Cerus Corp (CERS) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Cerus Corporation fourth quarter and year end and 2008 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded today, February 26, 2009. It is now my pleasure to introduce your host, Mr. Jason Spark of Porter Novelli Life Sciences, the investor and public relations firm representing Cerus Corporation. Thank you, sir. You may now begin.

Thank you, and good afternoon. Cerus issued a press release today announcing financial results for the fourth quarter and year ended December 31, 2008 and describing the Company's recent business highlights. You can access a copy of this announcement on the Company's website at www.cerus.com.

Before introducing Cerus management, I would like to remind you that during this call, Company Management will be making forward-looking statements about commercialization progress including product adoption, sales growth and gross margins, regulatory and governmental processes, research and development activities, sufficiency of the Company's cash resources and business and financing prospects. The Company's actual results may differ materially from those suggested by forward-looking statements the Company will be making, and the Company assumes no obligation to update guidance or other forward-looking statements. I call your attention to the disclosure in the Company's SEC filings, in particular, Cerus' most recent quarterly report filed on form 10-Q and annual report on form 10-K including the sections entitled Risk Factors. This call will be archived temporarily on the Company's website and will not be updated during that time. I now turn the call over to Claes Glassell, President and CEO of Cerus Corporation. Claes?

Thank you, Jason. I'm joined today by Bill Dawson, our Chief Financial Officer and Larry Corash, our Chief Medical Officer.

To begin the call, I'd like to provide a high-level overview of key developments since our last earnings call. First, full-year product sales were $15.5 million, up almost double from 2007. Product sales for the fourth quarter of 2008 were $3.5 million, up from the $2.4 million during the same period last year and up from the $3.1 million recognized in the third quarter of 2008. The pace of commercial penetration continues to be below our target, though I will touch on some encouraging developments later on the call. Second, operating expenses were $12.6 million(Sic-see press release) lower in 2008 than in 2007. We have reduced headcount, frills and salaries and paid no bonuses for 2008. We are continuing to take steps to extend our cash runway. We are prioritizing spending on supporting our commercial business. We are further trimming expenses and expect to free up cash invested in working capital. We now expect our cash reserves to carry us into 2010. Third, we learned earlier this week that the largest region of the German Red Cross received authorization to market INTERCEPT (inaudible). This authorization is a very important springboard to commercial adoption, both in and outside of Germany. Fourth, we initiated a small, inexpensive and well powered open label phase I trial of the modified red cell system in the fourth quarter, which we expect to complete by mid 2009. And finally, we entered into a manufacturing agreement with Fenwal that secured the long term supply of our disposable kits through 2013 and improves our margins.

Before turning the call over to Bill for financial highlights, I do want to stress that while our revenues for the quarter did not meet our expectations, Cerus' fundamental business is improving. Our customer base is growing, our product sales were up substantially year-over-year, annual margins expanded and our operating expenses and cash burn are declining. Bill?

Thanks, Claes. Total revenue for the year ended December 31, 2008, was $16.5 million, an increase of 49% from the $11 million in 2007. Product revenue for the INTERCEPT blood system increased to $15.5 million during 2008, up 94% from $8 million during 2007. In addition, as anticipated, we recognized $1 million in government grant funding in 2008, $2 million less than in the prior year. Gross margins on product sales were 38% in 2008, up from 35% in 2007. Total operating expenses for 2008 were $37.4 million, down 24% from $49 million in 2007. SG&A expenses were 11% higher in 2008 due to our commercialization efforts relating to the INTERCEPT blood system in Europe. Offsetting the SG&A increase were 32% lower R&D expenses year-over-year. Operating expenses in 2007 also included the effects of a $9.5 million non-cash writedown of our equity holding in BioOne. Net loss for 2008 was $29.2 million or $0.90 per share compared to $45.3 million or $1.42 per share in 2007. In November, 2007, we spun off our immunotherapy business, which has been accounted for as a discontinued operation. Net loss from continuing operations for 2007 was $39.1 million or $1.23 per share. There were no effects of discontinued operations on the 2008 financial results.

Turning to the fourth quarter, total revenue for the three months ended December 31, 2008 was $3.6 million, up from $2.5 million in the fourth quarter of 2007. This year's fourth quarter included $3.5 million from product revenues, up 48% from the $2.4 million recognized in the fourth quarter of 2007. Government grant revenue for the fourth quarter of 2008 was $100,000, whereas no such revenue was recognized in the fourth quarter of last year. Gross margins from product sales net of royalties to Fenwal were 16% in the fourth quarter of 2008 compared to 31% in the fourth quarter of 2007. Quarterly fluctuations in margins are due not only to product mix, but also to the timing and direction of manufacturing and purchase price variances and nonrecurring charges.

