Cerus Corp (CERS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Cerus Corporation second quarter 2011 results conference call. (Operator instructions) As a reminder, today's conference call is being recorded. I would now like to introduce your host for this conference call, Miss Lainie Corten. You may begin, ma'am.

Thank you, Kevin. 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 second quarter ended June 30, 2011 and describing the Company's recent business highlights. You can access a copy of this announcement on the Company 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 blood 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' 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 our website and will not be updated during that time.

On today's call, we'll begin with the Company's financial results from Kevin, followed by commentary on by Obi, who will review the recent quarter's achievements. And now it's my pleasure to introduce Kevin Green, Cerus' Chief Accounting Officer.

Thank you, Lainie.

Total revenue for the quarter was $6.8 million, up 14% from the second quarter of last year and was entirely attributable to product sales. In comparison to the second quarter of 2010, product revenue increased 19%. We did not recognize any U.S. Department of Defense grant revenue in Q2, compared to $200,000 recognized in Q2 of 2010.

We do expect to receive a new Department of Defense funding grant during 2011 that can continue to fund nonclinical development activities of our red blood cell program. Once awarded, we will be able to recognize revenue and collect cash for development costs incurred 90 days prior to the award date.

We are continuing to execute 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 we will update this on future quarterly calls as needed.

Gross margins on product sales during the quarter were 41% compared to 48% during the same period in 2010 and 44% sequentially from Q1 of 2011. The lower gross margin seen in recent quarters are attributable to the mix of products sold in each quarter and lower per unit costs of INTERCEPT Blood System product sold in 2011 compared to this year.

Total operating expenses for Q2 2011 were $8.3 million compared to $6.7 million during the same period in 2010. This year-over-year increase is primarily a result of increased research and development costs in preparation for the ACUTE red blood cell trial. We expect research and development costs to continue at approximately this level for the remainder of the year.

Net loss for the second quarter of 2011 was $6.3 million, or $0.13 per share, compared to a net loss of $5.6 million, or $0.14 per share, for the second quarter of 2010.

Turning to cash, we ended the quarter with cash and marketable securities of $17.8 million, compared to $24.4 million at end of the first quarter. The $6.6 million of cash burn is higher than the levels we have typically seen in recent quarters as a result of operating expenses to support the red cell clinical trial, the lack of government grant revenue and also of completing the increased inventory build initiated last quarter 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.

Thank you, Kevin. During last quarter's call, I explained that our mission to secure blood safety for patients across the globe involves three key elements. First, to accelerate adoption of INTERCEPT plans and plasma and open up new markets; 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. Today I'd like to provide an update on progress in each area.

Many of us at Cerus attended the International Society of Blood Transfusion Congress in Lisbon, Portugal. It was evident from the congress program and the dialog at the meeting that the transfusion services are now evaluating the benefits of pathogen activation with regard to logistics and cost containment, in addition to the advantages of patient safety.

The successful conversion by the Swiss Red Cross has served as an important example of how this technology can be deployed. INTERCEPT was at the center of discussion relating to the pathogen activations and the meeting helped to reinforce its place in the industry as an essential blood thinner technology. We believe our leadership positioned in the pathogen activation field will be a crucial advantage, as blood centers choose which system to implement.

I'll spend a few moments now to update you on commercial progress in the past quarter. Our sales this quarter grew primarily from the Swiss Red Cross's increasing use of kits as they ramp their implementation towards 100% routine use of INTERCEPT platelets, as well as increased sales in Russia and Slovenia.

As Kevin mentioned, we are maintaining our guidance of 20% total revenue growth for 2011. This rate is based on incremental growth in our markets and does not assume a significant increase in adoption by larger European countries like France.

We still expect the French National Transfusion Service, the EFS, to issue a tender that they previously communicated would be issued within the second quarter. Our preliminary understanding is that they will be negotiating a contract with Cerus to continue supplying the six EFS centers already using their (inaudible) and plasma. Beyond this particular tender, recent developments in France may impact their ongoing pathogen activation technology choices.

In light of concerns regarding allergic reactions associated with methylene blue treated plasma, the National Haemovigilance committee has recommended that AFSSAPS, the French regulatory agencies, suspend the production of all methylene blue treated plasma. With methylene blue plasma reported to represent about 65% of plasma produced in France in 2010, such a regulatory decision could have a significant impact on production levels of both INTERCEPT and solvent/detergent plasma and the other technique used by the EFS.

