We face competition with respect to our current product candidates, and will face competition with
respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty
pharmaceutical companies and biotechnology companies worldwide. We are aware of a number of large pharmaceutical and biotechnology companies, as
well as smaller, early-stage companies, that are pursuing the development of products, including microbiome therapeutics, for the prevention of CDI, IBD and
other disease indications we are targeting. Some of these competitive products and therapies are based on scientific approaches that are similar to our
approach, and others may be based on entirely different approaches. For example, FMT is a procedure that is currently used for recurrent CDI and has
resulted in high cure rates for recurrent CDI and our competitors and physicians may continue to seek to standardize and implement this procedure. Potential
competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent
protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources,
established presence in the market and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining
regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in
even more resources being concentrated among a smaller number of our competitors.
These third parties compete with us in recruiting and retaining qualified scientific, clinical, manufacturing sales and marketing and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for,
our programs.
The key competitive factors affecting the success of SER-109, SER-287, SER-262, SER-301 and SER-155 and any other product candidates that we
develop, if approved, are likely to be their efficacy, safety, convenience, price, the level of competition and the availability of reimbursement from
government and other third-party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are more effective, have
fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or
other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market, especially for any competitor developing a microbiome therapeutic which will likely share our same
regulatory approval requirements. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to
encourage the use of lower cost products.
Government Regulation
The FDA and other regulatory authorities at federal, state and local levels, as well as in foreign countries, extensively regulate, among other things, the
research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, record keeping,
approval, advertising, promotion, marketing, post-approval monitoring and post-approval reporting of drugs and biologics such as those we are developing.
We, along with our contract manufacturers, will be required to navigate the various pre-clinical, clinical and commercial approval requirements of the
governing regulatory agencies of the countries in which we wish to conduct studies or seek approval for our product candidates. The process of obtaining
regulatory approvals and ensuring subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of
substantial time and financial resources.
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In the United States, the FDA regulates drug and biologic products under the Federal Food, Drug and Cosmetic Act, its implementing regulations and
other laws, including, in the case of biologics, the Public Health Service Act. Our product candidates are subject to regulation by the FDA as biologics.
Biologics require the submission of a biologics license application, or BLA, and approval by the FDA before being marketed in the United States. None of
our product candidates has been approved by the FDA for marketing in the United States, and we currently have no BLAs pending. If we fail to comply with
applicable FDA or other requirements at any time during product development, clinical testing, the approval process or after approval, we may become
subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, suspension or revocation of
approved applications, warning letters, product recalls, product seizures, total or partial suspensions of manufacturing or distribution, injunctions, fines, civil
penalties or criminal prosecution. Any FDA enforcement action could have a material adverse effect on us.
The process required by the FDA before our biologic product candidates may be marketed in the United States generally involves the following:
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completion of pre-clinical laboratory tests and animal studies performed in accordance with the FDA’s good laboratory practice, or GLP,
regulations;
submission to the FDA of an IND, which must become effective before clinical trials in the United States may begin;
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each
proposed indication, conducted in accordance with the FDA’s good clinical practice, or GCP, regulations;
submission to the FDA of a BLA;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance
with cGMP regulations; and
FDA review and approval of the BLA prior to any commercial marketing, sale or shipment of the product.
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product
candidates will be granted on a timely basis, if at all.
Pre-clinical and Clinical Trials
Once a product candidate is identified for development, it enters the pre-clinical testing stage. Pre-clinical studies include laboratory evaluations of
drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which must be conducted in accordance with GLP requirements.
The results of the pre-clinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the
conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may result in the FDA not allowing clinical
trials to commence or not allowing clinical trials to commence on the terms originally specified in the IND. A separate submission to an existing IND must
also be made for each successive clinical trial conducted during product development, and the FDA must grant permission, either explicitly or implicitly by
not objecting, before each clinical trial can begin.
Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified investigators. Clinical trials are
conducted under protocols detailing, among other things, the objectives of the clinical trial and the parameters and criteria to be used in monitoring safety and
evaluating effectiveness. Each protocol must be submitted to the FDA as part of the IND. An independent institutional review board, or IRB, for each
investigator site proposing to participate in a clinical trial must also review and approve the clinical trial before it can begin at that site, and the IRB must
monitor the clinical trial until it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various grounds,
including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP requirements, including
requirements for informed consent.
For purposes of BLA approval, clinical trials are typically conducted in three sequential phases, which may overlap or be combined.
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Phase 1 — Phase 1 clinical trials involve initial introduction of the investigational product into healthy human subjects or patients with the
target disease or condition. These studies are typically designed to test the safety, dosage tolerance, absorption, metabolism and distribution of
the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness.
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Phase 2 — Phase 2 clinical trials typically involve administration of the investigational product to a limited patient population with a specified
disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible adverse side effects and
safety risks.
Phase 3 — Phase 3 clinical trials typically involve administration of the investigational product to an expanded patient population to further
evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple
geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational
product and to provide an adequate basis for product approval.
In some cases, the FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the
biologic’s safety and effectiveness after BLA approval. Such post-approval clinical trials are typically referred to as Phase 4 clinical trials.
Although most clinical research performed in the United States in support of a BLA must be authorized in advance by the FDA, under the IND
regulations and procedures described above, there are certain circumstances under which clinical trials can be conducted without submission of an IND. For
example, a sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial
under an IND. Similarly, the FDA may exercise enforcement discretion to permit sponsors to conduct certain types of clinical investigations without an IND.
Pursuant to the FDA guidance document “Enforcement Policy Regarding Investigational New Drug Requirements for Use of Fecal Microbiota for
Transplantation to Treat Clostridium difficile Infection Not Responsive to Standard Therapies” (July 2013), the FDA announced its intention to exercise
enforcement discretion and not apply the IND requirements for the use of FMT to treat CDI not responsive to standard therapies, provided that the treating
physician obtains adequate informed consent from the patient or his or her legally authorized representative for the use of FMT products. In March 2014, the
FDA issued a draft guidance document to clarify its Enforcement Policy in the July 2013 guidance. In the March 2014 draft guidance, the FDA noted that
since the issuance of its Enforcement Policy in July 2013, it has continued to review its policies in this area and it intends to continue to exercise enforcement
discretion in more narrow circumstances than previously identified. Specifically, the March 2014 draft guidance indicated the FDA’s intent to limit
enforcement discretion in circumstances where the licensed health care professional treating the patient obtains adequate informed consent from the patient or
his or her legally authorized representative for the use of FMT products; the FMT product is obtained from a donor known to either the patient or the licensed
health care provider; and the stool donor and stool are qualified by screening and testing performed under the discretion of the licensed health care provider
for the purposes of providing the FMT product. Following receipt of public comments on the March 2014 draft guidance proposing to modify the July 2013
Enforcement Policy, the FDA issued a new draft guidance in March 2016 announcing its intention to further modify its approach to enforcement discretion
for INDs for the use of FMT products. In this draft guidance, the FDA indicated that it intends to continue to exercise enforcement discretion, provided that
the licensed health care professional treating the patient obtains adequate informed consent for use of the FMT product; the FMT product is not obtained from
a stool bank; and the stool donor and stool are qualified by screening and testing performed under the direction of the licensed health care provider for
purposes of providing the FMT product to treat his or her patient. The FDA further clarified in the March 2016 that, when finalized, the policy would
supersede the final Enforcement Policy espoused in the July 2013 Guidance. However, to date, the FDA has not finalized the March 2014 draft
guidance. The FDA provided confirmation to us that it intended to exercise enforcement discretion with respect to our Phase 1b/2 clinical study of SER-109,
and accordingly, we did not conduct this trial under an IND. However, we have conducted and will continue to conduct all subsequent clinical studies of SER-
109 under an IND.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the
chemistry and physical characteristics of the biologic and finalize a process for manufacturing the biologic in commercial quantities in accordance with
cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and manufacturers must
develop, among other things, methods for testing the identity, strength, quality and purity of the final biological product. Additionally, appropriate packaging
must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration
over its shelf life.
BLA Submission and FDA Review
The results of pre-clinical studies and clinical trials, together with other detailed information, including extensive manufacturing information and
information on the composition of the biologic, are submitted to the FDA in the form of a BLA requesting approval to market the biologic for one or more
specified indications. The submission of a BLA requires payment of a substantial user fee unless a waiver is granted. However, an orphan-designated product,
such as our SER-109, is not subject to an application user fee unless the human drug application includes an indication for other than a rare disease or
condition. Each BLA submitted to the FDA is reviewed for administrative completeness and reviewability within 60 days of the FDA’s receipt of the
application. If the BLA is found to be complete, the FDA will file the BLA, triggering a full review of the application. The FDA may refuse to file any BLA
that it deems incomplete or not properly reviewable at the time of submission.
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Once a BLA has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant. However, the review
process is often significantly extended by FDA requests for additional information or clarification. Under the Prescription Drug User Fee Act, the FDA has a
goal of reviewing BLAs within ten months of the 60-day filing date for standard review or six months for priority review, but the overall timeframe is often
extended by FDA requests for additional information or clarification. The FDA reviews a BLA to determine, among other things, whether the biological
product is safe, pure and potent and whether the facility or facilities in which it is manufactured meet standards designed to assure the product’s continued
safety, purity and potency. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
Before approving a BLA, the FDA will inspect the facility or the facilities at which the biologic product is manufactured, and will not approve the product
unless cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance with GCP
requirements, and will not approve the biologic unless compliance with such requirements is satisfactory.
The FDA may deny approval of a BLA if the applicable statutory and regulatory criteria are not satisfied, or it may require additional pre-clinical or
clinical data. Even if such data are submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data from clinical trials
are not always conclusive and the FDA may interpret data differently than sponsors. Once the FDA approves a BLA, such approval defines the indicated uses
for which the biologic may be marketed. The FDA may also require implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which can
include a medication guide, communication plan, or elements to assure safe use, such as restricted distribution methods, physician training, patient registries
and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling claims or the development of
adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory
standards is not maintained or if problems occur after the product reaches the market. The FDA may require one or more Phase 4 post-market studies and
surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing based on the results
of these post-marketing studies.
The biologic testing and approval processes encompasses significant risk, and requires substantial time, effort and financial resources, and each may
take several years to complete. The FDA may not grant approval on a timely basis, or at all. Even if we believe a clinical trial has demonstrated safety and
efficacy of one of our product candidates for the treatment of a disease or condition, the results may not be satisfactory to the FDA. Pre-clinical and clinical
data may be interpreted by the FDA in different ways, which could delay, limit or prevent regulatory approval. We may encounter difficulties or unanticipated
costs in our efforts to secure necessary governmental approvals which could delay or preclude us from marketing our product candidates. The FDA may limit
the indications for use or place other conditions on any approvals that could restrict the commercial application of our products. After approval, certain
changes to the approved biologic, such as adding new indications, manufacturing changes or additional labeling claims, are subject to further FDA review and
approval. Depending on the nature of the change proposed, a BLA supplement must be filed and approved before the change may be implemented. For many
proposed post-approval changes to a BLA, the FDA has up to 180 days to review the application. As with new BLAs, the review process is often significantly
extended by the FDA requests for additional information or clarification.
Expedited Development and Review Programs
The FDA maintains several programs intended to facilitate and expedite development and review of new drugs and biologics to address unmet medical
needs in the treatment of serious or life- threatening diseases or conditions. These programs include Fast Track designation, Breakthrough Therapy
designation, Priority Review designation and Accelerated Approval, and the purpose of these programs is to provide important new drugs to patients earlier
than under standard FDA review procedures.
A new drug or biologic is eligible for fast track designation if it is intended to treat a serious or life- threatening disease or condition and demonstrates
the potential to address unmet medical needs for such disease or condition. Fast Track designation provides increased opportunities for sponsor meetings with
the FDA during pre-clinical and clinical development, in addition to the potential for rolling review once a marketing application is filed, meaning that the
agency may review portions of the marketing application before the sponsor submits the complete application, as well as Priority Review, discussed below. In
addition, a new drug or biologic may be eligible for breakthrough therapy designation if it is intended to treat a serious or life-threatening disease or condition
and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically
significant endpoints, such as substantial treatment effects observed early in clinical development. Breakthrough Therapy designation provides all the features
of Fast Track designation in addition to intensive guidance on an efficient drug development program beginning as early as Phase 1, and FDA organizational
commitment to expedited development, including involvement of senior managers and experienced review staff in a cross-disciplinary review, where
appropriate.
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Any product submitted to the FDA for approval, including a product with Fast Track or Breakthrough Therapy designation, may also be eligible for
additional FDA programs intended to expedite the review process, including Priority Review designation and accelerated approval. A product is eligible for
Priority Review if it has the potential to provide a significant improvement in safety or effectiveness in the treatment, diagnosis or prevention of a serious
disease or condition. The FDA aims to review applications for new products designated for priority review within six months, compared to ten months under
standard review. Additionally, products are eligible for accelerated approval if they can be shown to have an effect on a surrogate endpoint that is reasonably
likely to predict clinical benefit, or an effect on a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality which is
reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of
the condition and the availability or lack of alternative treatments. Accelerated approval is usually contingent on a sponsor’s agreement to conduct additional
post-approval studies to verify and describe the product’s clinical benefit. In addition, the FDA currently requires, as a condition for accelerated approval, pre-
approval of all promotional materials intended for dissemination or publication within 120 days following marketing approval, which could adversely impact
the timing of commercial launch of the product.
Fast Track designation, Breakthrough Therapy designation, Priority Review designation and Accelerated Approval do not change the standards for
approval but may expedite the development or review process. We have received Breakthrough Therapy designation for SER-109, and we may apply for one
or more of the FDA’s expedited programs for our other product candidates. The FDA may disagree that our product candidates satisfy the criteria for such
programs, such programs may fail to result in expedited development or review timelines, or the FDA may ultimately refuse to approve our product
candidates despite their inclusion in any expedited programs. In addition, if the Breakthrough Therapy designation for SER-109 is no longer supported by
subsequent data, FDA may rescind the designation.
Post-Approval Requirements
Approved biologics that are manufactured or distributed in the United States are subject to pervasive and continuing regulation by the FDA, including,
among other things, requirements relating to recordkeeping, periodic reporting, product distribution, advertising and promotion and reporting of adverse
experiences with the product. There also are continuing, annual user fee requirements for products and the establishments at which such products are
manufactured, as well as new application fees for certain supplemental applications.
Any biologics manufactured or distributed by us or our contract manufactures pursuant to FDA approvals would be subject to continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the product. Manufacturers and their subcontractors are
required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain
state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain procedural and documentation requirements upon
us and our contract manufacturers. Failure to comply with statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory
action, such as warning letters, suspension of manufacturing, product seizures, injunctions, civil penalties or criminal prosecution. We cannot be certain that
we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory
requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our
clinical trials, require us to recall a product from distribution or withdraw approval of the BLA for that product.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with
manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information,
requirements for post-market studies or clinical trials to assess new safety risks, or imposition of distribution or other restrictions under a REMS. Other
potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve applications or supplements to approved applications, or suspension or revocation of product approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
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The FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet and social media. A
company can make only those claims relating to safety and efficacy that are approved by the FDA. Physicians may prescribe legally available biologics for
uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. The FDA does not regulate the behavior
of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.
Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.
Biosimilars and Regulatory Exclusivity
We believe that any of our product candidates approved under a BLA should qualify for a 12-year period of exclusivity against biosimilar competition
currently permitted by the Biologics Price Competition and Innovation Act, or BPCIA. Specifically, as part of the Patient Protection and Affordable Care Act
enacted in 2010, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the Affordable Care Act, the BPCIA established
an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The new abbreviated regulatory pathway provides legal
authority for the FDA to review and approve biosimilar biologics based on their similarity to an existing brand product, referred to as a reference product,
including the possible designation of a biosimilar as interchangeable with a brand product. Under the BPCIA the approval of a biosimilar product may not be
made effective by the FDA until 12 years from the date on which the reference product was first licensed. Moreover, the extent to which a biosimilar, once
approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological drug products
is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. The BPCIA is complex and is only beginning to
be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. While it is uncertain when
any such processes may be fully adopted by the FDA, any such processes that operate to limit the scope or length of exclusivity afforded by the BPCIA could
have a material adverse effect on the future commercial prospects for our biological products. In addition, the period of exclusivity provided by the BPCIA
only operates against third parties seeking approval via the abbreviated pathway, but would not prevent third parties from pursuing approval via the traditional
approval pathway. In addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example,
biological products in the EU may be eligible for at least a ten-year period of exclusivity.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a
disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States, there is
no reasonable expectation that the cost of developing and making the product available in the United States for the disease or condition will be recovered
from sales of the product. Orphan designation must be requested before submitting a BLA. Orphan designation does not convey any advantage in or shorten
the duration of the regulatory review and approval process, though companies developing orphan products are eligible for certain incentives, including tax
credits for qualified clinical testing and waiver of application fees.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the
product is entitled to a seven-year period of marketing exclusivity during which the FDA may not approve any other applications to market the same
therapeutic agent for the same indication, except in limited circumstances, such as a subsequent product’s showing of clinical superiority over the product
with orphan exclusivity or where the original applicant cannot produce sufficient quantities of product. Competitors, however, may receive approval of
different therapeutic agents for the indication for which the orphan product has exclusivity or obtain approval for the same therapeutic agent for a different
indication than that for which the orphan product has exclusivity. Orphan product exclusivity could block the approval of one of our products for seven years
if a competitor obtains approval for the same therapeutic agent for the same indication before we do, unless we are able to demonstrate that our product is
clinically superior. Further, if a designated orphan product receives marketing approval for an indication broader than the rare disease or condition for which
it received orphan designation, it may not be entitled to orphan exclusivity.
In August 2015, the FDA granted orphan drug designation to SER-109 for the treatment of recurrent CDI.
We may seek orphan designation for one or more of our product candidates, but the FDA may disagree with our analysis of the prevalence of a disease
or condition or other criteria for designation and refuse to grant orphan status. We cannot guarantee that we will obtain designation or approval for any
product candidate, or that we will be able to secure orphan product exclusivity if we do obtain approval.
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Government Regulation Outside of the United States
To market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries
regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, manufacturing, commercial sales and distribution of
our products.
For instance, in the EEA (comprised of the 28 EU Member States plus Iceland, Liechtenstein and Norway) medicinal products must be authorized for
marketing by using either the centralized authorization procedure or national authorization procedures.
Centralized procedure—Under the centralized procedure, following the opining of the EMA’s Committee for Medicinal Products for Human Use, or,
CHMP, the European Commission issues a single marketing authorization valid across the EEA. The centralized procedure is compulsory for human
medicines derived from biotechnology processes advanced therapy medicinal products (such as gene therapy, somatic cell therapy and tissue engineered
products), products that contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, neurodegenerative
disorders, diabetes, autoimmune diseases and other immune dysfunctions, viral diseases, and officially designated orphan medicines. For medicines that do
not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the
medicine concerned contains a new active substance not yet authorized in the EEA, is a significant therapeutic, scientific or technical innovation, or if its
authorization would be in the interest of public health in the EEA. Under the centralized procedure the maximum timeframe for the evaluation of an MAA by
the EMA is 210 days, excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by
the CHMP. Accelerated assessment might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health
interest, particularly from the point of view of therapeutic innovation. The timeframe for the evaluation of an MAA under the accelerated assessment
procedure is 150 days, excluding clock stops.
National authorization procedures—There are also two other possible routes to authorize medicinal products in several countries, which are available
for products that fall outside the scope of the centralized procedure:
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Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one EU
country of medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of the
centralized procedure.
Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with
the national procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedure
whereby the countries concerned recognize the validity of the original, national marketing authorization.
In the EEA, new products authorized for marketing (i.e., reference products) qualify for eight years of data exclusivity and an additional two years of
market exclusivity upon marketing authorization. The data exclusivity period prevents generic or biosimilar applicants from relying on the preclinical and
clinical trial data contained in the dossier of the reference product when applying for a generic or biosimilar marketing authorization in the EU during a period
of eight years from the date on which the reference product was first authorized in the EU. The market exclusivity period prevents a successful generic or
biosimilar applicant from commercializing its product in the EU until ten years have elapsed from the initial authorization of the reference product in the EU.
The ten-year market exclusivity period can be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing
authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization,
are held to bring a significant clinical benefit in comparison with existing therapies.
The criteria for designating an “orphan medicinal product” in the EEA are similar in principle to those in the United States. In the EEA a medicinal
product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition;
(2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product, without the benefits
derived from orphan status, would not generate sufficient return in the EU to justify investment; and (3) there exists no satisfactory method of diagnosis,
prevention or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those
affected by the condition. Orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a
marketing authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. During this ten year orphan market exclusivity
period, no marketing authorization application shall be accepted and no marketing authorization shall be granted for a similar medicinal product for the same
indication. An orphan product can also obtain an additional two years of market exclusivity in the EU for pediatric studies. The ten year market exclusivity
may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation, for example, if
the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may be granted to a similar
product for the same indication at any time if (i) the second applicant can establish that its product, although similar, is safer, more effective or otherwise
clinically superior; (ii) the applicant consents to a second orphan medicinal product application; or (iii) the applicant cannot supply enough orphan medicinal
product.
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Other Healthcare Laws
In addition to FDA restrictions on marketing of pharmaceutical and biological products, other healthcare regulatory laws restrict business practices in
the biotechnology industry, which include, but are not limited to, anti-kickback, false claims, physician payment and pricing transparency and data privacy
and security laws. The federal Anti-Kickback Statute prohibits the offer, receipt, or payment of remuneration in exchange for or to induce the referral of
patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal healthcare programs. Remuneration
has been broadly interpreted to include anything of value, including cash, improper discounts and free or reduced price items and services. The government
has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies based on sham research or consulting and other financial
arrangements with physicians. Further, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have
committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the False Claims Act (discussed below). Many states have similar laws that apply to their state
healthcare programs as well as private payors.
The federal false claims and civil monetary penalties laws, including the False Claims Act, or FCA, impose liability on persons who, among other
things, knowingly present or cause to be presented, a false, fictitious or fraudulent claim for payment to, or approval by, the federal government, knowingly
make, use, or cause to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or knowingly make a false
statement to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. The FCA has been used to prosecute persons submitting
claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Actions
under the FCA may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the FCA
can result in significant monetary penalties and treble damages. The federal government is using the FCA, and the accompanying threat of significant liability,
in its investigation and prosecution of pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of
products for unapproved uses and other sales and marketing practices. The government has obtained multi-million and multi–billion dollar settlements under
the FCA in addition to individual criminal convictions under applicable criminal statutes. In addition, companies have been forced to implement extensive
corrective action plans, and have often become subject to consent decrees or corporate integrity agreements, severely restricting the manner in which they
conduct their business. Given the significant size of actual and potential settlements, it is expected that the government authorities will continue to devote
substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.
The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among
other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party
payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not
need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The
Affordable Care Act, among other things, imposed new reporting requirements through the Physician Payments Sunshine Act on certain drug manufacturers
for payments made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of
$1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and
completely reported in an annual submission. Drug must submit reports by the 90th day of each subsequent calendar year. Certain states also mandate
implementation of compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts,
compensation and other remuneration to physicians.
We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technologyfor Economic and Clinical Health Act, or HITECH, and their respective implementing regulations,
including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of
individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business
associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in
connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against
covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions
in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws
govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have
the same requirements, thus complicating compliance efforts.
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To the extent that any of our product candidates, once approved, are sold in a foreign country, we may be subject to similar foreign laws and
regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and
implementation of corporate compliance programs and reporting of payments or other transfers of value to healthcare professionals.
The shifting commercial compliance environment and the need to build and maintain robust systems to comply with different compliance and/or
reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or more of the requirements. If our
operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including,
without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and
state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In both
domestic and foreign markets, sales and reimbursement of any approved products will depend, in part, on the extent to which third-party payors, such as
government health programs, commercial insurance and managed healthcare organizations provide coverage, and establish adequate reimbursement levels
for, such products. Third-party payors are increasingly challenging the prices charged for medical products and services and imposing controls to manage
costs. Third-party payors may limit, or hinder, coverage to specific products on an approved list, also known as a formulary, which might not include all of
the FDA-approved products for a particular indication. Additionally, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate
the cost-effectiveness of our products, as well as provide rebates and discounts which may impact the net selling price of our products. If third-party payors
do not consider our products to be cost-effective compared to other therapies, the payors may not cover our products as a benefit under their plans or, if they
do, the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis.
The containment of healthcare costs also has become a priority of federal and state governments and the prices of pharmaceutical and biological
products have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls,
restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption
of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results.
Outside the United States, ensuring adequate coverage and payment for our products will face challenges. Pricing of prescription pharmaceuticals is
subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory
marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to
other available therapies. Conducting such a clinical trial could be expensive and result in delays in our commercialization efforts. Third-party payors are
challenging the prices charged for medical products and services, and many third-party payors limit reimbursement for newly approved healthcare products.
Recent budgetary pressures in many countries are also causing governments to consider or implement various cost-containment measures, such as price
freezes, increased price cuts and rebates. If budget pressures continue, governments may implement additional cost-containment measures. Cost-control
initiatives could decrease the price we might establish for products that we may develop or sell, which would result in lower product revenues or royalties
payable to us. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow
favorable reimbursement and pricing arrangements for any of our products.
Healthcare Reform
In the United States, there have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and
biological products, government control and other changes to the healthcare system. It is uncertain what legislative proposals will be adopted or what actions
federal, state or private payors for medical goods and services may take in response to any healthcare reform proposals or legislation. We cannot predict the
effect medical or healthcare reforms may have on our business, and no assurance can be given that any such reforms will not have a material adverse effect.
By way of example, in March 2010, the Affordable Care Act was signed into law, which, among other things, includes changes to the coverage and
payment for pharmaceutical and biological products under government health care programs. Among other things, the Affordable Care Act:
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expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and
generic drugs and revising the definition of ‘‘average manufacturer price,’’ or AMP, for calculating and reporting Medicaid drug rebates on
outpatient prescription drug prices;
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extended Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an
alternate rebate formula for new formulations of certain existing products that is intended to increase the amount of rebates due on those drugs;
expanded the types of entities eligible for the 340B drug discount program that mandates discounts to certain hospitals, community centers and
other qualifying providers. With the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted
340B pricing on orphan drugs. In addition, because 340B pricing is determined based on AMP and Medicaid drug rebate data, the revisions to
the Medicaid rebate formula and AMP definition described above could cause the required 340B discounts to increase; and
established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of-sale-discount off the
negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’
outpatient drugs to be covered under Medicare Part D.
There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges
and amendments to the Affordable Care Act in the future, particularly in light of the new Presidential administration and U.S. Congress.
Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. In August 2011, the Budget
Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with
recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the
legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal
year, which went into effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional Congressional
action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare
payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers
from three to five years. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their
marketed products, which have resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies
for pharmaceutical and biological products. Adoption of other new legislation at the federal or state level could further limit reimbursement for
pharmaceuticals, including our product candidates if approved.
Employees
As of December 31, 2016, we had 127 full-time permanent employees. 31 employees work in administration and operations and 96 work in research
and development.
Our Corporate Information
We were incorporated in the State of Delaware in 2010 under the name Newco LS21, Inc. In October 2011, we changed our name to Seres Health,
Inc., and in May 2015, we changed our name to Seres Therapeutics, Inc. Our principal executive offices are located at 200 Sidney Street, Cambridge,
Massachusetts 02139 and our telephone number is (617) 945-9626. Our website address is www.serestherapeutics.com. The information contained in, or
accessible through, our website does not constitute a part of this annual report on Form 10-K.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, accordingly, file
reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be
read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, NE,
Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains material regarding
issuers that file electronically, such as ourselves, with the Securities and Exchange Commission.
We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission.
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Item 1A. Risk Factors
Our business faces significant risks and uncertainties. Accordingly, in evaluating our business, you should carefully consider the risk factors discussed
below, as well as the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and
“Management’s Discussion and Analysis of Results of Operations and Financial Condition.” The occurrence of any of the events or developments described
below or elsewhere in this report could harm our business, financial condition, results of operations or growth prospects.
Risks Related to Our Financial Position and Need for Additional Capital
We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and
may never achieve or maintain profitability.
Since inception, we have incurred significant operating losses. Our net loss was $91.6 million for the year ended December 31, 2016, $54.8 million for
the year ended December 31, 2015, and $16.7 million for the year ended December 31, 2014. As of December 31, 2016, we had an accumulated deficit of
$174.2 million. To date, we have financed our operations through the initial public offering of our common stock, private placements of our preferred stock,
milestone payments under the licensing agreement with Nestec, Ltd., and the issuance of convertible promissory notes and borrowings under a loan and
security agreement with Comerica Bank, or the loan and security agreement. We have devoted substantially all of our financial resources and efforts to
developing our microbiome therapeutics platform, identifying potential product candidates and conducting pre-clinical studies and clinical trials. We are in
the early stages of development of our product candidates, which we call Ecobiotic microbiome therapeutics, and we have not completed development of any
Ecobiotic microbiome therapeutics or other drugs or biologics. We expect to continue to incur significant expenses and operating losses for the foreseeable
future. We anticipate that our expenses may increase substantially as we:
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continue the clinical development of SER-109, our lead product candidate; based on feedback received from the FDA, we plan to initiate a new
Phase 2 SER-109 clinical study;
conduct our Phase 1b clinical studies of SER-287 and SER-262;
continue the research and development of our other product candidates, including completing pre-clinical studies and commencing clinical
trials for SER-301 and SER-155;
seek to enhance our microbiome therapeutics platform and discover and develop additional product candidates;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
potentially establish a sales and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we
may obtain regulatory approval;
maintain, expand and protect our intellectual property portfolio;
add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product
development and potential future commercialization efforts and to support our operation as a public company; and
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues
or other regulatory challenges.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will
require us to be successful in a range of challenging activities, including completing pre-clinical testing and clinical trials of our product candidates,
discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products
for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and,
even if we do, may never generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical product and biological development, we are unable to accurately
predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the U.S. Food and Drug
Administration, or FDA, or the European Medicines Agency, or EMA, or other regulatory authorities to perform studies in addition to those currently
expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates, our expenses could increase and
revenue could be further delayed.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and
remain profitable would depress our value and could impair our ability to raise capital, expand our business, maintain our research and development efforts,
diversify our product offerings or even continue our operations.
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We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are
unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
Our expenses may increase in connection with our ongoing activities, particularly as we continue the clinical development of SER-109, including with
a potential redesigned Phase 2 clinical study, and conduct our Phase 1b clinical studies of SER-287 and SER-262, and continue to research, develop and
initiate clinical trials of SER-301 and SER-155 and our other product candidates. In addition, if we obtain regulatory approval for any of our product
candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we
have incurred and expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial
additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to
delay, reduce or eliminate our research and development programs or any future commercialization efforts.
We continue to expect that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure
requirements through 2018. This estimate excludes net cash flows from future business development activities. In addition, the specifics of future SER-109
related activities could impact capital requirements and cash projections. We have based this estimate on assumptions that may prove to be wrong, and we
could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
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our potential, redesigned Phase 2 clinical study of SER-109;
the progress and results of our Phase 1b clinical study of SER-287;
the progress and results of our Phase 1b clinical study of SER-262;
the cost of manufacturing clinical supplies of our product candidates;
the scope, progress, results and costs of pre-clinical development, laboratory testing and clinical trials for our other product candidates,
including SER-301 and SER-155;
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration
arrangements for product candidates.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and
commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to
us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities,
whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or
convertible securities would dilute all of our stockholders. The incurrence of indebtedness could result in increased fixed payment obligations and we may be
required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license
intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek
funds through arrangements with collaborators or others at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to
some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our
business, operating results and prospects.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay, or discontinue one or more of our research or
development programs or the commercialization of any product candidates, or be unable to expand our operations or otherwise capitalize on our business
opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Since our inception in October 2010, we have devoted substantially all of our resources to developing SER-109, SER-262, SER-287, SER-301, and
SER-155, building our intellectual property portfolio, developing our supply chain, planning our business, raising capital and providing general and
administrative support for these operations. All but three of our product candidates, SER-109, SER-262, and SER-287, are still in pre-clinical development.
