Cerus Corp (CERS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerus Corporation first-quarter 2014 results conference call. (Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Lainie Corten, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon. I'd like to thank everyone for joining us today. With me on the call are Obi Greenman, Cerus's President and Chief Executive Officer; Kevin Green, our Chief Financial Officer; Carol Moore, our Senior Vice President of Regulatory Affairs, Quality, and Clinical; and also Larry Corash, our Chief Medical Officer.

Cerus issued a press release today announcing our financial results for the first quarter ended March 31, 2014, 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 regarding the Company's products, prospects, and results, including expectations for future sales growth and performance; new customers and 2014 revenues; anticipated impact and timing of strategic decisions regarding Cerus's distributor relationship; the expected impact from the Company's amended agreement with its manufactured disposable kits; the anticipated timing, completion, and potential approval of the Company's modular PMA submission to FDA and Medical Device Applications to Health Canada for plasma and platelets; the potential commercial launch of the INTERCEPT blood system for plasma platelets in North America and on the red blood cell system Europe, including anticipated marketing activities and expenses in support thereof; future operating expenses and cash utilization; research and development activities and the expenses related thereto; the timing of completing our ongoing clinical trials, including the reporting of data from these trials; the success of our collaboration with Nipro; and the timing and outcome of a NHSBT position on INTERCEPT.

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 December 31, 2013, on Form 10-K, including the section 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 quarterly financial results from Kevin, followed by an update from Carol on our development programs and regulatory submissions. 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's Chief Financial Officer.

Thank you, Lainie. Earlier today we reported Q1 revenue of $7.9 million, consistent with our guidance that H1 revenues will be impacted as we work through a certain distributor transition. We expect this impact will continue through the second quarter and remain confident in our full-year 2014 revenue guidance of $38 million to $40 million.

Our gross margins during the first quarter were 47%, consistent with the margins we reported last quarter as well as the 48% reported in the first quarter of 2013. I'd like to remind you that Q1 marks our first quarter operating under our amended manufacturing agreement with Fresenius-Kabi, which establishes a fixed schedule of pricing for our kits over the next several years, with lower pricing for each successively higher tier of production. Accordingly, we believe our amended agreement provides a baseline for a solid foundation for future expansion of margins.

Turning now to operating expenses, total operating expenses for Q1 were $12.9 million compared to $12.1 million and $14.5 million during Q1 of last year. Looking ahead, we anticipate operating expenses may increase as we had add resources commensurate with our global growth, and as we transition from a distribution to a direct model in some regions, consistent with the strategic changes we mentioned on the February call. In addition, costs may increase if we are able to develop and execute on a regulatory pathway which would allow us to expedite the CE Mark approval and commercialization of the red blood cell program.

Net losses for the quarter were $0.2 million or $0.12 per diluted share when adjusted for the diluted impact of the mark-to-market value of outstanding warrants. Comparatively, net loss was $10.2 million or $0.17 per diluted share in Q1 of 2013.

The reported operating results for Q1 were impacted by a non-cash gain of $9 million from the warrant accounting. Of the 5.9 million warrants currently outstanding, 2.4 million warrants expire in Q3 of this year, with the remainder expiring in November of 2015.

Now, looking at balance sheet, we ended Q1 with cash and short-term investments of $48.3 million compared to $57.7 million at the end of the last quarter. For 2014 as a whole, we expect our average quarterly burn to be approximately $7.5 million per quarter rather than matching the rate we recorded in Q1.

With that I would like to turn to call over to Carol, who will discuss our regulatory progress as well as our development programs.

Thank you, Kevin. I'll start with an update on the status of our regulatory submissions in the US and Canada. We are continuing our active dialogue with FDA as they progress in their review of our INTERCEPT plasma PMA. We are in the process of completing the required audit and responding to the questions we have received to date. We remain very optimistic that the plasma review will be completed in H2.

As recently announced, we submitted INTERCEPT plasma application to help Health Canada, which has accepted the file for review. So the Canadian medical device reviews operate under a 90-day review clock; we are estimating that our review response will likely take longer than this and guide you to expect approximately 6 months.

Turning now to INTERCEPT platelets, we still expect to submit our third and final module of the platelet PMA this quarter. We plan to submit our Canadian application for platelets in Q2, as well. Consistent with our previous estimates, we expect the Canadian review to take approximately 6 months and the US review approximately 9 months.

