Cerus Corp (CERS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Cerus first quarter 2011 results conference cal. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Lainie Corten from Cerus. You may begin.

Thank you, Stephanie. Good afternoon. I'd like to thank everyone for joining us today. With me on the call are Obi Greenman, Cerus' President and Chief Executive Officer; Kevin Green, our Chief Accounting Officer; and Dr. Larry Corash, our Chief Medical Officer.

Cerus issued a press release today announcing Cerus' financial results for the first quarter ended March 31, 2011 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.

I would like to remind you that during this call we will be making forward-looking statements, including statements about forecasts of revenue and annual growth rates, commercialization progress and timing of tenders, regulatory and governmental processes, the scope and timing of red cell trials, research and development activities, sales, operating expenses, gross margins, use of cash, 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 period ended September 30, 2010 on Form 10-K, including the sections entitled "Risk Factors". This call will be archived temporarily on the Cerus' website and will not be updated during that time.

On today's call, we'll begin with some remarks from Larry. Following this, we'll hear commentary on the Company's financial results from Kevin and then conclude the call with Obi, who will share his vision for Cerus. And now it's my pleasure to introduce Dr. Larry Corash, Chief Medical Officer, Cerus founder and director on the Cerus board.

Thank you, Lainie. As a Cerus founder and director, I'm acutely focused on the Company's performance and ability to realize its full potential. From this perspective, I'd like to begin the call by offering some commentary and context on the recent appointment of Obi Greenman as the next President and Chief Executive Officer of Cerus.

Leadership transitions are inevitable for all companies and require planning. For some time, Cerus has had a succession plan in place. So, when we received Claes' resignation, the board already had a successor in mind and did not need to look outside the Company for an ideal candidate. I've worked with Obi for over 15 years, since his arrival at Cerus as Director of Business Development. Obi has always demonstrated a dedication to Cerus' mission to improve the safety of blood transfusion and his contributions have been critical to our progress over the past decade-and-a-half.

Obi comes to his new position with a wealth of experience with our business partners and customers around the globe. In his business development roles, he's been instrumental in managing Cerus' relationships with Baxter, Fenwal, BioOne, Grifols, CSL and many others. During his years as President of Cerus Europe, leading our sales, marketing and customer services operations based in the Netherlands, he spent considerable time in the field with customers and key opinion leaders, experiencing firsthand the challenges and successes of our European commercialization effort.

Obi's experience and character make him ideally suited for his new role as President and CEO of Cerus. I congratulate him on his appointment and I look forward to working under his leadership.

Now I'll turn the call over to Kevin to provide our Q1 financial results.

Thank you, Larry. Like Larry, and other members of Cerus' executive management team and I believe the entire organization, I too am excited to work with Obi in his new capacity. I look forward to assisting Obi with making his vision and strategy for Cerus a reality.

As a foundation, we are well on our way to executing on the guidance we provided during our last conference call where we announced expected 2011 total revenue growth of 20% from 2010. This remains our guidance and of course we will update this on future calls as needed.

Total revenue for the quarter was $6.6 million, up 16% from Q1 of last year. Product revenue represented $6.2 million, an increase of 12% year-over-year. It's important to note that this increase was due to growth in kit sales, demonstrating the expanding revenue contribution of our installed user base. Of the $6.2 million in product revenue, disposable kits accounted for over 90%.

The US Department of Defense support for the red blood cell system provided $436,000, compared to the $222,000 in grant revenue recognized in Q1 of last year. We expect to receive Department of Defense funding under a new grant during 2011, a key source of funding as we prepare to enter Phase III clinical trials of our red blood cell program.

Gross margins on product sales during the quarter were 44%, compared to 43% during the same period in 2010 and 39% sequentially from Q4 of 2010. The key factor in our ability to continue improving gross margins is and will be the volume at which we manufacture our disposable kits. Our inventory levels have increased from the December balance sheet date in anticipation of growth in customer demand.

I'd like to turn now to our operating expenses, an area that we have spent considerable time managing over the past few years. Total operating expenses for Q1 of 2011 were $7.4 million, compared to $6.8 million during the same period in 2010. This year-over-year increase is primarily a result of increased research and development costs, due to our preparation for initiation of the Phase III red blood cell clinical trial. We expect research and development costs will modestly increase as we get closer to the red cell trial initiation.