We have completed our Phase 1b/2 and Phase 2 clinical studies of SER-109,
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our lead product candidate, but have not completed any other clinical trials for this or any other product candidate. In our Phase 2 clinical study of SER-109,
the primary endpoint of reducing the relative risk of CDI recurrence at up to 8-weeks after treatment was not achieved and we are in discussions with the
FDA regarding a potential new, redesigned Phase 2 clinical study of SER-109, taking into account the analysis of our prior Phase 2 clinical study. We have
not yet demonstrated our ability to successfully complete any Phase 2 clinical study or any Phase 3 or other pivotal clinical trials, obtain regulatory approvals,
manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful
product commercialization. Additionally, we expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter
and year to year due to a variety of factors, many of which are beyond our control. Consequently, any predictions you make about our future success or
viability may not be as accurate as they could be if we had a longer operating history.
Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates
We are early in our development efforts and may not be successful in our efforts to use our microbiome therapeutics platform to build a pipeline of
product candidates and develop marketable drugs.
We are using our microbiome therapeutics platform to develop Ecobiotic microbiome therapeutics. We are at an early stage of development and our
platform has not yet, and may never lead to, approvable or marketable drugs. We are developing additional product candidates that we intend to be used to
treat diseases where the microbiome is implicated. We may have problems applying our technologies to these areas, and our product candidates may not be
effective in preventing infection and disease. Our product candidates may not be suitable for clinical development, including as a result of their harmful side
effects, limited efficacy or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market
acceptance.
The success of our product candidates will depend on several factors, including the following:
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completion of pre-clinical studies and clinical trials with positive results;
receipt of marketing approvals from applicable regulatory authorities;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
making arrangements with third-party manufacturers for, or establishing our own, commercial manufacturing capabilities;
launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;
entering into new collaborations throughout the development process as appropriate, from pre-clinical studies through to commercialization;
acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
effectively competing with other therapies;
obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors, for our products, if
approved;
protecting our rights in our intellectual property portfolio;
operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;
maintaining a continued acceptable safety profile of the products following approval; and
maintaining and growing an organization of scientists and business people who can develop and commercialize our products and technology.
For example, on July 29, 2016, we announced the interim eight-week results from our SER-109 Phase 2 clinical study for the prevention of multiply
recurrent CDI. The study’s primary endpoint of reducing the relative risk of CDI recurrence at up to eight weeks after treatment was not achieved. In order to
understand the difference in outcome between the Phase 1b/2 and Phase 2 clinical studies for SER-109, we conducted an analysis of the Phase 2 study. Based
on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with multiply recurrent C.
difficile infection. If we do not successfully develop and commercialize product candidates, such as SER-109, we will not be able to obtain product revenue in
future periods, which likely would result in significant harm to our financial position and adversely affect our stock price.
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Our product candidates are based on microbiome therapeutics, which is an unproven approach to therapeutic intervention.
All of our product candidates are based on microbiome therapy, a therapeutic approach that is designed to treat disease by restoring the function of a
dysbiotic microbiome. We have not, nor to our knowledge has any other company, received regulatory approval for a therapeutic based on this approach. We
cannot be certain that our approach will lead to the development of approvable or marketable products. In addition, our Ecobiotic microbiome therapeutics
may have different effectiveness rates in various indications and in different geographical areas. Finally, the FDA or other regulatory agencies may lack
experience in evaluating the safety and efficacy of products based on microbiome therapeutics, which could result in a longer than expected regulatory review
process, increase our expected development costs and delay or prevent commercialization of our product candidates. For example, on July 29, 2016, we
announced the interim 8-week results from our SER-109 Phase 2 clinical study for the prevention of multiply recurrent CDI. The study’s primary endpoint of
reducing the relative risk of CDI recurrence at up to 8 weeks after treatment was not achieved. Based on feedback received from the FDA, we plan to initiate
a new Phase 2 SER-109 clinical study in approximately 320 patients with multiply recurrent C. difficile infection.
Our microbiome therapeutics platform relies on third parties for biological materials, including human stool. Some biological materials have not
always met our expectations or requirements, and any disruption in the supply of these biological materials could materially adversely affect our business. For
example, if any supplied biological materials are contaminated with disease organisms, we would not be able to use such biological materials. Although we
have control processes and screening procedures, biological materials are susceptible to damage and contamination and may contain active pathogens.
Improper storage of these materials, by us or any third-party suppliers, may require us to destroy some of our raw materials or products, which could delay the
development or commercialization of our product.
Clinical drug development involves a risky, lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience
delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
It is difficult to predict when or if any of our product candidates will prove effective and safe in humans or will receive regulatory approval, and the
risk of failure through the development process is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate,
we must complete pre-clinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in
humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failed clinical
trial can occur at any stage of testing. The outcome of pre-clinical testing and early clinical trials may not be predictive of the success of later clinical trials,
and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies,
and we cannot be certain that we will not face similar setbacks.
In addition, we cannot be certain as to what type and how many clinical trials the FDA, or other regulators, will require us to conduct before we may
successfully gain approval to market SER-109 or any of our other product candidates. Prior to approving a new therapeutic product, the FDA generally
requires that safety and efficacy be demonstrated in two adequate and well-controlled clinical trials. In some situations, evidence from a Phase 2 trial and a
Phase 3 trial or from a single Phase 3 trial can be sufficient for FDA approval, such as in cases where the trial or trials provide highly reliable and statistically
strong evidence of an important clinical benefit. In the course of our discussions with the FDA, the FDA has indicated that we may be required to conduct
more than one Phase 3 clinical trial of SER-109 in order to gain approval.
Based on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with multiply
recurrent C. difficile infection. Study participants will be randomized 1:1 between SER-109 and placebo and will receive a dose that is approximately 10-fold
higher than in the first Phase 2, administered over three consecutive days. The FDA has agreed that this new trial may qualify as a pivotal study with
achievement of a persuasive clinical effect and addressing FDA requirements, including clinical and statistical factors, an adequately sized safety database,
and certain CMC parameters. Additional clinical trials or changes in our development plans could cause us to incur significant development costs, delay or
prevent the commercialization of SER-109 or otherwise adversely affect our business.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing
approval or commercialize our product candidates, including:
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regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a
prospective trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with
prospective trial sites;
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clinical trials of our product candidates may demonstrate undesirable side effects or produce negative or inconclusive results, and we may
decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials
may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at
all;
we may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are
being exposed to unacceptable health risks;
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons,
including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;
the cost of clinical trials of our product candidates may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be
insufficient or inadequate;
regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate; and
regarding trials managed by any future collaborators, our collaborators may face any of the above issues, and may conduct clinical trials in
ways they view as advantageous to them but potentially suboptimal for us.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are
unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only
modestly positive or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for our product candidates;
lose the support of current or any future collaborators, requiring us to bear more of the burden of development of certain compounds;
not obtain marketing approval at all;
obtain marketing approval in some countries and not in others;
obtain approval for indications or patient populations that are not as broad as we intend or desire;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
be subject to additional post-marketing testing requirements;
be subject to increased pricing pressure; or
have the product removed from the market after obtaining marketing approval.
We completed our Phase 1b/2 clinical study of SER-109 in 2014, dosed the first patient in a Phase 2 clinical study for this product candidate in May
2015, completed enrollment in May 2016, and announced results in January 2017. Although most clinical research performed in the United States must be
authorized in advance by the FDA under its investigational new drug application, or IND, regulations, we did not conduct our Phase 1b/2 clinical study under
an IND pursuant to the FDA’s exercise of enforcement discretion with regard to IND requirements for use of fecal microbiota for transplantation to treat CDI
not responsive to standard therapies. Although the FDA provided confirmation that it intended to exercise enforcement discretion with respect to our Phase
1b/2 clinical study of SER-109, it stated that continued clinical evaluation of SER-109 will require an IND. In April 2015, the FDA authorized the conduct of
our initial Phase 2 clinical study of SER-109 under an IND. We intend to conduct all future clinical studies of SER-109 under this IND. Unlike with SER-109,
we expect that the FDA will require an IND before we initiate clinical testing of our other product candidates and may also require us to conduct more
extensive pre-clinical tests prior to the start of clinical trials than were required for SER-109. For our other and future product candidates, we initiated or will
initiate INDs.
On July 29, 2016, we announced the interim eight-week results from our SER-109 Phase 2 clinical study for the prevention of multiply recurrent CDI.
The study’s primary endpoint of reducing the relative risk of CDI recurrence at up to 8-weeks after treatment was not achieved. We are in discussions with the
FDA regarding a potential new, redesigned Phase 2 clinical study of SER-109,
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taking into account the analysis of our prior Phase 2 clinical study. Based on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109
clinical study in approximately 320 patients with multiply recurrent C. difficile infection. Study participants will be randomized 1:1 between SER-109 and
placebo and will receive a dose that is approximately 10-fold higher than in the first Phase 2, administered over three consecutive days. The FDA has agreed
that this new trial may qualify as a pivotal study with achievement of a persuasive clinical effect and addressing FDA requirements, including clinical and
statistical factors, an adequately sized safety database, and certain CMC parameters. Additional clinical trials or changes in our development plans could
cause us to incur significant development costs, delay or prevent the commercialization of SER-109 or otherwise adversely affect our business.
Our product development costs will increase if we experience delays in clinical testing or marketing approvals. We do not know whether any of our
pre-clinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant pre- clinical or
clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our
competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our
business and results of operations.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or
prevented.
We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible
patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. We are developing our lead product
candidate, SER-109, to prevent further recurrences of CDI in patients suffering from recurrent CDI. We estimate the addressable population of patients with
recurrent CDI to be between 85,000 and 110,000 patients per year in the United States, and accordingly, there is a limited number of patients from which to
draw for clinical studies.
Patient enrollment is also affected by other factors including:
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the severity of the disease under investigation;
the patient eligibility criteria for the study in question;
the perceived risks and benefits of the product candidate under study;
the availability of other treatments for the disease under investigation;
the existence of competing clinical trials;
the efforts to facilitate timely enrollment in clinical trials;
our payments for conducting clinical trials;
the patient referral practices of physicians;
the burden, or perceived burden, of the clinical study;
the ability to monitor patients adequately during and after treatment; and
the proximity and availability of clinical trial sites for prospective patients.
Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays and could require us to abandon one or
more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would
cause the value of our company to decline and limit our ability to obtain additional financing.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates
or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture,
safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA
and other regulatory agencies in the United States and by the EMA and similar regulatory authorities outside the United States. Failure to obtain marketing
approval for a product candidate in any jurisdiction will prevent us from commercializing the product candidate in that jurisdiction, and may affect our plans
for commercialization in other jurisdictions as well. We have not received approval to market any of our product candidates from regulatory authorities in any
jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third
parties to assist us in this process. Securing marketing approval requires the submission of extensive pre-clinical and clinical data and supporting information
to regulatory authorities for each therapeutic indication to establish the product
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candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and
inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may
prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit
commercial use.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, risky and may take many years. The scope and
amount of clinical data required to obtain marketing approvals can vary substantially from jurisdiction to jurisdiction, and it may be difficult to predict
whether a particular regulatory body will require additional or different studies than those conducted by a sponsor, especially for novel product candidates
such as our Ecobiotic microbiome therapeutics. The FDA or foreign regulatory authorities may delay, limit, or deny approval to market our product
candidates for many reasons, including: our inability to demonstrate that the clinical benefits of our product candidates outweigh any safety or other perceived
risks; the regulatory authority’s disagreement with the interpretation of data from nonclinical or clinical studies; the regulatory agency’s requirement that we
conduct additional pre-clinical studies and clinical trials; changes in marketing approval policies during the development period; changes in or the enactment
of additional statutes or regulations, or changes in regulatory review process for each submitted product application; or the regulatory authority’s failure to
approve the manufacturing processes or third-party manufacturers with which we contract. Regulatory authorities have substantial discretion in the approval
process and may refuse to accept a marketing application as deficient. In addition, varying interpretations of the data obtained from pre-clinical and clinical
testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to
restrictions or post-approval commitments that render the approved product not commercially viable. Of the large number of drugs in development, only a
small percentage successfully complete the FDA or other regulatory approval processes and are commercialized.
Furthermore, our product candidates may not receive marketing approval even if they achieve their specified endpoints in clinical trials. Clinical data
is often susceptible to varying interpretations and many companies that have believed that their products performed satisfactorily in clinical trials have
nonetheless failed to obtain regulatory agency approval for their products. The FDA or foreign regulatory authorities may disagree with our trial design and
our interpretation of data from nonclinical and clinical studies. Upon the FDA’s review of data from any pivotal trial, it may request that the sponsor conduct
additional analyses of the data and, if it believes the data are not satisfactory, could advise the sponsor to delay filing a marketing application.
Even if we eventually complete clinical testing and receive approval of a biologics license application, or BLA, or foreign marketing authorization for
one of our product candidates, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional
clinical trials, which may be required after approval. The FDA or the applicable foreign regulatory agency may also approve our therapeutic candidates for a
more limited indication and/or a narrower patient population than we originally request, and the FDA, or applicable foreign regulatory agency, may not
approve the labeling that we believe is necessary or desirable for the successful commercialization of our therapeutic candidates. Any delay in obtaining, or
inability to obtain, applicable regulatory approval would delay or prevent commercialization of our therapeutic candidates and would materially adversely
impact our business and prospects.
The development of therapeutic products targeting the underlying biology of the human microbiome is an emerging field, and it is possible that the
FDA and other regulatory authorities could issue regulations or new policies in the future affecting our Ecobiotic microbiome therapeutics that could
adversely affect our product candidates.
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product
candidates may be harmed and our ability to generate revenues will be materially impaired.
A Fast Track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
We may seek Fast Track designation for some of our product candidates. If a drug or biologic is intended for the treatment of a serious or life-
threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs for this condition, the drug or biologic sponsor
may apply for FDA Fast Track designation. Fast Track designation provides increased opportunities for sponsor meetings with the FDA during pre-clinical
and clinical development, in addition to the potential for rolling review once a marketing application is filed. The FDA has broad discretion whether or not to
grant this designation, and even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide
to grant it. Even if we do receive Fast Track designation, we may not experience a faster development process, review or approval compared to conventional
FDA procedures. Fast Track designation does not assure ultimate approval by the FDA. The FDA may withdraw Fast Track designation if it believes that the
designation is no longer supported by data from our clinical development program.
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A Breakthrough Therapy designation by the FDA for our product candidates may not lead to a faster development, regulatory review or approval process,
and it does not increase the likelihood that our product candidates will receive marketing approval.
We have received Breakthrough Therapy designation for SER-109, and we may seek a Breakthrough Therapy designation for our other product
candidates. A Breakthrough Therapy is defined as a drug or biologic that is intended to treat a serious or life-threatening disease or condition, and preliminary
clinical evidence indicates that the drug or biologic may demonstrate substantial improvement over existing therapies on one or more clinically significant
endpoints, such as substantial treatment effects observed in early clinical development. For drugs that have been designated as breakthrough therapies,
interaction and communication between the FDA and the sponsor can help to identify the most efficient path for clinical development. Drugs designated as
breakthrough therapies by the FDA are also eligible for rolling review of the associated marketing application, meaning that the agency may review portions
of the marketing application before the sponsor submits the complete application, as well as priority review, where the agency aims to act on the application
within eight months.
Designation as a Breakthrough Therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the
criteria for designation as a Breakthrough Therapy, the FDA may disagree and instead determine not to make such designation. The availability of
Breakthrough Therapy designation was established recently with the passage of the Food and Drug Administration Safety and Innovation Act of 2012, and
the FDA has only recently released additional guidance as to the criteria it uses in designating drugs as breakthrough therapies. As a result, we cannot be sure
that our evaluation of our product candidates as qualifying for Breakthrough Therapy designation will meet the FDA’s expectations. In any event, the receipt
of a Breakthrough Therapy designation for a product candidate may not result in a faster development process, review or approval compared to conventional
FDA procedures and does not assure ultimate approval by the FDA. In addition, not all products designated as breakthrough therapies ultimately will be
shown to have the substantial improvement over available therapies suggested by the preliminary clinical evidence at the time of designation. As a result, if
the Breakthrough Therapy designation for SER-109 or any future designation we receive is no longer supported by subsequent data, the FDA may rescind the
designation.
We may seek orphan drug designation for some of our product candidates, but may not be able to obtain it.
We have obtained orphan drug designation from the FDA for SER-109 for recurrent C. difficile infection and may seek orphan drug designation and
exclusivity for some of our future product candidates. Regulatory authorities in some jurisdictions, including the United States and Europe, may designate
drugs and biologics for relatively small patient populations as orphan drugs. In the United States, the FDA may designate a drug or biologic as an orphan drug
if it is intended to treat a rare disease or condition, which is defined as a disease or condition that affects fewer than 200,000 individuals annually in the
United States.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such
designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application
for the same drug or biologic for that time period. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity
period can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that
market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially
defective or if the manufacturer is unable to assure a sufficient quantity of the drug or biologic to meet the needs of patients with the rare disease or condition.
Orphan drug exclusivity for a product may not effectively protect the product from competition because different drugs can be approved for the same
condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later
drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
Risks Related to our Dependence on Third Parties and Manufacturing
The Collaboration and License Agreement, or the License Agreement, with Nestec Ltd., or NHS, is important to our business. If we or NHS fail to
adequately perform under the License Agreement, or if we or NHS terminate the License Agreement, the development and commercialization of our CDI
and inflammatory bowel disease, or IBD product candidates, including SER-109, SER-262 and SER-287, would be delayed or terminated and our
business would be adversely affected
The License Agreement may be terminated:
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by NHS in the event of serious safety issues related to SER-109, SER-262, SER-287, SER-301 or other specific products added under the
License Agreement, or, collectively, the NHS Collaboration Products;
by us if NHS challenges the validity or enforceability of any of our licensed patents; and
by either NHS or us in the event of the other party’s uncured material breach or insolvency.
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Upon termination of the License Agreement, all licenses granted to NHS by us will terminate, and all rights in and to the NHS Collaboration Products
held by NHS will revert to us. If we commit a material breach of the License Agreement, NHS may elect not to terminate the License Agreement but instead
apply specified adjustments to its payment obligations and other terms and conditions of the License Agreement. If NHS were to make such adjustments, the
funding from and benefits of the License Agreement could be diminished, which could adversely affect our financial condition. Unless the License
Agreement is terminated by us for NHS’ uncured material breach, upon termination of the License Agreement, NHS will be eligible to receive post-
termination royalties from us until NHS has recouped certain development costs related to the NHS Collaboration Products and specified percentages of any
milestone payments paid to us under the License Agreement prior to termination, which could have a material adverse effect on our business.
Termination of the License Agreement could cause significant delays in our product development and commercialization efforts that could prevent us
from commercializing our CDI and IBD product candidates, outside of the United States and Canada, without first expanding our internal capabilities or
entering into another agreement with a third party. Any alternative collaboration or license could also be on less favorable terms to us. In addition, under the
License Agreement, NHS agreed to provide funding for certain clinical development activities. If the License Agreement were terminated, we may need to
refund those payments and seek additional financing to support the research and development of any terminated products or discontinue any terminated
products, which could have a material adverse effect on our business.
Under the License Agreement, we are dependent upon NHS to successfully commercialize any NHS Collaboration Products outside of the United
States and Canada. We cannot directly control NHS’ commercialization activities or the resources it allocates to our product candidates. Our interests and
NHS’ interests may differ or conflict from time to time, or we may disagree with NHS’ level of effort or resource allocation. NHS may internally prioritize
our product candidates differently than we do or it may not allocate sufficient resources to effectively or optimally commercialize them. If these events were
to occur, our business would be adversely affected.
We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including
failing to meet deadlines for the completion of such trials.
We expect to continue to rely on third parties, such as contract research organizations, or CROs, clinical data management organizations, medical
institutions and clinical investigators, to conduct and manage our clinical trials.
Our reliance on these third parties for research and development activities will reduce our control over these activities but does not relieve us of our
responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational
plan and protocols for the trial. Moreover, the FDA requires us to comply with regulatory standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, safety and
welfare of trial participants are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must comply. We also
are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within
specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not
successfully carry out their contractual duties, do not meet expected deadlines, experience work stoppages, terminate their agreements with us or need to be
replaced, or do not conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may need to enter into new arrangements
with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed, or terminated or may need to be
repeated. If any of the foregoing occur, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and
may not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our
distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional
losses and depriving us of potential product revenue.
We rely on third parties for certain aspects of the manufacture of our product candidates for pre-clinical and clinical testing and expect to continue to do
so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or that
such quantities may not be available at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We rely, and expect to continue to rely, on third parties for the manufacture of certain aspects of our product candidates for pre-clinical and clinical
testing, as well as for commercial manufacture if any of our product candidates receive marketing approval. This reliance on third parties increases the risk
that we will not have sufficient quantities of our product candidates on a timely basis or at all, or that such quantities will be available at an acceptable cost or
quality, which could delay, prevent or impair our development or commercialization efforts.
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We may be unable to establish any agreements with third-party manufacturers on acceptable terms or at all. Even if we are able to establish agreements
with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;
breach of manufacturing agreements by the third-party manufacturers;
failure to manufacture our product according to our specifications;
failure to manufacture our product according to our schedule or at all;
failure to collect sufficient material from donors for some of our product candidates;
misappropriation or disclosure of our proprietary information, including our trade secrets and know-how; and
termination or nonrenewal of agreements by third-party manufacturers at times that are costly or inconvenient for us.
Third-party manufacturers may not be able to comply with current good manufacturing processes, or cGMP, regulations or similar regulatory
requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in
sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocations,
seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect
supplies of our products. The contract manufacturer we rely on to produce SER-109, SER-262 and SER-287 has never produced an FDA-approved
therapeutic. If our contract manufacturer is unable to comply with cGMP regulation or if the FDA does not approve their facility upon a pre-approval
inspection, our therapeutic candidates may not be approved or may be delayed in obtaining approval. In addition, there are a limited number of manufacturers
that operate under cGMP regulations and that might be capable of manufacturing our products. Therefore, our product candidates and any future products that
we may develop may compete with other products for access to manufacturing facilities. Any failure to gain access to these limited manufacturing facilities
could severely impact the clinical development, marketing approval and commercialization of our product candidates.
Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. Except for
backup facilities in Massachusetts and California, we do not currently have arrangements in place for redundant supply or a second source for required raw
materials used in the manufacture of our product candidates or for the manufacture of finished SER-109 product. If our current contract manufacturers cannot
perform as agreed, we may be required to replace such manufacturers and we may be unable to replace them on a timely basis or at all. Our current and
anticipated future dependence upon others for the manufacture of our product candidates or products could delay, prevent or impair our development and
commercialization efforts.
We have no experience manufacturing our product candidates at commercial scale, and, we cannot assure you that we can manufacture our product
candidates in compliance with regulations at a cost or in quantities necessary to make them commercially viable.
We have manufacturing facilities at our Cambridge locations where we conduct process development, scale-up activities and a portion of the
manufacture of Ecobiotic microbiome therapeutics. The FDA and other comparable foreign regulatory agencies must, pursuant to inspections that are
conducted after submitting a BLA or relevant foreign marketing submission, confirm that the manufacturing processes for the product meet cGMP. We have
not yet had any of our manufacturing facilities inspected.
We may establish a manufacturing facility for our product candidates for production at a commercial scale. We have no experience in commercial-
scale manufacturing of our product candidates. We currently intend to develop our manufacturing capacity in part by expanding our current facility or
building additional facilities. This activity will require substantial additional funds and we would need to hire and train significant numbers of qualified
employees to staff these facilities. We may not be able to develop commercial-scale manufacturing facilities that are adequate to produce materials for
additional later-stage clinical trials or commercial use.
The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent qualification requirements by regulatory
agencies, including validation of facility, equipment, systems, processes and analytics. We may be subject to lengthy delays and expense in conducting
validation studies, if we can meet the requirements at all.
In addition, some of our product candidates require donor material, of which we may not be able to collect sufficient quantities for commercial-scale
or other manufacturing.
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Risks Related to Commercialization of Our Product Candidates and
Other Legal Matters
Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients,
hospitals, third-party payors and others in the medical community necessary for commercial success.
If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients,
third-party payors and others in the medical community. For example, current CDI treatment involves the use of antibiotics that are well established in the
medical community or the use of fecal microbiota transplantation, or FMT, and physicians may continue to rely on these treatments. If our product candidates
receive approval but do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The
degree of market acceptance of our approved product candidates, if any, will depend on a number of factors, including:
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their efficacy, safety and other potential advantages compared to alternative treatments;
the clinical indications for which our products are approved;
our ability to offer them for sale at competitive prices;
their convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support;
the availability of third-party coverage and adequate reimbursement for our product candidates;
the prevalence and severity of their side effects and their overall safety profiles;
any restrictions on the use of our products together with other medications;
interactions of our products with other medicines patients are taking; and
inability of certain types of patients to take our product.
If we are unable to establish effective sales, marketing and distribution capabilities or enter into agreements with third parties with such capabilities, we
may not be successful in commercializing our product candidates if and when they are approved.
We have limited sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve
commercial success for any product for which we obtain marketing approval, we will need to establish a sales and marketing organization or make
arrangements with third parties to perform sales and marketing functions and we may not be successful in doing so.
In the future, we expect to build a focused sales and marketing infrastructure to market or co- promote our product candidates in the United States and
potentially elsewhere, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution capabilities. For
example, recruiting and training a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product
candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or
unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and
marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to or educate physicians on the benefits of our products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies
with more extensive product lines;
unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
inability to obtain sufficient coverage and reimbursement from third-party payors and governmental agencies.
Outside the United States, we rely and may increasingly rely on third parties, including NHS, to sell, market and distribute our product candidates. We
may not be successful in entering into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In addition, our
product revenue and our profitability, if any, may be lower if we rely on third parties for these functions than if we were to market, sell and distribute any
products that we develop ourselves. We likely will have little control over
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such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish
sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our product candidates.
We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully
than we do.
The development and commercialization of new drug and biologic products is highly competitive and is characterized by rapid and substantial
technological development and product innovations. We face competition with respect to our current product candidates, and will face competition with
respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty
pharmaceutical companies and biotechnology companies worldwide. We are aware of a number of large pharmaceutical and biotechnology companies, as
well as smaller, early-stage companies, that are pursuing the development of products, including microbiome therapeutics, for the prevention of CDI and
other disease indications we are targeting. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar
to our approach, and others may be based on entirely different approaches. For example, FMT is a procedure that has resulted in high cure rates for recurrent
CDI and our competitors and physicians may continue to seek to standardize and implement this procedure. Potential competitors also include academic
institutions, government agencies, not-for-profits, and other public and private research organizations that conduct research, seek patent protection and
establish collaborative arrangements for research, development, manufacturing and commercialization.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources,
established presence in the market and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining
regulatory approvals and reimbursement and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology
industries may result in even more resources being concentrated among a smaller number of our competitors.
These third parties compete with us in recruiting and retaining qualified scientific, sales and marketing and management personnel, establishing
clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are more effective, have
fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or
other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market, especially for any competitor developing a microbiome therapeutic which will likely share our same
regulatory approval requirements. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to
encourage the use of generic or biosimilar products.
Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations or third-party coverage
and reimbursement policies, any of which would harm our business.
Our ability to commercialize any product candidates successfully will depend, in part, on the extent to which coverage and reimbursement for these
products and related treatments will be available from government health administration authorities, private health insurers and other organizations.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay
for and impact reimbursement levels.
Obtaining and maintaining adequate reimbursement for our products may be difficult. We cannot be certain if and when we will obtain an adequate
level of reimbursement for our products by third- party payors. Even if we do obtain adequate levels of reimbursement, third-party payors, such as
government or private healthcare insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs.
Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A primary trend in the
U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting
coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with
predetermined discounts from list prices and are challenging the prices charged for drugs. We may also be required to conduct expensive pharmacoeconomic
studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and reimbursement are not available or
reimbursement is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing
approval, and the royalties resulting from the sales of those products may also be adversely impacted.
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There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which
the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that a
drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement
levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to
the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost treatment approaches and may
be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government
healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at
lower prices than in the United States. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private
payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to
commercialize products and our overall financial condition.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country.
Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining
approvals. Some countries require approval of the sale price of a drug before it can be reimbursed. In many countries, the pricing review period begins after
marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental
control, including possible price reductions, even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular
country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the
revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in
one or more product candidates, even if our product candidates obtain marketing approval. There can be no assurance that our product candidates, if they are
approved for sale in the United States or in other countries, will be considered medically necessary for a specific indication or cost-effective, or that coverage
or an adequate level of reimbursement will be available.
Product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and will face an even greater risk
if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products
caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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regulatory investigations, product recalls or withdrawals, or labeling, marketing or promotional restrictions;
decreased demand for any product candidates or products that we may develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards to trial participants or patients;
loss of revenue;
reduced resources of our management to pursue our business strategy; and
the inability to commercialize any products that we may develop.
We currently hold $5.0 million in product liability insurance coverage in the aggregate, with a per occurrence limit of $5.0 million, which may not be
adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence
commercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a
reasonable cost or in an amount adequate to satisfy any liability that may arise.
We may face competition from biosimilars, which may have a material adverse impact on the future commercial prospects of our product candidates.
Even if we are successful in achieving regulatory approval to commercialize a product candidate faster than our competitors, we may face competition
from biosimilars. In the United States, the Biologics Price Competition and Innovation Act, or BPCIA, enacted in 2010 as part of the Patient Protection and
Affordable Care Act, created an abbreviated approval pathway for biological products
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that are demonstrated to be “highly similar,” or biosimilar, to or “interchangeable” with an FDA-approved biological product. Under the BPCIA, an
application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the
FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was
first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves
a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate
the safety, purity and potency of their product. This new pathway could allow competitors to reference data from innovative biological products 12 years after
the time of approval of the innovative biological product. This data exclusivity does not prevent another company from developing a product that is highly
similar to the innovative product, generating its own data and seeking approval. Data exclusivity only assures that another company cannot rely upon the data
within the innovator’s application to support the biosimilar product’s approval.
We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity.
However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product
candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. In each of his
proposed budgets for fiscal years 2013 through 2015, President Obama proposed to cut this 12-year period of exclusivity down to seven years. He also
proposed to prohibit additional periods of exclusivity due to minor changes in product formulations, a practice often referred to as “evergreening.” It is
possible that Congress may take these or other measures to reduce or eliminate periods of exclusivity. The BPCIA is complex and only beginning to be
interpreted and implemented by the FDA. As a result, its ultimate impact is subject to uncertainty. The FDA has issued several guidance documents to date
discussing the biosimilar pathway, and the FDA approved the first biosimilar under the BPCIA in March 2015. However, several issues still remain unclear
with respect to the FDA’s final implementation of the BPCIA, and such FDA implementation could have a material adverse effect on the future commercial
prospects for our product candidates.
In Europe, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-
specific guidelines for biosimilar approvals issued over the past few years. In Europe, a competitor may reference data supporting approval of an innovative
biological product, but will not be able to get on the market until 10 years after the time of approval of the innovative product. This 10-year marketing
exclusivity period will be extended to 11 years if, during the first eight of those 10 years, the marketing authorization holder obtains an approval for one or
more new therapeutic indications that bring significant clinical benefits compared with existing therapies. In addition, companies may be developing
biosimilars in other countries that could compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing our
products, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences.
Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.
In order to market and sell our products in the European Union, or EU, and many other jurisdictions, we or our collaborators must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve
additional testing. The time required to obtain approval in foreign countries may differ substantially from that required to obtain FDA approval. Clinical trials
conducted in one country may not be accepted by regulatory authorities in other countries. The regulatory approval process outside the United States
generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the
product be approved for reimbursement before the product can be approved for sale in that country. We or our collaborators may not obtain approvals for our
product candidates from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by
regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have
a negative effect on the regulatory process in others. We may not be able to file for marketing approvals and may not receive necessary approvals to
commercialize our products in any market.
Any product candidate for which we obtain marketing approval could be subject to post- marketing restrictions or withdrawal from the market, and we
may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if
any of them are approved.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling,
advertising and promotional activities for such product, will be subject to the continual requirements of and review by the FDA and other regulatory
authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP
requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding
the distribution of samples to physicians and recordkeeping. We and our contract manufacturers will also be subject to continual review and periodic
inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of
regulatory compliance, including manufacturing, production and quality control.
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Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product
may be marketed or to specific conditions of approval, including a requirement to implement a risk evaluation and mitigation strategy, or REMS, which could
include requirements for a medication guide, communication plan, or restricted distribution system. If any of our product candidates receives marketing
approval, the accompanying label may limit the approved use of our drug, which could limit sales of the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of our
approved products. The FDA closely regulates the post-approval marketing and promotion of drugs and biologics to ensure they are marketed only for the
approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’
communications regarding off-label use, and if we market our products outside of their approved indications, we may be subject to enforcement action for
off-label marketing. Violations of the FDA’s restrictions relating to the promotion of prescription drugs may also lead to investigations alleging violations of
federal and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, if a regulatory agency or we later discover previously unknown problems with our products, such as adverse events of unanticipated
severity or frequency, problems with manufacturers or manufacturing processes, or failure to comply with regulatory requirements, the regulatory agency may
impose restrictions on the products or us, including requiring withdrawal of the product from the market. Any failure to comply with applicable regulatory
requirements may yield various results, including:
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litigation involving patients taking our products;
restrictions on such products, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on product distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters;
withdrawal of products from the market;
suspension or termination of ongoing clinical trials;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
damage to relationships with potential collaborators;
unfavorable press coverage and damage to our reputation;
refusal to permit the import or export of our products;
product seizure or detention;
injunctions; or
imposition of civil or criminal penalties.
Noncompliance with similar EU requirements regarding safety monitoring or pharmacovigilance can also result in significant financial penalties.
Similarly, failure to comply with U.S. and foreign regulatory requirements regarding the development of products for pediatric populations and the protection
of personal health information can also lead to significant penalties and sanctions.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate
negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and
generate revenues. If regulatory sanctions are applied or if regulatory approval is withheld or withdrawn, the value of our company and our operating results
will be adversely affected.
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Our relationships with customers, physicians and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare
laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion from governmental healthcare programs, contractual
damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for
which we obtain marketing approval. Our future arrangements with third-party payors, physicians and customers may expose us to broadly applicable fraud
and abuse and other healthcare laws and regulations that may restrict the business or financial arrangements and relationships through which we market, sell
and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include
the following:
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the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or
the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program, such as
Medicare and Medicaid; a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have
committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (described below);
the false claims and civil monetary penalties laws, including the federal False Claims Act, which, among other things, impose criminal and civil
penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be
presented, to the federal government, claims for payment that are false or fraudulent, knowingly making, using or causing to be made or used, a
false record or statement material to a false or fraudulent claim or from knowingly making a false statement to avoid, decrease or conceal an
obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme
to defraud any healthcare benefit program or making false statements relating to healthcare matters; similar to the federal Anti-Kickback
Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them to have committed a
violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also
imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually
identifiable health information;
the federal Physician Payment Sunshine Act requires applicable manufacturers of covered drugs to report payments and other transfers of value
to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members;
manufacturers are required to submit reports to the government by the 90th day of each calendar year;
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to our business practices,
including but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services
reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers, pricing information or marketing expenditures; and
state and foreign laws that govern the privacy and security of health information in some circumstances, many of which differ from each other
in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully
defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting
compliance environment and the need to build and maintain a robust system to comply with multiple jurisdictions with different compliance and reporting
requirements increases the possibility that a healthcare company may violate one or more of the requirements.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial
costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case
law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any
other governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines,
imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our
operations.
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Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval for and commercialize our product
candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding
the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our
ability to profitably sell any product candidates for which we obtain marketing approval.
In the United States, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, or collectively the Affordable Care Act, a sweeping law intended to broaden access to health insurance, reduce or constrain
the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
Among the provisions of the Affordable Care Act of importance to our potential product candidates are the following:
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establishment of a new pathway for approval of lower-cost biosimilars to compete with biologic products, such as those we are developing;
an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti- Kickback Statute, new government investigative
powers and enhanced penalties for noncompliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated
prices;
extension of manufacturers’ Medicaid rebate liability;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
new requirements to report financial arrangements with physicians and teaching hospitals;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research,
along with funding for such research.
There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges
and amendments to the Affordable Care Act in the future, particularly in light of the new presidential administration and U.S. Congress. At this time, the full
effect that the Affordable Care Act would have on our business remains unclear.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the Budget Control
Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with
recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the
legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal
year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional
Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things,
reduced Medicare payments to several providers, including hospitals, and an increase in the statute of limitations period for the government to recover
overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and
otherwise affect the prices we may obtain.
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in additional
reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on
the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to
generate revenue, attain profitability, or commercialize our product candidates, if approved.
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Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products.
Individual states in the United States have become increasingly aggressive in implementing regulations designed to contain pharmaceutical and biological
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and
transparency measures. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of
operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to
determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the
ultimate demand for our product candidates, if approved, or put pressure on our product pricing, which could negatively affect our business, results of
operations, financial condition and prospects.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for
pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or
interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition,
increased scrutiny by Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent
product labeling and post-marketing testing and other requirements.
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, particularly the countries of the EU, the pricing of prescription pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. In addition,
there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment
measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage
and reimbursement have been obtained. Reference pricing used by various EU member states and parallel distribution or arbitrage between low-priced and
high- priced member states, can further reduce prices. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If coverage and reimbursement of our products are
unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product
candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial
condition and prospects.
Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other
countries with respect to our proprietary technology and products. We seek to protect our proprietary position by filing patent applications in the United States
and abroad related to our novel technologies and product candidates. We also rely on trade secrets to protect aspects of our business that are not amenable to,
or that we do not consider appropriate for, patent protection.
The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent
applications at a reasonable cost, in a timely manner, or in all jurisdictions. Prosecution of our patent portfolio is at a very early stage. For some patent
applications in our portfolio, we have filed national stage applications based on our Patent Cooperation Treaty, or PCT, applications, thereby limiting the
jurisdictions in which we can pursue patent protection for the various inventions claimed in those applications. It is also possible that we will fail to identify
patentable aspects of our research and development output before it is too late to obtain patent protection. It is possible that defects of form in the preparation
or filing of our patents or patent applications may exist, or may arise in the future, such as, with respect to proper priority claims, inventorship, claim scope or
patent term adjustments. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be
invalid and unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Any of these outcomes
could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition and operating
results.
We have obtained a license and options to obtain licenses from third parties and may obtain additional licenses and options in the future. In some
circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering
technology that we license from third parties. We may also require the cooperation of our licensors to enforce any licensed patent rights, and such cooperation
may not be provided. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our
business. Moreover, if we do obtain necessary licenses, we will likely have obligations under those licenses, and any failure to satisfy those obligations could
give our licensor the right to terminate the license. Termination of a necessary license could have a material adverse impact on our business.
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Our patent portfolio is in the early stages of prosecution. We currently have six issued U.S. patents. Although we have numerous patent applications
pending, substantive prosecution has begun in only a small number of those applications. We cannot provide any assurances that any of our pending patent
applications will mature into issued patents and, if they do, that such patents or our current patents will include claims with a scope sufficient to protect our
product candidates or otherwise provide any competitive advantage. For example, we are pursuing claims to therapeutic, binary compositions of certain
bacterial populations. Any claims that may issue may provide coverage for such binary compositions and/or their use. However, such claims would not
prevent a third party from commercializing alternative compositions that do not include both of the bacterial populations claimed in pending applications,
potential applications or patents that have or may issue. There can be no assurance that any such alternative composition will not be equally effective. Further,
given that our SER-109 product candidate is a complex composition with some variation from lot-to-lot and that, likewise, third-party compositions may have
similar complexity and variability, it is possible that a patent claim may provide coverage for some but not all lots of a product candidate or third-party
product. These and other factors may provide opportunities for our competitors to design around our patents, should they issue.
Moreover, other parties have developed technologies that may be related or competitive to our approach, and may have filed or may file patent
applications and may have received or may receive patents that may overlap or conflict with our patent applications, either by claiming similar methods or by
claiming subject matter that could dominate our patent position or cover one or more of our products. In addition, given the early stage of prosecution of our
portfolio, it may be some time before we understand how patent offices react to our patent claims and whether they identify prior art of relevance that we
have not already considered.
Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other
jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were
the first to make the inventions claimed in any owned patents or pending patent applications, or that we were the first to file for patent protection of such
inventions, nor can we know whether those from whom we may license patents were the first to make the inventions claimed or were the first to file. For
these and other reasons, the issuance, scope, validity, enforceability and commercial value of our patent rights are subject to a level of uncertainty. Our
pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which
effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws
in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.
We may be subject to third-party preissuance submissions of prior art to the United States Patent and Trademark Office, or USPTO, or in a foreign
jurisdiction in which our applications are filed, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or
interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation
could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us,
without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the
breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to
license, develop or commercialize current or future product candidates. Furthermore, an adverse decision in an interference proceeding can result in a third
party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize our product candidates. The
issuance, scope, validity, enforceability and commercial value of our patents are subject to a level of uncertainty.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and
has in recent years been the subject of much litigation. Due to legal standards relating to patentability, validity, enforceability and claim scope of patents
covering biotechnological and pharmaceutical inventions, our ability to obtain, maintain and enforce patents is uncertain and involves complex legal and
factual questions. Even if issued, a patent’s validity, inventorship, ownership or enforceability is not conclusive. Accordingly, rights under any existing patent
or any patents we might obtain or license may not cover our product candidates, or may not provide us with sufficient protection for our product candidates to
afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our product candidates or any other
products or product candidates;
any of our pending patent applications will issue as patents at all;
we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire;
we were the first to make the inventions covered by any existing patent and pending patent applications;
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we were the first to file patent applications for these inventions;
others will not develop similar or alternative technologies that do not infringe or design around our patents;
others will not use pre-existing technology to effectively compete against us;
any of our patents, if issued, will be found to ultimately be valid and enforceable;
third parties will not compete with us in jurisdictions where we do not pursue and obtain patent protection;
we will be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all;
any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive
advantages or will not be challenged by third parties;
we will develop additional proprietary technologies or product candidates that are separately patentable; or
our commercial activities or products will not infringe upon the patents or proprietary rights of others.
Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of
our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies
awarded if we were to prevail may not be commercially meaningful. Even if we are successful, domestic or foreign litigation, or USPTO or foreign patent
office proceedings, may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or potential
collaborators, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the
United States. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or other proceedings. In addition,
during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim
proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock
could be significantly harmed.
If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position may be harmed.
In addition to seeking patents for some of our technology and product candidates, we also utilize our trade secrets, including unpatented know-how,
technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-
disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific
collaborators, contract manufacturers, consultants, advisors and other third parties. We also seek to enter into confidentiality and invention or patent
assignment agreements with our employees, advisors and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our
proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Our trade secrets may also be
obtained by third parties by other means, such as breaches of our physical or computer security systems. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the
United States are less willing or unwilling to protect trade secrets. Moreover, if any of our trade secrets were to be lawfully obtained or independently
developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to
compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biotechnology industry involves both technological and legal complexity, and is therefore costly, time-consuming and inherently
uncertain. In addition, patent reform legislation could further increase the uncertainties and costs surrounding the prosecution of our patent applications and
the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into
law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are
prosecuted and may also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith
Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, in particular the first to file provisions, only became effective on
March 16, 2013. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an
invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from
invention to filing of a patent application. Thus, for our U.S. patent applications containing a priority claim after March 16, 2013, there is a greater level of
uncertainty in the patent law. Moreover, some of the patent applications in our portfolio will be subject to examination under the
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pre-Leahy- Smith Act law and regulations, while other patents applications in our portfolio will be subject to examination under the law and regulations, as
amended by the Leahy-Smith Act. This introduces additional complexities into the prosecution and management of our portfolio.
In addition, the Leahy-Smith Act limits where a patentee may file a patent infringement suit and provides opportunities for third parties to challenge
any issued patent in the USPTO. These provisions apply to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary
standard in USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim, a third party could
potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to
invalidate the claim if first presented in a federal court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent
claims because it may be easier for them to do so relative to challenging the patent in a federal court action. It is not clear what, if any, impact the Leahy-
Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs
surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect
on our business and financial condition.
In addition, United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the
rights of patent owners in certain situations. From time to time, the U.S. Supreme Court, other federal courts, the United States Congress, or the USPTO, may
change the standards of patentability and any such changes could have a negative impact on our business.
A number of cases decided by the Supreme Court have involved questions of when claims reciting abstract ideas, laws of nature, natural phenomena
and/or natural products are eligible for a patent, regardless of whether the claimed subject matter is otherwise novel and inventive. These cases include
Association for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 12-398 (2013) or Myriad; Alice Corp. v. CLS Bank International, 573 U.S. 13-298
(2014); and Mayo Collaborative Services v. Prometheus Laboratories, Inc., or Prometheus, 566 U.S. 10-1150 (2012). In response to these cases, the USPTO
has issued guidance to the examining corps.
The full impact of these decisions is not yet known. For example, in view of these and subsequent court decisions, the USPTO has issued various
materials to patent examiners providing guidance for determining the patent eligibility of claims reciting laws of nature, natural phenomena or natural
products. Our current product candidates include natural products, therefore, this decision and its interpretation by the courts and the USPTO may impact
prosecution, defense and enforcement of our patent portfolio. On March 4, 2014, the USPTO issued a memorandum reflecting the USPTO’s interpretation of
the cases related to patent eligibility of natural products. The March 4, 2014 memorandum was superseded by interim guidance published on December 15,
2014. Additional guidance was published in July 2015 (July 2015 Update: Subject Matter Eligibility) and May 2016 (May 2016 Subject Matter Eligibility
Update). The USPTO’s interpretation of the case law and new guidelines for examination may influence, possibly adversely, prosecution and defense of
certain types of claims in our portfolio.
In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect
to the value of patents, once obtained. Depending on these and other decisions by Congress, the federal courts and the USPTO, the laws and regulations
governing patents could change or be interpreted in unpredictable ways that would weaken our ability to obtain new patents or to enforce any patents that may
issue to us in the future. In addition, these events may adversely affect our ability to defend any patents that may issue in procedures in the USPTO or in
courts.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain
and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability, and the ability of our collaborators, to develop, manufacture, market and sell our product candidates
and use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the
biotechnology and pharmaceutical industries. While no such litigation has been brought against us and we have not been held by any court to have infringed a
third party’s intellectual property rights, we cannot guarantee that our technology, products or use of our products do not infringe third-party patents.
We are aware of numerous patents and pending applications owned by third parties in the fields in which we are developing product candidates, both
in the United States and elsewhere. However, we may have failed to identify relevant third-party patents or applications. For example, applications filed
before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue.
Moreover, it is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our product candidates and
technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the
meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but
incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition,
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we may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of a current or future product candidate, or we may
incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications that have
been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, our products or the use of our products. We
are aware of several pending patent applications containing one or more claims that could be construed to cover some of our product candidates or
technology, should those claims issue in their original form or in the form presently being pursued. In addition, we are aware of third-party patent families
that include issued and allowed patents, including claims that, if valid and enforceable, could be construed to cover some of our product candidates or their
methods of use.
The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights.
Other parties may allege that our product candidates or the use of our technologies infringes patent claims or other intellectual property rights held by them or
that we are employing their proprietary technology without authorization. We may become party to, or threatened with, future adversarial proceedings or
litigation regarding intellectual property rights with respect to our products and technology, including interference or derivation proceedings before the
USPTO and similar bodies in other countries. Third parties may assert infringement claims against us based on existing intellectual property rights and
intellectual property rights that may be granted in the future. If we were to challenge the validity of an issued U.S. patent in court, such as an issued U.S.
patent of potential relevance to some of our product candidates or methods of use, we would need to overcome a statutory presumption of validity that
attaches to every U.S. patent. This means that in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s
claims. There is no assurance that a court would find in our favor on questions of infringement or validity.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. If we are
found, or believe there is a risk we may be found, to infringe a third party’s intellectual property rights, we could be required or may choose to obtain a
license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any such license on
commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same
technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we
could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of
infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially
harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on
our business.
Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these
proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a
license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time-
consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could
force us to do one or more of the following:
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cease developing, selling or otherwise commercializing our product candidates;
pay substantial damages for past use of the asserted intellectual property;
obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
in the case of trademark claims, redesign, or rename, some or all of our product candidates or other brands to avoid infringing the intellectual
property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.
Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.
Issued patents covering our product candidates could be found invalid or unenforceable or could be interpreted narrowly if challenged in court.
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file
infringement claims to stop third-party infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming.
If we initiated legal proceedings against a third party to enforce a patent, if and when issued, covering one of our product candidates, the defendant could
counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims
alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory
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requirements, including lack of novelty, obviousness or non-enablement, or failure to claim patent eligible subject matter. Grounds for unenforceability
assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading
statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context
of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, such as opposition proceedings.
Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive
products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be
certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal
assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Moreover, even
if not found invalid or unenforceable, the claims of our patents could be construed narrowly or in a manner that does not cover the allegedly infringing
technology in question. Such a loss of patent protection would have a material adverse impact on our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these
requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the
patent and, in some jurisdictions, during the pendency of a patent application. The USPTO and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent
lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which
noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant
jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to
respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event,
our competitors might be able to enter the market, which would have a material adverse effect on our business.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
It is our policy to enter into confidentiality and intellectual property assignment agreements with our employees, consultants, contractors and advisors.
These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However,
these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, even if we have a consulting agreement
in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing
services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all such
intellectual property to his or her employing institution.
Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in
addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual
property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could
result in substantial costs and be a distraction to management and other employees.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of
what we regard as our own intellectual property.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or
potential competitors. We may also engage advisors and consultants who are concurrently employed at universities or other organizations or who perform
services for other entities. Although we try to ensure that our employees, advisors and consultants do not use the proprietary information or know-how of
others in their work for us, we may be subject to claims that we or our employees, advisors or consultants have used or disclosed intellectual property,
including trade secrets or other proprietary information, of any such party’s former or current employer or in violation of an agreement with another party.
Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against any such
claims.
In addition, while it is our policy to require our employees, consultants, advisors and contractors who may be involved in the development of
intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party
who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and
we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our
intellectual property. Similarly, we may
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be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an
employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary
to defend against these claims. Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be
necessary to defend against any such claims.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or
personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to
management.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our
business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be
infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among
potential collaborators or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding
our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims
brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over
the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and
our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights
or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial
condition or results of operations.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our
intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively
expensive, and our intellectual property rights in some countries outside the United States could be less extensive than in the United States, assuming that
rights are obtained in the United States and assuming that rights are pursued outside the United States. The statutory deadlines for pursuing patent protection
in individual foreign jurisdictions are based on the priority date of each of our patent applications. For each of the patent families that we believe provide
coverage for our lead product candidates, we decide whether and where to pursue protection outside the United States. In addition, the laws of some foreign
countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, even if we do elect to
pursue patent rights outside the United States, we may not be able to obtain relevant claims and/or we may not be able to prevent third parties from practicing
our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or
other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further,
may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These
products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective
or sufficient to prevent third parties from so competing.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies
have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some
countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to
biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property
rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition,
many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents
may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent
protection in such countries.
If our ability to obtain and, if obtained, enforce our patents to stop infringing activities is inadequate, third parties may compete with our products, and
our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Accordingly, our intellectual property
rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property we develop or license.
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Risks Related to Our Operations
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on Roger Pomerantz, our President and Chief Executive Officer and Chairman of the Board of Directors, as well as the other
principal members of our management, scientific and clinical team. Although we have entered into employment agreements with our executive officers, each
of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. The loss of
the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives
and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult
and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to
successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to
hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies
for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition,
we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization
strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with
other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth
strategy will be limited.
We may expand our operational capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We may experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of lead discovery and
product development, regulatory affairs, clinical affairs and manufacturing and, if any of our product candidates receives marketing approval, sales, marketing
and distribution. To manage potential future growth, we must continue to implement and improve our managerial, operational and financial systems, expand
our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our
management team in managing a company with such potential growth, we may not be able to effectively manage the expansion of our operations or recruit
and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business
development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
We will continue to incur increased costs as a result of being a public company, and our management will continue to devote substantial time to
compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we have incurred and will continue to incur significant
legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the listing requirements of The NASDAQ Global Select Market and other applicable securities rules and regulations impose
various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance
practices. Our management and other personnel devote and will need to continue to devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and make some activities more
time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to maintain director
and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our internal
control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal
control over financial reporting issued by our independent registered public accounting firm. If we are unable to maintain effective internal control over
financial reporting, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a public
company or comply with the requirements of the SEC or Section 404. This could result in a restatement of our financial statements, the imposition of
sanctions, including the inability of registered broker dealers to make a market in our common stock, or investigation by regulatory authorities. Any such
action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements or by disclosure
of an accounting, reporting or control issue could adversely affect the trading price of our securities and our business. Material weaknesses in our internal
control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain. This could result in an
adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
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A variety of risks associated with operating internationally could materially adversely affect our business.
We currently have limited international operations, but our business strategy incorporates potentially expanding internationally if any of our product
candidates receive regulatory approval. We currently plan to rely on collaborators, including NHS, to commercialize any approved products outside of the
United States. Doing business internationally involves a number of risks, including but not limited to:
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multiple, conflicting and changing laws and regulations, such as privacy regulations, tax laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals, permits and licenses;
failure by us to obtain and maintain regulatory approvals for the use of our products in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;
limits in our ability to penetrate international markets;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on
demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of
trade and other business restrictions;
certain expenses including, among others, expenses for travel, translation and insurance; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the
purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.
Any of these factors could significantly harm our future international expansion and operations and, consequently, our results of operations.
Our business and operations would suffer in the event of information technology and other system failures.
Despite the implementation of security measures, our internal computer systems and those of our current and future contractors and consultants are
vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we
are not aware of any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations,
it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or
future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we
rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a
material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications,
or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our
product candidates could be delayed.
Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our business.
We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in
complementary businesses. We have not made any acquisitions to date, and our ability to do so successfully is unproven. Any of these transactions could be
material to our financial condition and operating results and expose us to many risks, including:
•
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disruption in our relationships with future customers or with current or future distributors or suppliers as a result of such a transaction;
unanticipated liabilities related to acquired companies;
difficulties integrating acquired personnel, technologies and operations into our existing business;
diversion of management time and focus from operating our business to acquisition integration challenges;
59
•
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•
increases in our expenses and reductions in our cash available for operations and other uses;
possible write-offs or impairment charges relating to acquired businesses; and
inability to develop a sales force for any additional product candidates.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different
cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of
our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial
condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our
operating results.
We are currently subject to securities class action litigation and may be subject to similar or other litigation in the future, which may harm our business.
On September 28, 2016, a purported stockholder filed a putative class action lawsuit in the U.S. District Court for the District of Massachusetts against
us entitled Mariusz Mazurek v. Seres Therapeutics, Inc., et.al. and on February 12, 2017, we received an amended complaint. The lawsuit alleges violations of
Sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making allegedly false and misleading statements and
omissions about our clinical trials for our product candidate SER-109 in our public disclosures between June 25, 2015 and July 29, 2016. The lawsuit seeks,
among other things, damages in connection with our allegedly inflated stock price between June 25, 2015 and July 29, 2016 as a result of those allegedly false
and misleading statements, as well as interest, attorneys’ fees and costs. We can make no assurances as to the time or resources that will need to be devoted to
this lawsuit or its final outcome, or the impact, if any, of this lawsuit or any proceedings on our business, financial condition, results of operations and cash
flows. While we are vigorously defending against all claims asserted, this litigation could result in substantial costs to us and a diversion of our
management’s attention and resources, which could harm our business. In addition, the uncertainty of the pending lawsuit or potential filing of additional
lawsuits could lead to more volatility and a reduction in our stock price.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could
harm our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling,
use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including
chemicals and biological materials such as human stool. Our operations also produce hazardous waste products. We generally contract with third parties for
the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or
injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also
could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for
environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive
materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These
current or future laws and regulations may impair our research, development or production efforts. Our failure to comply with these laws and regulations also
may result in substantial fines, penalties or other sanctions.
60
Risks Related to Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.
Our stock price is likely to be volatile. On July 29, 2016, our stock price declined significantly following an announcement that the interim results of
our Phase 2 clinical study of SER-109 indicated that the primary endpoint, reducing the relative risk of CDI recurrence at up to 8 weeks after treatment, was
not achieved. Furthermore, the stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, our stockholders you may not be
able to sell their common stock at or above the price they paid for their common stock. The market price for our common stock may be influenced by many
factors, including:
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•
the success of competitive products or technologies;
actual or anticipated changes in our growth rate relative to our competitors;
results of clinical trials of our product candidates or those of our competitors;
developments related to any future collaborations;
regulatory or legal developments in the United States and other countries;
development of new product candidates that may address our markets and may make our product candidates less attractive;
changes in physician, hospital or healthcare provider practices that may make our product candidates less useful;
announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or
capital commitments;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
the level of expenses related to any of our product candidates or clinical development programs;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems;
market conditions in the pharmaceutical and biotechnology sectors;
general economic, industry and market conditions; and
the other factors described in this “Risk Factors” section.
Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to control or significantly influence all matters
submitted to stockholders for approval.
Our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock and their respective affiliates, in the
aggregate, hold shares representing approximately 70% of our outstanding voting stock. As a result, if these stockholders were to choose to act together, they
would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example,
these persons, if they choose to act together, would control or significantly influence the election of directors and approval of any merger, consolidation or
sale of all or substantially all of our assets. This concentration of ownership control may:
•
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•
delay, defer or prevent a change in control;
entrench our management and the board of directors; or
impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
61
A significant portion of our total outstanding shares are eligible to be sold into the market, which could cause the market price of our common stock to
drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of our common stock. Approximately 30.5 million shares of our common stock are eligible to be
sold into the market, unless held by one of our affiliates, in which case the resale of those securities is subject to volume limitations under Rule 144 of the
Securities Act of 1933, as amended, or Rule 144. Moreover, holders of an aggregate of approximately 18.3 million shares of our common stock as of
December 31, 2016 have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders, until such shares can otherwise be sold without restriction under Rule 144 or until
the rights terminate pursuant to the terms of the investors’ rights agreement between us and such holders. We have also registered and intend to continue to
register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the
public market upon issuance, subject to volume limitations applicable to affiliates.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock
less attractive to investors.
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an
emerging growth company until the last day of the fiscal year following the fifth anniversary of the closing of the initial public offering of our common stock.
However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues
exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company
prior to the end of such five-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from
certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
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•
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•
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements,
with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden
parachute payments not previously approved.
We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common
stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be reduced or more volatile. In
addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised
accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to
private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business.
If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock
performance, or if our clinical studies and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of
these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
62
Provisions in our restated certificate of incorporation and amended and restated bylaws and under Delaware law could make an acquisition of our
company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current
management.
Provisions in our restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or
other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for
your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing
the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these
provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors. Among other things, these provisions include those establishing:
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•
a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a
majority of our board of directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the
resignation, death or removal of a director, which prevents stockholders from filling vacancies on our board of directors;
the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including
preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our
bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our
stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer,
the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action,
including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters
to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to
elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of
Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three
years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is
approved in a prescribed manner. Furthermore, our restated certificate of incorporation specifies that, unless we consent in writing to the selection of an
alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought
against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors
particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection
against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The
enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is
possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our restated
certificate of incorporation to be inapplicable or unenforceable in such action.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be the sole source
of gain for our stockholders.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the
growth and development of our business. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the
foreseeable future.
63
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In April 2016, we moved our corporate headquarters to a new facility in Cambridge, Massachusetts, where we lease approximately 83,396 square feet
of office, laboratory, and pilot manufacturing space under a lease that expires in November 2023. We also maintain a research and development facility in
Cambridge, Massachusetts, where we lease approximately 7,484 square feet of office and laboratory facilities under a lease that expires in April 2020.
Research and Offices
Clinical Manufacturing
We currently conduct part of our manufacturing operations in our leased facilities in Cambridge, Massachusetts, which both contain manufacturing
facilities for clinical products. We believe our current laboratory facilities and contract relationships are sufficient to meet our current bioprocess development
and manufacturing needs. We expect the new facility at our headquarters represents an important addition to our existing manufacturing network, which will
broaden our capabilities in bioprocess development and manufacturing, in particular, the production of synthetic microbiome candidates. We expect to utilize
both of the manufacturing facilities to prepare for commercialization of SER-262, SER-287, SER-301 and SER-155. Product candidates may be brought into
the facilities for economies of operation, or may remain external with contract manufacturing organizations, depending on business dynamics and
development needs.
We plan to control the production of all products under current good manufacturing practices by making strategic investments in manufacturing, which
may include collaborations with third parties, the design and renovation of existing facilities and the construction of additional new facilities for commercial
supply.
Item 3. Legal Proceedings
On September 28, 2016, a purported stockholder filed a putative class action lawsuit in the U.S. District Court for the District of Massachusetts against
us entitled Mariusz Mazurek v. Seres Therapeutics, Inc., et. Al. and on February 12, 2017, we received an amended complaint. The lawsuit alleges violations
of Sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making allegedly false and misleading statements and
omissions about our clinical trials for our product candidate SER-109 in our public disclosures between June 25, 2015 and July 29, 2016. The lawsuit seeks,
among other things, damages in connection with our allegedly inflated stock price between June 25, 2015 and July 29, 2016 as a result of those allegedly false
and misleading statements, as well as interest, attorneys’ fees and costs. We can make no assurances as to the time or resources that will need to be devoted to
this lawsuit or its final outcome, or the impact, if any, of this lawsuit or any proceedings on our business, financial condition, results of operations and cash
flows. We are vigorously defending against all claims asserted.
Item 4. Mine Safety Disclosures
Not applicable.
64
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has been traded on The Nasdaq Global Select Market under the symbol “MCRB” since our initial public offering on June 26, 2015.
Prior to this time, there was no public market for our common stock. The following table shows the high and low sale prices per share of our common stock
as reported on The Nasdaq Global Select Market for the periods indicated:
PART II
2016
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
2015
Second Quarter 2015 (beginning June 26, 2015)
Third Quarter 2015
Fourth Quarter 2015
High
Low
34.70 $
34.99 $
35.98 $
13.77 $
High
Low
51.40 $
52.00 $
44.51 $
21.12
22.88
8.05
8.86
28.11
26.95
25.00
$
$
$
$
$
$
$
On March 10, 2017, the last reported sale price for our common stock on The Nasdaq Global Select Market was $9.33 per share.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between June 26, 2015 (the date of our initial public
offering) and December 31, 2016, with the cumulative total return of (a) the Nasdaq Biotechnology Index and (b) the Nasdaq Composite Index, over the same
period. This graph assumes the investment of $100 on June 26, 2015 in our common stock, the Nasdaq Biotechnology Index and the Nasdaq Composite Index
and assumes the reinvestment of dividends, if any. The graph assumes our closing sales price on June 26, 2015 of $51.40 per share as the initial value of our
common stock and not the initial offering price to the public of $18.00 per share.
