Cerus Corp (CERS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerus Corporation's Fourth Quarter 2015 Earnings Conference Call. At this time, all participants lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session. Instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Lainie Corten, with investor relations for Cerus.

You have the floor, ma'am.

Thank you, Operator, and good afternoon. I would 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 Financial Officer, Richard Benjamin, our Chief Medical Officer, and Larry Corash, our Chief Scientific Officer.

Cerus issued a press release today announcing our financial results for the fourth quarter and year-ended December 31, 2015 and also 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'll be making forward-looking statements regarding the Company's expectations for it's products, process, and future result, including 2015 revenue guidance and related assumptions, expectations for future demand and revenue growth, operating at the G&A and R&D expenses, sufficiency of cash, foreign exchange rates, Cerus' US commercialization team, customer implementation and the scope and timing thereof, customer support initiatives, US-customer contract, the timing of US revenues, resumed sales growth in Europe, including revenue inflection points and new customers, expected or anticipated regulatory submission and approval and the timing thereof, including US label extension submissions and the potential CE mark submission for and approval of the Red Blood Cell System, commercial launch of new products, including the Red Blood Cell System, or in new territories.

Cerus' plan phase four study, including the timing and scope thereof, and at the A-guidance document and the timing and content thereof. DLA submissions by US centers and the potential availability of INTERCEPT red cells under IDE. 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 and the Company's SEC filings. In particular, in Cerus' current report on form 10-Q, filed with the SEC on November 6th 2015 under the heading, 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 opening remarks from Obi, followed by Q4 and year-end financial results from Kevin. Next, Richard will provide a Zika virus update and will conclude with 2016 outlook and final remarks from Obi.

And now it's my pleasure to introduce Obi Greenman, Cerus' President and Chief Executive Officer.

Thank you, Lainie, and good afternoon. 2015 was an important year for Cerus in many ways with both successes and some challenges. We entered 2016 as a fundamentally different company, and are poised to transform even more dramatically over the next 24 months as our INTERCEPT commercialization plans in the US are executed.

In addition, our anticipated C-mark approval for red cells would complete the INTERCEPT portfolio for the EMAA markets, allowing us to address the full $2 billion market opportunity for pathogen-activated blood component in that region.

Since our FDA approvals at the end of 2014 for platelets and plasma, we now have signed contracts, or framework agreements, with organizations representing approximately 60% of the market in the US, a collective, annual footprint of nearly $1.4 million INTERCEPT kits. We have also established out-patient reimbursement for INTERCEPT platelets and plasma in the US. Early INTERCEPT adopters report that hospitals are accepting premium pricing, and believe that the 2016 P-Code rates have established an acceptable pricing benchmark.

Our US customers include some of the largest providers in the world. For example, the American Red Cross supplies over 800,000 platelets units per year, to over 2,600 hospitals. Blood Systems, Incorporated, through its affiliates, annually distributes 240,000 platelet units to more than 700 hospitals. Any one of these is larger than the majority of our core EMEA country market.

Our contract with the American Red Cross is particularly transformational to Cerus and is perhaps one of greatest, single achievements. We are extremely excited about this partnership and what it offers to both parties. I would like to spend a few minutes on our understanding of the Red Cross' plans for INTERCEPT.

The Red Cross has ordered the first illuminaires to allow initial implementation to start in Q2. They are making a strategic selection of [mayifa] sites targeted for insulation this year, and are planning to roll out INTERCEPT in key markets. By late 2016, up to 25% of their total sites could potentially have INTERCEPT production capacity. As they see demand for INTERCEPT, the Red Cross has expressed that they want to be in a position to leverage the nationwide distribution capabilities. Initial manufacturing sites are being selected for their ability to serve multiple markets and scale of production is needed in the near-term.

The Red Cross also plans to pursue BLA licenses for inter-state shipment as quickly as possible, estimating that in 2017 they will be well-positioned to make pathogen-reduced platelets available nationwide to any hospital customer requesting them.

Hospital [then] will drive their decisions on how quickly production will scale up in each region and nationwide. Looking back, looking at the US market as a whole, we have made rapid progress to-date, but are still early in our launch. With three of our early adopters now in routine use with INTERCEPT platelets, we're beginning to see the success of our commercial launch plans. While we are confident in our ability to support our US customers as they make the transition from contract signature to operational implementation to hospital roll out, we've also seen these steps take a few quarters, even for smaller centers with single manufacturing facilities, and a limited number of hospital customers.

