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. The platelet and plasma systems received U.S. FDA approval in December 2014 and were being commercially launched in the United States during 2015. The red blood cell system remained in development. This report covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Financial statement amounts are in thousands except per-share data.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $8.0 million | $10.4 million | $24.6 million | $26.8 million |
| Gross profit | $2.5 million | $4.7 million | $7.3 million | $12.2 million |
| Gross margin | 31% | 45% | 30% | 46% |
| Loss from operations | $(16.2) million | $(11.4) million | $(46.1) million | $(31.6) million |
| Net loss | $(15.7) million | $(10.8) million | $(41.1) million | $(18.6) million |
| Basic loss per share | $(0.16) | $(0.14) | $(0.43) | $(0.25) |
| Diluted loss per share | $(0.17) | $(0.16) | $(0.48) | $(0.44) |
- Research and development expense increased 6% in Q3 and 11% for the nine-month period, to $7.7 million and $18.5 million, respectively.
- Selling, general and administrative expense increased 25% in Q3 and 28% for the nine-month period, to $10.9 million and $34.7 million, respectively, primarily reflecting the U.S. commercial launch.
- Net cash used in operating activities was $42.3 million for the first nine months of 2015, compared with $31.2 million in the prior-year period.
- At September 30, 2015, cash and cash equivalents were $50.8 million, short-term investments were $49.0 million, and the Aduro marketable equity investment was $7.7 million. Total available-for-sale securities, including cash-equivalent investments, were $98.8 million.
- Total debt was approximately $19.9 million, including $1.4 million classified as current. Debt principal was $20.0 million, with maturity in June 2019.
- Total assets were $135.2 million and stockholders’ equity was $95.5 million at September 30, 2015. The accumulated deficit was $583.1 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 22% in Q3 and 8% for the first nine months. Management attributed the decline primarily to approximately 16% and 18% deterioration in the euro relative to the U.S. dollar for the respective periods, lower Q3 platelet kit volume, and weaker CIS sales. The nine-month decline was partly offset by higher platelet kit volume.
- Gross margins declined materially because of foreign-exchange effects, product obsolescence charges, and manufacturing-related charges. Inventory reserves for potentially obsolete, expiring, or unsalable product increased to $1.3 million from $0.1 million at year-end 2014.
- Operating losses widened as commercial-launch spending and development costs increased. The nine-month net loss also reflects the absence of the prior year’s larger non-cash warrant revaluation gain.
- The company raised approximately $75.4 million net through a January 2015 underwritten offering of 14.6 million common shares and borrowed an additional $10.0 million under its Oxford Finance term loan.
- The fair value of the warrant liability declined to $2.4 million from $10.5 million at December 31, 2014, producing a $4.7 million non-cash gain for the first nine months of 2015.
- Aduro’s April 2015 IPO converted Cerus’s preferred shares into 396,700 common shares, recorded at a September 30 fair value of $7.7 million. The resulting unrealized gain was recorded in other comprehensive income, not operating income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected platelet and plasma revenue to increase over time as adoption expands, including in the United States, but stated that meaningful U.S. revenue was not expected in 2015. Continued euro weakness and CIS market headwinds could reduce reported revenue.
- Management expected losses to continue and anticipated higher selling, general and administrative costs as U.S. commercial capabilities, sales and marketing, and medical-science support expanded.
- The company believed available cash, cash equivalents, short-term investments, and product-sale proceeds would fund requirements for at least the next twelve months, but noted that this conclusion depended on assumptions that could prove incorrect. Additional equity or debt financing may be required and could dilute shareholders or impose restrictive terms.
- The third $10.0 million Oxford Finance tranche was available only if Cerus achieved a specified trailing six-month revenue threshold by the applicable deadline. Failure to meet that condition could reduce liquidity.
- In October 2015, Cerus entered into a new Fresenius manufacturing and supply agreement extending through July 2025. The agreement covers platelet, plasma, and red blood cell kits, includes potential milestone payments and joint funding obligations, and eliminates Fresenius royalties on product sales after June 30, 2015. Fresenius remains a critical manufacturing source, creating concentration and supply-continuity risk.
- The red blood cell program remained subject to clinical, manufacturing, regulatory, and funding risks. Cerus planned development and CMC work supporting a potential European CE Mark submission in the second half of 2016, but stated that approval could take years or never occur.
- The FDA had asked questions concerning Cerus’s PMA supplement for platelet storage in 100% plasma; failure to respond satisfactorily or timely could delay approval. The company also had required post-approval platelet studies and ongoing Ebola and chikungunya/dengue IDE studies.
- Disclosure controls and procedures were not effective at September 30, 2015 because previously reported material weaknesses remained in inventory valuation and cost-of-revenue controls, and in the timeliness and accuracy of accrued-liability adjustments. Remediation was in progress.
- Other material risks included dependence on U.S. market adoption, regulatory approvals and post-market requirements, reimbursement uncertainty, sole or limited-source suppliers, foreign-exchange exposure, competition, product liability, intellectual property disputes, continuing losses, and earthquake or information-technology disruption.
Important Facts for Investors to Verify
- Progress and economics of U.S. adoption of the INTERCEPT platelet and plasma systems, including customer contracts, reimbursement, site-specific licenses, and revenue conversion.
- Whether gross margins recover from the 30% nine-month level and whether inventory obsolescence and manufacturing charges decline.
- Operating cash-burn trends and the sufficiency of approximately $99.8 million of cash, cash equivalents, and short-term investments relative to planned commercialization and clinical spending.
- Whether Cerus achieves the revenue threshold required to access the remaining $10.0 million Oxford Finance tranche and its ability to service approximately $20.0 million of outstanding principal.
- Implementation and financial effects of the October 2015 Fresenius agreement, including elimination of royalties, pricing adjustments, milestone payments, and supply obligations.
- Resolution of the internal-control material weaknesses and any related effects on reported inventory, cost of revenue, accruals, or financing access.
- Regulatory progress for the 100%-plasma platelet label expansion, required post-approval studies, and the red blood cell program.
- Volatility and concentration risk associated with the $7.7 million Aduro equity investment and the remaining warrant liability.