Cerus Corp (CERS) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Cerus Corporation second quarter 2010 conference call.

(Operator instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jason Spark, Senior Vice President of Canale Communications. Thank you, sir, you may begin.

Thank you, and good afternoon. Cerus issued a press release today announcing Cerus' financial results for the second quarter ended June 30, 2010, 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, 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' quarterly report for the fiscal period ended March 31, 2010, on Form 10-Q, 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.

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

I'd like to begin by reviewing the highlights of the second quarter. First, we reported Q2 total revenue of $5.9 million, representing 41% growth compared to the second quarter of last year. Comparing Q1 to Q2 sales in euros to remove the effects of exchange rate fluctuation, demand for INTERCEPT rose 12%. Second, we continued to add new customers who we expect will fuel sales growth in future quarters. Third, we continued to deliver on our goal to improve our profit margins and control expenses. Finally, we confirmed that the INTERCEPT Blood System inactivates XMRV, the newly recognized human retrovirus that may be linked to chronic fatigue syndrome and prostate cancer.

As in previous quarters, the majority of our sales came from existing customers in Belgium, France and Southern Europe. In addition, our CIS distributor continues to make progress in their territory, placing additional illuminators and increasing the volume of their INTERCEPT kit purchases. Sales growth also came from other countries in Western Europe. For example, we saw additional revenue from the Swiss Red Cross as [the first site to] proceed with their implementation of the platelet system.

We've also taken steps to continue our sales growth next quarter. We gained new customers in Q2 and won several tenders. The full impacts on these new contracts will be seen in later quarters when the blood centers complete their installations and move into routine production.

INTERCEPT's growing sales despite difficult economic times in some countries demonstrate that our customers believe a secure blood supply is not a luxury but rather an essential element of a healthcare system. Preventing transfusion-transmitted infections protects the health of patients and is also more cost-effective for the healthcare system.

A significant strength of the INTERCEPT Blood System is that our customers are able to replace some other safety measures when they begin inactivation. By taking advantage of these benefits, customers can offset a large proportion of their purchase cost, or, in some cases, even reach cost neutrality. This value proposition to blood centers has been a critical factor in growing our sales, even as healthcare budgets have been under increasing economic pressure.

In addition to our presence in Western Europe, we've been successful in expanding our sales territory into Eastern Europe and the Middle East and beyond through distributors. INTERCEPT is now in routine use in blood centers in 12 countries and represented by distributors in 20 additional countries.

Alongside the growing momentum for INTERCEPT platelets and plasma, a consistent theme in the market has been intense interest in our red blood cell development program. Our current strategy of advancing the red cell program through collaborations with (inaudible), the German Red Cross and the French National Transfusion Service, EFS, has been very successful. With these partners and access to DOD funding, we've been able to move red cell development forward faster and at substantially less cost than we could do by ourselves.

Finally, I just want to comment that the United States remains an important market for INTERCEPT. We expect that our next step will be an assessment of the patient population under consideration for a new trial. This data will be very helpful in refining our estimates of the required trial size. This is a critical consideration in both the cost and feasibility of the eventual study design.

I'll now turn the call over to Kevin to review our financial results.

Kevin?

Thank you, Claes.

Our Q2 sales represented our fifth consecutive quarter of growing demand for the INTERCEPT Blood System. As Claes mentioned, our total revenue for the quarter was $5.9 million, up 41% year over year. INTERCEPT product revenue represented $5.7 million during Q2, a 47% increase from Q2 of last year.

Demand for the INTERCEPT Blood System grew by 12% from the first quarter to the second, comparing product sales in euros between the two quarters to remove the effect of fluctuating exchange rate. Despite average foreign exchange rates between the euro and US dollar eroding by about 18% during this period, INTERCEPT revenue still increased by 4% as reported in US dollars. This top line growth during the quarter was a result of continued sales to our existing customer base supplemented by new customers coming online. Specifically, INTERCEPT disposable kit sales continued to grow and represented more than 80% of our total product sales.

I'd like to discuss our gross margins for a moment, which have continued to show steady improvement over 2009 and historical levels. Gross margins for product sales were 48% during Q2, compared to 35% during the same period in 2009 and 43% in the first quarter. As we've mentioned on previous calls, during 2009 we significantly reduced our manufacturing volumes in order to optimize inventory levels and preserve cash. Throughout 2010 we've manufactured at higher levels than we have historically, which lowers our per-unit selling cost and improves our gross margin. In addition, during the second quarter we sold more illuminators than we did in Q1. Illuminators generally carry a higher gross margin than disposable kits.

Now I'd like to turn to our operating expenses. Total operating expenses for the second quarter of 2010 were $6.5 million, compared to $7.2 million during Q2 of last year and $6.5 million during Q1. We expect our current level of operating expenses will be sustainable for the near term.

Net loss for the second quarter of 2010 was $5.4 million, or $0.14 per share, compared to a net loss of $6.2 million, or $0.19 per share, for the second quarter of 2009. As we mentioned during our last call, our results during both Q1 and Q2 of the current year were negatively affected by a total of $1.6 million of noncash accounting charges due to the value of outstanding warrants associated with our August 2009 registered direct offering.

