Cerus Corp (CERS) 2010 Q1 法說會逐字稿

Greetings and welcome to the Cerus Corporation's fourth (sic) quarter 2010 earnings results conference call. (Operator instructions.)

It is now my pleasure to introduce your host Jason Spark, Vice President of Porter Novelli Life Sciences for Cerus Corporation. Thank you, Mr. Spark, you may begin.

Thank you, and good afternoon. Cerus issued a press release today announcing Cerus's financial results for the first quarter ended March 31, 2010, and describing the company's recent business highlights. You can access a copy of this announcement on the company's Web site at www.cerus.com.

Before introducing Claes Glassell, President and CEO of Cerus, I would like to remind you that this call -- 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, gross margins, use of cash, 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 annual report for the fiscal year ended December 31, 2009, on Form 10-K, including the sections entitled "Risk Factors." This call will be archived temporarily on the company's Web site and will not be updated during that time.

I'll now turn the call over to Claes Glassell, President and CEO of Cerus Corporation.

Thank you, Jason.

I'm joined today by Kevin Green, our Chief Accounting Officer, as well as Larry Corash, our Chief Medical Officer. Larry and I are joining from Rome, Italy, where we are attending our fifth annual international INTERCEPT symposium.

We're off to a very positive start in 2010. I'd like to quickly review the highlights of the first quarter.

First, we reported Q1 revenue of $5.7 million, representing 64% growth compared to the first quarter of last year.

Second, we signed an agreement with the Swiss Red Cross for deployment of the INTERCEPT blood system for platelets.

Third, we initiated an important new collaboration with a French national transfusion service, the EFF, to coinvest in INTERCEPT red cell development.

Fourth, we secured a $10 million credit facility, realizing our objective to obtain nondiluted financing.

And, finally, we announced successful outcomes in both our European seven-day platelet trial and our Phase I red blood cell trial.

Many of these developments happened early in the year and were already discussed during our last conference call in February. So today we will focus the call on our financial results and the most recent developments.

Previously we mentioned that we expected France, Belgium, and Southern Europe to drive sales this year. This was indeed the case for Q1, with sales to these countries contributing the majority of product revenue.

A new customer coming on board this past quarter was the Swiss Red Cross. I'd like to point out a few important aspects of this significant progress in Switzerland.

The Swiss Red Cross decision to adopt pathogen inactivation was driven by a recommendation by the Swiss regulatory authority, Swissmedic. It's significant that Swissmedic has joined other European regulatory agencies and specifically allowed several label claims that are very important to our customers. Use of INTERCEPT can extend platelet storage through seven days, eliminate the need for bacterial detection, and replace the use of gamma irradiation to prevent transfusion-associated graft versus host disease. These are important operational advantages that Swiss blood centers can implement immediately.

Swiss adoption also affirms our success in developing and registering a product that demonstrates favorable economics for our customers. The Swiss Red Cross collects a substantial proportion of double-dose platelet components. This allows them to take advantage of our double-dose platelet treatment kit to reduce their per-unit treatment cost. The Swiss experience illustrates how our substantial body of scientific data and flexible product design provides competitive advantages.

In late March, the Swiss Red Cross signed a three-year purchase agreement to implement INTERCEPT platelets in at least 11 of the 13 regional Red Cross blood centers. Deployment in a few centers has already begun, and we expect implementation will be completed by the middle of next year. Switzerland is the latest country, following Kuwait and Belgium, to make pathogen inactivation the standard of care for their platelet supply.

The Middle East is a region that we believe to be a significant market for INTERCEPT technology. Kuwait converted 100% of its platelet supply to the INTERCEPT system two years ago. They are considered an important thought leader in their region. Many countries in the Middle East have advanced health-care systems and high standards for blood safety. This quarter we're pleased to announce signed agreements with three additional Middle Eastern distributors.

Finally, in addition to the substantial recurring sales to existing customers, this quarter's revenue included a broadening of our user base and also illuminated sales to distributors and to sites beginning adoption of our technology. Aside from the Swiss Red Cross and distributors in the Middle East, INTERCEPT use expanded into new customer sites in Italy, Spain, and Sweden. Through our own sales force and through our distribution partners, we're continuing to build a robust pipeline of sales prospects.

I will now turn the call over to Kevin to review our financial results. Kevin?

Thank you, Claes.

