Cerus Corp (CERS) 2009 Q3 法說會逐字稿

Welcome to the Cerus 2009 third quarter financial results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. (Operator Instructions)

As a reminder, this conference call is being recorded today, October 29, 2009. I would now like to turn the call over to Mr. Jason Spark of Porter Novelli Life Sciences, the investor and public relations firm representing Cerus Corporation. Please go ahead.

Thank you and good afternoon. Cerus issued a press release today announcing Cerus's financial results for the third quarter ended September 30, 2009 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 Claes Glassell, President and Chief Executive Officer of Cerus, I would like to remind you that during this call, Company management will be making forward-looking statements, including statements about commercialization progress, regulatory and governmental processes, research and development activities, sales, operating expenses, sufficiency of the Company's cash resources, potential profitability, finances and business 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's quarterly report for the fiscal quarter ended June 30, 2009 on Form 10-Q and Annual Support 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 will now turn the call over to Claes Glassell, President and CEO of Cerus Corporation.

Thank you, Jason. I am joined today by Kevin Greene, our Chief Accounting Officer; as well as Larry Koresh, our Chief Medical Officer. As you all know, Cerus's major goals for 2009 are to grow our product sales, manage our operating expenses and carry forward our development programs with reduced cash expenditures.

Today I am pleased to update you on our continued execution in all three of these areas. First, we reported third-quarter product revenue of $4.6 million, representing an 18% increase over the second quarter. Third-quarter sales were almost entirely driven by sales of disposable [chips], up by 54% from the second quarter.

Second, we have completed a financing [netting] $12.3 million to strengthen our cash position while maintaining a substantially reduced burn rate. I believe that we are now well positioned in our drives toward profitability.

And finally, we continue to advance our INTERCEPT development programs. We will join the FDA on November 16 to present our proposed [platet] Phase 3 clinical protocol to its blood products advisory committee, or BPAC. And in our (inaudible) program, we have completed enrollment and are currently awaiting the data collected in the trial with results expected this quarter.

I would also like to take a moment to comment on some recent events that underscore the continuing threat of blood safety and availability of emerging pathogens. This includes not just pandemic influenza, but a broad range of viruses, bacteria and parasites both known and unknown.

In August, AABD, the leading International Association of Blood Banks, published a 235 page special supplement in the journal, Transfusion, which identified 68 infectious agents and analyzed their potential threat to transfusion safety. The issue also included extensive discussion of pathogen inactivation as the preferred strategy for defending the blood supply. I would encourage you all to review this article because it provides a good summary of threats to blood safety and the advantages of INTERCEPT as compared to other approaches.

Also in August, the prestigious Journal of Science reported on detection of an infectious retrovirus in blood cells of patients with chronic fatigue syndrome. This virus XMRV was detected in the majority of chronic fatigue patients. Of note, it was also detected in 3.7% of healthy volunteers, a population that presumably represents the typical blood donor.

The study demonstrated that transmission of the virus by blood may be possible both by cells and [cell free] fluids, thus indicating possible risk of transfusion transmission. In September, a separate publication in the Proceedings of the National Academy of Sciences indicated that XMRV may also be associated with prostate cancers.

Because retroviruses like HIV and HTLV are inactivated by INTERCEPT, we expect that XMRV would also be inactivated by our treatment process. This is another example of INTERCEPT's potential to eliminate health risks from known and unknown transfusion transmitted pathogens.

During the quarter, the AABD also updated its annual standards to include pathogen inactivation for platelets to prevent bacterial contamination which is the most prevalent infectious transfusion risk. This change demonstrated increasing support for INTERCEPT as an accepted approach to improve blood safety. AABB accreditation and compliance with AABB standards are also seen as the gold standard in the international transfusion (inaudible) community.

I will now turn the call over to Kevin to review our financial results before returning to discuss our commercial and development progress in greater detail. Kevin?

Thank you. We are pleased with the growth from the INTERCEPT during the third quarter of 2009 and to have raised net proceeds to $12.2 million during the quarter. This recently completed financing allows us to continue our focus efforts on growing top line revenues and reaching profitability.

As part of the financing, we issued common stock warrants that for accounting purposes require that we record them as liabilities on our balance sheet using accepted valuation methods. We will be required to revalue these warrants each period in the quarter with changes in the valuation reported as a non-cash component of income.

As Claes highlighted, we saw continued growth in our top line with total revenue of $4.8 million during the third quarter of 2009, up almost 25% from total revenue recognized during the third quarter of 2008. Of the $4.8 million in revenue recognized during the third quarter, $4.6 million was generated from the INTERCEPT Blood System, up from $3.1 million in revenue in the third quarter of 2008 and up from $3.9 million from Q2 this year.

