Cerus Corp (CERS) 2007 Q2 法說會逐字稿

Welcome to the Cerus 2007 second quarter financial results conference call. At this time, all participants are in a listen-only mode. Following managers prepared remarks we will hold a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, July 31st, 2007. I would now like to turn your call over to Ms. Myesha Edwards. Please proceed, ma'am.

Thank you, operator, and good afternoon. We issued a press release today announcing Cerus' financial results for the second quarter ended June 30th, 2007, and describing the Company's recent business highlights. You can access a copy of this announcement on our website at www.cerus.com. Before introducing Claes Glassell, President and Chief Executive Officer of Cerus, I would like to remind you that during this call we will be making forward-looking statements about development, research, regulatory process, commercialization, finances, strategic alternatives and business prospects. Our actual results may differ materially from those suggested by forward-looking statements we will be making, and we assume no obligation to update guidance or other forward-looking statements. I call your attention to our most recent Form 10-Q and annual report on Form 10-K, including a section entitled Risk Factors. This call will be archived temporarily on our website and will not be updated during this time. I will now turn the call over to Claes Glassell, CEO of Cerus Corporation. Claes?

Thank you, Myesha. I am joined today by Bill Dawson, our Chief Financial Officer. David Cook, our Corporate Senior Vice President, will also be available to answer questions. Since our last call, we have made solid commercial progress. First, our sales increased to $1.7 million from $800,000 in the second quarter of last year. Year-to-date sales were up $2.9 million, up significantly from $1.3 million in the same period in 2006. We signed an initial contract to supply national blood centers in France with our platelet system. We signed an agreement with Grifols to distribute the INTERCEPT Platelet and Plasma Systems in Spain and Portugal. In addition to the Grifols agreement, we signed additional distribution agreements in Greece and Turkey, and we have an existing distribution agreement in Kuwait. The INTERCEPT Plasma System gained registration in the French Official Journal, allowing the sale of INTERCEPT treated plasma at prevailing transfer prices in France. And finally, we capped the quarter with a successful presence at the International Society for Blood Transfusion Congress in Madrid, Spain.

Let me elaborate on these accomplishments. The value proposition of the INTERCEPT Blood System, including both economic and clinical benefits, is becoming increasingly accepted. Sales during the second quarter of 2007 were $1.7 million, a 40% increase in sales over the first quarter. INTERCEPT has been used in over 50 blood centers in 16 countries. Cumulative INTERCEPT platelet and plasma kit shipments are now approaching 100,000. These metrics indicate growing momentum in the market. They are the result of our European team's efforts in establishing new customer relationships and distribution agreements since launch. Our commercial team has laid a strong foundation for future growth.

In response to recent trends in blood product usage, we have updated our market data. Based on units transfused, we estimate that the addressable market opportunity for our platelets and plasma systems to be approximately $425 million in Europe and the Middle East. As you are aware, our initial focus has been on France and Germany, where we estimate commercial opportunities to be $36 million and $76 million respectively. Over the past year, however, we've also begun to make inroads in other European and Middle Eastern markets where sizeable opportunities exist. The addressable markets are as follows: Italy is $45 million; Spain, $32 million; UK, $51 million; Turkey, $37 million; Eastern Europe, $71 million; and a combination of the Nordics, Benelux, and other EU countries, total over $90 million. We now have direct sales and customer service or distributor presence in virtually all those territories. Also of note, the number of platelet transfusions is growing in this region due to increasingly aggressive cancer treatment. Clearly, we do not expect 100% conversion of the addressable market. Nevertheless, I think you will agree that we have a large and attractive opportunity in front of us.

During the quarter, we announced a very important milestone toward widespread commercial adoption. We signed an initial agreement with EFS to sell French national blood centers up to $8 million worth of INTERCEPT platelet kits over the next two years. We are currently selling platelet kits to four EFS centers and plasma kits to one center. We understand the EFS plans to add additional centers this year, and more in 2008. As we mentioned in our last conference call, a senior member of EFS has publicly stated their intention to fully adopt the INTERCEPT Platelet System by the end of 2008. As additional EFS centers come on line, this first commercial contract will need to be expanded or supplanted by a larger contract in 2008. The form of the initial contract will be used as a template for further EFS agreements, which should expedite the contracting process in the future. I also want to make clear that EFS blood centers are now purchasing our platelet and plasma systems, and they are able to sell INTERCEPT treated components to transfusing hospitals under transfer prices already in place in France.