As Claes mentioned, our Q1 sales represented our best quarter to date and the fourth consecutive quarter of growth. Revenue for the quarter totaled $5.7 million, up 64% over our first quarter of 2009.

INTERCEPT product revenue represented $5.5 million during Q1, compared to $3.1 million during the same period last and $5.2 million during the preceding quarter.

Top-line growth during the quarter was marked by continued sales to our existing customer base, supplemented by new customers coming on line. Specifically, INTERCEPT disposable kit sales continued to grow and represented almost 90% of our total product sales.

The growth in sales is especially noteworthy because we invoice customers in Euros and report results in US Dollars. As many of you know, the Dollar strengthened against the Euro during Q1 with averages up by more than 6% from Q4 averages.

Moving now to gross margins, another important area where we have made significant progress, gross margins from product sales were 43% during Q1 of 2010, compared to 32% during the same period in 2009 and 29% from Q4 of last year.

As we've mentioned on previous calls, during 2009 we dramatically reduced our manufacturing volumes in order to optimize inventory levels and preserve cash. As a consequence, the manufacturing overhead we incurred was spread over fewer manufactured units, leading to higher per-unit costs and lower margins.

Throughout Q4 of last year and Q1 of this year, we have manufactured at higher volumes in order to meet increasing demand. This, in turn, has led to lower per-unit carrying costs and improved margins. We expect to continue manufacturing at higher levels than 2009, and as a result, we expect our gross margins will continue to be in the low-40s over the near term with substantial room to improve as manufacturing levels increase in order to meet the anticipated stronger demand for INTERCEPT.

Now I'd like to turn to our operating expenses. Total operating expenses for the first quarter of 2010 were $6.5 million, compared to $8.8 million during Q1 of last year and $6.7 million during Q4 of last year. The lower operating expense levels are attributable to the effects of our March 2009 restructuring program and strong focus on cost containment. We expect current operating expense levels will be relatively stable in the near term.

Net loss for the first quarter of 2010 was $5 million, or $0.13 per share, compared to a net loss of $7.4 million, or $0.23 per share, for the first quarter of 2009.

Our results during Q1 of the current year were negatively affected by a $1 million noncash accounting charge to value -- to the value of outstanding warrants associated with our August 2009 register direct offering. Future changes in stock price will result in similar adjustments as needed.

We ended the quarter with cash and marketable securities of $19 million.

Net cash used during the quarter was $900,000, compared to $7.2 million during the first quarter of 2009.

Q1 2010 cash included the $4.8 million in net proceeds received from our growth capital loan with Oxford Finance, and offsetting this were approximately $2.5 million in payments for 2009 manufacturing variances and our 2009 settlement with Baxter. As we mentioned during our last call, we expect remaining 2010 cash utilization to generally return to the levels we saw during the second half of 2009.

I'd like to conclude with some comments regarding the recently signed $10 million credit facility with Oxford Finance Corporation. The credit facility provided a $5 million loan to Cerus at March 31st and allowed Cerus to draw an additional $5 million between September 30th and December 31st of this year. The credit facility requires interest-only payments at 12% interest for the first nine months after each draw and then even payments of principal and interest for an additional 30 months. We believe this facility is strategically significant to the company. We expect the facility will provide us with the growth capital necessary to take the European platelet and plasma business to profitability without needing to issue additional equity.

I would now like to turn the call over to Larry.

Thank you, Kevin.

As Claes mentioned, we're calling in today from Rome, Italy, where we're hosting Cerus's annual international INTERCEPT meeting with over 50 blood center directors and transfusion-medicine experts. Included in this audience, we have thought leaders from over 20 countries in Europe, the Middle East, and North America. I'd like to touch on just a few topics of current interest that we're discussing with this group.

The first is the growing concern regarding xenotropic murine retrovirus, or "XMRV," a retrovirus that was recently the focus of an article in "The Wall Street Journal." This virus is potentially associated with both prostate cancer and chronic fatigue syndrome. Though the disease association of this agent is not yet clear, as a retrovirus, like HIV and HTLV, it is seen as having a high potential for transfusion transmission.

In response to this threat, the Canadian, Australian, and New Zealand blood services recently announced a new donor deferral policy to exclude donations from chronic fatigue syndrome patients, indicating that blood services are taking this risk seriously. Based on the established efficacy of the INTERCEPT technology for inactivation of other retroviruses, we are confident that XMRV is highly susceptible to the INTERCEPT process.