INTERCEPT Blood System revenue during the current period was primarily driven by sales of disposable kits. In Q3, kit revenue contributed $4.3 million to the top line compared to $2.8 million for Q2 of this year. This growth represents an increase of over 50%. Government grant revenue during the third quarter of 2009 was $247,000 compared to $787,000 in the same period last year.

Now turning to our gross margins, gross profit from product revenue was $300,000, down from $1.2 million for the same period in 2008. We continue to focus on tightly managing working capital components, including inventory levels. While we have been successful in tightening our inventory levels, our gross margins have been significantly affected by higher manufacturing variances.

In that regard, our cost of product revenue during the third quarter of 2009 included period costs of $1 million. These costs represent idle manufacturing facility costs attributable to the Company's decision to tightly manage inventory levels.

Total operating expenses for the third quarter of 2009 were $6.6 million, down from the $9.6 million for the same period in 2008 and $7.2 million in Q2 of the current year. Third quarter 2009 operating expenses came in as expected and largely reflect the full results of our previously announced restructuring. We expect operating expenses in the near term to level out as the full impact of our restructuring is realized.

Net loss for the third quarter of 2009 narrowed to $5.6 million or $0.16 per share compared to a net loss of $7.8 million or $0.24 per share for the third quarter of 2008. At September 30, 2009 the Company had cash, cash equivalents and short-term investments of $22.7 million. Net cash used from operations during the quarter was $2.4 million, slightly down from Q2 of this year and down considerably from Q1 of the current year.

Consistent with the financial discipline highlighted during the last call, our focused efforts on controlling and reducing operating expenses, tight management of inventory levels and collection efforts have clearly made an impact. While we are pleased with the historically low levels of cash burn seen in Q2 and Q3 of this year, we do expect our product sales to continue to increase which may require investments in working capital components beyond those made in Q2 or Q3 of this year.

I would now like to turn the call back over to Claes for further discussion of the third quarter highlights.

Thank you, Kevin. I would like to elaborate on some of our key developments in Europe. As we already discussed on last quarter's call, Belgium issued a royal decree in July mandating that all platlet components must be treated with pathogen activation, effective no later than August of 2010. As pathogen inactivation of plasma has already been mandatory since 2007, this makes Belgium the first country to require countrywide pathogen inactivation of both components.

The UK is also considering the role of pathogen inactivation in their national blood safety program. Their national advisory body, the Safety of Blood, Tissue and Organs Committee, or SBTO, recently recommended the use of pathogen inactivated in imported plasma for all recipients.

Previously, imported plasma that had been pathogen inactivated was used only for pediatric patients. In July, the committee recommended that this practice be extended to all patients receiving plasma. It is not yet clear how this recommendation will be implemented.

The Belgian mandate, the UK recommendation and the German AK Blu bacterial safety recommendation from last year all indicate that the value of pathogen activation is being recognized by healthcare policymakers at the highest level throughout Europe. This policy decision in combination with growing adoption by individual (inaudible) centers are making pathogen inactivation the standard of care for platelet and plasma transfusion in Europe.

In the past, we've focused our comments about Germany on the Frankfurt region of the German Red Cross which continues to make progress. We are pleased to announce that other centers in Germany are making significant regulatory progress in adopting INTERCEPT for their operation.

Recently we understand that two additional centers filed their marketing authorization applications or MAAs for platlets. These MAAs represent the final regulatory requirements for the blood centers before commercial use of intercept.

Importantly, another center has now filed the first MAA for plasma in Germany. In France, we have successfully implemented INTERCEPT plasma in routine use in the two additional centers discussed on that quarter's call.

Summarizing our sales results, we saw both quarter-over-quarter and year-over-year product revenue growth. We saw increased sales in Belgium as a result of a full quarter's routine INTERCEPT platelet production for the French speaking Belgian Red Cross.

Revenue from France was also up a result of the two new French centers initiating routine use of INTERCEPT plasma, though the full effect will not be realized until Q4. In Southern Europe, Grifols continued to perform well and has increased penetration in their territory.

It's important to note that Q3 revenue was derived almost exclusively from sales of disposable kits to our customers in routine production, up over 50% sequentially and year-over-year. We expect this income from disposable kits will continue to grow as Cerus and our distribution partners convert additional customers will to INTERCEPT platelet and plasma production.

This quarter we also announced a new regulatory milestone. We received marketing authorization for INTERCEPT platelets in Switzerland. We believe this addition and regulatory approval for INTERCEPT is a clear indication of the strength of the available preclinical, clinical and routine use data supporting the safety and efficacy of our products. Achieving this regulatory milestone clears the way for adoption by Swiss Red Cross blood centers.