We ended the quarter with cash and marketable securities of $15.9 million. Net cash used during the quarter was $3.1 million. Our growing sales together with reduced operating expense levels and active management of working capital have all contributed to the historically low level of cash consumption.

Finally, I'd like to mention the $5 million of availability we have with our growth capital credit facility entered into in Q1 and announced during our last call. At our option, we have the ability to draw down the additional $5 million. This facility provides us with a vehicle to drive growth of the business without dilution to our shareholders.

I'd like to conclude with some remarks about the impact of foreign exchange rates on our business. While the recent weakening of the euro compared to the US dollar does affect the translated revenues we report, we also purchased and paid for the majority of our inventory in euros, and we maintain a European operation which incurs operating expenses in euro. This reduces our cost of goods sold, and, to a lesser extent, our selling, general and administrative expenses. This natural hedge is currently fairly well balanced, and in turn foreign exchange rate fluctuations do not impact our bottom line net income or cash flows significantly.

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

Thank you, Kevin.

Last quarter I commented on the growing concern regarding xenotropic murine retrovirus, or XMRV, a retrovirus imputed to be associated with chronic fatigue syndrome and prostate cancer and potentially present in approximately 4% of healthy blood donors. Reports of these observations have been featured in The Wall Street Journal and other media. The emergence of XMRV demonstrates several important points regarding blood transfusion safety.

First, as revealed over 30 years ago during the HIV pandemic, the emergence of new pathogens in blood donor populations highlights the vulnerability of reactive approaches such as testing to protect patients from transfusion-transmitted infections. The reliance on donor screening questions and a limited spectrum of pathogen-specific tests exposes patients to transfusion-transmitted infections during the interval required to recognize and characterize each new infectious agent.

Historically, thousands of patients were infected with HIV, hepatitis B and hepatitis C before these viruses were identified, proven to cause disease, and before specific safety measures against each agent were implemented in blood centers. While the disease association of XMRV remains controversial, it is clear that currently no methods are available to blood centers to detect asymptomatic infected donors.

Secondly, it is with emerging pathogens that the strength of pathogen inactivation is demonstrated. The INTERCEPT Blood System broadly targets DNA and RNA of potential pathogens that may contaminate donated blood without regard to pathogen identity or disease causality. As new pathogens continue to emerge, Cerus has performed studies to confirm that our process inactives these threats to transfusion safety, including West Nile Virus, Dengue Virus, the SARS agent, Chikungunya virus and the influenza viruses and Babesia. As Claes mentioned, Cerus has already conducted initial testing to demonstrate that XMRV is inactivated by the INTERCEPT Blood System. We'll report additional definitive data at the first international XMRV conference in September.

As a last comment on the general issue of emerging pathogens, I'd like to point out that Dengue Virus has recently reemerged in the Southern United States and Puerto Rico. Similar to West Nile Virus, Dengue is spread by mosquito species that are widespread in the United States, and this virus may become another significant threat to the blood supply. The tick-borne infection Babesia is a growing concern for blood transfusion safety and has caused several deaths in transfusion recipients. Together with XMRV, these emerging pathogens present an ongoing risk to transfusion recipients.

Now I'd like to turn to our activities at the International Society for Blood Transfusion Congress in Berlin, Germany, from June 26 to July 1. As described in our press release, the program included 22 presentations of data with the INTERCEPT Blood System for platelets, plasma and red blood cells. Blood centers in Spain, France, Germany, Italy, Belgium, Sweden, Luxembourg and Scotland contributed to these scientific studies. I'd like to highlight three that are of particular interest.

Two studies examined the safety and efficacy of INTERCEPT platelets stored for an extended period up to seven days. Dr. Miguel Lozano, of Barcelona, Spain, reported the results of the multinational (inaudible) study, the first clinical study performed to date which has demonstrated the therapeutic efficacy of seven-day-old platelet components treated with pathogen inactivation. In a second study, Dr. Jean Claude Osselaer, of the Mont-Godinne, Belgium blood center, presented results of a six-year postmarketing surveillance study on the prevention of central nervous system bleeding. These data demonstrated that INTERCEPT platelets stored for up to seven days were as effective as conventional platelets stored for five days for the prevention of central nervous system bleeding in hematology patients during multiple chemotherapy cycles.

Finally, Dr. (inaudible), of the German Red Cross, Frankfurt, reported studies showing that red cell components prepared with the INTERCEPT S-303 process retain critical functional properties after 35 days of storage. In combination with our clinical data on the viability of S-303 RBC that will be reported at the upcoming AABB Congress, these data pave the way for clinical development of the RBC platform.

And now I'll turn the call back to Claes.

Thank you, Larry.

In conclusion, our second quarter continued our track record of sales growth. We are delivering on our goal to improve margins and tightly control our spending, maintaining the financial health of the Company. We look forward to sustaining this momentum through the remainder of the year. We will also be closely watching the evolving scientific dialog regarding XMRV. We believe this virus could dramatically change the landscape for pathogen inactivation.

