Cerus Corporation 2018 Q3 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; its red blood cell system remains in development. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company operates in one blood-safety segment and sells primarily in Europe, North America and other international markets.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $19.3 million | $13.1 million | $55.8 million | $32.7 million |
| Product revenue | $15.4 million | $10.8 million | $44.4 million | $27.3 million |
| Government contract revenue | $3.9 million | $2.3 million | $11.4 million | $5.4 million |
| Gross profit on product revenue | $7.3 million | $5.4 million | $21.2 million | $13.9 million |
| Product gross margin | 47% | 50% | 48% | 51% |
| Operating loss | $(13.6) million | $(12.4) million | $(39.5) million | $(46.7) million |
| Net loss | $(14.2) million | $(13.4) million | $(41.4) million | $(49.1) million |
| Net loss per share | $(0.11) | $(0.12) | $(0.32) | $(0.46) |
| Cash used in operating activities | — | — | $(24.2) million | $(42.2) million |
As of September 30, 2018, cash and cash equivalents were $22.3 million, short-term investments were $96.7 million, restricted cash was $2.7 million, and working capital was approximately $107.0 million. Total debt was approximately $29.9 million, including $5.7 million classified as current. Total assets were $161.7 million and stockholders’ equity was $91.8 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 48% in Q3 and 71% for the first nine months, driven by higher disposable kit sales, particularly in Europe following nationwide platelet-system adoption in France, increased U.S. platelet-kit sales, and higher BARDA activity.
- Product revenue increased 43% in Q3 and 62% year to date. EMEA generated $11.9 million of Q3 product revenue and $34.9 million year to date.
- Product gross margin declined to 47% in Q3 and 48% year to date from 50% and 51%, respectively, primarily because of lower average selling prices to major customers and, in Q3, unfavorable foreign exchange effects.
- Research and development expense increased 37% in Q3 and 16% year to date, reflecting red blood cell clinical development, supplemental product approvals and BARDA-related activities. Selling, general and administrative expense increased 14% in Q3 and 5% year to date, primarily from increased U.S. commercial activity.
- Net loss improved year to date, partly because 2017 included a $3.5 million gain on the sale of Aduro Biotech securities and approximately $4.0 million of related tax expense. The 2018 results do not include a comparable gain.
- Operating cash burn improved by $18.0 million year to date, while investing cash use increased because the company invested proceeds from its equity offerings in short-term securities.
Financing, Liquidity and Commitments
- The company raised approximately $57.2 million net from a January 2018 offering of 14.03 million common shares and $22.3 million net from 3.2 million shares sold under its Cantor equity-sales agreement. Approximately $47.3 million remained available under that agreement at September 30, 2018.
- The Oxford term loan has $30.0 million principal outstanding, bears interest at approximately 9.12% at quarter-end, requires interest-only payments through February 2019, and includes an 8% final payment fee.
- Contractual obligations totaled $86.9 million, including $38.3 million of debt, $13.5 million of minimum purchase commitments, $6.4 million of manufacturing and development obligations, and $27.5 million of operating leases.
- The remaining Fresenius manufacturing and development payment of €5.5 million is due in August 2019.
- Management stated that available cash, investments, product receipts and BARDA reimbursements are expected to fund requirements for at least the next twelve months, but this assessment depends on assumptions that may prove incorrect.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance is provided. Management expects disposable-kit revenue to increase as market adoption expands, including in the U.S., but cautions that historical results may not indicate future performance.
- The red blood cell system achieved primary endpoints in European Phase 3 trials, and the company planned a CE Mark submission in the fourth quarter of 2018. Regulatory approval was not expected before 2020, if achieved.
- BARDA funding is committed at up to $103.2 million for the base period and exercised options, with a potential total opportunity of $201.2 million. Additional funding depends on milestones and BARDA option exercises; BARDA may terminate the agreement for convenience.
- The company remains dependent on Fresenius and other sole or limited-source suppliers. Supply interruptions, component obsolescence, manufacturing nonconformities and regulatory inspections could restrict product availability and margins.
- The company disclosed voluntary recalls of specified platelet-kit lots in April and September 2018 relating to a possible incomplete seal and a possible incorrect-sized bag. It also disclosed leakage incidents in France under investigation with the French regulator; further corrective action or recall remains possible.
- Major commercial risks include U.S. customer adoption, reimbursement, concentrated customers, competition, regulatory approvals, required post-approval studies, foreign exchange volatility and continued operating losses.
- Product revenue concentration increased the importance of France: Établissement Français du Sang represented 41% of Q3 product revenue and 40% of nine-month product revenue. The current arrangement does not include purchase-volume commitments.
- The company adopted ASC 606 and several other accounting standards in 2018 without material impact. It planned to adopt the new lease standard on January 1, 2019, which was expected to increase reported assets and liabilities.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2018, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether revenue growth, particularly in France and the U.S., converts into sustainable recurring disposable-kit volume without further price pressure.
- Whether product gross margins stabilize or continue declining as customer pricing, product mix, manufacturing costs and foreign exchange change.
- The timing, amount and conditions of future BARDA reimbursements and option-period funding.
- Progress and regulatory outcomes for the red blood cell system, including the planned CE Mark submission and U.S. clinical requirements.
- The scope and financial or customer impact of the 2018 recalls and the French leakage investigation.
- Whether operating cash burn can be reduced sufficiently to avoid additional equity or debt financing and related dilution or leverage.
- Compliance with Oxford debt covenants and the company’s ability to meet debt, Fresenius, supplier and lease obligations.
- Customer concentration, reliance on Fresenius and other sole-source suppliers, and the effect of product or component obsolescence on supply continuity.