Cerus Corp (CERS) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the conference call regarding the restructuring of the agreement with Baxter and the fourth-quarter 2004 Cerus earnings. My name is Christy (ph), and I will be your audio call coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Lainie Corten, Manger of Corporate Communications and Investor Relations. Please proceed, Ma'am.

Thank you and good morning. Before introducing Claes Glassell, President and Chief Executive Officer of Cerus, I remind you that during this call we will be making forward-looking statements that involve risks and uncertainties, including statements about development, research, regulatory progress, commercialization, finances, and business prospects. Our actual results may differ materially from those suggested by forward-looking statements we will be making.

I call your attention to the disclosure in our SEC filings, in particular our most recent quarterly report filed on Form 10-Q for the quarter ended September 30, 2004, including the section entitled Risk Factors. To request copies of our SEC filings or our press releases, please call 925-288-6319 or find them on our website at Cerus.com. This call will be archived temporarily on our website and will not be updated during that time. I will now turn the call over to Claes.

Thank you, Lainie. I'm here today with our Chief Financial Officer, Bill Dawson, and also David Cook, our Vice President of Research and Development.

On this call, we will cover the new Baxter agreement announced earlier this morning and our financial results for the fourth quarter and bring you up-to-date on accomplishments made since our last conference call.

As many of you know, improving our relationship with Baxter was one of the four strategic initiatives I announced last year when I became Chief Executive Officer of Cerus. Today I am very pleased to tell you that we have achieved this goal, which has been my own top priority.

The new agreement described in this morning's press release restructures our collaboration with Baxter for commercialization of the INTERCEPT Blood Systems for platelets, plasma, and red cells.

Importantly, we have also resolved our loan dispute, resulting in a gain to Cerus of $22.1 million. Both parties have agreed to dismiss the related legal actions. We believe the terms of the agreement collectively are quite favorable to Cerus.

Bill will comment on the financial impact of this announcement in a moment. First, I would like to comment on the INTERCEPT development program and the restructured commercialization agreement with Baxter.

Cerus is firmly committed to commercializing pathogen inactivation. Partnerships are a key part of our strategy for INTERCEPT. We value our relationships with Baxter and BioOne. Cerus will continue to seek additional INTERCEPT collaborations with new and capable partners to help bring INTERCEPT into new market segments and new geographies.

I believe that the terms of the new agreement will enable us to improve INTERCEPT's opportunities for regulatory and commercial success. Baxter and Cerus will continue to work together worldwide on INTERCEPT Platelets and outside of North America for INTERCEPT Plasma. In Europe, Baxter has committed substantial funding for this effort over the next two years.

We will also continue our joint activities in pursuit of U.S. regulatory approval for platelets, including discussion with the FDA to clarify additional steps required for product approval. We will also continue to work together with BioOne in Asia on both platelets and, prospectively, plasma.

In the restructured agreement, Cerus has acquired worldwide rights for INTERCEPT Red Cells and also rights to plasma in the United States and Canada. Based on cumulative investments and clinical progress to date, we believe these programs have significant value. We look forward to discussions with potential partners who share our enthusiasm for commercializing pathogen inactivation.

The agreement does not change our relationship with BioOne. As you will recall, BioOne paid Cerus $10 million in upfront payments for rights to INTERCEPT Platelets in Asia. Cerus may also receive future milestone payments aggregating to $8 million and will split double-digit royalties evenly with Baxter in future sales in the territory.

As announced earlier this month, Cerus and Baxter have entered into a letter of intent with BioOne to license INTERCEPT plasma in the same region, and the three companies will continue their negotiations toward a definitive agreement. Cerus has a strong relationship with BioOne. We believe BioOne is well positioned to commercialize INTERCEPT in Asia.

Now I would like to offer a few more details about the status of each INTERCEPT program.

In Europe, Baxter will provide $13.1 million to fund INTERCEPT Platelet and Plasma commercialization activities through 2006, including preparation of a CE Mark application for plasma. These funds will be escrowed for joint management by Cerus and Baxter. This funding commitment to support INTERCEPT is considerably greater than amounts Baxter spent in 2004. A good portion will be used to conduct a large number of experience studies to get INTERCEPT Platelets into the hands of potential European customers.

Beyond the increased funding, Baxter has also committed additional personnel to marketing, sales, and regulatory activities in Europe. Our existing customers will benefit from a Baxter sales team now dedicated to INTERCEPT, aided by a Cerus technical support staff.