I will now turn the call over to Larry for additional discussion of AABB and the upcoming November BPAC meeting.

Think you, Claes. We have just returned from the AABB annual meeting at which we and others presented a number of abstracts regarding INTERCEPT platelet and plasma. As many of you know, one abstract of specific interest was the study comparing INTERCEPT platelets with conventional platelets, performed by the Netherlands HOVAN trials group.

This was a small study, enrolling fewer than 100 patients in the INTERCEPT group. The presentation confirmed that this trial was not blinded and that a significant majority of patients in the INTERCEPT group received off-protocol transfusions.

No detailed information on the type of bleeding was reported. But from other sources, we have determined that most of the reported bleeding events were grade one bleeding; defined as minimal symptoms, intervention not indicated. Grade one bleeding is a common event for platelet transfusion dependent, hematology/oncology patients and is not correlated with higher grades of bleeding.

Most of the data presented was regarding the primary endpoint of platelet count increments which while lower in the INTERCEPT group, were consistent with differences seen in prior studies of treated platelets. It is important to note that while this platelet count increment difference has been seen in other clinical studies, it has not been associated with differences in the ability of INTERCEPT platelets to prevent or control bleeding in study subjects.

For example, the SPRINT trial included a test group of 318 INTERCEPT patients in which count increments were lower but prevention of bleeding was equivalent to that observed for the control group of 327 patients. Following the HOVAN presentation, several independent experts in the audience questioned the validity of the HOVAN study conclusions due to lack of sufficient power to evaluate bleeding and also the study design. In light of these considerations and combined with the considerable data from our own powered blinded studies as well as the experience of national transfusion services, we remain confident in the accuracy and safety of our product.

Cerus and independent investigators presented six abstracts and a workshop on the conduct of clinical trials for pathogen inactivation. One of the most important abstracts was a cumulative analysis of INTERCEPT platelet components transfused to pediatric patients. Data from more than 700 transfusions confirmed an excellent safety profile in this important patient population.

Turning now to the United States, on November 16, Cerus will present our proposed US clinical trial protocol to BPAC. The committee will be asked to provide their ascent that this protocol was designed to address the concerns previously expressed by FDA regarding the SPRINT trial and whether successful completion of the proposed study would be sufficient to satisfy the clinical portion of our FDA approval application for platelets. The committee will also be asked to comment on our proposed post-marketing study to commence following US approval.

The proposed Phase 3 trial would include approximately 1000 patients, somewhat larger than the SPRINT trial of 645 patients. The endpoints are different. For efficacy, we propose to focus on direct hemostatic endpoints rather than surrogate endpoints and with fewer endpoints than in the SPRINT trial.

The primary safety endpoint would be the instance of acute lung injury with three secondary endpoints to examine observed differences between treatment groups in the SPRINT trial. The scope of these safety endpoints is narrower than in the SPRINT trial. We are proposing this trial because after prolonged discussions with FDA, this is the only identified path forward for US approval.

We don't intend to use our current funds to run the proposed Phase 3 trial, but we believe that having a defined protocol will improve our ability to attract project funding. We look forward to updating you on the outcome following the November meeting. And now I will turn the call back to Claes.

Thank you, Larry. In conclusion, I would like to make a few comments. In March of this year, we adopted a plan to focus on commercial growth in Europe as our top priority. Since then, we have reduced our operating expenses, focused on cash flow and completed a financing.

Our objective is to reach profitability without needing to sell additional equity. We believe we have a very good chance of reaching that goal.

Operator, I would now like to open the call to questions.

(Operator Instructions) Daniel Owczarski, Avondale Partners.

Yes, thanks. Good afternoon. Now to go back to the November 16 meeting, you said you have been in discussions with the FDA. It sounds like the FDA will have a chance to present their I guess opinions to this panel. Is that the case and do you anticipate that they will support your proposed protocols in front of the panel?

The purpose of our discussions with FDA was to arrive at a mutual agreement on the required protocol. And we believe that we have achieved that point. So we feel that we and FDA are approaching this from the same perspective, that is this protocol will satisfy their concerns if successfully executed.

Okay and then on the Phase 1 Red Cell trial, I'm assuming that the timetable is still that we'll see some data this year. And can you give us an idea of how you would announce those results or where you would announce them and what are the potential outcomes or what are the measurements that we are going to see when you announce those?

The trial -- we expect -- to your question -- we expect to announce it before the end of the year. I think it's going to be in the form of a press release.

The primary endpoint in this is recovery data. But we are also measuring data on lifespan in these red cells. So we will provide comments on that. And I think then that's probably what we will tell. Then when we come back on the next conference call, we might elaborate on what our next steps will be with the Red Cell [development] program?