We still need to obtain approval for platelets in 100% plasma to enable many of our customers to implement INTERCEPT, and we expect to see the first BLA applications submitted later this year. Through all the competitive pressures between blood centers will play in the market is unclear until more centers are in routine.

Also, the impact of the Zika virus guidance and the possible revised bacterial safety guidance requirements have yet to play out fully. Therefore, we continue to regard 2015 as a market building year for the US, positioning us for more rapid growth potentially in the following years. We have recently seen sharply increased public concern about the expanding Zika virus epidemic in the western hemisphere, including the recognition of previously unknown neurologic health impacts, such as Guillian-Barre syndrome and newborn microcephaly. Pathogen reduction has a critical role to play in securing the safety, and even more importantly, the availability of the blood supply from the continual onslaught of mosquito borne threats.

I will now turn the call over to Kevin Green, our Chief Financial Officer, to provide an update on financials and guidance for 2016. And then Dr. Benjamin, our Chief Medical Officer, to provide an update on the Zika epidemic and the potential use of INTERCEPT to protect against the arbovirus epidemic.

Thank you, Obi. This afternoon we reported Q4 revenue of $9.7 billion, which represents a 22% year-over-year increase in INTERCEPT disposable kit demand. Full-year 2015 revenue was $34.2 million; within the range of our guidance of $34 million to $36 million, and represents a healthy 15% growth in kit demand over 2014.

Reported revenue for 2015 was driven primarily by the European and Middle Eastern markets. Compared to 2014, 2015 dollar reported revenues were negatively affected by the weaker euro rate compared to the US dollar, Cerus' reporting currency.

We began the 4th quarter of 2015 with five signed US contracts. By year-end, that number had more than doubled to 12 contracts. And as Obi mentioned, that momentum has continued into the first quarter of 2016, with the signing of five additional US contracts thus far, including Blood Systems Inc. and the American Red Cross, which account for a significant proportion of the distribution of blood components in the US. We are continuing to execute on our US launch plans and expect the majority of our US revenue this year will be driven by our illuminator installations, in contrast to our mature INTERCEPT markets, where disposable kits represent upwards of 90% of sales.

Until we gain further operational experience with these US customers, and also without being able to yet understand the potential impact of the Zika epidemic or potential FDA bacterial safety guidance, we will continue to be conservative regarding US revenue projections.

As a result, we are currently providing 2016 global revenue guidance of $37 million to $40 million. This assumes relatively flat AMIA revenue, driven by continued softness in the Russian and CIS markets. With 2016 growth, driven primarily by our US and emerging markets (inaudible) and APEC regions, with US adoption contributing to the growth in the second half of the year.

Now I'd like to turn back to our 2015 results, starting with gross margins. Gross margins for the fourth quarter were 36% compared to 31% in the prior year. For the full-year 2015, gross margins were 31% compared with 42% for the full-year of 2014. We recorded certain period charges for expiring product in certain minimum purchase commitments, which resulted in a 10% and 7% reduction to reported gross margins for the quarter and year, respectively. In contrast, these types of charges had a negligible impact in the previous year.

As we've mentioned earlier in the year, the majority of these charges were driven from reserves for potentially expiring product built over one year ago in contemplation of Russian and CIS market expansion, which, as I mentioned earlier, is experiencing softness. Our reserves contemplate continued headwinds in those markets, and therefore, we do not expect similar charges of this magnitude in the future.

In addition, when compared to the previous year, full-year 2015 margins were negatively impacted by approximately 5% from the decline in the value of the euro relative to the US dollar.

Turning now to operating expenses. Total operating expenses for Q4 were $18.5 million, up from $15.9 million during Q4 of the prior year. Total operating expenses were 2015 were $71.9 million compared to $59.7 million for 2014. The increase in operating expenses was driven by SG&A costs, incurred in support of our US commercialization efforts.

Turning now to operating expenses, total operating expenses for Q4 were $18.5 million, up from $15.9 million during Q4 of the prior year. Total operating expenses for 2015 were $71.8 million compared to $59.7 million for 2014. The increase in operating expenses was driven by SG&A costs incurred in support of our US commercialization efforts. While we expect our SG&A costs to begin to stabilize, we anticipate seeing the full-year impact of 2015 hires in 2016, leading to some year-over-year growth.

In addition, the level of research and development costs are expected to continue to grow to support label claim expansion and our post-marketing study in the US, and as we see a potential CE Mark approval for our Red Blood Cell product.