In Germany, our team continues to work closely with the several blood centers in preparing manufacturing and marketing license applications. Once those applications have been approved, blood centers are authorized to sell INTERCEPT treated components. Among the major centers to date, five have received manufacturing licenses, and one center has received marketing authorization for INTERCEPT platelets, and is now a paying customer. The largest region within the German Red Cross is headquartered in Frankfurt. It makes up around 30% of the German blood component market. That region has now filed its marketing application with the Paul Ehrlich Institute. This application is specific to the marketing of INTERCEPT treated platelets. Three centers within this region have already received manufacturing licenses. For regional blood centers, these submissions are not trivial undertakings. It is reasonable to expect that once these blood centers receive approvals, they will be highly motivated to adopt INTERCEPT. This progress supports our expectations of increasing commercial sales in Germany in 2008.

Also during the quarter we announced an exclusive distribution agreement with Grifols, a publicly traded company in Spain, to commercialize the INTERCEPT Blood System for both platelets and plasma in Spain and Portugal. This agreement represents an important part of our growth strategy. The addressable market in Spain and Portugal for Cerus' INTERCEPT Platelet and Plasma Systems is around $36 million, which is roughly equal to the French market. The purchase decisions in this market are made by regional blood centers, and would have required significant resources for us to cover independently. Grifols is well established in the blood banking market. It is one of the largest pharmaceutical companies in Spain, and the largest European plasma fractionator. The agreement is a vote of confidence by Grifols in the future of the INTERCEPT Blood System. It also reflects growing customer appreciation for the inherent benefits of processing both platelets and plasma using a single system within the blood center. Grifols is also a supplier to regional hospitals, which will enable Grifols to market INTERCEPT not only to the blood centers, but also to hospitals and transfusing physicians. For these reasons, we are confident that Grifols can help us accelerate penetration of the Spanish and Portuguese markets.

We've also established distributor agreements in Greece, Turkey and Kuwait. The addressable market in Greece is approximately $13 million, and in Turkey it is $37 million. The Kuwaiti market is only a couple of million dollars, but their transfusion medicine standards are leading within that region. These distribution agreements are consistent with our overall strategy to support the rollout of the INTERCEPT System, without investing in customer service and sales groups in territories where it would be too costly to build our own presence. Cerus had a major presence at the International Society for Blood Transfusion Congress, or ISBT, in Spain in late June. We hosted a well-attended symposium featuring key opinion leaders in transfusion medicine, and round-table sessions with current and potential customers. The abstracts are available on Cerus.com under the Events page, and the symposium replay will be available next week.

Importantly, INTERCEPT blood bankers from France, Belgium, Spain, Germany and Switzerland presented abstracts describing their experience with INTERCEPT platelet and plasma systems. Let me share a few highlights of the data presented. The EFS center in Alsace presented haemovigilance data from a six-month study of routine use of INTERCEPT platelets in a broad patient population. The EFS center concluded that use of INTERCEPT platelets meant that the center did not have to re-implement bacterial detection. The center also discontinued gamma irradiation for prevention of graft-versus-host disease and CMV serology testing. The overall incidence of acute transfusion reactions was reduced by 74% after adopting INTERCEPT compared to the experience with conventional platelet components. The Mont-Godinne blood center in Belgium presented data on routine use of the INTERCEPT Platelet System to examine the impact of INTERCEPT on production, utilization of platelets, wastage of platelet components, extension of storage, and acute transfusion reactions based on three years of experience. Data from this study demonstrated that the introduction of the INTERCEPT platelet system allowed the blood center to avoid introduction of bacterial detection, to replace gamma irradiation, and to discontinue C&D serology testing. In addition, with use of INTERCEPT, platelet storage was extended from five to seven days, resulting in reduction of platelet wastage from 9% to 1%. Prior data had already shown a 31% reduction in acute transfusion reactions.

