Seres Therapeutics, Inc. (MCRB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Seres Therapeutics Business Update Conference Call. [Operator Instructions] Please be advised that this conference call is being recorded. I would now like to hand the conference over to your speaker for today, Dr. Carlo Tanzi of Investor Relations. Carlo, please go ahead.

Thank you, and good morning. A press release announcing that Seres has entered into a license agreement with Nestlé Health Science, who we'll be referring to as Nestlé to co-commercialize SER-109 became available at 7:00 a.m. Eastern Time this morning and can be found on the Investors & News section of the company's website. I'd like to remind you that we'll be making forward-looking statements relating to the timing, enrollment and results of our clinical studies, regulatory approval, the promise and potential impact of SER-109, including the potential market size, any potential benefits of collaborating with Nestlé, potential future financial milestones and profits and the use of such funds to support the company. Additionally, these statements are subject to certain risks and uncertainties, which are discussed under the Risk Factors section of our recent SEC filings. Any forward-looking statements made on today's call represent our views as of today only. We may update these statements in the future, but we disclaim any obligation to do so. On today's call with prepared remarks, I'm joined by Seres' President and Chief Executive Officer, Eric Shaff; and Chief Financial Officer, David Arkowitz. During the Q&A portion of the call, we will also be joined by Dr. Lisa von Moltke, Chief Medical Officer; and by Dr. Terri Young, Chief Commercial and Strategy Officer. And with that, I'll pass the call over to Eric.

Thank you, Carlo, and good morning, everyone. We are very pleased to announce today that Seres has entered into a license agreement with Nestlé Health Science to co-commercialize SER-109, Seres' lead investigational oral microbiome therapeutic for recurrent C. difficile infection in North America. Let me begin by highlighting how we believe this agreement advances our strategic objectives and fits squarely within the company's vision to most effectively provide our microbiome therapeutics to patients in need while also continuing to extend Seres leadership position in this new segment of medicine. We believe that this transaction maximizes our opportunity to bring SER-109 to individuals suffering from recurrent CDI, transform the treatment of this challenging disease and meaningfully improve patient outcomes. This agreement also represents an important step towards fulfilling our long-term strategic objective to implement the optimal commercial approach for SER-109 that maximizes the value generated by this remarkable investigational microbiome therapeutic. And with Nestlé's broad reach and extensive commercial capabilities, we believe we are delivering on this objectives. Furthermore, this transaction is financially attractive for Seres, providing our company with meaningful capital to drive continued pipeline growth and enabling our team to utilize our unique expertise and our promising platform to aggressively pursue the next generation of microbiome therapeutics. The agreement provides Seres with a substantial upfront payment of $175 million, an additional $125 million upon FDA approval of SER-109, $10 million upon Canadian regulatory approval and up to an additional $225 million based on achieving certain sales goals. Upon commercialization of SER-109, Seres will be entitled to an amount equal to 50% of commercial profits, providing our company with ongoing value into the future. Today's agreement expands upon our prior agreement with Nestlé, which provided them with commercial rights to our products targeting CDI in inflammatory bowel disease outside of North America. Nestlé has been a long-term supporter of Seres, having invested in the company from venture stage through to several public equity investments. This collaboration deepens our valued and longstanding relationship. We are particularly excited about this collaboration. Nestlé has developed an effective pharmaceutical commercial organization aiming therapeutics with a focus on the gastrointestinal market and will be leading the commercialization of SER-109 with Seres playing an active role in the commercialization. We believe combining Seres' deep scientific microbiome therapeutic expertise with Nestlé's commercial capabilities positions SER-109 to broadly reach the recurrent CDI patient segment while also maximizing the value accrued to Seres. We believe Nestlé's commercial organization is well suited to market SER-109. Through their pharmaceutical business, which operates under Aimmune Therapeutics, they have built a strong network of relationships with gastroenterologists, who are among the primary physicians treating recurrent CDI. Nestlé has demonstrated its commitments to expand its global pharmaceutical business. To support this effort, Nestlé has developed a sizable and highly capable GI sales force and marketing function to form a strong and effective pharmaceutical organization. Nestlé's GI-focused field sales force has successfully driven the growth of several pharmaceutical products in the space, including Zenpep and Viokace. In addition, they have developed strong complementary commercial capabilities, including an experienced market access function. With Nestlé's current GI-focused commercial capabilities, and the intent to establish an equally effective infectious disease targeted sales force, we believe that their organization is the ideal co-commercialization collaborator and extraordinarily well suited to maximize the commercial success of SER-109. Today's agreement follows the highly successful SER-109 Phase III clinical study results announced last summer. To remind you, those data demonstrated a highly effective, sustained clinical response rate of approximately 88% in patients with multiply recurrent CDI, and we also subsequently reported that this patient benefit was maintained through 24 weeks. Furthermore, our Phase III data demonstrated a favorable safety profile associated with SER-109 that was comparable to placebo. These remarkable results exceeded the efficacy threshold communicated by the FDA regarding the statistical requirements to support the efficacy requirement for a SER-109 BLA submission. We believe our SER-109 results support the potential for this investigational products to transform the management of recurrent CDI, a severe disease that has been very challenging to treat with existing therapies, and which impacts approximately 170,000 individuals and kills 20,000 annually in the U.S. alone. Since obtaining our SER-109 Phase III data, we have continued to build a SER-109 safety database to support a BLA filing. We remain on track to complete target enrollment in our open-label safety study in the third quarter of this year and pending 24-week follow-up data, we look forward to filing a BLA thereafter. This is an exciting opportunity for Seres and Nestlé, and we believe that it represents a substantial opportunity to transform a disease where current treatment options are suboptimal due to limitations regarding efficacy, safety concerns or onerous routes of administration. No currently approved therapies address the underlying microbiome dysbiosis that is central to recurrent CDI. This is the precise mechanistic target for SER-109, a first-of-its-kind microbiome therapeutic candidate. I'll now turn the call over to David to provide additional information about the agreement terms.