I'd like to remind you that the timing I have just mentioned for the plasma and the platelet review decisions represents our best estimate at this time. Review timelines are variable, and we will provide ongoing updates each quarter as we make progress and continue our dialogue with FDA and with Health Canada.

Moving on to our INTERCEPT red cell development program, I'll give a quick status update on our three ongoing clinical studies. In the US Phase II red cell study, subjects are entering the second crossover period. We continue to anticipate reporting data in the second half of this year, following submission of the final report to FDA.

Turning to Europe, enrollment in our European Phase III chronic trial continues to proceed at a slow pace and will likely require at least three years to complete at the present rate, consistent with our previous estimate. Finally, the European Phase III acute anemia trial continues to enroll at the expected pace, with results still anticipated in late 2014. We are continuing to evaluate options to accelerate both the completion of the chronic trial and our overall strategy and timelines for our potential European CE Mark approval.

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

Thank you, Carol. In addition to the continued red cell clinical progress, we also recently signed a collaboration deal with Nipro to design a simple delivery system to improve the operational ease of adding S-303 and glutathiones to the red cell unit as part of the commercial INTERCEPT red cell kit. We believe that Nipro can deliver an easy-to-use system that improves on the reconstitution set kit design we are using now for the initial CE Mark.

We have already shown that the treatment process is robust and easy to implement at numerous blood centers throughout the globe, but delivering on this Phase III clinical data as well as evolving the commercial kit design, will make 2014 a pivotal year for the red cell program.

We are eager to move this program towards CE Mark approval in Europe, and as Carol mentioned, are actively evaluating our commercial strategy to assess whether we can accelerate the CE Mark submission. In our current INTERCEPT platelet and plasma markets, we continue to take action to enter distributor markets, which, as expected, is impacting our H1 revenues.

As a reminder, we are transitioning into a direct model in some geographies; and also, we are hiring additional Cerus staff to support our distributors and improve their performance through training programs. We are currently working through the elements of this transition with a goal of concluding these activities in the near term.

Earlier this week the UK national transfusion safety committee released its updated evaluation of pathogen inactivation technologies for platelets. The committee previously considered pathogen inactivation in 2010, concluding then that sufficient evidence was not yet available to fully characterize the three available platelet systems. It also questioned the cost-effectiveness of PI in terms of cost per quality adjusted life year, or quality.

A new, comprehensive evaluation was initiated in late 2013 in recognition that considerable additional data has since accumulated, and that many global regulatory authorities in blood services are taking a serious look at bacterial contamination of platelets.

We do not expect the committee to recommend pathogen inactivation in this report, since neither PI nor other blood safety measures meet the threshold typically set for cost-effectiveness in the UK using the quality calculation. This was indeed the case, but we were pleasantly surprised to see INTERCEPT clearly identified as the only system with the potential to be, I quote, a safe and effective alternative to bacterial screening.

We believe this outcome does allow the UK blood services the option to replace bacterial detection when their current supply contract nears expiration. The NHSBT's operational evaluation of the INTERCEPT platelet system is ongoing, and it should provide a better framework for the operational economics and cost savings associated with the system. We believe INTERCEPT is well positioned to gain this business if the NHSBT decides to implement pathogen inactivation in 2015.

Turning now to North America, we are very focused on the launch preparation as we enter the final stretch prior to our first potential US and Canadian approvals. Our commercial team is largely built out to the level we have targeted for the initial launch period, with just a few key positions to fill over the next several quarters. We are preparing launch materials and organizing key events for later this year. When we receive the plasma approval decisions, our commercial team will be ready.

In conclusion, we are excited about the prospect of finally accessing the North American market and believe that the FDA process is moving forward on the schedule that we anticipated. We also look forward to reporting INTERCEPT red cell clinical data later this year. Finally, we remain confident that we've taken the decisive action necessary to improve future sales performance and deliver ongoing revenue growth in the second half of 2014.

Operator, please open the call for questions.

(Operator Instructions) Josh Jennings, Cowen and Company.

I just wanted to start off -- I think we mismodeled and in the consensus number out there for the quarter kind of mismodeled the impact in the first half of the year. I know you're not looking to give quarterly guidance, but looking at the run rate in Q1 and then looking at the expected back-half acceleration, in Q2 just directionally, are we looking at a kind of similar revenue run rate? How should the Street be thinking about the Q2 revenue projection?

