Cerus Corporation Form 10-Q Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction of platelets and plasma; its red blood cell system remained in development. This quarterly report covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The filing presents unaudited U.S. GAAP condensed consolidated results.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $19.5 million | $11.2 million | $36.5 million | $19.6 million |
| Product revenue | $15.4 million | $9.5 million | $29.0 million | $16.5 million |
| Government contract revenue | $4.0 million | $1.7 million | $7.5 million | $3.1 million |
| Gross profit on product revenue | $7.7 million | $5.2 million | $13.9 million | $8.5 million |
| Product gross margin | 50% | 54% | 48% | 51% |
| Operating loss | $(12.6) million | $(16.2) million | $(25.9) million | $(34.3) million |
| Net loss | $(13.3) million | $(17.1) million | $(27.2) million | $(35.7) million |
| Net loss per share | $(0.10) | $(0.16) | $(0.21) | $(0.34) |
Product revenue growth was driven primarily by increased European, Middle Eastern and African sales, including nationwide adoption in France, and increased U.S. platelet-system disposable-kit sales. The largest product customer, Établissement Français du Sang, represented 39% of second-quarter product revenue and 40% of year-to-date product revenue.
- Research and development expense was $9.9 million in the quarter and $19.3 million year to date, up 11% and 7%, respectively, primarily due to red blood cell development, regulatory work and BARDA-related activities.
- Selling, general and administrative expense was $14.4 million in the quarter and $28.0 million year to date, broadly flat year over year.
- Interest expense increased to $1.0 million in the quarter and $1.9 million year to date, primarily because of higher average debt under the amended Oxford credit agreement.
- Other income declined substantially from 2017 because the prior-year periods included approximately $3.4 million and $3.5 million of realized gains from the sale of Aduro Biotech securities.
- Net cash used in operating activities improved to $19.3 million year to date from $29.3 million in 2017.
- Net cash used in investing activities was $51.6 million, principally from purchases of investments, compared with $17.4 million of investing cash inflow in 2017.
- Net cash provided by financing activities was $74.0 million, including $57.2 million of net proceeds from a January 2018 public offering and $11.9 million from the Cantor equity sales agreement.
At June 30, 2018, cash and cash equivalents were $14.3 million, restricted cash was $2.7 million, and short-term investments were $97.6 million. Total cash, cash equivalents and restricted cash were $17.0 million. Working capital was $113.1 million, compared with $66.8 million at December 31, 2017.
Total debt had a principal balance of $30.0 million and a net carrying value of $29.8 million. The term loan bore interest at approximately 9.06% at June 30, 2018, required interest-only payments through February 2019, and was secured by substantially all assets other than intellectual property and 35% of the Company’s investment in Cerus Europe B.V. Contractual obligations totaled $89.8 million, including debt, minimum purchase requirements, manufacturing and development obligations, operating leases and other commitments.
Material changes versus the prior comparable period
- Total revenue increased 74% in the second quarter and 86% for the first six months.
- Product revenue increased 62% in the quarter and 75% year to date, while government contract revenue increased 143% and 142%, respectively.
- Product gross margin declined four percentage points in the quarter and three percentage points year to date, primarily because of lower average selling prices to major customers and foreign-exchange effects.
- Operating and net losses narrowed despite higher research and development spending, largely because of revenue growth and the absence of the prior-year tax expense and investment-sale gains.
- Cash resources increased materially following equity financing, although operations remained cash-flow negative.
- Shares outstanding increased following the January public offering and Cantor sales; 133.8 million common shares were outstanding as of July 24, 2018.
Guidance, outlook, risks and unusual items
Management stated that available cash, cash equivalents, short-term investments, expected product receipts and BARDA reimbursements were expected to fund capital requirements for at least the next twelve months, while cautioning that this conclusion depends on assumptions that may prove incorrect. The Company expected continued losses and did not expect positive operating cash flow in the near term.
- Management planned to pursue a CE mark submission for the red blood cell system in the second half of 2018, but stated that no regulatory approval was expected within the next twelve months, if ever. U.S. approval would require additional clinical and regulatory work.
- BARDA funding provided a committed opportunity of up to $103.2 million under the base period and exercised options, with potential total funding of up to $201.2 million if additional options were exercised. BARDA could terminate for convenience, reduce funding or decline future options, and reimbursements were subject to government audit.
- The Company relied heavily on Fresenius and other sole or limited-source suppliers. Supply interruptions, component obsolescence, manufacturing nonconformities or regulatory issues could impair product availability and margins.
- In April 2018, the Company initiated a voluntary recall of a specified lot of disposable platelet kits because of possible incomplete seals. Additional lots could be recalled if the issue recurred.
- Leakage incidents involving disposable kits used in France were reported to the French medicines agency; the Company was investigating root cause and imputability, and acknowledged the possibility of a broader recall.
- Commercial adoption remained concentrated in a small number of blood-service customers, and French purchase volumes were not contractually guaranteed. U.S. adoption depended on customer implementation, site-specific licenses, reimbursement and market acceptance.
- The Company remained exposed to foreign-exchange risk, particularly involving the euro, and had no formal hedging program.
- The INTERCEPT platelet system required post-approval studies, including a haemovigilance study and a recovery study. Failure or unfavorable results could result in additional costs, restrictions or loss of approval.
- The Company planned to adopt the new lease standard on January 1, 2019, which it expected would increase reported assets and liabilities, although the ultimate impact was still under assessment.
- Management reported effective disclosure controls as of June 30, 2018, no material changes in internal control over financial reporting, and no legal proceedings.
Most important facts for investors to verify
- Whether French nationwide adoption and the EFS relationship produce sustainable, repeatable purchase volumes and pricing.
- Progress, cost and enrollment status of the red blood cell clinical program and the anticipated CE mark submission.
- BARDA option exercises, milestone performance, audit outcomes and the durability of reimbursement revenue.
- Cash burn relative to the $101.9 million of cash, restricted cash and short-term investments at June 30, 2018, and the timing of future financing needs.
- Debt repayment requirements, the 9.06% interest rate, security interests and compliance with credit-agreement covenants.
- Resolution of the platelet-kit recall and French leakage reports, including any additional recalls, remediation costs or regulatory actions.
- Product gross-margin trends, customer concentration and the effect of pricing concessions and euro exchange rates.
- Reliability and capacity of Fresenius and other sole-source suppliers, including replacement components and redesigned illuminators.
- Completion and results of required FDA post-approval studies and the ability to obtain additional product configurations and regulatory approvals.