Cerus Corp (CERS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Cerus Corporation third quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now turn the conference over to your host, Lainie Corten. You may begin.

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' President and Chief Executive Officer; Kevin Green, our Chief Financial Officer; Richard Benjamin, our Chief Medical Officer; and Carol Moore, our Senior Vice President of Regulatory Affairs & Quality.

Cerus issued a press release today announcing our financial results for the third quarter ended September 30, 2016 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'd like to remind you that some of the statements we will make on this call relate to future events and future performance, rather than historical facts, and are forward-looking statements. Examples of forward-looking statements include; statements related to our 2016 guidance with respect to revenue gross margin and cash burn, future product sales and volume, future regulatory related events, clinical trials and other product development activities, our commercial goals and initiatives, including the potential approval of our red cell product in Europe and the US and commercial launch thereof, and the timing of the foregoing events and activities. These forward-looking statements involve numerous risks and uncertainties that could cause actual events, performance and results to differ materially. These risks and uncertainties are identified and described in today's press release and under Risk Factors in our Form 10-Q for the quarter ended June 30, 2016, and our Form 10-Q for the quarter ended September 30, 2016 that we expect to file shortly. We undertake no duty or obligation to update any forward-looking statements we make today.

On today's call, we'll begin financial results from Kevin, followed by an INTERCEPT red cell update from Richard, and finally, concluding remarks from Obi.

Now it's my pleasure to introduce Kevin Green, Cerus' Chief Financial Officer.

Good afternoon, everyone. This afternoon we reported Q3 product revenue of $10.2 million; a 26% year-over-year increase. The reported product revenue growth was driven by disposable kit demand that is up approximately 30% year-over-year, primarily from the EMEA region and INTERCEPT sales in the United States. Product revenue was $27.1 million year-to-date, up 10% compared to the first nine months of 2015, and was driven by both increased EMEA kit sales and the rollout to US customers.

As a reminder from our last earnings call, we have begun reporting BARDA contract revenue separately from product revenue and product gross margins. Accordingly, we have not and will not be including any BARDA revenue in our annual product revenue guidance. Our 2016 product revenue guidance is predicated on second half growth from US sales, as well as potential new business opportunities in the EMEA region. As we expected, US sales began to accelerate in the third quarter as a growing number of centers, including the American Red Cross, installed the system, and furthermore, moved into routine production -- serving their first hospitals. Certain steps in this initial handoff of INTERCEPT between the blood center and hospital require careful coordination, and thus, the pattern of each blood centers' early kit orders is variable.

Outside of the US we await the outcome of several contracts that could have a significant impact to our top line in 2016 and beyond. Therefore, we have conservatively decided to leave our revenue guidance broad at the previously stated range of $37 million to $40 million for the full-year.

Now turning from revenue to other Q3 results. Gross margins on product revenue for the third quarter were 46% compared to 31% in the third quarter of 2015. Similarly, year-to-date gross margins were 46% compared to 30% during the same period last year. 2016 margins have improved over 2015 levels as a result of the beneficial impact of our current manufacturing agreement with Fresenius Kabi, removing the historical royalty that we owed on kit sales. In addition, 2016 gross margins were marked by inventory management efficiencies realized over 2015. Looking forward, we expect that gross margins will remain in the mid-40s through the end of the year.

Turning now to operating expenses; total operating expenses for Q3 were $19.2 million compared to $18.7 million during Q3 of the prior-year. As expected, the increase was driven primarily by SG&A spend related to the ramp of US commercialization efforts. On a year-to-date basis, operating expenses were $59 million compared to $53.3 million during the same period in 2015. Research and development expenses drove the majority of the reported increase for the first nine months of 2016, primarily from red cell development activities and activities in support of PMA supplemental approvals. Net losses for the quarter were $14.4 million or $0.14 per diluted share, compared to $15.7 million or $0.17 per diluted share in the prior year quarter. On a year-to-date basis, net losses were $49.4 million or $0.49 per diluted share for 2016, compared to $41.1 million or $0.48 per diluted share for 2015.