We believe the EFS's positive experience with INTERCEPT over a multiyear period, combined with our superior safety profile, places us in a position to make a strong case increased use of INTERCEPT plasma.

Outside of Europe, we continue to expand our markets. This past quarter we announced distribution agreements with Ilex for Israel and South Africa and I am pleased to announce today that we've also signed new agreements with Grifols for Mexico and with CEI for Brazil. These new regions collectively represent approximate production of 500,000 units of platelets and almost 1,000,000 units of plasma per year for an estimated $90 million market opportunity for INTERCEPT.

Turning now to our red blood cell program, we are continuing to prepare for initiation of the ACUTE trial in Europe. We completed GMP manufacturing of reagents for the red cell clinical kits and process validation studies at the trial sites are nearing completion.

An important upcoming milestone for this program is submission of the clinical trial application, or CTA, which is targeted for later this quarter. This submission has a 60 to 90 day review clock, so a positive response should allow us to initiate the trial late this year or early next year. If the regulatory authority initially responds with questions rather than approval, those questions would need to be resolved prior to starting the trial.

I'd also like to provide an update on the United States. As you know, we believe that defining FDA pathway approvals for all three programs is a critical priority for Cerus. As expected, our Q2 meeting with the FDA regarding the platelet program was a productive discussion that's still only an incremental step towards defining a clinical trial protocol satisfactory to both Cerus and the FDA. We plan to schedule at least one additional platelet discussion before year-end.

This fall we'll meet with the FDA regarding both the red cell programs and the TTP orphan drug indication for plasma. The meeting about plasma is to discuss whether our existing clinical data package is sufficient or if the FDA will require additional data for approval, a critical question to determine how rapidly this program can move forward with a PMA filing.

For red cells, we plan to discuss the design of the trial in chronically transfused Sickle Cell and thalassemia patients and depending on the timing of the responses to these discussions; I hope to share the outcomes of these discussions on our next call.

In conclusion, I believe we have achieved solid progress this quarter, both in growing our commercial markets and in advancing our development programs in Europe and the United States. In my vision for Cerus, each of these areas is critical to our success.

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

(Operator instructions) Zarak Khurshid, Wedbush Securities

Yes, Zarak Khushid, Wedbush Securities. Hey guys.

Hi Zarak.

Hi Zarak.

Hi. Thanks. Thanks for taking the questions. Congrats on what looks like a pretty clean, good quarter. I guess first on the guidance that you are laying out, does that include the Grifols, Mexico and the new Brazilian distributer as well?

That doesn't. No. Right now we're looking at the registration process for those countries to take around six-to-twelve months. So, if we were to see revenue from those geographies or those countries, then it would be sometime in 2012.

Okay and competitively, is any type of pathogen and activation used in South America and Mexico?

There's, I think, a little bit of methylene blue, but those markets are largely untapped, so there's not a lot of -- it's not yet consider the standard of care three and so that's one of the things that we're looking at, is that we really believe that pathogen activation allows these emerging markets to essentially leapfrog current blood safety paradigms and go straight to pathogen activation. And I think that's the two companies that we entered into agreements with, CEI in Brazil and Grifols in Mexico, are really strong in those markets and we believe that we'll be well positioned to roll INTERCEPT out there.

Sounds good and then a couple more follow ups. I don't recall you saying much about Germany. How are things tracking there and just as a kind of housekeeping item, how should we be thinking about the grant revenue to play out over the course of this year and then next year. And is there any risk that the austerity and kind of the budget discontinuities we're seeing will have an impact on that revenue line? Thanks.

Well, I'll cover the first question and I'll turn the second question over to Kevin. So with regard to Germany, I think that the thing that we're sort of surprised by -- not really surprised by, but the adoption of INTERCEPT in Switzerland and the smooth deployment in all the centers there. They're almost at 100% in routine use right now.

It really seems to have an impact on other countries in the region, so specify in Austria and also in Germany they're looking to the experience that the Swiss have had and said, wow that's really well done, and on top of that, the patient safety benefit that INTERCEPT affords. So I think you'll be seeing additional news flow from us for those other countries and specify Germany over the coming couple of quarters.

I'll turn the second part of the question over to Kevin.

So, Zarak, regarding the Department of Defense grant, we do expect to receive that grant this year and expect to recognize the majority of that in 2011. To put it in perspective, Q2 represented about $900,000 worth of development activities that would have been covered under the grant if we had received it in time

Okay, thanks.

