Cerus Corporation 10-Q Summary
Reporting period: Three and six months ended June 30, 2019, compared with the same periods in 2018. The filing contains unaudited condensed consolidated financial statements. Cerus operates in one segment, blood safety, and commercializes the INTERCEPT Blood System for platelets and plasma while developing a red blood cell system.
Financial Results and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Product revenue | $18.2 million | $15.4 million | $35.7 million | $29.0 million |
| Government contract revenue | $4.3 million | $4.0 million | $8.7 million | $7.5 million |
| Total revenue | $22.5 million | $19.5 million | $44.4 million | $36.5 million |
| Gross profit on product revenue | $10.1 million | $7.7 million | $19.2 million | $13.9 million |
| Product gross margin | 55% | 50% | 54% | 48% |
| Research and development expense | $14.4 million | $9.9 million | $27.9 million | $19.3 million |
| SG&A expense | $16.7 million | $14.4 million | $32.9 million | $28.0 million |
| Loss from operations | $(16.8) million | $(12.6) million | $(32.9) million | $(25.9) million |
| Net loss | $(17.6) million | $(13.3) million | $(36.4) million | $(27.2) million |
| Net loss per share | $(0.13) | $(0.10) | $(0.26) | $(0.21) |
- Product revenue increased 18% in the quarter and 23% year to date, primarily from higher U.S. disposable-kit volume, increased platelet-system adoption, and higher Middle East sales. France product mix and euro weakness partially offset growth.
- Government contract revenue relates principally to BARDA reimbursement and increased 5% in the quarter and 16% year to date.
- Product gross margin improved to 55% in the quarter and 54% year to date, driven by lower contract-manufacturer pricing, product mix, and increased platelet-product demand.
- Operating expenses increased materially, with R&D up 46% in the quarter and 44% year to date, primarily because of red blood cell clinical development, supply and compatibility activities, and BARDA-related work. SG&A increased 16% in the quarter and 17% year to date.
- Interest expense increased to $4.1 million year to date, including a $2.1 million loss on extinguishment of the Oxford term loan.
Cash Flow, Liquidity, Debt and Balance Sheet
- Net cash used in operating activities was $35.1 million for the six months ended June 30, 2019, compared with $19.3 million in the prior-year period. The increase primarily reflected the timing of receivable collections, inventory purchases, and related payments.
- Investing activities provided $8.8 million, including $43.0 million of investment maturities and sales, partially offset by $27.7 million of investment purchases and $6.5 million of capital expenditures.
- Financing activities provided $20.9 million, including $39.4 million of loan proceeds, $6.8 million from an at-the-market equity offering, and $1.3 million from equity incentives, partly offset by $31.0 million of debt repayments.
- Cash, cash equivalents and restricted cash totaled $26.2 million at June 30, 2019, compared with $31.6 million at December 31, 2018. Short-term investments totaled $72.7 million, compared with $88.7 million at year-end.
- Total debt was approximately $43.8 million at June 30, 2019, consisting principally of a $39.3 million term loan and $4.5 million drawn under a revolving facility. The term loan matures March 1, 2024 and bears interest at a fixed spread plus the greater of 1.8% or one-month LIBOR; the effective interest rate was approximately 8.10% at June 30.
- The new MidCap term loan refinanced the Oxford facility in March 2019. The company expects principal repayments of $15 million in 2022, $20 million in 2023, and $5 million in 2024, subject to the agreement’s terms.
- Working capital declined to $85.1 million from $94.2 million at December 31, 2018. Total assets were $174.6 million and stockholders’ equity was $65.6 million at June 30, 2019.
- The company adopted the new lease standard on January 1, 2019 and reported $14.4 million of operating lease right-of-use assets and $20.4 million of operating lease liabilities at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was accompanied by substantially higher R&D and SG&A spending, resulting in a larger operating and net loss despite improved product gross margins.
- Year-to-date operating cash use increased by $15.8 million, while year-to-date net loss increased by $9.2 million.
- Debt financing changed materially: Cerus replaced the Oxford term loan with the MidCap facility, drew $40.0 million under the new term loan, and drew $4.5 million under the revolving facility.
- Cerus sold approximately 2.0 million shares under its Cantor at-the-market agreement for $9.8 million of net proceeds during the first six months. Approximately $31.5 million remained available under the agreement at June 30.
- Inventories increased to $17.4 million from $13.5 million, and accounts receivable increased to $13.4 million from $8.8 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects product revenue to increase as U.S. adoption expands and commercialization progresses in additional geographies, but notes that euro-dollar movements may materially affect reported revenue.
- Management expects BARDA revenue to increase as the RedeS study continues and other qualified development activities ramp. The BARDA agreement provides committed funding of up to $103.2 million, with potential total funding of up to $201.2 million if additional options are exercised. Funding remains subject to milestones, audits, government appropriations, and BARDA’s right to terminate for convenience.
- Management believes available cash, short-term investments, product receipts and anticipated BARDA funding will meet capital requirements for at least the next twelve months. The company continues to expect operating losses and may require additional debt, equity, collaboration or other financing.
- The company had an unconditional manufacturing and development obligation to Fresenius of approximately $6.2 million, relating to the remaining €5.5 million payment scheduled for August 2019. Total contractual obligations were $119.6 million, including debt, leases, minimum purchase commitments and manufacturing obligations.
- The red blood cell system remains in development. Cerus filed for CE Mark approval in December 2018 but did not expect regulatory approval before 2022, if ever. U.S. approval requires additional clinical, regulatory and manufacturing work, including the RedeS and ReCePI studies and a potential additional chronic-anemia study.
- Key business risks include continued operating losses, dependence on successful U.S. commercialization, reliance on Fresenius and other sole-source suppliers, clinical and regulatory uncertainty, product recalls or complaints, customer concentration, foreign exchange exposure, BARDA funding risk, debt covenants, and the potential need for additional capital.
- The filing identifies leakage reports involving disposable kits in France and prior voluntary recalls of specified lots in Europe and the U.S. The company states that it is investigating and addressing the issues.
- No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of June 30, 2019.
Important Facts for Investors to Verify
- Whether U.S. platelet and plasma adoption converts into sustained disposable-kit volume and improved operating leverage.
- The timing, amount and auditability of BARDA reimbursements, exercise of additional options, and progress against contract milestones.
- Cash burn relative to the $98.9 million of cash, cash equivalents and short-term investments at June 30, 2019, and the timing of future financing needs.
- Compliance with MidCap debt covenants, interest-rate exposure to LIBOR, and scheduled principal repayments beginning in 2022.
- Resolution of the Fresenius payment obligation and the company’s dependence on Fresenius and other single-source manufacturers.
- Regulatory progress and clinical results for the red blood cell system, including supplier qualification and the status of U.S. and European approvals.
- Customer concentration and contract renewal or purchase-volume risk, particularly involving EFS and the American Red Cross.
- Potential effects of product complaints, recalls, supply constraints, foreign exchange movements and changing reimbursement or healthcare regulations.