While we can offer no guarantee that these changes will lead to market success, increased funding and a dedicated organization for platelet marketing in Europe should produce a much more intensive and focused effort than INTERCEPT has enjoyed to date.

For platelets in the United States, the next step will be the submission of the independent expert panel supplemental analysis of our Phase III SPRINT trial to the FDA. Following that, we expect to have discussions with the FDA regarding the potential size and scope of a possible additional platelet trial that may be required.

In acquiring the right for red cells worldwide and the rights for plasma in United States and Canada, Cerus also gains responsibility for development and commercialization of these products in these geographies. I would like to briefly remind you of the status of plasma and red cells in the United States.

Our Phase III trials for plasma in the United States have been completed, but because we have prioritized European regulatory activity for plasma, we expect to find a European CE Mark application for plasma prior to seeking approval in the United States. Under our present plan, we target filing of the CE Mark application by the end of 2005.

For red cells, an evaluation of the modified S-303 treatment process that we described at December's American Society of Hematology meeting is ongoing. We expect to analyze additional data before reaching a decision later this year regarding reentry into the clinic. If we develop sufficient data to support a renewed clinical effort, we would likely need to conduct early phase studies using the modified process prior to starting a Phase III red cell study. Once we have completed our analysis and come to a decision, we will provide further information on our plans for the red cell program.

I will now turn the call over to Bill Dawson, our Chief Financial Officer, for a discussion of last quarter's financial results and the financial impact of the restructured Baxter agreement.

Thanks, Claes. Revenue for the fourth quarter of 2004 was $3 million, down from 3.5 million for the fourth quarter of 2003, with increases in milestone and development funding from partners partially offsetting decreased funding from the U.S. Armed Forces for blood safety programs.

Total operating expenses for the fourth quarter of 2004 were $7.3 million, down from 12.5 million for the same period in 2003. This was primarily due to the effects of the strategic realignment announced in June and decreased payments to Baxter under the terms of our INTERCEPT collaboration.

Net loss for the fourth quarter of 2004 was $5.4 million, or 24 cents per share, compared to 10.1 million, or 46 cents per share, for the fourth quarter of 2003.

Revenue for the year ended December 31, 2004 was $13.9 million, up from 9.7 million for 2003, primarily due to increased milestone and development funding from MedImmune and BioOne. Total operating expenses for 2004 were $40.7 million, down from 63.5 million for the prior year. Net loss for 2004 narrowed to $31.2 million, or $1.41 per share, compared to 58.3 million, or $3.01 per share, for 2003.

At December 31, 2004 the Company had cash, cash equivalents, and short-term investments of $95.3 million, up from 89.6 million at the end of the third quarter. This increase is due in large part to the receipt during the fourth quarter of two cash payments from BioOne totaling $10.5 million -- 7.5 million upon the closing of the licensing agreement for platelets in October and 3 million upon signing of the letter of intent for plasma in very late December.

Given the terms of the new agreement with Baxter, uncertainties on our balance sheet have now been eliminated. In lieu of principal and accrued interest on the disputed Baxter loan totaling $61.5 million, our balance sheet as of December 31, 2004 reflects the following entries related to the new Baxter agreement and the settlement of the loan dispute -- the current payable to Baxter of 34.5 million, a $770,000 reserve for other expenses in connection with the new agreement included within other current liabilities, a deferred gain on the loan settlement of $22.1 million, which will be recognized in the first quarter of 2005, and long-term debt of 4.5 million, representing the new note due to Baxter in December, 2006, which accrues interest at 8 percent.

After giving effect to the payment of $34.5 million to Baxter, which was made earlier today by wire transfer, Cerus begins 2005 with a cash balance in excess of $60 million. With the Baxter loan dispute resolved, it is our objective to end 2005 with an excess of $45 million in cash.

We announced last year that we were taking steps to reduce our annual burn rate. We also announced that spending for INTERCEPT projects would be brought into balance with the level of revenue from product sales and available external funding. We have fully implemented both initiatives. The funding from BioOne, along with support from Baxter for platelets and plasma in Europe and ongoing grants from the U.S. Department of Defense, will substantially aid us in moving INTERCEPT forward in 2005 while maintaining this disciplined financial approach. More broadly, our cash balance now provides Cerus ample resources to reach key clinical milestones in programs involving our novel immunotherapies for cancer and infectious disease.