On the balance sheet, we ended Q3 with cash and short-term investments of more than $81 million. We anticipate that cash used from operations in Q4 will be in line with the levels we've seen throughout 2016, which have averaged approximately $12.5 million to $15 million per quarter, though this does not contemplate any impact from the BARDA contract.

Now I'll turn the call over to Richard for highlights in the recent AABB conference and to provide you with an update on our red blood cell development program.

The Cerus team has recently returned from AABB meeting in Orlando, which is the largest blood banking conference in the world. I'd like to share some observations and review some of the information presented there.

One topic of significant interest throughout the meeting was bacterial sepsis. Institution of severe sepsis as inpatient quality measure by CMS has heightened awareness of platelet transfusion as one source of infection. Attendees were sensitive to the pending FDA guidance regarding bacterial contamination and the role that pathogen reduction may play in protecting patients. The general session on pathogen reduction was oversubscribed and each presentation on the topic was well attended.

The status of the Zika virus epidemic and the impact to blood safety was clearly a second hot topic throughout the conference; multiple speakers reviewed the current state of knowledge regarding the spread of Zika, expanding knowledge about the cause of infection, the risks to pregnant women and developing fetuses, and initial blood bank experiencein complying with the FDA's final Zika guidance as updated in August. I'm sure you've heard the CDC's recent statements that controlling the spread of Zika is extremely difficult, leading to the expectation that Zika will become endemic to this hemisphere. These statements underscore why it was necessary for the FDA to act rapidly and decisively to introduce safety measures to protect the blood supply. Nevertheless, blood centers are finding it difficult to meet the implementation deadlines and are expressing concerns about the need to rely on investigational Zika tests. Many have already initiated testing, but some are still scrambling to meet the November 18 deadline for full nationwide compliance. This dynamic is leading to heightened interest in INTERCEPT red cells, as blood centers anticipate the value of prospect to blood safety measures that could obviate the need for the disruptive implementation of additional tests for each new pathogen. They are noting that the FDA's August guidance already embraces the future use of red cell pathogen reduction, indicating that if such products were improved they can replace Zika testing.

Therefore, in Orlando, we not only fielded many questions regarding the status of our development program, but also received an enthusiastic response from the blood centers and hospitals we are beginning to recruit as participating sites in our coming Phase 3 red cell trials.

Moving on to an update on our BARDA funded US development activities. Our major focus this quarter is twofold. First, we are working on initiation activities for [REDIS], the red cell trial designed to be conducted in areas of Zika transmission. Second, we are prepared to meet with the FDA to clarify the scope of clinical data necessary to fulfill the requirement for future product approval. Regarding the REDIS study, the clinical team is working with Banco Nacional de Sangre (inaudible), or BSSM, to implement INTERCEPT red cell production for the trial. They are also preparing several local hospitals to begin patient enrollment.

As a reminder, REDIS is the two arm 600 patient randomized control trial, which we will conduct initially in Puerto Rico. We may expand the study to include sites in additional areas of active transmission, such as Florida. We expect REDIS to take at least 18 months to complete once enrollment begins. The goal of the upcoming FDA discussion is to clarify whether REDIS, along with our acute recipe and chronic CN studies, plus a dossier of English [hub] European red data, will selectively satisfy the scope and breadth of clinical data needed to support approval of INTERCEPT red cells in the US.

We have requested a meeting date with the FDA and we look forward to updating you on the results of that meeting in the future. As a reminder, recipes modeled of the recent [RECIS] study, a trial which evaluated the efficacy and the safety of red cell transfusions to treat acute anemia in cardiovascular surgery patients.

We've already had preliminary discussions with the FDA about the design of the study. We are somewhat early in the design for the CN trial, of which we are proposing a two arm crossover study evaluating chronic transfusion support in sickle cell patients.

