Cerus Corp (CERS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Cerus Third Quarter 2010 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. And now I'll turn the program over to Jason Spark, Senior Vice President with Canale Communications. Please go ahead.

Thank you, and good afternoon. Cerus issued a press release today announcing Cerus' financial results for the third quarter ended September 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 the Company management will be making forward-looking statements including statements about forecasts of revenue and annual growth rate, commercialization progress and timing of tenders, regulatory and governmental processes, the size and timing of red blood cell trials, 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 for the fiscal period ended June 30, 2010 on Form 10-Q including the section 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 Obi Greenman, our Chief Business Officer. Larry Corash, who usually joins us on these calls, is currently traveling.

It's been an active quarter, and I'd like to begin by highlighting our progress in several key areas. We've continued to see growing demand for the INTERCEPT Blood System. Our reported revenue of $5 million understates the true level of demand since it does not include approximately $1.6 million in late September orders that we expect will be largely recorded as Q4 revenue.

Second, we regained platelet and plasma rights in Asia from BioOne. This gives us the opportunity to pursue new markets in this region, which represents an estimated potential market of over $2 billion.

Third, we announced a distribution agreement with CSL for INTERCEPT platelets in Australia and New Zealand. And finally, we again achieved our goal of improving profit margins and controlling expenses.

I'll begin by discussion our Q3 revenue and provide you with our outlook for the remainder of the year. As I just mentioned, our third quarter revenue does not reflect approximately $1.6 million in orders received late in the quarter. These orders gave us a strong start for the upcoming fourth quarter. We continue to expect solid demand for INTERCEPT through the remainder of this year. Therefore, we anticipate 2010 total revenue growth of approximately 35% to 40% over 2009.

Looking at demand in Euros, in which we typically make our sales, growth in demand is projected to be closer to 45%. Eight new centers have begun purchasing INTERCEPT this past quarter, and INTERCEPT was also awarded three new tenders. We believe sales will continue to grow despite challenging economic conditions in Western Europe.

On that note, I'd like to spend a few moments reviewing our status in several key INTERCEPT territories. In Southern Europe, Grifols continues to deliver growing sales in Spain, Portugal and Italy. This past quarter, Grifols began supplying INTERCEPT to blood centers serving approximately 25% of the Portuguese market, a country that previously was without significant use of either INTERCEPT platelets or plasma. We expect that these new customers will be ramping up production as they complete their implementations in the coming months.

France remains one of our largest and most important markets, contributing significantly to our current revenue. That said, there is considerable room for further growth as our current sales represent only about 10% of the potential market. INTERCEPT is the only product approved in France for pathogen inactivation of platelets, and the [Alsace] region has recently published multi-year experience data documenting positive safety data in routine use.

With that data, we believe that France will move forward with a broader adoption of INTERCEPT for platelets. The timing of a nationwide implementation is still being determined. Based on our recent interactions with EFS, we expect that they will issue a competitive tender for both platelets and plasma in March of 2011. This tender would be awarded in the second half of the year.

Turning now to Switzerland, I am pleased to report that the implementation continues under our national platelet contract with the Swiss Red Cross. We anticipate that 12 of 13 Swiss Red Cross centers will be in full production by mid-2011.

Belgian remains the most progressive adopter of pathogen inactivation in Europe with royal decrees mandating use of these technologies for all platelet and plasma components. We currently hold the market share of approximately 40% for platelets and expect that share to remain steady in the near term.

We continue to make progress outside of Western Europe, particularly in the CIS countries. This region has driven significant recent sales growth, which we expect to continue going forward. Historically, our sales to this region have been difficult to predict, but our distributors' recent accelerated orders of both kits and illuminators indicate additional market penetration in these nations.

To summarize, we built a solid and growing base of business in Europe, the CIS countries, and the Middle East. Over 60 blood centers in 16 countries are now transfusing INTERCEPT in routine use.

