Cerus Corporation 2011 Form 10-K Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System, designed to inactivate pathogens in donated blood components. Platelet and plasma systems were commercialized in Europe, the CIS, the Middle East and selected other markets; the red blood cell system remained in development. The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results.
- Products had no FDA approval in the United States. U.S. platelet and plasma approvals remained dependent on additional regulatory discussions and potential clinical work.
- The company had 82 employees at year-end and operated as one blood-safety reporting segment.
- Three customers represented 57% of 2011 product revenue; two customers represented approximately 58% of trade receivables at year-end.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Product revenue | $30.6 million | $21.7 million | Up 41% |
| Government grants and cooperative agreements | $2.4 million | $1.4 million | Up 71% |
| Total revenue | $33.0 million | $23.1 million | Up 43% |
| Gross profit | $14.5 million | $11.1 million | Up 31% |
| Gross margin on product sales | 39% | 44% | Down 5 percentage points |
| Loss from operations | $(15.9) million | $(16.0) million | Improved slightly |
| Net loss | $(17.0) million | $(16.9) million | Comparable loss |
| Basic and diluted loss per share | $(0.35) | $(0.42) | Improved |
| Research and development expense | $7.2 million | $5.2 million | Up 38% |
| Selling, general and administrative expense | $23.1 million | $21.6 million | Up 7% |
Fourth-quarter 2011 total revenue was $10.4 million, including $9.9 million of product revenue and $0.5 million of grant revenue. Fourth-quarter net loss was $7.7 million, or $0.16 per share.
- Net cash used in operating activities was $15.6 million, compared with $14.3 million in 2010.
- Net cash provided by investing activities was $0.6 million; net cash provided by financing activities was $11.6 million.
- Cash, cash equivalents and short-term investments totaled $25.8 million at December 31, 2011, down from $30.0 million.
- Working capital was $18.6 million, compared with $22.1 million at December 31, 2010.
- Total debt was $7.2 million, consisting of $5.0 million of Comerica growth capital debt and $2.3 million drawn under a revolving credit line, net of discount.
- Current and non-current debt totaled $2.5 million and $4.7 million, respectively. The company also reported a $8.0 million warrant liability.
Material changes versus the prior comparable period
- Product revenue increased $8.9 million, primarily from higher disposable platelet and plasma kit volumes, increased customer adoption and market penetration. Illuminator volumes declined.
- Cost of product revenue increased 54% to $18.5 million, exceeding revenue growth, primarily because of higher kit volumes and increased scrap rates for certain components.
- Gross margin declined because of non-routine period costs and manufacturing scrap. Management expected higher production volumes to reduce future per-unit costs, although this depended on actual manufacturing levels.
- Research and development spending increased $2.0 million, primarily for the red blood cell program. Selling, general and administrative expense increased $1.5 million as European marketing activities expanded.
- In August 2011, Cerus received a $2.1 million Department of Defense grant supporting red blood cell development.
- In September 2011, Cerus replaced its Oxford debt with a Comerica facility, borrowed $5.0 million under the growth capital loan and drew $2.3 million under the revolving line of credit.
- Under its at-the-market agreement, Cerus sold approximately 3.5 million shares during 2011 for $9.7 million of net proceeds. Through the filing date, it sold approximately 3.0 million additional shares for approximately $9.1 million.
- The first three quarters of 2011 were restated for approximately $0.1 million of cost-of-product-revenue adjustments in each quarter related to capitalized inventory costs. The company stated that the corrections were individually immaterial and did not affect quarterly loss per share.
Guidance, outlook, management commentary, risks and unusual items
- Management expected product revenue to continue increasing as adoption expanded in approved markets, but stated that historical results might not indicate future revenue and that profitability was not assured.
- Management expected research and development spending to increase in the near term for European red blood cell development and indicated that U.S. regulatory programs would require additional capital.
- The company believed available cash, product sales, government grants and access to debt would meet capital requirements for at least the next twelve months, subject to the accuracy of its assumptions.
- Cerus expected to continue incurring substantial losses until the INTERCEPT system achieved significantly broader market acceptance and stated that it might never achieve profitability.
- The red blood cell program required additional clinical trials, process validation, commercial design work, manufacturing validation and regulatory approvals. The company had no plans to initiate additional U.S. platelet or plasma trials without adequate funding.
- The Comerica facility required a minimum cash balance of $2.5 million and minimum trailing revenue levels. Cerus was in compliance at December 31, 2011; noncompliance could accelerate repayment and permit liquidation of collateral.
- Fenwal was the sole manufacturer of platelet and plasma disposable kits. Other critical components also depended on sole or limited suppliers, including Porex, NOVA and Ash Stevens. Component non-conformities had already delayed kit manufacturing in 2011.
- The company had $14.9 million of contractual obligations, including $3.7 million of minimum purchase commitments, $1.6 million of operating leases and $8.3 million of debt-related obligations.
- Market acceptance depended on reimbursement, customer budgets, clinical and safety data, compatibility with collection platforms, regulatory approvals and competition. INTERCEPT did not claim to inactivate all pathogens, including prions and certain non-lipid-enveloped viruses.
- Other risks included foreign-exchange exposure, concentrated customers, product liability, intellectual-property challenges, potential inventory expiration or obsolescence, business interruption from earthquakes and continuing dependence on external financing.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective.
Investor verification points
- Verify the company’s current cash runway, operating cash burn and ability to satisfy Comerica’s cash and revenue covenants.
- Track product revenue growth separately from government grant revenue and assess whether gross margin recovers from the 2011 decline.
- Assess customer concentration, particularly the EFS, Movaco and Delrus relationships, and the renewal and purchase commitments under the EFS contract.
- Confirm regulatory progress for U.S. platelet and plasma systems and European red blood cell trials, including required funding and clinical milestones.
- Review Fenwal and other supplier agreements, minimum purchase commitments, kit availability, illuminator production and the expiration or replacement of critical supply contracts.
- Monitor dilution from the at-the-market program, the $150 million shelf registration, outstanding warrants and approximately 7.5 million shares subject to outstanding equity awards.
- Reconcile quarterly restatements and inventory accounting, including the $0.6 million reserve for potentially obsolete or expiring inventory at year-end.