Net losses for the quarter were $14.8 million, or $0.15 per diluted share. Comparatively, net loss was $20.2 million, or $0.26 per diluted share in Q4 of 2014. For the year, net losses were $55.9 million, or $0.61 per diluted share, compared to $38.8 million, or $0.61 per diluted share in the prior year.

The reported net losses for 2015 were impacted by non-cash charges of $1.1 million from the warranty counting and by non-cash gains of $3.6 million for the full-year. As of December 31, 2015, we had no remaining outstanding warrants, and therefore, we do not expect mark-to-market adjustments of this nature going forward.

Now, looking at the balance sheet, we ended 2015 in a strong position, with cash and short-term investments of almost $108 million, compared to $107 million at the end of September 2015, and approximately $51 million at the end of 2014. According to our current projections, we anticipate that we have at least two years worth of cash at December 31, 2015. We believe that we are extremely well positioned to execute on our initiatives, including continued market penetration for INTERCEPT platelets and plasma in the US and, importantly, bringing the Red Blood Cell product to market in the EU.

And now I'll turn the call over to Dr. Richard Benjamin. Richard?

Recent experiences with dengue chikungunya and Zika virus is it highlight of the potential threat in emerging pathogens prove for US blood supply. As each new epidemic has been recognized, testing has not been immediately available to guarantee the safety of donated blood. And [all the before] measures have reduced the availability of donors needed to maintain an adequate supply.

The Zika epidemic has proven to be even more challenging than previous epidemics due to the high frequency of asymptomatic infections among potential blood donors. Heightened public concern has been driven by reports of severe neurological impacts, like Guillain-Barre syndrome and microcephaly, as well as sexual and transfusion transmission of the virus.

National authorities like the FDA are acting decisively to intervene, calling for rapid implementation of safety measures and placing further pressure on blood centers. In the blood safety guidance issued last month, the FDA requires rapid, nationwide deferral of donors with Zika risk factors. Further, in the areas of active local transmission from mosquitoes, local blood collections must be suspended unless additional safety measures, including pathogen reduction or Zika testing are implemented.

With no approved Zika tests on the market, pathogen adaption for platelets and plasma are a readily available solution for areas like Puerto Rico, where local Zika transmissions have already been detected. The only alternative is importing blood components from areas of lower risk in the continental US with complex logistics and perceptibility to weather interference.

While the immediate crisis of supply of these measures called to Puerto Rico is very real, we have yet to fully understand the full impact Zika could have on the continental US blood supply. With FDA guidance requiring the collection of [health] upon detection of even a single local case of Zika, Hawaii and certain southern states could now be a potential risk of sudden reductions in their local supplies. The volume of blood control that's currently produced in states like Florida, Texas or California would be difficult to replace, especially within the timeframe specified in the guidance. [Inter-cyclic] from the process of being implemented at Servicios Mutuos, the largest blood collector in Puerto Rico, to help maintain local platelet and plasma collections.

We are in discussion with the FDA, not only for platelets and plasma, but also for the possibility that our Red Cell treatment could be made available under an investigational device exemption, or IDE. We also are investigating what federal funding might be available in light of the emergency supplemental request for Zika and how this might accelerate development of the Red Cell product. Depending on the course of the epidemic, these measures would become applicable in much broader geographic areas, and we see mainland blood centers already actively preparing for the possibility of local Zika transmissions.

Turning to other US updates, we are now enrolling title phase four study patients at both Yale and Vanderbilt. Over the past several months, the clinical and (inaudible) teams have had extensive contact with US hospitals as we recruit additional sites for [pipeline]. There is strong interest in INTERCEPT, especially for reducing the risk of sepsis in platelet transfusion recipients.

We expect FDA's upcoming revised bacterial guidance will further raise awareness of this important transfusion safety issue on the role of pathogen reduction. Based on FDA's most recent target list for 2016, the revised guidance document is expected some time this year.

And now I'll turn the call back over to Obi for closing remarks.

Our path forward in the US for platelets and plasma is clear. We need to bring product label claim extensions, like platelets in 100% plasma to fruition, support our customers as they roll out INTERCEPT in the coming months, and be poised to take advantage of FDA guidance documents that can help drive use of pathogen reduction. By the end of 2016, we expect that multiple hospitals will follow the NIH's example and convert to 100% INTERCEPT platelets.