Net losses were held to $5.0 million in the quarter, down slightly from the $5.3 million level in Q1 of 2010. We were able to realize this decline in net losses despite higher interest expenses incurred as a function of our growth capital facility and larger charges incurred as a result of marking-to-market the value of outstanding warrants during Q1 of 2011. Non-cash charges related to marking the warrants to market were $1.3 million.

On a per share basis, net loss was $0.11 during the Q1 of 2011, compared to $0.14 during Q1 of 2010, with the change primarily attributable to the share increase from our November 2010 public offering.

Turning to cash, we ended the quarter with cash and marketable securities of $24.4 million, compared to $30 million at the end of 2010. The $5.6 million of cash burn experienced during the recently completed quarter is higher than the levels we have seen in recent quarters. This increased cash burn is a result of certain annual operating payments made in Q1, transaction costs associated with the BioOne acquisition accrued during 2010 but paid in Q1, and increased inventory build in anticipation of customer demand.

We continue to maintain the availability of the second $5.0 million tranche under our growth capital credit facility, which may be drawn down prior to September 30th of this year at our option.

I'm now pleased to turn the call over to Obi, our new President and Chief Executive Officer.

Thank you, Kevin. I'd like to start by explaining what motivates my passion for the INTERCEPT opportunity and the difference that we are already making for patients in Europe and CIS in the Middle East.

Early in my career in Baxter's plasma fractionation business I witnessed firsthand the risk to patients from viral contamination and I saw the profound affect that pathogen activation can have blood safety. Joining Cerus, I saw the opportunity to work with an organization whose technology would revolutionize the safety of blood components, bringing pathogen activation to play as plasma and red cells.

As Cerus' CEO, it is my conviction and my commitment that fulfilling the global need to protect transfusion recipients will translate into increasing value for Cerus shareholders.

Looking ahead, there's one thing we know for certain; that pathogens will inevitably emerge from year to year and become threats to the blood supply. During my time at Cerus this has occurred on numerous occasions with threats emerging from West Nile virus, chikungunya, and most recently dengue.

Under the old testing paradigm, transfusion recipients are exposed to infection until a new test can be developed and from the blood center's perspective, costs multiply as tests increase. Furthermore, recent product launches in the blood screening market have proven to be disappointing for test manufactures, leaving the companies potentially locked in to invest in the development of tests for new pathogens.

For these reasons, I'm convinced the old testing paradigm is not sustainable and will be succeeded by pathogen activation. The perfect track record for pathogen activation and securing the safety of plasma derivatives over the last two decades is direct evidence of its value.

Cerus' INTERCEPT blood system addresses the threat presented by the virtual certainty of future emerging pathogens as well as from known agents of concern, such as bacteria, West Nile, chikungunya, dengue and others. Our mission is to bring this comprehensive protection for patients across the globe.

Our strategy is threefold. First, to accelerate adoption of INTERCEPT plans in plasma and to expand the markets in which we operate; second, to advance the red cell system through Phase III trials towards commercial launch, initially in Europe; and finally to define a pathway to FDA approval for all three INTERCEPT programs.

Since taking over sales and marketing from Baxter in 2006, Cerus has established INTERCEPT in over 80 blood centers in 15 countries. Safety is just one of the daily challenges faced by blood centers. They also struggle to maintain a consistent supply while operating in an environment of demanding cost containment.

From our customers we have learned that INTERCEPT's ability to help streamline production, eliminate redundant safety measures and improve the logistics of platelet and plasma availability could all be critical to their adoption decisions. I will be challenging our sales and marketing teams to clearly communicate these benefits to our prospective customers, alongside the improved safety INTERCEPT brings. Fortunately, our current customers are excellent references for the value and service that Cerus provides.

Blood safety decision-making varies from country to country. Local reports of transfusion-transmitted infections can substantially influence the speed of adoption. In order to succeed in these markets, Cerus must persevere in our day to day sales effort in each region, but also must be able to execute flawlessly when unexpected opportunities arise.

Our recent experience in Switzerland demonstrates that we are able to rise to this challenge. A pediatric fatality in Geneva brought platelet safety into the public eye in 2009. This brought Swiss regulatory pressure for nationwide implementation of new safety measures and resulted in Swissmedic approval for our platelet system.

In 2010 we signed a contract with the Swiss Red Cross and this year, in just a few more months, we expect that 100% of the platelets in Switzerland will be treated with INTERCEPT. This achievement is a testament both to the quality of our product and to our ability to officially implement our process in all 13 Swiss blood centers over just an 18-month period.