Our experience with our platelets and plasma customers also continues to underscore the critical importance of the INTERCEPT red blood cell program. Red blood cells are the most frequently transfused blood component; therefore, represent each blood center's greatest concern regarding improved safety for blood recipients.

They also represent a nearly $5 billion annual global market, making this component the largest potential market for pathogen inactivation. We're now taking steps towards starting a Phase III clinical trial for red cells. Our goal is to initiate that trial in Q4 of 2011.

Accessing the global market for pathogen inactivation remains a priority for us. A recent reacquisition of platelet and plasma rights in Asia is a significant event as is our new partnership with CSL for Australia and New Zealand.

Now I would like to turn the call over to Kevin to review our financial results. Kevin?

Thanks, Claes. Total revenue for the third quarter was $5 million, compared to $4.8 million during Q3 of last year. As Claes mentioned earlier, this total does not include large orders received very late in the quarter.

In Q3, we had demand of approximately $6.1 million for INTERCEPT products. For accounting purposes, this translated into product revenue of $4.5 million and additional demand of approximately $1.6 million, resulting from late September orders which we were unable to recognize in accordance with our revenue recognition accounting policies. This demand was largely fulfilled in October, contributing to our expected full year 2010 growth of approximately 35% to 40% compared to 2009.

Approximately 85% of our Q3 revenue was attributable to INTERCEPT disposable kits, with the remainder coming from illuminator sales. This mix has been relatively consistent over the past several quarters and demonstrates not only strong natural demand for the consumables, but also new illuminator placements for future consumable kit demand.

Overall, gross margins were 53%, up from 12% for the third quarter of 2009. Gross margins on product sales were 49%, up slightly from 48% in Q2 and 7% in Q3 of last year. During Q3 of last year, we recorded non-recurring charges amounting to 21% of product revenue. In the near term, we expect margins to remain relatively stable.

Now I'd like to turn to our operating expenses. Total operating expenses for the third quarter of 2010 were $6.4 million, down slightly from $6.5 million during Q2 and $6.6 million during Q3 of last year. We expect our current level of operating expenses will be sustainable for the near term.

Net loss for the third quarter of 2010 was $3.8 million, or $0.10 per share, compared to a net loss of $5.6 million, or $0.16 per share, for the third quarter of 2009. Similar to reporting in prior quarters, our results during Q3 were again negatively affected by a total of $700,000 of non-cash accounting charges due to an increase in the value of the outstanding warrants associated with our August 2009 registered direct offering.

We ended the quarter with cash and marketable securities of $13.2 million. Net cash used during the quarter was $2.7 million, in line with our target levels of $2.5 million to $3 million per quarter for 2010. We plan to continue tight management of our working capital and to focus on operating expense control.

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

I'd now like to turn the call over to Obi.

Thanks, Kevin. I'd like to begin by discussing our strategy in Asia. As Claes mentioned, in August we regained Asian rights for INTERCEPT platelets and plasma from BioOne. This consolidation of commercial rights now puts us in a position to pursue a new business strategy for this region and to pursue potential partnerships that would include all three INTERCEPT programs and the manufacturing of disposable sets for the region and for export.

Asia is a growing transfusion market that we currently estimate to be larger than either the European or North American markets in terms of the total number of transfusions. It is a complex market and one that we expect will develop slowly for pathogen inactivation in the absence of strong regional partners.

Japan has a single blood service, the Japan Red Cross. The JRC has been discussing the possibility of pathogen inactivation for several years. Because of the unique specifications of platelet components produced by the JRC relative to those produced in all of our other markets, we are looking for a large Japanese corporate partner who will be able to assist Cerus with the customization of the INTERCEPT system to meet the Japanese product specifications.

China is now the largest market for transfused blood components in Asia and is a country in which we believe it is critical to work with partners who have the requisite expertise, infrastructure, and local industry contacts. Our immediate focus on China is to update the platelet regulatory submission previously filed by BioOne to the State Food and Drug Administration.

We also have regained rights to Taiwan, Singapore, Korea, Thailand and Vietnam, and will be working to expand our distributor network to serve these additional markets.