Hi, Josh, it's Kevin. So you're right, we don't want to get into quarterly guidance, just given where we are in our commercialization history. And there is going to be quarterly choppiness, but looking specifically at this transition, we expect the first half to be fairly soft, with Q2 approximating Q1. And then in the back half of the year, we do expect our direct sales efforts to contribute meaningfully to the top line, as well as some of the other regions that we are contributing continuing to explore coming online.

Okay. Great. That's helpful. And then, Obi or Kevin, with the sales force optimization process, any incremental color, just in terms of how this process has progressed over the last couple of months? And just any further visibility in terms of the proportion of direct versus distributor ratios in the different territories, internationally?

Yes. That's still in process, but I think we are making definitive progress towards resolving these markets to the direction we want to go in. And we have hired several Cerus FTEs for certain distributor markets. So they are on board now, and so I think that will help. And then in the markets where we want to go direct, that's something that will likely take place in the second half of the year, as Kevin mentioned. But we're making good progress towards first going direct in certain countries.

And then just with the SaBTO documents that were made public, there is a little bit of a mixed message in there, and I think there's a wide range of interpretations. But is there any way you can help us out -- any anecdotal conversations you either had with the SaBTO committee or with the NHSBT in terms of how they are thinking about this document and then how that could influence the potential for INTERCEPT adoption once these bacterial testing contracts run out in 2015?

Yes. I think that you -- it was actually -- if you -- and I know you probably have, Josh, read the entire SaBTO report; in there there is a lot of very positive recommendations about the utility of the technology, both operationally and from a safety and efficacy perspective. And as I mentioned in my prepared remarks, that wasn't the case in 2010.

So I think we have come a long way with the NHSBT. I think the operational evaluation right now is progressing as expected, and I think from what we've heard, it's working well.

I think at a higher level -- just to maybe restate this -- that the UK SaBTO advisory group is part of the Department of Health in the UK. They typically review new technologies in a similar fashion to the way NICE does. And so there's a very strict threshold for cost effectiveness of GBP25,000 pounds per year.

As I mentioned in my prepared remarks, no blood safety interventions really can achieve that -- the most recent of which in 2010/2011, was bacterial culture of platelets. So SaBTO didn't recommend that either, and the NHSBT still went ahead and implemented the technology.

So I think, to summarize the outcome of the NHSBT -- or the UK SaBTO report, it did recommend INTERCEPT as a technology; and it encouraged the NHSBT to develop their framework for assessing INTERCEPT from an operational cost savings perspective. And that's what we believe is underway.

Thanks. Thanks for taking the questions. Thanks for the answers.

Zarak Khurshid, Wedbush Securities.

Have you lost any customers through the transition process? And can you just talk about if there's any risk of that over the next couple of quarters?

We don't believe there's a lot of risk for that. We have not lost any customers since we started this process, and I think it's really just sort of getting -- in the markets where we choose to go direct, getting those people on board. I think it's safe to say, also, we already have people on board in those markets. We're not starting from a complete standstill. And I think by and large, we know all the customers very well.

So I think it's just a function of working through the transition plan with the distributors in the markets that are affected and then moving forward. So I think it's -- as I mentioned, again, in the prepared remarks, this is the decisive action that we decided to undertake. And I think we are going to be better off for it in the long term.

That's great to hear. And then I couldn't tell from the press release, but how would you characterize the other parts of Europe -- Germany, Switzerland, Scandinavia, etc.? Are things getting better or worse there?

Well, I think we continue to see adoption in places like Switzerland and Austria. So for Switzerland, they still have yet to implement 100% for INTERCEPT plasma, so there's opportunity there. We are seeing a number of customers coming online in Austria, and the discussion in the Nordic countries is also progressing.

We obviously will announce when we have customer contracts in hand for routine use. But things seem to be moving in the right direction. Germany continues to be a difficult market, just because of the competitiveness between blood centers there and the lack of reimbursement for INTERCEPT. So as you probably know, for medical devices in Germany it's a very long process to secure reimbursement. We've also been at it for a while. And we ultimately believe that large blood services to take on INTERCEPT will realize significant cost savings operationally. And so that's just something we have to demonstrate better in Germany.

Got it. And then as a follow-up -- I'm not sure if you mentioned it in the press release, and I apologize if you did -- but the Illuminator sales, if you could break those out? Thanks.

Yes. So this is one of those unusual quarters where the disposable kits were disproportionate. They are normally, as you'd recall, about 90% of our overall revenue. This quarter they were closer to 97%. Disposable kits.