Scott Gleason, Stephens, Inc.

Hey Kevin, hey Obi, thanks for taking my questions.

Hey Scott.

Hi you guys. I guess when we look at the discussions that we have with the FDA coming up here in the next couple months, can you talk a little bit about maybe what the potential outcomes of those actual meetings are? So when we look at like the meeting on red cells, is the potential to get an IDE, I guess, or an NDA to basically come out of that meeting? And then, when you look at platelet piece, same thing. Is it a potential that you guys could get approval at that time to go forward with another potential Phase III clinical trial?

Thanks. I think that the meeting that we're most excited about is the first one related to plasma and that's because we've already completed a Phase III clinical study in TTP patients and so that meeting is to discuss whether that data is sufficient to begin initiating a PMA submission.

And then, with regard to your question on red cells, we're very excited about the Phase I data that we have and just basically this is our first time that we're going to be going to talk to the FDA about what would be required for a Phase III clinical study in thalassemia and Sickle Cell patients. And so what we'd like to try and do there is work with the FDA to define what the actual clinical study requirements would be for that indication.

And for platelets, we're just in an ongoing dialog with them about what the clinical requirements would be, ultimately, to address their safety concerns related to the product and that's, as you know, been an ongoing dialog with them for some time.

Okay. So, Obi, I guess just to kind of parse out your comments there, it sounds like probably on the red cell side and the platelet side the next meetings wouldn't necessarily give us kind of 100% clarity on what the path forward would be and just kind of further progress in the discussions there. Is that the right way to think about it?

Yes. I guess the way I look at it is that we have one group at CBER that we're meeting with very frequently now for all three programs, so I wouldn't say they'd see these as being sort of singular meetings in that we're more intent on defining an FDA pathway to approval for all three programs before the end of the year. And we'll update you when we have more clarity subsequent to the meetings that have been scheduled, but also the ongoing dialog that we have with them.

Great. And then, you guys, I guess if we could dig maybe into what's going on in France a little bit? So France had recommended basically not to use methylene blue because of the issues with allergic reactions. Does that have potential ramifications in other countries where they might follow kind of the French decision and then that could be incremental revenue you would pick up elsewhere?

Yes, so I think just to be clear on your questions, Scott, it's the AFSSAPS group, the French regulatory agency that has been recommended this national haemovigilance group within AFSSAPS that's recommended the suspension of the methylene blue program. But this is a process by which the EFS and AFSSAPS will be looking at the overall issue and we really don't have any indication as to what the EFS's intentions are at this moment, other than the data that we've disclosed to you today and has been published in the AFSSAPS annual report.

So I think obviously safety issues for a product, for a competitive product, is a potential opportunity for Cerus and maybe I'll turn it over to Larry so he can expand on what those safety issues are and why it might be important for current customers of methylene blue treated plasma to think about alternatives.

The National Haemovigilance Commission in France, which is a working group within the AFSSAPS regulatory body, reviewed all of the methylene blue adverse reactions and the types of those reactions are very serious reactions in that they're described as "anaphylactic", which means a drop in blood pressure, and there was one death associated with them.

So it's not only the number, but also the clinical characteristics of those reactions that I think are very important and now that recommendation has been submitted to the main body of AFSSAPS for action and also, of course, there has to be a discussion with EFS on what type of plasma they would use.

Our safety profile with INTERCEPT plasma doesn't have these types of reactions and we have a recent haemovigilance experience that's been published that includes data on 10,000 patients and 57,000 INTERCEPT components that were transfused and also a liver transplant study done by the transplant group in Strasbourg with very successful outcomes on more than 200 liver transplants. So we believe we're very well positioned and we have to wait for this process to play out through the French regulatory system.

Okay and I guess just kind of staying on the topic of France, do we have any kind of clarity or any kind of visibility into why the tender process has kind of been delayed here and I guess is there any reason why or any possibility that the French tender won't be kind of issued before the October timeframe?

Well, I think that the situation with regard to methylene blue has created a disconnect in the normal EFS tendering process and that's the only thing we can conclude by the absence of having the tenders issued when we thought they'd be issued, or when we were told there was going to be issued.

Okay and I guess, Obi, if the French government decided not to go forward with methylene blue, is it your sense that you guys would pick up the majority of that? Is there excess capacity in terms of the solvent/detergent process to handle additional platelets -- or plasma, I'm sorry?