Thanks, Eric, and good morning. I'll begin with a summary of the deal financials. In exchange for SER-109 co-commercialization rights in North America, Nestlé Health Science will provide Seres with an upfront payment of $175 million. Seres will also receive an additional $125 million upon FDA approval of SER-109 and a $10 million payment upon Canadian regulatory approval. Furthermore, the agreement includes meaningful sales milestones, which, if achieved, total up to $225 million. We believe that these sales milestones are very achievable and break down as follows: $50 million milestone for exceeding annual sales of $250 million; $75 million milestone for exceeding annual sales of $500 million; and $100 million milestone for exceeding annual sales of $750 million. In summary, the aggregate value of the upfront payment plus the potential approval in sales milestones totals $535 million. Under the agreement, Seres will fund all prelaunch commercialization and medical affairs expenses up until product approval. Upon commercialization, Seres will be entitled to an amount equal to 50% of the profits generated by the commercialization of SER-109. Notably, we expect that Nestlé's existing commercial capabilities should result in efficiencies related to SER-109 commercialization, and we anticipate that this should lead to cost savings and improved profitability. The agreement's profit split is an important component of the transaction and we believe this will provide Seres with substantial longer-term value. This is a co-commercialization agreement. So we will be operating in a way that is a true collaboration with both entities having a key role in the commercialization of SER-109. Nestlé Health Science will be responsible for leading commercialization activities subject to Seres option to provide a proportion of physician detailing under certain conditions, and Seres and Nestlé will share responsibilities for medical affairs activities with Seres leading these efforts prior to launch and with Nestlé leading them thereafter. Seres will continue to leverage its deep scientific expertise and one example of that is our team of medical science liaisons, a number of whom have already been deployed and have deep relationships within the medical community. Seres will be responsible for the manufacturing and supply of SER-109 for the U.S. and Canada in addition to ex North America under the existing agreement with Nestlé. We view microbiome therapeutic manufacturing as a core capability, and we believe that maintaining CMC operations within our company provides us with long-term strategic value. Furthermore, Seres will lead development and regulatory activities. Oversight and governance of the collaboration will be provided by a joint steering committee composed of an equal number of members from each company. This structure will continue to enable Seres to provide meaningful input into all aspects of product commercialization. In summary, we wanted to ensure we could leverage the broad and deep core competencies in the areas that each company brought to the collaboration. The capital provided by this transaction will support the continued development of SER-109 as well as prelaunch commercialization activities. The capital provided will also enable the continued advancement of Seres' overall microbiome therapeutic pipeline, including our clinical stage SER-287 and SER-301 ulcerative colitis programs, our SER-155 program targeting infection in graft-versus-host disease and our early-stage oncology programs. In addition, we intend to continue to strengthen our field-leading drug discovery and manufacturing capabilities. Operationally, we are very fortunate to have had a long-standing and productive relationship with Nestlé, and the 2 teams already know one another and work well together. Nestlé has had a particular interest in the microbiome over a number of years, demonstrating their deep commitment to the advancement of this novel therapeutic modality and helping to drive meaningful alignment across the 2 companies. To conclude, we are very excited to announce this transaction. We believe this positions SER-109 for commercial success while providing Seres with meaningful capital that will continue to fuel our pipeline and the development of novel transformative microbiome therapeutics. With that, I'll turn the call back to Eric.