As of March 10, 2017, there were approximately 23 holders of record of our common stock. The actual number of stockholders is greater than this
number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. The
number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Holders
65
We have not paid any cash dividends on our common stock since inception and do not anticipate paying cash dividends in the foreseeable future.
Dividends
We did not make any sales of unregistered securities during the quarter ended December 31, 2016.
Recent Sales of Unregistered Securities
Use of Proceeds from Registered Securities
On July 1, 2015, we completed the initial public offering of our common stock, or IPO, and issued and sold 8,545,138 shares of our common stock at a
public offering price of $18.00 per share, including 1,114,583 shares of our common stock pursuant to the underwriters’ full exercise of their option to
purchase additional shares of our common stock. We received aggregate net proceeds of approximately $139.3 million after deducting underwriting discounts
and commissions of $10.8 million and offering expenses of $3.7 million. As of the date of filing of this Annual Report on Form 10-K, we have used all of the
net proceeds from our IPO. There has been no change in our prior disclosure regarding our use of proceeds from our IPO contained in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2016.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
There were no repurchases of shares of common stock made during the quarter ended December 31, 2016.
66
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” our consolidated financial statements and related notes, and other financial information included in this Annual Report on
Form 10-K. We have derived the consolidated statement of operations data for the years ended December 31, 2016, 2015, and 2014 and the consolidated
balance sheet data as of December 31, 2016 and 2015 from our audited consolidated financial statements, which are included elsewhere in this Annual Report
on Form 10-K. The consolidated statement of operations and consolidated balance sheet data as of December 31, 2014, 2013 and 2012 are derived from our
audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of
the results that should be expected in the future.
Consolidated Statement of Operations Data:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Revaluation of preferred stock warrant liability
Total other income (expense), net
Net loss
Accretion of convertible preferred stock to redemption
value
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic
and diluted(1)
$
$
2016
Year Ended December 31,
2015
2014
(in thousands, except per share data)
2013
2012
$
21,766 $
— $
— $
— $
—
81,989
32,616
114,605
(92,839)
2,229
(969)
—
1,260
(91,579)
38,095
16,761
54,856
(54,856)
638
(555)
(7)
76
(54,780)
10,718
4,364
15,082
(15,082)
—
(209)
(1,418)
(1,627)
(16,709)
4,805
1,247
6,052
(6,052)
—
(42)
(8)
(50)
(6,102)
2,077
956
3,033
(3,033)
—
(93)
—
(93)
(3,126)
—
(91,579) $
—
(54,780) $
(1,291)
(18,000) $
(875)
(6,977) $
(276)
(3,402)
(2.30) $
(2.33) $
(2.67) $
(1.09) $
(0.59)
(1)
See Note 11 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K for further details on the calculation of
basic and diluted net loss per share attributable to common stockholders.
2016
2015
As of December 31,
2014
(in thousands)
2013
2012
Consolidated Balance Sheet Data:
Cash and cash equivalents(1)
Investments(1)
Working capital(2)
Total assets
Preferred stock warrant liability
Long-term debt, net of discount, including
current portion
Convertible preferred stock(3)
Total stockholders’ equity (deficit)
$
54,539
175,456
167,912
272,646
—
$
73,933
131,149
196,690
216,900
—
$ 114,185
—
109,140
117,345
1,582
$
$
1,654
—
649
2,125
164
6,215
—
6,067
6,538
—
—
—
132,631
—
—
205,394
2,504
136,077
(26,721)
838
11,583
(11,116)
—
10,708
(4,348)
(1)
In January 2016, we entered into a Collaboration and License Agreement with NHS for the development and commercialization of certain of our
product candidates. In exchange for the license, NHS paid us an upfront cash payment of $120 million, which we received in February 2016.
(2) We define working capital as current assets less current liabilities.
(3)
Convertible preferred stock was converted into our common stock upon the listing of our common stock on The NASDAQ Global Select Market on
June 26, 2015. See Note 8 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K for further details.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations together with Item 6 “Selected Consolidated
Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and
other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our
plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A. Risk Factors.
Overview
We are a microbiome therapeutics platform company developing a novel class of biological drugs, which are designed to treat disease by restoring the
function of a dysbiotic microbiome. Our lead product candidate, SER-109, is designed to prevent further recurrences of Clostridium difficile, or C. difficile,
infection, or CDI, a debilitating infection of the colon, by treating the dysbiosis of the colonic microbiome and, if approved by the U.S. Food and Drug
Administration, or FDA, could be a first-in-field oral microbiome drug. Using our microbiome therapeutics platform, we are developing additional product
candidates to treat diseases where the microbiome is implicated, including SER-262, a synthetic product candidate, to prevent an initial recurrence of primary
CDI, SER-287 to treat inflammatory bowel disease, or IBD, including ulcerative colitis, or UC, SER-301, a synthetic IBD candidate, and SER-155, a
synthetic product candidate, to prevent mortality following allogeneic hematopoietic stem cell transplantation, or allo-HSCT, due to infections and graft-
versus-host disease, or GvHD. We are also using our microbiome therapeutics platform to conduct research on metabolic diseases, such as non-alcoholic
steatohepatitis (NASH); inflammatory diseases, such as Crohn’s disease; rare liver disorders such as primary sclerosing cholangitis (PSC); and immuno-
oncology treatments.
Since our inception in October 2010, we have devoted substantially all of our resources to developing SER-109, SER-287 and SER-262, researching
our pre-clinical candidates SER-155 and SER-301, building our intellectual property portfolio, developing our supply chain, business planning, raising capital
and providing general and administrative support for these operations.
On July 1, 2015, we completed an initial public offering, or IPO, of our common stock, and issued and sold 8.5 million shares of common stock at a
public offering price of $18.00 per share, resulting in net proceeds of approximately $139.3 million after deducting underwriting discounts and commissions
and offering expenses. Upon the listing of our common stock on The NASDAQ Global Select Market, or NASDAQ, on June 26, 2015, all outstanding shares
of our convertible preferred stock automatically converted into 22.9 million shares of our common stock. The shares issued upon closing of the IPO included
1.1 million shares of our common stock, pursuant to the underwriters’ full exercise of their option to purchase additional shares of common stock. All of our
product candidates other than SER-109, SER-262 and SER-287 are still in pre-clinical or research development. Our ability to generate product revenue
sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product
candidates. Since our inception, we have incurred significant operating losses. Our net loss was $91.6 million for the year ended December 31, 2016. As of
December 31, 2016, we had an accumulated deficit of $174.2 million.
On July 29, 2016, we announced the interim 8-week results from our SER-109 Phase 2 clinical study, a randomized, double-blind, placebo controlled
Phase 2 clinical study conducted in 89 subjects to evaluate the safety, tolerability and efficacy of SER-109 in adults with recurrent CDI. In that study, 44% of
subjects (26 of 59) who received SER-109 experienced a recurrence at the 8 week endpoint compared to 53% of subjects (16 of 30) who received placebo, a
result that was not statically significant. SER-109 was generally safe and well-tolerated in our Phase 1b/2 clinical study and in the Phase 2 clinical study. The
most common adverse events for SER-109 and placebo, respectively, were diarrhea (25% vs. 14%), abdominal pain (22% vs. 14%), flatulence (12% vs. 3%),
and nausea (10% vs. 10%). No drug-related serious adverse events were observed.
In order to understand the difference in outcome between Phase 1b/2 and Phase 2 clinical studies, we conducted an analysis of the available clinical,
microbiome and chemistry, manufacturing and control data. This root-cause investigation looked at the clinical trial population, study conduct, and diagnostic
testing used for study inclusion and endpoint analysis, assessed clinical specimens for genomic and metabolomic biomarkers that might give insight into
SER-109 efficacy and potency, reviewed manufacturing procedures and processes, performed retrospective analysis using high-resolution whole
metagenomics sequencing of Phase 1b/2 clinical study stool samples, and reviewed analytical methods, that may have differed between Phase 1b/2 and Phase
2 clinical studies. We have now identified specific factors that we believe contributed to the Phase 2 clinical study results, including issues related to both the
accurate diagnosis of C. difficile recurrent infection, and potential suboptimal dosing of certain subjects in the trial. The SER-109 analyses were recently
shared with the FDA. Based on feedback received from the FDA, we plan to initiate a new Phase 2 SER-109 clinical study in approximately 320 patients with
multiply recurrent C. difficile infection. Study participants will be randomized 1:1 between SER-109 and placebo. Diagnosis of C. difficile infection for both
study entry and for endpoint analysis will be confirmed by C. difficile cytotoxin assay, compared to the first Phase 2, where most patients were diagnosed by
PCR. Patients in the SER-109 arm will receive a total SER-109 dose, administered over three days, approximately 10-fold higher than the dose used in the
prior Phase 2 study. The new study will evaluate patients for 24 weeks and the primary endpoint will compare the C. difficile recurrence rate in subjects who
receive SER-109 verses placebo at up to eight weeks after dosing. The FDA has agreed that this new trial may qualify as a pivotal study with achievement of
a persuasive clinical effect and addressing FDA requirements, including clinical and statistical factors, an adequately sized safety database, and CMC
parameters.
68
We initiated a Phase 1b clinical trial of SER-287 in December 2015 and expect results from this study in the second half of 2017. We initiated a Phase
1b clinical study of SER-262 in July 2016 and expect results from this study in the second half of 2017.
Our expenses may increase substantially in connection with our ongoing and planned activities, particularly as we:
•
•
•
•
•
•
•
•
continue the clinical development of SER-109, our lead product candidate; based on feedback received from the FDA, we plan to initiate a new
Phase 2 SER-109 clinical study;
continue the clinical development of SER-262 to be used following antibiotic treatment of primary CDI to prevent an initial recurrence of CDI;
continue the clinical development of SER-287 for the treatment of UC;
conduct research and continue pre-clinical development of additional Ecobiotic® microbiome therapeutics, including SER-155 to improve
clinical outcomes following allo-HSCT due to infections and GvHD and SER-301, our synthetic IBD product candidate;
make strategic investments in manufacturing capabilities, including potentially planning and building a small-scale commercial manufacturing
facility;
maintain and augment our intellectual property portfolio and opportunistically acquire complementary intellectual property;
begin to build the infrastructure necessary to support potential commercialization of our product candidates; and
seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to
product manufacturing, marketing, sales and distribution. Furthermore, we expect to continue to incur additional costs associated with operating as a public
company.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from
product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may
include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital
as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate
significant revenue to achieve profitability, and we may never do so.
In January 2016, we entered into a Collaboration and License Agreement, or the License Agreement, with Nestec Ltd., or NHS, for the development
and commercialization of certain of our product candidates in development for the treatment and management of CDI and IBD, including UC and Crohn’s
disease. The License Agreement will support the development of our portfolio of products for CDI and IBD in markets outside of the United States and
Canada, or the Licensed Territory, and is expected to provide substantial financial support for our ongoing research and development. We have retained full
commercial rights to our entire portfolio of product candidates with respect to the United States and Canada, where we plan to build our own commercial
organization.
Under the License Agreement, we granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed Territory,
certain products based on our microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262, SER-287
and SER-301, or, collectively, the NHS Collaboration Products. We also granted to NHS a non-exclusive license to export, develop and make NHS
Collaboration Products in the licensed fields worldwide solely for commercialization in the licensed fields and in the Licensed Territory.
In exchange for the license, NHS made an upfront cash payment of $120 million to us in February 2016. NHS has also agreed to pay us tiered
royalties, at percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory. Additionally,
NHS has agreed to pay us up to $660 million for the achievement of certain development and regulatory milestones and up to an aggregate of $1.125 billion
for the achievement of certain commercial milestones related to the sales of NHS Collaboration Products. We received a $10.0 million milestone payments in
2016 associated with the planned initiation of a Phase 1b study for SER-262 in CDI. The full potential value of the up-front payment and milestone payments
payable by NHS is over $1.9 billion, assuming all products receive regulatory approval and are successfully commercialized. NHS is also obligated to pay
some of the costs related to our clinical trials. See “—Liquidity and Capital Resources.”
We expect that our existing cash, cash equivalents and investments, will enable us to fund our operating expenses and capital expenditure requirements
through 2018. See “—Liquidity and Capital Resources.”
69
Revenue
To date we have not generated any revenues from the sale of products. Our revenues from collaborations have been derived from the License
Financial Operations Overview
Agreement.
Operating Expenses
Our operating expenses since inception have consisted primarily of research and development activities and general and administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the
development of our product candidates, which include:
•
•
•
•
•
•
expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research, pre-clinical
activities and clinical trials on our behalf as well as contract manufacturing organizations that manufacture drug products for use in our pre-
clinical and clinical trials;
salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and development
functions;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
the cost of laboratory supplies and acquiring, developing and manufacturing pre-clinical study and clinical trial materials;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other
operating costs.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to
completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the
terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued
research and development expenses. All costs associated with the License Agreement are recorded in research and development expense in the consolidated
statements of operations and comprehensive loss.
Our primary focus of research and development since inception has been on our microbiome therapeutics platform and the subsequent development of
SER-109, SER-262, SER-287, SER-301 and SER-155. Our direct research and development expenses are tracked on a program-by-program basis and consist
primarily of external costs, such as fees paid to investigators, consultants and CROs in connection with our pre-clinical studies and clinical trials and
regulatory fees. We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are
deployed across multiple product programs under development and, as such, are classified as costs of our microbiome therapeutics platform research, along
with external costs directly related to our microbiome therapeutics platform.
The table below summarizes our research and development expenses incurred on our platform and by product development program.
Microbiome therapeutics platform
SER-109
SER-262
SER-287
Total research and development expenses
2016
Year Ended December 31,
2015
(in thousands)
2014
$
$
46,611 $
25,386
5,269
4,723
81,989 $
20,603 $
13,828
1,549
2,115
38,095 $
7,584
3,122
12
—
10,718
70
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect
that our research and development expenses will continue to increase in the foreseeable future as we advance the clinical development of SER-287 and SER-
262, continue to discover and develop additional product candidates, including SER-155 and SER-301, and pursue later stages of clinical development of our
product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our
executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to
patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related
expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We anticipate that our general and administrative expenses may increase in the future if we increase our headcount to support the expected growth in
our research and development activities and the potential commercialization of our product candidates. We also may incur increased expenses associated with
being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with
exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.
Other Income (Expense), Net
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and investments.
Interest Expense
Interest expense consists of amortization of purchased premiums and discounts associated with our investments. During the years ended December 31,
2015 and 2014, interest expense consisted of interest at the stated rate on borrowings under our loan and security agreement, amortization of deferred
financing costs and interest expense related to the accretion of debt discount associated with (1) the fair value of preferred stock warrant we issued in
connection with the loan and security agreement and (2) a final payment due at maturity. There was no such interest expense recorded for these items in 2016
as we held no preferred stock warrants or debt during the year ended December 31, 2016.
Revaluation of Preferred Stock Warrant Liability
Revaluation of preferred stock warrant liability consists of the net gain or loss associated with the change in the fair value of our preferred stock
warrant liability. In connection with the loan and security agreement, we issued a warrant for the purchase of our Series A-2 convertible preferred stock,
which we believe is a financial instrument that may have required a transfer of assets because of the redemption feature of the underlying stock. Therefore, we
classified this warrant as a liability that we re-measured to fair value at each reporting period, and we recorded the changes in the fair value as a component of
other income (expense), net. Upon the listing of our common stock on The NASDAQ on June 26, 2015, the preferred stock warrant became a warrant to
purchase common stock. We performed the final mark to market adjustment on the preferred stock warrant using the fair value of the underlying common
shares of $18.00 per share on June 26, 2015 and recorded the change in fair value in other income (expense), net in the consolidated statement of operations
and comprehensive loss. The preferred stock warrant liability was then reclassified to additional paid-in-capital as it became a warrant to purchase common
stock.
Income Taxes
Since our inception in 2010, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our
earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2016, we had federal and
state net operating loss carryforwards of $47.1 million and $46.3 million, respectively, both of which begin to expire in 2031. As of December 31, 2016, we
also had federal and state research and development tax credit carryforwards of $13.5 million and $2.3 million, respectively, which begin to expire in 2031
and 2028, respectively. The federal research and development tax credits include an orphan drug credit carryforward of $8.5 million.
71
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The
preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of
assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates and assumptions involved in the accounting policies
described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting
policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and
conditions.
Collaboration revenue
We evaluate multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognition-Multiple-Element
Arrangements, or ASC 605-25. Pursuant to this guidance, we identify the deliverables included in the arrangement and determine: (1) whether the individual
deliverables have value to the customer on a standalone basis and represent separate units of accounting or whether they must be accounted for as a combined
unit of accounting; and (2) if the arrangement includes a general right of return relative to the delivered item. This evaluation requires us to make judgments
about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are
considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement
includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially
in our control. In assessing whether an item has standalone value, we consider factors such as the research, manufacturing and commercialization capabilities
of the collaboration partner, the retention of any key rights by us, and the availability of the associated expertise in the general marketplace. In addition, we
consider whether the collaboration partner can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether
the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s).
In situations where we have identified multiple units of accounting, the arrangement consideration that is fixed or determinable is allocated among the
separate units of accounting using the relative selling price method. Then, the applicable revenue recognition criteria in ASC 605-25 are applied to each of the
separate units of accounting in determining the appropriate period and pattern of recognition. We determine the selling price of a unit of accounting following
the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement
using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or
best estimate of selling price if neither VSOE nor TPE is available.
We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25 are satisfied
for that particular unit of accounting. We will recognize as revenue arrangement consideration attributed to licenses that have standalone value from the other
deliverables to be provided in an arrangement upon delivery. We will recognize as revenue arrangement consideration attributed to licenses that do not have
standalone value from the other deliverables to be provided in an arrangement over the estimated performance period as the arrangement would be accounted
for as a single unit of accounting.
If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then we recognize revenue under
the arrangement for the single unit of accounting on a time-based proportional performance method over the period we are expected to complete our
performance obligations. Alternatively, if the pattern of performance in which the service is provided to the customer can be determined and objectively
measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized
is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the time-based
proportional performance method or effort-based proportional performance method, as applicable.
At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on
the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either our
performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from our
performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the
deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must
be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment.
There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive.
We recognize revenue associated with substantive milestones in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method upon
successful accomplishment of each milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would
be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.
72
Application of the above guidance requires significant judgment and requires the Company to make determinations based on the facts and
circumstances under each arrangement.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses.
This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our
behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise
notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when
contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our
financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include
fees paid to:
•
•
•
•
CROs in connection with performing research services on our behalf and clinical trials;
investigative sites or other providers in connection with clinical trials;
vendors in connection with pre-clinical and clinical development activities; and
vendors related to product manufacturing, development and distribution of pre-clinical and clinical supplies.
We base our expenses related to pre-clinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes
and contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation,
vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level
of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful
enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be
performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of
services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our
estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual
status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we
have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of grant and recognize
the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.
Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the
straight- line method. The Company recognizes adjustments to stock compensation expense for forfeitures as they occur.
We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date at which the related service
is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non- employees until
completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current
fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.
We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model requires that we make
assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the
expected term of our stock options and our expected dividend yield. Because we lack company-specific historical and implied volatility information, we
estimate our expected volatility based on the historical volatility of a group of publicly traded peer companies. We expect to continue to do so until such time
as we have adequate historical data regarding the volatility of our traded stock price. We use the simplified method prescribed by Securities and Exchange
Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of options granted to employees and directors. We base
the expected term of options granted to consultants and non-employees on the contractual term of the options. We determine the risk-free interest rate by
reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.
Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future. We
adjust stock-based compensation expense for forfeitures as they occur.
73
The assumptions we used to determine the fair value of stock options granted to employees and directors are as follows, presented on a weighted
average basis:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
2016
Year Ended December 31,
2015
2014
1.54%
6.0
84.2%
0%
1.80%
6.0
81.4%
0%
1.83%
6.0
83.5%
0%
These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment.
The following table summarizes the classification of our stock-based compensation expenses recognized in our consolidated statements of operations:
Research and development
General and administrative
Fair value of stock options
2016
Year Ended December 31,
2015
(in thousands)
2014
$
$
8,310
8,547
16,857
$
$
5,297
4,397
9,694
$
$
1,068
1,000
2,068
Prior to our IPO, the estimated fair value of our common stock was determined contemporaneously by our board of directors based on valuation
estimates provided by management and prepared in accordance with the framework of the American Institute of Certified Public Accountants’ Technical
Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Practice Aid, as well as independent third-party
valuations. Our contemporaneous valuations of our common stock were based on a number of objective and subjective factors, including external market
conditions affecting the biotechnology industry sector and the prices at which we sold shares of preferred stock, the superior rights and preferences of
securities senior to our common stock at the time of each grant and the likelihood of achieving a liquidity event such as an IPO. Consequently, after the IPO
the fair value of the shares of common stock underlying the stock options is the closing price on the option grant date.
Valuation of Warrant to Purchase Convertible Preferred Stock
We classified a warrant to purchase shares of our Series A-2 convertible preferred stock as a liability on our balance sheets as this warrant is a free-
standing financial instrument that may require us to transfer assets upon exercise. The warrant was initially recorded at fair value on date of grant, and it was
subsequently remeasured to fair value at each balance sheet date. Changes in fair value of this warrant were recognized as a component of other income
(expense), net in our consolidated statement of operations and comprehensive loss.
We used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the preferred stock warrant. We assessed
these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. Estimates and assumptions impacting
the fair value measurement include the fair value per share of the underlying Series A-2 convertible preferred stock, the remaining contractual term of the
warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying preferred stock. We determine the fair value per
share of the underlying preferred stock by taking into consideration our most recent sales of our convertible preferred stock, results obtained from third-party
valuations and additional factors that we deemed relevant. We have historically been a private company and lack company-specific historical and implied
volatility information of our stock. Therefore, we estimated expected stock volatility based on the historical volatility of publicly traded peer companies for a
term equal to the remaining contractual term of the warrant. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time
periods approximately equal to the remaining contractual term of the warrant. We estimated a 0% dividend yield based on the expected dividend yield and the
fact that we have never paid or declared dividends.
74
Upon the listing of our common stock on the NASDAQ on June 26, 2015, the preferred stock warrant became a warrant to purchase common stock.
We performed the final mark to market adjustment on the preferred stock warrant using the fair value of the underlying common shares of $18.00 per share on
June 26, 2015 and recorded the change in fair value in other income (expense), net in the consolidated statement of operations and comprehensive loss. The
preferred stock warrant liability was then reclassified to additional paid-in-capital as it became a warrant to purchase common stock.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an ‘‘emerging growth company’’ such as us to take advantage of an
extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to
private companies. We have irrevocably elected to ‘‘opt out’’ of this provision and, as a result, we will comply with new or revised accounting standards when
they are required to be adopted by public companies that are not emerging growth companies.
Comparison of the Years Ended December 31, 2016 and 2015
Revenue
Results of Operations
Total revenue was $21.8 million for the year ended December 31, 2016. Of this $21.8 million, $10.0 million was received from NHS associated with
the initiation of the Phase 1b study for SER-262 in CDI which is a substantive development milestone under the License Agreement. We recognized revenue
associated with substantive milestones in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method. The $10.0 million was
recognized in full as related party collaboration revenue during the year ended December 31, 2016. The remaining $11.8 million relates to the recognition of
the $120.0 million upfront payment from NHS over the estimated performance period of 10 years. We had no revenue for the year ended December 31,
2015.
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Revaluation of preferred stock warrant liability
Total other income (expense), net
Net loss
Research and Development Expenses
Microbiome therapeutics platform
SER-109
SER-262
SER-287
Total research and development expenses
75
Year Ended
December 31,
2016
2015
(in thousands)
Change
21,766 $
— $
21,766
81,989 $
32,616
114,605
(92,839)
2,229
(969)
—
1,260
(91,579) $
38,095 $
16,761
54,856
(54,856)
638
(555)
(7)
76
(54,780) $
43,894
15,855
59,749
(37,983)
1,591
(414)
7
1,184
(36,799)
Year Ended
December 31,
2016
2015
(in thousands)
Change
46,611 $
25,386
5,269
4,723
81,989 $
20,603 $
13,828
1,549
2,115
38,095 $
26,008
11,558
3,720
2,608
43,894
$
$
$
$
$
Research and development expenses were $82.0 million for the year ended December 31, 2016, compared to $38.1 million for the year ended
December 31, 2015. The increase of $43.9 million was due primarily to the following:
•
•
•
•
an increase of $26.0 million in research expenses related to our microbiome therapeutics platform, due primarily to higher payroll and
consultant costs of $16.0 million, which included an increase in stock-based compensation expense of $3.0 million due primarily to an increase
in research and development employee headcount of 26 individuals, an increase in facilities and depreciation costs of $7.0 million due
primarily to the buildout of new laboratory and manufacturing space in Cambridge, Massachusetts, an increase in license costs of $1.3 million,
an increase in laboratory consumables and supplies of $1.2 million, and an increase in travel costs of $0.3 million;
an increase of $11.6 million in expenses related to our SER-109 program, due primarily to an increase in clinical trial costs of $7.1 million in
connection with our Phase 2 clinical study, an increase in other consulting costs of $0.4 million, an increase in laboratory consumables and
supplies of $2.2 million, an increase in sequencing costs of $0.9 million, and an increase in conference costs of $0.5 million;
an increase of $3.7 million in expenses of our SER-262 program primarily driven by an increase in clinical trial costs of $1.4 million, an
increase in contract manufacturing costs of $0.9 million, an increase in animal studies costs of $0.1 million, an increase in other consulting
costs of $0.2 million, and an increase in lab consumables and supplies of $1.0 million; these increase are due primarily to the initiation of our
Phase 1b clinical study in July 2016; and
an increase of $2.6 million in expenses of our SER-287 program primarily driven by an increase in clinical trial costs of $2.2 million, an
increase in lab consumables and supplies of $0.6 million, offset in part due to a decrease in other consulting costs of $0.2 million. These
increase are due primarily to the initiation of a Phase 1b clinical trial in December 2015.
We expect that our research and development expenses may increase in the foreseeable future as we advance the clinical development of SER-109,
SER-287 and SER-262, and continue to discover and develop additional product candidates, including SER-301 and SER-155, and pursue later stages of
clinical development of our product candidates.
General and Administrative Expenses
Personnel related (including stock-based compensation)
Professional fees
Facility-related and other
Total general and administrative expenses
Year Ended
December 31,
2016
2015
(in thousands)
Change
$
$
16,623 $
9,090
6,903
32,616 $
8,371 $
5,894
2,496
16,761 $
8,252
3,196
4,407
15,855
General and administrative expenses were $32.6 million for the year ended December 31, 2016, compared to $16.8 million for the year ended
December 31, 2015. The increase of $15.9 million was primarily due to the following:
•
•
•
an increase in personnel related costs of $8.3 million primarily due to the hiring of additional employees from December 31, 2015 to December
31, 2016 to support corporate operations and business development activities, including an increase of $4.2 million in stock-based
compensation;
an increase in professional fees of $3.2 million due to an increase in contracted employee costs of $1.0 million, an increase in information
technology project consulting costs of $0.6 million, an increase in other general consulting costs of $0.6 million, and an increase in legal,
accounting, and audit fees of $0.7 million as a result of ongoing business activities; and
an increase in facility-related and other costs of $4.4 million primarily due to an increase in office-related expenses of $2.2 million due to the
build-out of the 200 Sidney facility, an increase in depreciation and rent charges of $0.9 million, an increase in information technology
expenses of $0.9 million, and an increase in insurance costs of $0.5 million.
Other Income (Expense), Net
Other income (expense), net for the year ended December 31, 2016 was $1.3 million, compared to $0.1 million for the year ended December 31, 2015.
The $1.2 million increase in other income, net was primarily due to interest income from investing activities.
76
Comparison of Years Ended December 31, 2015 and 2014
The following table summarizes our results of operations for the years ended December 31, 2015 and 2014:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Revaluation of preferred stock warrant liability
Total other income (expense), net
Net loss
Research and Development Expenses
Microbiome therapeutics platform
SER-109
SER-262
SER-287
Total research and development expenses
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
— $
— $
—
38,095
16,761
54,856
(54,856)
638
(555)
(7)
76
(54,780) $
10,718
4,364
15,082
(15,082)
—
(209)
(1,418)
(1,627)
(16,709) $
27,377
12,397
39,774
(39,774)
638
(346)
1,411
1,703
(38,071)
Year Ended
December 31,
2015
2014
(in thousands)
Change
20,603 $
13,828
1,549
2,115
38,095 $
7,584 $
3,122 $
12 $
—
10,718 $
13,019
10,706
1,537
2,115
27,377
$
$
$
Research and development expenses were $38.1 million for the year ended December 31, 2015, compared to $10.7 million for the year ended
December 31, 2014. The increase of $27.4 million was due primarily to the following:
•
•
•
•
an increase of $13.0 million in research expenses related to our microbiome therapeutics platform, due primarily to higher payroll and
consultant costs of $10.0 million, which included an increase in stock-based compensation expense of $4.2 million, due primarily to an increase
in employee headcount, an increase in laboratory consumables and supply costs of $1.2 million, facility- related costs of $1.4 million and travel
costs of $0.4 million;
an increase of $10.7 million in expenses related to our SER-109 program, due primarily to higher clinical trial costs of $6.0 million, higher
bioprocess development costs of $3.0 million, higher laboratory consumables and supply costs of $1.2 million and higher sequencing costs of
$0.5 million;
an increase of $1.5 million in expenses of our SER-262 program in connection with various pre- clinical, development and clinical activities
related to the program; and
an increase of $2.1 million in expenses of our SER-287 program in connection with various pre- clinical, development, and clinical activities
related to the program.
General and Administrative Expenses
Personnel related (including stock-based compensation)
Professional fees
Facility-related and other
Total general and administrative expenses
77
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
$
8,371
5,894
2,496
16,761
$
$
2,047 $
1,785
532
4,364 $
6,324
4,109
1,964
12,397
General and administrative expenses were $16.8 million for the year ended December 31, 2015, compared to $4.4 million for the year ended
December 31, 2014. The increase of $12.4 million was primarily due to the following:
•
•
•
an increase in personnel related costs of $6.3 million primarily due to the hiring of additional employees from December 31, 2014 to December
31, 2015 to support corporate operations and business development activities, including an increase of $3.4 million in stock-based
compensation;
an increase in professional fees of $4.1 million due to an increase in accounting, audit and legal fees as a result of operating as a public
company, including $0.5 million in costs in connection with the collaboration agreement with NHS; and
an increase in facility-related and other costs of $2.0 million primarily due to an increase in office-related expenses and rent expense resulting
from our new facility for research and development that commenced in February 2015.
Other Income (Expense), Net
Other income (expense), net for the year ended December 31, 2015 was an income of $0.1 million, compared to an expense of $1.6 million for the year
ended December 31, 2014. The $1.7 million increase in other income, net was primarily due to gains recorded to adjust the fair value of our preferred stock
warrant liability due to a decrease in the fair value of the underlying Series A-2 convertible preferred stock over that period.
In connection with the extinguishment of the loan and security agreement, we recorded a loss on extinguishment of $0.1 million, which has been
recorded as interest expense in the year ended December 31, 2015.
Liquidity and Capital Resources
Since our inception, we have generated revenue only from collaborations and have incurred recurring net losses. We anticipate that we will continue to
incur losses for at least the next several years. We expect that our research and development and general and administrative expenses may continue to increase
and, as a result, we will need additional capital to fund our operations, which we may obtain from additional financings, public offerings, research funding,
additional collaborations, contract and grant revenue or other sources.