Another emerging infectious disease of concern to the transfusion-medicine community is Q fever, an infection caused by the bacterium Coxiella burnetii. Since 2007 there have been annual outbreaks of Q fever in The Netherlands, these outbreaks resulting in infections to humans from livestock. Due to the observations that donors with asymptomatic infections could transmit the disease to blood-transfusion recipients, The Netherlands National Transfusion Service began nucleic acid testing for Q fever in high-risk areas in mid-March. Netherlands health authorities are continuing to evaluate the ongoing risks both from environmental transmission and from contaminated blood donations.

These two pathogens illustrate the varied ways in which blood safety can be threatened by unanticipated infectious agents. The recent emergence of XMRV as a potential transfusion-transmitted infection demonstrates that new agents continue to spread silently through potential blood-donor populations before recognition and definition of the epidemiology.

Transfusion safety may also be threatened by epidemic infections, such as Q fever, which can impact donor populations even if the primary disease transmission route is not blood borne. The continuous protection of the blood supply provided by the INTERCEPT pathogen inactivation system offers a pragmatic, proactive defense against diverse transfusion risks.

Another topic of interest to key opinion leaders at the symposium has been the INTERCEPT red cell program. With this group, we're reviewing the data from our recently completed Phase I trial, as well as discussing our product development strategy and collaborations with the German Red Cross and the French National Transfusion Service, both of whom are participating in the meeting.

Finally, we're sharing information about the anticipated clinical and regulatory pathway for INTERCEPT red cells in Europe. We've recently submitted a proposed Phase III trial protocol to European regulatory authorities and will meet with them to reach agreement on the clinical development program required to obtain CE mark registration. A recent market survey documented strong interest in the INTERCEPT red cell program, which could enable comprehensive protection for all three blood components.

I'll now turn the call back to Claes.

Thank you, Larry.

In conclusion, our first quarter is a strong start for Cerus in 2010. We reported record sales, we are adding new customers and new distribution partners to support future revenue growth, we've maintained financial discipline and achieved a healthy balance sheet. We look forward to an exciting year to come.

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

Thank you. (Operator instructions.)

Our first question comes from Daniel Owczarski from Avondale Partners.

Yes. Thanks, and good afternoon.

Hi, Dan.

Hi, Dan.

Was -- just wanted to follow up a little bit on the XMRV issue. It sounds like there's a lot of talk. You talked about growing concern. Three countries are already talking about deferring donations. Is there speculation that more countries will follow or what could be the next steps, and has the US Red Cross made any statement on XMRV yet?

I don't think the US Red Cross has made any statement yet, not that I'm aware of at least, but XMRV has absolutely attracted a lot of attention right now. I'm sure you're familiar, Dan, that there are very few studies published so far, but I think that there are many different groups that are beginning to study the impact and to develop their own data. I think the actual taken to date in Canada, Australia, and New Zealand -- I think is -- in my view, it's a reflection of the fact that, if the early indications of XMRV are turning out to be proven over again, I think that they want to act decisively early on to avoid any risk.

Larry, do you want to elaborate on that?

No, I think that Claes has emphasized the important aspects of it, and I think that there will be an ongoing learning process. Although, I believe that it's highly significant that three blood services have taken a very early preventive measure.

Okay. And then just to switch to some of your real-world experience with the INTERCEPT units out in the field, are you seeing -- or what is your experience so far in customers adapting the technology to use it on plasma? I mean, it sounds like it's a straightforward argument to use it on platelets, but is it easy to convince somebody to use it on plasma because they're already using some type of pathogen inactivation, or is it a little bit more of a struggle to convince them to use it on the plasma versus platelets?

Well, I think there's a longer established history, particularly in Europe, of inactivation of plasma with reimbursement in place already in multiple European countries to begin with. Secondly, once you have the platelet system operating, you have the platform, and the technical procedures are actually simpler for plasma than they are for the platelet system, although the platelet system is easily implemented in blood centers, and countries where they are using quarantine have actually been able to demonstrate to their own satisfaction -- such as France -- that they can effect some cost savings by switching away from quarantine to pathogen and activation with the INTERCEPT system, and they've been able to achieve a male-donor-only plasma supply, larger inventories, and maintain inventories of all blood groups. So it's been highly successful for the French centers that have implemented the technology.