Yes I think that capacity considerations for a solvent/detergent treatment are one factor that the EFS is considering and I think, other than that, we've had smooth implementation of INTERCEPT plasma in the three sites that are currently using it in mainland France and so, hopefully, they'd be looking at that as well as an alternative to their current situation.

Okay, great and then I guess, Kevin, just one last quick question. Can you give us what the impact of currency was in the quarter on or offline?

Yes. So clearly the topline benefited from the tailwind that the Euro/dollar exchange rates, but our topline was also impacted by the deficiency of the DoD revenue, so we can't predict what the FX rates are going to be in the future. But we're comfortable with our 20% guidance.

Okay. Thanks for taking my questions.

Thanks, Scott.

Chris Raymond, Robert W. Baird & Co.

Yes. I wanted to explore, a little bit, this methylene blue issue and also the FX a little bit further, so if you don't mind me just maybe being a little bit repetitive. On methylene blue, can you maybe tell us how often with AFSSAPS makes a recommendation to EFS follow-through or listen to it, like -- I'm trying to get some perspective on how much teeth are really in this recommendation.

Chris, I'm not sure we have any sort of history of past AFSSAPS recommendations and whether they were followed by the EFS. I guess AFSSAPS is essentially the French FDA and so they're responsible for the safety and efficacy of products within France and so their recommendations, obviously, have a lot of weight. And I think it's just a function of working through this process and allowing the two bodies to figure out how they're going to handle a situation.

Okay and so how many -- can you just remind us how many can units currently are being treated with methylene blue, how many plasma units in France?

It's about 65% of the market and so I'd say its north of 200,000 or maybe that's 180,000 to 200,000 on an annual basis.

Okay. Okay and so that's the number we should be thinking about in terms of being -- if the decision is to really suspend methylene blue we should be thinking about between solvent/detergent and INTERCEPT?

Yes.

Okay. And then sorry, Kevin, I was -- I'm sorry. Kevin, if you could maybe expand a little bit on this currency question? What exactly, percentage-wise, was the FX tailwind in the quarter?

I don't have that data in front of me, Chris, but I'd be happy to look it up when I've got that in front of me, but clearly there was a tailwind this quarter over last year.

Can you give us some perspective sequentially of that quarter on quarter, what the unit volume dynamic was?

Well, I'll answer it this way. The mix of product sold in both Q1 and Q2 were fairly consistent and that being the majority of the product sales were kit sales. In the past, we've had more of an 80/20 mix between kits and illuminators.

I'm sorry; I don't understand what that means. So you normally have 80/20 and in Q2 you had mostly kits or more?

The majority of our product sales in both Q1 and Q2 were disposable kits.

Right, but can you give us some dynamic of the kits, unit dynamics between Q1 and Q2?

I'd say closer to 90% in Q1 and Q2 as opposed to the historical -- I'm not sure if I'm answering your question.

No. Yes, what I'm just asking is what was the growth or trajectory of unit volume between Q1 and Q2? What percent did it go up or go down, if you -- I don't know if you have that info.

You know, I don't have that info, those specific numbers in front of me, Chris, but I'd be happy to talk to you offline and answer that.

Okay. Thank you.

(Operator instructions) Caroline Corner, McNicoll, Lewis & Vlak

Hi guys, thanks for taking my call and congratulations on a solid quarter. So most of my questions have been answered, but I do have a follow up with France, the part of the market in Bordeaux that's been treated with solvent/detergent. Given what's been going on down there, some of the dynamics with the manufacturing process, etc., how vulnerable do you think that $5.0 million worth of market share is to Cerus right now?

Sorry, Caroline, I didn't quite understand your question. So the vulnerability of our ability to pick up share from methylene blue, is that what you're asking, based upon the production in Bordeaux?

Yes.

I think that they're ramping solvent/detergent treated plasma beyond 50% would be a challenge, based upon their current production levels and the overall size of that facility. But I think maybe Larry has a little bit more insight into that.

Caroline, last year and going back fairly early into 2010, that facility was temporarily shut down due to contamination with bacteria in the processing system and it's still not producing at full capacity and it's a single facility in which their intention was to produce 50% of their plasma.

I think one of the advantages that INTERCEPT has is that it's a distributive technology. We have three centers in metropolitan France that are making plasma and at least on a temporary basis, one of our centers has doubled its production to have some excess capacity for export to other regions in France. We think that's a strength. We hope that EFS will see that as a strength as well, between these two technologies.