I think, Dan, that unfortunately the timing of the release of these results doesn't allow us to submit them to any scientific meeting in the United States this year. So we will present them as we always do. And probably the next opportunity will be for the International Society of Blood Transfusion meeting which is going to be in early summer of next year.

Okay, just one last question about Germany and platelets. I thought there was a movement towards [four-day] platelet if they were not using pathogen inactivation. Is that happening right now? And is that having an impact on platelet supply in that country?.

It is happening. I think it's broadly happened already. I don't think on the word of anybody who has not taken [this step]. And to your second question, it also has had an impact on discard of platelets because of the shorter availability for them.

That impact -- we're actually trying to help the blood centers in quantifying that. But I will say if the prior discard rates were in the order of magnitude 10%, I think it's probably gone up by another 10% of units. It's a very significant impact on discard.

So I think to your question, we mentioned that there are two new centers that have filed their MAAs. There is a considerable amount of work that goes into these filings. We provide of course the majority of the information because it's to do with INTERCEPT.

But the blood centers had to go through validations that are specific to their own equipment and submit that as part of their overall MAA application. So the two that went in this quarter have gone through that work and I think that there are more in the queue now or in the pipe for preparing or in various stages of preparing those. That is I think largely driven by their desire to use pathogen inactivation as a means to [extend trial sites] and that also improves your economics.

Ross Haberman, Haberman Value Fund.

I just wanted to follow up on your -- one of your final statements. You said that you hoped to hit profitability. I didn't quite hear a timeframe on when you hoped to do that. Could you give us some sort of rough expectation?

We were tempted to do that but we resisted the temptation.

Could this be -- is a realistic -- well (multiple speakers)

That's what the plan is.

Throw out what has to happen or throw out maybe one of the two or three ingredients that you need to see happen for a revenue level that you have to hit to begin to make some money?

Obviously we put together a plan and the plan as you can imagine is only as good as its assumptions. And the biggest assumption of course is the rate of adoption among key customers.

So that's the assumption, that's why we don't want to share that because then we have to follow up and let you know customers by customer how we're doing on those options. But in broad strokes, I think what's going to have to happen for us -- if you look at our OpEx and our margins, we would need to get to sales of somewhere between 40 and $50 million to get to breakeven, probably closer to 50.

And to get there, we need to get additional adoption. As you can see from our sales (inaudible) they're growing. We are expecting more customers to join. And if that happens, especially in some of the big countries, that's going to be what will be sufficient to take us to that point.

Do you have any expectations based on what you can see today? Could you see 15 to $20 million in revenue for fiscal 2010 based on the rates of adoption you're seeing today?

I think that we are -- if you just take the third quarter and multiply by four, you're between 16 and 20. So that should suggest we had no growth from Q3 this year. I think we can do better than that.

We do expect sales to continue to grow.

Okay, guys. Best of luck. Thank you.

Bret Rice, Janney Montgomery Scott.

Good afternoon, gentlemen. Can you say anything about BioOne and what if anything is going on in Japan?

BioOne continues to have the license and the rights for Japan and for parts of Asia. They are pushing hard I think and trying to get progress across that whole territory. Information that we have is largely secondhand or through them.

But of course we noted that there was a change in political power in Japan as the party that came to power actually has pathogen inactivation as a part of their agenda. So we believe that there is political will in Japan, but it's still hard for us to say that we know how fast that will translate to concrete action on the part of the Japanese Red Cross.

Right, right. Different subject. With respect to that HOVAN study which is causing issues, do you feel that it's been discredited enough by people with knowledge in this area so that it does not have a chilling effect on any potential customers that might want to use the pathogen inactivation system of your Company?

My take on this is that I think the HOVAN study -- we're actually pleased that the data have been presented. Because I think when that happens, it was clear to a lot of people that the study was small. It wasn't blinded and it wasn't really a very strong data set to draw conclusions from.

So I think it's actually helping us that it's now been presented, the data has been presented in more detail. So, it's very hard to gauge if anybody was slowing down in their decision-making process in anticipation of this. It's quite possible that that would have happened somewhere. But I think our perspective it that it's good that it's represented because now we can put it basically behind us.

Right, right. Now I listened to a webinar where I heard that the head of the American Red Cross speak and the head of the California health care system, where these fellows were proponents of pathogen inactivation. And I take it these fellas are proponents with knowledge of this HOVAN study?

Yes, they were both well informed.

There are no other questions in the queue at this time. I would like to hand the call back over to management for closing comments.

Thank you for joining us today. We look forward to updating you on our third quarter conference call in February. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your consideration. You may disconnect your lines at this time and have a wonderful day.