Cerus Corporation: Q3 2021 Form 10-Q Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction of blood components. Commercial products include platelet and plasma systems, illuminators, and the newly launched INTERCEPT Fibrinogen Complex (IFC). The red blood cell system remains in development. This Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $42.1 million | $29.2 million | 44% increase |
| Product revenue | $36.1 million | $23.6 million | 53% increase |
| Government contract revenue | $6.0 million | $5.6 million | 7% increase |
| Gross profit on product revenue | $18.5 million | $12.7 million | 47% increase |
| Product gross margin | 51% | 54% | Down 3 percentage points |
| Operating loss | $(11.1) million | $(14.0) million | Improved by $2.9 million |
| Net loss | $(12.4) million | $(14.1) million | Improved by $1.7 million |
| Net loss per share | $(0.07) | $(0.08) | Improved |
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Total revenue | $109.4 million | $80.7 million | 36% increase |
| Product revenue | $91.0 million | $63.7 million | 43% increase |
| Operating loss | $(42.0) million | $(44.0) million | Improved by $2.0 million |
| Net loss | $(45.3) million | $(45.5) million | Improved by $0.2 million |
| Net cash used in operating activities | $(32.7) million | $(32.9) million | Broadly unchanged |
Revenue growth was primarily driven by higher U.S. disposable platelet-system kit volume and favorable euro translation. Product gross margin declined because of product mix, particularly increased sales of lower-margin platelet kits used to produce a single therapeutic dose. Selling, general and administrative expense increased 25% in the quarter and 23% year to date, primarily due to stock-based and incentive compensation and investment in the IFC launch.
At September 30, 2021, cash and cash equivalents were $78.5 million, short-term investments were $41.5 million, and restricted cash was $2.3 million, for total cash, investments and restricted cash of $122.2 million. Working capital was $113.3 million, compared with $123.5 million at December 31, 2020.
Total debt was $64.7 million, including $55.0 million of term-loan principal and approximately $10.0 million drawn under the revolving facility. The term loan bears an effective interest rate of approximately 7.50%, is interest-only through March 2023, and has scheduled principal payments of $41.25 million in 2023 and $13.75 million in 2024. The company was in compliance with its debt covenants at September 30, 2021.
Material changes versus the prior comparable period
- Product revenue increased 53% in Q3 and 43% for the first nine months, led by U.S. platelet-kit sales.
- Product gross margin declined from 54% to 51% in Q3 and from 55% to 52% year to date.
- Operating loss improved despite higher commercial and stock-based compensation costs.
- Interest expense increased because the company drew an additional $15.0 million term-loan tranche in March 2021.
- Cash increased from $36.6 million at year-end 2020 to $78.5 million, while short-term investments declined from $97.0 million to $41.5 million as investments were liquidated to support operations.
- Inventory increased to $35.4 million from $23.3 million, including $5.9 million classified as non-current, reflecting demand planning and supply-chain protection.
- The company formed a 51%-owned Chinese joint venture and recognized a $1.0 million noncontrolling-interest contribution; related operating expenses were de minimis.
- BARDA committed an additional $9.6 million in June 2021, increasing committed funding to up to $126.5 million. Potential total funding, if further options are exercised, is up to $223.5 million through December 2023.
Guidance, outlook, commentary and risks
Management expects product revenue to increase as U.S. sales expand, market acceptance improves, international commercialization continues, and IFC demand develops. Management stated that government-contract revenue is not expected to materially change from historical trends because of the continuing effects of COVID-19 on BARDA-funded activities. The filing does not provide formal quarterly or annual revenue or earnings guidance.
IFC sales began in the third quarter of 2021, but the launch remains limited. Sales are initially restricted to states where manufacturing partners operate until those partners obtain FDA biologics licenses. Management is building infrastructure for direct hospital sales and is seeking additional manufacturing partners.
The red blood cell system remains subject to substantial clinical, manufacturing and regulatory uncertainty. The company resubmitted its European application under the Medical Device Regulation in June 2021 but did not expect an approval decision for at least 12 months, if ever. U.S. RedeS and ReCePI studies continue, although COVID-19 has delayed enrollment. The filing disclosed two S-303 antibody events in RedeS and three similar events in ReCePI, without evidence of hemolysis; the company stated that the events were not clinically significant and that enrollment was continuing.
Key risks include continued operating losses and negative operating cash flow; reliance on additional capital, BARDA funding and market access; possible dilution from future equity issuance; debt covenants and substantial 2023 principal repayments; COVID-19-related clinical and commercial delays; dependence on Fresenius and other sole-source suppliers; supply constraints and component obsolescence; regulatory approval and post-approval obligations; concentrated customer exposure; foreign-exchange volatility; and uncertainty regarding adoption, reimbursement and pricing for INTERCEPT products and IFC.
The company had no legal proceedings reported in the filing and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting.
Most important facts for an investor to verify
- Whether U.S. platelet-system volume growth and IFC adoption can continue without further deterioration in product gross margin.
- The timing and scope of FDA and other regulatory approvals for IFC manufacturing partners and the red blood cell system.
- Progress, enrollment and safety developments in the RedeS, ReCePI and required post-approval studies.
- BARDA option exercises, reimbursement timing, milestone performance and the risk of termination or reduced funding.
- Liquidity relative to ongoing operating cash burn, the $64.7 million debt balance, and the large scheduled term-loan principal payments beginning in 2023.
- Fresenius supply capacity, sole-source dependencies, illuminator redesign and component-obsolescence risks.
- Customer concentration, particularly American Red Cross and Établissement Français du Sang, which represented significant portions of product revenue.