And was that impacted by the distributor transition?

Not necessarily. You know, certainly in those distributor territories where we are transitioning, we are doing so in part because we want to address new customers and don't see those new customers coming online as fast.

So I think that is a contributing factor. But if you look at it kind of quarter over quarter, we don't see that that decision had a meaningful impact on the Illuminator placement. It just is a one-time event.

Got it. Thanks, Kevin.

(Operator Instructions) Jeff Elliott, Robert W. Baird.

Kevin, first, on the direct side of the business, can you give us any feel for how that performed in the quarter? I get the dynamic on the distributor side, but how did the direct side do in the quarter?

The direct side year over year was up as well as sequentially. Where we really saw the impact was on the this distributors; year over year it was down significantly, and that's in line with our guidance for the year. It's something that we contemplated in that conservative guidance.

Got it. Thanks, that's helpful. And then, Obi, can you talk about -- have you seen any response compared to the response -- I get you swapped some distributors out; you were planning to do that. But have you seen any response in the market from those distributors that you have swapped out, or one to suspect that they could be next?

No. I think the discussions thus far have been amicable. We are obviously trying to make a reasoned approach forward.

Obviously, it's a balance, too. In certain markets we may choose to actually give them more resources to effect a better outcome. I think they are largely receptive to that.

And then in other markets, where we are planning to transition to a direct sales force, obviously it's longer-term lost revenue for them. But I think there are other opportunities from a collaboration perspective, so we're just trying to balance this across each one of the distributor relationships we have.

Got it. And then on the red blood cell enrollment, what steps can you do to accelerate the enrollment? How much further could you accelerate that in terms of timing?

I think that on the chronic side is what you are referring to, Jeff. And I think there we are looking at bringing up some additional sites, so that we have additional thalassemia patient populations to draw from.

But I think the other thing that we alluded to on the call is that we are fundamentally reassessing our CE Mark regulatory strategy to see whether there's a way that we might be able to accelerate that independent of the pace of the chronic transfusion study. I think, obviously, we will update you on the next quarterly call as it relates to that, or whenever we have more clarity. But I think there are ways we might be able to do that, as well as looking at what we would do in a postapproval phase from a CE Mark perspective.

Got it. Thanks, I'll get back in queue.

Brett Reiss, Janney Montgomery Scott.

In a future distributorship contract, is there any way to include some sort of prophylactic clause or language that would protect us from the distributor entering into a business that would potentially compete with us?

We obviously look at that closely, because we want to make sure that our interests are aligned with our distributors. I would say that -- you know, we won't speak to the specific language in our distributor contracts, but we look at that as well as performance milestones, as well. So I think we are pretty circumspect with regard to how we enter distributor relationships and not place some of those. Some of those are affected by events that are beyond our control.

Right. Right.

And I think it's important to note that -- I don't want to leave with the impression that we haven't had those kinds of safeguards in place in the past.

Okay. Okay. Could you just give me a little background on -- I may be mispronouncing it -- Nipro? Who are they, and why are they a good partner? And did you knock on their door, or did they knock on your door? How did that come about?

Nipro is one of the larger medical device companies in Japan, and it's a global business. They make, essentially, dual-chamber syringes. They make containers for a number of different pharmaceutical companies.

It's obviously a listed company. It's a multibillion dollar company with thousands of employees, with manufacturing plants throughout the globe.

That's actually a discussion that has evolved over the last, I'd say, five years. And what we have been looking to do is to really make the INTERCEPT red cell system very, very simple to use for large-volume blood centers. We believe that this reconstitution kit design that we are collaborating with Nipro on will not only make a fairly -- very easy to use process available, but something that would be able to be done in both large-volume blood centers as well as small-volume blood centers around the globe.

Since you've been talking to them for five years, why was it good to enter into the deal now for each of you?

I think it was just a comfort level. Certainly, the Japanese respect the duration of our discussions and the relationship that has arisen over the course of five years. I'd say that was a strong factor in their decision-making, because once they commit to something, they commit to something. I think, at the same time, there were some feasibility issues that we are still working through with regard to the design of the reconstitution set that they wanted to get comfortable with before they would commit.

All right. Thank you for taking my questions.

Thank you. And I'm not showing any further questions at this time. I would now like to turn to call back over to Obi Greenman for any closing remarks.

Thank you for joining us today. Once again, we look forward to updating you again on our next call in July. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.