Cerus Corp (CERS) 2009 Q4 法說會逐字稿

Greetings and welcome to the Cerus Corporation fourth-quarter and year-end 2009 financial results conference. 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. It is now my pleasure to introduce your host, Mr. Jason Spark of Porter Novelli Life Sciences. Thank you. Mr. Spark, you may begin.

Thank you and good afternoon. Cerus issued a press release today announcing Cerus' financial results for the fourth quarter and year ended December 31, 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 CEO 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, potential US Department of Defense funding, 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' quarterly report for the fiscal quarter ended September 30, 2009, 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 will now turn the call over to Claes Glassell, President and CEO of Cerus Corporation.

Thank you, Jason. I am joined today by Kevin Green, our Chief Accounting Officer, as well as Larry Corash, our Chief Medical Officer.

As we all know, 2009 was a challenging year for the global economy. In this environment we still managed to achieve our fourth consecutive year of sales growth, finishing strong with total fourth-quarter revenue up 51% compared to Q4 2008. In addition to meeting our goal of growing sales, we also met our goals for significant reduction in operating expenses as well as continued progress in our development program.

I'd like to take this opportunity as we look back on 2009 and ahead to 2010 to address three questions. First, what drove sales last year? Second, which regions will drive our continued growth in 2010? And finally, how will we advance our pipeline program to extend our business opportunities beyond the current placement and (inaudible)?

So primarily our sales were driven by growing momentum in France, Belgium and southern Europe. I would like to briefly discuss our progress to date in each of these three critical regions.

France has been an important INTERCEPT market and is one of the larger European transfusion markets. INTERCEPT is now used in 7 of 17 French regional transfusion centers run by the French National Blood Service or EFS. Our sales growth in France was historically driven by INTERCEPT platelets, but in 2009 we saw plasma adoption by two new regions of significant size.

Of particular note is the fact that 100% of France's plasma was already treated with pathogen inactivation. These new centers represent instances where INTERCEPT plasma has successfully gained market share against established platform technologies.

Like France, Belgium has also been an early adopter. The blood transfusion center in Mont Godinne was one of the first INTERCEPT platelet customers following our CE mark approval in 2002. Since then use of INTERCEPT have spread to other Belgian centers collectively representing 40% of the market. The most recent are operated by the French-speaking Belgian Red Cross, which converted to INTERCEPT platelet production shortly before the 2009 royal decree mandating universal use of pathogen inactivation for platelet components by mid-2010.

Belgium's royal decree for platelets actually followed a similar decree regarding universal pathogen inactivation of plasma enacted in 2007. Together these mandates demonstrate Belgium's proactive commitment to protecting blood recipients from transfusion transmitted infections, and indicate a new standard of care to policymakers throughout Europe.

Southern Europe has also been a growing market for pathogen inactivation. Grifols has proven to be an ideal partner in delivering INTERCEPT to customers in Spain, Portugal and Italy. Recently we have agreed to further expand their territory into the Czech Republic and Slovakia. In total, Grifols' territory represents the largest INTERCEPT market in Europe. Having access to Grifols' established team of over 50 sales representatives has been critical to INTERCEPT's sales growth in this region.

France, Belgium and southern Europe were the major contributors to our sales last year. However, it is important to remember that they are not the only regions using INTERCEPT. We concluded 2009 with over 40 centers using INTERCEPT in 11 countries spanning Europe, CIS and the Middle East. Recurring kit sales to this existing customer base formed a strong foundation for sales growth in the coming year.

Looking ahead to 2010, we believe that expanding adoption in France, Belgium and southern Europe will continue to be a significant contribution to rising sales. Our current market penetration within each of these regions is modest in proportion to the overall opportunity, allowing substantial room for further growth this year.

In addition to adoption by new sites within the countries we currently service, we also have INTERCEPT validations ongoing at over 20 additional centers and in 10 more countries in Europe and the Middle East. We expect our annual growth rate to accelerate significantly in 2010 as new sites complete their implementation additions.

I will review progress in our development programs later. But for now, I will turn the call over to Kevin to review our financial results. Kevin?

Thank you, Claes. As Claes mentioned, 2009 represented our fourth consecutive year of sales growth. Revenue for the year totaled $18 million, up 9% over 2008. It's important to note that 2008's revenue included recognition of $1.5 million of deferred revenue from 2007 sales. Product revenue for the INTERCEPT blood system represented $16.8 million this year, up 8% in 2008.