Let me explain why reducing transfusion reactions is important. Obviously, transfusion reactions require healthcare interventions, such as medications or extended hospital stays, all of which cost money. This is part of the economic benefits of converting to INTERCEPT for platelets. I'd like to focus on the clinical value of reducing transfusion-related adverse events. Many patients who require platelets have cancer, and they've been treated with chemotherapy and received bone marrow transplantations. These procedures impair the ability of the bone marrow to make platelets, and lead to compromised immune systems. Common adverse reactions to transfusions include fever, nausea, aches, and chills. In rare cases, reactions are much more severe. Independent reports of dramatic reductions in adverse events due to the adoption of the INTERCEPT Blood System are creating growing awareness on the part of transfusing physicians of the clinical benefits of our products.

During our first quarter conference call, I mentioned the Pathogen Inactivation Consensus Conference which took place in Toronto, Canada in March. The panel's preliminary recommendations were published in the medical journal Vox Sanguinis. The recommendation for broad implementation of pathogen inactivation made by the consensus conference panel is receiving wide attention in the blood banking community, and was widely discussed at ISBT. For those who studied recommendations in more detail, it is clear that pathogen inactivation should be implemented only using systems that are thoroughly researched and comprehensively tested. Post marketing surveillance programs should also be implemented. This means that preclinical, clinical, and post marketing data should be robust. The INTERCEPT Blood System has been developed to pharmaceutical standards and meets these requirements. As part of our efforts to expand the post marketing experience with INTERCEPT platelets, we have now collected data on approximately 20,000 INTERCEPT platelet transfusions. We continue to observe a reduced rate of acute transfusion reactions.

On our red blood cell program, we continue to make progress. As we discussed in our last conference call, preliminary results of our Phase I study demonstrate a modest, but clinically relevant shortening of red blood cell lifespan. We have now identified what we believe to be the cause of this reduction. The red blood cells were dehydrated, meaning they have lost some of their internal water. It is known from other research that cellular dehydration can shorten red blood cell circulatory lifespan. Cellular dehydration can be altered by the amount of salt in the additive solution, salt contributed by the treatment, and other treatment dependent effects. At this point, we have developed four independent assays to measure red blood cell dehydration. These assays give us the tools to look at modifications to our process in order to prevent the loss of water from red cells. Our work is ongoing with the goal of developing a process that we will again test in a clinical trial in healthy volunteers. If all goes well, we expect to resume testing in humans before year-end. At the same time, we are continuing system development activities with a goal of entering Phase III trials in 2009.

Turning to Immunotherapy, during our last call we announced that we are evaluating strategic alternatives with respect to our Immunotherapy business. We are well down the path of evaluating alternatives. We are confident by year-end that we will have implemented a strategy which would allow us to significantly reduce, if not eliminate, the cash burn associated with that business. I will now turn the call over to Bill to review our financial highlights.

Thanks, Claes. Revenues for the second quarter of 2007 were $4.5 million, down from $6.5 million for the second quarter of 2006. Product revenues for the INTERCEPT Blood System increased to $1.7 million during the current quarter, up from $800,000 during the second quarter of 2006. In contrast to the prior quarter in 2006, when we recognized $4.2 million of revenue from milestone payments received from BioOne and development funding from our agreements with Baxter and MedImmune, we recognized only $130,000 of such revenue in the second quarter of 2007.

Total operating expenses for the second quarter of 2007 were $23.4 million, up from $12.4 million for the same period in 2006, primarily due to a $9.5 million noncash charge I will discuss in a moment, and to a lesser degree, costs associated with our INTERCEPT commercialization efforts in Europe. Net loss for the second quarter of 2007 was $17.9 million or $0.56 per share compared to a net loss of $5.1 million or $0.18 per share for the second quarter of 2006. Total operating expenses and loss during the quarter included the noncash charge of $9.5 million or $0.30 per share, reflecting a writedown of the carrying value of our equity interest in BioOne, to which we have licensed commercialization rights for our platelet and plasma systems in Asia.

