Cerus Corp (CERS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerus Corporation third quarter 2011 results conference call. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn your conference over to your host for today, Ms. Lainie Corten with Cerus Corporation. Ma'am, you may begin.

Thank you, Ben. 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 third quarter ended September 30, 2011 and describing the Company's recent business highlights. You can access a copy of this announcement on the Company website at 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 rate, commercialization progress and timing of tenders, regulatory and governmental processes, the scope and timing of red cell trials and other red cell activities, 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 June 30, 2011 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 Larry, who will give an update on our development program. We'll conclude our prepared remarks with commentary from 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 $9.2 million, up from $5.0 million during Q3 of 2010. To place this comparison in context, it's important to note that as a result of our accounting policies Q3 2010 revenue did not include approximately $1.6 million in late-September customer orders.

Product revenue for the current quarter represented $7.8 million, an increase over the $4.5 million from Q3 of last year and up sequentially from $6.8 million last quarter. Despite the 7.0%, sequential weakening of the Euro-dollar foreign exchange spot rates, revenue growth was strong, as evidenced by the more than 10% sequential growth in the demand for INTERCEPT disposable kits. We have seen demand for INTERCEPT kits grow by 34% for the nine-month period, a sign that we believe demonstrates the health of our recurring business.

U.S. Department of Defense support for the red blood cell system provided $1.5 million of revenue, compared to the $500,000 in grant revenue recognized in Q3 of last year and no revenue recognized last quarter.

The higher-than-usual grant revenue recognized during Q3 was a result of our ability to recover development costs incurred 90 days prior to the award date, as well as costs incurred subsequent to the award date. This allowed us to recognize five months' worth of red blood cell development activities during the third quarter. Our most recent U.S. Department of Defense grant was received in mid-August for $2.1 million.

Gross margins on total revenue were 50% for the quarter, compared to 53% for Q3 of 2010. Calculated on product sales, gross margins were 40% in Q3 compared to 49% during the same period in 2010 and relatively flat, sequentially, from Q2. We see this variation because of the current sales levels; our supply chain production volumes do not always have a one-to-one correlation to sales, which causes variability in our margins from quarter-to-quarter. We anticipate that if sales to continue to increase, we will see a more direct, linear correlation between supply chain production and sales.

Total operating expenses for Q3 2011 were $7.2 million, compared to $6.2 million during the same period in 2010. The year-over-year increase is attributable to increased development costs incurred in 2011 for the red blood cell program, reflecting increased program activity in preparation for the Phase III clinical trial.

Sequentially, general and administrative operating expenses were down, due to the concentration of scientific conferences in the second quarter. We expect fairly consistent research and development costs, in the near-term, as we complete the preparation for and then initiate our Phase III clinical trial for red blood cells.

Net income for the quarter was $2.3 million or $0.05 per diluted share, compared to a net loss of $3.6 million, or $0.09 per share, for Q3 of 2010. The change from net loss to net income is the result of our narrowing operating losses and a Q3 2011 $5.4 million noncash gain resulting from changes in the assumed fair value of our outstanding warrants. As we've remarked previously, these warrants are marked to market each quarter and consistent with the general decline in the broader stock market, our stock price decreased from June 30th to September 30th, negatively affecting the assumed fair value of those warrants and as a result, generating a significant Q3 gain for Cerus.

Over the past several quarter, operating expenses have remained very consistent, a trend that we expect will continue as we remain focused on managing operating expenses very tightly.

For the nine months ended September 30th, net loss was $9.0 million, or $0.19 per share, compared to $14.5 million, or $0.37 per share, during same period last year. The decrease in year-to-date net loss is attributable to the noncash gain from the change in the assumed fair value of the outstanding warrants.

Turning to cash, we ended the quarter with cash and marketable securities of $15.2 million, compared to $17.8 million at the end of the second quarter. This $2.6 million of cash burn is generally in line with the expectations, which we've previously communicated.

I'd like to elaborate on our recently announced growth capital credit facility and revolving line of credit with Comerica Bank. This combined facility provides Cerus with a great deal of flexibility and extremely competitive costs of capital through two key components.