2009 product revenue was driven primarily by INTERCEPT disposable kit sales, which represented almost 90% of our product revenue for the year. Continued US Department of Defense support for the red blood cell system provided $1.2 million in government grant revenue, slightly more than the $1 million recognized during 2008.

Our cost of product revenue was $12.6 million in 2009, up from $9.7 million in 2008. As such, gross margins on product sales were 25% during 2009, down from 38% during 2008. A significant portion of this decline in margin is attributable to our lower manufacturing volumes in 2009 which added approximately 15% to the cost of product sales.

While these reduced volumes temporarily eroded our margins, it allowed us to tighten our inventory levels and conserve cash. We believe that finished product inventory levels at the end of 2009 have been optimized and we target margins of approximately 40% for 2010.

Total operating expenses for 2009 were $29.2 million, down 22% from 2008. This decrease is due to the effects of our restructuring plan announced in March of 2009. Operating expenses in 2009 included several nonrecurring expenses and gains, including restructuring charges of $0.8 million and non-cash impairment charges of $2.3 million associated with the write down of our investment in BioOne Corporation.

Offsetting these charges are cash gains of $0.8 million associated with the disposition of our investment in Anza Therapeutics and gains of $1.4 million from a settlement with Baxter regarding the 2006 transition of INTERCEPT commercialization rights. As a result, net losses narrowed during 2009 to $24.1 million or $0.69 per share compared to $29.2 million or $0.90 per share in 2008.

Now I'd like to discuss and analyze the fourth quarter 2009 results. Total revenue for Q4 was $5.5 million, up 51% in comparison to the same period in 2008. Q4 product revenue was particularly strong, marking our most successful quarter of INTERCEPT sales. Product revenues for the quarter were $5.2 million, representing an increase of 48% from 2008. Government grant revenue for Q4 2009 contributed $0.2 million, compared to $0.1 million recognized during the same period in 2008.

Fourth-quarter 2009 cost of product revenue totaled $3.7 million, compared to $3 million in Q4 2008. This resulted in gross margins from product revenue of 29% for the fourth quarter of 2009 compared to 16% in 2008.

Total operating expenses for the fourth quarter of 2009 were $6.7 million, down from $7.8 million in 2008. As previously mentioned, this decrease is attributable to the effect of our 2009 restructuring plan. Going forward, we expect operating expenses to remain relatively stable.

Net loss for the fourth quarter of 2009 was $4.9 million or $0.13 cents per share, compared to a net loss of $6.5 million or $0.20 per share for the fourth quarter of 2008.

We ended the year with cash and marketable securities of $19.9 million. Net cash used in 2009 was $2.6 million compared to $34.3 million in 2008. Recall that in 2009 we received $12.2 million in net proceeds from an equity offering. Looking ahead to Q1 we expect higher cash burn largely due to anticipated changes in payables before returning to the levels we have seen over the past three quarters.

Concluding now with the housekeeping item, as of today we have very few shares available for issuance out of the original 50 million shares authorized under our charter in 1991. At our annual shareholders meeting in June we plan to propose our shareholders approve an increase to the number of authorized common shares. We believe it is essential to establish a share reserve that can be used over the next 10 to 15 years. We do not intend to pursue equity financings in the near term.

I would now like to turn the call back over to Claes for discussion of our development programs.

Thank you, Kevin. Our development pipeline remains important to Cerus because it provides future opportunities beyond our current placement in the plasma market. We are excited by the recent progress in our red blood cell program, which represents an estimated $4 billion opportunity globally. Our near-term focus will be on the $1.5 billion European market, three times the size of our current platelet and plasma markets, and the final element to provide full protection to blood component recipients.

Earlier this month, we reported the successful outcome of our Phase I red cell trial. Larry will review the data with you in a moment. What I would like to focus on now is the strategic importance of this outcome for Cerus. With this confirmation that treated red cells maintain acceptable recovery and survival, we have decided to move forward with the clinical and regulatory steps towards approval in Europe.

As we have stated clearly before, we will need project funding in order to complete these clinical and regulatory steps. However, the commitments and investments by Grifols, the German Red Cross, and most recently EFS will allow this program to advance through 2010 without an immediate need for new funds.