On July 1, 2015, we completed our IPO, and issued and sold 8.5 million shares of our common stock at a public offering price of $18.00 per share,
resulting in net proceeds of approximately $139.3 million after deducting underwriting discounts and commissions and offering expenses. The shares issued
upon closing of the IPO included 1.1 million shares of our common stock, which were sold pursuant to the underwriters’ full exercise of their option to
purchase additional shares of our common stock. Upon the listing of our common stock on NASDAQ on June 26, 2015, all outstanding shares of our
convertible preferred stock automatically converted into 22.9 million shares of our common stock.
In January 2016, we entered into the License Agreement with NHS, for the development and commercialization of certain of our product candidates in
development for the treatment and management of CDI and IBD, including UC and Crohn’s disease. In exchange for the license, NHS agreed to pay us an
upfront cash payment of $120 million, which we received in February 2016. NHS has also agreed to pay us tiered royalties, at percentages ranging from the
high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory. We are eligible to receive up to $285.0 million in
development milestone payments, $375.0 million in regulatory payments and up to an aggregate of $1.1 billion for the achievement of certain commercial
milestones related to the sales of NHS Collaboration Products. The full potential value of the up-front payment and milestone payments payable by NHS is
over $1.9 billion, assuming all products receive regulatory approval and are successfully commercialized. In September 2016, we received a $10 million
milestone payment associated with the initiation of the Phase 1b clinical study for SER-262 in CDI.
For the development of NHS Collaboration Products for IBD under a global development plan, we agreed to pay the costs of clinical trials of such
products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the
remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, we agreed to pay the costs of such activities to support
approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the
Licensed Territory.
78
With respect to development of NHS Collaboration Products for CDI under a global development plan, we agreed to pay all costs of Phase 2 clinical
trials for SER-109 and for Phase 3 clinical trials for SER-109. We agreed to bear all costs of conducting any Phase 1 or Phase 2 clinical trials under a global
development plan for NHS Collaboration Products other than SER-109 for CDI. We agreed to pay 67% and NHS agreed to pay 33% of other costs of Phase 3
clinical trials conducted for NHS Collaboration Products other than SER-109 for CDI under a global development plan. For other clinical development of
NHS Collaboration Products for CDI, we agreed to pay costs of such development activities to support approval in the United States and Canada, and NHS
agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.
As of December 31, 2016, we had cash, cash equivalents and investments totaling $230.0 million and an accumulated deficit of $174.2 million.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
2016
Year Ended December 31,
2015
(in thousands)
2014
$
$
$
$
43,921 $
(65,453)
2,138
(19,394) $
(40,844) $
(137,133)
137,725
(40,252) $
(10,358)
(1,103)
123,992
112,531
During the year ended December 31, 2016, operating activities provided $43.9 million of cash, primarily due to upfront cash of $120.0 million and a
milestone payment of $10.0 million received in connection with the License Agreement, and cash provided by changes in our operating assets and liabilities
of $6.0 million. This increase was partially offset by a net loss of $91.6 million, less non-cash charges of $20.7 million. Net cash provided by changes in our
operating assets and liabilities during the year ended December 31, 2016 consisted of a $3.6 million increase in accounts payable and a $5.0 million increase
in accrued expenses and other current liabilities, offset in part by $2.6 million increase in prepaid expenses and other current assets. The increases in our
accounts payable and accrued expenses were due to the timing of payments, an increase in payroll related costs, and an increase in amounts accrued for
clinical trial and contracted manufacturing expenses. The increase in prepaid expenses and other current assets was due primarily to prepayments made for
clinical trial activities.
During the year ended December 31, 2015, operating activities used $40.8 million of cash, primarily resulting from our net loss of $54.8 million and
cash provided by changes in our operating assets and liabilities of $3.1 million, partially offset by non-cash charges of $10.8 million. Net cash provided by
changes in our operating assets and liabilities during the year ended December 31, 2015 consisted of a $2.5 million increase in prepaid expenses and other
current assets, a $2.7 million increase in accounts payable and a $2.9 million increase in accrued expenses and other current liabilities. The increases in our
accounts payable and accrued expenses were due to the timing of payments, an increase in payroll related costs, and an increase in amounts accrued for
clinical trial and contracted manufacturing expenses. The increase in prepaid expenses and other current assets was due primarily to prepayments made for
clinical trial activities.
During the year ended December 31, 2014, operating activities used $10.4 million of cash, primarily resulting from our net loss of $16.7 million,
partially offset by non-cash charges of $4.1 million and by cash provided by changes in our operating assets and liabilities of $2.3 million. Net cash provided
by changes in our operating assets and liabilities during the year ended December 31, 2014 consisted primarily of a $0.8 million increase in accounts payable
and a $1.5 million increase in accrued expenses and other current liabilities. The increase in accounts payable was due to an overall increase in our
development activities, primarily driven by expenditures in connection with advancing the development of SER-109. The increase in accrued expenses and
other current liabilities was due to an increase in accruals for development and manufacturing costs related to SER-109; payroll and payroll-related costs due
primarily to bonuses; legal and audit-related professional fees; and facility- related costs.
Investing Activities
During the year ended December 31, 2016, we used $65.5 million of cash in investing activities, consisting of purchases of investments of $290.6
million and purchases of property and equipment of $21.5 million; these increases were offset by maturities of investments of $246.5 million and a decrease
in our restricted cash balance of $0.1 million.
79
During the year ended December 31, 2015, we used $137.1 million of cash in investing activities, consisting of purchases of investments of $267.8
million, purchases of property and equipment of $4.4 million, and an increase in our restricted cash balance of $1.4 million; these increases were offset by
maturities of investments of $136.4 million.
During the year ended December 31, 2014, we used $1.1 million of cash in investing activities, primarily consisting of purchases of property and
equipment of $1.0 million.
Financing Activities
During the year ended December 31, 2016, net cash provided by financing activities was $2.1 million in connection with the exercise of options to
purchase our common stock.
During the year ended December 31, 2015, net cash provided by financing activities was $137.7 million as a result of proceeds from the issuance of
common stock in connection with our IPO of $143.0 million and proceeds of $0.3 million in connection with the exercise of options and warrants to purchase
our common stock. These increases were partially offset by principal repayments of $2.6 million of borrowings under our loan and security agreement and
payments of costs in connection with the IPO of $2.9 million.
During the year ended December 31, 2014, net cash provided by financing activities was $124.0 million as a result of net proceeds of $123.2 million
received from our sale of Series B, Series C, Series D and Series D-1 convertible preferred stock and $2.0 million from borrowings under our loan and
security agreement. These amounts were partially offset by principal repayments of $0.4 million of borrowings under our loan and security agreement and
payments of IPO costs of $0.8 million.
Funding Requirements
Our expenses may increase substantially in connection with our ongoing development activities related to SER-109, which is still in clinical
development, and our follow-on therapeutics and other programs. In addition we expect to continue to incur additional costs associated with operating as a
public company. We anticipate that our expenses will increase substantially if and as we:
•
•
•
•
•
•
•
•
•
•
continue the clinical development of SER-109, our lead product candidate; based on feedback received from the FDA, we plan to initiate a new
Phase 2 SER-109 clinical study;
conduct our Phase 1b clinical studies of SER-287 and SER-262;
continue the research and development of our other product candidates;
seek to enhance our microbiome therapeutics platform and discover and develop additional product candidates, including SER-155 and SER-
301;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
potentially establish a sales and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we
may obtain regulatory approval;
maintain, expand and protect our intellectual property portfolio;
add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product
development and potential future commercialization efforts and to support operations as a public company;
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues
or other regulatory challenges; and
perform our obligations under the collaboration agreement with NHS.
80
We continue to expect that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure
requirements through 2018. This estimate excludes net cash flows from future business development activities. The specifics of future SER-109 related
activities could impact capital requirements, and cash projections. We have based this estimate on assumptions that may prove to be wrong, and we may use
our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of SER-
109, SER-262 and SER-287 or our follow-on programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated
with completing the research and development of our product candidates. Our future capital requirements for SER-109, SER-262 and SER-287 or our other
programs will depend on many factors, including:
•
•
•
•
•
•
•
•
•
•
•
continue the clinical development of SER-109, our lead product candidate; based on feedback received from the FDA, we plan to initiate a new
Phase 2 SER-109 clinical study;
the progress and results of our Phase 1b clinical study of SER-287;
the progress and results of our Phase 1b clinical study of SER-262;
the cost of manufacturing clinical supplies of our product candidates;
the scope, progress, results and costs of pre-clinical development, laboratory testing and clinical trials for our other product candidates,
including SER-155 and SER-301;
the costs, timing and outcome of regulatory review of our product candidates and research activities;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product
candidates for which we receive marketing approval;
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration
arrangements for product candidates.
Identifying potential product candidates and conducting pre-clinical testing and clinical trials is a time-consuming, expensive and uncertain process
that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In
addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products
that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our
business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of
these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Additional debt financing and
preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute your
ownership interest.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, in addition to the License
Agreement, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses
on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to
delay, limit, reduce or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.
81
The following table summarizes our contractual obligations at December 31, 2016 and the effect such obligations are expected to have on our liquidity
and cash flows in future periods:
Contractual Obligations and Commitments
Operating lease commitments(1)
Total
Total
1 Year
Less Than
Payments Due by Period
1 - 3 Years
(in thousands)
4 - 5 Years
More Than
5 Years
$
$
42,349 $
42,349 $
5,978 $
5,978 $
12,500 $
12,500 $
12,342 $
12,342 $
11,529
11,529
(1)
Amounts in the table reflect payments due for (i) our laboratory and office space in Cambridge, Massachusetts under an operating lease agreement that
expires in November 2023 and (ii) our lease for office and laboratory space in Cambridge, Massachusetts with a term expiring April 2020.
We enter into contracts in the normal course of business with CROs for clinical trials, pre-clinical research studies and testing, manufacturing and
other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-
cancelable obligations under these agreements are not material.
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and
regulations of the Securities and Exchange Commission.
Off-Balance Sheet Arrangements
For a discussion of recent accounting standards see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements
included in this report.
Recently Issued and Adopted Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Interest Rate Fluctuation Risk
We are exposed to market risk related to changes in interest rates. As of December 31, 2016, our cash, cash equivalents and investments consisted of
cash, money market accounts, and investments in corporate bonds, commercial paper, certificates of deposit, treasury bonds, and government securities. Our
primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the
short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market
value of our investment portfolio or on our financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in
Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
82
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal
financial officer have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule
13a-15(f) under the Securities Exchange Act, as amended.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in
“Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Item 9B. Other Information
None.
83
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
Name
Noubar B. Afeyan, Ph.D.
Dennis A. Ausiello, M.D.
Grégory Behar
Peter Barton Hutt
Richard N. Kender
Lorence H. Kim, M.D.
Kurt C. Graves
Roger J. Pomerantz
Directors of the Registrant
Age
54
71
47
82
61
42
49
59
Position
Lead Independent Director
Director
Director
Director
Director
Director
Director
President, Chief Executive Officer and Chairman of the Board
Noubar B. Afeyan, Ph.D., has served as a member of our board of directors since October 2010. Since 1999, Dr. Afeyan has served as the Managing
Partner and Chief Executive Officer of Flagship Pioneering, formerly known as Flagship Ventures, an early-stage venture capital firm that he co-founded. Dr.
Afeyan serves on the board of directors of numerous private companies, including Moderna Therapeutics, Inc. and Pronutria Biosciences, Inc., and has
previously served on the board of directors of several public companies, including BG Medicine, Inc., BIND Therapeutics, Inc., Eleven Biotherapeutics, Inc.,
and Helicos Biosciences. Dr. Afeyan received a B.S. from McGill University and a Ph.D. in Biochemical Engineering from the Massachusetts Institute of
Technology. We believe Dr. Afeyan is qualified to serve on our board of directors because of his extensive investment experience and his knowledge of the
biotechnology industry.
Dennis A. Ausiello, M.D., has served as a member of our board of directors since April 2015. Dr. Ausiello serves as the Director of the Center for
Assessment Technology and Continuous Health (CATCH), Jackson Distinguished Professor of Clinical Medicine at Harvard Medical School and Physician-
in-Chief Emeritus at Massachusetts General Hospital. From 1996 to April 2013, Dr. Ausiello served as the Chief of Medicine at Massachusetts General
Hospital. Dr. Ausiello is a member of the Institute of Medicine of the National Academy of Sciences and a fellow of the American Academy of Arts and
Sciences. Dr. Ausiello has also served on the board of directors of Pfizer Inc. since December 2006 and Alnylam Pharmaceuticals since April 2012. Dr.
Ausiello received his undergraduate degree from Harvard College and an M.D. from the University of Pennsylvania. We believe that Dr. Ausiello is qualified
to serve on our board of directors because of his extensive experience as a physician and as a director of pharmaceutical companies.
Grégory Behar has served as a member of our board of directors since December 2014. Mr. Behar has served as Chief Executive Officer of Nestlé
Health Science S.A., a health sciences company, since October 2014. From July 2011 to July 2014, Mr. Behar was President and Chief Executive Officer of
Boehringer Ingelheim Pharmaceuticals Inc. (USA), a pharmaceutical company. From 2010 to July 2011, Mr. Behar was Corporate Vice President Region
NECAR (North European Union, Canada and Australasia) for Boehringer-Ingelheim GmbH, a pharmaceutical company. Mr. Behar received his B.S. from the
University of California, Los Angeles, an M.S. in Mechanical Engineering and Manufacturing from EPFL in Switzerland and an MBA from INSEAD in
France. We believe that Mr. Behar is qualified to serve on our board of directors because of his extensive business experience in the health sciences and
pharmaceutical industries.
Peter Barton Hutt has served as a member of our board of directors since May 2013. Mr. Hutt is senior counsel at Covington & Burling LLP, a law
firm, where he specializes in food and drug law. Mr. Hutt has served as a member of the board of directors of Q Therapeutics, Inc. since 2002, Xoma
Corporation since 2005, Concert Pharmaceuticals since 2006, Selecta Biosciences, Inc. since 2010, and Flex Pharma, Inc. since 2014. Mr. Hutt previously
served on the board of directors of BIND Therapeutics, Inc., which was acquired by Pfizer Inc., DBV Technologies, Momenta Pharmaceuticals, Inc., Celera
Corporation, which was acquired by Quest Diagnostics in 2011, and ISTA Pharmaceuticals, which was acquired by Bausch & Lomb in 2012. Mr. Hutt
received a B.A. from Yale College, an LL.B. from Harvard Law School and an LL.M. in food and drug law from the New York University School of Law. We
believe that Mr. Hutt is qualified to serve on our board of directors because of his experience serving as a director of biotechnology companies and his legal
and regulatory knowledge.
84
Richard N. Kender has served as a member of our board of directors since October 2014. From October 1978 to September 2013, Mr. Kender held
positions in a variety of corporate areas at Merck, most recently serving as Senior Vice President of Business Development and Corporate Licensing. Mr.
Kender has served on the board of directors of INC Research Holdings, Inc. since 2014 and Poxel S.A. since 2015. Mr. Kender received a B.S. from
Villanova University and an M.B.A. from Fairleigh Dickinson University. We believe Mr. Kender is qualified to serve on our board of directors because of his
extensive business experience and his knowledge of the pharmaceutical industry.
Lorence H. Kim, M.D., has served as a member of our board of directors since October 2014. Since April 2014, Dr. Kim has been the Chief Financial
Officer of Moderna Therapeutics, a biotechnology company. From July 2000 to April 2014, Dr. Kim held a number of positions at Goldman, Sachs & Co., an
investment bank, most recently as Managing Director and Co-Head of Biotechnology Investment Banking. Dr. Kim received an A.B. from Harvard
University, an MBA in Healthcare Management from the Wharton School of the University of Pennsylvania, and an M.D. from the University of
Pennsylvania’s School of Medicine. We believe Dr. Kim is qualified to serve on our board of directors because of his finance experience and knowledge of
the biotechnology industry.
Kurt C. Graves has served as a member of our board of directors since November 2015. Mr. Graves has been the Chairman, President and Chief
Executive Officer of Intarcia Therapeutics, a biotechnology company, since April 2012. Mr. Graves served as Executive Chairman of Biolex Therapeutics, a
biotechnology company, from November 2010 to March 2012, and served as Executive Chairman of Intarcia Therapeutics from August 2010 to April 2012.
Previously, he served as Executive Vice President, Chief Commercial Officer and Head of Strategic Development at Vertex Pharmaceuticals Inc. from July
2007 to October 2009. Prior to joining Vertex, Mr. Graves held various leadership positions at Novartis pharmaceuticals from 1999 to June 2007. He was also
the first Chief Marketing Officer for the Pharmaceuticals division from September 2003 to June 2007. He has served as a director of Intarcia Therapeutics,
Inc. since 2012, Radius Health, Inc. since 2011, and Achillion Pharmaceuticals, Inc. since 2012. Mr. Graves received a B.S. in Biology from Hillsdale
College. We believe Mr. Graves is qualified to serve as a member of our board of directors because of his extensive experience in the life sciences industry,
membership on various boards of directors and his leadership and management experience.
Roger J. Pomerantz, M.D., has served as our President and Chief Executive Officer since June 2014 and as Chairman of our board of directors since
November 2013. Since July 2014, Dr. Pomerantz has been a Senior Partner at Flagship Pioneering, formerly known as Flagship Ventures, an early-stage
venture capital firm. From January 2011 to September 2013, Dr. Pomerantz was Worldwide Head of Licensing and Acquisitions and Senior Vice President at
Merck & Co., Inc., or Merck, a pharmaceutical company, where he oversaw licensing and acquisitions for Merck Research Laboratories, the research and
development division of Merck. From February 2010 to February 2013, Dr. Pomerantz served as Global Head of Infectious Diseases and Senior Vice
President at Merck, where he oversaw pharmaceutical development and discovery of antibiotics, antivirals, antifungals and antiparasitic agents. Prior to
Merck, Dr. Pomerantz was Global Head of Infectious Diseases for the pharmaceutical division of Johnson & Johnson, Inc., a multinational medical device,
consumer goods and pharmaceutical corporation, where he was responsible for anti-infective agents worldwide. He joined Johnson & Johnson, Inc. in August
2005 as President of Tibotec Pharmaceuticals, Inc., now Janssen Therapeutics and a subsidiary of Johnson & Johnson, Inc., a pharmaceutical company
focused on the treatment of infectious diseases. Dr. Pomerantz has developed ten approved infectious disease drugs for diseases including HIV, HCV and
tuberculosis. He has served on the board of directors of Contrafect Corporation, a biotech company, since 2014. Dr. Pomerantz received his B.A. in
Biochemistry from The Johns Hopkins University and his M.D. from The Johns Hopkins School of Medicine. We believe Dr. Pomerantz’s extensive
academic and clinical experience, as well as his knowledge of the pharmaceutical industry, qualifies him to serve on our board of directors.
Name
Roger J. Pomerantz, M.D.
John G. Aunins, Ph.D.
David N. Cook, Ph.D.
Thomas J. DesRosier
Wael Hashad
Eric D. Shaff
Michele Trucksis, Ph.D., M.D
Executive Officers of the Registrant
Age
59
56
59
62
54
41
63
Position
President, Chief Executive Officer and Chairman of the Board
Executive Vice President of Bioprocess & Manufacturing and Chief Technology Officer
Executive Vice President of Research & Development and Chief Scientific Officer
Executive Vice President and Chief Legal Officer
Executive Vice President and Chief Commercial Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Medical Officer
85
John G. Aunins, Ph.D., has served as our Chief Technology Officer and Executive Vice President of Bioprocess Development since December 2012.
Prior to joining our company, Dr. Aunins served on our Scientific Advisory Board from February 2012 to December 2012. From April 1989 to November
2011, Dr. Aunins served in various roles at Merck, most recently as Executive Science Director. At Merck, Dr. Aunins led process and product development
teams for six licensed vaccines and multiple vaccine candidates. He is a Fellow of the American Institute for Medical and Biological Engineering and an
adjunct Full Professor at the Instituto de Tecnologia Quimica e Biologica in Oeiras, Portugal. Dr. Aunins received his B.S. from the University of Kansas and
his Ph.D. in Chemical Engineering from the Massachusetts Institute of Technology.
David N. Cook, Ph.D., has served as our Chief Scientific Officer and Executive Vice President of Research & Development since October 2012. From
February 2010 to October 2012, Dr. Cook was the Chief Operating Officer at the International AIDS Vaccine Initiative, a global not-for-profit, research and
development organization focused on the development of a safe and accessible vaccine for HIV. As Chief Operating Officer, Dr. Cook acted as the head of
operations, overseeing seven international offices and research facilities. Dr. Cook received his A.B. from Harvard College and his Ph.D. in Chemistry from
the University of California, Berkeley.
Thomas J. DesRosier has served as our Chief Legal Officer, Executive Vice President, and Secretary since May 2016. Previously, he served as
Executive Vice President, Chief Legal and Administrative Officer and Secretary of ARIAD Pharmaceuticals, Inc., a biopharmaceutical company, from 2015
to 2016, as Executive Vice President, Chief Legal and Administrative Officer and Secretary of Cubist Pharmaceuticals, Inc., or Cubist, a biopharmaceutical
company, from 2014 to 2015 and as Senior Vice President, Chief Legal Officer and Secretary of Cubist from 2013 to 2014. Before that, Mr. DesRosier served
as Senior Vice President, General Counsel North America of Sanofi, a global biopharmaceutical company, from 2011 to 2013. From 1999 to 2011,
Mr. DesRosier held several increasing leadership roles within the legal group of Genzyme Corporation, a biotechnology company, culminating in his role as
Senior Vice President, Chief Legal Officer. Mr. DesRosier earned a B.A. in chemistry from the University of Vermont and a J.D. from Wake Forest University
School of Law.
Wael Hashad has served as our Chief Commercial Officer since January 2016. He has over 20 years of experience as a commercial leader and has held
senior marketing and general management positions in the pharmaceutical and biotechnology industry. Prior to joining Seres, from July 2013 to September
2015, he served as Vice President and General Manager for Middle East and Africa at Amgen, Inc., a pharmaceutical company, where he lead a team of more
than 200 to expand markets, launch new products and grow existing products. Prior to that he served as Vice President – Regional Commercial Head for
Japan, China and Asia Pacific at Amgen, from October 2012 to June 2013, where he expanded commercial opportunities through strategic partnerships and
implementation of go-to-market strategies. From August 2011 to June 2013, Mr. Hashad was Vice President – Head of Global Marketing for General
Medicine at Amgen, where he optimized the launch of Repatha (Evolocumab). Prior to Amgen, Mr. Hashad worked at Boehringer Ingelheim, a
pharmaceutical company, from April 2009 to August 2011, as Vice President – US Cardiovascular and Metabolic Disorders and at Eli Lilly, a pharmaceutical
company, from 1989 to 2009, where he held various roles. At Boehringer Ingelheim and Eli Lilly, Mr. Hashad launched several products in the U.S., most
notably Pradaxa® and Cymbalta®. Mr. Hashad earned a B.Sc. in Pharmacy and Pharmaceutical Sciences from the University of Cairo and an M.B.A. from
the University of Akron.
Eric D. Shaff has served as our Chief Financial Officer and Executive Vice President since November 2014. From January 2012 to November 2014,
Mr. Shaff was Vice President of Corporate Finance for Momenta Pharmaceuticals, a biotechnology company, where he helped manage Momenta’s
accounting, finance, planning, and procurement functions, as well as contributing to Momenta’s investor relations efforts. From June 2004 to December 2011,
Mr. Shaff held a number of corporate development and finance positions with Genzyme Corporation, a biotechnology company, most recently as Vice
President of Finance/Controller for the Personalized Genetic Health division. Mr. Shaff received his B.A. from the University of Pennsylvania and his MBA
from Cornell University.
Michele Trucksis, Ph.D., M.D., has served as our Chief Medical Officer and Executive Vice President since January 2015. Dr. Trucksis was an
Associate Clinical Professor at Harvard Medical School from January 2005 to April 2015. From December 2006 to December 2014, Dr. Trucksis held various
positions of increasing seniority at Merck Research Laboratories, the research and development division of Merck. Most recently, from June 2014 to
December 2014, Dr. Trucksis served as Executive Director, Team Leader & Clinical Lead, Antifungals and Antibacterials where she was responsible for
medical, clinical and global product development and strategy. From July 2011 to June 2014, Dr. Trucksis was Project Leader, Antifungals and Antibacterials,
and from December 2006 to July 2011, she was Director in Clinical Pharmacology. Dr. Trucksis received her B.S. in Medical Technology from Youngstown
State University, her Ph.D. in Biochemistry from Kent State University and her M.D. from Case Western Reserve University School of Medicine.
86
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to our directors, officers and employees, including our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Business
Conduct and Ethics is available on our website at www.serestherapeutics.com in the “Investors & Media” section under “Corporate Governance.” We intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and
Ethics, as well as the requirement by The NASDAQ Global Select Market, or NASDAQ, to disclose waivers with respect to directors and executive officers,
by posting such information on our website at the address and location specified above.
Committees of the Board of Directors
Our board of directors has established three standing committees—Audit, Compensation, and Nominating and Corporate Governance—each of which
operates under a written charter that has been approved by our board of directors. All of the members of each of the board of directors’ three standing
committees are independent as defined under the NASDAQ rules. Our board of directors has determined that Richard N. Kender, Dennis A. Ausiello, and
Kurt Graves meet the independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. From March
2013 to June 2016, Werner Cautreels, Ph.D., served on our board of directors and on its Audit Committee. In connection with his service on the Audit
Committee, our board of directors determined that Dr. Cautreels met the independence requirements of Rule 10A-3. All members of the Compensation
Committee meet the heightened standard for independence specific to members of a compensation committee under the NASDAQ rules. All members of the
Nominating and Corporate Governance Committee are independent under the NASDAQ rules.
The members of each of the board of directors’ committees and committee Chairs are set forth in the following chart.
Name
Noubar B. Afeyan, Ph.D.
Dennis A. Ausiello, M.D.
Kurt Graves
Peter Barton Hutt
Richard N. Kender
Lorence H. Kim, M.D.
Audit Committee
Our Audit Committee’s responsibilities include:
Audit
X
X
Chair
Compensation
Chair
X
X
Nominating and
Corporate
Governance
X
X
Chair
X
•
•
•
•
•
•
•
•
•
appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such
firm;
reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements
and related disclosures;
monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
discussing our risk management policies;
establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and
retention of accounting related complaints and concerns;
meeting independently with our internal auditing staff, if any, independent registered public accounting firm and management;
reviewing and approving or ratifying any related person transactions; and
preparing the audit committee report required by the SEC rules.
87
The members of the Audit Committee are Messrs. Kender and Graves and Dr. Ausiello. Mr. Kender serves as the Chair of the committee. The
members of our Audit Committee meet the requirements for financial literacy under the applicable rules of the SEC and NASDAQ. Our board of directors
has determined that Mr. Kender is an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K.
Compensation Committee
Our Compensation Committee is responsible for assisting the board of directors in the discharge of its responsibilities relating to the compensation of
our executive officers. In fulfilling its purpose, our Compensation Committee has the following principal duties:
•
•
•
•
•
•
•
•
annually reviewing and approving corporate goals and objectives relevant to CEO compensation;
determining our CEO’s compensation;
reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our other executive
officers;
overseeing an evaluation of our senior executives;
overseeing and administering our cash and equity incentive plans;
reviewing and making recommendations to our board of directors with respect to director compensation;
reviewing and discussing annually with management our “Compensation Discussion and Analysis,” if required; and
preparing the annual compensation committee report, if required by SEC rules.
The members of our Compensation Committee are Dr. Afeyan and Messrs. Hutt and Kender. Dr. Afeyan serves as the Chair of the Compensation
Committee.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee’s responsibilities include:
•
•
•
•
identifying individuals qualified to become board members;
recommending to our board of directors the persons to be nominated for election as directors and to each board committee;
reviewing and making recommendations to our board of directors with respect to management succession planning;
developing and recommending to our board of directors corporate governance principles; and
overseeing an annual evaluation of our board of directors.
•
The members of our Nominating and Corporate Governance Committee are Mr. Hutt and Drs. Afeyan, Ausiello, and Kim. Mr. Hutt serves as the
Chairperson of the Nominating and Corporate Governance Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and stockholders who beneficially own more than 10% of any class of our
equity securities registered pursuant to Section 12 of the Exchange Act, or the Reporting Persons, to file initial statements of beneficial ownership of
securities and statements of changes in beneficial ownership of securities with respect to our equity securities with the SEC. All Reporting Persons are
required by SEC regulation to furnish us with copies of all reports that such Reporting Persons file with the SEC pursuant to Section 16(a). Based solely on
our review of the copies of such forms received by us and upon written representations of the Reporting Persons received by us, we believe that there has
been compliance with all Section 16(a) filing requirements applicable to such Reporting Persons with respect to the year ended December 31, 2016.
88
Item 11. Executive Compensation
Executive Compensation
Executive and Director Compensation
This section discusses the material components of the executive compensation program offered to our named executive officers, or NEOs, identified
below. For 2016, our NEOs were:
•
•
•
Roger J. Pomerantz, M.D., President and Chief Executive Officer;
Thomas DesRosier, Executive Vice President, Chief Legal Officer and Secretary; and
Wael Hashad, Executive Vice President and Chief Commercial Officer.
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and have elected to
comply with the reduced compensation disclosure requirements available to emerging growth companies under the JOBS Act.
2016 Summary Compensation Table
Name and Principal Position
Roger J. Pomerantz, M.D.(1)
President and Chief Executive Officer
Thomas DesRosier (2)
Executive Vice President, Chief
Legal Officer and Secretary
Wael Hashad (3)
Executive Vice President and Chief
Commercial Officer
Year
2016
2015
Salary
($)
564,500
455,646
Option
Awards
($)(4)
3,289,572
—
Non-Equity
Incentive Plan
Compensation ($)
(5)
225,800
348,100
All Other
Compensation ($)
176,835 (6)
$
74,424
Total ($)
4,256,707
878,170
2016
243,750
2,202,230
125,600
5,850 (7)
2,577,430
2016
338,910
2,433,730
109,500
29,646(8)
2,911,786
Dr. Pomerantz also serves as Chairman of our board of directors but receives no additional compensation for this service.
(1)
(2) Mr. DesRosier commenced employment with us on May 16, 2016.
(3) Mr. Hashad commenced employment with us on January 4, 2016.
(5)
(6)
(7)
(8)
Represents the aggregate grant date fair value of the option awards computed in accordance with FASB ASC Topic 718. For a description of the
assumptions used in valuing these awards, see Note 2 to our audited consolidated financial statements included in this Annual Report.
Represents amounts paid under our annual cash bonus program. For additional information regarding these amounts, refer to “—Narrative Disclosure
to Summary Compensation Table—Annual Cash Bonuses.”
Consists of $9,000 in company matching contributions under our 401(k) plan, $100,701 in reimbursements of travel and lodging expenses associated
with working in the Cambridge, Massachusetts area and $67,134 in reimbursements of taxes relating to the travel and lodging expense
reimbursements. For additional information, refer to “—Employment Agreements” below.
Consists of company matching contributions under our 401(k) plan.
Consists of $7,650 in company matching contributions under our 401(k) and $13,693 in reimbursements of expenses associated with Mr. Hashad’s
relocation to the Cambridge, Massachusetts area and $8,304 in reimbursements of taxes relating to the relocation expense reimbursements. For
additional information, refer to “—Employment Agreements” below.
89
Narrative Disclosure to Summary Compensation Table
The primary elements of compensation for our NEOs are base salary, annual cash bonuses and long-term, equity-based compensation awards. Our
NEOs also participate in employee benefit plans and programs that we offer to our other full-time employees on the same basis and have from time to time
received relocation or other expense reimbursements from us.