First, a four-year, $5.0 million term loan, which we drew against on September 30th. This component is interest only for the first 12 months and bears a coupon of 6.37%. Another $5.0 million is available to us in a combination of additional term debt and a revolver. We anticipate the revolver will represent most, if not all, of this second $5.0 million and will allow us to draw against the facility for 80% of our trade receivables.

The facility provides us with an interest-only funding source at prime plus 1.5%. We expect to draw against the revolver in the fourth quarter. In sum, this transaction replaces our previous credit facility with one that is more flexible and less costly. I believe the Comerica facility provides us with a good source of non-dilutive capital to continue growing the INTERCEPT business.

I'm now pleased to turn the call over to Larry.

Thank you, Kevin. We've achieved substantial progress over the past few months in our INTERCEPT clinical development programs. Today I'd like to review our European red cell program, our recent meetings with FDA regarding the approval pathways for red cells and plasma in the United States, and the clinical perspective for INTERCEPT plasma expansion in Europe.

We're preparing to initiate a Phase III trial in Europe to support CE Mark registration for INTERCEPT red cells. An important update on this program is that following negotiation with our Notified Body, TUV, we reached agreement to perform a significantly smaller trial than initially anticipated. I'm pleased to report that a 50-patient trial in cardiovascular surgery patients with acute anemia will be sufficient for CE Mark registration, in combination with the clinical data generated in our previous Phase I and Phase III trials.

Based on TUV's acceptance of our proposal, we revised the Clinical Trial Application, or CTA, and expect to complete the CTA submission later this month. The CTA review process can take up to 90 days and may take longer if we receive questions during the review. Therefore, we anticipate receiving final approval of the CTA as early as the first quarter of 2012. We've already met with the European cardiovascular surgical teams who will be conducting the trial and gained their agreement on the revised protocol.

Initiation of this Phase III study will be an important milestone in our red cell program. The 50-patient protocol significantly shortens the expected duration and expense of the trial, which we anticipate can be completed within 12 months of initiation.

I'd like to take a moment to clarify the sequence of steps we expect are required to achieve CE Mark registration for the acute anemia indication, as well as the additional work needed to access the full European red cell market.

Obtaining a CE Mark for acute anemia will require not only the 50-patient ACUTE anemia trial, but also conduct of manufacturing, development, and validation studies in preparation for commercial launch. This approval will allow us to initiate sales for the acute anemia indication in many countries, representing a $1.1 billion opportunity.

To access the full red cell market, we'll need to collect additional clinical data to support a CE Mark label claim for the chronic anemia indication, as well as for approvals of the treated red cell components in countries such as France, Switzerland and Germany.

We believe the chronic anemia data can be collected in the United States, as I'll explain in a moment. The chronic anemia indication and locum market approvals will allow access to an additional $500 million red cell opportunity, as well as supporting our marketing effort for the acute indication throughout Europe and the Middle East.

Last month we met with FDA to discuss our proposal for a Phase III red cell trial in the United States to support approval of INTERCEPT red cells for sickle cell and thalassemia patients. Red cell transfusions are a critical supportive therapy for chronic anemia in these patients who may receive hundreds of red cell units over the course of their treatment and, thus, are at increased risk of transfusion transmitted infection.

We've worked closely with the clinicians who care for these patients to develop a trial design and this patient population is motivated to participate in trials to improve transfusion safety. Also, we believe this clinical indication will be highly informative to support a subsequent U.S. label expansion for the acute anemia indication.

The primary outcome of the red cell FDA meeting was agreement that a single Phase III study will suffice for this indication and FDA has agreed to review our study design under a special protocol assessment, or SPA. The advantage of the SPA route is that it guarantees a protocol decision following a defined dialog over a limited period of time.

The FDA requested that we submit some additional in vitro data for the INTERCEPT red cell process, which can be collected in parallel with the SPA filing. These data are similar to the data we've already been collecting in Europe. Before submitting the SPA, we plan to reach preliminary agreement with FDA on the primary endpoints and trial size. This is a positive outcome from the October meeting and provides a pathway to pursue approval for this initial indication in the United States.