Asia also has unique concerns with regard to emerging pathogens and other transfusion transmitted diseases. Dengue, chickungunya, malaria and other mosquito-borne threats are frequently present due to the tropical climate, and rates of hepatitis and HIV can be relatively high compared to other regions. We believe that INTERCEPT can provide blood services the opportunity to leapfrog an outdated blood safety paradigm and go straight to pathogen inactivation.

Our newly announced distribution agreement with CSL represents another significant achievement for Cerus this past quarter. Like our partner Grifols, CSL is one of the top three plasma fractionation companies in the world and has a long history of implementing pathogen inactivation measures into its production of plasma derivatives in Australia and around the globe.

We see the CSL contract as a strong endorsement of INTERCEPT, validating both the strength of our technology and the market opportunity in Australia and New Zealand. We consider CSL an ideal partner for bringing INTERCEPT to these markets.

I would now like to give you brief updates on our red cell development and our dialogue with the FDA regarding platelets. In September, we announced that we had been awarded $1.4 million in US Department of Defense funding to advance our red cell program. This continued funding from the DOD, in combination with our collaborations with Grifols, the French National Transfusion Service and the German Red Cross is critical to continued progress towards initiation of Phase III trials in Europe.

[Further discussions] with European regulators over the last year, we now believe that it will be feasible to achieve CE Mark approval by completing two Phase III clinical trials with fewer than 300 total patients.

Regarding our plan of development program in the United States, we are now assessing the incidence of safety events in a representative patient population receiving frequent transfusions of conventional platelets.

These data are drawn from a large stem cell transplant database including thousands of patients over a nine-year period and are critical to refining estimates of the trial size required to assess the study endpoints posed during the Blood Products Advisory Committee meeting in late 2009. This quarter, we plan to request a meeting with the FDA to discuss this new data.

Finally, I'd like to finish with an update on recent emerging pathogens. As we have mentioned in previous calls, the threat of mosquito-borne diseases in Europe is a real concern to local health agencies. Historically, European cases have mainly been imported by travelers returning from other regions; however, during the third quarter, domestic cases of dengue, chickungunya, and West Nile Virus were reported in France and Spain, leading to fears that these viruses are becoming endemic.

Another current concern is XMRV and other MLV-related viruses for which disease causality and the prevalence in blood donors remain to be determined. The NIH has convened a blood working group to evaluate and document the potential transfusion transmission risk of this newly discovered family of viruses, and we anticipate a great many publications and press releases on this topic from the scientific community over the coming months.

In September, Cerus and the Whittemore Peterson Institute presented data for XMRV and MLV-related viruses at the NIH's first international workshop on XMRV, demonstrating inactivation of high levels of virus in both platelets and red blood cells. We will continue to monitor the evolving body of data on XMRV and provide an update on our next conference call.

Now, I'd like to turn the call back over to Claes.

Thank you, Obi. In conclusion, we are pleased to have achieved strong growth for INTERCEPT platelets and plasma throughout 2010. We are continuing to increase penetration of our existing markets as well as expanding into new markets, and we are very confident that our growth will continue in 2011.

We also remain committed to advancing our red blood cell program through the clinic and into the market. When we combine our demonstrated market success to date for platelets and plasma with the opportunity for red cells, we believe we have a very compelling value proposition.

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

Yes, sir. (Operator Instructions). Our first questioner in queue is Scott Gleason with Stephens. Please go ahead with your question.

Hey, Claes. Hey, Kevin. Thank you for taking my questions.

Hey, Scott.

Hi, Scott. Pleasure.

Claes, I think you mentioned on the call that a red cell trial for a Phase III study in Europe would incorporate less than 300 patients. Can you give us maybe a little bit better idea in terms of kind of the timeframe that it would take to conduct that study, maybe what the cost could potentially look like in terms of -- from an overall basis? And then, I guess, in terms of those 300 patients, can you give us a breakdown of kind of what that cohort might look like?