Okay, so the addressable market in France, then. Do you see that, right now, just over a $5.0 million opportunity in total, or do you see the possibility that you could take some of the solvent/detergent market as well?

I think that the best way to look at it is just incrementally on a quarter-to-quarter basis. It would be an incremental one-plus million Euros a quarter. It could be north of that.

Okay. Yes, that's helpful, and then just a quick question about your plans in the U.S. with the FDA meetings. The meeting for the red blood cell system in the U.S. and also with the TTP plasma trial meeting, are those already scheduled or are they already on the books, so to speak, at this point?

They are scheduled. Both meetings are scheduled.

I'm sorry, I'm breaking up. I was just wondered if the meetings are already scheduled?

Yes. I'm sorry. Both meetings are scheduled. Can you hear me or --? Yes.

Sorry. I will ask you offline. Sorry.

Okay. Thanks, Caroline.

Klaus von Stutterheim, Deutsche Bank

Hi. Can we talk about the balance sheet for a minute and the cash burn and back to raise additional capital and how would you likely go about that?

Yes, so I think the cash burn is characterized this quarter by increased research and development costs, which were predicted last quarter and that's been exacerbated by the lack of DoD funding. And then finally, over the first half of the year we did build quite a bit of inventory to meet anticipated customer demand. I think that net inventory increase that we've seen in the first half is not expected to continue going forward, so we're comfortable with the cash position and availability of cash that we have.

Right, but my question said going forward at what point do you think you're going to have to raise additional capital and what form might that take?

Well, I think it depends on the opportunities that are presented to us in the U.S. with the TTP and the red cell program. So, right now, we're running our business and depending on the outcome of those meetings, we'd contemplate any number of financing vehicles, including partnering.

Alright, thanks.

Frank Barresi, Stifel Nicolaus

Hi guys. How are you doing?

Hi Frank.

Is this methylene blue used outside France? Is there an opportunity there as well? That was my first question. My second question was the amount of money that you're using per work, do you think this is a higher-than-normal amount of money you're using this quarter and how long do you think before you're going to need to get extra capital?

Frank, I'll take the first question and turn the second one over to Kevin. So, yes, methylene blue is used in a number of other countries throughout Europe and the Middle East and Eastern Europe, including Belgium, Spain and Russia, for example. So there are additional places where we would hope to pick up market share if there were a real problem with methylene blue as an outside AFSSAPS and EFS. And I'll turn the second part of the question over to Kevin.

Hi Frank.

Hi.

So on the capital question, I think we're going to be able to turn that investment in inventory into cash. Obviously, when we go back or if we need to go back and raise additional capital it's going to be a function of the sales trajectory in the EU and like I just mentioned, also potential costs, if and when these development opportunities in the U.S. present themselves to us. So we don't have a specific timeline for a need for cash.

How much methylene blue is -- I mean, is being sold and are your costs like comparable to methylene blue or the prices you sell it, I guess, or?

Yes. Our prices are comparable and from an operational standpoint we believe we have some advantages. Certainly given that our system uses the same illuminator or same device as our platelet system, so the synergies of having a combined platelet and plasma offering are party compelling. And so I think its -- there's a sizeable market out there. But really what we're also looking at is how do we grow the business organically in markets that currently aren't using pathogen activations or for those markets that using pathogen activation for platelets, how do we get them to begin using it or plasma.

Okay, so there is -- I mean do we know how many, how much methylene blue is being used or?

We don't directly, because the company that makes the product is a private company and so they do not disclose what their sales are. We do have a pretty good idea as to what the overall market share is in the various countries in which we compete and I can try and give that to you offline, Frank, when you have a moment.

Okay, sure, I'll give you a call. And then you're saying that you -- I didn't quite catch what you said but you were saying, basically, that you're trying -- the people who are already using INTERCEPT for platelets, you're putting a major effort into trying to incorporate plasma?

I think that the fundamental premise of the Company is that pathogen activation for blood components shouldn't be used just for specific blood components, but they should be used for every blood component. And so, logically, if you're using pathogen activation for platelets, you principally would have already accepted the concept that it's better for your patients and for overall blood safety and therefore, why wouldn't you implement it for plasma? And the situation is the same for those that are using plasma. Why wouldn't they use it for platelet?

Right. Okay. Hey, thanks.

Thanks, Frank.

Yes, Frank, thanks.

And I'm not showing any further questions at this time.

Great. Well, thank you for joining us today. We look forward to update you on our third quarter conference call in October. Thanks a lot.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.