Margins for the fourth quarter of 2008 were adversely impacted by a higher proportion of disposable kit sales to illuminator sales by manufacturing and purchase price variances and by our reserve for in process inventory that did not initially meet release specifications. By contrast, the fourth quarter of 2007 margins were favorably impacted by manufacturing and purchase price variances. Nonrecurring charges within cost of goods in the fourth quarter of 2008 were $350,000, negatively impacting gross margin by 10 percentage points on a non-GAAP basis. Total operating expenses for the fourth quarter of 2008 were $7.8 million, down by one-third from the $11.6 million from the fourth quarter of 2007, with lower spending in the current period in both R&D and SG&A expenses. This decrease reflects our efforts to reduce expenses and conserve cash.

Net loss in the fourth quarter of 2008 was $6.5 million compared to a net loss from continuing operations in the fourth quarter of 2007 of $10.2 million during which we also recognized $1.2 million in net losses from discontinued operations. Net loss per share was $0.20 for the fourth quarter of 2008 compared to $0.36 per share for the fourth quarter of 2007. Net loss from continuing operations in the fourth quarter of 2007 was $0,32. We ended the year with cash and marketable securities of $22.6 million, reflecting a cash burn of $34.3 million over the course of 2008, of which $8.1 million was due to an increase in working capital. As guidance, we expect cash burn in 2009 to be less than $20 million. Consequently, we expect our current cash balance will be adequate to fund operations into 2010.

While we also have a $10 million senior credit facility in place, we will be unable to draw any funds down against the facility until such time as we add equity or subordinated debt capital to our balance sheet to meet a minimum capital covenant under the terms this facility. We are taking steps to conserve our cash so that we will not be obliged to raise capital in today's dysfunctional capital markets. I believe we are comparatively well positioned to attract strategic or financial investors by virtue of fact that we have a superior pathogen activation product with growing sales. Now I'd like to turn the call back to Claes who will discuss recent highlights.

Thanks, Bill. I'm optimistic that we will see continued growth in 2009 and beyond. I'm confident in our INTERCEPT product. INTERCEPT is the leading pathogen in activation technology on the market. I believe our system will be a key component in the future of blood safety. Contamination of the blood supply is acknowledged as a persistent problem, and each contaminated transfusion is unacceptable. We accomplished a lot 2008. The number of INTERCEPT users has grown over the year. The body of data supporting safety and efficacy is growing, as well. Several key customers are preparing to implement INTERCEPT in 2009. Our efforts in building advocacy are beginning to have significant impact in key countries like the UK.

Results for 2008 were good, but fell short of our expectations, principally due to the lack of progress in France. The situation with regard to pathogens in activation in France is paradoxical. The French National Blood Service, or EFS, has already implemented pathogen inactivation technologies to treat all French plasma. For platelets, by contrast where the risks are higher, EFS has implemented pathogen in activation in only four of 18 regions. INTERCEPT is the only commercially available TI technology for platelets in France. It is inconceivable that EPS should not implement TI for platelets across the whole country. In our opinion, it is not a question of if, but how fast. We're cautious about making predictions since the EFS has not met stated goals and timelines over the past year and a half with respect to adoption of the INTERCEPT blood system. However, we are seeing encouraging signs of movement.

Our distribution partnership with Grifols in Spain and Portugal continues to be a highlight of our commercial efforts. Since signing on in 2007 to distribute the INTERCEPT blood system, Grifols has been quite successful. The INTERCEPT platelet system is now used in blood centers serving more than 30% of the Spanish population, and we expect that number to grow. Grifols has also begun to make inroads into blood banks in Portugal for both platelets and plasma. For reference, the addressable market for platelets and plasma in Spain and Portugal is estimated at $35 million, essentially equal in size to the marketable opportunity in France. Based on our good experience with them to date, we are exploring an expansion of our distribution relationship with Grifols . Developments in Germany and the United Kingdom also provide good reason for optimism.