As a reminder, Cerus has received $19.5 million in upfront nonrefundable cash payments from BioOne since its founding in 2004, and may receive additional cash milestone payments and royalties tied to future commercial milestones. We also have received equity in BioOne that now makes up less than 20% of BioOne's voting securities, which at the times of its issuance, was worth $11.2 million. BioOne recently completed a fourth round of financing to fund its operations, valued at a price below Cerus' historic carrying value. Since the initial funding, the Japanese Red Cross has moved more cautiously than had been expected, causing BioOne to underperform relative to its original business plan. This factor, combined with a more difficult biotech venture-funding environment in Japan, led to a significant downround. BioOne is independent and will have to succeed on its own. As Cerus has transitioned into a commercial Company, our focus has been on Europe. We do not expect that the events in Japan will have any material effect on our commercial progress in Europe, the Middle East, or other markets we may enter.

We ended the second quarter with cash and marketable securities of $74.4 million in cash, reflecting a cash burn of $19 million over the first half, including only $6 million in the second quarter. We believe we will burn no more than the previous guidance of $42 million over the full course of 2007. The rate of cash consumption in the second half may increase slightly due to growing working capital requirements. I also want to reiterate our guidance that we do not expect to raise additional equity capital this year. While we have not yet given guidance on cash burn for 2008 and beyond, I also want to touch briefly on one forward-looking point. We expect our Immunotherapy business to consume on the order of $14 million in cash in this year, 2007. As Claes mentioned earlier, if we are able to implement a strategic alternative for that business by year-end, we would not have to fund the business in 2008, extending our runway going forward into next year and beyond. Now I'd like to turn the call back to Claes for some concluding remarks.

Thanks, Bill. In summary, the second quarter was very good. We made great commercial progress, increasing sales, adding customers, and extending our commercial reach through new distribution agreements. The Cerus team performed well at ISBT. The recommendation from the consensus conference is clearly being heard in the blood banking community. There is a growing body of data suggesting that INTERCEPT has a significant positive affect on transfusion outcomes. The momentum for commercial success continues to build. I look forward to answering your questions. Operator, we will now open the call for questions.

(OPERATOR INSTRUCTIONS) Liisa Bayko, Next Generation Equity Research.

Well, it sounds like you've been busy.

Hi, Liisa. Yes, indeed, we have.

First question is, could you break out revenue into platelets and plasma?

We actually don't want -- haven't done that, and we don't want to get into that, partly because we do have competition on plasma. We don't really want to give them too much information about our progress.

Okay. And then your G&A, is that your run rate going forward that we should expect?

Yes. For the rest of the year.

Okay. And on government grants, same thing?

I think so, Liisa. This is Bill. Although the recognition of that is dependent on work that we do, and is inherently a bit lumpier.

Okay. And then in terms of the 50 blood centers that you have currently using INTERCEPT. How many of those are paying customers versus customers who may be participating in the experience trials?

We don't disclose that information. But the large majority of them are paying customers.

Okay. And then the UK, any update there? I know you mentioned that as one of the countries.

At UK we have been -- to date we have been I think guiding some degree of caution. But after the consensus conference, we've had contacts and we seem to see some levels of increased interest. So I will probably be able to update you more on that later in the year.

Okay. Well, that's a positive step in a difficult direction. And then my final question is when do you think that this $8 million initial tender with France may need to be revisited for something a little bit larger?

The sooner the better, Liisa. But we expect that the French will probably roll in their purchases of plasma into this tender, which will actually serve to consume the dollar amount faster, and lead them to -- need to issue a new contract faster than that. So we -- as we said, we think a new contract would have to be in place sometime early '08.

Okay. Wonderful. Thanks a lot.

Chris Raymond, Robert W. Baird.