Thanks, David. At Seres, our mission is to bring transformative microbiome therapeutics to patients in need, and this agreement represents an important and meaningful step in support of this goal. Through the agreement announced today, we are optimally positioning our company to most effectively bring SER-109 to patients suffering from recurrent CDI while also creating substantial value. We expect that the meaningful capital provided by this transaction will enable us to rapidly advance the novel and promising field of microbiome therapeutics for patients and support our ongoing commitment to enhance shareholder value. Today's transaction further solidifies Seres' position as the leader in the development of microbiome therapeutics. Along with the clinical achievements we have generated to date, this agreement advances our efforts to aggressively pursue the full promise of microbiome therapeutics. We believe that our success in addressing recurrent CDI is only the beginning and that our technology has the potential to transform the management of many other severe and hard-to-treat diseases across multiple therapeutic areas. With that, operator, we'll now pause and open the call up to questions.

[Operator Instructions] Your first question is from the line of Joe Thome with Cowen and Company.

Congratulations on the news. First one from me is just how much of an overlap with the Aimmune existing sales force is there specifically in the call points for C. diff? Would this be a pretty seamless transition over there with their existing group? And then second, in terms of how Seres is thinking about keeping indications in-house versus down the line kind of launching their own. Are there any specific indications or therapeutic areas that you would like to kind of keep under the Seres Therapeutics umbrella completely?

Yes, Joe, thanks for the question. Good morning. Maybe I'll take the second one first, and then I'll ask Terri to comment more fully on the commercial overlap. I think it's worth maybe just stepping back for a moment and just talking about our interest as it relates to partnership. And for us, I think this is a great illustration of what we hope to do. We think that first -- look, this transaction we believe, for recurrent C. diff provides the most effective way to get this drug to patients. So that means leveraging Nestlé's infrastructure, their reach, their capabilities to serve patients more quickly, more expansively and probably ultimately more profitably than we can do ourselves, right? The second is that we think that we and our shareholders are getting great value for the asset. And if you look at the fixed payments, the upfront payments, the sales-based milestones and then the profit split, we think there's a compelling economic case. The last point, Joe, is that we think that this is really the best of both worlds, right? So we think that SER-109 will be the first approved microbiome therapy in the space and launching that, we see as a precious responsibility and the idea of sharing that with someone is a pretty significant choice. We felt it made sense with Nestlé because we felt that they could help us do more than we could do ourselves. At the same time, the idea of transacting here, we think, really opens up capital bandwidth focus to be able to aggressively pursue the next set of opportunities to help patients in microbiome therapeutics, which starts with IBD and specifically our upcoming SER-287 readout. So when I've been asked the question in the past about how do we think about partnership, the short answer is that we think about our ability to help patients and our ability to create value for shareholders. And we think that this transaction is extremely favorable on both of those dimensions. Now how we take that going forward in terms of future indications, we'll think about on a case-by-case basis. But we do have a very broad set of objectives in terms of helping patients and we've got -- we think we've got the technology to be able to do so. So that's the second question. Maybe I can ask Terri to comment a little bit more specifically on the overlap with the Nestlé GI infrastructure.

Thanks, Eric. Good morning, Joe. So your question referenced sales force overlap and it was specific to Aimmune, I think where I'd start is that Nestlé Health Science has actually acquired broad and meaningful capabilities through the Aimmune acquisition, but also through the recent acquisition of a couple of Allergan GI products, and that was really important to us. So really, what we were looking for is not only a meaningful field sales presence, which is what they have, but we were also looking for capabilities beyond that in terms of market access for the customers that will be important for us and for SER-109 and also operational back-end capabilities that give us expertise and efficiencies. And when we were vetting partners, Eric referenced a competitive process. We had several large multinationals at the table and my team and I embarked on a pretty significant deep-dive and robust assessment of each potential partner's commercial capabilities and what we learned regarding Nestlé Health Science was that they have significant GI sales force to get you to your specific question, capabilities. This is the team, many of whom were at the table to launch Zenpep back in 2009, Zenpep is one of the Allergan products that Nestlé brought over. This is also the team that helped co-promote and grow LINZESS in partnership with Ironwood. So they have been around for a long time. They have meaningful relationships in the GI space in addition to the other capabilities that they are bringing to the table that were really interesting for us.