In addition, to the national roll out INTERCEPT anticipated from the Red Cross, many other blood centers across the country start will start to make INTERCEPT broadly available nationwide. As blood centers take steps to protect transfusion recipients from Zika and other emerging viruses, we are there to help and may even be able to treat the red cells under an IDE study.

In our EMEA markets, we are looking forward to Gualtiero Garlasco's new leadership perspective on the business to reinvigorate our approach as the team focuses on key inflection points, like potential adoption in South Africa and further growth in France. The European team is also preparing for the potential launch of INTERCEPT Red Blood Cells, beginning to integrate this new product into our sales and marketing plans for 2017 in parallel with the final preparation for that regulatory submission this year.

We continue to expect approximately 12 months for that review. For the second half, 2016 submission resulting in CA Mark approval decision in the second half of 2017. We're most excited about the potential INTERCEPT Red Blood Cell launch. Not only for the $1.4 billion market opportunity it brings, but also the added value of the complete INTERCEPT portfolio across all three components and the synergies and leverage that that affords.

Finally, we continue to make progress in Latin America and Asia as well. Our recent Brazilian approval comes as that country is struggling to respond to the Zika epidemic and secure its blood supply. And we believe that some Brazilian centers will begin to use INTERCEPT as a defense against the emerging pathogens in the near-term. We also recently completed and filed our CFDA submission in China, where it has been accepted for review. In both of these regions, emerging pathogens are an important blood safety issue, and many of these countries are also influenced by standards established by US blood centers and the FDA.

In summary, we expect 2016 to be a dynamic year for Cerus, positioning us to transform dramatically in the 2017 to the 2018 timeframe as we continue to execute on our commercial plans and potentially launch INTERCEPT Red Cells in Europe.

Operator, please open the call for questions.

(Operator Instructions) Drew Jones from Stevens Incorporated.

On the guidance, just to be clear, the US expectation, is that somewhere between $3 million and $6 million in 2016?

We haven't broken this out by region, and part of the reason for that is that with American Red Cross representing almost 50% of the market and just having signed them up in the last month, we see it's going to take a couple quarters to get them going so that we have an understanding of what the pace of adoption looks like.

And so, given that, we also have other areas of the world that are coming online as well, just like Latin America and APAC. And so, what we've provided in the script today was sort of insights into the growth that we see in Europe, and that's been relatively flat and the remainder that coming from other parts of the world.

In the Zika affected areas, can you tell us about your conversation far as plasma is concerned? Is that something that they are sourcing from other locales, or is there potential there to get maybe some pathogen reduction plasma as well?

Yes, certainly that's been the plan in Puerto Rico. So the contract we signed last week, I think it's important to note that within five days of signing that contract, as of today, Servicios Mutuos is in routine use with INTERCEPT. So I think we've established a record for us as far as implementation, and that's for platelets and they plan to implement plasma later on this week.

And then, last one from me. On Red Blood Cells, could, Dr. Benjamin, could you give us a little more color around the potential use of an IDE this year for RBC? And then also, an update on Phase 3 trial design domestically, for Red Blood Cells?

As you know, we continue the Phase III trial in Europe and are planning on submitting for CE-market in second half of the year for our Red Cell program.

We have been in discussion with the FDA around accelerating the use of a red cell product under IDE for Puerto Rico; relatively it's too early to really say much more about those conversations. We're still working out what would be an optimum design, [if Kenny] would like to see implementation in Puerto Rico, and the Company clearly would like to head towards an FDA approvable product by the end of any IDE.

So, those discussions are still underway and I think it's too early to comment on what the final design will look like if the FDA accepts it.

Thomas Yip from FBR & Company.

Can you remind us what are your most important label expansions that you are looking for in the US in 2016 and what specifically are required to get these expansions?

The one that we've been working most aggressively towards is platelets and 100% plasma because a big part of the [AIDS Races] platelet collection market would require that. And a number of blood centers, including some of the big ones that we've just signed up, are not looking to go to platelets and platelet added solution. And so, that, that's really critical and that's really the priority for 2016. We are expecting an action date in March for that approval and hope to have something announced soon.

I want to switch gears a little bit and talk about numbers. I see that there is a 22% year-to-year kit demand increase, but there seems to be a disconnect between the year-to-year revenue growth. So obviously, as you pointed out in your remarks earlier, there are some foreign exchange fluctuations, but I'm also going to guess perhaps Illuminator orders could fluctuate from year-to-year as well. But other than those two factors, are there other factors that could explain this disconnect?