We are also pleased to note that the funding we have received for many years through the US Department of Defense has been extended in the fiscal year 2010 budget. And we expect these funds will provide support through 2011. At very little net cost to Cerus we can work with European regulatory authorities this year to finalize a Phase III protocol and clarify the regulatory requirements for a CE mark. Further, we expect that our collaborations will help the design of the commercial product as well as aiding future clinical studies and regulatory submissions.

The recently announced collaboration with EFS is a seminal event for our red cell program. Our experience commercializing the INTERCEPT platelet and plasma systems have clearly shown us the value of working directly with our customers during the development stage. We expect that the participation of our collaborators and their financial interest in the program will lead to more rapid adoption after regulatory approval.

We also appreciate the commitment to blood safety that this collaboration represents for EFS whose president commented this is an important step leading toward the future where hopefully all labeled blood components will be secured with pathogen inactivation technology.

In addition to the red cell opportunity in Europe, we continue to believe the North American opportunity for platelets and plasma holds future value. Last year we took important steps forward by working with the FDA to clarify the regulatory path for INTERCEPT platelets in the United States. Following the feedback received by the FDA Blood Product Advisory Committee last November regarding our Phase III platelet clinical trial refined proposal, we are working with the FDA to reach final agreement regarding clinical requirements for product approval.

I would now like to turn the call over to Larry to review recent clinical data further demonstrating the safety of INTERCEPT components in routine use.

Thank you, Claes.

The results from several important studies of INTERCEPT blood components were announced in recent months. In late 2009 we completed the TESSI study, which was a randomized, controlled, clinical trial to evaluate the efficacy and safety of INTERCEPT platelet components stored for 6 or 7 days. This study was performed to support supplemental label claims.

TESSI was a four-center European study conducted in the UK, Spain, France and Sweden. It met its primary endpoint demonstrating the one-hour post transfusion corrected count increment, the CCI, of INTERCEPT platelet components was not inferior to that of conventional platelets. Importantly, we did not see differences in the incidence of bleeding, the use of red cell transfusions, the time to the next platelet transfusion or the safety profile.

As we have already observed, extension of platelet component storage to 7 days has a significant impact on the economics of platelet transfusion by easing the challenges of platelet supply logistics leading to reduced platelet wastage and an increased supply. INTERCEPT is the only pathogen inactivation technology with data to support this claim.

Just last week, new data regarding the post marketing experience with INTERCEPT platelet and plasma components were reported at the International Haemovigilance Seminar. Data from 21 blood centers was reported in a multi-year experience with transfusion of more than 18,000 INTERCEPT platelet components confirming the excellent safety profile of these products. These data were consistent with an independent study conducted by the EFS reporting a three-year experience with transfusion of over 42,000 platelet units.

The EFS also reported a statistically significant reduction in adverse transfusion reactions for INTERCEPT platelets compared to conventional platelets in centers not using INTERCEPT. This is an important clinical outcome for patients. Similar studies were reported for plasma including a multi-center, haemovigilant study of more than 32,000 INTERCEPT plasma components and an independent EFS experience with more than 26,000 units of INTERCEPT plasma.

The positive and growing post-marketing experience with the INTERCEPT systems for platelets and plasma provides a solid clinical basis for potential new customers to adopt the technology. Another recent achievement was the completion of the INTERCEPT red cell Phase I study. This study was a crossover design in which healthy subjects donated two units of red blood cells in random order. One unit was treated with INTERCEPT and one with conventional methods.

After 35 days of storage a portion of the red blood cell unit was labeled with a radioactive tracer. The tracer is used to measure the proportion of cells remaining in the circulation after transfusion which is referred to as "the red cell recovery." INTERCEPT red cells demonstrated a recovery of 88% compared to 90% for control red cells. This met the primary endpoint of recovery greater than 75% of cells remaining in circulation after 24 hours. INTERCEPT treated red blood cells met the criteria for red cell recovery recommended by the FDA.

The lifespan of the red blood cells was also evaluated. The lifespan, expressed as half life, of INTERCEPT red cells was 33 days, which falls within the established reference range of 28 to 35 days. The control red cell half life was 40 days, above the normal range.

Based on the success in meeting the Phase I primary endpoint, the comparable recovery between INTERCEPT and control red cells, the half life of treated cells within the established reference range, and the preservation of red cell metabolic function, as established in numerous in vitro studies, this body of data gives us confidence to move forward with INTERCEPT red cells in Phase III studies.