That is very helpful. And congrats again.

Your next question is from the line of Ted Tenthoff with Piper Sandler.

Great. And congratulations on this partnership. I think this is a great way to bring this drug to patients quickly and broadly. A couple of quick questions and they're a little bit in the weeds. But firstly, where do you envision cost of goods sold coming out? And then secondly, will Nestlé book revenues and you'll recognize a kind of either a royalty or a collaborative line?

Ted, good morning. We love the detailed questions. Maybe I'll start with COGS and then I'll ask David to comment on the booking sales piece. So we have not provided guidance as it relates to COGS historically, but I think it's worth remembering that as we think about manufacturing, which we've said before and I think it's worth reiterating, we think it's a hugely important aspect of what we do; not commoditized as we thought about roles and responsibilities in this partnership and what each party brings uniquely to the table, we thought that it was important that we continue to manage the manufacturing piece. The scale at which we operate, I think sometimes is surprising to folks where we're not talking 20,000-liter bioreactors, we're talking about efficient small, nimble disposable programs within our manufacturing network. So -- whereas we have not guided as to COGS, we can say that, of course, with the price not being set, we see this as a favorable program profile, favorable gross margin, and we think it's going to create value for both parties. Maybe I can ask David to comment on your question as it relates to royalty and what the P&L would look like.

Yes. Thank you. Thanks Ted. So a lot of that is ahead of us as we're now working with our external auditors, PwC regarding accounting treatment. What I can tell you is, first of all, the $175 million upfront payment, our belief, our expectation is that that's going to be recognized as revenue, but it's going to be amortized over the performance period. We think that the profit split, our share of the commercial profits will be reflected. This is preliminary and subject to further discussion with our others, will be reflected as collaboration revenue on our P&L, that net amount. Whether there is a COGS line or not, I think is still under discussion, under review.

Yes. Yes, makes sense. Perfect. Well, really, really exciting. And looking forward to additional data, not just on 109, but on the rest of the pipeline, including the upcoming UC data.

Your next question is from the line of Chris Shibutani with Goldman Sachs.

Yes. Congratulations on the update. Can you just remind us with the existing Nestlé relationship and access to the IBD opportunity for 287 and 301, clarify what is in place with that relationship in terms of commercial opportunity? Do you once again have an opportunity to extend that to pursue potential other partners?

So Chris, just as a reminder, in 2016, we initiated a global strategic partnership with Nestlé around our lead ID assets and IBD assets, including, as you mentioned, 287 and 301. So Nestlé owns ex North American rights to 287 and 301 and we own U.S. rights, North American rights to 287 and 301. So as we've said, this partnership is focused on 109 and we're really looking forward to seeing the data as the next step. And of course, after that, we'll determine what the right way to do -- the right way to bring the drug forward will be.

Got it. And then with the announcement you included specifically an upfront payment with approval in Canada. Can you remind us what the time lines and status of the regulatory approval process in Canada is for 109 currently? And also where you guys are outside North America?

Yes. Chris, it's a good question. We haven't guided. I'll say that we have been very specific as to where we are in next steps on the FDA process. I think it's fair to say that we will take this opportunity to reset with our Nestlé colleagues, the global regulatory path for geographies like in Europe and like in Canada. So we don't have guidance to that today, but certainly, it's something that we're actively talking about and I suspect we'll have a formal plan for reasonably shortly.

And actively talking about includes with the 2 of you engaging with regulators in those respective geographies?

We're always -- we're very frequently engaging with regulators as to next steps. So it's a combination of discussions with regulators and with our partners.

Great. And then finally, SER-109, the debate on pricing. Can you comment at all where you are in terms of any updated research that you've been doing? Terri has often referenced some discussions that you're having there? As I look through the Nestlé product portfolio, there's a fair amount in nutritionals, kind of the magnitude of the price point of SER-109, which I think you're contemplating, is at kind of a different level as an advanced therapeutic. Talk to us about where maybe the inputs are coming from Seres and from Nestlé, obviously, you came to some agreement to establish these sales annual milestones? Can you help us at all think about what kind of embedded assumptions are about pricing?

Yes. Chris, let me start and then I'll ask Terri to comment further. But I would say there's a strong alignment on the value that we can provide patients with SER-109, especially relative to options that are available today, right? So think about 170,000 patients in the U.S., think about the data, which suggests that each recurrence can cost $34,000, and think about the nature of the disease and the fact that with each recurrence, you're more likely to recur again. And if you can break that cycle of recurrences, I think we demonstrated that we are highly effective in doing with our Phase III study, you can have a strong pharmacoeconomic case to charge a price that is reflective of the value that you're creating for the system and for the patient and the innovation that's incumbent in the product. So we certainly think there's a strong case to charge a price that's commensurate with the value that we're creating. And certainly, that will be a discussion as we get closer to launch that we'll have with our partners. But maybe Terri can comment further.

