Cerus Corporation 10-Q Summary
Business Context and Reporting Period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction of blood components. Platelet and plasma systems were marketed in multiple countries, including the U.S.; the red blood cell system remained under development, with a CE Mark application filed in December 2018. The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Product revenue | $17.5 million | $13.6 million | +29% |
| Government contract revenue | $4.5 million | $3.5 million | +29% |
| Total revenue | $22.0 million | $17.0 million | +29% |
| Gross profit on product revenue | $9.1 million | $6.2 million | +46% |
| Product gross margin | 52% | 46% | +6 percentage points |
| Research and development | $13.4 million | $9.4 million | +42% |
| Selling, general and administrative | $16.2 million | $13.6 million | +19% |
| Loss from operations | $(16.1) million | $(13.4) million | Loss increased |
| Net loss | $(18.8) million | $(13.9) million | Loss increased |
| Net loss per share | $(0.14) | $(0.11) | Loss increased |
| Net cash used in operating activities | $(22.2) million | $(10.3) million | Cash use increased |
Product revenue growth was driven primarily by higher U.S. disposable-kit sales, increased platelet-system adoption, and higher Middle East sales. France product mix and an approximately 8% deterioration in the euro versus the U.S. dollar partially offset growth. EMEA accounted for $12.7 million of product revenue, North America for $4.6 million, and other regions for $0.3 million.
At March 31, 2019, cash and cash equivalents were $29.0 million, short-term investments were $71.4 million, and restricted cash was $2.7 million. Total cash, cash equivalents and restricted cash were $31.7 million. Accounts receivable were $13.8 million and inventories were $15.8 million. Total assets were $175.9 million and stockholders’ equity was $69.5 million.
Total debt was $39.4 million, consisting of the new MidCap term loan. The effective interest rate was approximately 8.20%. The company also had $20.9 million of operating lease liabilities and $6.0 million of manufacturing and development obligations, primarily payable to Fresenius. Working capital declined to $87.3 million from $94.2 million at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased 29%, reflecting stronger product sales and higher BARDA reimbursement revenue.
- Product gross margin improved from 46% to 52%, primarily due to economies of scale, lower contract-manufacturing pricing, product mix improvements in France, and stronger platelet-product demand.
- R&D expense increased $4.0 million, principally due to red blood cell clinical development, BARDA-related activities, and higher headcount.
- SG&A expense increased $2.6 million, largely due to investments in manufacturing and supply-chain capabilities.
- Interest expense increased to $2.9 million from $0.9 million, including a $2.1 million loss on extinguishment of the Oxford term loan.
- Operating cash use more than doubled, partly because of the timing of receivable collections, inventory purchases, and payments.
- On March 29, 2019, Cerus replaced its Oxford term loan with a MidCap term-loan facility. The company drew $40.0 million, repaid approximately $31.2 million of Oxford principal and interest, and recorded the extinguishment loss.
- Operating lease right-of-use assets and liabilities were recorded following adoption of the new lease accounting standard on January 1, 2019. March 31, 2019 operating lease liabilities totaled $20.9 million.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management expected product revenue to increase as U.S. adoption expanded and commercialization progressed, but cautioned that euro exchange-rate movements, customer adoption, product mix, and quarterly variability could materially affect results. SG&A spending was expected to remain relatively consistent for the rest of 2019, while R&D costs were expected to rise with clinical, regulatory, post-approval, and BARDA activities.
Management stated that available cash, short-term investments, product receipts, and expected BARDA funding should meet capital requirements for at least the next twelve months. This assessment depends on assumptions regarding product revenue, BARDA funding, capital-market access, clinical spending, and working-capital needs. Cerus continued to expect operating losses and may require additional debt or equity financing; equity financing could dilute stockholders.
BARDA had committed up to $103.2 million under the base period and exercised options, with a potential total funding opportunity of $201.2 million. Additional funding depends on BARDA exercising options, achievement of milestones, government appropriations, and contract compliance. BARDA may audit costs or terminate the agreement for convenience, which could reduce revenue and cash flow.
The company was obligated to pay approximately €5.5 million to Fresenius in August 2019 under its supply agreement. Total contractual obligations were reported at $117.5 million, including debt, operating leases, minimum purchase requirements, manufacturing and development obligations, and other commitments.
- Major risks include continued losses, operating cash consumption, financing needs, debt covenants, floating-rate exposure to LIBOR, and secured borrowings.
- Commercial results depend heavily on U.S. market adoption, the American Red Cross and other concentrated customers, reimbursement, regulatory approvals, and the sustainability of the French EFS relationship, which had no purchase-volume commitments.
- Cerus relies on Fresenius and other third parties, including sole or limited-source suppliers, for manufacturing and key components. Supply interruptions, component obsolescence, quality issues, or regulatory failures could impair sales and clinical programs.
- The red blood cell system required additional clinical, manufacturing, and regulatory work and was not commercialized. The company did not expect regulatory approval before 2020, if ever.
- The company disclosed prior voluntary recalls of specified platelet-kit lots in Europe and the U.S., reported leakage issues associated with French deployment, and described ongoing product-quality and regulatory risks.
- Required FDA post-approval studies for the platelet system and ongoing RedeS and ReCePI red blood cell studies could be delayed, costly, or unsuccessful.
- Three customers represented approximately 59% of accounts receivable at March 31, 2019; EFS represented 29% of product revenue and American Red Cross 13% during the quarter.
- Management reported no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2019.
Important Facts for Investors to Verify
- Whether U.S. platelet and plasma adoption produces sustained revenue growth and improves operating leverage.
- The timing, conditions, and availability of the additional $30 million of MidCap term-loan tranches and compliance with debt covenants.
- Whether operating cash consumption can be reduced without slowing commercialization or clinical development.
- BARDA milestone performance, future option exercises, audit outcomes, and the risk of reduced, delayed, or terminated funding.
- Payment of the Fresenius manufacturing and development obligation and continued reliability of the supply chain.
- Progress and regulatory outcomes for the red blood cell system, including manufacturing qualification and clinical-trial enrollment.
- Resolution of product complaints, recalls, and required post-approval studies for the platelet and plasma systems.
- Customer concentration, EFS purchasing levels, American Red Cross utilization, reimbursement developments, and foreign-exchange effects.
- The company’s ability to fund ongoing losses and potential dilution from future equity offerings; approximately $41.6 million remained available under the Cantor at-the-market agreement at March 31, 2019.