Operator, I'd now like to open the call for questions.

(Operator instructions).

Our first question is coming from Klaus (inaudible), of Deutsche Bank.

It's Klaus (inaudible). Do you have any idea, are you going to need another financing before you reach cash flow break-even?

As we said on the previous call, we have an additional $5 million available to us between September 30 and December 30 of this year. We believe that financing will provide us with the capital necessary.

Thanks.

Our next question is coming from Scott Freeman, of Avondale Partners.

Good afternoon, gentlemen.

Hi, Scott.

You mentioned earlier progress with the Swiss Red Cross in I believe two sites that have become up and running. Is there any update on further sites maybe starting that process, or any kind of more clarity you can give us there?

Yes, there is actually three of them are now in operation, and (inaudible). So there's a -- the process is that by the middle of next year [11 centers] should be fully in routine use. And we expect that as the year progresses we will continue -- between now and then we'll continue to [adding centers].

And a quick housekeeping for Kevin. The noncash charge for the warrant, do you see that -- is that going forward? Are we going to see more of those charges in 3Q and 4Q as well?

Well, it's kind of a double-edged sword. The good news is that the share price rises, but the bad news is we take a charge for that. Because the warrants are outstanding we have to mark to market those.

Okay.

So the underlying share price drives that. So the answer is yes, we'll likely see changes, both an additional expense and possibly a (inaudible).

And just lastly, on the red cell -- I'm sorry, on the platelet discussion with the FDA, you had mentioned getting the assessment data for your patient population. Any idea on time frame for that?

We're actively engaged in that process. We are taking advantage of a very large database at a highly respected institution, and they are working with us. It's a little bit early to set a timetable for that activity. I would say that by the next call we would have a much better fix on that timetable.

Excellent. Thank you very much.

Thanks, Scott.

(Operator instructions).

We have a question coming from Ronald Urvater, from Ormed Capital.

Yes, hi. Good afternoon, Claes and Larry and Kevin. Just two questions. One, can you give a little insight as to what's happening in France specifically? If I recall there are a certain number of departments that had approved it and there was a rollout process that was sort of projected. Are you pretty much on track there, or can you comment on the timing of the French departments in terms of the number of departments that have been enrolled in the program?

For plasma (inaudible) 100% at [pathogen inactivation] and half or slightly more than half of that is provided by EFS themselves and the rest of it is split between (inaudible) supplier and us, and we actually are the smallest supplier. We expect that they will put up a tender towards the end of this year for that portion that they don't do themselves, and of course we will be actively pursuing that piece of the market. For places where we're the only approved source, and we expect that, as you said, that they will continue adoption in France from the existing centers that are in use. But we don't have any -- I can't tell you any -- we'll communicate that when we have a clear plan that's available to us. Right now they're in the middle of their planning process for next year.

Okay. I was just trying to get a sense a little bit of whatever bureaucratic hurdles existed in the past, do you believe in a general sense they've been -- that it's a sort of a more widespread acceptance and adoption, because if I recall there was a little conflict between one bureaucratic entity and the other, let's say. Have we gotten past that now? Has the [country] gotten past that?

I think that the support for full implementation is pretty broad-based now (inaudible).

Good. The other question, which is maybe difficult to answer, but just coming back to the XMRV issue, and you indicated that chronic fatigue syndrome sufferers would be a target population that would be interested in basically having this adopted. My question goes to to what degree are you aware of advocacy groups or awareness by the chronic fatigue syndrome population as to this potential threat, and how active are they currently, to your knowledge?

I think that they are very active. Actually, there are patient advocacy groups in several Western European countries as well as in the US, and they've -- they, I think, feel that this is the first time that someone finds a pathogen that links this to their disease and their syndrome, and I think that they strongly stay on top of any news there.

I think we -- the point of view that we have on this is that we don't really want to get in a position where we comment on causality of the disease or prevalence or anything like that, because I think that still is being in early data gathering stage right now. The point we're trying to make is that no matter what the end result is, if there is a pathogen out there, a retrovirus, if it's XMRV or anything else, that could potentially cause disease, that there's a very strong likelihood it could be inactivated. And why shouldn't you use it?

Right. There's no downside.

Exactly. There's no downside, and on top of that you -- we inactivate bacteria which are known threats, as well, and we have other positive effects. So I think this is a very vivid illustration of why pathogen inactivation is a proactive approach and as such should be adopted widely.

Yes. Great. Thank you. Thank you very much.

Okay.

Thanks, Ron.

Thank you. Our next question is coming from Brett Rice.

Afternoon, gentlemen, hi, Claes, Kevin.

Hi, Brett.

Hi, Brett.

Larry. Have you won any other tenders?

Yes, we did. We won several tenders in Q2, and we're having several others which are under review right now, so we're adding.

Well, that's music to my ears. Thanks.

Thank you.

There seems to be no questions at this time.

Well, thank you for joining us today. We look forward to updating you on our third quarter conference call in October.

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