Sure. Good morning Chris. I think what I would add is kind of to build on the team in my answer to Joe earlier, which is that despite Nestlé being built on a foundation of nutritional business originally, they have done a fantastic job of building out their capabilities in a pharma presence globally via some of these acquisitions recently. So I've been working and collaborating with this team since I joined Seres to ensure that we have the most robust value proposition and pricing strategies as we move forward globally. Obviously, they have had the rest of the world, ex U.S. and Canada. So our relationship has been very tight, and I feel like we're very aligned in terms of our path forward, and I look forward to working with them as we approach launch to make the right decisions that ensure that patients who really need this medicine have access to it, but also we're returning value and we select a price that's representative of the innovation that we're bringing.

Great. Congratulations on the deal, and we look forward to learning more about the Nestlé folks.

Your next question is from the line of Roger Song with Jefferies.

Great. Congrats again for this kind of announcement and collaboration. Maybe just 2 quick kind of financial-related questions from us. So one is -- so just could you comment on how much commercial costs are related to the medical affair prelaunch and postlaunch from the Seres. The other one is the -- in terms of the commercial profits. So could you provide us some kind of benchmark in this kind of commercial process we can think kind of the industry standard in terms of the share between 2 partners?

Yes. Roger, thanks for the question, and maybe I'll start and David can fill in if I'm missing something. So in terms of commercial costs, again, we haven't provided guidance. I think the way that we thought about this is that we will continue to work with Nestlé to create the right prelaunch plan that ensures that we're supporting both companies to be in the best position to bring the drug forward as successfully as we can. But it's also notable that part of the -- and I think this is embedded in David's prepared remarks, part of the efficiency or the attractiveness of this deal for us is really the efficiency that's gained by leveraging Nestlé's significant existing capabilities. And we do think that, that will translate into greater profitability. On the second question as it relates to the margin profile, I think I'll just reiterate what we said beforehand, which is we think that the efficiency related to manufacturing here is such that this will be an attractive financial profile as a product, and it will create an opportunity, we think, with penetration to create value for both companies. But David, anything I missed there?

No. Just -- I would just add, I mean, the tremendous unmet medical need, the profile of SER-109 and the capabilities and opportunity to leverage those capabilities that Nestlé brings to the table as well as our expertise and capabilities that we bring to bear, I think all roll up to something that is attractive and very compelling.

Great. Congrats again.

Okay. Your next question is from the line of Gobind Singh with JMP.

Congrats on the news, everyone. So I guess just one sort of housekeeping question. Was the collaboration revenue going to be booked as -- I know you mentioned it was probably going to be amortized. Is this a 2Q or is this going to be a 3Q sort of event? And then maybe just a little bit more subtle, I apologize if I missed this, but can you comment at all if Nestlé saw any of the results from the open label that's ongoing that may have motivated them to dig deeper into a relationship with you?

Yes. Gobind, so thanks for the questions. I think on the first, the deal was consummated in Q3 officially. So David, maybe you can comment on the expected revenue and how that will flow through our financials.

Yes, certainly. So yes, Eric, is correct. This was executed today. So this is -- this will start Q3. And the first piece that we mentioned previously is the upfront $175 million, again work still needs to be conducted with our auditors, but our expectation is that that's going to be amortized over performance period. As we talked about, there's a number of other meaningful economic terms, approval milestones, sales milestones and then the 50% of profits that we'll be receiving once commercial, and we'll be working with our auditors to figure out the appropriate accounting for that going forward.

And then Gobind on the second question, I would say, I prefer not to comment on what is shared internally or externally. I'll just comment in general on the open label. We're making good progress, we expect to finish enrollment in Q3. There'll be a 6-month follow-up following that. And this is the safety dimension that the FDA has asked for in support of a BLA. And we are in the process of fulfilling that, and we feel good about where we are.

Congrats again, guys.

And at this time, there are no further questions. I will turn the call back to the company for any final remarks.

So thanks, operator, and I want to thank everybody for joining today's call and for your interest in Seres. In the coming weeks, we expect the top line clinical results from our SER-287 study. We look forward to communicating those data. And with that, we'll conclude today's call. Have a great day. We appreciate your attention.

Thank you for joining today's conference call. You may now disconnect.