I will now turn the call over to David Cook, our Vice President of Research and Development, who will provide an update on recent progress in our cancer immunotherapy programs.

Thanks, Bill. In December, we announced that we acquired an exclusive worldwide license to Chugai's patent on the DNA sequence of Mesothelin in the field of cancer vaccines. Controlling the rights to this intellectual property, combined with rights to Mesothelin we have already licensed from Johns Hopkins, will raise barriers to entry for competitors and allow us additional flexibility in engineering our Listeria Mesothelin therapeutic.

As you'll recall, Mesothelin is a protein overexpressed in the vast majority of pancreatic and ovarian cancers. Immune responses to Mesothelin have been documented in pancreatic cancer patients who received an experimental wholesale cancer vaccine, and these immune responses correlated with long-term patient survival. The goal of our Listeria-Mesothelin development program is to stimulate the cancer patients' immune systems to recognize Mesothelin and selectively destroy tumors expressing this protein.

During the fourth quarter, we continued to make progress with our partners at Johns Hopkins and MedImmune in our programs combining Mesothelin and EphA2 with our novel Listeria technology platform. And today, I am pleased to officially announce a new program which will apply our proprietary Listeria platform to the treatment of colon cancer that has metastasized to the liver.

The new program will pursue the clinical use of our Listeria platform alone in inducing an innate immune response, including the activation of NK cells that can provide a defense against tumors. This cascade of immune stimulation may also promote antigen-specific responses against metastatic tissue. Our program takes advantage of the growing awareness that cancer can be treated by activating the innate immune system. However, what makes our approach unique from others is that our proprietary attenuated Listeria focuses the immune response selectively to the liver, which is the major site for the spread of colon cancer.

The liver is a common site for metastasis of all gastrointestinal cancers, such as cancers of the colon and pancreas, because blood from these organs flows directly to the liver. Over 140,000 new cases of colorectal cancer are diagnosed each year in the United States alone. Development of these metastases is associated with a grave prognosis and may be the life-limiting component of the disease for up to 60 percent of colorectal cancer patients.

Our new program grew out of studies at Johns Hopkins showing that Listeria treatment led to a long-term increase in survival in mice with experimental colon cancer implanted in the liver. Results of these studies will be published later this year. Importantly, the favorable safety profile of Cerus' attenuated Listeria strain is critical to clinical development of this approach.

For Cerus, the synergy with our existing Mesothelin and EphA2 development programs makes this an especially attractive opportunity. The preclinical work, safety testing, manufacturing development, and regulatory documentation for this new program overlaps substantially with what we are already doing in our antigen-specific development programs. In addition, we believe that entering the clinic first with the parent attenuated Listeria strain is an excellent approach to establishing the safety of our immunotherapy platform. We now expect that the IND we file later this year will be for colorectal liver metastases, with INDs for Mesothelin and EphA2 to follow soon thereafter. I will now turn the call back over to Claes for some concluding remarks.

Thank you, David. With the Baxter agreement behind us, we can now focus completely on Cerus's future. Our cancer immunotherapy programs continue to make good progress. We have added a third program and we are targeting submission of an IND by the end of 2005. We will continue to work with Johns Hopkins and MedImmune on the Mesothelin and EphA2 programs, expecting that these IND submissions will take place in 2006.

For the INTERCEPT programs, we are pleased to have gained full control of red cells. Our key activities in 2005 will include preparation and filing of a CE Mark application for plasma, completing a definitive agreement with BioOne for INTERCEPT Plasma in Asia, and reaching a decision regarding whether to seek reentry to the clinic for red cells. We are also happy to have two partners committed to commercializing INTERCEPT.

Financially, we will continue our strategic investment in the immunotherapy programs while maintaining our balanced approach to spending for INTERCEPT development. As Bill indicated earlier, we reiterate our goal of managing our burn rate such that we end 2005 with at least $45 million in cash. Now I would like to turn the call over for questions.

(OPERATOR INSTRUCTIONS) John Sonnier of Prudential.

Thank you. Congrats on all the good progress there. I had just a few questions. I guess when I think about the programs that you own now, it's plasma U.S. and it's the red cell program, right?

That's right.

So with plasma, where there's already a lot of existing data from a Baxter system, how do you treat that? Do you need to find a new partner and then do additional testing on their devices?

