Cerus Corporation — Form 10-Q Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction in platelets and plasma, with a red blood cell system in clinical development. The platelet and plasma systems had CE marks and were sold in Europe, the Commonwealth of Independent States and the Middle East, while U.S. premarket approval applications for both systems were under FDA substantive review. This report covers the three and nine months ended September 30, 2014; financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $10.4 million | $10.5 million | $26.8 million | $30.4 million |
| Gross profit | $4.7 million | $3.7 million | $12.2 million | $12.8 million |
| Gross margin | 45% | 35% | 46% | 42% |
| Operating loss | $11.4 million | $8.4 million | $31.6 million | $20.5 million |
| Net loss | $10.8 million | $20.5 million | $18.6 million | $37.5 million |
| Net loss per share | $0.14 basic; $0.16 diluted | $0.29 basic and diluted | $0.25 basic; $0.44 diluted | $0.56 basic and diluted |
Revenue declined 2% year over year in the quarter and 12% for the first nine months, primarily because of lower disposable-kit and illuminator sales to distributors during a transition to direct sales and new distribution partners, especially in southern Europe. Gross margins improved because of product mix, supply-chain factors and lower scrap charges.
- Research and development expense increased 66% in the quarter and 57% year to date, to $7.3 million and $16.6 million, respectively, driven by red blood cell clinical trials and FDA approval activities.
- Selling, general and administrative expense increased 13% in the quarter and 20% year to date, to $8.7 million and $27.0 million, respectively, reflecting higher workforce, stock-based compensation and commercialization costs.
- Operating cash flow was negative $31.2 million for the first nine months, compared with negative $20.1 million in the prior-year period. Capital expenditures were $2.0 million.
- Cash and cash equivalents were $22.3 million at September 30, 2014, and short-term investments were $25.2 million, for total cash and investments of $47.6 million.
- Working capital was $51.5 million, compared with $38.7 million at December 31, 2013.
- Total debt was $10.0 million principal, or $9.9 million net of discount, under a new Oxford Finance term loan. The prior $3.4 million revolving credit balance was repaid in May 2014 and the facility expired in June.
Material changes versus the prior comparable period
- The company entered into a five-year agreement allowing up to $30.0 million of term loans. It drew $10.0 million in June 2014 at a 6.95% interest rate; additional $10.0 million tranches depend on FDA approval and, for the third tranche, a revenue threshold.
- Warrant liability declined from $20.4 million at December 31, 2013, to $3.9 million at September 30, 2014. The company recorded a non-cash warrant revaluation gain of $14.3 million for the first nine months, versus a $16.8 million loss in the prior-year period.
- During the third quarter, all 2.4 million 2009 warrants were exercised; approximately 3.3 million 2010 warrants remained outstanding at quarter-end. Warrant and stock-option exercises contributed $10.3 million of financing cash flow year to date.
- The company sold approximately 1.7 million shares under its at-the-market Cantor agreement for $7.1 million during the first nine months and had approximately $34.4 million remaining available under that agreement.
- Inventory increased to $13.5 million from $13.1 million at year-end, with finished goods increasing and work-in-process decreasing. Accounts receivable increased to $7.4 million from $6.1 million.
- Fresenius-related manufacturing and supply activity remained significant. The company paid Fresenius $13.9 million for manufacturing during the first nine months and had $4.1 million accrued for kits at quarter-end.
Guidance, outlook, risks and unusual items
- Management expected product revenue to improve over the longer term as distribution transitions were completed, market acceptance increased and additional regulatory approvals were obtained, but expected near-term revenue pressure from distributor transitions.
- Research and development and selling, general and administrative spending were expected to increase as Cerus pursued FDA approval, red blood cell clinical programs, IDE studies and potential U.S. commercialization.
- Management believed cash, investments and product receipts would fund requirements for at least the next twelve months, but stated that additional capital would be required for longer-term development, particularly the red blood cell program. The filing does not provide a specific cash runway beyond this statement.
- FDA review of the platelet and plasma PMAs could involve deficiency letters, additional studies, delays or denial. Approval timing and outcome were not predictable.
- Fresenius was the key manufacturing partner for finished disposable kits. In October 2014, Fresenius announced workforce reductions and plans to cease certain non-Cerus product lines. Cerus said Fresenius intended to continue operating under the supply agreement, but a disruption could impair inventory levels and customer fulfillment.
- The company remained dependent on third-party manufacturers, distributors and concentrated customers. Four customers represented approximately 77% of outstanding trade receivables at September 30, 2014, and one customer represented 30% of quarterly revenue and 26% of nine-month revenue.
- Other important risks included continuing losses, substantial clinical and regulatory costs, possible equity dilution, debt covenants and collateral, foreign-exchange losses, limited market adoption, reimbursement uncertainty, competition, product liability, intellectual-property disputes and supply-chain interruptions.
- The filing included an Ebola compassionate-use IDE proposal and an FDA-approved expanded-use IDE involving chikungunya and dengue outbreaks. Cerus stated that these initiatives would not determine or increase the likelihood of PMA approval, and it had no additional data establishing INTERCEPT efficacy against Ebola.
- Subsequent to the earnings release, Cerus revised diluted loss per share upward by $0.01 for both the quarter and nine months, to $0.16 and $0.44, respectively; basic loss per share and total net loss were unchanged.
Most important facts for investors to verify
- Current status, timing and potential additional requirements for the FDA platelet and plasma PMAs.
- Actual cash burn, sales growth and availability of financing relative to the company’s stated twelve-month liquidity expectation.
- Whether the Fresenius manufacturing transition or workforce reductions affect production, inventory, costs or customer supply.
- Progress, enrollment, results and funding requirements for the red blood cell Phase III program and related IDE studies.
- Revenue recovery after distributor-to-direct-sales transitions and the resulting effect on working capital and collection periods.
- Terms and availability of the remaining Oxford Finance loan tranches, including FDA approval and revenue conditions.
- Potential dilution from the Cantor equity facility, outstanding 2010 warrants, stock options and other equity awards.