Concurrently, with increasing market penetration and expanding the markets for our platelet and plasma systems, we are preparing for our European Phase III red cell trials. The red cell system represents a very important opportunity for Cerus as the potential market sizes and multiple of the combined platelet and plasma markets. I believe that our decision to partner our development effort with two of Europe's largest transfusion services - the French National Transfusion Service and the German Red Cross - will facilitate our European regulatory approvals and streamline our pathway to reimbursement in these markets.

With the launch of the INTERCEPT red cell system, Cerus will be able to offer our customers comprehensive protection across all three blood components and I also believe that we will be the first company to market with a red cell system, just as we were first to market with platelet pathogen activation.

I'd like to conclude with a few remarks about the United States. The importance of US approval goes beyond simply the market value for platelet and plasma and red cells. An FDA approval is a meaningful validation and an important influence on the global standard of medical care.

I recognize the US regulatory challenges that INTERCEPT has faced to date. However, I believe that there must be a way forward for each program and I'm committed to finding the pathway to licensure, along with the clinical and regulatory teams. As the new CEO, I expect to instill a heightened sense of urgency on this front.

In summary, I welcome the opportunity to build on the success Cerus has achieved to date, continuing to work alongside the many Cerus employees who made the success possible. Our most significant achievements are still to come as we fulfill our mission to protect patients worldwide.

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

(Operator Instructions) Chris Raymond, Robert W. Baird & Co.

Thanks, just a question, a point of detail that you gave in your prepared comments. I think you'd mentioned that a portion of your increased cash spend for the quarter was for reasons to effect an inventory build. Can you quantify maybe how much of that was the inventory build and what exactly are you seeing that would necessitate that in terms of -- you mentioned increased demand. Is there something that's happening that we should be thinking about?

Hi Chris. This is Obi. I'll turn it over to Kevin to answer that question around the burn.

Yes, hi, Chris. So, as you'll see on our balance sheet, inventory increased from just over $5.0 million to over $9.0 million. In part, that's due to increased inventory for the demand that we see coming.

Yes and so it's basically consistent with what our plans are.

Okay, but no -- is there any granularity like country-specific any kind of contract or something like that that we could point to?

No. I think there are a number of opportunities that we sort of have in our forecasting and essentially we want to be ready for those, but its just part of our overall planning.

Okay. Thanks.

Scott Gleason, Stephens, Inc.

Hey Obi, hey Kevin, thanks for taking my questions and congratulations on the good quarter.

Hey, thanks, Scott, hi.

I guess, to start off, if we look at kind of the onetime carry-forward from the third quarter into the fourth quarter, it's a pretty big sequential jump in terms of the revenue here. Can you guys give us maybe a little bit more granularity on kind of where that growth came from, when we think about the third to fourth quarter progression?

Well, I think what we've been able to do is sort of establish a solid foundation of existing customers and a revenue base and that growth came across the board from a number of different countries. I think, going forward, as a number of opportunities continue to mature across all of the same countries, we would expect to see acceleration in revenue growth in the second half of the year, but that's about the most granularity I can give to at the present time.

Okay and then, I guess, Kevin, when we think about the red cell development program in Europe, can you maybe give us a little bit more granularity on kind of where the costs will come on a quarterly basis and maybe how you kind of see that progressing over the next four quarters or so?

Sure. So we saw some increased costs this quarter, as we produced our chemical, active compound and we expect that manufacturing will continue into Q2. I think the cost increase will be nominal, but we'll continue to see cost escalation as we prepare for the Phase III clinical trial.

Okay and then we actually see the trial costs in the second half of the year?

Yes. You'll likely see the trial cost at initiation and beyond.

Yes. Basically, the CRO costs are throughout the duration of the study, so.

Okay and then, I guess, Obi, I know you guys have an important meeting coming up here with the FDA in May. I'd just be curious to kind of hear what your thoughts and expectations are for that meeting and maybe what you would expect, kind of from an outcome standpoint, to come out of it.

Well, we're basically submitting a clinical protocol for the FDA's consideration and we expect this to sort of be the beginning of the number of iterative discussions with them to gain agreement. So I think essentially we'll have to defer answering more definitively until we have more information, the outcome, as a result of the meeting. So, Larry, do you have anything to add to that, or?