Finally, some additional comments regarding the agreement with the EFS to collaborate on the development of INTERCEPT red cells. The EFS has been an early adopter of the INTERCEPT platelet and plasma systems and has a long-standing competency to assess pathogen inactivation technology. They have conducted independent assessments of these technologies to gain confidence in INTERCEPT.

We expect that their scientific and operational expertise in this field will contribute to the development of a red cell system that meets the requirements of the French regulatory authority, AFSSAPS, and the operational needs of the EFS. I view this agreement as a significant benchmark in our development program.

And now I will turn the call back to Claes.

Thank you, Larry. In conclusion, I would like to make a few comments. 2009 may have been a challenging year, but nevertheless we finished the year a stronger company. The INTERCEPT experience in routine use is now approximately half a million transfusions. We have a loyal and growing platelet and plasma customer base. Our red blood cell program is moving toward Phase III.

We look forward to continued sales growth in 2010 and a future in which we can offer a complete pathogen inactivation solution -- platelets, plasma and red cells.

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

Thank you. (Operator Instructions) First question is coming from the line of Mr. Daniel Owczarski with Avondale Partners. Your line is open and you may proceed with your question.

Yes, thanks, good afternoon.

Hi, Dan.

Can you give us an indication about how your discussions are going with the FDA on this Phase III trial? What specifically -- are there specific points that you are focusing on on how to move things forward and what are you really want to try to do to move to a Phase III here? And once you get an agreement would you have to go back in front of that panel again?

It's actually a work in progress as we speak. As you may recall the recommendation from the Blood Product Advisory Committee was that we should go back and see whether we could increase the sensitivity around our safety endpoint.

There are a couple of different ways of trying to approach that and we are in dialogue with them right now. The outcome of that I think will be clear to us, I hope, very soon and then we can decide exactly how it will go forward in the US. We are in active discussion with the FDA on this.

But it sounds like you do have some options of maybe not a huge sample size or patient enrollment. There are some that you could do less than what the panel was suggesting?

Well, I think our proposal called for enrollment of just over a thousand patients. And of course you could get to a higher sensitivity by increasing that number, and I think we have tried to find approaches that would not require us to do that. But we are still waiting for the FDA's feedback on that. But our approach is to see whether we can get additional data somehow in a setting or a fashion that would ultimately satisfy their concerns but without necessarily increasing the size of the trial or at least not by much.

Okay. And then for red cells in 2010, can you give us an idea about how much will be spent on that program this year? You started talking about what needs to be done, so it sounds like a Phase III wouldn't come -- wouldn't start until next year?

Yes, I think our expectation is we will now have interaction with European regulatory bodies on our proposal for a Phase III trial. We assume we get some feedback from them and that will give us clarity around that trial design. And then we can, you know, we can be more clear about the exact timing for the start of that trial.

With regards to spend, as we said, we have DoD funding; that takes care of most of our spend this year. So what we tried to say on the call was very little -- very low net cost to sales. We haven't been more precise than that.

Let me amplify on that, Dan. We are currently doing red cell processing with the German Red Cross and we are in discussions to set the technology up in a French blood center. They will be providing resources to do the work that we need to support the implementation of a Phase III clinical trial. So there will be some very key pieces of data that will be collected this year to support that.

Yes, one last point on that, Dan. I think the work that we plan to pursue in 2010 is sufficiently covered by the Department of Defense funds that we have available for us and is allowable by those grants.

Okay. And then just last question, I guess we are a few months post HOVON and I was wondering what has the reaction been on the potential -- you know, customers or users of your technology their reaction to HOVON? Has that slowed things down at all or what has been the reaction in the field?

I think it is not that easy to assess. I think that there are people who would like to see the HOVON data published in their entirety. They have just seen the abstract and heard about the presentation that they made at AABB. I think people would like to really see all the data so they could read through it and form their own opinion. So that could be to some extent holding people up.

But I don't think -- it is hard to make a general statement. There may be individuals who are waiting for that. I think our progress in many other places is very helpful and our continued flow of, I would say, high caliber clinical data is very helpful for us to continue demonstrating that our system actually is sufficient and safe.