Just a couple questions, actually. Regarding this Grifols deal, I guess I did not, when it was first announced, understand a couple of matters and I just wanted to get some clarification. Actually, after going back, it appears they actually have their own -- and correct me if I'm wrong. Do they have their own Methylene Blue product that they distribute right now?

They don't distribute Methylene Blue. They are doing a centralized processing with Methylene Blue.

Okay.

And that's a practice that blood centers are trying to get away from, or as a market, drive away from that. And it's (inaudible) Grifols will not use Methylene Blue for [in blood center inactivations], Chris.

So they have their own product that's Methylene Blue-based, right?

It's a service.

It's a service. So why I guess, I mean -- this is maybe a rhetorical question. When you had your discussions, if they have their own process, why did they decide to do this -- have this relationship with -- in terms of moving to the INTERCEPT system? Is this -- I guess does this mean that they're going to sort of deemphasize that or stop?

I think they're saying that that service is a declining business, because blood centers don't want to send in products for centralized pathogen activation. And I think they saw INTERCEPT as a much better opportunity for providing products to blood centers for use within the blood centers.

And I know so Methylene Blue has obviously had some application in other countries. Is there anything we should maybe draw from this, that this might be the beginning of a trend here of converting from Methylene Blue to INTERCEPT?

I think that there are several shortcomings of Methylene Blue that will help people to draw the conclusion they should work with INTERCEPT. I think the particular situation in Spain with Grifols is unique to them, because I'm not aware of any other country or situation where there is a centralized Methylene Blue service going on. But I think as a whole, the data we have, the inactivation data we have for INTERCEPT suggests that this product has a better profile than Methylene Blue.

Okay. And then maybe just a detail on Germany. You mentioned that the Frankfurt -- I guess it's a region that controls about 30% has applied for a marketing application. What is the timing where that -- that we should expect for approval, and therefore, revenue ramp in that region?

Well, it's subject to review by the Paul Ehrlich Institute. And the Paul Ehrlich Institute has already given approval to the site up in [Lubic] that is now a paying customer. So we're hopeful that the -- they will be able to carry out the review for Frankfurt and the region faster than they did for Lubic. But it's really difficult for us to guess how long time it will take first. I mean it's not something we control. But I guess our best guess will be they would have their approval before the end of the year.

Okay. Okay. And then maybe one final question. Is there any update you can provide or , sort of clarity as to where things stand between you guys and the FDA

Well, we continue to have a good dialogue with -- we have a dialogue with the FDA. I think it's hopefully turning maybe to more trying to find alternative ways of satisfying their need for data. We talked about it being a situation where they were asking us to do a fairly large randomized clinical trial again, and we don't think that's a good use of our time and money. So we're hoping that we can use the growing body of data that's now being accumulated in Europe from -- in clinical use and commercial use of the product.

And I know these aren't completely related, because I know you're talking (inaudible) platelets. But on another side of the business there's been -- a lot of dust has been kicked up relative to a serious cutback in the use of EPO or ESAs, and thus resulting potentially in more blood transfusions. Have you had any dialogue with them? Has that sort of resonated with the folks that you're talking to, that maybe they need to -- there might be a little bit of pressure applied to the supply of red blood cells, and therefore -- ?

I haven't -- can't say that that has yet been discussed between us and the FDA. I think that there is pressure building on the FDA from the fact that INTERCEPT has now been reviewed and approved by a couple of leading European regulatory bodies. And at the Consensus Conference in Canada, FDA was there -- was present, actually, they were part of the steering committee. And their recommendations that came out of Canada were pretty clear. So I think those events create more pressure on the FDA with regards to [pathogen inactivation] than perhaps what's happening with EPO. Although I think, as you point out, this -- these events with EPO certainly suggest that there will be a growing demand for red cell transfusions.

Right. Right. Okay, great. Thanks, guys.

There are no more questions. I would now like to turn the call over back to management for closing remarks.

Well, thank you, everybody, for your interest today, and we look forward to giving you a further update on our next conference call. Bye bye.

Thank you for your participation in today's conference. This concludes our presentation, and you may now disconnect. Have a wonderful day.