No. It's primarily FX. As you look at simple averages for the two years, 2015 was down roughly 16% from the prior year, so that has a negating effect. The 22% Q4 over Q4 and 15% full-year over full-year, so that explains the relative flatness in reporting revenues.

(Operator Instructions) Emily Spen from Robert W. Baird.

First question, could you walk through how much FX you expect in 2016 on revenue and gross margin?

We don't expect a whole lot. Certainly, the choppiness that we saw in margins and revenues in 2015 occurred in the first half of the year where we saw the euro plummet. As we look ahead, we expect that we'll be in the [$110 million] range, which is where the FX rates occur and we are, and that's where we largely were for the majority of 2015. So, we don't expect a whole lot of FX impact.

Next, could you provide any color on 2016 cash burn?

Yes. I think it's going to be fairly consistent to what it's been in 2015, which was roughly $50 million from operations. But of course, that's dependent on the top-line to the extent that we have large revenue inflection points that come on above and beyond what we've guided; that number obviously changes.

Do you have any additional timing details on FDA label expansions for triple dosing, seven-day label claim, etcetera?

Yes. Those are both programs that we're actively working on at the Company. We are planning to launch the triple-dose set in Europe this year. But in the United States, really, the focus is on completing the work and getting the submissions in.

Karen Koski from BTIG.

Just the first question is, Obi, you mentioned in your script potential competitive pressures now that you've gotten the American Red Cross on board. They obviously have significant breadth in the US. Can you speak at all anecdotally as to how a smaller blood center would compete with the American Red Cross if they do not implement and adopt INTERCEPT?

I think it's a good question. I think, ultimately, they should be competitive if they do implement INTERCEPT. And obviously, what we're already seeing is a number of the major academic hospitals are looking to issue RFPs specific to pathogen-activated platelet components.

I think that the real advantage that the Red Cross has is just the breadth of their production capacity, and then ultimately, their nationwide distribution network. So that's what is core to their strategy, but it's also something that we're sort of prohibited from talking about because it's part of the confidentiality of our partnership.

We're there to support them. We're obviously there to support other local and regional blood centers as well. We don't have a dog in the fight; we're just there to support our blood center customers.

And as kind of a follow-up; for smaller blood centers that are kind of waiting on the sidelines, what do you think they're waiting for? And if it is the bacterial detection guidance, given your discussions of the FDA around Red Cells, it sounds like the relationship has certainly improved versus prior years. Do you have incremental confidence that that guidance document could be favorable?

I think that the Zika epidemic certainly has taken precedence in the context of the issuance of a revised draft guidance for bacteria. I think, as Richard alluded to in his prepared remarks, the FDA and HHS and acting decisively to protect the blood supply, not only in Puerto Rico, but looking to establish plans what would happen when there's a local Zika transmission in the continental US.

I'm not really sure I'm answering your question around timing of a bacterial guidance, but I think, ultimately, what we've seen is that the customers that we have signed up have clearly done so in a context of replacing bacterial culture, replacing gamma radiation and CMV testing, and the associated implications on platelet supply logistics. And if you marry that, then, with the 2016 P-code rates that we have established, that really, as I mentioned, established a pricing benchmark, and so we're seeing more and more blood centers talking about a $100-plus up-charge for INTERCEPT treated platelet components to their hospital customers, and that's being received well.

And then just my last question around UK and France and other countries in Europe that have at least held off on adopting INTERCEPT to some extent. Are they watching what's happening in the US and getting to kind of a hypothetical 60% penetration so quickly? And do you think adoption in the US matters as they think about implementing?

Ultimately, I think they're very independent with regard to their decision making. With that being said, they do look at national sort of policies and standards as it relates to specifically bacterial contamination of platelets. I think that's what drove the UK to go to tender last year, and unfortunately, as you know, that tender was essentially postponed as a function of some other priorities that they had with regard to consolidation of their manufacturing operations.

I do think that the upside, if you will, of Zika is that is has reminded people and blood centers, specifically, of the potential impact of emerging pathogens on the blood supply. And if you look at what it's done to the availability of blood in Puerto Rico with all products, other than INTERCEPT treated products being imported into Puerto Rico as of this week. I think that just reminds people as to how tenuous blood safety and availability is without a proactive solution like INTERCEPT in place.

That's all the questioners that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

Thank you all for joining us today. We look forward to updating you again on our Q1 call in early May. Thanks very much.

Ladies and gentlemen, thank you again for you participation in today's conference call. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.