Sure. The timeframe that we indicated, our goal is to start in Q4 next year, so we're spending time between now and then to prepare for the trial. And part of that work is towards preparing some parts of the CMC section which are important to go into the protocol.

The timing -- it will be a two arm study, actually, so it will start with an acute trial, which we estimate will be 200 patients. And to be soon followed with a chronic arm, which will be estimated to enroll 75 patients, so that's how we get to this less than 300 total.

And the timing for conclusion, though, we haven't given guidance on that, but I think it's probably going to be faster to do the acute arm -- it's easier to enroll, it's a much larger number of patients -- so the chronic arm will take a bit longer.

Great. And then, Claes, I'm sure you guys saw the recent study that was put out by Harvard that was questioning, I guess, the link between XMRV and chronic fatigue syndrome. I guess it was a pretty small sample size there. What's your guys' kind of current thoughts related to that and also to the NIH FDA study, and how are you guys going to look at that data, I guess?

I think it just demonstrates that this is early, it's still controversial. We don't really -- we're not experts in the field, so I think we're beginning to hear the choice of assays and development of assays is going to be very important in terms of finding XMRV. And if you can't find it at all in a large sample, I think that actually to me a strange signal when people are finding it even in healthy volunteers.

We don't really want to get entangled in their science too much. I think we're just watching it and I think you may have seen also a recent study that they have found it in people with prostate cancer. So there's going to continue, I think, to be some contradiction of the data in time to come.

But I think most importantly, from our point of view, is that we enacted, I think, XMRV and I think it's one more example of yet another potential threat to blood safety that could be addressed by pathogen inactivation.

Okay, great. Kevin, what was the total impact from, I guess, from a year-over-year basis from the Euro conversion rate?

Last quarter, exchange rates dropped about 8%. We're not really sure where they're going to go in the future, but we assume that they're going to remain relatively stable at 1.4, but it remains to be seen.

Okay. And did you have that top-line impact, I guess, on a year-over-year basis from a gross standpoint, if we were using a constant currency number?

Yes. I think using the Euros, it's like 45% growth year-over-year.

Okay, great.

Is that what you were asking?

Yes. And then, Claes, I guess just one last question. You obviously -- getting the distribution rights back from BioOne was a pretty big victory for you guys. Can you maybe talk about a little bit in terms of what you kind of envision as some of the largest potential opportunities there, maybe from a short-term standpoint and also from a longer-term standpoint?

I think the short-term, as Obi indicated, I don't think we should expect any sales opportunities either in Japan or China anytime soon because we're still far from that. But we think that there are other countries in the region where we could see, with the help of distributors, see business developing in maybe the next 12 to 18 months.

I think in Japan the pathway, as Obi outlined, to find a new partner, someone who can bring more to the table than BioOne was able to do in terms of capabilities, size and critical mass, and potentially the manufacturing for the Japanese market is going to be important. So if we do find such a partner, that will be a significant event, of course, once we can report that.

Similarly for China, although I think the partner profile will be quite different. But I think, again, we're targeting at least finding a local partner rather than going it ourselves or going it alone.

Okay, great. Thanks for taking my questions, guys.

Thanks, Scott.

Thanks, Scott.

Thank you, sir. Our next question comes from Daniel Owczarski with Avondale Partners. My apologies, go ahead.

Yes, thanks. Good afternoon.

Hi, Dan.

Hey, Dan.

Claes or Obi, could you revisit or go over again the data set that you talked about combing through or assembling for the FDA, the next meeting? What is that data? And has the FDA kind of directed you or given you an indication that they'd be open to that data set or is this going to be -- I guess how far along are those discussions with the FDA to get them to the point where they would accept something like this?

Okay. I think the data centers is basically from a very large stem cell transplant center in the US and it's, as I mentioned, over a nine-year period, a recent nine-year period in thousands of patients. And so we're just looking at safety events in that stem cell transplantation and all of those patients had received conventional platelet transfusions.