An advisory committee on the safety and supply of blood within the German Ministry of Health recommended in October that the storage life of conventional platelets be reduced from five to four days. This was done in an attempt to lower the potential for high bacterial counts in transfusion units that lead to adverse events including fatal cases of sepsis. Obviously, shorter shelf life means logistical challenges and higher discard rates for blood banks. Importantly, the recommendation explicitly exempted INTERCEPT treated platelets from this shortened shelf life restriction due to INTERCEPT's ability to inactivate bacteria.

That leads me to this week's announcement that Paul Ehrlich institute has issued a marketing authorization to the Frankfurt Red Cross, allowing Europe's largest group of independent blood banks to begin using the INTERCEPT platelet system in routine clinical use. In June of last year, we signed a multiyear supply contract with the Frankfurt Red Cross. The value could be as high as $20 million once adoption occurs. Under the terms of the contract, we expect the Frankfurt Red Cross to conduct a hemovigilance study before starting to purchase INTERCEPT system components. We expect purchases may begin late in the year. A number of other blood banks within Germany are now showing increased interest in adopting INTERCEPT.

To further improve blood center economics we have developed and plan to launch a new platelet disposable kit, particularly applicable to the German and UK markets. We have been relatively quiet about our efforts in the UK. We believe the British National Blood Service has prioritized dealing with mad cow disease. However, the tide is beginning to shift in our favor. The British have yet to implement any broad measures to address bacterial contamination of platelet components and have now begun an internal review on the merits of pathogen inactivation. Studies in Ireland and Wales revealed unacceptably high rates of bacterial contamination despite testing in their platelet supplies. Over 60 members of Parliament have gone on written record urging the Minister of Health to adopt pathogen inactivation technologies for the British military.

In addition to these commercial efforts in key western European countries, we expanded our geographic reach during 2008. INTERCEPT is now sold in 18 countries. On the manufacturing side, we took a significant step forward in December by negotiating an extension of our supply agreement with Fenwald. The new agreement secures our supply of platelet and plasma disposable kits through 2013. Importantly, it also lowers our unit costs and provides for still lower costs in the future as our annual demand for disposable kits grows. Together with the other initiatives we have undertaken, we have lowered our breakeven point and extended our cash runway. I will now ask Larry Corash to comment briefly on our progress with the FDA and our red

Thanks, Claes. Since mid-2008, we've had a series of interactions with the key members of the FDA's review staff concerning the INTERCEPT platelet system. The discussion has focused on a potential study of INTERCEPT platelets in routine medical use in Europe. In contrast to a more conventional, randomized clinical study, we would expect to enroll more patients in the study in routine use with the upside being faster patient enrollment and lower overall cost. Based on discussions to date, we know that such a study will need to be prospective and that test and control arms will need to be conducted sequentially at study sites in order to minimize confounding variables. We will also have to ensure that the patient population tested approximates the population receiving platelet transfusions in the United States. We have not yet settled on precise protocols, end points and data-gathering methods. Arriving at a final agreement on this less conventional approach will require continued back and forth dialogue with the FDA which will take time. Assuming we reach consensus with the FDA, we expect to commence such a study once we have funding in hand to complete the study and make regulatory submissions.

With respect to our red cell system, we initiated an open label phase I trial using the modified system in December. The trial was small, inexpensive and well powered, requiring 28 healthy volunteers at two centers in the United States. We expect to complete the trial by mid 2009. As with past trials, we will be measuring post transfusion circulation and life span of treated red blood cells in comparison to untreated blood cells. At the conclusion of the phase I trial, our plans call for a number of developmental activities in preparation for a phase III trial and commercial launch. In the aggregate, these activities will require significant funding beyond our current resources. We will not commence the next phase of activities until we have secured adequate funds. We are comfortable that we can continue some level of program advancement on a cash neutral basis with grant funding from the Department of Defense and existing and new partners. We were just advised that Cerus was awarded in excess of $1.5 million in government grants for the current year, and we have applied for more in future years. With that, I'll turn the call back to Claes for some concluding remarks.

Thanks, Larry. As we look back on 2008, we accomplished quite a bit. Product sales nearly doubled, margins expanded and operating expenses were reduced. We signed up new customers and expanded our distribution network. While the big dominos of France, Germany, and the UK did not fall in 2008, we are supplying customers in 18 countries. As I look forward to 2009, we expect sales to continue growing. We remain committed to reaching significant commercial breakthroughs. I thank all of you for your support during these times. Operator, I would now like to open the call for questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. (Operator instructions). We'll take a moment to poll for questions. Our first question comes from the line of Brett Rice with Janney Montgomery Scott

Good afternoon, gentlemen.

