Cerus Corporation — Form 10-Q Summary
Business context and reporting period
Cerus Corporation reported unaudited results for the three months ended March 31, 2018. The company operates in one blood-safety segment and commercializes the INTERCEPT Blood System for platelets and plasma. Its red blood cell system remains in development. Product revenue is generated primarily in Europe, the Middle East and Africa, with continuing commercialization in the United States.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Product revenue | $13.6 million | $7.0 million | 94% |
| Government contract revenue | $3.5 million | $1.4 million | 142% |
| Total revenue | $17.0 million | $8.4 million | 102% |
| Gross profit on product revenue | $6.2 million | $3.3 million | 88% |
| Product gross margin | 46% | 47% | Down 1 percentage point |
| Operating loss | $(13.4) million | $(18.1) million | Improved by $4.7 million |
| Net loss | $(13.9) million | $(18.6) million | Improved by $4.7 million |
| Net loss per share | $(0.11) | $(0.18) | Improved |
| Cash used in operating activities | $(10.3) million | $(16.3) million | Improved by $6.0 million |
Product revenue growth was attributed primarily to higher EMEA and U.S. disposable-kit sales, particularly platelet kits, and favorable euro exchange rates. France was a significant customer market; Établissement Français du Sang represented 41% of product revenue in Q1 2018.
Research and development expense increased 3% to $9.4 million, while selling, general and administrative expense declined 1% to $13.6 million. Interest expense increased to $0.9 million from $0.5 million, largely due to the amended Oxford debt facility. The operating loss represented approximately 78% of total revenue, and the net loss represented approximately 82% of total revenue.
| Balance-sheet and liquidity item | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $14.9 million | $13.7 million |
| Restricted cash | $2.8 million | $0.2 million |
| Short-term investments | $91.0 million | $47.0 million |
| Total debt, net | $29.8 million | $29.8 million |
| Working capital | $110.1 million | $66.8 million |
| Total assets | $144.4 million | $98.2 million |
Cash, cash equivalents and restricted cash totaled $17.7 million at March 31, 2018, supplemented by $91.0 million of short-term investments. January 2018 equity issuance generated approximately $57.2 million of net proceeds; much of the proceeds was invested in marketable securities. Net cash used in investing activities was $44.7 million, primarily reflecting investment purchases.
The company had $30.0 million of principal outstanding under its Oxford facility, carried at $29.8 million net of discount. The company achieved the revenue milestone required to access an additional $10.0 million tranche, but the borrowing availability expired May 14, 2018. Debt bears interest at the greater of 8.01% or three-month LIBOR plus 6.72%; the rate on the drawn tranche was approximately 9.03% at quarter-end.
Material changes versus the prior comparable period
- Total revenue more than doubled, driven by product sales and BARDA reimbursement revenue.
- Product gross margin was broadly stable at 46%, despite higher volume, pricing effects, manufacturing-volume purchases and foreign-exchange impacts.
- Operating and net losses narrowed materially, although the company remained substantially loss-making.
- Operating cash burn improved, but remained significant at $10.3 million for the quarter.
- Research and development spending increased modestly for red blood cell development, clinical programs, supplemental approvals and BARDA activities.
- The company issued 14.03 million common shares at $4.10 per share in January 2018, increasing paid-in capital and materially strengthening liquidity.
- ASC Topic 606 revenue recognition, adopted January 1, 2018 using the modified retrospective method, had no reported impact on the consolidated financial statements.
Guidance, outlook, commentary and risks
- Management expects product revenue to increase as INTERCEPT gains market acceptance, France continues national platelet adoption, and U.S. and other market sales expand. However, the filing states that French purchase volumes are not committed and may vary materially by quarter.
- Management expects R&D expense to increase as it conducts required platelet post-approval studies, pursues additional regulatory approvals, advances the red blood cell system and performs BARDA-funded activities. SG&A was expected to remain relatively consistent for the remainder of 2018.
- The company planned to submit the red blood cell system for CE mark approval in the second half of 2018, but stated that no regulatory approval was expected within the next twelve months, if ever. U.S. approval requires additional clinical and regulatory work.
- BARDA had committed up to $88.2 million under the base period and exercised options, with a potential total funding opportunity of $186.2 million. Additional funding depends on milestones and BARDA option decisions; BARDA may terminate the agreement for convenience, and billings remain subject to government audit.
- The company stated that available cash, investments, product receipts and expected BARDA receipts should fund requirements for at least the next twelve months, while acknowledging that this conclusion depends on assumptions that may prove incorrect. The company expects continuing losses and may require additional capital.
- The business depends substantially on Fresenius and other sole-source or limited-source suppliers. Supply interruptions, component obsolescence, manufacturing nonconformities, regulatory inspections or alternate-supplier qualification could delay products and increase costs.
- In April 2018, after the quarter-end, the company initiated a voluntary recall of a specified lot of disposable platelet kits due to possible incomplete seals at the sampling pouch tubing connection. Additional recalls were possible, and the filing states the recall could materially affect customers and customer relationships.
- France reported leakage incidents involving disposable kits during national deployment. The matter was reported to the French regulator, and the company was investigating root cause and imputability; failure to resolve the issue could lead to further action or recall.
- Other significant risks include regulatory approval and post-approval study requirements, uncertain U.S. adoption and reimbursement, clinical-trial delays, competition, foreign-exchange volatility, customer concentration, intellectual-property claims, debt covenants, and dependence on continued capital-market access.
Important facts for investors to verify
- Whether France’s national INTERCEPT rollout produces sustainable and recurring purchase volumes, given the absence of volume commitments.
- The scope, customer impact and financial consequences of the April 2018 platelet-kit recall and any related regulatory actions.
- Whether Cerus draws the additional $10.0 million Oxford tranche and how debt amortization affects future liquidity.
- Progress, funding availability and milestone compliance under the BARDA agreement, including the possibility of option non-exercise or termination.
- Enrollment and results of required platelet post-approval studies and the RedeS, ReCePI and other red blood cell studies.
- Timing and likelihood of CE mark or FDA approvals for the red blood cell system and additional platelet or plasma configurations.
- Product gross-margin sustainability in light of Fresenius pricing tiers, manufacturing costs, foreign exchange and product mix.
- Whether recurring operating cash burn declines sufficiently to reduce reliance on equity, debt and government funding.