Base Salary. Our NEOs receive base salary to compensate them for the satisfactory performance of duties to our company. The base salary payable to
each NEO is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities.
Our Compensation Committee periodically reviews NEO base salaries in consultation with management and Radford, the Compensation Committee’s
independent compensation consultant, to determine whether any adjustments are necessary or appropriate. The following table shows the annual base salaries
of our NEOs for 2016 and 2017. All annual base salary increases were effective January 1 of the given year, except that 2016 annual base salaries for Messrs.
DesRosier and Hashad were effective upon their commencing employment with us in 2016.
Name
Roger J. Pomerantz, M.D.
Thomas DesRosier
Wael Hashad
2016 Annual Base Salary ($)
2017 Annual Base Salary ($)
564,500
390,000
340,000
581,400
401,700
350,200
Annual Cash Bonuses. Our NEOs have the opportunity to earn annual performance bonuses based on the achievement of short-term performance
goals. The NEOs’ employment agreements establish their 2016 target annual cash bonuses, expressed as a percentage of base salary, as described in the
section titled “Employment Agreements.”
Our Compensation Committee generally determines annual bonuses for our NEOs by multiplying (a) base salary, by (b) target cash bonus percentage,
by (c) the level of achievement of corporate and/or individual performance objectives. In addition, the Compensation Committee retains discretion to adjust
annual bonuses as it determines to be appropriate to reflect company performance, individual performance or other factors that the committee believes to be
appropriate. For Messrs. DesRosier and Hashad, the achievement of 2016 corporate objectives was weighted 80% and the achievement of individual
objectives was weighted 20%. Dr. Pomerantz’s 2016 bonus was weighted 100% on corporate objectives.
For 2016, our corporate bonus objectives were based on operational and developmental milestones related to clinical development programs,
discovery and research initiatives, bioprocess and manufacturing processes, and corporate infrastructure objectives For Messrs. DesRosier and Hashad, the
2016 individual performance considerations focused on their respective areas of responsibility within our company. In January 2017, our Compensation
Committee reviewed our performance against our 2016 objectives, elected not to adjust NEO bonuses based on discretionary factors and, in consultation with
management and based on guidance from Radford, determined to award our NEOs 2016 performance bonuses of approximately 80% of their target bonus
levels. The actual amounts paid to our NEOs under our 2016 annual cash bonus program are set forth in the “Non-Equity Incentive Plan Compensation”
column of the Summary Compensation Table above.
Equity-Based Compensation.
We have historically offered stock options to our employees, including our NEOs, as the long-term incentive
component of our compensation program. We typically grant options to employees when they commence employment with us and may thereafter grant
additional options in the discretion of our board of directors or Compensation Committee. Our stock options allow employees to purchase shares of our
common stock at a price equal to the fair market value of our common stock on the grant date and may be intended to qualify as “incentive stock options”
under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
Our stock options typically vest as to 25% of the shares subject to the option on the first anniversary of the grant date (or service commencement date
for initial grants) and in 12 quarterly installments during the three-year period thereafter, subject to the holder’s continued service with us. From time to time,
our board of directors or Compensation Committee may also construct alternate vesting schedules as it determines are appropriate to motivate particular
employees. Stock options granted to our employees may be subject to accelerated vesting in certain circumstances, as described in the section titled
“Employment Agreements.”
90
We awarded stock options to our NEOs during 2016 in the following amounts and subject to vesting in accordance with our standard time-based
vesting schedule described above:
Named Executive Officer
Roger J. Pomerantz, M.D.
Thomas DesRosier
Wael Hashad
2016 Options
Granted (#)
176,500
100,000
100,000
In January 2017, our Compensation Committee elected to expand our long-term incentive compensation program for employees to include awards of
restricted stock units. Each restricted stock unit represents the right to receive one share of our common stock or its cash value equivalent upon vesting. We
granted restricted stock units to our NEOs in January 2017 in the amounts listed in the table below. The restricted stock units vest as to 20% of the award on
the first anniversary of the date of grant, 30% on the second anniversary of the date of grant and 50% on the third anniversary of the date of grant.
Additionally, in January 2017, we awarded stock options to our NEOs in the following amounts and subject to vesting in accordance with our standard time-
based vesting schedule described above:
Named Executive Officer
Roger J. Pomerantz, M.D.
Thomas DesRosier
Wael Hashad
Restricted Stock Units
Granted (#)
Options
Granted (#)
0
50,000
25,000
261,000
60,000
75,000
Retirement, Health, Welfare and Additional Benefits. Our NEOs are eligible to participate in our employee benefit plans and programs, including
medical and dental benefits and life insurance, to the same extent as our other full-time employees, subject to the terms and eligibility requirements of those
plans. We also sponsor a 401(k) defined contribution plan in which our NEOs may participate, subject to limits imposed by the Internal Revenue Code, to the
same extent as all of our other full-time employees. During 2016, we made discretionary employer matching contributions equal to 50% of elective
contributions made by participants in the 401(k) plan, up to 6% of a participant’s eligible compensation. These matching contributions are fully vested as of
the date on which the contribution is made. We believe that providing a vehicle for tax-deferred retirement savings through our 401(k) plan adds to the overall
desirability of our executive compensation package and further incentivizes our employees, including our NEOs, in accordance with our compensation
policies. We do not typically provide any perquisites or special personal benefits to our NEOs, but have from time to time reimbursed amounts associated
with relocation and other expenses for our NEOs.
Outstanding Equity Awards at 2016 Fiscal Year End
Name
Roger J. Pomerantz, M.D.
Thomas DesRosier
Wael Hashad
Vesting
Commencement
Date
September 9, 2013 (1)
June 1, 2014 (1)
February 1, 2016 (2)
May 16, 2016 (2)
January 4, 2016 (2)
Option Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
55,000
528,613
0
0
0
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1)
27,500
523,673
176,500
100,000
100,000
Option
Exercise
Price ($)
Option
Expiration
Date
$0.48 November 5, 2023
$0.71 August 6, 2024
$26.20 January 31, 2026
$30.90 May 31, 2026
$34.10 January 3, 2026
(1)
(2)
Option vests as to 25% of the total shares subject to the option on the first anniversary of the vesting commencement date, and as to 6.25% of the
shares subject to the option on the last day of each calendar quarter during the three-year period thereafter, subject to the holder’s continued
employment with us through the applicable vesting date and potential accelerated vesting as described in the section titled “Employment Agreements.”
Option vests as to 25% of the total shares subject to the option on the first anniversary of the vesting commencement date, and as to 6.25% of the
shares subject to the option upon each consecutive three months of service during the three-year period thereafter, subject to the holder’s continued
employment with us through the applicable vesting date and potential accelerated vesting as described in the section titled “Employment Agreements.”
91
Employment Agreements
We have entered into employment agreements with each of our NEOs. Certain key terms of these agreements are described below.
Roger J. Pomerantz, M.D.
The employment agreement with Dr. Pomerantz entitles him to an initial annual base salary of $464,100, subject to periodic review and adjustment by
our board of directors or Compensation Committee, and an annual target bonus opportunity of 50% of his annual base salary.
In the event Dr. Pomerantz’s employment is terminated by us without cause or he resigns for good reason, subject to his timely executing a release of
claims in our favor, he is entitled to receive 12 months of continued base salary and up to 12 months of continued medical, dental or vision coverage pursuant
to COBRA, if elected. If the termination occurs within 60 days prior to or 12 months following a change in control, Dr. Pomerantz is also entitled to
accelerated vesting of his time-based equity awards. On February 3, 2016, Dr. Pomerantz’s employment agreement was amended to provide that, upon such
termination within 60 days prior to or 12 months following a change in control, in addition to accelerated vesting of his time-based equity awards,
Dr. Pomerantz will also be entitled to receive 18 months of continued base salary and up to 18 months of continued medical, dental or vision coverage
pursuant to COBRA, if elected.
Dr. Pomerantz has agreed to refrain from disclosing our confidential information during or at any time following his employment with us and from
competing with us or soliciting our employees or consultants for 12 months following termination of his employment.
For purposes of the employment agreement:
•
•
“Cause” generally means Dr. Pomerantz’s (i) failure to substantially perform his duties with us (other than due to disability) or materially
comply with our policies; (ii) material failure to carry out or comply with any lawful and reasonable directive of our board of directors;
(iii) breach of a material provision of his employment agreement; (iv) conviction, plea of no contest or imposition of unadjudicated probation
for any felony or crime involving moral turpitude; (v) unlawful use (including being under the influence) or possession of illegal drugs on our
(or our affiliate’s) premises or while performing his duties and responsibilities under his employment agreement; or (vi) commission of an act
of fraud, embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against us or any of our affiliates.
“Good reason” generally means, subject to certain notice requirements and cure rights, without Dr. Pomerantz’s consent, (i) a reduction in his
base salary (except for a reduction of less than 10% contemporaneously affecting other senior executives); (ii) a material reduction in his
authority or areas of responsibility; or (iii) a relocation of his primary office more than 50 miles outside of the Boston metropolitan area.
Thomas DesRosier and Wael Hashad
The employment agreements with Messrs. DesRosier and Hashad entitle them to initial annual base salaries of $390,000 and $340,000, respectively,
subject to periodic review and adjustment by our board of directors or Compensation Committee, and annual target bonus opportunities of 40% of their
annual base salaries.
Mr. Hashad was also entitled to receive reimbursement of reasonable moving expenses incurred prior to December 1, 2016 in connection with the
relocation of his primary residence to the Cambridge, Massachusetts area, as well reimbursement of all related income and employment taxes. Mr. Hashad
may be required to repay any relocation assistance or gross-up payment that he receives if his employment is terminated prior to the second anniversary of the
date that he commenced employment.
In the event either of Messrs. DesRosier and Hashad is terminated by us without cause or he resigns for good reason, subject to his timely executing a
release of claims in our favor, he is entitled to receive 12 months of continued base salary and up to 12 months of continued medical, dental or vision
coverage pursuant to COBRA, if elected. If either of Messrs. DesRosier and Hashad’s termination occurs within 60 days prior to or 12 months following a
change in control, he is also entitled to accelerated vesting of his time-based equity awards.
Each of Messrs. DesRosier and Hashad has agreed to refrain from disclosing our confidential information during or at any time following his
employment with us and from competing with us or soliciting our employees or consultants for 12 months following termination of his employment.
92
For purposes of the employment agreements, “cause” and “good reason” have the same meanings as in Dr. Pomerantz’s employment agreement.
Director Compensation
Directors who are also our employees do not receive compensation for their service on our board of directors. Dr. Pomerantz served as a director and
executive officer of our company during 2016. Refer to the 2016 Summary Compensation Table and related narrative disclosure above for information
regarding the compensation he received from us during 2016.
We maintain a compensation program for our non-employee directors providing for each non-employee director to receive the following amounts for
serving on our board of directors:
•
•
•
•
an option to purchase 30,000 shares of our common stock upon the director’s initial election or appointment to our board of directors;
if the director has served on our board of directors for at least six months as of the date of an annual meeting of stockholders, an option to
purchase 15,000 shares of our common stock on the date of the annual meeting;
an annual director fee of $35,000, and if the director serves as chairman of our board of directors or lead independent director, an additional
annual director fee of $20,000; and
if the director serves on a committee of our board of directors, an additional annual fee as follows:
•
•
•
•
•
•
chairman of the audit committee—$15,000;
audit committee member other than the chairman—$7,500;
chairman of the compensation committee—$10,000;
compensation committee member other than the chairman—$5,000;
chairman of the nominating and corporate governance committee—$7,000; and
nominating and corporate governance committee member other than the chairman—$3,500.
Stock options granted to our non-employee directors under the program have an exercise price equal to the fair market value of our common stock on
the grant date. The stock options granted upon a director’s initial election or appointment vest in four annual installments following the grant date. The stock
options granted annually to directors vest in a single installment on the earlier of the day before the next annual meeting of stockholders or the first
anniversary of the grant date. In addition, all unvested stock options vest in full immediately prior to a change in control.
Each member of our board of directors is entitled to be reimbursed for reasonable travel and other expenses incurred in connection with attending
meetings of the board of directors and any committee of the board of directors on which he or she serves.
2016 Director Compensation Table
Name
Fees Earned or Paid in Cash ($)
Option Awards ($)(2)
Total ($)
Noubar B. Afeyan, Ph.D.
Peter Barton Hutt
Lorence H. Kim, M.D.
Richard N. Kender
Grégory Behar(1)
Dennis A. Ausiello, M.D.
Kurt C. Graves
Werner Cautreels, Ph.D (3)
$66,750
$47,000
$42,250
$55,000
$35,000
$42,250
$38,750
$18,571
$320,439
$320,439
$320,439
$320,439
_
$320,439
$320,439
-
$387,189
$367,439
$362,689
$375,439
$35,000
$362,689
$359,189
$18,571
(1) Mr. Behar elected to waive all non-cash compensation payable to him for his service on our board of directors during 2016.
(2)
Represents the aggregate grant date fair value of the option awards granted during 2016 computed in accordance with FASB ASC Topic 718. For a
description of the assumptions used in valuing these awards, see Note 9 to our audited consolidated financial statements included in this Annual
Report. The table below shows the number of option awards held as of December 31, 2016 by each of our directors who are not NEOs. None of our
directors held unvested stock awards as of that date.
93
(3)
Dr. Cautreels served on our Board until June 14, 2016.
Name
Noubar B. Afeyan, Ph.D.
Peter Barton Hutt
Lorence H. Kim, M.D.
Richard N. Kender
Grégory Behar
Dennis A. Ausiello, M.D.
Kurt C. Graves
Werner Cautreels, Ph.D.
Stock Options (#)
30,000
80,000
105,000
105,000
-
90,000
45,000
-
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2016, Noubar B. Afeyan, Ph.D., Peter Barton Hutt and Richard N. Kender served as members of our
Compensation Committee. No current member of our Compensation Committee is or has been our current or former officer or employee. None of our
executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, one
of whose executive officers served as a director or member of our Compensation Committee during the fiscal year ended December 31, 2016.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Common Stock
The following table sets forth certain information with respect to holdings of our Common Stock by (i) stockholders who beneficially owned more
than 5% of the outstanding shares of our Common Stock, and (ii) each of our directors (which includes all nominees), each of our named executive officers
and all directors and executive officers as a group as of February 16, 2017, unless otherwise indicated. The number of shares beneficially owned by each
stockholder is determined under rules issued by the SEC. Under these rules, beneficial ownership includes any shares as to which a person has sole or shared
voting power or investment power. Applicable percentage ownership is based on 40,368,128 shares of Common Stock outstanding as of February 16,
2017. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to
options, or other rights held by such person that are currently exercisable or will become exercisable within 60 days of February 16, 2017 are considered
outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each beneficial owner listed below is 200 Sidney Street, Cambridge, MA 02139. We believe, based on
information provided to us, that each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned by
the stockholder unless noted otherwise, subject to community property laws where applicable.
NAME OF BENEFICIAL OWNER
NUMBER
PERCENTAGE
5% or Greater Stockholders
Entities affiliated with Flagship Venture Funds 1
Nestlé Health Science US Holdings, Inc.2
FMR LLC3
Named Executive Officers and Directors
Roger J. Pomerantz, M.D.4
Noubar B. Afeyan, Ph.D.1,5
Dennis A. Ausiello, M.D.6
Grégory Behar
Kurt C. Graves7
Peter Barton Hutt8
Richard N. Kender9
Lorence H. Kim, M.D.10
Thomas J. DesRosier
Wael Hashad11
All executive officers and directors as a group (14 persons)12
94
12,682,876
6,888,888
6,053,363
929,915
12,697,876
37,500
-
7,500
115,000
61,875
61,875
-
25,014
14,914,505
31.4%
17.1%
15.0%
2.3%
31.4%
*
*
*
*
*
*
*
*
36.9%
*
1
2
3
4
5
6
7
8
9
10
11
12
Less than 1%
Based solely on a Schedule 13G/A filed with the SEC on February 13, 2017 by Flagship Venture Fund 2007, L.P. (“Fund 2007”), Flagship Ventures
2007 General Partner LLC (“Fund 2007 GP”), Flagship Ventures Fund IV, L.P. (“Fund IV”), Flagship Ventures Fund IV-Rx, L.P. (“Fund IV-Rx”),
Flagship VentureLabs IV, LLC (“VentureLabs IV”), Flagship Ventures Fund IV General Partner LLC (“Fund IV GP”), Noubar B. Afeyan, Ph.D. and
Edwin M. Kania, Jr. Fund 2007, Fund 2007 GP, Fund IV, Fund IV-Rx, VentureLabs IV, Fund IV FP, Noubar Afeyan and Edwin Kania are collectively
referred to herein as the “Flagship Reporting Persons.” As the general partner of Fund 2007, Fund 2007 GP may be deemed to beneficially own shares
of Common Stock directly held by Fund 2007. As the manager of VentureLabs IV, Fund IV may be deemed to beneficially own shares of Common
Stock directly held by VentureLabs IV. As the general partner of Fund IV and Fund IV-Rx, Fund IV GP may be deemed to beneficially own shares of
Common Stock beneficially owned by Fund IV and directly held by Fund IV-Rx, respectively. Messrs. Afeyan and Kania, as Managers of Fund 2007
GP and Fund IV GP, may be deemed to beneficially own shares of Common Stock beneficially owned by Fund 2007 GP and Fund IV GP, respectively.
Fund IV has shared voting and dispositive power over 10,757,414 shares. Fund IV-Rx has shared voting and dispositive power over 1,925,462 shares.
VentureLabs IV has shared voting and dispositive power over 2,734,994 shares. Fund IV GP has shared voting and dispositive power over 12,682,876
shares. Messrs. Afeyan and Kania have shared voting and dispositive power over 12,682,876 shares. Fund 2007 and Fund 2007 GP do not have voting
or dispositive power over any shares. The address for the Flagship Reporting Persons is c/o Flagship Pioneering, Inc., 55 Cambridge Parkway, Suite
800E, Cambridge, Massachusetts 02142.
Based solely on a Schedule 13G filed with the SEC on July 6, 2015 by Nestlé Health Science US Holdings, Inc. (“NHS”), NIMCO US, Inc.
(“NIMCO”) and Nestlé S.A. (“Nestlé”). NHS is a wholly owned subsidiary of NIMCO, which is a wholly owned subsidiary of Nestlé, a publicly
traded company. Each of these entities may be deemed to share voting and investment power with respect to all shares of Common Stock held by
NHS. Each of NHS, NIMCO and Nestlé disclaims beneficial ownership of such shares of Common Stock except to the extent of its pecuniary interest
therein. The address for NHS and NIMCO is 383 Main Ave., 5th Floor, Norwalk, CT 06851. The address for Nestlé is Avenue Nestlé 55, CH-1800,
Vevey Switzerland.
Based solely on a Schedule 13G/A filed on February 14, 2017 by FMR LLC, Abigail P. Johnson and Select Biotechnology Portfolio. Members of the
Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC,
representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’
voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common
shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the
Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR
LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered
under the Investment Company Act (“Fidelity Funds”) advised by Fidelity Management & Research Company (“FMR Co”), a wholly owned
subsidiary of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. FMR Co carries out the voting of the shares under written
guidelines established by the Fidelity Funds’ Boards of Trustees. FMR LLC has sole voting power over 709,025 shares and sole dispositive power
over 6,053,363 shares. Abigail P. Johnson has sole dispositive power over 6,053,363 shares. Select Biotechnology Portfolio has sole voting power over
2,320,475 shares. The address for FMR LLC is 245 Summer Street, Boston, Massachusetts 02210.
Includes 746,223 shares of Common Stock which Dr. Pomerantz has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 15,000 shares of Common Stock which Dr. Afeyan has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 37,500 shares of Common Stock which Dr. Ausiello has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 7,500 shares of Common Stock which Mr. Graves has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 65,000 shares of Common Stock which Mr. Hutt has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 61,875 shares of Common Stock which Mr. Kender has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 61,875 shares of Common Stock which Dr. Kim has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Includes 24,999 shares of Common Stock which Mr. Hashad has the right to acquire pursuant to outstanding stock options which are or will be
immediately exercisable within 60 days of February 16, 2017.
Consists of (a) 13,264,021 shares of Common Stock and (b) 1,650,484 shares of common stock which the holders have the right to acquire pursuant to
outstanding stock options which are or will be immediately exercisable within 60 days of February 16, 2017.
Equity Compensation Plan Information
95
The following table provides information on our equity compensation plans as of December 31, 2016.
Plan Category
Equity compensation plans approved by security
holders2
Equity compensation plans not approved by security
holders
Total
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
5,184,6333
—
5,184,633
Weighted Average
Exercise Price
of Outstanding Options
Warrants and Rights
Number of Securities
Available for Future Issuance
Under Equity Compensation Plans1
$14.364
—
$14.36
2,108,7275
—
2,108,727
1
2
3
4
5
Pursuant to the terms of the 2015 Incentive Award Plan, or the 2015 Plan, the number of shares of common stock available for issuance under the 2015
Plan automatically increases on each January 1 until and including January 1, 2025, by an amount equal to the lesser of: (a) 4% of the shares of
common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our
board of directors. Pursuant to the terms of the 2015 Employee Stock Purchase Plan, or the 2015 ESPP, the number of shares of common stock
available for issuance under the 2015 ESPP automatically increases on each January 1 until and including January 1, 2025, by an amount equal to the
least of: (a) 400,000 shares, (b) 1% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (c)
such smaller number of shares as is determined by our board of directors.
Consists of the 2012 Stock Incentive Plan, or the 2012 Plan, the 2015 Plan, and the 2015 ESPP.
Includes 2,616,454 outstanding options to purchase stock under the 2012 Plan, 2,452,679 outstanding options to purchase stock under the 2015 Plan,
and 115,500 restricted stock units under the 2015 Plan.
As of December 31, 2016, the weighted-average exercise price of outstanding options under the 2012 Plan was $4.73 and the weighted-average
exercise price of outstanding options under the 2015 Plan was $24.65.
As of December 31, 2016, a total of 755,820 shares of stock were available for issuance and no purchase rights were outstanding under the 2015 ESPP
and 1,352,907 securities available for future issuance under the 2015 Plan.
96
Item 13. Certain Relationships and Related Transactions and Director Independence
Policies and Procedures for Related Person Transactions
Our board of directors has adopted a written Related Person Transaction Policy and Procedures, setting forth the policies and procedures for the review
and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K, any
transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we (including any of our subsidiaries)
are, were or will be a participant, where the amount involved exceeds $120,000 in any fiscal year and a related person has, had or will have a direct or indirect
material interest. Our finance team is primarily responsible for developing and implementing procedures to obtain information regarding potential related
person transactions and for determining whether a related person transaction requiring compliance with our policy exists. Our Chief Financial Officer then
presents the related person transaction to our Audit Committee. In reviewing and approving any such transaction, our Audit Committee is tasked to consider
all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s
length transaction, the extent of the related person’s interest in the transaction and the conflicts of interest and corporate opportunity provisions under our
Code of Business Conduct and Ethics. No director may participate in approval of a related person transaction in which he or she is a related person. Our Audit
Committee may also ratify related party transactions that were entered into by management because pre-approval was not feasible and transactions that were
not initially recognized as related person transactions. If these transactions are not ratified, our management must make all reasonable efforts to cancel or
annul such transactions. Our management must update our Audit Committee on material changes to any approved or ratified related person transaction and
provide an annual status report on all then-current related person transactions. The following are certain transactions, arrangements and relationships with
our directors, executive officers and stockholders owning 5% or more of our outstanding Common Stock.
Transactions with Nestle Health Science
In January 2016 we entered into a Collaboration and License Agreement, or the License Agreement, with Nestec Ltd., or NHS, an affiliate of Nestlé
Health Science US Holdings, Inc., which holds 17.1% of our Common Stock as of February 16, 2017, for the development and commercialization of certain
of our product candidates in development for the treatment and management of C. difficile infection, or CDI, and inflammatory bowel disease, or IBD,
including ulcerative colitis and Crohn’s disease. The License Agreement supports the development of our portfolio of products for CDI and IBD in markets
outside of the United States and Canada, or the Licensed Territory, and is expected to provide substantial financial support for our ongoing worldwide
research and development. We have retained full commercial rights to our entire portfolio of product candidates with respect to the United States and Canada,
where we plan to build our own commercial organization.
Under the License Agreement, we granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed Territory,
certain products based on our microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262, SER-287
and SER-301, or the NHS Collaboration Products. Upon mutual agreement, one or more other products based on our microbiome technology for CDI or IBD
may be added to the License Agreement in lieu of or in addition to the then-existing NHS Collaboration Products. NHS’ exclusive license in the Licensed
Territory to develop and commercialize NHS Collaboration Products extends to any indications for which the parties agree to develop such products. We also
granted to NHS a non-exclusive license to export, develop and make NHS Collaboration Products in the licensed fields worldwide solely for
commercialization in the licensed fields and in the Licensed Territory. Additionally, the rights to develop and commercialize a given Collaboration Product in
certain non-EU countries within the Licensed Territory may revert to us if NHS either elects not to pursue commercialization of such NHS Collaboration
Product in such country, or fails to meet certain agreed upon milestones for commercialization of such NHS Collaboration Product in such country. If the
licensed rights in any country revert to us in this way, then we would pay to NHS a royalty in the mid-single digits on net sales of such Collaboration Product
in such country.
The License Agreement sets forth our and NHS’ respective obligations for development, commercialization, regulatory and manufacturing and supply
activities for the NHS Collaboration Products with respect to the licensed fields and the Licensed Territory. Under the License Agreement, our and NHS’
development activities will be governed by global and regional development plans, including the conduct of additional clinical studies. We agreed to
manufacture and supply NHS Collaboration Products to support development and commercialization of NHS Collaboration Products in the licensed fields
and in the Licensed Territory. We also agreed to use diligent efforts to develop NHS Collaboration Products under a global development plan and to obtain
approval for such NHS Collaboration Products in the European Union.
In exchange for the license, NHS paid us an upfront cash payment of $120 million in February 2016. NHS has also agreed to pay us tiered royalties, at
percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory. Additionally, NHS has
agreed to pay us up to $660 million for the achievement of certain development and regulatory milestones and up to an aggregate of $1.125 billion for the
achievement of certain commercial milestones related to the sales of NHS Collaboration Products. We received a $10 million milestone payment in 2016
associated with the initiation of our Phase 1b study for SER-262 in CDI.
97
For the development of NHS Collaboration Products for IBD under a global development plan, we are obligated to pay the costs of clinical trials of
such products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the
remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, we will pay the costs of such activities to support
approval in the United States and Canada, and NHS will bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed
Territory.
With respect to development of NHS Collaboration Products for CDI under a global development plan, we agreed to pay all costs of an ongoing Phase
2 clinical trial for SER-109 and of Phase 3 clinical trials for SER-109. We agreed to bear all costs of conducting any Phase 1 or Phase 2 clinical trials under a
global development plan for NHS Collaboration Products other than SER-109 for CDI. We agreed to pay 67% and NHS agreed to pay 33% of other costs of
Phase 3 clinical trials conducted for NHS Collaboration Products other than SER-109 for CDI under a global development plan. For other clinical
development of NHS Collaboration Products for CDI, we agreed to pay costs of such development activities to support approval in the United States and
Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.
The License Agreement continues in effect until terminated by either us or NHS on the following bases: (i) NHS may terminate the License
Agreement in the event of serious safety issues related to any of the NHS Collaboration Products; (ii) we may terminate the License Agreement if NHS
challenges the validity or enforceability of any of our licensed patents; and (iii) either we or NHS may terminate the License Agreement in the event of the
other party’s uncured material breach or insolvency. Upon termination of the License Agreement, all licenses granted to NHS by us will terminate, and all
rights in and to the NHS Collaboration Products in the Licensed Territory will revert to us. If we commit a material breach of the License Agreement, NHS
may elect not to terminate the License Agreement but instead apply specified adjustments to its payment obligations and other terms and conditions of the
License Agreement.
Employment Agreements
We have entered into employment agreements with our named executive officers. For more information regarding these agreements, see Part III, Item
11. “Executive and Director Compensation—Employment Agreements.”
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us
or will require us to indemnify each director (and in certain cases their related venture capital funds) and executive officer to the fullest extent permitted by
Delaware law, including indemnification of expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive
officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’s services as a director or executive
officer.
Director Independence
All of our directors, other than Roger J. Pomerantz, M.D., qualify as “independent” in accordance with the listing requirements of NASDAQ. In
addition, from March 2013 to June 2016, Werner Cautreels, Ph.D., served as a member of our board of directors and qualified as “independent” in accordance
with the listing requirements of NASDAQ. The NASDAQ independence definition includes a series of objective tests, including that the director is not, and
has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of
business dealings with us. In addition, as required by NASDAQ rules, our board of directors has made a subjective determination as to each independent
director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us
with regard to each director’s business and personal activities and relationships as they may relate to us and our management. Dr. Pomerantz is not
independent because he is our President and Chief Executive Officer. There are no family relationships among any of our directors or executive officers.
For additional information regarding our board of directors and their committee memberships see Part III, Item 10, “Directors, Executive Officers, and
Corporate Governance.”
98
Item 14. Principal Accountant Fees and Services
The following table summarizes the fees of PricewaterhouseCoopers LLP, our independent registered public accounting firm, billed to us for each of the last
two fiscal years for audit services and billed to us in each of the last two fiscal years for other services:
Fee Category
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
$
$
2016
478,000 $
—
—
—
478,000 $
2015
820,000
—
—
—
820,000
Audit Fees
Audit fees consist of fees billed for the audit of our annual consolidated financial statements, the review of the interim consolidated financial
statements, and related services that are normally provided in connection with registration statements, including the registration statement for our initial
public offering. Included in the 2015 audit fees is $420,000 of fees billed in connection with our initial public offering in July 2015.
There were no such fees incurred in 2016 or 2015.
Audit-Related Fees
Tax Fees
Tax fees consist of fees for professional services, including tax consulting and compliance performed by PricewaterhouseCoopers LLP. There were no
such fees incurred in 2016 or 2015.
We did not incur any other fees in 2016 or 2015.
All Other Fees
Audit Committee Pre-Approval Policy and Procedures
The Audit Committee has adopted a policy, or the Pre-Approval Policy, which sets forth the procedures and conditions pursuant to which audit and
non-audit services proposed to be performed by the independent registered accounting firm may be pre-approved. The Pre-Approval Policy generally
provides that we will not engage PricewaterhouseCoopers LLP to render any audit, audit-related, tax or permissible non-audit service unless the service is
either (i) explicitly approved by the Audit Committee, or specific pre-approval, or (ii) entered into pursuant to the pre-approval policies and procedures
described in the Pre-Approval Policy, or general pre-approval. Unless a type of service to be provided by PricewaterhouseCoopers LLP has received general
pre-approval under the Pre-Approval Policy, it requires specific pre-approval by the Audit Committee or by a designated member of the Audit Committee to
whom the committee has delegated the authority to grant pre-approvals. Any proposed services exceeding pre-approved cost levels or budgeted amounts will
also require specific pre-approval. For both types of pre-approval, the Audit Committee will consider whether such services are consistent with the SEC’s
rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and
efficient service, for reasons such as its familiarity with the Company’s business, people, culture, accounting systems, risk profile and other factors, and
whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole,
and no one factor should necessarily be determinative. On an annual basis, the Audit Committee reviews and generally pre-approves the services (and related
fee levels or budgeted amounts) that may be provided by PricewaterhouseCoopers LLP without first obtaining specific pre-approval from the Audit
Committee. The Audit Committee may revise the list of general pre-approved services from time to time, based on subsequent determinations.
99
Item 15. Exhibits, Financial Statements and Schedules
(a)(1) Financial Statements.
