Cerus Corporation 2017 Q3 Form 10-Q Summary
Business context and reporting period
Cerus Corporation is a blood-safety company focused on the INTERCEPT Blood System for pathogen reduction of platelets and plasma. The red blood cell system remained in development. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $13.1 million | $10.4 million | $32.7 million | $27.3 million |
| Product revenue | $10.8 million | $10.2 million | $27.3 million | $27.1 million |
| Government contracts revenue | $2.3 million | $0.3 million | $5.4 million | $0.3 million |
| Gross profit on product revenue | $5.4 million | $4.7 million | $13.9 million | $12.4 million |
| Product gross margin | 50% | 46% | 51% | 46% |
| Operating loss | $(12.4) million | $(14.3) million | $(46.7) million | $(46.3) million |
| Net loss | $(13.4) million | $(14.4) million | $(49.1) million | $(49.4) million |
| Net loss per share | $(0.12) | $(0.14) | $(0.46) | $(0.49) |
| Cash used in operations | Not separately reported | Not separately reported | $(42.2) million | $(43.8) million |
Research and development expense was $7.9 million in Q3 and $25.9 million for the nine-month period, increases of 12% and 15%, respectively. Selling, general and administrative expense was $12.2 million in Q3 and $39.9 million for nine months, essentially flat in Q3 and up 10% year over year for the nine-month period. Interest expense increased to $1.1 million in Q3 and $2.1 million for nine months.
At September 30, 2017, cash and cash equivalents were $17.0 million, short-term investments were $42.6 million, and restricted cash was $0.3 million. Total debt was $29.8 million, consisting of a $30.0 million secured term loan less unamortized discount. Working capital was $64.6 million, compared with $67.2 million at December 31, 2016.
Material changes versus the prior comparable period
- Total revenue increased 25% in Q3 and 20% for the first nine months, driven primarily by BARDA reimbursement revenue.
- Product revenue increased 6% in Q3 but only 1% for nine months. Platelet-system sales and U.S. and EMEA sales improved, while lower plasma-system sales, particularly in France, offset growth for the nine-month period.
- Product gross margin improved to 50% in Q3 and 51% for nine months, from 46% in both prior-year periods, reflecting product mix, higher platelet-system demand, inventory efficiencies and favorable euro exchange rates.
- Operating loss was modestly lower in Q3 but slightly higher for nine months because increased R&D and commercial spending offset revenue and gross-margin improvements.
- Non-operating income for the nine-month period included a $3.5 million realized gain from the sale of the company’s remaining Aduro investment. The associated tax expense was approximately $4.0 million.
- On July 31, 2017, Cerus refinanced its prior term loans with a new secured credit agreement providing up to $40.0 million. It drew $30.0 million, used partly to repay approximately $17.6 million of prior debt. The additional $10.0 million tranche is contingent on achieving a defined trailing six-month revenue milestone.
- Cerus sold 7.6 million shares under its at-the-market offering during the first nine months, generating approximately $19.3 million of net proceeds. A new shelf registration statement had not yet become effective at September 30, 2017.
Guidance, outlook, commentary and risks
- Management expected product revenue to increase as INTERCEPT gains acceptance, French platelet adoption continues, U.S. sales develop and additional geographies become accessible; however, euro exchange-rate movements could materially affect reported revenue.
- Management expected BARDA revenue to increase as the RedeS study and other qualified development activities expand. The BARDA agreement provides a potential funding opportunity of up to $186.2 million, but additional option periods are discretionary and the agreement may be terminated for convenience.
- Management stated that available cash, investments, product receipts and expected BARDA funding should meet capital requirements for at least the next twelve months, while cautioning that this conclusion depends on assumptions that may prove incorrect.
- Cerus expected to continue incurring substantial losses and negative operating cash flow. Future funding may require additional debt, equity issuance, collaboration arrangements or reductions in development and commercialization activities.
- The red blood cell system had not been commercialized and required additional clinical, manufacturing and regulatory work. No regulatory approval was expected within the next twelve months.
- Key risks include slow U.S. market adoption, reimbursement and regulatory uncertainty, required post-approval studies, clinical-trial delays, reliance on BARDA funding, dependence on Fresenius and other sole-source suppliers, manufacturing or component obsolescence, foreign-exchange exposure, competition, intellectual-property claims and secured-debt covenant or default risk.
- The company had $10.9 million of minimum purchase commitments, $6.5 million of remaining Fresenius manufacturing and development obligations, $2.6 million of future operating lease payments and no reported off-balance-sheet arrangements.
- No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of September 30, 2017, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Actual U.S. adoption, recurring product revenue and customer utilization of the INTERCEPT platelet and plasma systems.
- BARDA milestone performance, option-period funding, reimbursement audits and the impact of any delays to the RedeS or other clinical programs.
- Cash burn relative to the company’s stated twelve-month liquidity outlook and the availability of additional equity or debt financing.
- Achievement of the revenue milestone required to access the additional $10.0 million Oxford tranche.
- Compliance with secured-loan covenants and the effect of the approximately 8% final payment fee and high interest rate on future cash requirements.
- Progress, cost and regulatory prospects for the red blood cell system, including the ongoing chronic-anemia trial and future U.S. Phase III requirements.
- Supply continuity and pricing under the Fresenius agreement and other sole-source manufacturing arrangements.
- Potential effects of product gross-margin variability, euro exchange rates, inventory shelf life and customer concentration.