As I mentioned, we expect to leverage the U.S. clinical data for support of the chronic anemia indication in Europe.

Our second October meeting with FDA was for the plasma program. Earlier this year, we received orphan drug designation for INTERCEPT plasma to treat thrombotic thrombocytopenic purpura, or TTP. Our meeting with FDA was to discuss whether data from the previously completed U.S. Phase III trial in TTP patients would be sufficient to fulfill the clinical data requirement for a PMA submission.

In response to our proposal, the FDA asked that Cerus provide additional clinical data on the treatment of TTP. FDA's request is due to the limited size of the U.S. Phase III trial, which included 35 patients. We proposed to satisfy FDA's request with INTERCEPT plasma experience data collected in Europe. Our next step is to provide a sample of these data to FDA to gain agreement on their use to support our orphan drug application.

The French National Transfusion Service has documented successful treatment of almost 10,000 patients with INTERCEPT plasma, including approximately 30 TTP patients. In addition, we believe French data for 215 patients supported with INTERCEPT plasma during liver transplantation are particularly relevant to evaluate safety.

Finally, recent events in France have shaped an opportunity for expansion of INTERCEPT plasma adoption. Serious adverse allergic responses detected by the French Haemovigilance System to a competitive product - methylene blue plasma - led AFSSAPS, the French medicinal authority, to withdraw this product from use. Methylene blue was previously used to treat a substantial proportion of plasma in France and is also used in other markets, including Belgium, Spain, and Germany.

INTERCEPT's preclinical, clinical, and active haemovigilance experience is more extensive than that for any other pathogen inactivation blood component and includes more than 15,000 patients throughout Europe, ranging from neonatal to geriatric patients, demonstrating an excellent safety profile for all therapeutic indications. We believe these data will provide potential new customers with confidence in the INTERCEPT plasma as they consider this alternative to methylene blue-treated plasma.

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

Thank you, Larry. It's been a great quarter for the Company and we're beginning to see the benefit of years of development effort and Phase IV experience data. After more than five years on the market, INTERCEPT is seen as a proven and dependable technology by national blood services to secure the safety and availability of their blood supplies.

I'd like to begin with some comments on our strong revenue growth this quarter and the recent award of the device tender in France.

We saw growth across many markets over the past several months, including the effect of full implementation in Switzerland and the increased sales to France under our previous contract. France's National Transfusion Service, the EFS, has already installed 10 illuminators under a new tender award, as a result of AFSSAPS' decision to diversify its pathogen-activated plasma to INTERCEPT and solvent detergent, or SD, plasma by March 2012.

Although we have not yet received notification of the EFS decision on the INTERCEPT plasma and platelet kit tender, these 5 new centers in 3 regions are producing INTERCEPT plasma with kits purchased under the old tender. Together with the centers previously using our plasma treatment, INTERCEPT plasma is now being produced at an increasing rate. We will have to see where the INTERCEPT market share settles out over time as a function of EFS center economics, our upcoming tender award, SD production capacity and availability.

We remain encouraged by the inherent synergies between INTERCEPT platelet and plasma products and as such, it is important to note that the 5 new centers now producing INTERCEPT plasma are well positioned to implement platelet production, should the EFS take that decision in the future.

Based on the revenue growth achieved to date this year, the new French tender award for INTERCEPT illuminators and our outlook for additional sales in the fourth quarter, we are highly confident that we will soundly beat our annual revenue guidance for the year.

Moving now to our development programs, I am particularly excited about our INTERCEPT red cell progress. It's clear what we need to accomplish in 2012 to pursue both the acute and chronic indications for red cell transfusions. Cerus can be the first to market in this over $4.0 billion global opportunity and, upon CE Mark approval, we can leverage our existing sales team and distribution partners to sell INTERCEPT red cells alongside INTERCEPT platelets and plasma.

I also believe it remains important to continue pursuing approval pathways for plasma and platelets in the United States. The U.S. is an attractive market opportunity and FDA approvals are an important global benchmark.

In summary, we've delivered strong performance this quarter with significant sales growth and market developments leading to our optimism for year-end revenue growth. We're advancing our development programs and having increasing clarity on the requirements for both the EU and the U.S. Phase III trials for the red cell program.