As a quick note on BARDA funding, we work continuously with the Agency to keep them updated on the status of our trial design and FDA dialogue, and we'll be able to request activation of additional option period funds under our contract as soon as reach parity with the FDA and finalize each clinical trial protocol.

Finally, turning to Europe, our CE Mark submission is largely complete with the team working to finalize the few remaining elements over the next month or two. We continue to target a submission date before year-end and a commercial launch in 2018.

I will now turn the call over to Obi for further US market updates and concluding remarks.

Thank you, Richard. At AAB last week in Orlando, we were gratified to see extensive interest in INTERCEPT and also a broad awareness of the many US blood centers who have embraced this new technology over the past year. As we so often focus on a quarter-to-quarter progress, it is easy to lose sight of how far we've come and so an event like AAB provides an opportunity to step back and take a longer view and hear our customers describe their progress.

For example, during a keynote session on pathogen reduction, the head of the transfusion service at the US NIH clearly explained his institution's rationale for implementing INTERCEPT and the very positive experience that they now have routing use. In October of 2015 at the previous ABB meeting, we featured the first three blood centers to initiate INTERCEPT platelet production and boasted a modest pipeline of additional new contracts. This year, however, we have customers in every region of the United States and throughout the audience attending Europe, Orlando meeting, providing a tangible demonstration that pathogen reduction has truly arrived in the US.

Full nationwide availability of INTERCEPT platelets is now on the horizon with large blood services beginning to produce INTERCEPT across multiple manufacturing sites and with the first five BLAs submitted. These developments indicate that there will be an increase in supply of INTERCEPT platelets available across the US in 2017 and 2018.

As a largest customer globally, the American Red Cross is a critical account through growth in the US market. In just the last three months, the Red Cross has expanded from an initial implementation at their manufacturing facility in North Carolina, and now producing INTERCEPT platelets in Maryland and Connecticut as well. We understand that New York is likely to become their fourth site to go live and an additional three to four sites are actively preparing for local launches in the Q4 or Q1 timeframe.

During the end of their pilot production phase, the Red Cross is now turning its thoughts to broader distribution INTERCEPT platelets in 2017 and also the role that pathogen reduction of other components may play in the future. To this end, we had a productive meeting of the Red Cross leadership team at AABB to discuss how we can improve and expand our partnership, including potential Red Cross participation in our Phase 3 red cell clinical trial.

Our experience with the Bonfils blood center in Denver has also been instrumental in furthering our discussions with Blood Systems, the nation's second-largest blood provider. Bonfils initiated production of INTERCEPT in July and is now supplying their largest hospital customer in routine and scaling up INTERCEPT use. Having seen the pilot experience with Bonfils and also at the second BSI facility in Bergen, New Jersey, Blood Systems is now planning to deploy INTERCEPT at several more of their key sites in the West and Southwest US. The key hospital demand for INTERCEPT platelets from both Bonfils and Bergen has been most encouraging to Blood Systems.

While we have now had a decade of experience with INTERCEPT in the EMEA region and are savvy about the long sale cycles associated with National Transfusion Services in many of those countries, the experience to date in the US has been markedly different; hospitals here play a much bigger role in the decision to improve blood safety and patient care. As was well stated recently by one of our early US blood center customers, INTERCEPT provide a transfusion-ready blood component with multiple distinct value propositions to the hospital blood banks, transfusion physicians, and most importantly, patients. Whether it is the earlier availability of platelets, eliminating concerns about CMV, Zika or sepsis, or reducing the burden of special orders to maintain an inventory of radiated components, the many of benefits by INTERCEPT resonates well with transfusion physician.