You know, Dan, the TESSI study was larger than the HOVON study and used exclusively seven-day platelet products, so it's more stringent. The investigators in the TESSI study were blinded to make their observations whereas HOVON was not a blinded trial. So I think the TESSI data will stand us in good stead with European clinical centers looking at the technology.

Okay. Thank you.

Thank you. Our next question is coming from the line of Mr. Chris Raymond with Robert W. Baird and Company. Your line is open. You may proceed with your question.

Thanks, guys. Just a question on the red cell program. You know, it might be premature to be able to answer this question, but can you maybe talk to that signal, if it is a signal, of difference in half life of the red cells treated with INTERCEPT versus the control? Do you think that is something that should bear out in future trials? And maybe could you speculate a little bit about if so, what is it about the formulation or about the mechanism that could possibly even cause that.

Chris, first of all the post transfusion 24-hour recovery for these red -- for the treated red cells was excellent, was 88%, which is extremely high and was not statistically different from the control. The half life is a noisier measurement. And the half life data we are within the established reference range. The control data actually we are a little bit above the reference range.

We think there are some technical issues and some outliers, but this was an intent-to-treat trial so we were obligated to analyze and include all of the data. I don't see this as being a highly significant signal predictive of anything. I think the most important fact is that the half life for the treated cells was in the established reference range.

Right. So the answer is then -- because it is a small trial, that possibly you just had an aberration there with the control?

I think it is a technical issue with the control. The study had sufficient power around the post-transfusion recovery measurement that could measure it with quite a bit of precision. The half life is a noisier measurement.

And I think the fact that we -- we have seen excellent data on metabolism as well and on the red cell physiology so there is nothing to indicate that there is anything different with the INTERCEPT-treated red cells from the conventional ones.

And as I understand, you guys are also actively looking for any kind of antibody response, correct?

We are. That's a part of our program. We are conducting studies that go far beyond what was done in this Phase I study that are in progress now looking at several thousand sera for potential immunologic responses.

Thanks.

Thanks.

Thank you. (Operator Instructions) Our next question comes from the line of Mr. Brett Reiss with Janney Montgomery Scott. Your line is open. You may proceed.

Thank you, operator. Good afternoon, gentlemen.

Hi, Brett.

Spain, which has been a good market for us, but you read in the news about a lot of issues in the Spanish economy. Would you speak to Grifols, do they think that that's going to slow sales in Spain?

No, I haven't heard anything about that. I don't think the Spanish economy has actually deteriorated very much from what it has been for several years. It is just that it has gotten more visibility now because of the situation in Greece.

I don't -- if it would have been an issue, it would have been an issue earlier as well. So I don't hear anything to the contrary, Brett.

Okay. That's good to hear. Now, you enjoyed 13.8% sequential growth from the third to fourth quarter, and you said in the call that you see growth accelerating in 2010. I know you don't give guidance, but what kind of -- is there a range of expectations that we can look for -- what would make you happy?

The guidance on accelerated growth really refers to the year-over-year growth, which even if you back out the deferred sales of '08 it was 20%. We expect to do better than that this year. How much better, we haven't given guidance. We sort of considered the temptation of giving guidance; we were able to resist it.

Right, right. I guess one -- my last question or area of interest, what -- I think Germany has been a disappointment this year. What didn't happen in Germany and what are you looking for in 2010 from that critical market?

I think what we expected in Germany was a more rapid conversion from having gotten the necessary regulatory approvals to going through what was described as an experimental or evaluation trial. The execution from our customer has been slower than we thought and I don't think there is any -- I don't think there is anything behind that except that they are preoccupied with a number of different things.

These are people who have a lot on their plates, and I think that they just find it a combination of validations, adjustment to their operating procedures in a large number of centers, etc., has just -- everything has just taken much longer than they expected. We have been there to try to help them, but I don't see that there is anything beyond that. But you are right, we would have liked to see things happen faster.

I think outside of the DRK, Brett, there are also a number of other independent centers that are pursuing MAAs and MLs and I think that that's an opportunity for us. But we don't expect significant movement in the German market in 2010.

I would say the DRK in Frankfurt is making INTERCEPT platelets and transfusing them to cardiovascular surgery patients. So they are continuing with their pilot rollout.

All right. Thank you.

Thanks.

Thank you. (Operator Instructions) It appears that there are no more questions at this time. I would like to turn the floor back over to the management team for any closing comments.

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

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.