Okay. And then, as far as the -- again -- the units in the field as far as capacity or productivity, are they -- is it -- are the centers finding that they can use, maybe, the one unit or two units with the backup? Is there any kind of bottleneck, or is the production flowing smoothly when they're -- when they've got INTERCEPT as part of the process?

I think I could say -- you know, it's been interesting because the meeting we have here in Rome has been a forum for several of our customers to present data of their own experience with the INTERCEPT technology, and I would say, without exception, the feedback is that the system is easy to operate, it's very robust, doesn't require any additional resources, and I don't think anybody has observed any issues with bottlenecks around the equipment or anything else (inaudible) actually showing that, compared to using (inaudible) testing, they can release products sooner and the, again, overall observations are observing a reduction in transfusion reactions, and, in general, they see benefits in the form of lower discard. So many of the benefits that we have talked about have been further underscored by the (inaudible) customers here today.

Thank you.

Thank you. (Operator instructions.)

Our next question comes from Mark [Nuchman], who's a private investor.

Yes. Good afternoon. What is the status of the FDA approval process. I heard you had a meeting with the FDA and that certain things were agreed upon in terms of the clinical trial. Just (inaudible) what the status of that currently is.

Well, we are engaging in discussions with the FDA about the design of the protocol, and you'll probably recall that we had a meeting in November of last year with the Blood Product Advisory Committee, which prompted -- or gave us a feedback that we had to try to modify the design to create a higher sensitivity around our safety end points, and that's what we are now discussing back and forth. I think it -- what we feel is important is to get some updated information on the background incidents of that safety end point so that's where we -- I think that's where we are right now, and once we have that, I think that's going to guide us in our future discussion with the FDA on that trial.

Well, thank you. I wish you all well. Thank you very much.

Thanks.

Thank you.

Thank you.

Thank you. Our next question comes from Chris Raymond from Robert W. Baird.

Hey, thanks, guys.

Hi, Chris.

I apologize. I hoped on a little bit late so, if I'm asking a question that's already been addressed, excuse me but -- so kind of more of a, maybe, sort of strategic question. You guys are now four quarters into having put up some decent growth numbers, and it seems like you've got a lot more clarity in terms of country-by-country uptake and more certainty around that. At what point do you guys start talking about putting some brackets around guidance?

We -- Kevin is in Concord, and I'm in Rome, Italy, so we need to get our heads together and let you know about that, Chris, but it's a fair question. I think it may be (inaudible) to do for 2011 at some stage.

Uh-huh.

That's -- but we haven't made -- we don't make a commitment to that here on this call now.

Okay. Thank you.

(Operator instructions.) Our next question comes from Brett Rice from Janney Montgomery Scott.

Good afternoon, Claes and Kevin.

Hi, Brett.

Hi, Brett.

Your statement that there's strong interest in the Phase III red blood cell trial in Europe to get a CE mark approval, is it too early to give us some timelines on that?

I think it is, Brett, because, as Larry indicated, we're in -- or we expect to have meetings with European regulators to get feedback on the proposed trial design. I think, when we have that feedback, that's going to help us to fine-tune the program and to go forward.

Okay. And the nonroutine working capital payments --

Uh-huh.

-- that came through in the first quarter, could you just give us some color on what that was?

Sure, Brett. As we mentioned, we had lowered our manufacturing volumes last year to preserve cash and optimize our inventory levels, and as a result of that decision, we incurred manufacturing variations from our manufacturers. Those are accumulated throughout the year and paid at the beginning of every year. So we simply relieved those payments.

The other item for $500,000 was a settlement we had with Baxter relating to the 2006 commercialization transition which we entered into the agreement in December of last year and paid in Q1 of this year.

Do you know --

We don't expect those type of charges going forward.

Okay. And what do you think the run rate on cash burn will be going forward quarter by quarter for the rest of the year?

Well, we're not giving quarter-by-quarter guidance, but general guidance. Similar to what we saw in the back half of last year in the -- generally around $3 million.

Okay. I thank you, and good quarter.

Thanks, Brett.

Thank you. (Operator instructions.)

We appear to have no further questions. I'd like to turn the call back over to Mr. Glassell for any closing comments.

Well, thank you very much for joining us today. We look forward to updating you on our second quarter conference call in July. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.