From our discussions with many US blood centers, it is clear the four factors are critical to our success and the rate of US growth going forward. The first two are factors which we believe will accelerate the adoption of pathogen reduction by US hospitals, and the latter two relate to lifting some current limitations on the ability for blood centers to ramp up to maximum INTERCEPT production. The first factor is creating hospital awareness and also supporting hospital implementation. The feedback received from our blood center customers further reinforces the plans we have already made to increase the size of our hospital affairs team with a number of hires already in progress before year-end.

Hospital focused activities are top priority for us moving into 2017 and help our blood center customers manage the demand for INTERCEPT platelets. With a large proportion of platelet used concentrated in a subset of the hospital market, we believe a focused Cerus effort can be successful in reaching the key US institutions with a relatively small team. The second key factor, which has been obvious for some time, is to the timing and content of the FDA's final [factual] safety guidance. While the industry does not expect any substantial content changes from the requirements from the last draft, the timing of the final document is unknown and dependent on the FDA. Though blood centers and hospitals are increasingly aware of the draft guidance and preparing themselves for compliance, we believe that their level of urgency will ramp substantially upon a final guidance document that will serve to define the expected 12 month implantation period.

A third key factor is BLA submissions and how rapidly centers receive their approvals. While we assume that the first submission may take the full 12 months of review per FDA regulations, we are optimistic that future reviews could eventually become more streamlined as FDA becomes familiar with the format and data in these dossiers. With blood centers beginning to receive their BLA approvals next year and the national availability of INTERCEPT will expand rapidly rather than be limited to certain states where production facilities are located.

In addition to the BLAs already submitted, we are aware of a number of others that are in preparation. We believe that most INTERCEPT customers will eventually submit BLAs in order to both serve their customers across state lines and to enable the opportunity to export INTERCEPT components into new markets if demand in some areas exceeds the existing supply.

And the fourth and final factor is Cerus' ability to expand our processing specifications to increase compatibility with blood center production, most notably to enable the treatment of triple-dose platelet collections. The rate of triple collections varies considerably from center to center but compatibility with those collections is a critical consideration for our large customers as they scale INTERCEPT platelet production. We have already resubmitted our CE Mark application for the approval of this triple storage kit in Europe, and we'll be collecting the expanded set of study data necessary for FDA approval through 2017 with a US approval of the triple dose storage kit anticipated in 2018.

Beyond our ongoing efforts in EMEA, our global commercial footprint is expanding significantly and we are also excited about the opportunity to complete the INTERCEPT portfolio with red cells, the largest INTERCEPT opportunity, initially through our anticipated EEMEA launch in 2018. As we get closer to the initial CE Mark approval we will be able to share further details about target markets and additional ex-US regulatory submission.

In conclusion, we've made considerable progress to date this year in the US with 39 blood centers under contract and routine production ramping, we have built a broad foundation for strong growth going forward. Our ex-US customer markets continue to be important sources of both current revenue and future growth opportunities, and we have never been in a stronger position to realize our important mission of becoming the standard of care in safeguarding blood components globally.

Operator, please open the call for questions.

(Operator Instructions) Josh Jennings with Cowen & Company.

I was hoping to start off with just asking question about demand -- and at the AABB and through checks over last few months, it's become clear [its hit the] bottleneck for US platelet adoption has moved from the hospital customer to the blood bank to some degree. And if you could provide some details maybe around the building hospital customer demand; I know you addressed it, Obe, in some of your prepared remarks, but any more color? I mean, understanding there's some hospitals out there that are looking to move a 100% INTERCEPT platelets as soon as they can. And also how you see the manufacturing step up in INTERCEPT play that's evolving as these blood centers.

Really, the struggle right now with adoption in the US is the supply demand equation. So you have hospitals that want to go and then they typically want go 100% once they have made a decision because they're concerned about the ethics of being of partial adoption.

And so, then you get into a situation where the large hospital customers, blood centers, need to be fulfilled at a 100%. And then that automatically sort of constrains the initials - the initial ability of those blood centers to supply all the demand. And so I think what we'll see then, as I sort of alluded to in the prepared remarks, that with the BLAs coming through next year, that will expand the export market and allow for some ability to fulfill that unfulfilled demand.