The prospect of widespread INTERCEPT adoption is becoming a reality, as demonstrated by the recent expanded deployment of illuminators in France and our successful implementation of INTERCEPT plans in all of Switzerland. We're obviously proud of our demonstrated ability to partner with blood services to help them secure the safety and availability of their blood supply.

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

(Operator instructions) Trey Cobb, Stephens, Inc.

Good afternoon and congratulations on a great quarter.

Thanks, Trey.

First, maybe if we could start with France and the recent tenders there? Can you give us any indication of kind of the size of each of those components and when you would expect to hear something back? I think, Obi, you said that the new illuminators were basically purchasing under the previous contract?

No, we announced today that we have a tender award for INTERCEPT illuminators for 10 to 12 illuminators and of those 10 to 12, 10 have already been deployed, so that's the first tender. The second tender relates to the kits for INTERCEPT platelets and plasma and that has not yet been announced.

Okay and so, as far as the illuminators and the placements in the new centers, what type of coverage does that give you for France? I think previously you were primarily in the Alsace region.

Well, I think we're in about 50% of the blood thinners in France right now, but we really don't have any visibility into sort of what the market share will be for INTERCEPT plasma until we know more about the upcoming tender award for the kits.

Okay and then, just in terms of what you're hearing from customers in Belgium, Spain, countries that use methylene blue now, have they given you any sort of indication about following suit with France, possibly pulling it? And then, kind of the opportunity that that presents for you?

I think they're obviously taking the French decision very seriously and the AFSSAPS, or the French Haemovigilance System is largely regarded as the best in the world, so, if you're going to see a safety event, that's the place that you would see it. So they are taking it very seriously. Although I think each country, each blood service and each regulatory body within the countries will ultimately act as they see fit and we haven't seen any action yet, although they're obviously looking at the data and the subsequent withdrawal from the market there in France.

And then, I guess, sticking with Europe, looking at countries like Austria, Germany, kind of what's the latest there, and kind of how we should be thinking about those markets going forward?

I think, as we've mentioned previously, the Swiss decision to implement it 100% certainly has an impact on other countries, with regard to how they choose to improve the safety of their platelet products and so we are actively working in Austria and Germany and trying to secure the approvals that are necessary to expand the market there. And I think we'll just plan to update you when we have something more to say about that.

Okay, thanks. I'll hop back in the queue.

Zarak Khurshid, Wedbush Securities.

Great. Hi guys. Thanks for taking the questions. I have one quick one and that is as we think about what's developing now in France with methylene blue. Are there any precedents in the blood field of products that were similarly withdrawn or recalled that can serve as a precedent for a proxy for both conversion of or the timing of the conversion of France as well as other jurisdictions within Europe? Thanks.

Larry, do you want to handle that?

Yes. Well, certainly we have seen in the United States a black box warning placed on solvent detergent plasma some years ago, regarding increased events of hepatic artery thrombosis in liver transplantations. Which, although the product was not formally withdrawn from the marketplace, it is no longer available in the marketplace in the United States, so there is a precedent for that. And we have seen various components of blood collection systems withdrawn at various points in time over safety concerns.

So there is a precedent for this type of thing and I would just like to reinforce Obi's comment that the AFSSAPS EFS eFIT system is probably the best haemovigilance system operating today and it's one of the things that give us confidence in the INTERCEPT products, because they have also been heavily monitored in this system.

Zarak, is that it or --?

Thank you. Thank you. Thank you, guys.

Sure. Thanks.

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

Thanks. You know, just thinking about the magnitude of impact from any potential French kit tender that we might see coming up here in the future. Can you just remind us what the total amount, tender amount, was of the original French kit tender? And what percent of that has been fulfilled?

Well, it basically was ended as of the end of September, Chris, and so it was representative of -- and I'm just going to be guessing here -- of roughly around 25,000 platelet kits annually and maybe the same amount, maybe a little bit more for plasma. But, officially, that contract has now expired and so we're basically waiting for the outcome of this upcoming tender.

