Cerus Corporation 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 remains in development. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Product revenue | $18.6 million | $17.5 million | +6% |
| Government contract revenue | $6.0 million | $4.5 million | +35% |
| Total revenue | $24.6 million | $22.0 million | +12% |
| Gross profit on product revenue | $10.3 million | $9.1 million | +13% |
| Product gross margin | 55% | 52% | +3 percentage points |
| Research and development expense | $15.8 million | $13.4 million | +18% |
| Operating loss | $(15.4) million | $(16.1) million | Improved by $0.7 million |
| Net loss | $(16.5) million | $(18.8) million | Improved by $2.3 million |
| Net loss per share | $(0.10) | $(0.14) | Improved |
| Cash used in operating activities | $(19.8) million | $(22.2) million | Improved by $2.4 million |
Product revenue growth primarily reflected higher U.S. disposable-kit sales and platelet-system adoption, partly offset by product mix in France and timing of Middle East purchases. Product gross margin improved due to manufacturing scale and lower unit costs.
At March 31, 2020, cash and cash equivalents were $33.7 million, restricted cash was $2.4 million, and short-term investments were $99.4 million, for cash, cash equivalents and restricted cash of $36.1 million and total cash and short-term investments of approximately $133.1 million. Working capital was $133.2 million.
Total debt was approximately $44.3 million, consisting primarily of a $40.0 million term loan and $4.8 million drawn under a revolving facility. The debt facilities mature in 2024, are secured by substantially all assets subject to exclusions, and contain financial and other covenants with which the company reported compliance at quarter-end. Future contractual obligations totaled $98.9 million, including debt, operating leases, minimum purchase requirements and other commitments.
Material changes versus the prior comparable period
- Total revenue increased 12%, driven by growth in both product revenue and BARDA-related government contract revenue.
- Research and development expense increased $2.4 million due primarily to product enhancements, expanded platelet-label initiatives and the red blood cell program.
- Selling, general and administrative expense decreased 2%, partly because COVID-19 reduced marketing activity and travel.
- Interest expense declined $2.0 million because Q1 2019 included a $2.1 million loss on extinguishment of a prior loan.
- Operating cash use declined to $19.8 million from $22.2 million, while investing cash flow shifted to a $50.2 million use, primarily from purchases of investments funded by the January equity offering.
- In January 2020, Cerus issued 16.9 million shares in an underwritten offering, generating approximately $62.7 million of net proceeds. It also sold approximately 1.0 million shares under its Cantor at-the-market agreement for $4.4 million of net proceeds.
- Shares outstanding increased to approximately 164.0 million at March 31, 2020, from approximately 144.3 million at December 31, 2019.
Guidance, outlook, commentary and risks
Management stated that available cash, short-term investments, product-sale proceeds and expected BARDA reimbursements were expected to fund requirements for at least the next twelve months, but emphasized that this assessment depends on assumptions that may prove incorrect. The company expects continuing operating losses and may require additional equity, debt, collaboration or government funding.
BARDA had committed up to $103.2 million as of March 31, 2020. In April 2020, after the reporting period, an additional $13.8 million was committed, increasing committed funding to up to $116.9 million; potential total funding could reach $213.9 million through December 31, 2021 if additional options are exercised. BARDA may terminate the agreement for convenience, and future funding depends on milestones, appropriations and approved activities.
- COVID-19 delayed enrollment in the RedeS and ReCePI red blood cell studies, post-approval platelet studies and other development activities. Management expected BARDA revenue to decline over the following three to nine months before potentially recovering as studies resumed.
- COVID-19 could reduce customer adoption, disrupt sales and technical support, affect collections, increase supply-chain costs, and limit access to capital.
- Fresenius is the primary manufacturing partner for disposable kits and operates in France, creating concentration and supply-continuity risk. The company also relies on several sole or limited-source suppliers.
- The red blood cell system is not commercialized. European approval is not expected before 2022, if ever, and U.S. approval requires additional clinical, regulatory and manufacturing work.
- U.S. platelet-market opportunity depends on customer implementation of the FDA bacterial-risk-control guidance by March 31, 2021, although COVID-19 could affect timing and adoption.
- The company faces regulatory, clinical-trial, reimbursement, product-liability, intellectual-property, foreign-exchange and competition risks. Its products do not inactivate all pathogens, and efficacy against SARS-CoV-2 had not yet been established.
- The filing disclosed no legal proceedings and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective as of March 31, 2020.
Important facts for investors to verify
- Actual cash burn and runway relative to management’s twelve-month liquidity assessment.
- Progress, enrollment resumption and funding eligibility for the RedeS, ReCePI and post-approval studies.
- BARDA option-period exercises, reimbursement timing, audit exposure and any termination or funding reductions.
- U.S. adoption of INTERCEPT, including customer implementation before the March 2021 compliance deadline.
- Fresenius production capacity, sole-source supplier continuity, inventory levels and potential COVID-19-related disruptions.
- Regulatory progress for the red blood cell system and transition of European products from the MDD to the MDR framework.
- Future equity issuance and dilution, debt covenant compliance, and repayment requirements beginning in 2022.