I think just the general rollout of the technology going for -- or implementations going forward will help immensely as well. We're still relatively early stage with American Red Cross with just three sites in production, but they are expanding that rapidly, and the same is true for other large blood center networks in the US; as they get increased production and we work with them to deploy the technology effectively, they'll quickly be able to get north of 50% of production.

As I also alluded to, the triple source set does have an impact on certain large blood center operators like the American Red Cross, and so their ability to get to 100% production will be somewhat constrained, but we're working towards solving that problem, and as I mentioned, we have submitted for approval of that set in Europe and we'll plan to do so -- submit for approval in the US in 2017.

Just on the international business, I was hoping to just see if there was any update on the South Africa tender process, and then also on the decision in France that's on tap for INTERCEPT versus bacterial culture adoption?

Yes, both of those are still very much in play and we are very optimistic about those outcomes, but I think timing is still TBD, and so it could happen this year or could dripped in the next. But I think we still have a couple more months left here. So we will remain optimistic.

And then just any other regulatory reimbursement decisions on the upcoming in any other countries that could be impactful for 2017?

Nothing in EMEA. I think nothing is like specific reimbursement or tenders; we do have a lot of opportunities in the Middle East and elsewhere. And so we'll continue to try and move those opportunities forward.

As we look out into 2017 and the US platelet ramp, you've outlined a great download in your prepared remarks, but just in terms of timing, how should we be thinking about those important catalyst which you outlined, including the BLA submission process, particularly by the American Red Cross, and also bacterial detection guidance finalization by the FDA? Should we think those as first half of 2017 events, or second half 2017 event in terms of those being triggers for increased utilization in INTERCEPT sales?

So obviously the biggest impact on the rate of adoption will be the final FDA guidance document. As you recall, the second draft -- the revised draft of the guidance document was issued in March, and typically the FDA would look to take action on that in a sort of a 12 month time frame, but we really don't know. I mean, sometimes it can take a shorter period of time; ultimately this about patient safety, and so we would hope that would be driving the decision on the timing. With regard to BLA's, I think that will likely be a second half of 2017 event, largely because of we just don't know what the timing will be for the FDA review of the BLAs that the blood centers have estimated to date.

Bryan Brokmeier with Cantor Fitzgerald.

A few weeks ago you announced that community blood center in Wisconsin had completed the BLA submission, and I believe just now and then also during your prepared remarks you referenced up multiple BLA submissions. How many have been submitted so far, and is the Red Cross one of those?

We have five that have been submitted so for now and another five are in the queue. So to date, the Red Cross is yet to submit their BLA, but they are certainly dependent upon their national distribution network. And so, this is a priority for them.

And are the customers that recently adopted in the US, are they utilizing INTERCEPT for just for platelets, or they using it for both platelets and plasma?

Right now the focus is really been on platelets and I think that's just inline of getting prepared for the timing of the final bacterial guidance document for platelets. There is interest in plasma, but these blood centers are clearly looking at sort of doing this sequentially. And they've also been somewhat preoccupied with the recent FDA guidance around addressing the Zika risk. And so there is been timeline to be compliant with that guidance of November 18. So that's been somewhat of a fire drill for many blood centers.

If you look at the US opportunities that you had at the beginning of the quarter that you thought would be near-term placement, did you see any delays or anything sort of changes in the timelines from those states that the FDA deemed at high risk for Zika?

I think they were really preoccupied with been able to address the guidance document because we don't have the three red cells approved yet in the US. Their focus went to the implementation of the investigational NAT assay. So I don't think I would be able to attribute any kind of acceleration of the pace of adoption to Zika. Really, the main takeaway I would have from the whole Zika crisis is that the FDA can act decisively and the blood centers realize that and they've been given a long heads-up around what the FDA ultimately looks back to address the actual contamination of platelets.

