Cerus Corporation — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Cerus develops and commercializes the INTERCEPT Blood System for pathogen reduction of blood components. Platelet and plasma systems were commercialized, while the red blood cell system remained in development. The filing covers the quarter and six months ended June 30, 2020, including the effects of the COVID-19 pandemic on customers, suppliers, clinical trials and operations.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Product revenue | $21.5 million | $18.2 million | $40.1 million | $35.7 million |
| Government contract revenue | $5.3 million | $4.3 million | $11.4 million | $8.7 million |
| Total revenue | $26.8 million | $22.5 million | $51.5 million | $44.4 million |
| Gross profit on product revenue | $11.8 million | $10.1 million | $22.1 million | $19.2 million |
| Product gross margin | 55% | 55% | 55% | 54% |
| Operating loss | $(14.6) million | $(16.8) million | $(30.0) million | $(32.9) million |
| Net loss | $(14.9) million | $(17.6) million | $(31.3) million | $(36.4) million |
| Net loss per share | $(0.09) | $(0.13) | $(0.19) | $(0.26) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(27.6) million | $(35.1) million |
Total revenue increased 19% in the quarter and 16% for the six-month period. Product revenue growth was attributed primarily to higher U.S. platelet kit volume and increased plasma kit and illuminator sales in Europe and the Middle East. Government contract revenue primarily reflected reimbursable BARDA activities.
Financial Position, Liquidity and Debt
- Cash and cash equivalents were $34.9 million at June 30, 2020, compared with $35.0 million at December 31, 2019.
- Short-term investments increased to $101.6 million from $50.7 million, primarily reflecting investment of proceeds from equity offerings.
- Total cash, cash equivalents and restricted cash were $138.9 million, compared with $88.2 million at year-end 2019.
- Working capital increased to $135.8 million from $77.8 million.
- Total debt was $44.5 million, consisting of $5.0 million under the revolving facility and $39.5 million net carrying value under the term loan.
- The term loan had an effective interest rate of approximately 7.5%, with principal repayments scheduled to begin in 2022. The company was in compliance with debt covenants at June 30, 2020.
- Contractual obligations totaled $98.4 million, including debt, operating leases, minimum purchase commitments and other commitments.
Material Changes Versus the Prior Comparable Period
- Product revenue increased 18% in Q2 and 12% for the six months; government contract revenue increased 25% and 30%, respectively.
- Research and development expense increased 8% in Q2 and 13% year to date, driven by product enhancements, expanded platelet claims, the red blood cell program and illuminator development.
- Selling, general and administrative expense decreased 4% in Q2 and 3% year to date, primarily because COVID-19 reduced travel and marketing expenses.
- Operating loss narrowed by $2.2 million in Q2 and $2.9 million year to date, although the company remained substantially loss-making.
- Interest expense declined, particularly year to date, because the 2019 comparable period included a $2.1 million loss on extinguishment of prior debt and the current term loan had a lower interest rate.
- Operating cash burn improved by $7.5 million year to date, while investing cash flow declined by $60.5 million because of increased purchases of short-term investments.
- In January 2020, Cerus issued 16.9 million shares for approximately $62.7 million net proceeds. It also sold approximately 2.5 million shares under its at-the-market agreement for $13.9 million net proceeds; no capacity remained under that agreement at June 30, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available cash, short-term investments, expected product receipts and BARDA funding were expected to meet capital requirements for at least the next 12 months, while acknowledging that the estimate depends on assumptions that may prove incorrect.
- Cerus expected continued operating losses and stated that it may never achieve profitability or positive operating cash flow.
- BARDA funding committed as of June 30, 2020 was up to $116.9 million, with a potential total funding opportunity of $213.9 million through December 31, 2021 if additional options were exercised. BARDA could terminate the agreement for convenience, and funding depended on milestones, audits, appropriations and performance.
- COVID-19 delayed enrollment in the RedeS and ReCePI red blood cell trials, post-approval platelet studies and other development activities. Further delays could reduce BARDA revenue and increase costs.
- The red blood cell system had not been commercialized. Cerus did not expect a European approval decision before 2022, if ever, because of the transition from the Medical Device Directive to the Medical Device Regulation. U.S. approval remained dependent on additional clinical, regulatory and manufacturing work.
- Cerus filed a PMA supplement in May 2020 for use of the plasma system to produce extended-storage cryoprecipitate. Approval, labeling, commercialization and market acceptance were uncertain.
- The company relies heavily on third-party manufacturers, including Fresenius as the primary supplier of disposable kits, and faces sole-source, component-obsolescence, regulatory, capacity and COVID-19 supply-chain risks.
- Two customers represented 38% of Q2 product revenue: Établissement Français du Sang represented 20% and the American Red Cross 18%. Customer concentration, lack of volume commitments in certain agreements and foreign-exchange exposure create revenue volatility.
- There were no legal proceedings reported in the filing, no off-balance-sheet arrangements, and no material changes to market-risk disclosures. Management concluded that disclosure controls were effective as of June 30, 2020.
Investor Verification Priorities
- Verify the pace and sustainability of U.S. adoption of the platelet and plasma systems, including the effect of the FDA platelet-safety compliance deadline of March 31, 2021.
- Track cash burn, investment balances, equity issuance and the timing of term-loan repayments relative to management’s stated liquidity runway.
- Confirm continued BARDA funding, milestone achievement, option-period exercises and any effects of trial delays or government audits.
- Monitor COVID-19 effects on clinical enrollment, Fresenius manufacturing capacity, customer implementation and product demand.
- Assess regulatory progress for the red blood cell system, extended-storage cryoprecipitate, MDR re-registration and additional platelet configurations.
- Review customer concentration, EFS and American Red Cross purchase volumes, pricing and the absence of firm volume commitments in key arrangements.
- Evaluate dilution and potential future financing needs given ongoing losses, development spending and the company’s stated reliance on equity and debt markets.