And how much of those did they -- or if you don't know that's fine, I'll maybe circle back (inaudible - multiple speakers)?

Yes. I don't have the exact answer for it, so I can get it to you offline, so, yes.

Okay, great and can you just also remind us and this is a little bit offbeat question, but what is your IP horizon? When is your key patents, where do they go out to again?

Oh, it's about 2019-2020 for platelets; 2023-2024 for plasma and 2027-2028 for red cells.

Great. Perfect, thank you.

Caroline Corner, McNicoll, Lewis & Vlak.

Hi guys, congratulations on the quarter.

Thanks, Caroline.

A quick question on the timeline for the acute red cell program in Europe. You said now that that's going to be a shorter trial. Before, you'd said it was going to take 12 to 18 months for that acute trial and now it looks like 12 months. Based on that timeline, could we see a submission for CE Mark as early as second half of 2013?

Larry, why don't you handle that?

Yes. So the clinical trial is one component and it will, of course, provide us with very important data and validations and build value for us, but we also need to complete the manufacturing development and validation studies. And that will take us some time to do and also, it will be contingent upon how fast we can fund that from our revenue sources. So that will become the controlling event into the launch of the product.

Okay, very good. And then you gave us an update on the FDA red cell and plasma. Did you also give you an update on platelets in the U.S. and could you repeat that if I missed it?

I didn't talk specifically about platelets. Clearly, as you can see, with red cells, plasma and platelets we've got a very full plate with FDA. We've prioritized red cells first, because that's our most important program in terms of size of market opportunity now and we are on the market in Europe with platelets and plasma. So we're pleased with the way that's going.

But, with platelets, we are continuing to work with the agency. Right now we're in the process of pulling together data to come back and reinforce our proposal to the agency for what, we believe, should be the definitive trial to complete the registrations of the platelet product in the United States.

Okay, thanks and then, apologies, but jumping backing to the EU, the $1.1 billion opportunity that you saw for acute in Europe. Can you just walk us through how you get that estimate?

Well, Caroline, why don't we give you a call afterwards so that we can detail that for you specifically? I think that'd be a better use of everyone's time.

Effectively, Caroline, it's the potential number of transfusions multiplied by an ASP, similar to how we calculate market sizes per platelet class.

Okay, so that's based on the number of transfusions for acute conditions?

That's right.

That's right.

Yes.

Okay. Alright, very good. That's all I have. Thanks.

Thanks, Caroline.

Chris Raymond, Robert W. Baird & Co.

Hey, thanks for letting me sneak a follow-up question in here, just maybe more of a global question here in the context of European austerity and other sort of pressures that are happening. Can you talk about where your pricing is going, directionally? Is it stable? Are you seeing any pressures? Are you able to actually effect any price increases? Can you give us some sort of direction there? That'd be great.

Yes. So we've seen just general stability in our pricing over the last five years that we have been marketing the products independent of Baxter and so, that's, I think, a strong signal that the value of our products are recognized and that there's operational cost savings associated with the technology as well. And that goes for both distributor sales, as direct as well.

Okay. Thank you.

Thanks, Chris.

Caroline Corner, McNicoll, Lewis & Vlak.

Thanks, sorry, thanks. One more question for me. Since you mentioned that the original tender in France expired at the end of September, how are people purchasing the kits currently until the new tender comes into place? Is there any problem there with ability of people with illuminators to get a supply?

Yes, that's a good question. So, obviously, they basically had to stock up to bridge a period here, so they're basically looking at -- so we have deployment of the new illuminators. But also we really need to figure out when this tender award will be issued, because ultimately they will need kits.

With the illuminators that have been deployed, the new ones, the new 10, they don't have kits associated with them yet?

Well, I mean, basically were purchased -- those kits were purchased under the previous contract that we have with the EFS.

Okay.

Caroline, we expect that the tender will not be too far off, because, as Obi pointed out, they're going to need to continue production.

Sure. Okay, thank you. That's all I have.

Thank you and with no further questions in queue, I'd like to turn the call back over to Mr. Obi Greenman for any closing remarks.

Thank you for joining us today. We look forward to updating you on our fourth quarter and year-end conference call in February. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.