Hi, Brett.

Can you tell me what's going on with BioOne and Japan?. Anything you can tell us on that front?

Well, we get reports from BioOne from time to another about their progress. They are -- the Japanese Red Cross is still in the process of moving forward and evaluating our system and the other system involved, and this is a project that has been going on for a while. It is our understanding that the Japanese Red Cross is committed to implementing pathogen activation. But I think that the next steps will be for them to run a clinical trial in Japan because I think they want data from local subjects before they go forward. So the time scale for this is not imminent. In the meantime, BioOne is continuing to make progress in some other parts of their territory, and I think that they seem somewhat optimistic about progress in China in particular.

Okay. Now you mentioned that the line of credit from Wells Fargo, you can't use it unless there's a minimum capital covenant that's met. Is it possible for you to say what that minimum capital covenant threshold is?

Brian, unfortunately, it's not possible for us to disclose the exact terms, and that's by agreement with Wells Fargo. They don't want the details of their credit facilities made public.

Yes. Even if they're taking top money?

I'm sorry, but we can't -- we can't.

Okay. And could you just -- the reserve for the work in progress inventory that impacted margins in the fourth quarter --

Yes?

What is that all about?

Well, we have a fairly elaborate supply chain -- and this relates to components that go into the compound absorption device of our platelet and plasma kits, and the material in question met release specifications from an initial vendor but by the time it had arrived at a second vendor along the supply chain and that vendor tried to work with the material, found it to be out of spec. And so we have reserved fully for the value of that lot of work in process material and are now in the process of determining if that product is usable or not. If it is not usable, we fully reserve against it. If it is usable, we'll reverse that charge and have a gain in the future period.

Alright. One final question, and then I'll go back in the queue. You mentioned encouraged signs of movement by the EFS in France. Without compromising what's going on there, is -- can you give us some more color on that?

Well, I think as we've tried to say, they recognized the fact that they are committed to pathogen activation, and they have already implemented fully for plasma. They know that they cannot continue just using it in four out of 18 regions. They know that, and they accept that fact. And I think it comes down to a question of what will be the triggering events for a plan for full implementation in the country. We've been -- we have had a change of country managers last year, and I think we are finding the dialogue these days to be quite productive and good, but I don't want to say more than that, Brett, because we have been burnt in the past.

Okay. Fair enough. Thank you for answering my questions.

Thank you, Brett.

Our your next question question comes from the line of Daniel Owczarski with Annandale Partners.

Thanks and good afternoon.

Hi, Dan. How are you?

Good. Can you talk a little bit about just the headcount reductions, what areas would be impacted, and could you give us any sense as to the magnitude of those efforts there?

Certainly, Dan. First of all, I'd call your attention to our fourth quarter R&D and SG&A, which if you were to annualize the rate of our R&D and SG&A spending in the fourth quarter, it's $6 million less than we had for the full year. So the reductions that we made in OpEx expenses begun in the fourth quarter have that much of an impact on cash consumed if spread over a full year. And the reductions have been across the board and not simply headcount elated, but program-related. We're talking about consultants and other ways that we can trim excesses and focus on our commercial sales.

Okay. And then if we could switch to Germany, I think I've got an understanding about what happens now with the single donor platelets and the hemovigilance study. But what happens, what's the next steps for the pooled platelets and does that have to go through the same kind of regulatory approval and the same kind of hemovigilance? And is there a -- some idea of how should we think about what -- that Frankfurt region now, a split. Is it mostly single donor right now, or is half and half, or --?

So the only difference between the two approvals is that it has to do with the time that lapses between when you collect the platelets from the patient which would use a single donor or a pooled. Everything else in the application is the same. The same for the -- the pooled application has been reviewed in full, as well, and we expect an approval very soon for that, too. So I don't want to give an exact date, because we don't control that. But as I say, very soon. So our expectation is that Frankfurt will be able to start both whole blood as well as (inaudible) collection treatment of INTERCEPT within a month or so.

So they would wait until they get the pool's approval and then do one study?

No. I think that they will start the (inaudible) relatively -- very soon because it's not just the hemovigilance study, but they are also feeling the pinch now of this four day storage recommendation. So they have additional incentive to move over to INTERCEPT as soon as possible.