No, I think we will be able to use a lot of their components. We'll have to find new partners for manufacturing for the U.S. market. But for Europe, the plan is that they will continue to manufacture.

But in the U.S., since all of the trials were done on a Baxter system, do you need to revalidate that in another partner's system before you could ultimately get it approved? I guess the ultimate question, and it is probably true with red cells also, is do you need to secure a new partner before you can move forward?

Let me start in the tail end of your question with red cells. The new process that we are working on will require some development work on equipment also, John. And we would expect that that will be done by new partner. We have access to some prototypes and some of the work that was done by Baxter on the red cells and might be helpful for a new partner, but there will be a need for some additional work on that -- on the red cells.

On plasma, the agreement is that we will get components, that we will have access to components from Baxter, but we will need to revalidate any kind of U.S. manufacture, even if we use those components.

Okay. And I guess on the economic side, as I read through this, I am trying to understand what Baxter gave up. In other words, I know they're not going to support the R&D for red cells or plasma U.S. But did you have to alter your existing revenue share agreement to gain the rights back to the two programs? How does that work?

Where we are still working together in Europe and the U.S. platelets, the revenue sharing basically remains the same. And outside of that, of course, where we get the rights back, there is no more revenue sharing, but they will have some single digit royalties on sales or any partnership deals that we will do.

I see. And then my final question was for David. Just trying to figure out what the two or three most important inflection points are in '05 for the cancer platform.

I think certainly entering the clinic, filing our IND in this colon cancer application is going to be an important inflection point. I think shortly after that, you will see an IND in early 2006 for pancreatic cancer, and that will be another inflection point. So we will really have two clinical programs in the next 12 to 15 months.

Terrific, thanks a lot.

(OPERATOR INSTRUCTIONS) Brett Reiss of Wachovia Securities.

Just an accounting question on the deferred gain. I guess with the tax loss carryforwards you don't have to space it out, so you'll book it all in the first quarter and all of these entries are non-cash?

We will recognize the gain in the first quarter; that is correct. And yes, we do have very substantial tax loss carryforwards, so we may well report a profit for the full year of 2005 as a consequence of that gain in the first quarter, but we would not expect to be paying tax.

Okay. And I apologize because I was jumping on and off the call -- if you answered this, I apologize. Could you repeat again what your intentions are with the Red Blood Cell Program?

We have presented a modified process for red cells at ASH in San Diego in December of last year. That process is designed to eliminate or at least very drastically reduce any risk for formation of antibodies. And we are conducting some additional tests to make sure we have -- that we think it is going to work, and when we have those tests completed, if they are completed with a satisfactory outcome, we will put together some sort of approach and discuss with the FDA a reentry into the clinic.

Any ballpark timetable on that?

It certainly will be decided before the end of this year.

Right. And I think you did discuss what is happening with the vaccine program, so you answered my questions. I thank you.

(OPERATOR INSTRUCTIONS) Ira Sochet of Sochet & Company.

This was an amazing performance in the six months you've been with the company, seven months.

Thank you very much.

Most of the questions have been answered, but I would like to again go back to the balance sheet. Based on the deferred gains being picked up in the first quarter, you would then be showing, not counting the cash burn, a net equity of somewhere around 40 some odd million dollars? Is that correct?

I'm looking at Bill Dawson, who is a thumbing through the papers.

Ira, I don't have that in front of me and I will get back to you. (multiple speakers)

The other question on the balance sheet was also the same thing. If you're not carrying any intellectual properties as assets, you're writing everything off as you go? So that basically the only assets you're showing on the balance sheet is your cash and accounts receivable.

That is correct. That's right. We have some de minimus long-term assets property, plant and equipment.

Okay. So you're putting no value whatsoever on the intellectual properties for INTERCEPT or for the various -- I can't even pronounce -- Listeria and other -- the colorectal and other properties. Okay.

Last comment is it was very difficult to get on the call today because -- you may not have too many questions because of the movement of your time. So everybody I know could not get on the call.

I apologize for that, Ira. Actually, this deal was being put together and it coincided with the fourth quarter and we thought that this was such material information that we wanted to go out with it as quickly as possible. That is why we changed, so apologies for that.

Thank you.

Ron Antipa of Deutsche Bank.

A couple of quickies. On the 13 million that is going to be escrowed for marketing expenses in Europe with Baxter, how would you typify that dollar amount relative to prior sales and marketing effort on their side over the last couple of years?