And so the real goal for that is to look at how one might be able to design a clinical study looking at safety events, and that would be used for an upcoming discussion with the FDA to discuss trial design options.

And they -- to answer your question, they are aware of the fact that we are assembling this data, but they haven't seen the data yet.

Okay. But they at least conceptually think it's worth digging into that data to look at potential sizing of your study?

Yes, I think that they have absolutely understand the critical nature of assessing that data so that -- it's going to have an impact on staff and size and they know that. In the weird way that biostatistics work, so that's a pretty strong impact, so it's important to get the data as fresh and as correct as possible, and they understand that that's the purpose.

And do you anticipate meeting with them or sitting down with them before the end of the year?

We're going to ask for a meeting. I don't know the exact timing, but we will find that request is going to come down to calendaring, so we don't know when the meeting itself will take place before the end of the year or not.

And then, I think maybe, Kevin or Claes, maybe you said that 60 blood centers in 15 countries, are those -- Should we assume that those are running full production or are some of them still in that validation process, or how do we (technical difficulty) those?

So, some of them have not yet reached full production. But they're all running, but they haven't yet come to full adoption.

Okay. And has anybody turned the machine off or pulled to off once they're on?

The only -- no, I don't think that's happened, actually, anywhere. There are centers in some parts of the world that never get to 100% because -- I think that's in Russia, at least my understanding that they have one budget to buy illuminators and another one to buy kits. The kit budget comes from local authorities which have not quite departed from the Federal government. But that's the one part of the world where we are aware of that; otherwise, they tend to go to 100%.

Then just one last one, revising that XMRV. I realize that maybe earlier in the year that there were some countries that did put restrictions on donors with chronic fatigue. Are there more countries that are added to that list? Or are the existing countries, are they sticking with that restriction? Or what's -- from a donation perspective, XMRV and chronic fatigue, has there been any movement in the last several months?

I think the most recent notification was from the UK National Health Service. As of November 1, there will be restrictions against patients who have CFS -- CFS patients who are donating blood. And beyond that, some other countries that are considering that in light of the other countries that have made the donor deferral policies.

But I think in general what people are looking for is this ongoing work that the NIH is doing and CDC and FDA, looking at overall prevalence in various patient populations and also documentation of transfusion transmission.

But the deferrals are getting more restrictive. Nobody's taking them off?

No one's taking them off.

All right, thank you.

Thank you, Dan.

Thank you, Dan.

Thanks.

Thank you, sir. Our next questioner in queue is Blake Arnold with Robert Baird. Please go ahead.

Hi, guys. Thanks for taking the question.

Hey, Blake.

Hi, Blake.

Could you maybe elaborate on the impact you're seeing with regard to EU budgetary pressures on the business? Has this been a major factor in your discussions with decision makers who may be considering INTERCEPT?

I think the European Union has been under economic recession for quite some time now, so the point we want to make is that the growth that we have has been accomplished in that environment where there's already been restrictions. I don't think -- in fact, an interesting [thing that] you've heard on the call that we're now beginning to supply it in a place like Portugal that's been one of the worst, I think, in terms of having austerity measures.

So I think it's a general observation that Europe is still in a recession and it's a tough economic climate, but I think we're still adding centers and customers and expecting growth to continue.

Great. And then could you also outline your expectations for Germany next year? Should we expect to see Germany contribute in a meaningful way of the top-line? And then also, quickly, any updates in the UK?

So with regards to Germany, historically we were expecting the Red Cross in Baden-Wurttemberg-Hessen to be the lead, and they were certainly the first to sign the contract. But they've -- since then, their progress has been slow. They are moving forward. They remain committed to INTERCEPT and their study now, I think, is getting close to be started.

But in terms of revenue impact from them, I'm not so more cautious about near term and don't know what impact it will be next year, if any. But in the meantime, we have been making good progress with a growing number of other countries that represent 75% of the market. And both on platelets as well as plasma, we're working actively with several centers now to get their marketing authorizations in place.

