Cerus Corporation 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Cerus develops and commercializes the INTERCEPT Blood System for pathogen reduction of platelets and plasma and is developing a red blood cell system. The platelet and plasma systems were approved in the U.S. in December 2014 and are marketed internationally; the red blood cell system remained in development. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $11.2 million | $9.3 million | $19.6 million | $16.9 million |
| Product revenue | $9.5 million | $9.3 million | $16.5 million | $16.9 million |
| Government contracts revenue | $1.7 million | None | $3.1 million | None |
| Gross profit on product revenue | $5.2 million | $4.3 million | $8.5 million | $7.6 million |
| Product gross margin | 54% | 46% | 51% | 45% |
| Loss from operations | $(16.2) million | $(16.7) million | $(34.3) million | $(32.1) million |
| Net loss | $(17.1) million | $(18.2) million | $(35.7) million | $(35.0) million |
| Net loss per share | $(0.16) | $(0.18) | $(0.34) | $(0.35) |
Research and development expense increased 4% in Q2 and 17% year to date, to $8.9 million and $18.0 million, respectively, primarily because of red blood cell clinical development, platelet and plasma supplement approvals, and BARDA activities. Selling, general and administrative expense increased 14% in Q2 and 15% year to date, to $14.1 million and $27.7 million, driven by U.S. commercialization, BARDA administration, and $0.7 million of bad debt expense recorded year to date.
Other income included a realized gain of approximately $3.4 million in Q2 and $3.5 million year to date from the sale of Cerus's remaining Aduro shares. The related tax expense was $3.9 million in both the quarter and year-to-date period. The Aduro investment was fully sold by June 30, 2017.
At June 30, 2017, cash and cash equivalents were $20.3 million, short-term investments were $30.6 million, and total current assets were $74.3 million. Cash, cash equivalents and restricted cash totaled $20.5 million. Working capital was $49.0 million, down from $67.2 million at December 31, 2016. Total debt was $17.5 million, consisting of $5.5 million current and $11.9 million non-current debt. Stockholders' equity was $39.3 million, compared with $57.8 million at year-end 2016.
Net cash used in operating activities was $29.3 million for the six months ended June 30, 2017, compared with $27.6 million in the prior-year period. Investing activities provided $17.4 million, primarily from investment maturities and the Aduro sale, compared with $51.2 million used in the prior year. Financing activities provided $9.8 million, including $10.7 million of net proceeds from the sale of 4.2 million common shares under the Cantor at-the-market program, partially offset by $1.9 million of debt repayments.
Material Changes Versus the Prior Comparable Period
- Q2 total revenue increased 21%, while six-month revenue increased 16%, primarily because of $1.7 million and $3.1 million of BARDA revenue in the respective periods.
- Q2 product revenue increased 3%, reflecting higher U.S. and EMEA disposable-kit sales, particularly platelet products. Six-month product revenue decreased 2%, mainly because of weaker European and Middle Eastern plasma demand and approximately 3% euro depreciation against the U.S. dollar.
- Product gross margin improved to 54% in Q2 and 51% year to date from 46% and 45%, respectively, due to manufacturing and inventory efficiencies and a greater proportion of lower-cost platelet products.
- Operating loss widened year to date despite improved gross profit because R&D and selling, general and administrative expenses increased.
- Cash used in operations increased by $1.8 million year to date, while total cash, cash equivalents and restricted cash declined by $2.2 million from the start of the year.
- Shares outstanding increased as a result of equity financing and equity incentives; 109.1 million common shares were outstanding as of July 27, 2017.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide formal numerical revenue or earnings guidance. It expects INTERCEPT disposable-kit revenue to increase as market acceptance expands, including continued U.S. contributions and newly accessible geographies. Management expected selling, general and administrative spending to remain reasonably consistent over the following year, but anticipated continued R&D spending for the red blood cell system, regulatory programs, post-approval studies, and BARDA activities.
Management stated that cash and short-term investments, together with anticipated product sales and BARDA receipts, were expected to fund requirements for at least the next twelve months. This assessment depends on assumptions about product adoption, BARDA funding, operating costs, working capital, and access to equity and debt markets. Cerus continued to expect operating losses and negative operating cash flow and may require additional financing, which could dilute shareholders or impose restrictive terms.
The BARDA agreement provides committed funding of up to $88.2 million for the base period and exercised options, with a potential total funding opportunity of $186.2 million. Additional funding depends on BARDA option exercises, milestone performance, allowable costs, government appropriations, and continued contract approval. BARDA may terminate the agreement for convenience, and government audits could adjust previously reported revenue or recover costs.
The red blood cell system remained subject to substantial clinical, manufacturing, regulatory, and funding risks. The company had completed its European Phase III acute-anemia trial, continued a chronic-anemia Phase III trial, and expected additional studies and approvals before commercialization. The filing stated that U.S. regulatory approval was not expected within the next twelve months, if ever.
On July 31, 2017, after quarter-end, Cerus entered into a restated Oxford loan agreement providing up to $40.0 million of secured term loans. It drew $30.0 million, repaid the prior term loan, and obtained interest-only payments through February 2019, subject to specified terms and covenants. A second $10.0 million tranche depends on achieving a specified trailing six-month revenue threshold by January 31, 2019. On August 4, 2017, Cerus amended its Cantor agreement to potentially sell up to $70.0 million of common stock, subject to an effective shelf registration statement; the sales agent commission may be up to 3.0%.
Key risks include continued losses and cash burn, dependence on U.S. adoption of INTERCEPT, regulatory and clinical uncertainty for the red blood cell system, reliance on Fresenius and other sole-source suppliers, manufacturing and product-quality risks, reimbursement and pricing uncertainty, foreign exchange exposure, customer and distributor concentration, BARDA termination or funding reductions, secured debt covenants, potential equity dilution, and intellectual-property disputes. Minimum purchase commitments were $13.2 million, and remaining Fresenius manufacturing and development obligations were approximately $6.3 million, expected to be paid in 2019 or 2022 depending on production volumes.
Important Facts for Investors to Verify
- Whether U.S. and international adoption of the platelet and plasma systems accelerates sufficiently to reduce operating losses and cash burn.
- The timing, funding, milestones, and audit exposure associated with the BARDA contract, including potential option-period funding.
- Clinical, manufacturing, and regulatory progress for the red blood cell system, including the chronic-anemia trial and anticipated European and U.S. submissions.
- Compliance with the July 2017 Oxford loan covenants and the conditions for accessing the additional $10.0 million tranche.
- Future equity issuance under the Cantor program and the resulting dilution to existing shareholders.
- Dependence on Fresenius and other sole-source suppliers, minimum purchase commitments, inventory requirements, and potential supply interruptions.
- Whether the Aduro gain and related tax expense are nonrecurring and should be excluded when assessing underlying operating performance.
- The effect of currency movements, particularly the euro and currencies in Russia and the CIS, on reported revenue and margins.