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 are marketed in the U.S. and internationally; the red blood cell system remains in development. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $22.8 million | $19.3 million | $67.3 million | $55.8 million |
| Product revenue | $18.0 million | $15.4 million | $53.7 million | $44.4 million |
| Government contract revenue | $4.8 million | $3.9 million | $13.6 million | $11.4 million |
| Gross profit on product revenue | $10.4 million | $7.3 million | $29.6 million | $21.2 million |
| Product gross margin | 58% | 47% | 55% | 48% |
| Operating loss | $(17.0) million | $(13.6) million | $(49.8) million | $(39.5) million |
| Net loss | $(18.0) million | $(14.2) million | $(54.3) million | $(41.4) million |
| Net loss per share | $(0.13) | $(0.11) | $(0.39) | $(0.32) |
| Operating cash flow | Not separately provided | Not separately provided | $(57.3) million | $(24.2) million |
Product revenue increased 17% in the quarter and 21% year to date, primarily from higher U.S. disposable-kit volumes, increased platelet-system adoption, and higher Middle East sales. Government contract revenue increased 23% in the quarter and 19% year to date, reflecting reimbursable BARDA development costs.
Gross margin improved primarily because of Fresenius volume-tier pricing, product mix, and stronger platelet demand. However, research and development expense increased 49% in the quarter and 46% year to date, while selling, general and administrative expense increased 16% and 17%, respectively. Stock-based compensation was $9.6 million for the first nine months.
At September 30, 2019, cash and cash equivalents were $24.4 million, restricted cash was $2.7 million, and short-term investments were $60.7 million, for approximately $87.8 million of cash, restricted cash and short-term investments. Working capital was $80.8 million, compared with $94.2 million at year-end 2018. Total debt was approximately $44.4 million, consisting of a $39.4 million term loan and $5.0 million revolving loan. The company stated that available liquidity, product receipts and BARDA reimbursements were expected to fund requirements for at least the next twelve months, subject to execution and funding assumptions.
Material changes versus the prior comparable period
- Total revenue rose 18% in Q3 and 21% for the first nine months.
- Product gross margin expanded from 47% to 58% in Q3 and from 48% to 55% year to date.
- Operating losses widened because increased revenue and gross profit were more than offset by higher R&D and SG&A spending.
- Net cash used in operations increased to $57.3 million from $24.2 million, driven by higher operating expenditures, inventory purchases, timing of sales, and a $6.1 million payment to Fresenius in August 2019.
- The company entered into a new $40 million term loan with MidCap, used partly to repay the Oxford term loan. It also drew approximately $5.0 million under a new revolving facility. The refinancing resulted in a $2.1 million debt-extinguishment loss.
- The company sold 3.5 million shares under its Cantor at-the-market agreement for approximately $17.7 million of net proceeds during the first nine months and had approximately $23.5 million of remaining capacity at September 30.
- Operating lease accounting adopted in 2019 added $14.1 million of right-of-use assets and $20.1 million of present-value lease liabilities at September 30.
- Inventories increased to $20.9 million from $13.5 million at year-end 2018, while accounts receivable increased to $14.5 million from $8.8 million.
Guidance, outlook, commentary and risks
Management expected product revenue to grow as U.S. adoption expands and commercialization progresses internationally, but noted that French customer volumes are not contractually committed and may vary materially. The company expected BARDA revenue to increase as the RedeS and ReCePI studies and other qualified development activities continue.
Management expected R&D spending to remain elevated for post-approval platelet studies, expanded product claims, extended-storage cryoprecipitate, red blood cell development, regulatory activities and BARDA programs. SG&A spending was expected to remain relatively consistent over the remainder of 2019. The company continued to expect losses and stated that it may never generate positive operating cash flow or achieve profitability.
Key contingencies include BARDA’s ability to terminate or reduce funding, future government audits of reimbursable costs, achievement of contractual and clinical milestones, and potential need for additional capital. BARDA funding opportunities totaled up to $201.2 million over the contract period, but approximately $98.0 million of potential additional funding depended on future option exercises and performance.
The red blood cell system had not been commercialized. Regulatory approval remained uncertain, additional U.S. clinical and manufacturing work was required, and management did not expect regulatory approval before 2022, if ever. The filing identified supplier problems involving a key red blood cell reagent and potential delays in qualifying replacement manufacturing capacity.
Additional material risks include dependence on Fresenius and other sole-source suppliers, manufacturing capacity and component obsolescence, regulatory inspections and approvals, product recalls or complaints, foreign-exchange exposure, customer concentration, competition, reimbursement and market-adoption uncertainty, debt covenants and secured collateral, potential dilution from future equity issuance, and ongoing substantial operating losses. EFS accounted for 28% of nine-month product revenue and the American Red Cross accounted for 13%; two customers collectively represented approximately 47% of receivables at September 30.
No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of September 30, 2019, and reported no material changes in internal control over financial reporting.
Facts investors should verify
- Whether U.S. platelet and plasma adoption and the September 2019 FDA bacterial-risk guidance translate into sustained order growth.
- Actual timing, amount and auditability of BARDA reimbursements and future option-period funding.
- Progress, enrollment, safety events and regulatory outcomes for the RedeS and ReCePI studies and the red blood cell program.
- Fresenius supply performance, inventory growth, component obsolescence and qualification of alternate suppliers.
- Cash-burn trends, remaining liquidity, debt-covenant compliance, interest costs and the timing of required debt repayments.
- Exposure to customer concentration, French volume variability, foreign-exchange movements and potential future equity dilution.