No. I think that this will be an ongoing decision with FDA to reach a satisfactory conclusion and it may take several iterations to get us to a point that we are comfortable with before we can communicate with the outside world.

Okay. Thanks for taking my questions, guys.

Thanks, Scott.

Caroline Corner, McNicoll, Lewis & Vlak

Hi. Congratulations on the quarter and thanks for taking my questions.

Hi, Caroline.

Hi. So just to ask a little bit more about the red blood cell Phase III trial in the EU? You said that the costs are going to ramp in the second half of the year. Can you talk a little bit about how many quarters those costs are going to be spread among and just enrollment timeline expectations and things like that? And also, would we expect the CHRONIC trial to overlap with that trial at some point as well?

Yes, so basically what the current plans are is we'll be conducting process validations at the blood centers in both Germany and France in the middle of this year and then essentially getting ready for the clinical trial application that will go into APSAS. Upon initiation of the study, we expect that study to run between 12 to 18 months and so the clinical trial costs that you referred to essentially would be over the duration of that period. So we don't really see dramatic increases in costs related to the red cell program, but just some incremental changes quarter-to-quarter.

Then, with regard to your question about the CHRONIC trial, so essentially what we'd be doing is starting the ACUTE study and filing the CE Mark upon the completion of that study and we anticipate that upon the completion of the ACUTE study it'd be about 12 months until we could submit the CE Mark.

Okay, fair enough, and then with regard to platelet reimbursement in France, there's a chance that that might be increased going forward, over the next year or so. I was just wondering if had a comment about that and what you think the chances are for that actually happening and just what needs to happen for that to move forward.

Okay, well and again, as we discussed on previous calls, we're basically awaiting a French tender, which has not yet been issued. So we really don't have any additional clarity to provide around the French tender and I think what our assumption is that the link to that French tender would be some understanding about what the scope would be for platelet and plasma adoption in France. I think EFS would need meeting to consider where the incremental reimbursement would come from, to allow them to move forward. So, I think that in the next quarter call, in July, we'll be able to provide a lot more information about the opportunity in France.

Okay and then just a final question. You mentioned in your remarks that you think there will be 100% adoption of pathogen and activation for platelets in the Swiss market by the end of next year. What's the competition in the Swiss market as you see it?

We don't really see -- there's no other platelet product approved in the Swiss market, so we're the only company with a Swissmedic approval and right now, our anticipation is actually that 100% Switzerland will be using INTERCEPT in the middle of this year, so (inaudible - multiple speakers).

Okay, great. Thank you. Great. Thanks for taking my call.

Thank you.

Thanks, Caroline.

Klaus von Stutterheim, Deutsche Bank

Hi. Congratulations, Obi. I have two questions. One is you mentioned that for the Phase III trial having partnerships with the drug and Red Cross and the French transfusion centers. Is that partnership in terms of operating the trials? Are they contributing money to it and would they share in the profits of the ultimate product?

I believe we've already announced this before, but we have formal collaborations with the both the German Red Cross and the FS for the red cell system development and those partnerships basically relate to their contributing services and manpower to conduct the validation studies as well as clinical studies. And there is some economic incentives for them to do this over the long-term, but primarily this is a research collaboration.

Alright, thanks. Sorry, I must have missed that. Sorry. And you mentioned DoD funding quickly. Can you be a little more specific, what order of magnitude and when that might happen?

Sure. So the award that we're expecting will be granted is roughly a $2.0 million award and it's up to us, depending on how fast we develop the red cell program and get ready for the Phase III clinical trial, how quickly we'll would utilize those funds.

Terrific. Great. How -- I mean, the DoD funds and the FDA drags its feet. Anyway, thanks.

Thank you.

(Operator Instructions) Frank Buresi, Stifel Nicolaus

Hi, Kevin and hi, Obi.

Hey Frank.

Yes and they asked most of the questions and I was just wondering, is there one thing, though the Swiss, I mean, what kind of potential is there in Swiss platelets?

It's roughly a $3.0 million opportunity on an annual basis. They do about 30,000 platelet doses a year in 13 centers and so it's a nice increase in our market opportunity at present.

Okay, thanks.

Thank you.

Thanks, Frank.

I'm showing no further questions at this time and would like to turn the call back over to management.

Well, thank you for joining us today. We look forward to updating you on our second quarter conference call in July and thanks again. Bye-bye.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.