I can give you -- with some certainty, I know what the spending was in 2004, and this number is significantly higher than 2004. That I can say with certainty. With regards to earlier years, we don't have hard data. We only have our own opinions about how much was actually spent, and again, I feel that this spending is higher than what was actually spent, again by significant amount. So I can't give you exact numbers because I think I would be disclosing information which is proprietary to Baxter.

I understand. Then on BioOne, can you give us guidance as to the status of their cash to proceed for regulatory and marketing of your products in Asia?

This is Bill. BioOne, as you may know, is a venture-backed Tokyo based company. They are backed by some very substantial venture firms in Asia. Our understanding is that they are likely to seek an additional private round, and that a public offering, God willing, is in their longer-term plans. They are well capitalized, they are adequately capitalized at this point to conduct what we have in mind for them short-term. But they will need to raise more money on their side to fully commercialize INTERCEPT in Asia.

Great. Lastly, again, I apologize for having to ask this question because I was having to hop off the call periodically, but on the 45 million that you anticipate for year-end cash balance, you mentioned that that would be adequate cash, and then I lost your description of what that was going to be adequate cash for.

It's adequate cash for reaching significant regulatory and other milestones, given our projected cash burn.

So is it for the vaccine programs or for the vaccine and the plasma platelet programs?

Both.

For all programs. Great. Thank you.

John Bossler (ph) of Dominick & Dominick.

Once again, congratulations. You have come a long way from your unveiling of you at the Plaza Hotel about seven months ago, so congrats. Just a question on the balance sheet. The other current liabilities (technical difficulty).

(technical difficulty) all of our payables and everything else, so I apologize for the summary presentation on our press release. We do not ordinarily bulk everything that is in current liabilities into another category.

Okay, from the third quarter to the fourth quarter that went from 8.5 to 19.3. Can you just tell me what that's about?

All I would say this point until we publish our K is that of that, there is $770,000 of reserve for other expenses associated. But we have accrued expenses and deferred revenue and other components in addition to payables that are part of that as well.

Just lastly, getting back to a question from an earlier caller regarding the carrying value of intellectual properties, when do you believe, based upon your industry, that it would be appropriate for you to put some kind of value on these properties?

I think we have a policy of expensing our development expenses as we go forward. And I think I would consider that a conservative and also appropriate accounting principle, and I don't see us changing that because it would lead us into a situation where we start attaching value and have to go back and revalue that on a periodic basis to make sure we are right. So in conclusion, I don't see us changing that policy.

Very good. Thanks so much and congratulations.

A follow-up from John Sonnier of Prudential.

Just a quick follow-up for David on the Listeria program. Can you walk us through your intellectual property estate and just an idea of who else is participating in the area?

Our intellectual property estate regarding Listeria goes to a number of things. Number one, composition of matter around our proprietary attenuated strain, which I will point out we think is the major breakthrough that is going to enable the use of Listeria in the clinic and which we published late last year.

In addition, we have methods for engineering Listeria so that it expresses antigens at high levels, and that has been a key area of technology focus at Cerus over the last couple of years. We have methods of use patents, including methods of use around this new program in colon cancer, for stimulating innate immune responses. And of course, our IP around antigens, in particular Mesothelin.

I think Listeria is part of a broad effort to develop antigen-specific immunotherapies, so it would be difficult in a few moments to categorize all the players in the field. What we feel, however, is unique about Listeria is that it induces a very potent immune response which is ultimately going to be the key to treating cancer in patients.

That is helpful, thanks.

This concludes today's question-and-answer session. Please proceed with your closing remarks.

Thank you all for listening today. In summary, the strategic changes we initiated last year have been successfully implemented. We have attained the goal of improving our relationship with Baxter, including a new INTERCEPT commercialization agreement and resolution of our loan dispute.

Cerus begins 2005 with a reduced burn rate and over $60 million in cash, which we believe will enable us to fund the Company through achievement of important milestones in our immunotherapy and blood safety programs.

For immunotherapy, we look forward to making progress in all three of our Listeria programs, including filing our first IND by the end of the year. For blood safety in 2005, we look forward to filing a European CE Mark for plasma, reaching a definitive agreement with BioOne for plasma in the Asian region, and reaching a decision regarding the future of the red cell program.

This concludes our call for this quarter and I hope you will plan to join us again when we report our results from the first quarter of 2005. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.