And then those centers, there are none of them who have indicated that they want to do anymore trials. So as long as they get their registrations, we expect them to start buying. So those centers we think will make a meaningful impact on next year's revenues.

And with regard to the UK, if we broadened the -- outside the UK, also include Ireland, they actually just issued a tender for platelets inactivation for the whole country. And we expect that we will submit that tender later in the quarter, and will hear about the outcome of that, I think, probably before the next call.

England and Wales and Scotland are moving forward with bacterial detection, although we are making the point to them that we can actually provide them with pathogen inactivation, which would provide more safety at comparable cost. And with the changing government over there, the changes that are occurring, I think that this is a message that we now communicate to new decision makers, but I wouldn't model any sales into them next year.

Thank you. (Operator Instructions). Our next questioner in queue is Stephen Dunn with LifeTech Capital. Please go ahead.

Thanks for taking my call. A question, and congratulations on all the progress on all fronts.

Thank you.

Thank you.

Three questions here. I think the first one is going to be for Kevin. You basically have a $1.6 million backlog situation from, I guess, orders the end of September. Since you're now a growing Company, should we expect now, or bake into our numbers, some kind of consistent backlog number or was this kind of a one-off situation?

Yes. I'd say it's more of a one-off situation. We generally don't have these type of situations, but we felt that it was conservative and in line with our revenue recognition practices to call out the demand but not recognize it in Q3. So I would not bake these type of situations in.

I'd like a little bit more color on the China situation. Did I understand this correctly that BioOne hadn't really done anything in China and that you really have to start from square one with a new partner? Or are you just signing what's been filed with the Chinese SDA, or a little bit of color of what the status is and what BioOne had already done in China?

Yes. BioOne had submitted for SFDA approval for the INTERCEPT platelet product in our system. And what we're planning to do is just update that dossier with the latest information that we submit to regulatory authorities in Europe like the Paul Ehrlich Institute in Germany and (inaudible) and Swissmedic.

So we'll be doing that in parallel with trying to identify a partner that could assist in the development of all three programs and also potentially manufacture for the domestic and export markets.

Okay. So it's not a re-file, it's just transferring it back to you for the time being --

That's right.

-- until you get a partner? Okay, got it. All right. My last question is really more of a color statement. Since you've been adopted so heavily in Switzerland and you're adopted in France, and then combining it with, as you mentioned in the last quarterly call, dengue fever and malaria and even yellow fever is coming back.

Since the Swiss and the French have clearly adopted what you've got, is there any strategy or lobbying effort going on with the World Health Organization in Geneva to start to fund some projects, let's say, in Latin American countries, whose people are traveling to the southwest border countries in the US and donating blood even though they shouldn't? Is there any kind of lobbying effort to get funds from the WHO?

Right now, I couldn't say we have. We've been in touch with them in the past, so they know about the technology. For those territories that you mentioned, I would say in South America we are planning to expand our geographical coverage through distributors. And what's been holding us back is actually our own resources because we have to file in each country before moving forward with applications there. So we don't think we need WHO funding or support to get business there.

Southeast USA, as you know, falls under the FDA, so I don't -- we haven't so far been able to -- we haven't tried hard either to convince the FDA to give us a regional approval. But you're pointing at a real demand, because there are parts of the US that are really -- have a higher incidence of some of these diseases that are blood-borne and transmitted through transfusion.

I guess the last point I want to make, as much as we're happy with Switzerland and France, we still think we have a lot -- we would like to see a much bigger penetration in France as well. And the fact that there now are cases of chickungunya, West Nile and dengue in France that are being transmitted from local carriers to us is a signal that blood safety is important and can be improved in France as well.

All right, great. Thanks.

Thank you.

Thank you, and at this time I'm showing no additional questions in the queue. I'd like to turn the program back over to Mr. Glassell for closing remarks.

Thank you, everybody, for joining us on this call today. We look forward to updating you on our final, full year results in February on the next call.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.