PART IV
See the “Index to Consolidated Financial Statements” on page F-1 below for the list of financial statements filed as part of this report.
(a)(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements
or Notes thereto set forth below beginning on page F-1.
(a)(3) Exhibits.
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index below
are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary
None.
100
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) As of December 31,
2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Seres Therapeutics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of
convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Seres
Therapeutics, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2017
F-2
SERES THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Investments
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term investments
Restricted cash
Total assets
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue - related party
Total current liabilities
Lease incentive obligation, net of current portion
Deferred rent
Deferred revenue, net of current portion - related party
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value;
10,000,000 shares authorized at December 31, 2016 and 2015; no shares
issued and outstanding at December 31, 2016 and 2015
Common stock, $0.001 par value; 200,000,000 shares authorized at December 31, 2016
and 2015; 40,355,753 and 39,082,017 shares issued and outstanding
at December 31, 2016 and 2015
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities, convertible preferred stock and stockholders’ equity
December 31,
2016
2015
54,539 $
138,704
5,126
198,369
36,125
36,752
1,400
272,646 $
7,587 $
10,812
12,058
30,457
10,730
2,072
96,756
140,015
73,933
131,149
2,528
207,610
7,751
—
1,539
216,900
5,397
5,523
—
10,920
586
—
—
11,506
—
—
40
306,931
(149)
(174,191)
132,631
272,646 $
39
287,937
30
(82,612)
205,394
216,900
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Revenue:
Collaboration revenue - related party
Total revenue
Operating expenses:
Research and development expenses
General and administrative expenses
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Revaluation of preferred stock warrant liability
Total other income (expense), net
Net loss
Accretion of convertible preferred stock to redemption value
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and diluted
Weighted average common shares outstanding, basic and diluted
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net of tax of $0
Total other comprehensive income (loss)
Comprehensive loss
2016
Year Ended December 31,
2015
2014
21,766 $
21,766
— $
—
81,989
32,616
114,605
(92,839)
2,229
(969)
—
1,260
(91,579)
—
38,095
16,761
54,856
(54,856)
638
(555)
(7)
76
(54,780)
—
(91,579) $
(2.30) $
(54,780) $
(2.33) $
—
—
10,718
4,364
15,082
(15,082)
—
(209)
(1,418)
(1,627)
(16,709)
(1,291)
(18,000)
(2.67)
39,846,928
23,532,400
6,748,037
(179)
(179)
(91,758) $
30
30
(54,750) $
—
—
(18,000)
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
Balance at December 31, 2013
Issuance of Series B convertible
preferred stock, net of
issuance costs of $71
Issuance of Series C convertible
preferred stock, net of
issuance costs of $187
Issuance of Series D and D-1
convertible preferred stock,
net of issuance costs of $168
Issuance of common stock upon
exercise of stock options
Issuance of common stock
Issuance of common stock warrant
Stock-based compensation expense
Accretion of convertible preferred
stock to redemption value
Net loss
Balance at December 31, 2014
Issuance of common stock upon
exercise of stock options
Issuance of common stock upon
exercise of common stock warrant
Issuance of common stock upon
completion of initial public offering,
net of offering costs
Stock-based compensation expense
Series D convertible preferred stock
issuance costs
Reclassification of preferred stock
warrant liability
Conversion of convertible preferred
stock upon listing
Unrealized gain on investments
Net loss
Balance at December 31, 2015
Issuance of common stock upon
exercise of stock options
Stock-based compensation expense
Unrealized loss on investments
Net loss
Balance at December 31, 2016
Series A, A-2, B, C,
D and D-1
Convertible
Preferred Stock
Shares
10,478,189
Amount
Common Stock
Shares
Par
Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
(11,123)
—
Total
Stockholders'
Equity (Deficit)
(11,116)
11,583 6,855,000
7
—
4,831,359
10,558
— —
—
—
—
3,946,328
47,813
— —
—
—
—
3,611,111
64,832
— —
—
—
—
—
—
—
—
—
—
—
28,687 —
6,563 —
— —
— —
5
5
317
2,068
22,866,987 136,077 6,890,250
1,291
—
— —
— —
7
(1,291)
—
1,104
—
—
—
—
—
—
—
—
—
—
—
5
5
317
2,068
—
(16,709)
(27,832)
(1,291)
(16,709)
(26,721)
—
—
232,970 —
93
—
—
—
—
546,672
1
168
—
—
93
169
—
—
— 8,545,138
—
— —
8 139,259
9,694
—
—
—
—
139,267
9,694
—
(24)
— —
—
—
—
—
—
—
— —
1,589
—
—
1,589
(22,866,987) (136,053) 22,866,987
—
—
— 39,082,017
— —
— —
23 136,030
—
—
39 287,937
—
30
—
30
—
—
(54,780)
(82,612)
— 1,273,736
—
—
—
— 40,355,753 $
2,137
1
— — 16,857
—
— —
—
— —
40 $ 306,931 $
—
—
(179)
—
—
—
—
(91,579)
(149) $ (174,191) $
F-5
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
136,053
30
(54,780)
205,394
2,138
16,857
(179)
(91,579)
132,631
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
$
(91,579) $
(54,780) $
(16,709)
2016
Year Ended December 31,
2015
2014
Stock-based compensation expense
Depreciation and amortization expense
Loss from revaluation of preferred stock warrant liability
Licensing fees paid in common stock warrant
Non-cash interest expense
Accretion of discount on investments
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Deferred revenue
Accounts payable
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchases of investments
Sales and maturities of investments
Changes in restricted cash
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock, net of
issuance costs
Proceeds from issuance of notes payable and preferred stock
warrant, net of issuance costs
Proceeds from exercise of stock options and common stock warrants
Proceeds from issuance of common stock upon completion of initial public offering
Proceeds from issuance of common stock and restricted common
stock
Repayment of notes payable
Payments of initial public offering costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Supplemental disclosure of non-cash investing and financing
activities:
$
$
16,857
4,205
—
—
—
(386)
(2,598)
108,814
3,581
5,027
43,921
(21,492)
(290,594)
246,494
139
(65,453)
—
—
2,138
—
—
—
—
2,138
(19,394)
73,933
54,539 $
9,694
728
7
—
367
—
(2,470)
—
2,682
2,928
(40,844)
(4,362)
(267,761)
136,390
(1,400)
(137,133)
2,068
190
1,418
317
81
—
(7)
—
810
1,474
(10,358)
(1,001)
—
—
(102)
(1,103)
(24)
123,203
—
262
143,015
—
(2,600)
(2,928)
137,725
(40,252)
114,185
73,933 $
2,000
5
—
5
(400)
(821)
123,992
112,531
1,654
114,185
109 $
163 $
122
Accretion of convertible preferred stock to redemption value
Deferred offering costs included in accounts payable
Property and equipment purchases included in accounts payable and accrued expenses
$
$
$
— $
— $
1,650 $
— $
— $
$
2,953
1,291
863
101
F-6
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
1.
Nature of the Business and Basis of Presentation
Seres Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in October 2010 under the name Newco LS21,
Inc. In October 2011, the company changed its name to Seres Health, Inc., and in May 2015, the Company changed its name to Seres Therapeutics, Inc. The
Company is a microbiome therapeutics platform company developing a novel class of biological drugs, which are designed to restore health by repairing the
function of a dysbiotic microbiome. The Company’s lead product candidate, SER-109, is designed to prevent further recurrences of Clostridium difficile
infection (“CDI”), a debilitating infection of the colon, and, if approved by the U.S. Food and Drug Administration (“FDA”), could be a first-in-field oral
microbiome drug. Using its microbiome therapeutics platform, the Company is developing additional product candidates to treat diseases where the
microbiome is implicated, including SER-262, a synthetic product candidate, to prevent an initial recurrence of primary CDI, SER-287 to treat ulcerative
colitis, SER-301, a synthetic inflammatory bowel disease product candidate, and SER-155, a synthetic product candidate, to improve clinical outcomes
following allogeneic hematopoietic stem cell transplantation (allo-HSCT) due to infections and graft-versus-host disease. The Company is also using its
microbiome therapeutics platform to conduct research on metabolic diseases, such as non-alcoholic steatohepatitis (NASH); inflammatory diseases, such as
Crohn’s disease; rare liver disorders such as primary sclerosing cholangitis (PSC); and immuno-oncology treatments.
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations,
protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing.
Product candidates currently under development will require significant additional research and development efforts, including extensive pre-clinical and
clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel
infrastructure and extensive compliance-reporting capabilities.
The Company’s product candidates are in development. There can be no assurance that the Company’s research and development will be successfully
completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government
regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is
uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in
technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its
employees and consultants.
The Company’s consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction
of liabilities in the ordinary course of business. The Company has experienced negative cash flows and had an accumulated deficit of $174,191 and $82,612
as of December 31, 2016 and 2015, respectively. The Company expects that its cash, cash equivalents and investments at December 31, 2016 of $229,995
will enable it to fund its operating expense and capital expenditure requirements through 2018. The future viability of the Company is dependent on its
ability to generate cash from operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when
needed could have a negative impact on its financial condition and ability to pursue its business strategies.
On July 1, 2015, the Company completed an initial public offering (“IPO”) of its common stock, and issued and sold 8,545,138 shares of common
stock at a price to the public of $18.00 per share, resulting in net proceeds of approximately $139,267 after deducting underwriting discounts and
commissions and offering expenses. The shares issued upon closing of the IPO included 1,114,583 shares of the Company’s common stock, which were sold
to the underwriters pursuant to the full exercise of their option to purchase additional shares of common stock. Upon the listing of the Company’s common
stock on The NASDAQ Global Select Market (“NASDAQ”) on June 26, 2015, all outstanding shares of the Company’s convertible preferred stock
automatically converted into 22,866,987 shares of the Company’s common stock. In addition, at this time, the warrant to purchase shares of the Company’s
Series A-2 convertible preferred stock was converted into a warrant to purchase shares of the Company’s common stock.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany accounts and
transactions.
F-7
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not
limited to, the accrual of research and development expenses and the valuation of common stock, stock-based awards and the preferred stock warrant liability.
Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.
Cash Equivalents
The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents.
Cash equivalents, which consist of money market accounts, corporate bonds, and certificates of deposit purchased with original maturities of less than 90 days
from the date of purchase, are stated at fair value.
Restricted Cash
The Company held cash of $1,400 as of December 31, 2016 and $1,539 as of December 31, 2015 in a separate restricted bank account as a security
deposit for the lease of the Company’s facilities. The Company has classified these deposits as long-term restricted cash on its balance sheet.
Investments
The Company classifies its available-for-sale investments as current assets on the consolidated balance sheet if they mature within one year from the
balance sheet date.
The Company classifies all of its investments as available-for-sale securities. The Company’s investments are measured and reported at fair value
using quoted prices in active markets for similar securities. Unrealized gains and losses on available-for-sale securities are reported as a separate component
of stockholders’ equity (deficit). The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other
income (expense) within the consolidated statement of operations and comprehensive loss. If any adjustment to fair value reflects a decline in the value of the
investment that the Company considers to be “other than temporary”, the Company reduces the investment to fair value through a charge to the consolidated
statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.
Concentration of Credit Risk and of Significant Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments.
The Company has all cash, cash equivalents and investments balances at one accredited financial institution, in amounts that exceed federally insured limits.
The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company is dependent on third-party manufacturers to supply products for research and development activities of its programs, including pre-
clinical and clinical testing. These programs could be adversely affected by a significant interruption in the supply of such drug substance products.
F-8
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of
unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value
hierarchy, of which the first two are considered observable and the last is considered unobservable:
•
•
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted
prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by
observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the
assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The Company’s cash equivalents and investments are carried at fair value, determined according to the fair value hierarchy described above (see Note
3). The Company’s investments in certificates of deposit are carried at amortized cost, which approximates fair value. Certain cash equivalents or investments
that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The carrying values of the Company’s accounts payable and accrued expenses approximate their fair value due to the short-term nature of these liabilities.
Deferred Offering Costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred
offering costs (non-current) until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’
equity (deficit) as a reduction of additional paid-in capital generated as a result of the financing. As of December 31, 2016 and 2015 the Company had
recorded no deferred offering costs. On July 1, 2015, the Company reclassified $3,748 of deferred offering costs to additional paid in capital as a reduction of
the proceeds from the IPO.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the
useful life of the asset. Laboratory equipment is depreciated over five years. Computer equipment and furniture and office equipment are depreciated over
three years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Expenditures for repairs
and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are
removed from the accounts and any resulting gain or loss is included in loss from operations.
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to
perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic
trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for
recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to
its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less
than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based
on discounted cash flows. To date, the Company has not recorded any impairment losses on long-lived assets.
F-9
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses include salaries, stock-based compensation and
benefits of employees, third-party license fees and other operational costs related to the Company’s research and development activities, including allocated
facility-related expenses and external costs of outside vendors engaged to conduct both pre-clinical studies and clinical trials.
Research Contract Costs and Accruals
The Company has entered into various research and development contracts with research institutions and other companies. These agreements are
generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated
ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or
completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of
any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different
from the actual costs.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the
recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Accounting for Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the
grant and recognizes compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.
Generally, the Company issues stock options, restricted stock units and restricted stock awards with only service-based vesting conditions and records the
expense for these awards using the straight-line method. For stock options or restricted stock units issued with performance-based vesting conditions, the
stock compensation expense related to these awards is recognized based on the grant date fair value when achievement of the performance condition is
deemed probable.
The Company measures stock-based awards granted to consultants and non-employees based on the fair value of the award on the date on which the
related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees
until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-
current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.
The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in
which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
The Company recognizes adjustments to stock compensation expense for forfeitures as they occur.
The fair value of each stock option grant is estimated on the date of grant using the Black- Scholes option-pricing model. The Company historically
has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility
based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data
regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified”
method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the
option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods
approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does
not expect to pay any cash dividends in the foreseeable future.
F-10
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Revenue Recognition
The Company currently generates its revenue through collaboration and license arrangements with strategic partners for the development and
commercialization of product candidates.
The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized
for each unit of accounting when all of the following criteria are met:
•
•
•
•
Persuasive evidence of an arrangement exists
Delivery has occurred or services have been rendered
The seller’s price to the buyer is fixed or determinable
Collectability is reasonably assured
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets.
Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current portion.
Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as long-term deferred revenue.
Collaboration Revenue
In January 2016 the Company entered into a Collaboration and License Agreement (the “License Agreement”) with Nestec Ltd. (“NHS”), an affiliate
of Nestlé Health Science US Holdings, Inc. In connection with the License Agreement, the Company received an upfront, non-refundable payment of
$120,000. Other non-refundable payments to the Company under this arrangement may include: (i) payments for research and development services,
(ii) payments for the supply of clinical product, (iii) payments for the supply of commercial product, (iv) payments based on the achievement of certain
development, regulatory, commercial, and sales-based milestones and (v) royalties on product sales.
The Company evaluates multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognition-Multiple-Element
Arrangements (“ASC 605-25”). Pursuant to this guidance, the Company identifies the deliverables included in the arrangement and determines: (1) whether
the individual deliverables have value to the customer on a standalone basis and represent separate units of accounting or whether they must be accounted for
as a combined unit of accounting; and (2) if the arrangement includes a general right of return relative to the delivered item. This evaluation requires
management to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual
relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis
and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the Company. In assessing whether an item has standalone value, the Company considers factors such as the
research, manufacturing and commercialization capabilities of the collaboration partner, the retention of any key rights by the Company, and the availability
of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use the other deliverable(s)
for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and
whether there are other vendors that can provide the undelivered element(s).
In situations where the Company has identified multiple units of accounting, the arrangement consideration that is fixed or determinable is allocated
among the separate units of accounting using the relative selling price method. The Company determines the selling price of a unit of accounting following
the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each
arrangement using vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE is not
available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.
Then, the applicable revenue recognition criteria in ASC 605-25 are applied to each of the separate units of accounting to determine the appropriate
period and pattern of recognition. The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue
recognition criteria in ASC 605-25 are satisfied for that particular unit of accounting. The Company will recognize as revenue, upon delivery, arrangement
consideration attributed to licenses that have standalone value from
F-11
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
the other deliverables to be provided in an arrangement. For licenses that do not have standalone value from the other deliverables to be provided in an
arrangement over the Company’s estimated performance period as the arrangement would be accounted for as a single unit of accounting.
The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25
are satisfied for that particular unit of accounting. The Company will recognize as revenue arrangement consideration attributed to licenses that have
standalone value from the other deliverables to be provided in an arrangement upon delivery. The Company will recognize as revenue arrangement
consideration attributed to licenses that do not have standalone value from the other deliverables to be provided in an arrangement over the Company’s
estimated performance period as the arrangement would be accounted for as a single unit of accounting.
If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then the Company recognizes
revenue under the arrangement for the single unit of accounting on a straight-line basis over the period the Company is expected to complete its performance
obligations. Alternatively, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable
performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is
limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method
or proportional performance method, as applicable.
At the inception of an arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both
parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with
either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting
from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable
relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory,
commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective
milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to
conclude that a milestone is substantive. The Company recognizes revenue associated with substantive milestones in accordance with FASB ASC Topic 605-
28, Revenue Recognition-Milestone Method upon successful accomplishment of each milestone, assuming all other revenue recognition criteria are met.
Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue
recognition criteria are met.
The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the
reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.
Refer to footnote 10 for further information related to the Company’s collaboration and license agreement with Nestec, Ltd.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred
taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company
assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of
available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established
through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and
considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount
of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the
taxing authorities. If the tax position is deemed more-likely-than-not to be sustained,
F-12
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized
is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of
any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Warrant to Purchase Convertible Preferred Stock
The Company classified a warrant to purchase shares of its Series A-2 convertible preferred stock as a liability on its consolidated balance sheets as
this warrant was a free-standing financial instrument that could have required the Company to transfer assets upon exercise. The warrant was initially
recorded at fair value on date of grant, and it was subsequently remeasured to fair value at each balance sheet date. Changes in fair value of the warrant were
recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. The Company continued to
adjust the liability for changes in fair value until the warrant became a warrant to purchase common stock in connection with the IPO.
The Company used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the preferred stock warrant. The
Company assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions was obtained. Estimates and
assumptions impacting the fair value measurement included the fair value per share of the underlying Series A-2 convertible preferred stock, the remaining
contractual term of the warrant, the risk-free interest rate, the expected dividend yield and the expected volatility of the price of the underlying preferred
stock. The Company determined the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of its convertible
preferred stock, results obtained from third-party valuations and additional factors that were deemed relevant. The Company historically has been a private
company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimated its expected stock volatility based on
the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate was
determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. Expected
dividend yield was based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Segment Data
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s
singular focus is on developing Ecobiotic microbiome therapeutics to treat dysbiosis in the colonic microbiome. Revenue to date has been generated solely
through the Company's collaboration with Nestle Health Science, all of which has been earned in the United States. All tangible assets are held in the United
States
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other
than those with stockholders. There was no difference between net loss and comprehensive loss for the year ended December 31, 2014. For the years ended
December 31, 2016 and 2015, other comprehensive income (loss) consisted of changes in unrealized gains (losses) from available-for-sale investments.
Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is
computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of
potential shares of common stock, including the assumed exercise of stock options and warrants and unvested restricted stock. The Company applies the two-
class method to calculate its basic and diluted net loss per share attributable to common stockholders, as its convertible preferred stock, which converted to
Common Stock upon completion of the listing of the Company’s common stock on the NASDAQ on June 26, 2015, and common stock are participating
securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have
been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company was in a net
loss position for each of the periods presented and preferred stockholders do not participate in losses.
F-13
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually
require the holders of such shares to participate in losses of the Company. Similarly, restricted stock awards granted by the Company entitle the holder of such
awards to dividends declared or paid by the board of directors, regardless of whether such awards are unvested, as if such shares were outstanding common
shares at the time of the dividend. However, the unvested restricted stock awards are not entitled to share in the residual net assets (deficit) of the Company.
Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common
stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if
their effect is anti-dilutive.
Recently Issued and Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue
recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or
services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB
issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new
standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the
implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing, which clarifies how a company identifies promised goods or services and clarifies whether
an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a
right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients related to disclosures of remaining performance obligations, as well as other
amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In December
2016 the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends
certain narrow aspects of the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-
period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and
the clarification of certain examples. We are currently evaluating the method of adoption and the potential impact that Topic 606 may have on the Company’s
financial position and results of operation.
In August 2014, the FASB issued guidance that explicitly requires a company’s management to assess an entity’s ability to continue as a going concern
and to provide related footnote disclosures in certain circumstances. The standard was effective for us on December 31, 2016. The adoption of this standard
did not have a material impact on our consolidated financial statements and related disclosures.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). The new standard removes the requirement to categorize within the fair value hierarchy all investments for which
fair value is measured using the net asset value per share practical expedient. The new standard became effective for us on January 1, 2016. Refer to the Fair
Value Measurements significant accounting policy for the impact of this change.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as
either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will
determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A
lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases
standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the
impact of this new guidance.
F-14
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting, which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the
settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. In addition, the ASU
requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards,
be classified as cash flows from operating activities in the statement of cash flows. The ASU also requires that cash paid by directly withholding shares for
tax withholding purposes be classified as a financing activity in the statement of cash flows. In addition, the ASU also allows companies to make an
accounting policy election to either estimate the number of awards that are expected to vest, consistent with current U.S. GAAP, or account for forfeitures
when they occur. The Company has elected to early adopt ASU 2016-09 for the year ended December 31, 2016. The adoption of this standard did not have a
material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard addresses specific
cash flow issues with the objective of reducing existing diversity in practice. The new standard will be effective for the Company on January 1, 2018. The
Company is in the process of evaluating the impact of this new guidance.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The new standard requires restricted cash and restricted cash equivalents be
included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The
new standard will be effective for the Company on January 1, 2018. The Company is in the process of evaluating the impact of this new guidance.
3.
Fair Value of Financial Assets and Liabilities
The following tables present information about the Company’s assets and liabilities as of December 31, 2016 and 2015 that are measured at fair value
on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
Assets:
Cash Equivalents
Repurchase Agreements
Investments:
Commercial Paper
Certificates of Deposit
Corporate Bonds
Government Securities
Treasury Bonds
Fair Value Measurements as of December 31, 2016 Using:
Level 1
Level 2
Level 3
Not Subject to
Leveling (1)
Total
$
$
—
—
—
—
—
—
—
—
$
4,740 $
7,000
19,689
10,629
94,609
33,466
17,063
187,196 $
$
— $
—
—
—
—
—
—
— $
1,567 $
—
—
—
—
—
—
1,567 $
6,307
7,000
19,689
10,629
94,609
33,466
17,063
188,763
(1)
Certain cash equivalents and investments that are valued using the net asset value per share (or its equivalent) practical expedient have not been
classified in the fair value hierarchy.
F-15
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Assets:
Cash Equivalents
Repurchase Agreements
Investments:
Commercial Paper
Corporate Bonds
Government Securities
Treasury Bonds
Fair Value Measurements as of December 31, 2015 Using:
Level 1
Level 2
Level 3
Not Subject to
Leveling (1)
Total
$
$
—
—
—
—
—
—
—
$
11,952 $
20,000
64,820
46,490
15,819
4,020
163,101 $
$
— $
—
—
—
—
—
— $
11,173 $
—
23,125
20,000
—
—
—
—
11,173 $
64,820
46,490
15,819
4,020
174,274
(1)
Certain cash equivalents and investments that are valued using the net asset value per share (or its equivalent) practical expedient have not been
classified in the fair value hierarchy.
As of December 31, 2016, the Company’s cash equivalents consisted of money market funds, corporate bonds, certificates of deposits, and repurchase
agreements with original maturities of less than 90 days from the date of purchase and were valued based on Level 2 inputs. Repurchase agreements are
agreements with banks to repurchase notes that are collateralized by U.S. government securities. All repurchase agreements have overnight maturities.
As of December 31, 2015, the Company’s cash equivalents consisted of money market funds, corporate bonds, commercial paper, and repurchase
agreements with original maturities of less than 90 days from the date of purchase and were valued based on Level 2 inputs. Repurchase agreements are
agreements with banks to repurchase notes that are collateralized by U.S. government securities.
The fair value of the Company’s investments, which consisted of corporate bonds, commercial paper, certificates of deposit, government securities,
and treasury bonds as of December 31, 2016 and 2015, were determined using Level 2 inputs. During the years ended December 31, 2016 and 2015, there
were no transfers between Level 1, Level 2 and Level 3.
4.
Investments
As of December 31, 2016 and 2015, the fair value of available-for-sale investments by type of security was as follows:
Investments:
Commercial Paper
Certificates of Deposit
Corporate Bonds
Government Securities
Treasury Bonds
Amortized
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Fair
Value
December 31, 2016
$
$
19,631 $
10,629
94,764
33,513
17,066
175,603 $
58 $
—
—
—
1
59 $
— $
—
(155)
(47)
(4)
(206) $
19,689
10,629
94,609
33,466
17,063
175,456
F-16
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Investments:
Commercial Paper
Corporate Bonds
Government Securities
Treasury Bonds
Amortized
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Fair
Value
December 31, 2015
$
$
64,733 $
46,538
15,823
4,022
131,116 $
87 $
—
—
—
87 $
— $
(48)
(4)
(2)
(54) $
64,820
46,490
15,819
4,020
131,149
Investments with original maturities of less than 90 days are included in cash and cash equivalents on the consolidated balance sheets and are not
included in the table above. Investments with maturities of less than 12 months are considered current and those investments with maturities greater than 12
months are considered non-current.
As of December 31, 2015, the Company’s corporate bonds, commercial paper, government securities and treasury bonds had remaining maturities of
less than 12 months.
5.
Property and Equipment, Net
Property and equipment, net consisted of the following:
Laboratory equipment
Computer equipment
Furniture and office equipment
Leasehold improvements
Construction in progress
Less: Accumulated depreciation and amortization
December 31,
2016
December 31,
2015
$
$
10,711 $
1,335
1,010
27,807
442
41,305
(5,180)
36,125 $
4,370
408
285
1,856
1,843
8,762
(1,011)
7,751
Depreciation and amortization expense was $4,205, $728 and $190 for the years ended December 31, 2016, 2015 and 2014, respectively.
6.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
Development and clinical manufacturing costs
Payroll and payroll-related costs
Professional fees
Facility and other
December 31,
2016
December 31,
2015
$
$
3,350 $
3,698
448
3,316
10,812 $
1,436
2,756
184
1,147
5,523
F-17
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
7.
Preferred Stock Warrant Liability
In September 2013, the Company issued a warrant to purchase 92,127 shares of Series A-2 convertible preferred stock in connection with the loan
security agreement. The warrant was immediately exercisable at an exercise price of $1.78 per share and had a contractual term of ten years from issuance.
The fair value of the warrant at issuance was estimated to be $156 and was recorded as a debt discount and as a preferred stock warrant liability.
The Company classified the warrant to purchase shares of its Series A-2 convertible preferred stock as a liability on its consolidated balance sheets and
subsequently re-measured to fair value at each balance sheet date. Changes in fair value of the warrant were recognized as a component of other income
(expense), net, in the consolidated statement of operations and comprehensive loss.
The Company recorded losses of $7 and $1,418 for the years ended December 31, 2015 and 2014, respectively, to reflect the change in fair value of
this preferred stock warrant.
The following assumptions and inputs were used in determining the fair value of the preferred stock warrant liability valued using the Black-Scholes
option-pricing model:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
Fair value of Series A-2 convertible preferred stock
Year Ended December 31,
2014
2015
2.40%
8.2
91.2%
0%
$
17.26
2.17%
8.7
84.0%
0%
17.18
$
The following table provides a rollforward of the fair value of the Company’s preferred stock warrant liability:
Balance as of December 31, 2013
Loss on revaluation
Balance as of December 31, 2014
Loss on revaluation
Reclassification to stockholders’ equity
Balance as of December 31, 2015
Fair Value
164
1,418
1,582
7
(1,589)
—
$
$
In connection with the automatic conversion of the Company’s convertible preferred stock, which occurred upon the listing of the Company’s common
stock on the NASDAQ on June 26, 2015, the preferred stock warrant became a warrant to purchase common stock. The Company performed the final mark to
market adjustment on the preferred stock warrant using the fair value of the underlying common shares of $18.00 per share on June 26, 2015 and recorded the
change in fair value in other income (expense), net in the consolidated statement of operations and comprehensive loss. The preferred stock warrant liability
was then reclassified to additional paid-in-capital as it became a warrant to purchase common stock.
On August 17, 2015, the common stock warrant was exercised in full at an exercise price of $1.78 per share of common stock. The Company received
proceeds of $164 in connection with the exercise of the common stock warrant.
There was no balance related to the preferred stock warrant liability as of December 31, 2016 and 2015.
8.
Convertible Preferred Stock
On July 1, 2015, in connection with the closing of the IPO, the Company effected its Restated Certificate of Incorporation, which authorizes the
Company to issue 10,000,000 shares of preferred stock, $0.001 par value per share.
F-18
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
9.
Stockholders’ Equity Common Stock
On July 1, 2015, the Company completed an IPO, and issued and sold 8,545,138 shares of common stock at a public offering price of $18.00 per
share, resulting in net proceeds of approximately $139,267 after deducting underwriting discounts and commissions and other offering expenses totaling
$3,748. The shares issued upon closing of the IPO included 1,114,583 shares of the Company’s common stock, which were sold to the underwriters pursuant
to the full exercise of their option to purchase additional shares of common stock. Upon the listing of the Company’s common stock on the NASDAQ on
June 26, 2015, all outstanding shares of the Company’s convertible preferred stock automatically converted into 22,866,987 shares of the Company’s
common stock.
As of December 31, 2014, the Company’s Amended and Restated Certificate of Incorporation, as further amended, authorized the Company to issue
38,000,000 shares of common stock, $0.001 par value per share. On July 1, 2015, in connection with the closing of the IPO, the Company effected its
Restated Certificate of Incorporation, which authorizes the Company to issue 200,000,000 shares of common stock, $0.001 par value per share.
Common Stock Warrants
In June 2014, the Company entered into a research agreement with the Mayo Foundation for Medical Education and Research (“Mayo”) under which
the Company acquired a license to intellectual property. In exchange for the license, the Company issued to Mayo a warrant to purchase 454,545 shares of
common stock at an exercise price of $0.01 per share, which was immediately exercisable. Upon issuance of the warrant, the Company recorded research and
development expense of $317 for the fair value of the warrant, determined using the following assumptions in the Black-Scholes option-pricing model:
expected volatility of 86.0%, risk-free interest rate of 2.3%, expected term of seven years (equaling the contractual term of the warrant) and no expected
dividends. Because this warrant was indexed to the Company’s stock and could only be settled by gross physical delivery of shares the Company determined
that this warrant qualified for equity classification. This warrant was exercised on April 29, 2015.
The Company also issued to Mayo an additional warrant (the “performance warrant”) to purchase up to 284,090 shares of common stock at an
exercise price equal to the per share price at which the Company most recently sold shares of its preferred stock. The performance warrant was exercisable for
a number of shares to be determined by the Company’s board of directors from time to time, upon the achievement by Mayo of specified milestones. The
performance warrant provided for termination upon the closing of an initial public offering by the Company. The IPO closed prior to any probable
achievement of the specified milestones, therefore, the warrant terminated and the Company did not record any expense for the performance warrant from the
date of issuance through the closing of the IPO.
2012 Stock Incentive Plan
The Company’s 2012 Stock Incentive Plan, as amended, (the “2012 Plan”) provides for the Company to sell or issue common stock or restricted
common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of
directors and consultants of the Company. The 2012 Plan is administered by the board of directors, or at the discretion of the board of directors, by a
committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their
committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common
stock on the date of grant and the term of stock option may not be greater than ten years. The Company generally grants stock-based awards with service
conditions only (“service-based” awards).