Thomas Yip with FBR.

I have a couple of question I think is mostly for Kevin. First of all, in the prepared remarks you mentioned that there are some significant ex-US contracts. Can you just give us sense what general region are they in, and are they new customers or existing customers?

We expect that the ex-US business will grow and it's not specific to any particular region. We expect that the Middle East will continue to grow. We mentioned that the French contract as well as the South African tender, but we've also been signing up distributors in Latin America and Asia Pacific as well. So I think all of those are regions and customers that will ultimately contribute to grow.

And those will be new customers or are they just new contracts with existing customers?

Many are new customers. In the case of France, we've been selling into continent of France into one region. So that would be an existing customer that would roll out the technology more broadly.

I'll switch gears for US market. You mentioned that 22 customers currently under contract will begin to kind of begin to adopt INTERCEPT. Do you expect that rate of adoption to be mostly weighted on the first half of 2017 or the second half of 2017?

I think the way you might look at it is, those 22 customers under contract are going to be deploying the technology and getting into routine use. So I don't think there will be meaningful drivers in the immediate term for revenue growth. And obviously the largest customer in the US is the American Red Cross, and that's the customer that really will plan to scale their activities over the course of 2017. And we also have another 16 blood centers in routine use, and they are not at anywhere close to 100% production either. So there is a lot of areas for growth in the US going into 2017.

One final question regarding gross margins. From what I understand, gross margin improved because ex-US markets stabilized greatly in 2016. So how should we think about gross margin in 2017 as US customers begin to come on board?

So for us expansion from margins is really a volume basis. And so as we're selling into more regions and as the customers that have signed up contracts and come online continue to consume and increase their demand of the disposable kits, that will drive lower and lower per unit costs for us, which will obviously then extend our margins.

Emily Stent with Robert W. Baird.

First off, could breakout what FX was in the quarter?

As far as the impact to top line, almost negative to both. Yes, I mean, it was almost negligible. I think if you look -- current quarter compared to last quarter it was both at on average 1.11, so almost no effect.

And then I wonder if you could walk me through how has the American Red Cross roll out gone in comparison to what your original expectations were?

Yes, it's basically on track. I think the supply demand equation I mentioned during Josh's question, it continues to be something that we have to work through. And for an organization like the American Red Cross they are very dependent upon the network effect been able to provide components to their key hospital customer.

So I think as we scale the number of production sites with the Red Cross going in 2017, some of the near-term supply demand imbalances will be mitigated.

I know you talked on this today already, but overall commentary you've been getting from hospitals regarding the final guidance document. Obviously the most recent one was published in March, but how do your conversations with hospitals been going since March through now that whether they are choosing to implement point of release testing or INTERCEPT treated products?

In general, hospitals decide on using INTERCEPT as a function of the demand from the transfusion physicians. Some are driven by the impending final guidance document, but others are just wanting to have a prospective safety measure that addresses a number of things that I mentioned in the prepared remarks; it can be addressing Zika or can be for pediatric hematologists, oncologists. It can be having something to address the CMV infections. A number of physicians have experienced septic fatalities over the course of their careers, and this was mentioned specifically during the ABB by a physician out of Denver, and that's what drove that institution to implement something so that they weren't putting patients at risk.

I think in general relevant to point of issue tests, hospitals would like to have a transfusion ready component; they don't want to do additional modifications at the hospital site. Now, whether that's radiation or trying to find CMV seronegative units or the concept of doing of point of issue test to be able to release the product. So in general we see strong demand for INTERCEPT.

Thank you. I'll now turn the conference back over to Mr. Obi Greenman for closing remarks.

Thank you all for joining us today and for your interest in Cerus. As evident from our conversations during AABB and pathogen reduction is inclusion as a fundamental component of blood safety policy is clear and Cerus is committed to lead the effort to drive patient access to safe blood. We look forward to updating you on our Q4 call in early March. Thanks very much.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.