Okay. And then as far as the rest of Germany, do they have -- where are they at least in the application process? Are there applications submitted? Do they have to do the similar, where it's single donor application and then pooled application?

Actually, we -- we're not the applicant in this. So we are -- we have been in touch with the Paul Ehrlich Institute ourselves, and they feel comfortable that as long as other centers are having similar operational procedures at either Frankfurt or Lubec, which has already has approval, they can get their approval relatively quickly or comparatively quickly. But there's always the risk that a center has some peculiar operation or has a different machinery. So there will be time to review these applications from other centers as well, but it should be faster than the time it took for Frankfurt. And there are several centers for who are already having the manufacturing license and are very close now to finding their marking authorization applications, as well.

Okay. And then just last question about the government grants. I think Larry touched on it right at the end. It looks like you might have commitments already for more than what you had -- what you reported in 2008. Could you talk a little bit about that, what's your expectation or what's your visibility is with government grants in 2009?

You're right. We already have been receiving an award for 2009 that is higher than we got in 2008, and we continue -- we've had these grants for a number of years, and for a while, they were trending downwards. We are encouraged to see them starting to trend the other direction right now, and I think this just demonstrates that safety is an important issue to people in DC.

So should we think of like the 1.5 as a baseline, that it could -- that that's a pretty definite number, and then it could grow from there?

Well, as much as anything is definite in government.

Okay. All right. Thank you.

Thanks.

Our next question comes from the line of [Klaus Van Studerheim] with Deutsche Bank.

Hi. I've got a few questions. One of them -- can you say something about the -- there's another system you said in Japan, and I'm just curious. I didn't realize what else there might be on the market. Then my second question is -- question that maybe lots of other people are wondering about. Obviously, any FDA studies will be very expensive as you point out, and you can't do it until you raise money. But what I can't figure out is how could such money be raised without being just devastatingly dilutive?

To answer your first question, I think we have mentioned several times in the past that there is a system on the market for inactivation pathogens for platelets by a Company called Caridian. The name of the system is Mirasol. The date that they have available suggests that the INTERCEPT system has much widely safety data and safety claims than they have had so far. And to date, we're not aware of any significant commercial progress for their system. And there are few side-by-side comparisons. There's one that has actually been done by the Japanese Red Cross, and I think it's safe to say that that was very favorable to INTERCEPT

Okay.

Are w regard to the FDA, it is correct that will require significant sums. I think that having a protocol that is defined and accepted by the FDA is going to be very helpful for us to attracts potential partners, and there are people out there who are having a growing interest in pathogen activation. Our progress in sales is not unnoticed by people in the industry, and the US market opportunity is very attractive. So I think that having a protocol defined that a potential partner can look at and evaluate and assess time and cost with that, I think is going to help us to widen the search for capital, so we wouldn't have to rely on equity markets alone.

That would be great. Thanks.

Thank you.

(Operator instructions). Our next question comes from the line of Ronald Urvater with Ormed Capital.

Yes, thanks, and congratulations on the German approval. My question speaks to that. Apart from France and Spain, which you talked about, we've all come to understand how important this approval was in Germany. Could you characterize -- I know it may be hard in terms of specific quantification, but what other either areas or countries who might have been on the fence do you think would be influenced by this approval in Germany? What kind of traction do you think that will generate for you now that you couldn't have pointed to before?

I think that the approval was very important not only in Germany, Ron, but also in many other countries. The-- there is an association in Europe called the European Blood Alliance and the head of the Frankfurt Red Cross, Professor Zeifred, is, I think, heavily influential in that. They openly exchange information, and the fact that the Germans decided last year to sign a contract that didn't go forward carried a lot of weight when we were talking to other members of that alliance, and that alliance includes members from most of the western European countries. The fact that we'll now have the approval and will be able to start, I think will act as a further impetus for others to move forward. So I think that this approval has a lot more value than just the addition -- the possible sales from Frankfurt.

And that would kick in in '09?

Well, as I said on the call, there are several blood centers that are in preparation for implementation. We are going down the road of validations and getting contracts in place, et cetera, so I think we'll start seeing effects in '09.

Okay. Great. Thanks.

Thank you.

(Operator instructions). Seeing that there are no further questions, I'd like to turn the call back to management for any concluding remarks.

Thank you for joining us today. We look forward to updating you on our first quarter conference call in late April. Thank you.

Ladies and gentlemen. This concludes today's teleconference. Thank you for your participation.