Stock options granted under the 2012 Plan generally vest over four years and expire after ten years, although options have been granted with vesting
terms less than four years.
The total number of shares of common stock that may be issued under the 2012 Plan was 1,261,836 shares as of December 31, 2013. In May 2014, the
Company effected an increase in the number of shares of common stock reserved for issuance under the 2012 Plan to 3,561,836 shares. In December 2014,
the Company effected an increase in the number of shares of common stock reserved for issuance under the 2012 Plan to 3,608,029 shares. The total number
of shares of common stock that may be issued under the 2012 Plan was 3,608,029 shares as of December 31, 2014. In March 2015, the Company effected an
increase in the number of shares of common stock reserved for issuance under the 2012 Plan to 4,309,653 shares. As of December 31, 2016, there were no
shares available for future grant under the 2012 Plan.
F-19
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
As required by the 2012 Plan, the exercise price for stock options granted is not to be less than the fair value of common shares as determined by the
Company as of the date of grant. The Company values its common stock by taking into consideration its most recently available valuation of common shares
performed by management and the board of directors as well as additional factors which may have changed since the date of the most recent
contemporaneous valuation through the date of grant.
2015 Incentive Award Plan
On June 16, 2015, the Company’s stockholders approved the 2015 Incentive Award Plan (the “2015 Plan”), which became effective on June 25, 2015.
The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock
units and other stock-based awards. The number of shares initially reserved for issuance under the 2015 Plan is the sum of (i) 2,200,000 shares of common
stock and (ii) the number of shares subject to awards outstanding under the 2012 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited
or repurchased by the Company on or after the effective date of the 2015 Plan. In addition, the number of shares of common stock that may be issued under
the 2015 Plan is subject to increase on the first day of each calendar year, beginning in 2016 and ending in 2025, equal to the lesser of (i) 4% of the number of
shares of the Company’s common stock outstanding on the last day of the preceding applicable calendar year and (ii) an amount determined by the
Company’s board of directors. As of December 31, 2016, there were 1,352,907 shares available for future grant under the 2015 Plan.
2015 Employee Stock Purchase Plan
On June 16, 2015, the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective on June 25,
2015. A total of 365,000 shares of common stock were reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be
issued under the ESPP will automatically increase on the first day of each calendar year, beginning in 2016 and ending in 2025, by an amount equal to the
least of (i) 400,000 shares, (ii) 1% of the number of shares of the Company’s common stock outstanding on the last day of the applicable preceding calendar
year and (iii) an amount determined by the Company’s board of directors. Offering periods under the ESPP will commence when determined by the plan
administrator. As of December 31, 2016, there were no shares issued under the ESPP.
Stock Option Valuation
The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows, presented
on a weighted average basis:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
2016
Year Ended December 31,
2015
2014
1.54%
6.0
84.2%
0 %
1.80%
6.0
81.4%
0%
1.83%
6.0
83.5%
0%
F-20
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Stock Options
The following table summarizes the Company’s stock option activity for the twelve months ended December 31, 2016:
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited
Outstanding as of December 31, 2016
Options vested and expected to vest as of December 31, 2016
Options exercisable as of December 31, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
8.01
26.04
1.68
24.93
14.36
14.36
8.05
8.70
$
136,945
8.26
8.26
7.62
$
$
$
16,736
16,736
9,048
Number of
Shares
5,026,246 $
1,695,125
(1,273,736)
(378,502)
5,069,133 $
5,069,133 $
1,686,284 $
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2016, 2015 and 2014 was $18.45, $14.56,
and $4.25 per share, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015, and 2014 was
$34,871, $4,125, and $512.
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the
Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.
The Company granted performance-based stock options to certain employees. These stock options were exercisable only upon achievement of
specified performance targets. During the year ended December 31, 2016, the Company determined that the achievement of these specified performance
targets occurred. Upon achievement of the performance targets, 60,000 options became immediately vested. The Company recorded stock based
compensation expense of $235 during the year ended December 31, 2016 related to these awards. The grant date fair value of these awards was $3.92 per
share.
As of December 31, 2016 and 2015, there were outstanding unvested service-based stock options held by non-employees for the purchase of 63,375
and 27,750 shares, respectively, of common stock.
Restricted Stock Units
The Company has granted restricted stock units with time-based vesting conditions. The table below summarizes the Company’s restricted stock
activity for the twelve months ended December 31, 2016:
Unvested restricted stock units as of December 31, 2015
Granted
Vested
Unvested restricted stock units as of December 31, 2016
Number
of Shares
Weighted
Average Grant
Date Fair Value
— $
115,500 $
— $
115,500 $
—
9.78
—
9.78
The aggregate intrinsic value of restricted stock units that vested during the years ended December 31, 2016, 2015 and 2014 was $0, $1,508, and $684,
respectively.
F-21
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Stock-based Compensation
The Company recorded stock-based compensation expense related to stock options and restricted stock units in the following expense categories of its
consolidated statements of operations and comprehensive loss:
Research and development expenses
General and administrative expenses
2016
Year Ended December 31,
2015
2014
$
$
8,310 $
8,547
16,857 $
5,297 $
4,397
9,694 $
1,068
1,000
2,068
As of December 31, 2016, the Company had an aggregate of $35,405 of unrecognized stock- based compensation cost, which is expected to be
recognized over a weighted average period of 2.66 years.
10. Collaboration Revenue
Nestec Ltd.
In January 2016 the Company entered into the License Agreement with NHS, an affiliate of Nestlé Health Science US Holdings, Inc., a significant
stockholder of the Company, for the development and commercialization of certain product candidates in development for the treatment and management of
CDI and IBD, including ulcerative colitis and Crohn’s disease. The License Agreement will support the development of the Company’s portfolio of products
for CDI and IBD in markets outside of the United States and Canada (the “Licensed Territory”). The Company has retained full commercial rights to its entire
portfolio of product candidates with respect to the United States and Canada.
Under the License Agreement, the Company granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed
Territory, certain products based on its microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262,
SER-287 and SER-301, (collectively, the “NHS Collaboration Products”). The License Agreement sets forth the Company’s and NHS’ respective obligations
for development, commercialization, regulatory and manufacturing and supply activities for the NHS Collaboration Products with respect to the licensed
fields and the Licensed Territory.
Under the License Agreement, the Company’s and NHS’ development activities will be governed by global and regional development plans, including
the conduct of additional clinical studies. The Company has agreed to manufacture and supply NHS Collaboration Products to support development and
commercialization of NHS Collaboration Products in the licensed fields and in the Licensed Territory. NHS will have the right to obligate the Company to
transfer technology necessary to manufacture Collaboration Products in the event that the Company materially fails to meet its supply commitments to NHS
under the commercial supply agreement. The Company has also agreed to use diligent efforts to develop NHS Collaboration Products under a global
development plan and to obtain approval for such NHS Collaboration Products in the European Union.
In exchange for the license, NHS agreed to pay the Company an upfront cash payment of $120,000, which the Company received in February 2016.
NHS also agreed to pay the Company tiered royalties, at percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration
Products in the Licensed Territory. The Company is eligible to receive up to $285,000 in development milestone payments, $375,000 in regulatory payments
and up to an aggregate of $1,125,000 for the achievement of certain commercial milestones related to the sales of NHS Collaboration Products.
For the development of NHS Collaboration Products for IBD under a global development plan, the Company agreed to pay the costs of clinical trials
of such products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the
remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, the Company agreed to pay the costs of such activities
to support approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in
the Licensed Territory.
F-22
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
With respect to development of NHS Collaboration Products for CDI under a global development plan, the Company agreed to pay all costs of an
ongoing Phase 2 clinical trial for SER-109 and of Phase 3 clinical trials for SER-109. The Company agreed to bear all costs of conducting any Phase 1 or
Phase 2 clinical trials under a global development plan for NHS Collaboration Products other than SER-109 for CDI. The Company agreed to pay 67% and
NHS agreed to pay 33% of other costs of Phase 3 clinical trials conducted for NHS Collaboration Products other than SER-109 for CDI under a global
development plan. For other clinical development of NHS Collaboration Products for CDI, the Company agreed to pay costs of such development activities to
support approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in
the Licensed Territory.
The License Agreement continues in effect until terminated by either the Company or NHS on the following bases: (i) NHS may terminate the License
Agreement in the event of serious safety issues related to any of the NHS Collaboration Products; (ii) the Company may terminate the License Agreement if
NHS challenges the validity or enforceability of any of the Company’s licensed patents; and (iii) either the Company or NHS may terminate the License
Agreement in the event of the other party’s uncured material breach or insolvency. Upon termination of the License Agreement, all licenses granted to NHS
by the Company will terminate, and all rights in and to the NHS Collaboration Products in the Licensed Territory will revert to the Company. If the Company
commits a material breach of the License Agreement, NHS may elect not to terminate the License Agreement but instead apply specified adjustments to its
payment obligations and other terms and conditions of the License Agreement.
The License Agreement contains customary representations and warranties, intellectual property protection provisions, certain indemnification rights
in favor of each party and customary confidentiality provisions and limitations of liability.
At the inception of the License Agreement, the Company identified the following deliverables: (i) a license to develop and commercialize the NHS
Collaboration Products in the Licensed Territory, (ii) obligation to perform research and development services, (iii) participation on a joint steering
committee, and (iv) manufacturing services to provide clinical supply to complete future clinical trials. The Company also identified a contingent deliverable,
the obligation to perform manufacturing services to provide commercial supply if commercialization occurs, which is contingent upon regulatory approval.
This contingent deliverable has been excluded from the initial allocation and will be treated as a separate unit of accounting when and if delivered.
The Company concluded that none of the four deliverables identified at the inception of the License Agreement has standalone value from the other
undelivered elements. Accordingly, all deliverables represent a single unit of accounting.
All consideration received relating to the four identified deliverables that comprise the single unit of accounting will be recognized over the period of
performance. The period of performance will be through the completion of development services for the NHS Collaboration Products which has been
estimated to be ten years. The Company will periodically review and, if necessary, revise the estimated development period.
The Company will recognize revenue utilizing a time-based proportional performance model where revenue related to each payment is recognized
over the ten year performance period. As of December 31, 2016, the only consideration that is fixed and determinable is the non-refundable upfront payment
of $120,000 and $580 for the reimbursement of development services since the inception of the arrangement. For additional consideration that could be
received for research and development services and/or manufacturing services for clinical supply, the Company will recognize a cumulative catch-up for the
amount of time that has elapsed and spread the unrecognized portion over the remaining performance period.
Development and regulatory milestones that involve substantial effort on the Company’s part and the achievement of which are not considered
probable at the inception of the License Agreement are considered substantive milestones, and will be recognized in their entirety in the period in which the
milestone is achieved, assuming all other revenue recognition criteria are met. All commercial milestones will be recorded as revenue upon achievement of
the milestone, assuming all other revenue recognition criteria are met.
The Company has evaluated all of the milestones that may be received in connection with the License Agreement with NHS. In evaluating if a
milestone is substantive, the Company assesses whether, (i) the consideration is commensurate with either the Company’s performance to achieve the
milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the
milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the deliverables and payment
terms within the arrangement. All development, approval and commercialization milestones that may be received under the License Agreement are
considered substantive on the basis
F-23
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
of the contingent nature of the milestone. The Company has specifically reviewed factors such as the scientific, clinical, regulatory, commercial and other
risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as
revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met.
During the year ended December 31, 2016, the Company received $10,000 from NHS in connection with the initiation of the Phase 1b study for SER-
262 in CDI. The Company recognizes revenue associated with substantive milestones in accordance with FASB ASC Topic 605-28, Revenue Recognition-
Milestone Method. The $10,000 was recognized in full as related party collaboration revenue during the year ended December 31, 2016.
Royalties will be recorded as revenue in the period they are earned assuming all other revenue recognition criteria are met.
During the year ended December 31, 2016, the Company recognized $21.8 million of related party revenue associated with the License Agreement. As
of December 31, 2016, there was $108.8 million of deferred revenue related to the License Agreement, which is classified as current or non-current in the
consolidated balance sheets based on the Company’s estimate of revenue that will be recognized within the next twelve months. All costs associated with the
License Agreement are recorded in research and development expense in the consolidated statements of operations and comprehensive loss.
11.
Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
Numerator:
Net loss
Accretion of convertible preferred stock to
redemption value
Net loss attributable to common stockholders
Denominator:
Weighted average common shares outstanding,
basic and diluted
Net loss per share attributable to common
stockholders, basic and diluted
2016
Year Ended December 31,
2015
2014
$
(91,579) $
(54,780) $
(16,709)
—
(91,579) $
—
(54,780) $
(1,291)
(18,000)
$
39,846,928
23,532,400
6,748,037
$
(2.30) $
(2.33) $
(2.67)
The Company’s potential dilutive securities, which include stock options, unvested restricted common stock, convertible preferred stock and warrants
to purchase convertible preferred stock or common stock, have been excluded from the computation of diluted net loss per share as the effect would be to
reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per
share attributable to common stockholders is the same. The following potential common shares, presented based on amounts outstanding at each period end,
were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would
have had an anti-dilutive effect:
Stock options to purchase common stock
Unvested restricted stock units
Unvested restricted common stock
Warrants for the purchase of convertible preferred stock
Warrants for the purchase of common stock
Convertible preferred stock (as converted to common stock)
F-24
Year Ended December 31,
2015
5,026,246
—
—
—
—
—
2016
5,069,133
115,500
—
—
—
—
5,184,633
5,026,246
2014
3,579,342
—
52,500
92,127
738,635
21,478,098
25,940,702
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
12.
Commitments and Contingencies
Leases
The Company previously leased office and laboratory space with a lease term expiring in January 2018 and no extension periods. In May 2016, upon
mutual agreement with the landlord, the Company accelerated the termination of the operating lease to June 30, 2016. Upon termination of the lease, the
Company recorded a benefit to rent expense of $136 to write off amounts previously recorded as deferred rent. The outstanding security deposit of $119,
which was secured by a cash collateralized letter of credit, was released in September 2016.
On April 1, 2015, the Company entered into a lease for additional office and laboratory space with a term expiring in April 2020.
On November 11, 2015, the Company entered into a non-cancelable property lease with BMR-Sidney Research Campus LLC (“BMR”) for 83,396
square feet of office, laboratory and pilot manufacturing space at 200 Sidney Street, Cambridge, Massachusetts. The lease term commenced in March 2016
and ends in November 2023. The Company has the option to extend the lease twice, each for a five-year period. The Company moved its corporate
headquarters to this location in April 2016. BMR has contributed a total of $12,509 toward the cost of tenant improvements. BMR’s contributions toward the
cost of tenant improvements is recorded as a lease incentive obligation on the Company’s consolidated balance sheet. The lease incentive obligation is
amortized to the Company’s consolidated statement of operations as reductions to rent expense over the lease term. As of December 31, 2016, we recorded a
lease incentive obligation of $12,080. During the year ended December 31, 2016, we amortized $429 of this lease incentive obligation as a reduction to rent
expense.
During the years ended December 31, 2016, 2015 and 2014, the Company recognized $3,826 , $1,246, and $543, respectively, of rental expense
related to office and laboratory space.
Future minimum lease payments for these operating leases as of December 31, 2016 are as follows:
Year Ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total
$
$
5,978
6,158
6,342
6,120
6,222
11,529
42,349
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and
other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property
infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and
its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service
as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements
is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe
that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows,
and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2016 or 2015.
F-25
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Legal Proceedings
On September 28, 2016, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District of
Massachusetts against the Company entitled Mariusz Mazurek v. Seres Therapeutics, Inc., et.al. and on February 12, 2017, the Company received an amended
complaint. The lawsuit alleges violations of Sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making allegedly
false and misleading statements and omissions about the Company’s clinical trials for its product candidate SER-109 in the Company’s public disclosures
between June 25, 2015 and July 29, 2016. The lawsuit seeks, among other things, damages in connection with the Company’s allegedly inflated stock price
between June 25, 2015 and July 29, 2016 as a result of those allegedly false and misleading statements, as well as interest, attorneys’ fees and costs. The
Company can make no assurances as to the time or resources that will need to be devoted to this lawsuit or its final outcome, or the impact, if any, of this
lawsuit or any proceedings on its business, financial condition, results of operations and cash flows. While the Company is vigorously defending against all
claims asserted, this litigation could result in substantial costs to the Company and a diversion of the Company’s management’s attention and resources,
which could harm its business. In addition, the uncertainty of the pending lawsuit or potential filing of additional lawsuits could lead to more volatility and a
reduction in the Company’s stock price. Given the early stage of the litigation, at this time the Company is unable to reasonably estimate possible losses or
form a judgment that an unfavorable outcome is either probable or remote. It is not currently possible to assess whether or not the outcome of these
proceedings may have a material adverse effect on the Company.
13.
Income Taxes
During the years ended December 31, 2016, 2015 and 2014, the Company recorded no income tax benefits for the net operating losses incurred in each
year or interim period, due to its uncertainty of realizing a benefit from those items.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Federal statutory income tax rate
Research and development tax credits
State taxes, net of federal benefit
Stock-based compensation
Revaluation of preferred stock warrant liability
Other
Change in deferred tax asset valuation allowance
Effective income tax rate
F-26
2016
Year Ended December 31,
2015
2014
(34.0)%
(8.8)
(5.8)
(6.3)
—
0.1
54.8
—%
(34.0)%
(5.7)
(5.3)
4.1
—
0.3
40.6
—%
(34.0)%
(3.8)
(5.3)
2.3
3.3
0.2
37.3
—%
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Net deferred tax assets as of December 31, 2016 and 2015 consisted of the following:
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credit carryforwards
Capitalized organization costs
Stock-based compensation expense
Charitable Contributions
Deferred Revenue
Accrued expenses
Capitalized research and development expenses
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
December 31,
2016
2015
$
$
$
$
18,481 $
14,991
483
5,624
6
42,742
5,560
115
88,002
(5,008)
(5,008)
(82,994)
— $
25,293
4,180
527
1,897
5
—
977
126
33,005
(228)
(228)
(32,777)
—
As of December 31, 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of $47,165 and $46,296,
respectively, which both begin to expire in 2031. As of December 31, 2016, the Company also had available research and development tax credit
carryforwards for federal and state income tax purposes of $13,500 and $2,260, respectively, which begin to expire in 2031 and 2028, respectively. The
federal research and development tax credits include an orphan drug credit carryforward of $8,473. Utilization of the net operating loss carryforwards and
research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986
due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards
that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing
the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since our formation, we have
raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders' subsequent disposition
of those shares, may have resulted in a change of control as defined by Section 382 or could result in a change of control in the future upon subsequent
disposition. We conducted an analysis under Section 382 to determine if historical changes in ownership through August 31, 2015 would limit or otherwise
restrict our ability to utilize these NOL and R&D credit carryforwards. As a result of this analysis, we do not believe there are any significant limitations on
our ability to utilize these carryforwards. However, future changes in ownership after August 31, 2015 could affect the limitation in future years. Any
limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. At December 31, 2016, $20,211 of the federal net
operating loss carryforwards, and $20,211 of the state net operating loss carryforwards relate to excess stock based compensation tax benefits for which the
benefit will be recorded to additional paid-in capital when recognized. The Company early adopted ASU 2016-09, and as such, as of December 31, 2016,
those amounts have been recorded as a deferred tax asset and offset by a valuation allowance.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered
the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from
product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets.
Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2016 and 2015. Management reevaluates the
positive and negative evidence at each reporting period.
F-27
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2016, 2015 and 2014 related primarily to the increases
in net operating loss carryforwards, research and development tax credit carryforwards and stock-based compensation were as follows:
Valuation allowance at beginning of year
Decreases recorded as benefit to income tax provision
Increases recorded to income tax provision
Valuation allowance as of end of year
2016
Year Ended December 31,
2015
2014
$
$
(32,777) $
—
(50,217)
(82,994) $
(10,522) $
—
(22,255)
(32,777) $
(4,294)
—
(6,228)
(10,522)
During the year ended December 31, 2016, the Company was awarded a $0.9 million tax incentive for job creation from the Massachusetts Life
Sciences Center. The program was established in 2008 in order to incentivize life sciences companies to create new sustained jobs in Massachusetts. Jobs
must be maintained for at least five years, during which time the grant proceeds can be recovered by the Massachusetts Department of Revenue ("DOR") if
the Company does not meet and maintain its job creation commitments. The award was received in 2016 and recognized as other income in the consolidated
statement of operations. As of December 31, 2016, the Company determined that it did not satisfy the job creation commitments under the award, and the full
amount of $0.9 million was reversed from other income and the award has been recorded as other current liabilities. The Company is currently evaluating
future treatment of the award, pending further discussion with the Mass Life Sciences Center.
14.
Selected Quarterly Financial Data (Unaudited)
The following table contains quarterly financial information for 2016 and 2015. The Company believes that the following information reflects all
normal recurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
Collaboration revenue - related party (1)
Total operating expenses
Loss from operations
Net loss
Net loss per share applicable to common
stockholders - basic and diluted
Collaboration revenue - related party (1)
Total operating expenses
Loss from operations
Net loss
Net loss per share applicable to common
stockholders - basic and diluted
First
Quarter
Second
Quarter
2016
Third
Quarter
Fourth
Quarter
$
2,710 $
22,626
(19,916)
(19,704)
3,004 $
31,144
(28,140)
(27,913)
13,015 $
32,110
(19,095)
(18,688)
3,037 $
28,725
(25,688)
(25,274)
Total
21,766
114,605
(92,839)
(91,579)
$
(0.50) $
(0.70) $
(0.46) $
(0.63) $
(2.30)
First
Quarter
Second
Quarter
2015
Third
Quarter
Fourth
Quarter
$
— $
8,167
(8,167)
(7,971)
—
$
12,340
(12,340)
(12,555)
—
$
14,561
(14,561)
(14,620)
$
—
19,788
(19,788)
(19,634)
Total
—
54,856
(54,856)
(54,780)
$
(1.15) $
(1.45) $
(0.38) $
(0.50) $
(2.33)
(1)
In January 2016, the Company entered into a Collaboration and License Agreement with NHS for the development and commercialization of certain
of its product candidates. In exchange for the license, NHS paid the Company an upfront cash payment of $120 million, which the Company received
in February 2016 and is being recognized as revenue over the ten year performance period. During the quarter ended September 30, 2016, the
Company received $10 million from NHS related to achievement of a milestone within this agreement, which was recognized in full as related party
collaboration revenue during 2016.
F-28
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
15.
Related Party Transactions
In October 2010, the Company entered into a services agreement with Flagship Ventures Management, Inc., an affiliate of one of its stockholders (and
now known as Flagship Pioneering), Flagship Venture Funds, to provide general and administrative services to the Company, including the employer portions
of employee health and dental benefit plans for Seres Therapeutics employees and consulting services. The Company made payments under the agreement of
$ 17, $502, and $454 during the years ended December 31, 2016, 2015 and 2014, respectively. There were no amounts due to Flagship Pioneering, related to
the services agreement as of December 31, 2016 and 2015.
As described in Note 10, in January 2016 the Company entered into a License Agreement with NHS for the development and commercialization of
certain product candidates in development for the treatment and management of CDI and IBD, including ulcerative colitis and Crohn’s disease. NHS is a
related party since NHS is an affiliate of Nestlé Health Science, one of the Company’s significant stockholders. During the year ended December 31, 2016,
the Company recognized $21,766 of related party revenue associated with the License Agreement. As of December 31, 2016, there was $108,814 of deferred
revenue related to the License Agreement, which is classified as current or non-current in the consolidated balance sheets. The Company has made no
payments to NHS during the year ended December 31, 2016. There is $306 due from NHS as of December 31, 2016 for the reimbursement of development
costs, which is classified as other current assets in the Company’s consolidated balance sheet.
16.
401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees
who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Effective January
1, 2016, the Company has elected to match 50% of the first 6% of an employee’s deferral. Company contributions are expensed in the year for which they are
declared. During the year ended December 31, 2016, the Company recorded expense of $457 for accrued 401(k) match contributions.
F-29
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 16, 2017
SERES THERAPEUTICS, INC.
By:
/s/ Roger J. Pomerantz
Roger J. Pomerantz
President, Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Roger J. Pomerantz
Roger J. Pomerantz, M.D.
/s/ Eric D. Shaff
Eric D. Shaff
/s/ Noubar B. Afeyan
Noubar B. Afeyan, Ph.D.
/s/ Dennis Ausiello
Dennis Ausiello, M.D.
/s/ Grégory Behar
/s/ Kurt C. Graves
Grégory Behar
Kurt C. Graves
/s/ Peter Barton Hutt
Peter Barton Hutt
/s/ Richard N. Kender
Richard N. Kender
/s/ Lorence H. Kim
Lorence H. Kim, M.D.
President, Chief Executive Officer
and Chairman of the Board
(principal executive officer)
Chief Financial Officer and
Executive Vice President (principal
financial and accounting officer)
Director
Director
Director
Director
Director
Director
Director
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
March 16, 2017
Exhibit
Number
3.1
3.2
4.1
4.2
10.1#
10.2#
10.3#
10.4
10.5
10.6#
10.7#
10.8#
10.9#
10.10#
10.11#
10.12#
10.13#
10.14#
10.15#
10.16#
10.17#
10.18^
EXHIBIT INDEX
Exhibit Description
Form
File No.
Exhibit
Incorporated by Reference
Restated Certificate of Incorporation, filed on July 1, 2015
Amended and Restated By-Laws
Amended and Restated Investors’ Rights Agreement, dated
December 19, 2014, by and among the Registrant and each of
the investors listed on Schedule A thereto
Specimen Stock Certificate evidencing the shares of common
stock
2015 Incentive Award Plan and forms of award agreements
thereunder
2015 Employee Stock Purchase Plan
Non-Employee Director Compensation Program
Lease Agreement, dated April 1, 2015, by and between the
Registrant and ARE-MA Region No. 38, LLC
Lease, dated November 11, 2015, by and between the
Registrant and BMR-Sidney Research Campus, LLC
Employment Agreement, dated June 14, 2015, by and between
the Registrant and Roger J. Pomerantz
First Amendment to Employment Agreement, dated February
3, 2016, by and between the Registrant and Roger J.
Pomerantz
Employment Agreement, dated June 14, 2015, by and between
the Registrant and Eric D. Shaff
Amendment to Employment Agreement, dated August 7, 2015
by and between the Registrant and Eric. D. Shaff
Employment Agreement, dated June 13, 2015, by and between
the Registrant and David N. Cook
Amendment to Employment Agreement, dated June 13, 2015
by and between the Registrant and David N. Cook
Employment Agreement, dated August 10, 2015, by and
between the Registrant and John G. Aunins
Amendment to Employment Agreement, dated February 8,
2017 by and between the Registrant and John G. Aunins
Employment Agreement, dated June 13, 2015, by and between
the Registrant and Michele Trucksis
Amendment to Employment Agreement, dated August 7, 2015
by and between the Registrant and Michele Trucksis
Employment Agreement, dated December 11, 2015, by and
between the Registrant and Wael Hashad
Employment Agreement, dated April 26, 2016 by and
between the Registrant and Thomas J. DesRosier
Collaboration and License Agreement, dated January 9, 2016,
by and between the Registrant and Nestec Ltd.
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
Filed/
Furnished
Herewith
Filing
Date
7/1/15
7/1/15
5/27/15
6/16/15
6/16/15
6/16/15
6/16/15
5/27/15
001-37465
001-37465
333-204484
333-204484
333-204484
333-204484
333-204484
333-204484
3.1
3.2
4.1
4.2
10.2
10.3
10.4
10.13
8-K
8-K
S-1
S-1/A
S-1/A
S-1/A
S-1/A
S-1
10-K
001-37465
10.13
3/14/16
S-1/A
333-204484
8-K
001-37465
S-1/A
333-204484
10-Q
001-37465
S-1/A
333-204484
001-37465
10.6
10.1
10.7
10.7
10.8
10.9
6/16/15
2/4/16
6/16/15
8/10/15
6/16/15
8/10/15
001-37465
10.10
8/10/15
*
S-1/A
333-204484
10.10
6/16/15
001-37465
10.12
8/10/15
001-37465
001-37465
001-37465
10.3
10.1
10.1
21.1
5/16/16
8/11/16
5/16/16
6/16/15
21.1
Subsidiaries of Seres Therapeutics, Inc.
S-1/A
333-204484
Exhibit
Number
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Exhibit Description
Form
File No.
Exhibit
Incorporated by Reference
Filing
Date
Filed/
Furnished
Herewith
Consent of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
*
*
*
**
**
*
*
*
*
*
*
*
**
#
^
Filed herewith.
Furnished herewith.
Indicates management contract or compensatory plan.
Confidential treatment has been granted with respect to redacted portions of this exhibit. Redacted portions of this exhibit have been filed separately
with the SEC.
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
Exhibit 10.13
This First Amendment (the “First Amendment”) to that certain Employment Agreement between Seres Therapeutics, Inc., a
Delaware corporation (together with any successor thereto, the “Company”), and John G. Aunins, Ph.D. (the “Executive”) dated as of August
10, 2015 (the “Employment Agreement”) is made as of February 8, 2017 (the “Amendment Date”), by and between the Company and the
Executive.
WHEREAS, the Company and the Executive desire to amend the terms of the Employment Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Executive hereby agree to the following:
1.
Amendment to the Employment Agreement. Effective as of the Amendment Date, the Employment Agreement is hereby
amended as follows:
entirety to read as follows:
(a)
The second sentence of Section 2(b) of the Employment Agreement is hereby amended and restated in its
“Executive’s annual incentive compensation under such incentive program (the “Annual Bonus”) shall be targeted at 40% of
Executive’s Annual Base Salary.”
2.
References. The references to “this Agreement” in the Employment Agreement shall mean the Employment Agreement,
as amended by this First Amendment.
3.
No Other Amendment. Except as expressly set forth in this First Amendment, the Employment Agreement shall remain
unchanged and shall continue in full force and effect according to its terms.
4.
Counterparts. This First Amendment may be executed in several counterparts, each of which shall be deemed an original
and all of which together shall constitute one document.
5.
Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts (without giving effect to any choice or conflict of laws provision or rule that would cause the application of
the laws of any other jurisdiction).
6.
Headings. The headings in this First Amendment are for reference purposes only and will not in any way affect the
meaning or interpretation of this First Amendment.
7.
Entire Agreement. This First Amendment constitutes the entire agreement among the parties concerning the subject
matter hereof and supersedes any prior representations, understandings or agreements.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the Amendment Date.
SERES THERAPEUTICS, INC.
By:
Name:
Title:
/s/ Roger J. Pomerantz
Roger J. Pomerantz, M.D.
President, Chief Executive Officer and
Chairman of the Board
EXECUTIVE
/s/ John G. Aunins
John G. Aunins
2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-205253 and 333-210171) of Seres Therapeutics,
Inc. of our report dated March 16, 2017 relating to the financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2017
Exhibit 31.1
I, Roger J. Pomerantz, certify that:
1. I have reviewed this Annual Report on Form 10-K of Seres Therapeutics, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 16, 2017
By:
/s/ Roger J. Pomerantz
Roger J. Pomerantz
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Exhibit 31.2
I, Eric D. Shaff, certify that:
1. I have reviewed this Annual Report on Form 10-K of Seres Therapeutics, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 16, 2017
By:
/s/ Eric D. Shaff
Eric D. Shaff
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Roger J. Pomerantz, President and Chief Executive Officer of Seres Therapeutics, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. §1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
The Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 16, 2017
/s/ Roger J. Pomerantz
Roger J. Pomerantz
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Eric D. Shaff, Executive Vice President and Chief Financial Officer of Seres Therapeutics, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C.
§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
The Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 16, 2017
/s/ Eric D. Shaff
Eric D. Shaff
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)